<PAGE> 1
Filed Pursuant to 424(b)(4)
Registration No. 333-38436
30,000,000 Shares
[LOGO]
SANTA FE INTERNATIONAL CORPORATION
Ordinary Shares
This is an offering of 30,000,000 ordinary shares of Santa Fe International
Corporation. The selling shareholder, SFIC Holdings (Cayman), Inc., is offering
all of the ordinary shares. Santa Fe International Corporation will not receive
any of the proceeds from the sale of the shares by the selling shareholder.
The ordinary shares are listed on the New York Stock Exchange under the
symbol "SDC." The last reported sale price of ordinary shares on June 27, 2000,
was $34 9/16 per share.
See "Risk Factors" beginning on page 13 to read about factors you should
consider before buying the ordinary shares.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial price to public..................................... $34.500 $1,035,000,000
Underwriting discount....................................... $ 0.949 $ 28,470,000
Proceeds, before expenses, to selling shareholder........... $33.551 $1,006,530,000
</TABLE>
To the extent that the underwriters sell more than 30,000,000 ordinary
shares, the underwriters have the option to purchase up to an additional
4,500,000 shares from the selling shareholder at the initial price to public,
less the underwriting discount.
The underwriters expect to deliver the ordinary shares against payment in
New York, New York on July 3, 2000.
GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
Prospectus dated June 27, 2000.
<PAGE> 2
[GALAXY III PHOTO]
[MONITOR PHOTO]
[RIG 140 PHOTO]
[GALVESTON KEY PHOTO]
[RIG 127 PHOTO]
Santa Fe's marine fleet consists of a diverse range of drilling units capable of
operating in the many and varied offshore regions around the world. GALAXY III,
one of Santa Fe's six heavy duty harsh environment jackup rigs is shown
operating with its drillfloor positioned on a client's platform in the North
Sea. MONITOR, another heavy duty harsh environment jackup, operating in the
North Sea. RIG 140 is one of the fleet's three semisubmersible units. Santa Fe
also operates two client owned semisubmersibles in the Caspian Sea. GALVESTON
KEY, a 300 foot cantilever jackup rig, is shown working in the cantilever mode.
Rig 127 operating in Qatar. In addition to the fleet's six heavy duty harsh
environment jackups, Santa Fe owns 17 jackup rigs, capable of working in water
depths ranging from 350 feet to two shallow water units. KEY GIBRALTAR, below,
operating over a client's platform in Malaysia.
[PHOTO OF WORKERS]
Santa Fe's international workforce is made up of over 40 nationalities, capable
of efficiently staffing drilling operations anywhere in the world.
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus and the documents incorporated by reference. This summary is not
complete and may not contain all of the information that you should consider
before investing in our ordinary shares. You should carefully read the entire
prospectus and the information incorporated by reference. In this prospectus,
references to "Santa Fe," "we," "us" and "our" are to Santa Fe International
Corporation, its subsidiaries and its predecessors. References to the "selling
shareholder" are to SFIC Holdings (Cayman), Inc. In this prospectus references
to "dollars" and "$" are to United States dollars.
SANTA FE INTERNATIONAL CORPORATION
Santa Fe International Corporation is a leading international offshore and
land contract driller of oil and natural gas wells. We own and operate a high
quality, technologically advanced fleet of 27 marine drilling rigs and 33 land
drilling rigs in 15 countries throughout the world. We primarily contract our
drilling rigs, related equipment and crews on a dayrate basis. We also provide
drilling related services to the international oil and gas industry.
At the core of our rig fleet are our heavy duty harsh environment jackup
rigs, which are capable of operating in water depths of up to 350-400 feet. We
own and operate one-third of the heavy duty harsh environment jackup rigs
currently in service in the drilling industry. Our fleet includes:
- six heavy duty harsh environment jackup rigs, including a recent
addition, the Galaxy III, placed in service on December 5, 1999;
- three semisubmersible rigs capable of operating in water depths of up to
2,300-2,400 feet;
- nine premium cantilever jackup rigs capable of operating in water depths
of up to 300-350 feet;
- eight jackup rigs capable of operating in water depths of up to 200-250
feet, six of which are cantilevered and two of which are specially
designed to operate in shallow water;
- one platform rig; and
- 33 land rigs, all specially equipped to operate in remote areas.
BUSINESS STRATEGY
As a leading provider of premium quality, cost-effective drilling services
to the international oil and gas industry, we tailor our services to the
particular needs of our customers. We also seek to take advantage of the
cyclical business upturns of our industry and mitigate the effects of the
drilling industry's cyclical downturns. The key elements of our strategy are:
MODERN RIG FLEET. We continually invest in our modern rig fleet by
adding new rigs and by upgrading and refurbishing rigs and associated
equipment to increase drilling productivity and prolong rig life. Since
1988, we have invested over $1.0 billion in our rig fleet.
We rigorously evaluate each of our rig investments based on expected
long-term return on capital. We have added new rigs to our fleet during
downturns in the cyclical drilling market, enabling us to construct or
acquire rigs on favorable terms. We have also selectively built rigs during
robust markets after having obtained firm drilling contracts, ensuring
utilization of the rig upon completion. For example, before commencing
construction of the Galaxy II and the Galaxy III, our most expensive rig
additions to date, we had secured long-term drilling contracts at
attractive dayrates. We believe this fiscal discipline and long-term focus
have enabled us to consistently earn superior overall returns on invested
capital in comparison with our competitors.
3
<PAGE> 4
We are currently monitoring and evaluating customer and competitor
plans and activities in exploring for oil and natural gas in increasingly
deeper water. Under appropriate circumstances, we may expand the scope of
our operations by entering the deep water market.
INTERNATIONAL MARKETS. We currently operate our rigs outside the
United States in major market areas around the world, including South
America, the Middle East, North Africa, West Africa, the North Sea and
Southeast Asia where we have continuously operated for over 30 years. We
believe focusing our business on international markets provides greater
opportunities to secure attractive contracts at high dayrates by giving us
access to a customer base that includes the largest oil and gas companies
worldwide. Historically, international markets have been less volatile than
the U.S. Gulf of Mexico offshore market and the U.S. land rig market, both
of which tend to rise and fall more rapidly in response to changes in
energy prices and rig supply/demand conditions. We have also been able to
limit worldwide taxation on our revenues, income and assets through
tax-efficient business structures afforded by our international operations
and Cayman Islands incorporation. We believe that we are better positioned
than many of our competitors to secure contracts in international markets
because these markets often require the specialized equipment and expertise
we possess.
HIGH QUALITY MULTINATIONAL WORKFORCE. We believe that our highly
trained, experienced multinational rig crews and supervisors give us a
competitive advantage in the international drilling market. Our extensive
hiring and training of employees from the various countries in which we
operate permit us to be cost-competitive in bidding on contracts and allow
us to meet or exceed requirements concerning the hiring of local nationals.
Approximately two-thirds of our employees are citizens of countries outside
North America and Europe.
We strive to retain as much of our rig and supervisory workforce as
possible, even when rigs are idle for brief periods, to be able to deliver
the depth of experience and training required to fully satisfy our
customers' expectations.
BALANCED AND FLEXIBLE CONTRACTING. We seek a mix of long- and
short-term drilling contracts with the objective of increasing our overall
rig utilization and long-term profitability in dynamic markets. While most
of our contracts are based on dayrates, we also consider performance based
compensation to take advantage of market opportunities.
STRONG FINANCIAL CONDITION. Our strong financial condition gives us
the flexibility to make major capital investments when favorable market
conditions and attractive opportunities present themselves. It also gives
us the ability to sustain our company during periods of decreased revenues.
As of March 31, 2000, we had no long-term debt and we had over $260 million
in cash and marketable securities.
SPECIALIZED DRILLING SERVICES. We distinguish ourselves through our
ability to provide specialized drilling services requiring advanced
equipment and technical expertise, such as high pressure, high temperature
drilling, underbalanced drilling and the capability to move certain of our
rigs' drillfloors onto a customer's platform to perform drilling
operations.
INDUSTRY CONDITIONS
The contract drilling industry is highly volatile, competitive and
cyclical. During the second quarter of 1998, drilling activity slowed in
response to weak oil prices that had been declining since late 1997. Oil and gas
companies responded to these weak prices by reducing their drilling
expenditures, thus reducing rig utilization. While the drilling industry has
benefited from the increase in oil and natural gas prices beginning in the
second quarter of 1999, the industry is still suffering from the most recent
downturn in rig utilization and dayrates.
4
<PAGE> 5
We believe that if oil and natural gas prices remain at or around current
levels, the offshore drilling market will improve moderately during 2000. The
recent improvement in the offshore drilling market began in the U.S. Gulf of
Mexico, where dayrates tend to be more responsive to changes in oil and natural
gas prices than in international markets. The international markets in which we
operate recently have begun to recover as the major and national oil and gas
companies that dominate these markets experience increased cash flows. As a
result, we expect that these oil and gas companies will increase their
exploration and production spending.
Our drilling operations have only recently begun to recover from the
industry-wide downturn. Our earnings during the first quarter of 2000 showed a
slight increase compared to the fourth quarter of 1999, which quarter marked our
fourth successive declining quarter during this recent downturn.
RELATIONSHIP WITH KUWAIT PETROLEUM CORPORATION
The selling shareholder, SFIC Holdings (Cayman), Inc., is a wholly owned
subsidiary of Kuwait Petroleum Corporation. SFIC Holdings (Cayman), Inc.
presently owns approximately 64.7% of our outstanding ordinary shares. Upon
completion of this offering SFIC Holdings (Cayman), Inc. will own approximately
38.6% of the outstanding ordinary shares, or 34.7% if the underwriters'
overallotment option is exercised in full. After completion of this offering,
Kuwait Petroleum Corporation, through SFIC Holdings (Cayman), Inc., will
continue to be able to significantly influence the management and affairs of our
company and all matters requiring shareholder approval, including the election
of our board of directors and significant corporate transactions.
While Kuwait Petroleum Corporation has advised us that it intends to sell
its remaining interest in our ordinary shares, Kuwait Petroleum Corporation may
decide to sell only a portion of our ordinary shares it beneficially owns or may
continue to hold those ordinary shares. Kuwait Petroleum Corporation intends to
make any future sales of our ordinary shares at times and in a manner consistent
with its evaluation of price levels and market conditions, the maintenance of an
orderly market for our ordinary shares and the lock-up agreement with the
underwriters of this offering.
We have entered into agreements with SFIC Holdings (Cayman), Inc. and/or
Kuwait Petroleum Corporation that require the consent of SFIC Holdings (Cayman),
Inc. to future significant corporate actions by us, the management and
allocation of specified liabilities relating to our former non-drilling
activities, registration of ordinary shares held by SFIC Holdings (Cayman), Inc.
and other matters.
We were incorporated in our current form in the Cayman Islands in 1990. Our
executive offices are located in Two Lincoln Centre, Suite 1100, 5420 LBJ
Freeway, Dallas, Texas 75240-2648, and our telephone number is (972) 701-7300.
Our Internet web site is on the worldwide web at sfdrill.com. The information on
our web site is not part of this prospectus and references in this prospectus to
our web site or any other web site are inactive textual references only.
5
<PAGE> 6
THE OFFERING
Selling shareholder................. SFIC Holdings (Cayman), Inc.
Total offering...................... 30,000,000 ordinary shares(1)
Total outstanding before and after
the offering........................ 115,144,252 ordinary shares(2)
Use of proceeds..................... We will not receive any proceeds from
the offering.
Overallotment option................ 4,500,000 ordinary shares
Dividend policy..................... We currently intend to pay quarterly
cash dividends on the outstanding
ordinary shares. The quarterly dividend
declared for the second quarter of 2000
was $0.0325 per share payable to
shareholders of record as of June 30,
2000. Purchasers of ordinary shares in
this offering will not receive this
dividend. The payment of future
dividends, if any, will be at the
discretion of our board of directors
and subject to other factors. For a
description of our dividend policy and
history, see "Price Range of Ordinary
Shares and Dividend History."
Listing............................. The ordinary shares are listed on the
New York Stock Exchange.
NYSE symbol......................... SDC
---------------
(1) Aggregate of 34,500,000 ordinary shares if the underwriters' overallotment
option is exercised in full.
(2) This does not include 6,225,748 ordinary shares reserved for issuance under
our employee and director benefit plans, including 3,779,375 ordinary shares
subject to outstanding options. For a description of our share awards and
options benefit plans, see notes 7 and 8 of the notes to the consolidated
financial statements included in this prospectus and our Annual Report on
Form 20-F for the year ended December 31, 1999 incorporated by reference in
this prospectus. After completion of this offering, Kuwait Petroleum
Corporation, through its ownership of SFIC Holdings (Cayman), Inc., will
beneficially own 44,500,000 ordinary shares, or 40,000,000 ordinary shares
if the underwriters' overallotment option is exercised in full.
6
<PAGE> 7
SELECTED CONSOLIDATED FINANCIAL DATA
We changed our fiscal year end from June 30 to December 31 effective
January 1, 1998.
The following table sets forth our selected consolidated financial data for
each of the periods indicated. You should read this information along with our
consolidated financial statements and the notes to those financial statements
included in this prospectus. For further discussion of our consolidated
financial statements, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED CALENDAR YEAR ENDED THREE MONTHS
JUNE 30, DECEMBER 31, ENDED MARCH 31,
-------------------------------- ------------------------------------ -----------------------
1995 1996 1997 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues............ $466,262 $470,882 $ 578,563 $ 688,957 $ 811,346 $ 614,241 $ 185,516 $ 132,548
Operating costs............... 320,317 308,513 339,665 373,833 414,022 355,763 93,513 88,643
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Operating margin.............. 145,945 162,369 238,898 315,124 397,324 258,478 92,003 43,905
Other operating costs and
expenses:
Depreciation and
amortization(1)............ 86,916 77,128 43,360 46,197 55,807 71,631 17,658 20,359
General and administrative... 16,225 17,168 16,931 20,149 22,161 18,596 5,189 4,121
Gain on sale of assets....... (1,355) (754) (1,041) (626) (5,988) (805) (200) (284)
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)....... 44,159 68,827 179,648 249,404 325,344 169,056 69,356 19,709
Other income (expense), net... 5,094 9,016 6,593 2,868 1,320 9,403 317 2,462
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for
taxes on income.............. 49,253 77,843 186,241 252,272 326,664 178,459 69,673 22,171
Provision for taxes on
income....................... 4,955 15,867 21,325 27,486 39,520 28,635 11,217 3,902
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.................... $ 44,298 $ 61,976 $ 164,916 $ 224,786 $ 287,144 $ 149,824 $ 58,456 $ 18,269
======== ======== ========== ========== ========== ========== ========== ==========
Net income per ordinary
share(2):
Basic........................ $ .39 $ .54 $ 1.44 $ 1.96 $ 2.51 $ 1.31 $ 0.51 $ 0.16
Diluted...................... $ .39 $ .54 $ 1.44 $ 1.96 $ 2.50 $ 1.30 $ 0.51 $ 0.16
Cash dividends per ordinary
share(3)..................... $ -- $ -- $ -- $ 0.065 $ 0.13 $ 0.13 $ 0.0325 $ 0.0325
OTHER FINANCIAL DATA:
Cash flows provided by (used
in):
Operating activities......... $131,685 $113,118 $ 207,178 $ 297,794 $ 343,221 $ 254,856 $ 61,422 $ 25,300
Investing activities......... (14,643) 5,012 (143,197) (235,648) (272,475) (266,700) (89,456) 125,041
Financing activities......... (98,373) (108,391) (66,893) (66,785) (14,885) (12,778) (1,622) (1,765)
EBITDA(4)..................... 131,075 145,955 223,008 295,601 381,151 240,687 87,014 40,068
Capital expenditures.......... 36,443 64,810 146,596 229,192 277,400 124,608 38,264 8,740
BALANCE SHEET DATA:
Working capital............... $ 89,033 $124,333 $ 125,730 $ 122,700 $ 170,776 $ 259,266 $ 207,051 $ 285,573
Property and equipment, net... 599,680 587,420 691,300 801,970 1,049,201 1,102,564 1,069,914 1,091,064
Total assets.................. 924,983 884,998 1,000,446 1,161,453 1,453,736 1,563,542 1,487,600 1,566,197
Total debt(5)................. 58,364 -- -- -- -- -- -- --
Shareholders' equity.......... 728,089 733,092 831,115 953,017 1,227,224 1,366,025 1,284,527 1,383,162
</TABLE>
---------------
(1) During 1996, we undertook engineering and economic studies to evaluate the
economic useful lives of our drilling rigs. The study results indicated that
the estimated useful lives should be extended by 12 years from 18 to 30
years for marine rigs and by four years from 12 to 16 years for land rigs.
Our board of directors approved application of the change in estimated
useful lives effective July 1, 1996, which reduced depreciation expense, and
increased net income, by approximately $34.5 million for the fiscal year
ended June 30, 1997.
(2) The basic net income per ordinary share data for the fiscal year ended June
30, 1997 and for the calendar years ended December 31, 1997, 1998 and 1999
is calculated based on the weighted average ordinary shares outstanding
during the period. The dilutive impact of ordinary shares or equivalent
securities under share awards and options outstanding under our share award
plans was not significant for the periods presented, increasing the weighted
average shares outstanding used in the computation of diluted net income per
ordinary share for the fiscal year ended June 30, 1997 to 114,502,000, for
the calendar year ended December 31, 1997 to 114,608,000, for the calendar
year ended December 31, 1998 to 114,812,000, and for the calendar year ended
December 31, 1999 to 115,443,000. The net income per ordinary share data for
the
7
<PAGE> 8
fiscal years ended June 30, 1995 and 1996 is calculated as though the number
of shares issued in our initial public offering in 1997, 114,500,000 shares,
were outstanding. For a discussion of the calculation of the net income per
ordinary share for the years ended December 31, 1997, 1998 and 1999, see
note 2 of the notes to the consolidated financial statements included in
this prospectus.
(3) Prior to and upon becoming a public company in June 1997, we made
distributions to our sole shareholder which are not reflected as cash
dividends.
(4) EBITDA, or operating income before depreciation, is a supplemental financial
measure that we use to evaluate our business. You should read this
information along with our consolidated financial statements and the notes
to those financial statements included in this prospectus. We believe that
EBITDA is a measure commonly used by analysts, investors and others
interested in the contract drilling industry. Accordingly, we provide this
information to permit a more complete analysis of our operating performance.
The difference between cash flows provided by operating activities and
EBITDA relates to interest, taxes, depreciation and changes in operating
assets and liabilities. EBITDA should not be considered as an alternative to
net income or cash flow from operating activities determined in accordance
with generally accepted accounting principles or as an indication of our
performance or as a measure of liquidity. Our definition of EBITDA may not
be comparable with similarly titled measures disclosed by other companies.
(5) Total debt, all of which was related to rigs held under leveraged
capitalized lease obligations. During 1994 and 1996 we acquired the equity
owners' interest in these rigs and extinguished the related lease
obligations during 1995 and 1996.
8
<PAGE> 9
MARINE RIG FLEET(1)
The following table describes our marine fleet as of May 31, 2000.
<TABLE>
<CAPTION>
MAXIMUM
SERVICE DATE/ WATER CURRENT
YEAR-OF-LATEST DEPTH CONTRACT
TYPE AND NAME ENHANCEMENT(2) (FT) LOCATION CUSTOMER(3) EXPIRATION(4)
------------- -------------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
HEAVY DUTY HARSH
ENVIRONMENT JACKUP
RIGS
Galaxy III......... 1999 400 U.K. North Sea BP Amoco Dec 02
Galaxy II.......... 1998 400 Canada Sable Group Nov 03
Magellan........... 1992/1993 350 U.K. North Sea Elf Mar 01(5)(6)
Galaxy I........... 1991 400 U.K. North Sea Elf Dec 00(5)(6)
Monitor............ 1989 350 U.K. North Sea BHP Jan 01(7)
Monarch............ 1988/1996 350 U.K. North Sea BP Amoco Nov 00
SEMISUBMERSIBLE RIGS
Rig 135............ 1983/1989 2,400 U.K. North Sea British Gas May 01(6)
Rig 140............ 1983/1998 2,400 U.K. North Sea Shell Jan 02
Aleutian Key....... 1976/1995 2,300 Equatorial Guinea Idle
300-350 FOOT PREMIUM
CANTILEVER JACKUP
RIGS
Compact Driller.... 1993 300 Thailand Chevron Aug 00
Parameswara........ 1993 300 Indonesia Kodeco Nov 00
Key Hawaii......... 1983 300 Saudi Arabia Saudi Aramco Feb 03
Key Singapore...... 1982/1994 350 Egypt Rashpetco Oct 00(6)
Rig 134(8)......... 1982/2000 300 Indonesia Idle
Rig 136............ 1982 300 Egypt Geisum Jun 00
Key Manhattan...... 1980/1996 350 Egypt Petrobel Jan 01
Galveston Key(8)... 1978/1988 300 Vietnam JVPC Apr 01
Key Gibraltar...... 1976/1996 300 Vietnam JVPC Jan 01(6)
200-250 FOOT JACKUP
RIGS
Rig 141............ 1982 250 Egypt Suco Jun 00(6)
Rig 124............ 1980 250 Egypt Petrobel Jun 00(6)
Key Bermuda........ 1980 200 Nigeria Chevron Oct 01
Rig 127............ 1981/1995 250 Qatar Occidental Jul 00
Rig 105............ 1975 250 Egypt Petrobel Jun 00(6)
Key Victoria....... 1974/1996 250 Venezuela Idle
Rig 103............ 1974/2000 250 United Arab Emirates Idle
Britannia.......... 1968/1987 230 U.K. North Sea Shell Jun 02
SANTA FE-OWNED
PLATFORM RIG
Rig 82............. 1968/1995 N/A U.K. North Sea Shell Evergreen
</TABLE>
---------------
(1) See "Business -- Contracts" for a table describing our land rig fleet as of
May 31, 2000.
(2) Indicates the year we placed the rigs in service and corresponds to the year
built, except for the Parameswara, which was built in 1983, the Monarch,
which was built in 1986, and the Compact Driller, which was built in 1992.
The second date, if given, is the most recent year in which the rig
underwent a major upgrade in capacity and/or refurbishment that extended its
useful working life. In some cases, the upgrade or refurbishment took place
over an extended period. In those instances the year given is the year in
which the work was completed.
9
<PAGE> 10
(3) Generic designation including affiliates, joint ventures and consortia.
"Geisum" means Geisum Oil Company.
"JVPC" means Japan Vietnam Petroleum Co. Ltd.
"Kodeco" means Kodeco Energy Company.
"Petrobel" means Belayim Petroleum Company.
" Rashpetco" means Rashid Petroleum Company.
"Sable Group" means Sable Offshore Energy, Inc.
"Saudi Aramco" means Saudi Arabian Oil Company.
"Suco" means Suez Oil Company.
(4) Indicates date of scheduled expiration of current contract term, or, if the
contract is for a fixed number of wells, date of estimated completion of
those wells at May 31, 2000. Most contracts are subject to early
termination.
(5) Effective July 24, 2000, we will swap the commitments of our rigs Magellan
and Galaxy I for the remainder of their respective contracts.
(6) Contract is subject to customer term extension option(s).
(7) In May 2000, Monitor commenced a contract with BHP for three firm wells (a
period of approximately five months from commencement of drilling
operations) plus options. On May 18, the Monitor sustained damage to the
starboard leg and adjoining hull while at dockside in Dundee, Scotland. The
rig currently is being moved to a shipyard in Rotterdam, Netherlands for
completion of the repairs, which were initiated in Dundee. Although BHP
could terminate the contract in response to performance delays that will
occur while the Monitor is repaired, based on discussions to date with BHP
management, we do not expect it to do so. We believe that damage to the
Monitor is an insured loss.
(8) The Galveston Key and Rig 134 are owned by P.T. Santa Fe Supraco Indonesia,
a limited liability company of which we are a 95% shareholder. Before
January 1, 2000, Rig 134 was classified as a 200-250 foot jackup rig.
The following table describes rigs we or our joint venture affiliates
operate for third parties as of May 31, 2000.
<TABLE>
<CAPTION>
CURRENT CONTRACT
TYPE AND NAME CUSTOMER LOCATION EXPIRATION (1)
------------- -------- -------- ----------------
<S> <C> <C> <C>
SEMISUBMERSIBLE RIGS
Dada Gorgud(2).................................... AIOC(3) Caspian Sea Sep 05
Istiglal(4)....................................... BP Amoco Caspian Sea May 05
PLATFORM RIGS
Beatrice Alpha.................................... Talisman U.K. North Sea Evergreen(5)
Beatrice Bravo.................................... Talisman U.K. North Sea Evergreen(5)
Buchan............................................ Talisman U.K. North Sea Evergreen(5)
Clyde............................................. Talisman U.K. North Sea Evergreen(5)
Fulmar............................................ Shell U.K. North Sea Jun 02
Kittiwake......................................... Shell U.K. North Sea Jun 02
Nelson............................................ Enterprise U.K. North Sea Evergreen(5)
</TABLE>
---------------
(1) Indicates date of scheduled expiration of current contract term, or, if the
contract is for a fixed number of wells, date of estimated completion of
these wells at May 31, 2000.
(2) Caspian Drilling Company Limited, of which we are a 45% shareholder,
operates the Dada Gorgud for us under a drilling services subcontract. For a
further discussion of Caspian Drilling Company Limited, see
"Business -- Joint Venture, Agency and Sponsorship Relationships and Other
Investments."
(3) "AIOC" means Azerbaijan International Operating Company, a consortium led by
BP Amoco.
(4) Caspian Drilling Company Limited, of which we are a 45% shareholder,
operates the Istiglal under a drilling services contract. For a further
discussion of Caspian Drilling Company Limited, see "Business -- Joint
Venture, Agency and Sponsorship Relationships and Other Investments."
(5) Evergreen contracts are subject to termination by the customer on specified
notice.
10
<PAGE> 11
SELECTED OPERATING DATA
REVENUES BY OPERATING AREA
The following table sets forth the revenues of our seven operating areas
during each of the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED CALENDAR YEAR ENDED ENDED
JUNE 30, 1996 DECEMBER 31, MARCH 31,
------------------------------ ------------------------------ -------------------
1995 1996 1997 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North Sea............... $196,047 $196,784 $219,466 $251,369 $308,802 $242,510 $ 77,818 $ 58,722
North Africa............ 95,692 98,423 107,979 117,377 142,468 48,443 21,657 10,476
West Africa............. 11,002 16,520 48,263 66,187 71,480 38,331 13,549 4,083
Southeast Asia.......... 55,734 37,347 49,585 67,412 84,760 54,622 19,914 9,411
Middle East/Caspian
Sea................... 91,129 89,786 93,988 115,177 132,003 103,909 28,051 26,069
South America........... 16,419 20,647 43,098 48,042 58,366 78,424 13,261 11,838
North America........... 239 11,375 16,184 23,393 13,467 48,002 11,266 11,949
-------- -------- -------- -------- -------- -------- -------- --------
Total........... $466,262 $470,882 $578,563 $688,957 $811,346 $614,241 $185,516 $132,548
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Our operations in the North Sea are presently all conducted within the U.K.
sector. Our operations in North Africa consist principally of operations in
Egypt. Our operations in the Middle East/Caspian Sea include significant
operations in Kuwait. All of our operations are located outside of the Cayman
Islands.
AVERAGE DAYRATES (1)
The following table sets forth the average dayrates for our rig fleet
during each of the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED CALENDAR YEAR ENDED ENDED
JUNE 30, DECEMBER 31, MARCH 31,
--------------------------- ----------------------------- -------------------
1995 1996 1997 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Heavy duty harsh environment
jackup rigs................ $56,151 $65,129 $82,466 $94,005 $100,132 $105,434 $100,582 $110,349
Semisubmersible rigs......... 32,550 45,357 59,133 82,507 115,298 95,584 107,100 58,945
300-350 foot premium
cantilever jackup
rigs(2).................... 25,219 26,645 35,887 42,952 54,487 37,472 52,735 24,862
200-250 foot jackup
rigs(2).................... 22,536 22,773 30,404 37,662 49,299 36,838 47,367 27,413
Other marine rigs(3)......... 12,468 9,203 15,593 16,416 18,237 -- -- --
Average of all marine
rigs............... 28,591 32,446 42,646 51,443 64,707 64,050 71,490 53,220
Land rigs.................... 12,462 12,264 13,118 14,611 15,642 17,593 16,596 16,924
</TABLE>
---------------
(1) "Dayrates" means the total amount of non-incentive revenue expressed on a
dollars-per-day basis earned by a drilling rig while working and earning a
normal daily margin under a customer contract. Dayrates may include, among
other things, charges for additional equipment, meals and lodging charges in
excess of stipulated allowances, amortization of net mobilization revenues
and similar amounts.
(2) For the fiscal years ended June 30, 1995 and 1996, "200-250 foot jackup
rigs" means our nine jackup rigs capable of operating in water depths of up
to 200-250 feet and the Key Gibraltar. During the fiscal year ended June 30,
1997, the Key Gibraltar was converted to a cantilever rig and extensively
upgraded and was reclassified as a 300-350 foot premium cantilever jackup
rig effective January 1, 1997.
(3) During the fourth quarter of 1998, we retired our lake barge rig, the Rey
del Lago, from service. Effective January 1, 1999, we reclassified our
platform rig as a component of drilling related services.
11
<PAGE> 12
RIG FLEET UTILIZATION
The following table sets forth information about the rig utilization of our
marine and land fleets during each of the periods indicated.
<TABLE>
<CAPTION>
AVERAGE FOR
THE THREE
AVERAGE FOR THE AVERAGE FOR THE MONTHS
FISCAL YEAR ENDED CALENDAR YEAR ENDED ENDED
JUNE 30, DECEMBER 31, MARCH 31,
------------------- -------------------- ------------
1995 1996 1997 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HEAVY DUTY HARSH ENVIRONMENT JACKUP
RIGS
Total rigs(1)........................ 4.0 4.0 4.0 4.0 4.1 5.1 5.0 6.0
Rigs under contract.................. 3.9 3.9 4.0 4.0 4.1 4.7 5.0 5.5
Utilization rate(2).................. 97.9% 97.5% 99.5% 99.0% 98.3% 93.0% 100.0% 91.9%
SEMISUBMERSIBLE RIGS
Total rigs........................... 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Rigs under contract.................. 2.7 2.3 3.0 2.9 2.7 2.5 3.0 1.0
Utilization rate(2).................. 89.0% 75.3% 100.0% 97.2% 91.1% 84.7% 100.0% 33.3%
300-350 FOOT PREMIUM CANTILEVER JACKUP
RIGS
Total rigs........................... 7.0 7.0 7.5 8.0 8.0 8.0 8.0 9.0
Rigs under contract.................. 6.4 6.7 7.2 7.8 7.6 5.9 7.2 6.1
Utilization rate(2).................. 91.5% 95.7% 95.5% 97.2% 94.7% 74.0% 89.7% 67.3%
200-250 FOOT JACKUP RIGS
Total rigs........................... 10.0 10.0 9.5 9.0 9.0 9.0 9.0 8.0
Rigs under contract.................. 9.2 8.8 8.8 8.9 8.0 4.3 4.9 5.8
Utilization rate(2).................. 91.7% 88.4% 92.1% 99.3% 88.4% 48.2% 54.2% 72.3%
OTHER MARINE RIGS(3)
Total rigs........................... 2.7 2.0 2.0 2.0 1.8 -- -- --
Rigs under contract.................. 2.5 1.4 1.9 2.0 1.8 -- -- --
Utilization rate(2).................. 94.2% 69.3% 96.7% 100.0% 100.0% -- -- --
LAND RIGS
Total rigs........................... 21.0 21.5 23.8 25.9 29.2 32.5 31.9 33.0
Rigs under contract.................. 20.4 20.5 21.5 23.5 25.9 22.3 23.3 22.5
Utilization rate(2).................. 97.3% 95.3% 90.6% 90.8% 88.8% 68.6% 73.0% 68.1%
</TABLE>
---------------
(1) We own the following six heavy duty harsh environment jackup rigs: Galaxy I,
Galaxy II, Galaxy III, Magellan, Monarch and Monitor. The other 12 heavy
duty harsh environment jackup rigs currently in service in the industry are:
Ensco 100, Ensco 101, Maersk Endurer, Maersk Gallant, Maersk Giant, Maersk
Guardian, Rowan-Gorilla II, Rowan-Gorilla III, Rowan-Gorilla IV,
Rowan-Gorilla V, Smedvig West Epsilon and Transocean Nordic.
(2) "Utilization" means the percentage of the number of days a drilling rig is
earning a normal daily margin under a customer contract compared to the
total number of days within a specified period.
(3) During the fourth quarter of 1998, our lake barge rig, the Rey del Lago, was
retired from service. Effective January 1, 1999, we reclassified our
platform rig as a component of drilling related services.
12
<PAGE> 13
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information contained and incorporated by reference in this
prospectus, before deciding to invest in our ordinary shares.
RISKS RELATED TO OUR BUSINESS
WE ARE SUBJECT TO OPERATING RISKS SUCH AS WELL BLOWOUTS AND FIRES THAT COULD
RESULT IN ENVIRONMENTAL DAMAGE, PROPERTY LOSS, PERSONAL INJURY AND DEATH.
Our drilling operations are subject to many hazards, including:
- well blowouts and fires;
- cratering, sinking and capsizing of rigs;
- oil or natural gas well fires;
- explosions; and
- oil spills and other disasters.
These hazards increase the likelihood of accidents. Accidents can result
in:
- personal injury or death;
- major environmental damage;
- costly delays or cancellations of drilling operations;
- serious damage to or destruction of our rigs and equipment;
- significant damage to oil and natural gas wells, reservoirs, production
facilities or other properties; and
- costly wild-well control.
In addition, our marine equipment is subject to other hazards, such as
grounding, collision, damage from heavy weather or hurricanes and damage to a
jackup rig leg or hull from the shifting of legs or the unexpected collapse of
the seabed. Loss of or serious damage to our equipment, even if adequately
covered by insurance, might materially reduce our revenues and operating profit
for an extended period of time.
WE MAY SUFFER LOSSES THAT ARE NOT INSURED OR FOR WHICH WE ARE NOT INDEMNIFIED.
We cannot always obtain insurance or obtain indemnities from our customers
to mitigate our operating risks. Although we carry insurance against the
destruction of or damage to our drilling equipment in amounts we consider
adequate, this insurance may not be available in the future at acceptable rates
for all risks and all geographic areas.
WE ARE SUBJECT TO REGULATION AND LIABILITY UNDER ENVIRONMENTAL LAWS THAT COULD
REQUIRE SIGNIFICANT EXPENDITURES AND COULD MATERIALLY DECREASE OUR NET INCOME.
Through our worldwide operations, we are subject to many environmental laws
and regulations, including regulations controlling the discharge of materials
into the environment, requiring removal and clean-up of discharged materials or
otherwise relating to the protection of the environment. As a result, the
application of these laws could materially adversely affect our results of
operations by increasing our cost of doing business, discouraging our customers
from drilling for hydrocarbons or subjecting us to liability. Laws and
regulations protecting the environment have become increasingly stringent in
recent years and may impose liability on us
13
<PAGE> 14
for environmental damage and disposal of hazardous materials even if we were not
negligent or at fault. We may also be liable for the conduct of others, or for
our own acts even if our acts complied with applicable laws at the time we
performed those acts.
WE MAY SUFFER LOSSES IF OUR CUSTOMERS TERMINATE OR SEEK TO RENEGOTIATE OUR
CONTRACTS.
Our contracts with customers often are cancelable upon specified notice at
the option of the customer. Some drilling contracts require the customer to pay
a specified early termination payment upon cancellation, which payments may not
fully compensate us for the loss of the contract. In addition, early termination
of a contract may result in a rig being idle for an extended period of time.
Contracts customarily provide for either automatic termination or termination at
the option of the customer in the event of total loss of the drilling rig or if
drilling operations are suspended for extended periods of time by reason of acts
of God or excessive rig downtime for repairs, or other specified conditions. Our
revenues may be adversely affected by customers' early termination of contracts,
especially if we are unable to recontract the affected rig within a short period
of time. In periods of rapid market downturn, our customers may not honor the
terms of existing contracts and may terminate contracts or seek to renegotiate
contract rates and terms to conform with depressed market conditions.
WE MAY SUFFER LOSSES IF WE FAIL TO MEET CONTRACT REQUIREMENTS OR IF WE ENCOUNTER
DIFFICULTIES DRILLING ON TURNKEY, FOOTAGE OR OTHER INCENTIVE CONTRACTS.
From time to time we enter into incentive drilling contracts, such as a
turnkey drilling contract. Under a turnkey drilling contract, we agree to drill
a well for a customer to a specified depth, and to provide the associated
services and supplies, such as drilling fluids and drill bits, for a fixed
price. Generally, the customer does not have to pay us unless we drill the well
to the specified depth. We will not make any profit under a turnkey drilling
contract unless we keep rig time and expenses within estimates used in
determining the contract price. Drilling a well under a turnkey contract
typically requires a larger cash commitment by us than that required under a
conventional dayrate contract and exposes us to risks of potential financial
losses, including losses resulting from delays in drilling progress or loss of a
well or a portion of a well. The financial results of a turnkey contract depend
upon the performance of the drilling unit, drilling conditions and other
factors, some of which are beyond our control.
Additionally, we undertake risks when entering into footage and other
incentive contracts, alliances and drilling project management contracts where a
portion of the remuneration is dependent upon achieving specified performance
goals. If we fail to meet the performance criteria, we will earn less revenue on
the contract and, in some circumstances, we may suffer a penalty in the form of
reduced or suspended remuneration or absorb rig time without payment.
TAX LAW AND REGULATION INTERPRETATIONS OR CHANGES COULD INCREASE OUR TAXES.
As a Cayman Islands company primarily doing business outside the United
States, we are taxed at rates substantially lower than if a substantial portion
of our income were derived from the conduct of a U.S. trade or business.
Although almost all of our operations are outside the United States, we have an
office in Texas from which a number of senior management personnel generally
oversee, supervise and control our policies. We report only income attributable
to the functions performed in the United States as income effectively connected
with a U.S. business. If the Internal Revenue Service deemed more of our income
earned from our worldwide operations to be effectively connected with a U.S.
business, we might have to pay U.S. income tax on this additional income, and
our operating results could be materially adversely affected.
Because most of our operations are outside the United States, we are able
to reduce the level of worldwide taxation on our revenues, income and assets
through various tax-efficient business structures. From time to time, tax
authorities around the world audit our tax returns and
14
<PAGE> 15
review and examine our tax-efficient business structures. If we could no longer
use these tax-efficient business structures, as a result of an audit, a change
in tax laws or other challenge, we could suffer substantial additional tax
expense. For a discussion of our tax position, see note 5 of the notes to the
consolidated financial statements included in this prospectus.
WE ARE HIGHLY DEPENDENT ON OUR WORKFORCE.
Our high quality, well-trained and cost-effective rig crew and supervisory
workforce contribute significantly to our ability to deliver premium quality
services. If we are unable to retain our current workforce or to hire comparable
personnel, it could have a material adverse effect on our business.
WE ARE SUBJECT TO POLITICAL HOSTILITY, ECONOMIC AND OTHER RISKS AS A RESULT OF
OUR OPERATIONS OUTSIDE THE UNITED STATES.
We derive substantially all of our revenues from operations outside the
United States. Certain of our non-U.S. operations are subject to political,
economic and other uncertainties not generally encountered in the United States,
including hazards incident to war and civil disturbances and other hazards that
may limit or disrupt markets, as well as the general hazards associated with a
foreign government asserting national sovereignty over areas in which we conduct
operations. Certain of our operations outside the United States are also subject
to:
- foreign customs and business practices;
- changes in political conditions, such as confiscatory taxation,
unreasonable regulation, costly customs duties, unrealistic pricing or
royalty terms, export sales restrictions, embargoes and expropriation or
nationalization with or without compensation;
- the possibility of realizing economic currency exchange losses when
transactions are completed in currencies other than U.S. dollars and
risks to our ability to freely repatriate our earnings under existing
exchange control laws; and
- export restrictions or trade sanctions imposed by the U.S. government
under the Export Administration Act, the Trading with the Enemy Act or
similar legislation or regulation which may impede our ability, or the
ability of our customers, to operate or continue to operate in certain
countries.
WE MAY SUFFER LOSSES AS A RESULT OF CURRENCY RISKS.
Our international drilling and services contracts are partially payable to
us in local currency in amounts that approximate our estimated operating costs,
with the balance of the payments under the contract payable in U.S. dollars,
except in Kuwait and Saudi Arabia where we are paid entirely in local currency.
To the extent that our revenues denominated in local currency do not equal our
local operating expenses, we are exposed to currency exchange transaction
losses, which could materially adversely affect our results of operations. We
have not historically entered into financial hedging arrangements to manage
risks relating to fluctuations in currency exchange rates.
WE RELY HEAVILY ON A SMALL NUMBER OF CUSTOMERS.
In each of the years ended December 31, 1997, 1998 and 1999 and the three
months ended March 31, 2000, more than 50% of our operating revenues was derived
from six or fewer customers. Of the $614.2 million of operating revenues for the
year ended December 31, 1999, approximately 14.5% was attributable to our
largest customer and approximately 62% was attributable to our five largest
customers. Our results of operations may be materially adversely affected if any
of these customers terminates its contracts with us, fails to renew our existing
contracts or refuses to award new contracts to us.
15
<PAGE> 16
RISKS RELATED TO OUR INDUSTRY
THE CONTRACT DRILLING INDUSTRY IS VOLATILE, AND, DURING INDUSTRY DOWN CYCLES,
OUR REVENUES WILL DECLINE AND WE MAY HAVE TO ACCEPT CONTRACTS WITH LESS
FAVORABLE TERMS.
The contract drilling industry is highly volatile and cyclical. Our
business and operations depend upon exploration and development spending by oil
and gas companies. An actual decline, or the perceived risk of a decline, in oil
and natural gas prices could cause oil and gas companies to reduce their overall
level of spending. As a result, demand for our services may decrease and our
revenues may be adversely affected through lower rig utilization and lower
average dayrates.
In addition, during industry down cycles we compete more aggressively for
contracts and we may have to accept liability and indemnity provisions that do
not offer the same level of protection against potential losses that we may
obtain during industry up cycles. During down cycles, we may feel compelled to
enter into long-term contracts for our rigs with low dayrates, and then we would
not be able to contract these rigs at higher dayrates if industry conditions
improve during the term of the contracts. Both increased contractual liabilities
and lower revenues may have an adverse effect on our results of operations.
CONSOLIDATION IN THE OIL AND GAS INDUSTRY MAY REDUCE DEMAND FOR OUR DRILLING
RIGS AND SERVICES AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
During the recent down cycle in late 1998 and early 1999, the oil and gas
industry continued to experience consolidation with the announcement or
completion of several business combinations involving major oil and gas
companies. As a result, oil and gas companies have not on the whole increased
their capital spending on exploration and production projects even though oil
prices have rebounded from the lows experienced in early 1999. During periods of
reduced drilling expenditures, our results of operations may be adversely
affected because we may be compelled to accept lower dayrates in new contracts
and our customers may fail to renew or may terminate existing contracts.
CONSOLIDATION IN THE CONTRACT DRILLING INDUSTRY MAY INCREASE COMPETITION AND
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
There has been significant consolidation in the contract drilling industry.
Further consolidation could lead to increased competition from larger industry
members and may adversely impact our operating margins.
RISKS RELATED TO OUR ORDINARY SHARES
SFIC HOLDINGS (CAYMAN), INC. HAS THE ABILITY TO SIGNIFICANTLY INFLUENCE MATTERS
ON WHICH OUR SHAREHOLDERS MAY VOTE.
After completion of this offering, SFIC Holdings (Cayman), Inc., which is
wholly owned by Kuwait Petroleum Corporation, which is in turn wholly owned by
the State of Kuwait, will control approximately 38.6% of our outstanding
ordinary shares, or 34.7% if the underwriters' overallotment option is exercised
in full. As a result, Kuwait Petroleum Corporation through SFIC Holdings
(Cayman), Inc. will continue to be able to significantly influence the
management and affairs of our company and all matters requiring shareholder
approval, including the election of our board of directors and approval of
significant corporate transactions. This concentration of ownership could delay
or deter a change of control of our company.
16
<PAGE> 17
WE MAY BE UNABLE TO TAKE SIGNIFICANT CORPORATE ACTIONS WITHOUT THE APPROVAL OF
OUR CONTROLLING SHAREHOLDER.
Although the owners of all of the ordinary shares outstanding after the
offering will be entitled to one vote per share, as long as SFIC Holdings
(Cayman), Inc. and its affiliates own at least 25% of the outstanding ordinary
shares or at least 25% of the outstanding voting shares, the consent of SFIC
Holdings (Cayman), Inc. will be required before we may take significant
corporate actions, including:
- an asset disposition by us in excess of $50.0 million;
- the issuance by us of equity securities;
- a change of our corporate domicile; or
- the incurrence of indebtedness by us above $250.0 million on a
consolidated basis.
This restriction on our ability to take significant corporate actions may
restrict our ability to take actions we deem to be in the best interest of our
shareholders.
SOME OF OUR DIRECTORS ARE ALSO DIRECTORS OR OFFICERS OF OUR CONTROLLING
SHAREHOLDER AND THEY MAY HAVE INTERESTS THAT ARE IN CONFLICT WITH THE INTEREST
OF OUR OTHER SHAREHOLDERS.
Our board of directors currently includes three persons who are also
directors or officers of SFIC Holdings (Cayman), Inc. or Kuwait Petroleum
Corporation. After this offering, our board of directors will continue to
include these persons. As a result, our directors who are also directors or
officers of Kuwait Petroleum Corporation or SFIC Holdings (Cayman), Inc. may be
faced with the following conflicts of interest:
- The directors who are affiliated with our controlling shareholder will
have a conflict of interest when our board of directors considers taking
significant corporate actions that our controlling shareholder may
oppose;
- These directors may have conflicts of interest in making decisions
relating to our contract drilling activities in Kuwait and our other
business relationships with Kuwait Petroleum Corporation's subsidiaries
and affiliates; and
- Because our articles of association allow our controlling shareholder to
compete with us and do not require our controlling shareholder to offer
our company business opportunities that may be in the best interest of
our company, these directors may have conflicts of interest in managing
our business.
The presence of potential or actual conflicts could affect the process or
outcome of board deliberations. Our articles of association state that Kuwait
Petroleum Corporation and its affiliated companies have no duty to refrain from
competing with us. Our articles also state that Kuwait Petroleum Corporation and
its affiliated companies are not under any duty to present corporate
opportunities to us in the event of a conflict, and that corporate opportunities
offered to persons who are directors or officers of our company and of Kuwait
Petroleum Corporation or its affiliates will be allocated based principally on
the capacities in which the individual director or officer is offered the
opportunity.
OUR SHAREHOLDERS HAVE LIMITED RIGHTS UNDER CAYMAN ISLANDS LAW.
We are incorporated under the laws of the Cayman Islands, and our corporate
affairs are governed by our memorandum of association and our articles of
association and by the Companies Law (2000 Revision) of the Cayman Islands.
Principles of law relating to matters such as the validity of corporate
procedures, the fiduciary duties of our management, directors and controlling
shareholders and the rights of our shareholders differ from those that would
17
<PAGE> 18
apply if we were incorporated in a jurisdiction within the United States.
Further, the rights of shareholders under Cayman Islands law are not as clearly
established as the rights of shareholders under legislation or judicial
precedent applicable in most U.S. jurisdictions. As a result, our public
shareholders may have more difficulty in protecting their interests in the face
of actions by the management, directors or controlling shareholders than they
might have as shareholders of a corporation incorporated in a U.S. jurisdiction.
In addition, there is doubt as to whether the courts of the Cayman Islands would
enforce, either in an original action or in an action for enforcement of
judgments of U.S. courts, liabilities that are predicated upon the U.S. federal
securities laws.
THE DIVISION OF OUR BOARD INTO THREE CLASSES MAY DELAY OR DETER A CHANGE OF
CONTROL THAT YOU MAY FAVOR.
Under our organizational documents, our board of directors is divided into
three classes. One third of the entire board is elected each year at our annual
shareholder meeting, and each class serves a three year term. As a result, it
could take a person who desires to take control of our board as long as two
years to elect a majority of our directors, and this may delay or deter a change
of control of the company, even when our other shareholders may favor the change
of control.
18
<PAGE> 19
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus that are subject
to risks and uncertainties. These forward-looking statements include information
about possible or assumed future results of our operations. When we use any of
the words "believes," "expects," "intends," "anticipates" or similar
expressions, we are making forward-looking statements. Examples of types of
forward-looking statements include trends in our dayrates and rig utilization
rates, expectations or trends in industry conditions, the anticipated level of
our capital expenditures, and the expected impact of risks on our results of
operations and revenues. You should understand that the following important
factors, in addition to those discussed elsewhere in this prospectus, could
affect our future financial results and performance and cause our results or
performance to differ materially from those expressed in our forward-looking
statements:
- fluctuations in the price of oil and natural gas;
- consolidation in the oil and gas industry;
- adverse changes in contract drilling industry conditions;
- consolidation in the drilling industry;
- competition from other drilling contractors;
- increases in industry fleet capacity;
- the impact of present or future environmental legislation and compliance
with environmental laws;
- the ongoing need for capital improvements;
- refurbishing and fabrication costs for drilling rigs;
- replacement costs for rig related equipment and spare parts;
- financing costs;
- changes in operating expenses;
- hiring and retaining skilled employees;
- uncertainties arising out of our operations outside the United States;
- adverse changes in applicable tax laws;
- adverse changes in governmental rules and fiscal policies;
- civil unrest;
- acts of God;
- acts of war; and
- other factors described in this prospectus under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
We claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for these
statements.
You should consider these risks when you purchase our ordinary shares and
the risks discussed in "Risk Factors."
19
<PAGE> 20
ENFORCEABILITY OF CIVIL LIABILITIES
Both we and the selling shareholder are Cayman Islands companies. In
addition, some of our directors and officers are residents of various
jurisdictions outside the United States. All or a substantial portion of our
assets, the selling shareholder's assets and the assets of some of our directors
and officers are located outside the United States. As a result, investors may
have difficulty in serving process within the United States upon these persons
or to enforce in the United States judgments obtained against these persons in
U.S. courts, including judgments predicated upon the civil liability provisions
of the U.S. federal securities laws. We have been advised by our Cayman Islands
counsel, Maples and Calder, that there is doubt as to whether Cayman Islands
courts would enforce (a) judgments of U.S. courts obtained in actions against
these persons or us that are predicated upon the civil liability provisions of
the U.S. federal securities laws or (b) original actions brought in the Cayman
Islands against us, or these persons, predicated upon the U.S. federal
securities laws.
There is no treaty in effect between the United States and the Cayman
Islands providing for this enforcement, and there are grounds upon which
remedies available under the U.S. federal securities laws would not be allowed
in Cayman Islands courts as contrary to that nation's policy.
USE OF PROCEEDS
We will not receive any proceeds from the offering. The selling shareholder
will receive all proceeds from the offering, net of the underwriting discount.
We will pay all of the expenses of the offering, including the expenses of the
selling shareholder, other than the underwriters' discounts and commissions. For
a description of the contractual provisions under which we will pay these
expenses, see "Our Relationship with Kuwait Petroleum Corporation -- Related
Party Agreements -- Intercompany Agreement."
20
<PAGE> 21
PRICE RANGE OF ORDINARY SHARES AND DIVIDEND HISTORY
Our ordinary shares are listed on the New York Stock Exchange under the
symbol "SDC." The following table sets forth the high and low prices of the
ordinary shares as reported in the consolidated transaction reporting system of
the New York Stock Exchange for the periods indicated.
<TABLE>
<CAPTION>
PRICE
PER SHARE
----------------
CALENDAR PERIOD HIGH LOW
--------------- ---- ---
<S> <C> <C>
1998
First Quarter............................................. $41.50 $29.75
Second Quarter............................................ 42.94 28.44
Third Quarter............................................. 31.44 12.25
Fourth Quarter............................................ 21.19 11.19
1999
First Quarter............................................. 20.38 13.00
Second Quarter............................................ 23.31 16.19
Third Quarter............................................. 27.00 19.13
Fourth Quarter............................................ 26.00 19.00
2000
First Quarter............................................. 38.38 24.38
Second Quarter (through June 27, 2000).................... 39.13 28.50
</TABLE>
See the cover page of this prospectus for a recent price of the ordinary
shares. As of May 31, 2000, there were approximately 285 shareholders of record
in the United States holding 40,529,317 ordinary shares and approximately 215
shareholders of record outside of the U.S. holding 74,614,935 ordinary shares.
These numbers include persons or entities holding shares as nominees for
beneficial owners.
We paid a dividend of $0.0325 per share during each period shown in the
table above. The dividends we paid in a given quarter related to the immediately
preceding quarter. On June 6, 2000, we announced the declaration of a dividend
for our second quarter of $0.0325 per share payable on July 17, 2000 to holders
of record of our ordinary shares as of the close of business on June 30, 2000.
Purchasers of ordinary shares in this offering will not receive this dividend.
As a matter of current policy, we intend to pay quarterly dividends on the
outstanding ordinary shares, presently at the quarterly rate of $0.0325 per
share. Our payment of dividends in the future, if any, will be at the discretion
of our board of directors and will depend upon our results of operations,
financial condition, cash requirements, future business prospects and other
factors. We cannot assure you that we will pay any dividends in the future.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read this information along with our consolidated financial
statements and the notes to those financial statements included in this
prospectus.
RESULTS OF OPERATIONS
GENERAL
OVERVIEW. The contract drilling industry is a highly competitive and
cyclical industry that is influenced by customer drilling budgets and
expenditures and oil and natural gas pricing, consumption and demand. Our
contract drilling revenues vary based upon demand, which affects the number of
days the rig fleet is utilized and the dayrates received. Revenue can also
increase or decrease as a result of the acquisition or disposal of rigs. To
improve utilization, realize higher dayrates or retain market share, we may move
our rigs from one market to another. During the period in which a rig is moved
to a new market, revenues generally are adversely affected. As a response to
changes in demand and dayrate conditions, we may withdraw a rig from the market
by "stacking" it in an idle mode or may reactivate a rig that was previously
stacked. Withdrawing a rig from a market may decrease revenues and reactivating
a rig may increase revenues. The volatile and cyclical nature of the industry
may be further exacerbated as newly built rigs enter the market and drilling
companies compete for the opportunities to contract offshore and land rigs.
INDUSTRY CONDITIONS. During an up cycle in the contract drilling industry,
our drilling services are in high demand, and we may contract our drilling fleet
at relatively high dayrates. During an industry down cycle, we compete
aggressively for drilling contracts at lower rates and we often must accept less
favorable contract terms. In addition, during a down cycle, we may have to lay-
up or "stack" idle rigs, which often results in terminating the employment of
all or part of the associated rig crews.
The volatility of our business is caused by many factors beyond our
control, including:
- the current and anticipated prices of oil and natural gas;
- the drilling expenditures of oil and gas companies;
- political and economic factors, including war and civil disturbances,
export sales restrictions, embargoes and expropriation or nationalization
with or without compensation; and
- the conversion of existing rigs and construction of new rigs by our
competitors.
Oil and natural gas prices are extremely volatile and are affected by
numerous factors, including:
- worldwide demand for oil and natural gas;
- the ability of the Organization of Petroleum Exporting Countries, also
referred to as OPEC, to set and maintain production levels and pricing;
- the level of production of non-OPEC countries;
- the policies of the various governments regarding exploration and
development of their oil and natural gas reserves;
- advances in exploration and development technology; and
- the political environment of oil-producing regions.
22
<PAGE> 23
During the second quarter of 1998, drilling activity slowed in response to
weak oil prices that had been declining since late 1997. Oil and gas companies
responded to depressed prices by reducing their drilling expenditures, thus
reducing rig utilization. As a result, for the year ended December 31, 1999, we
experienced sequential quarterly declines in rig utilization and generally lower
average rig dayrates, the combination of which led to decreased operating
revenues and lower net income. Other revenues, including those associated with
mobilization, incentive programs, drilling related services and project
management, were adversely impacted as well. We took action to minimize the
consequent decline in operating margin, such as selectively reducing personnel
employment as rigs became idle, deferring non-essential operating expenses,
reducing land based support personnel, deferring compensation actions and
applying other cost reduction measures. We will continue to evaluate market
conditions and make further adjustments as appropriate.
While the drilling industry has benefited from the increase in oil and
natural gas prices beginning in the second quarter of 1999, the industry is
still suffering from the latest downturn in rig utilization and dayrates. We
believe that if oil and natural gas prices remain at or around current levels,
the offshore drilling market will improve moderately during 2000. The recent
improvement in the offshore drilling market began in the U.S. Gulf of Mexico,
where dayrates tend to be more responsive to changes in oil and natural gas
prices than in international markets. The international markets in which we
operate recently have begun to recover as the major and national oil and gas
companies that dominate these markets experience increased cash flows. As a
result, we expect that these oil and gas companies will increase their
exploration and production spending.
RECENT DEVELOPMENTS. Our drilling operations have recently begun to recover
from the industry-wide downturn. Our earnings during the first quarter of 2000
were an improvement over our earnings in the fourth quarter of 1999, which
quarter had marked our fourth successive quarter of declining income.
During the first quarter of 2000 compared to the fourth quarter of 1999,
our total operating revenues increased $7.4 million while our total operating
costs increased only $1.0 million, equating to an operating margin increase of
$6.4 million, or 17.1%. Operating margins from our heavy duty harsh environment
jackups increased mainly due to the first full quarter of operations of the
Galaxy III and higher utilization of the Monitor. Increased utilization of our
300-350 foot premium cantilever jackups, mainly those working in Egypt, Saudi
Arabia and Indonesia, and of our 200-250 foot jackups working in Egypt also
resulted in increased revenues. The identified increased jackup revenues were
partly offset by costs associated with increased maintenance activities on Rig
134 while in the shipyard. The semisubmersible rig business segment margin
decreased primarily due to maintenance costs incurred on Rig 135 and on the
Aleutian Key while idle. The land rig business segment margin decreased slightly
due to lower utilization and average dayrates.
Operating income for the quarter ended March 31, 2000 increased $4.0
million, or 25.4%, compared to the quarter ended December 31, 1999. This
increase resulted primarily from the operating margin increase of $6.4 million,
partially offset by $1.8 million increased depreciation and amortization
expense, mainly due to full quarter operations of the Galaxy III, and $0.4
million increased general and administrative expense. Other income (expense),
net, decreased $1.2 million and the provision for income taxes increased $0.9
million, leading to a $1.9 million, or 11.8%, increase in net income for the
first quarter of 2000 compared with the last quarter of 1999.
OPERATING REVENUES. We derive our revenues primarily from dayrates under
drilling contracts and the provision of drilling related services. A drilling
contract may provide both dayrate and drilling related service revenues.
23
<PAGE> 24
Changes in or renewals of contracts may alter the composition of our
revenues. We recognize revenues from dayrate drilling contracts as we perform
the required work. When we are required to move or enhance a rig, we may receive
a lump-sum payment to offset all or a portion of the cost. When we move an
offshore rig from one market to another under a contract, we recognize
mobilization revenues less costs incurred over the term of the related drilling
contract. If we move a rig without a contract, we immediately charge all costs
incurred against income. We recognize payments received for rig enhancements as
revenues over the term of the related drilling contract. Revenues from contract
drilling may fluctuate from quarter to quarter due to the timing of contract
completions, mobilizations, scheduled maintenance and the weather.
We also earn revenue by providing drilling related services to the
international oil and gas industry, including third party rig operations,
incentive drilling, drilling engineering and project management. We recognize
revenues from third party rig operations and drilling engineering services as we
perform the services. We may derive revenues from performance-based incentive
drilling contracts, including turnkey and footage contracts, by negotiating the
opportunity to earn incremental revenue by meeting or exceeding job performance
criteria. We recognize incremental revenues from these incentive drilling
contracts as the terms and conditions of each contract are fulfilled. We use the
percentage of completion method to account for project management contracts.
Revenues from drilling services fluctuate from quarter to quarter as a result of
the amount of services being performed during the quarter and the timing of
achievement of performance objectives under incentive based and project
management contracts.
OPERATING COSTS. Our operating costs are primarily made up of those
expenses necessary to maintain and staff our rigs. Additionally, we pay for
costs associated with local operations, including warehousing and staff support.
We recognize activities that maintain rather than upgrade the rigs as an
operating cost. These repair and maintenance activities may include, but are not
limited to, painting, inspections and routine overhauls and repairs. These
operating costs also include the purchase of parts and materials from third
parties, the prices of which vary from period to period and are, in part,
impacted by factors outside our control. These factors include the demand for
these parts and materials relative to supply and raw material costs. While we
have experienced significant increase in the cost of rig-related equipment and
spare parts due to manufacturer/supplier price increases over the past few
years, prices generally stabilized in 1998 and 1999. Our financial results could
be negatively impacted if these or similar cost increases occur in the future.
Operating costs are not affected by changes in dayrates, nor are they
necessarily significantly affected by fluctuations in utilizations. For
instance, if a rig is idle for a short period of time, we realize few decreases
in operating expenses because the rig typically is maintained in a
ready-to-operate state with a full crew. However, if a rig is expected to be
idle for more than a short period of time, we may reduce the size of the rig's
crew and take steps to maintain the rig in an idle or "stacked" mode, which
lowers expenses and partially offsets the negative impact on operating income
associated with loss of revenues. Furthermore, we often elect to perform
extensive maintenance on a rig while it is in the idle mode, in which case
operating expenses could be as high or higher than those experienced in the
operating mode.
OPERATING INCOME. In addition to operating revenues and costs, operating
income is also affected by the level of general and administrative expense,
depreciation and amortization expense and any gains or losses from the sale or
retirement of assets. We capitalize costs of rig upgrades and depreciate these
costs over the expected useful lives of the upgrades. Increased depreciation
expense subsequent to capital upgrade decreases operating income.
PROVISION FOR TAXES ON INCOME. We are not subject to income taxes in the
Cayman Islands. Generally, the relationship between income before provision for
income taxes and the provision for income taxes varies from period to period
because each country in which we operate has its own tax system and because the
amounts earned in, and subject to tax by, each jurisdiction
24
<PAGE> 25
change from period to period. Increases or decreases in our consolidated pre-tax
income may not lead to corresponding changes in our effective tax rate because a
substantial portion of our pre-tax income is either not subject to taxation or
is subject to taxation at rates lower than our average worldwide rates. For a
discussion of how our income is taxed, see note 5 of the notes to the
consolidated financial statements included in this prospectus.
The following tables present data relating to our operating revenues,
operating costs, operating income, utilization and average dayrates by business
segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------------------------
------------------------------------------ MARCH 31, DECEMBER 31, MARCH 31,
1997 1998 1999 1999 1999 2000
---- ---- ---- --------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Heavy duty harsh environment
jackup rigs................... $135,931 $148,997 $181,662 $ 45,262 $ 44,398 $ 55,395
Semisubmersible rigs............ 87,787 114,952 88,702 28,917 11,597 5,364
300-350 foot premium cantilever
jackup rigs................... 121,854 150,602 81,015 34,067 10,622 13,699
200-250 foot jackup rigs........ 122,817 143,164 58,351 20,794 11,293 14,419
Other marine rigs(1)............ 11,984 11,836 -- -- -- --
-------- -------- -------- -------- -------- --------
Total marine rigs....... 480,373 569,551 409,730 129,040 77,910 88,877
Land rigs....................... 125,527 147,880 143,227 34,801 36,424 34,592
Drilling related services....... 81,472 92,746 60,143 21,373 10,586 8,787
Other........................... 1,585 1,169 1,141 302 204 292
-------- -------- -------- -------- -------- --------
TOTAL OPERATING
REVENUES.............. 688,957 811,346 614,241 185,516 125,124 132,548
-------- -------- -------- -------- -------- --------
OPERATING COSTS(2)
Heavy duty harsh environment
jackup rigs................... 47,091 49,549 62,175 14,437 16,950 17,385
Semisubmersible rigs............ 41,694 63,712 43,969 10,715 11,034 13,181
300-350 foot premium cantilever
jackup rigs................... 59,645 58,373 48,459 13,238 11,230 12,664
200-250 foot jackup rigs........ 59,260 66,982 49,992 12,243 13,652 13,686
Other marine rigs(1)............ 8,477 8,659 -- -- -- --
-------- -------- -------- -------- -------- --------
Total marine rigs....... 216,167 247,275 204,595 50,633 52,866 56,916
Land rigs....................... 86,547 97,966 95,255 23,606 24,607 23,632
Drilling related services....... 61,641 65,665 42,437 15,633 6,953 6,081
Other........................... 9,478 3,116 13,476 3,641 3,175 2,014
-------- -------- -------- -------- -------- --------
TOTAL OPERATING COSTS... 373,833 414,022 355,763 93,513 87,601 88,643
-------- -------- -------- -------- -------- --------
OPERATING MARGIN
Heavy duty harsh environment
jackup rigs................... 88,840 99,448 119,487 30,825 27,448 38,010
Semisubmersibles................ 46,093 51,240 44,733 18,202 563 (7,817)
300-350 foot premium cantilever
jackup rigs................... 62,209 92,229 32,556 20,829 (608) 1,035
200-250 foot jackup rigs........ 63,557 76,182 8,359 8,551 (2,359) 733
Other marine rigs(1)............ 3,507 3,177 -- -- -- --
-------- -------- -------- -------- -------- --------
Total marine rigs....... 264,206 322,276 205,135 78,407 25,044 31,961
Land rigs....................... 38,980 49,914 47,972 11,195 11,817 10,960
Drilling related services....... 19,831 27,081 17,706 5,740 3,633 2,706
Other........................... (7,893) (1,947) (12,335) (3,339) (2,971) (1,722)
-------- -------- -------- -------- -------- --------
TOTAL OPERATING
MARGIN................ 315,124 397,324 258,478 92,003 37,523 43,905
-------- -------- -------- -------- -------- --------
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------------------------
------------------------------------------ MARCH 31, DECEMBER 31, MARCH 31,
1997 1998 1999 1999 1999 2000
---- ---- ---- --------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DEPRECIATION/(GAIN) LOSS ON SALE
OF ASSETS
Heavy duty harsh environment
jackup rigs................... $ 10,974 $ 12,423 $ 18,034 $ 4,545 $ 4,537 $ 6,292
Semisubmersibles................ 3,752 4,975 6,558 1,518 1,802 1,821
300-350 foot premium cantilever
jackup rigs................... 9,625 9,836 10,535 2,679 2,519 2,853
200-250 foot jackup rigs........ 7,185 9,011 9,378 2,295 2,321 2,092
Other marine rigs(1)............ 321 231 -- -- -- --
-------- -------- -------- -------- -------- --------
Total marine rigs....... 31,857 36,476 44,505 11,037 11,179 13,058
Land rigs....................... 12,138 10,387 23,219 5,715 6,031 6,169
Drilling related services....... 322 1,102 912 242 222 225
Other........................... 1,254 1,854 2,190 464 644 623
-------- -------- -------- -------- -------- --------
TOTAL DEPRECIATION/(GAIN) LOSS
ON SALE OF ASSETS........... 45,571 49,819 70,826 17,458 18,076 20,075
-------- -------- -------- -------- -------- --------
Unallocated amount:
General and administrative.... 20,149 22,161 18,596 5,189 3,726 4,121
-------- -------- -------- -------- -------- --------
OPERATING INCOME................ $249,404 $325,344 $169,056 $ 69,356 $ 15,721 $ 19,709
======== ======== ======== ======== ======== ========
OPERATING INCOME AS A PERCENTAGE
OF REVENUES................... 36.2% 40.1% 27.5% 37.4% 12.6% 14.9%
======== ======== ======== ======== ======== ========
AVERAGE RIG FLEET UTILIZATION
Heavy duty harsh environment
jackup rigs................... 99.0% 98.3% 93.0% 100.0% 81.1% 91.9%
Semisubmersible rigs............ 97.2 91.1 84.7 100.0 54.3 33.3
300-350 foot premium cantilever
jackup rigs................... 97.2 94.7 74.0 89.7 60.6 67.3
200-250 foot jackup rigs........ 99.3 88.4 48.2 54.2 47.9 72.3
Other marine rigs(1)............ 100.0 100.0 -- -- -- --
Average of all marine
rigs.................. 98.4 93.0 69.9 80.2 59.6 70.6
Land rigs....................... 90.8 88.8 68.6 73.0 69.5 68.1
AVERAGE DAYRATES
Heavy duty harsh environment
jackup rigs................... $ 94,005 $100,132 $105,434 $100,582 $112,400 $110,349
Semisubmersible rigs............ 82,507 115,298 95,584 107,100 77,313 58,945
300-350 foot premium cantilever
jackup rigs................... 42,952 54,487 37,472 52,735 23,816 24,862
200-250 foot jackup rigs........ 37,662 49,299 36,838 47,367 28,446 27,413
Other marine rigs(1)............ 16,416 18,237 -- -- -- --
Average of all marine
rigs.................. 51,443 64,707 64,050 71,490 56,131 53,220
Land rigs....................... 14,611 15,642 17,593 16,596 17,271 16,924
</TABLE>
---------------
(1) During the fourth quarter of 1998, our lake barge rig, the Rey del Lago, was
retired from service. Effective January 1, 1999, we reclassified our
platform rig as a component of drilling related services.
(2) Exclusive of depreciation which is presented separately below.
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
OPERATING REVENUES. Our total operating revenues in the first quarter of
2000 decreased $53.0 million, or 28.6%, compared to the first quarter of 1999.
Revenues from our heavy duty
26
<PAGE> 27
harsh environment jackup rig fleet increased $10.1 million, or 22.4%, primarily
because of the commencement of operation of Galaxy III on December 5, 1999,
which generated $14.2 million of additional revenue. Partially offsetting this
increase were lower utilization, equal to $3.0 million, primarily for the
Monitor, and lower average dayrates, equal to $1.1 million. Operating revenues
for our semisubmersible rigs decreased $23.6 million, or 81.5%, mainly due to
idle time incurred for Rig 135 and the Aleutian Key, equal to $19.8 million, and
a 45.0% decrease in average dayrates, equal to $3.8 million. Revenues from our
300-350 foot premium cantilever jackups decreased $20.4 million, or 59.8%,
primarily because of a 52.9% decrease in average dayrates, equal to $16.3
million, and decreased utilization of rigs in Egypt and Saudi Arabia, equal to
$5.2 million. These decreases were partially offset by increased utilization of
the Galveston Key in Indonesia, equal to $1.1 million. Revenues from 200-250
foot jackup rigs decreased $6.4 million, or 30.7%, mainly due to a 42.1%
decrease in average dayrates, equal to $8.2 million, lower utilization of Rig
103 in Qatar, equal to $2.0 million, and the idling of Rig 134 as it was
upgraded during the first quarter of 2000, equal to $1.9 million. These
decreases were partially offset by increased utilization, equal to $5.7 million,
of rigs in Egypt and for Rig 127 in Qatar. Revenues from drilling related
services decreased $12.6 million, or 58.9%, primarily because of a $6.7 million
decrease in revenues from incentive contracts and a $6.1 million decrease in
third party rig operations. These decreases were partially offset by $0.3
million in revenues from our platform rig. Revenues from both incentive drilling
and third party rig operations decreased mainly due to lower activity in the
North Sea.
OPERATING COSTS. Total operating costs decreased $4.9 million, or 5.2%.
Operating expenses from heavy duty harsh environment jackup rigs increased $2.9
million, or 20.4%, primarily due to the commencement of Galaxy III operations on
December 5, 1999. Semisubmersible rig operating costs increased $2.5 million, or
23.0%, primarily due to maintenance costs incurred on Rig 135 and on the
Aleutian Key while idle. Operating costs for the 200-250 foot jackups rigs
increased $1.4 million, or 11.8%, primarily due to increased utilization.
Operating expenses from drilling related services decreased $9.6 million, or
61.1%, primarily due to a $6.3 million decrease in expenses associated with
incentive drilling contracts and a $3.2 million decrease in expenses from third
party operations. Other operating expenses decreased $1.6 million, or 44.7%,
primarily due to decreased provision for inventory obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
$1.1 million, or 20.6%, primarily due to lower employee benefit costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $2.7 million, or 15.3%, for the quarter ended March 31, 2000 as
compared with the same period in the prior year. The addition of the Galaxy III
added $1.7 million of depreciation expense and the addition of the Rig 180
increased depreciation expense by $0.4 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 $2.1 million for the
quarter ended March 31, 2000, mainly due to increased investment income,
primarily due to higher invested balances of cash and cash equivalents.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income decreased
$7.3 million, or 65.2%, for the first quarter of 2000 as compared with the same
quarter of 1999. The provision for income taxes represents 2.9% of our revenue
for the quarter ended March 31, 2000 versus 6.0% for the quarter ended March 31,
1999. Our effective tax rate for the quarter ended March 31, 1999 was 16.1% and
we estimate for the quarter ended March 31, 2000 was 17.6%, which we believe is
indicative of the effective tax rate for the year ending December 31, 2000.
NET INCOME. Net income for the quarter ended March 31, 2000 decreased $40.2
million, or 68.7%, to $18.3 million as compared to $58.5 million for the same
period in the prior year. This decrease resulted primarily from $53.0 million
decreased operating revenues and $2.7 million increased depreciation and
amortization expense, partially offset by decreased operating
27
<PAGE> 28
expense of $4.9 million, $2.1 million higher other income (expense), net,
decreased general and administrative expense of $1.1 million and a $7.3 million
decrease in the provision for income taxes.
YEARS ENDED DECEMBER 31, 1999 AND 1998
OPERATING REVENUES. Our total operating revenues decreased $197.1 million,
or 24.3%, during 1999 compared to 1998. Revenues from our heavy duty harsh
environment jackup rig fleet increased $32.7 million, or 21.9%, primarily
because 1999 was the first full year of operations for the Galaxy II. It
contributed $41.6 million to our 1999 revenues. Also, the Galaxy III began
operations on December 5, 1999, which contributed $4.1 million to our 1999
revenues. These increased revenues, however, were partially offset by lower
utilization, equal to $8.1 million, and lower average dayrates, equal to $4.9
million, for our heavy duty harsh environment jackup rigs overall.
Semisubmersible rig revenues decreased $26.3 million, or 22.8%, mainly due to
17.1% lower average dayrates, equal to $17.6 million, and lower utilization,
equal to $8.7 million. Revenues from 300-350 foot premium cantilever jackups
decreased $69.6 million, or 46.2%, primarily because of a 31.2% decrease in
average dayrates, equal to $46.4 million, and decreased utilization of rigs in
Egypt, Indonesia, Vietnam and Malaysia, equal to $27.8 million. These decreased
revenues were partially offset by increased utilization of the Compact Driller,
equal to $4.6 million. Revenues from 200-250 foot jackup rigs decreased $84.8
million, or 59.2%, mainly due to lower utilization, equal to $54.0 million, of
rigs in Egypt, Qatar and Venezuela and a 25.3% decrease in average dayrates,
equal to $30.8 million. Other marine revenues decreased $11.8 million due to the
retirement of the Rey del Lago and the reclassification of our platform rig to
drilling related services. Revenues from land rigs decreased $4.7 million, or
3.1%, primarily due to decreased utilization, equal to $38.1 million, and lower
average dayrates, equal to $2.0 million, earned by rigs in Egypt, Oman, Qatar
and Venezuela. These decreased revenues were partially offset by $21.8 million
of increased revenue from the first full year of operations of three rigs placed
in service in 1998 and $13.6 million of increased revenue from two new rigs
placed in service during 1999. Revenues from drilling related services decreased
$32.6 million, or 35.2%, due to a $16.9 million decrease in revenues from
incentive contracts and decreased third party rig operations revenues of $19.7
million. These decreased revenues were also partially offset by $4.0 million in
revenues from our 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, Qatar 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.
OPERATING COSTS. Our total operating costs decreased $58.3 million, or
14.1%, in 1999 compared to 1998. Operating expenses from heavy duty harsh
environment jackup rigs increased $12.6 million, or 25.5%, primarily because
1999 was the first full year of operations for the Galaxy II. Also, the Galaxy
III began operations on December 5, 1999, which contributed to these increased
costs. Semisubmersible rig operating costs decreased $19.7 million, or 31.0%,
primarily due to non-recurring Rig 140 upgrade costs in 1998 and lower
amortization of mobilization costs for Rig 135 in 1999. Operating costs for the
300-350 foot premium cantilever jackup rigs decreased $9.9 million, or 17.0%,
primarily due to lower utilization. Operating costs for the 200-250 foot jackup
rigs decreased $17.0 million, or 25.4%, primarily due to lower utilization of
rigs in Egypt, Qatar and Venezuela. These decreased costs were partially offset
by increased maintenance activity. Other marine operating expenses decreased
$8.7 million due to the retirement of our lake barge and the reclassification of
our platform rig to drilling related services. Operating costs associated with
land rigs decreased $2.7 million, or 2.8%, primarily due to reduced utilization.
These decreased costs were partially offset by increased costs associated with
the first full year operations of three rigs placed in service in 1998, equal to
$12.6 million, and costs for two new rigs placed in service in 1999, equal to
$7.0 million. Operating expenses from drilling related services decreased $23.2
million, or 35.4%, primarily due to a $10.6 million
28
<PAGE> 29
decrease in expenses from incentive drilling activities and $15.5 million
decreased expenses from third party rig operations. These decreased costs were
also partially offset by $2.8 million in expense from our reclassified platform
rig. Other operating expenses increased $10.4 million, primarily due to
increased provision for inventory obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
$3.6 million, or 16.1%, primarily due to decreased costs associated with reduced
staff and lower employee benefit costs.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expense
increased $15.8 million, or 28.4%, for the year ended December 31, 1999 as
compared with 1998. Depreciation of land rigs placed in service during 1998 and
1999 resulted in increased expense of $6.8 million. The addition of the Galaxy
II at the end of 1998 increased depreciation expense by $5.3 million in 1999.
The remainder of the increase was due to depreciation of general capital
additions to all other rigs and equipment.
GAIN ON SALE OF ASSETS. Gain on sale of assets decreased $5.2 million for
the year ended December 31, 1999 as compared with the prior year. During 1998,
we recognized a $4.8 million gain due to insurance recovery for damages
sustained on a land rig following a blowout incident. The remaining decrease of
$0.4 million resulted from lower sales and dispositions of miscellaneous
equipment.
OTHER INCOME OR EXPENSE, NET. Other income increased $8.1 million during
1999 compared with 1998, mainly due to $4.9 million increased investment income
associated with higher invested balances of cash and cash equivalents, $1.6
million decreased foreign exchange losses, primarily from operations in
Indonesia and Venezuela, and $1.6 million lower non-operating charges, mainly
due to a decrease in the provision for contingency reserves.
PROVISION FOR TAXES ON INCOME. The provision for income taxes for the year
ended December 31, 1999 decreased $10.9 million, or 27.5%, primarily due to
lower reportable earnings, principally in Egypt and the North Sea. This decrease
was partially offset by the commencement of Galaxy II operations in Canada and
Rig 135 operations in Trinidad. Our annualized effective tax rate increased to
16.1% in 1999 from 12.1% for 1998 due to changes in the mix of reportable
earnings generated within the various taxing jurisdictions in which we operate.
The provision for income taxes represents 4.7% of our 1999 revenue versus 4.9%
of our 1998 revenue.
NET INCOME. Net income for the year ended December 31, 1999 decreased
$137.3 million, or 47.8%, to $149.8 million as compared to $287.1 million for
the prior year. This decrease resulted primarily from $197.1 million of
decreased operating revenues, increased depreciation and amortization expense of
$15.8 million and $5.2 million lower gains on sale of assets. Partially
offsetting these decreases to net income were lower operating expense of $58.3
million, decreased general and administrative expense of $3.6 million, $8.1
million of higher other income, net and a $10.9 million decreased provision for
income taxes.
YEARS ENDED DECEMBER 31, 1998 AND 1997
OPERATING REVENUES. Our total operating revenues increased $122.4 million
in 1998, or 17.8%, compared to 1997. Revenues from our heavy duty harsh
environment jackup rig fleet increased $13.1 million, or 9.6%. Average dayrates
increased 6.5%, or $8.4 million. Our rig Galaxy II began operations on November
9, 1998, contributing revenues of $6.0 million in 1998. The Galaxy I worked an
additional eight days in 1998, contributing revenues of $0.8 million. These
increased revenues were partially offset by a decrease in revenue of $2.1
million due to the Magellan being idle while completing certification
inspections and preparing for a new contract. Operating revenues for our three
semisubmersibles increased $27.2 million, or 30.9%, mainly due to a 39.7%
increase in average dayrates, equal to $30.5 million, and 31 days increased Rig
135 utilization in the North Sea, equal to $3.0 million. These increases were
29
<PAGE> 30
partially offset by 98 days lower utilization of Rig 140, equal to $6.3 million,
as it was relocated from the Gulf of Mexico to the North Sea and undergoing a
planned shipyard maintenance and capital upgrade program before the commencement
of its new contract. Revenues from our 300-350 foot premium cantilever jackups
increased $28.7 million, or 23.6%, primarily because of a 26.9% increase in
average dayrates, equal to $33.7 million. These increased revenues were
partially offset by lower utilization, equal to $5.0 million, mainly for the
Parameswara as it was moved from Australia to Malaysia and the Compact Driller
as it was moved from Gabon to Thailand. Revenues from 200-250 foot jackup rigs
increased $20.3 million, or 16.6%, mainly due to a 30.9% increase in average
dayrates, equal to $33.3 million. These increased revenues were partially offset
by 357 days lower utilization, equal to $12.9 million, primarily on Rig 134 in
Indonesia, Rig 127 in Qatar, the Key Victoria in Venezuela and Rig 141 in Oman.
Revenues from land rigs increased by $22.4 million, or 17.8%. Four new land
rigs, three in South America and one in North Africa, commenced operations in
the calendar year ended December 31, 1998, increasing revenues by $10.7 million.
Higher utilization of four rigs that were placed in service in the Middle East
during 1997 contributed higher revenues of $14.5 million in 1998. Revenues from
the remaining land rigs decreased $2.8 million due to 475 days decreased
utilization, equal to $6.5 million. These decreased revenues were partially
offset by increased average dayrates, equal to $3.7 million. Revenues from
drilling related services increased $11.3 million, or 13.8%, primarily because
of a $14.0 million increase in revenues from incentive contracts. These
increased revenues were partially offset by a $2.7 million decrease in third
party rig operations revenues. Incentive drilling revenues increased because of
an increase in the number of contracts containing incentive based provisions,
primarily in the North Sea. Third party operations revenues decreased mainly due
to the August 1997 implementation of a joint venture company that operates a
third party semisubmersible in the Caspian Sea. We solely operated the rig
before that date. Decreased well engineering services in the North Sea were
partially offset by increased activity in the Middle East.
OPERATING COSTS. Our total operating costs increased $40.2 million in 1998,
or 10.8%, compared to 1997. Operating costs for our heavy duty harsh environment
jackup rigs increased $2.5 million, or 5.2%, primarily due to increased costs
associated with a new contract for the Magellan and the commencement of
operations of the Galaxy II in November 1998. Semisubmersible rig operating
costs increased $22.0 million, or 52.8%, primarily due to the relocation of Rig
140 from the Gulf of Mexico and costs incurred for its planned shipyard
maintenance program before commencing new work in the North Sea. Operating costs
for our 200-250 foot jackup rigs increased $7.7 million, or 13.0%, mainly due to
increased costs associated with a new contract for the Key Victoria in South
America, increased costs associated with maintenance and support on the Key
Bermuda in Nigeria and increased maintenance costs for Rig 127 in Qatar.
Operating costs associated with land rigs increased $11.4 million, or 13.2%, in
1998 primarily due to the staged deployment of eight additional rigs during the
years ended December 31, 1998 and December 31, 1997. The deployment of three
rigs in South America and one in North Africa during 1998 increased operating
costs by $7.5 million. Increased utilization of rigs deployed in 1997, two to
Saudi Arabia and two to the Kuwait-Saudi Partitioned Neutral Zone, resulted in
increased expense of $7.2 million. These increased costs were partially offset
by a decrease of $3.3 million in land rig operating costs resulting mainly from
decreased utilization. Operating costs from drilling related services increased
$4.0 million, or 6.5%. Incentive drilling expense increased $7.5 million mainly
due to an increase in the number of contracts containing incentive based
provisions in the North Sea. Third party rig operations expenses decreased $3.5
million mainly due to the August 1997 implementation of a joint venture company
that operates a third party semisubmersible in the Caspian Sea and decreased
well engineering services in the North Sea. These decreased costs were partially
offset by increased activity in the Middle East. The $6.4 million, or 67.1%,
decrease in other operating costs was primarily due to reduced provision for
inventory obsolescence.
30
<PAGE> 31
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$2.0 million, or 10.0%, primarily due to increased costs associated with
becoming a public company in June 1997, equal to $1.0 million, increased
employee benefit plan costs, equal to $0.5 million, and increased costs
associated with higher staff levels, equal to $0.5 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $9.6 million, or 20.8%, for the year ended December 31, 1998 as
compared with the same period in the prior year. Depreciation of eight new land
rigs placed in service during 1998 and 1997 and the Galaxy II resulted in
increased expense of $2.8 million in 1998, with the remainder of the increase
due to depreciation of general capital additions to all other rigs and
equipment.
GAIN ON SALE OF ASSETS. Gain on sale of assets increased $5.4 million for
the year ended December 31, 1998 as compared with the prior year. On July 10,
1998, Rig 162, one of our land rigs operating in Saudi Arabia, was severely
damaged following a blowout and subsequent fire. As permitted by the drilling
contract, the customer elected to cancel the remaining term of the contract and
we determined that the rig would not be rebuilt. We received $13.8 million total
proceeds from our insurance carrier in an unrepaired partial loss settlement.
Because of this settlement, we recognized a $4.8 million gain during the fourth
quarter of 1998. The remaining increase of $0.6 million resulted from increased
sales and dispositions of miscellaneous equipment.
OTHER INCOME OR EXPENSE, NET. This category experienced a $1.5 million
decrease for the year ended December 31, 1998. Foreign exchange losses increased
$1.7 million, primarily resulting from unfavorable movements of the dollar in
relation to the Indonesian rupiah and the Venezuelan bolivar. Other charges
increased $0.9 million, primarily due to increased provision for contingencies.
Investment income increased by $1.1 million, primarily due to higher invested
balances.
PROVISION FOR TAXES ON INCOME. The provision for income taxes for the year
ended December 31, 1998 increased $12.0 million, or 43.8%, primarily due to
increased earnings in North Africa, South America, Southeast Asia and the U.K.,
leading to an increase in our effective tax rate to 12.1% from 10.9% for 1997.
The provision for income taxes represents 4.9% of our 1998 revenue versus 4.0%
of our 1997 revenue.
NET INCOME. Net income for the year ended December 31, 1998 increased $62.3
million, or 27.7%, to $287.1 million as compared to $224.8 million for the prior
year. This increase resulted primarily from the increase of $122.4 million in
our operating revenues and $5.4 million increased gain on sales of assets. This
increase was partially offset by increased operating expense of $40.2 million,
increased general and administrative expense of $2.0 million, $9.6 million
higher depreciation expense, lower other income or expense, net, of $1.5 million
and an increased provision for income taxes of $12.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $25.3 million for the three
months ended March 31, 2000 and $61.4 million for the three months ended March
31, 1999. The decrease in cash flows from operations was primarily attributable
to decreases in income before non-cash charges. Investing activities provided
cash of $125.0 million for the three months ended March 31, 2000 and used cash
of $89.5 million for the corresponding period in 1999. The $214.5 million
increase in cash provided by investing activities was primarily due to $184.9
million increased net maturities and purchases of marketable securities and
lower capital spending of $29.5 million. Maturities and purchases of marketable
securities for the three month periods were primarily for Eurodollar debt
instruments and commercial paper with original maturities of more than 90 but
less than 365 days. For the three months ended March 31, 2000, cash used in
financing activities was $1.8 million and for the three months ended March 31,
1999, cash used in financing activities was $1.6 million. Dividends paid to
shareholders amounted to $3.7 million in
31
<PAGE> 32
each period, partially offset by the issuance of shares under our employee share
purchase plan of $1.9 million in January 2000 and $2.1 million in January 1999.
Our current dividend policy contemplates payment of future quarterly dividends
of $0.0325 per ordinary share.
Net cash provided by operating activities was $254.9 million for the year
ended December 31, 1999 and $343.2 million for the year ended December 31, 1998.
The decrease in cash flows from operations was primarily attributable to
decreased net income adjusted for non-cash charges, partially offset by
decreased working capital requirements. Investing activities used cash of $266.7
million for the year ended December 31, 1999 and $272.5 million for the year
ended December 31, 1998. The decrease in investing activities of $5.8 million
was primarily due to $171.3 million decreased capital spending and advance
payments related to drilling rig construction, partially offset by $151.6
million increased net purchases of marketable securities and $13.8 million
non-recurring proceeds received in 1998 from the insurance settlement associated
with the loss of Rig 162. Cash used in financing activities was $12.8 million
for the year ended December 31, 1999, consisting of $14.9 million in dividends
paid, partially offset by $2.1 million generated by the January 1999 issuance of
shares under our employee share purchase plan. For the year ended December 31,
1998, cash used in financing activities was $14.9 million, consisting solely of
dividends paid.
Capital expenditures totaled $8.7 million for the three months ended March
31, 2000 and $38.3 million for the three months ended March 31, 1999,
principally related to rig upgrades and modernization in both periods and rig
expansion in 1999. For the three months ended March 31, 2000, capital
expenditures on the heavy duty harsh environment jackup rig Galaxy III decreased
$21.9 million and spending for new land rigs decreased $5.0 million compared to
the corresponding period in 1999. Capital expenditures totaled $124.6 million
for the year ended December 31, 1999 and $277.4 million for the year ended
December 31, 1998, principally related to rig expansion, upgrades and
modernization. In 1999, capital expenditures on the heavy duty harsh environment
jackup rigs Galaxy II and Galaxy III decreased $50.2 million for Galaxy II and
$35.5 million for Galaxy III, while spending on new land rigs and related
expenditures decreased $66.2 million.
Set forth in the table below is more detailed information on our capital
expenditures.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ----------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CAPITAL SPENDING BY SEGMENT:
Heavy duty harsh environment jackup rigs......... $121,096 $145,411 $ 60,533 $21,879 $ 911
Semisubmersibles................................. 11,418 14,329 8,154 1,000 1,310
300-350 foot premium cantilever jackup rigs...... 16,273 5,223 4,530 (133) 361
200-250 foot jackup rigs......................... 15,430 19,615 26,825 937 548
Other marine rigs................................ -- 293 -- -- --
-------- -------- -------- ------- ------
Total marine rigs.......................... 164,217 184,871 100,042 23,683 3,130
Land rigs........................................ 54,215 88,906 19,750 5,636 1,348
Drilling related services........................ -- 79 603 16 243
Other............................................ 10,760 3,544 4,213 8,929 4,019
-------- -------- -------- ------- ------
TOTAL CAPITAL SPENDING.................. $229,192 $277,400 $124,608 $38,264 $8,740
======== ======== ======== ======= ======
</TABLE>
We have budgeted a total of approximately $150.0 million for capital
expenditures during the year ending December 31, 2000. Of this $150.0 million,
we have budgeted $60.0 million of capital spending to meet contractual
obligations to customers and for rig upgrade, modernization and enhancement
projects. These projects represent numerous individual transactions spread over
the year 2000. Further, we have budgeted $50.0 million intended for use in
initiating either the
32
<PAGE> 33
construction or acquisition of one or more rigs, based on market conditions. We
also have budgeted $40.0 million for expected equipment upgrades to the
semisubmersible Dada Gorgud in anticipation of favorable contract negotiations
with oil companies in Azerbaijan. These negotiations have now been successfully
concluded, and we will be operating the rig under a drilling contract expected
to last approximately six years. We currently estimate having to spend
approximately $30.0 million, of which $7.4 million has been spent, for capital
improvements to the Dada Gorgud in 2000 to meet the required contract
specifications. In negotiating the dayrates under this contract, we took the
costs of these upgrades into account so that we could recover these costs. It is
expected that the entire 2000 capital program will be funded from internally
generated funds. Future capital spending, particularly rig fleet additions, is
subject to our prospects for securing appropriate drilling contract
opportunities and the availability of suitable rigs, rig components,
construction facilities and supplies.
From time to time, we review opportunities for rig acquisition,
construction or upgrade. Once we undertake a capital project, factors outside
our control, such as changes in market demand, may alter the project economics
and we may be unable to fully recoup the cost of these expenditures through
future drilling contracts. At any time, if plans for rig acquisition,
construction or upgrade were not completed, we would not have those rigs
available in our markets.
Our principal source of funds has been cash flow from operations. We
believe available cash resources and cash flows from operations will be
sufficient to meet our capital requirements during 2000.
We currently have a $35.0 million uncommitted credit facility for advances
and letter of credit with a major bank. As of March 31, 2000, we had no amounts
or commitments outstanding under this facility.
CURRENCY RISK AND INFLATION
Our international drilling and services contracts are partially payable to
us in local currency in amounts that approximate our estimated operating costs,
with the balance of the payments under the contract payable in U.S. dollars,
except in Kuwait and Saudi Arabia where we are paid entirely in local currency.
Because of our strategy, we have reduced our net asset or liability positions
denominated in local currencies. As a result, we have not experienced
significant gains or losses associated with changes in currency exchange rates.
However, to the extent that our revenues denominated in local currency do not
equal our local operating expenses, we are exposed to currency exchange
transaction losses, which could materially adversely affect our results of
operations. We have not historically entered into financial hedging arrangements
to manage risks relating to fluctuations in currency exchange rates. However, we
may enter into hedging contracts in the future if we assume significant foreign
currency risks.
Although inflation has not had a significant impact on our results of
operations during the past several years, labor availability and cost and vendor
prices and delivery fluctuate in response to overall drilling industry
conditions.
CREDIT RISK
Our customers consist primarily of major international, state owned and
large independent oil companies and their affiliates. We have not incurred any
charges for credit losses during the last five years. We cannot assure you,
however, that in the future these charges will not occur. These charges may
adversely affect our profitability.
33
<PAGE> 34
OTHER
Operational risks and hazards may result in extensive damage to or total
loss of drilling rigs, with personal injuries and loss of life, pollution, well
loss, well control expenses and/or wreck removal or other requirements. These
losses, liabilities or obligations may be uninsured or underinsured. As a result
of these hazards, we may sustain a loss of revenue by reason of rig loss or
damage and may have to pay extraordinary expenses for losses that are uninsured
or underinsured.
In our international operations, we are subject to many environmental laws
and regulations, including regulations controlling the discharge of materials
into the environment, requiring removal and clean-up of discharged materials or
otherwise relating to the protection of the environment. As a result, the
application of these laws could materially adversely affect our results of
operations by increasing our cost of doing business, discouraging our customers
from drilling for hydrocarbons or subjecting us to liability. Laws and
regulations protecting the environment have become increasingly stringent in
recent years and may impose liability on us for environmental damage and
disposal of hazardous materials even if we were not negligent or at fault. We
may also be liable for the conduct of others, or for our own acts even if our
acts complied with applicable laws at the time we performed those acts.
Our liquidity may also be adversely impacted by reason of war, political
turmoil, revolution, insurrection or similar events which could result in damage
to or loss of our rigs, either physically or by reason of nationalization,
expropriation or deprivation of use, or could impair the concessionary rights of
our customers, thus jeopardizing our drilling contracts. We do not normally
insure against these risks. These events could result in an actual or
constructive loss of substantial assets and the associated loss of revenues
and/or receivables.
IMPACT OF YEAR 2000
Our successfully implemented Y2K initiative spanned a period of three years
and cost approximately $3.0 million. Our worldwide operations were prepared to
overcome any failures experienced during the millennium rollover and leap year
periods. To date, we have not experienced any disruptions. However, our
contingency plans will remain in effect throughout 2000 as circumstances
dictate.
34
<PAGE> 35
BUSINESS
We are a leading international offshore and land contract driller of oil
and natural gas wells. We own and operate a high quality, technologically
advanced fleet of 27 marine drilling rigs and 33 land drilling rigs in 15
countries throughout the world. We primarily contract our drilling rigs, related
equipment and crews on a dayrate basis. We also provide drilling related
services to the international oil and gas industry. These drilling related
services include third party rig operations, incentive drilling and drilling
engineering and project management services.
At the core of our rig fleet are our heavy duty harsh environment jackup
rigs, which are capable of operating in water depths of up to 350-400 feet. We
own and operate one-third of the heavy duty harsh environment jackup rigs
currently in service in the drilling industry. Our fleet includes:
- six heavy duty harsh environment jackup rigs, including a recent
addition, the Galaxy III, placed in service on December 5, 1999;
- three semisubmersible rigs capable of operating in water depths of up to
2,300-2,400 feet;
- nine premium cantilever jackup rigs capable of operating in water depths
of up to 300-350 feet;
- eight jackup rigs capable of operating in water depths of up to 200-250
feet, six of which are cantilevered and two of which are specially
designed to operate in shallow water;
- one platform rig; and
- 33 land rigs, all specially equipped to operate in remote areas.
Our predecessor began U.S. land drilling operations in 1947, commenced
international land operations in 1948, expanded into offshore platform drilling
in 1956 and initiated mobile offshore rig operations in 1964. We were
incorporated in our current form under the laws of the Cayman Islands in 1990.
BUSINESS STRATEGY
As a leading provider of premium quality, cost-effective drilling services
to the international oil and gas industry, we tailor our services to the
particular needs of our customers. We also seek to take advantage of cyclical
upturns of our industry and mitigate the effects of the drilling industry's
cyclical downturns. The key elements of our strategy are:
MODERN RIG FLEET. We continually invest in our modern rig fleet by adding
new rigs and by upgrading and refurbishing rigs and associated equipment to
increase drilling productivity and prolong rig life. Since 1988, we have
invested over $1.0 billion in our rig fleet.
We rigorously evaluate each of our rig investments based on expected
long-term return on capital. We have added new rigs to our fleet during
downturns in the cyclical drilling market, enabling us to construct or acquire
rigs on favorable terms. We have also selectively built rigs during robust
markets after having obtained firm drilling contracts, ensuring utilization of
the rig upon completion. For example, before commencing construction of the
Galaxy II and the Galaxy III, our most expensive rig additions to date, we had
secured long-term drilling contracts at attractive dayrates. We believe this
fiscal discipline and long-term focus have enabled us to consistently earn
superior overall returns on invested capital in comparison with our competitors.
Our commitment to maintaining a modern rig fleet is evidenced by the
following:
- Between 1988 and 1993, during a down cycle in our industry, we made
significant investments in acquiring six jackup rigs, including four
heavy duty harsh environment jackup rigs;
35
<PAGE> 36
- From 1996 to 1999, we expanded our land rig fleet by 13 rigs;
- We placed two newly constructed heavy duty harsh environment jackups in
service, the Galaxy II on November 9, 1998, and the Galaxy III on
December 5, 1999;
- Over the past several years, our rig fleet upgrade, modernization and
enhancement program has included improvements in mud processing and
liquid storage capacity, jackup leg extensions, cantilever upgrades and
the capability to move certain of our rigs' drillfloors onto a customer's
platform to perform drilling operations; and
- During the year ended December 31, 1999, we invested $124.6 million in
capital improvements to and expansion of our drilling fleet. We have
budgeted capital investments of approximately $150.0 million for the year
ending December 31, 2000. Our ability to fund or finance future capital
expenditures, internally or from independent external sources, will
affect the results of our operations and financial condition.
We are currently monitoring and evaluating customer and competitor plans
and activities in exploring for oil and natural gas in increasingly deeper
water. Under appropriate circumstances, we may expand the scope of our
operations by entering the deep water market.
INTERNATIONAL MARKETS. We currently operate our rigs outside the United
States in major market areas around the world, including South America, the
Middle East, North Africa, West Africa, the North Sea and Southeast Asia where
we have continuously operated for over 30 years. We believe the operational
expertise, international workforce and business relationships we have
established through our longstanding presence in our major international markets
provide a competitive advantage in securing work on attractive terms.
We believe focusing our business on international markets provides greater
opportunities to secure attractive contracts at high dayrates by giving us
access to a customer base that includes the largest oil and gas companies
worldwide. Historically, international markets have been less volatile than the
U.S. Gulf of Mexico offshore market and the U.S. land rig market, both of which
tend to rise and fall more rapidly in response to changes in energy prices and
rig supply/demand conditions. We have also been able to limit worldwide taxation
on our revenues, income and assets through tax-efficient business structures
which are afforded by our international operations and Cayman Islands
incorporation. We believe that we are better positioned than many of our
competitors to secure contracts in international markets because these markets
often require the specialized equipment and expertise we possess.
HIGH QUALITY MULTINATIONAL WORKFORCE. We believe that our highly trained,
experienced multinational rig crews and supervisors give us a competitive
advantage in the international drilling market. Our extensive hiring and
training of employees from the various countries in which we operate permit us
to be cost-competitive in bidding on contracts and allow us to meet or exceed
requirements concerning the hiring of local nationals.
We strive to retain as much of our rig and supervisory workforce as
possible, even when rigs are idle for brief periods, to be able to deliver the
depth of experience and training required to fully satisfy our customers'
expectations. Our ability to deliver cost-effective, successful results to our
customers that meet or exceed customer requirements is an important
distinguishing characteristic of Santa Fe.
As of May 31, 2000, we had approximately 5,300 full time employees from
more than 40 nations, over 95% of whom work outside the United States.
Approximately two-thirds of our employees are citizens of countries outside
North America and Europe. We also have an experienced management team. Our 14
officers have served the company for an average of 26 years and our 39
international managers have served the company for an average of 17 years. The
quality of our workforce and training program is reflected in our safety
36
<PAGE> 37
performance record, which has consistently exceeded the industry norm over the
past decade as compiled by the International Association of Drilling
Contractors.
BALANCED AND FLEXIBLE CONTRACTING. We seek a mix of long- and short-term
drilling contracts with the objective of increasing our overall rig utilization
and long-term profitability in dynamic markets. While most of our contracts are
based on dayrates, we also consider performance based compensation to take
advantage of market opportunities.
STRONG FINANCIAL CONDITION. Our strong financial condition gives us the
flexibility to make major capital investments when favorable market conditions
and attractive opportunities present themselves. It also gives us the ability to
sustain our company during periods of decreased revenues. As of March 31, 2000,
we had no long-term debt and we had over $260 million in cash and marketable
securities.
SPECIALIZED DRILLING SERVICES. We distinguish ourselves through our ability
to provide specialized drilling services requiring advanced equipment and
technical expertise, such as high pressure, high temperature drilling,
underbalanced drilling and the capability to move certain of our rigs'
drillfloors onto a customer's platform to perform drilling operations.
DRILLING RIG FLEET AND DRILLING RELATED SERVICES
MARINE RIGS. A marine rig consists of a suite of drilling equipment mounted
on a hull or offshore platform. The drilling equipment is generally comprised of
a derrick or mast, hoisting equipment, a rotary system, well control equipment,
systems for storing, treating and pumping drilling fluids, and a power plant.
The specifications of this drilling equipment determines the drilling
capabilities of the rig. Offshore rigs also generally include living quarters,
cranes, heliports and storage areas for drill pipe and drill collars and other
materials. The design of the rig and its hull determines the marine areas in
which it can operate. Our marine fleet consists of 23 jackup rigs, three
semisubmersible rigs and one platform rig. Our marine rigs generally are
documented as vessels and are registered outside the U.S.
JACKUP RIGS. We classify our jackup rigs in three categories:
- heavy duty harsh environment rigs;
- 300-350 foot premium cantilever rigs; and
- 200-250 foot rigs.
A jackup rig is a mobile rig that jacks down its legs to stand on the sea floor
with its hull elevated above the water surface during drilling operations. For
transportation between locations, the legs are raised and the hull is floated.
The legs are raised and lowered by multiple jacking units attached to the legs.
The water depth limit for each rig is a function of several factors, including
leg length, sea floor conditions and the anticipated wind, wave and current
severity at the drilling location.
Jackup rigs can be used to drill exploration wells or, with features such
as a cantilever, skid-off or set-off capacity and top drive, to drill multiple
production wells at the same location. If the derrick, drill floor and
substructure are mounted on a cantilever, the rig can be positioned over an
adjacent platform or subsea template so that it can drill multiple wells at the
same location without repositioning the rig. Twenty-one of our 23 jackup rigs
are cantilevered. Six of them also have the capability to move the rig's
drillfloor onto a customer's platform for development drilling, commonly
referred to as "skid-off" or "set-off" capability. In addition, all of our
jackup rigs are equipped with top drives. A top drive is an electric motor
mounted in a derrick that enables the rig to drill long, highly deviated wells
both more efficiently and more safely than conventional rotary equipment.
37
<PAGE> 38
We own the world's largest fleet of heavy duty harsh environment jackup
rigs, six of the 18 currently in service in the industry. Three of these rigs,
the Galaxy I, Galaxy II and Galaxy III, are Universe class rig designs capable
of operating in water depths of up to 400 feet and are currently qualified to
operate year-round in the harsh environment of the central North Sea in water
depths of up to 360 feet. Our three other heavy duty harsh environment jackup
rigs, the Monarch, Monitor and Magellan, are Monarch class rig designs capable
of operating in water depths of up to 350 feet. These rigs are able to operate
year-round in the central North Sea in water depths of up to 300 feet.
Two of our 300-350 foot premium cantilever jackup rigs are capable of
operating in water depths up to 350 feet and seven are capable of operating in
water depths of up to 300 feet. Six of our 200-250 foot jackup rigs are capable
of operating in water depths of up to 250 feet, one in water depths of up to 230
feet and one in water depths of up to 200 feet. Two of these rigs, the Key
Bermuda and the Key Victoria, are specially designed with eight-foot drafts to
permit them to work in shallow water depths and are equipped with large cranes
that enable them to perform certain construction and well completion activities
as well as drilling work. One of our 200-250 foot jackup rigs, Rig 134, is
currently in the shipyard for upgrade to 300-foot water depth capability,
extended cantilever capacity and other significant activity. Rig 134 has been
reclassified as a 300-350 foot premium cantilever jackup rig effective January
1, 2000.
SEMISUBMERSIBLE RIGS. Our three semisubmersible rigs are floating vessels
that can be submerged so that a substantial portion of the lower hull is below
the water surface during drilling operations. Because of this submersion
feature, they are well suited to work in deeper water than jackup rigs. These
semisubmersible rigs include the machinery, quarters and drilling equipment on a
deck structure. The buoyancy of two submerged barge-shaped hulls supports the
deck structure. Our semisubmersible rigs are moved between drill sites by
pumping seawater ballast out of the hulls until the rig is raised to its transit
draft. Once the rig is positioned on location by tugs, seawater ballast is
pumped into the hulls until the water level is approximately midway between
hulls and upper deck structure. Our semisubmersible rigs are maintained on
station by an eight point mooring system.
All of our semisubmersible rigs are equipped with top drives. Our
semisubmersible rig in Equatorial Guinea, the Aleutian Key, is capable of
operating in water depths of up to 2,300 feet of water. Our semisubmersible rigs
in the North Sea, Rig 135 and Rig 140, are capable of operating in water depths
of up to 2,400 feet.
SANTA FE-OWNED PLATFORM RIG. We currently own and operate one platform rig
in the North Sea that consists of a number of self-contained drilling equipment
packages. When these packages are assembled on a customer's offshore production
platform, they form a complete drilling rig.
38
<PAGE> 39
Information concerning our marine fleet, as of May 31, 2000, is set forth
in the table below:
<TABLE>
<CAPTION>
SERVICE DATE/ MAXIMUM MAXIMUM BLOWOUT
YEAR-OF-LATEST WATER DRILLING PREVENTER
TYPE AND NAME ENHANCEMENT(1) RIG DESIGN ATTRIBUTES(2) DEPTH(FT) DEPTH(FT) (PSI)
------------- -------------- ---------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
HEAVY DUTY HARSH ENVIRONMENT JACKUP RIGS
Galaxy III........... 1999 F&G Universe IC; SO; ATDS; SCR 400 30,000 15,000
Galaxy II............ 1998 F&G Universe IC; SO; ATDS; SCR 400 30,000 15,000
Magellan............. 1992/1993 F&G Monarch IC; SO; ATDS; SCR 350 30,000 15,000
Galaxy I............. 1991 F&G Universe IC; SO; ATDS; SCR 400 30,000 15,000
Monitor.............. 1989 F&G Monarch IC; ATDS; SCR 350 30,000 15,000
Monarch.............. 1988/1996 F&G Monarch IC; ATDS; SCR 350 30,000 10,000
SEMISUBMERSIBLE RIGS
Rig 135.............. 1983/1989 F&G 9500 PA; ATDS; SCR 2,400 25,000 15,000
Rig 140.............. 1983/1998 F&G 9500 PA; ATDS; SCR 2,400 25,000 15,000
Aleutian Key......... 1976/1995 F&G L-907 ATDS; SCR 2,300 25,000 10,000
300-350 FOOT PREMIUM
CANTILEVER JACKUP RIGS
Compact Driller...... 1993 MLT 116C IC; TDS; SCR 300 25,000 10,000
Parameswara.......... 1993 BMC 300IC IC; SO; TDS; SCR 300 25,000 10,000
Key Hawaii........... 1983 Mitsui IC; ATDS; SCR 300 25,000 10,000
Key Singapore........ 1982/1994 MLT 116C IC; TDS; SCR 350 25,000 10,000
Rig 134(3)........... 1982/2000 F&G L-780 Mod. II IC; TDS; SCR 300 20,000 10,000
Rig 136.............. 1982 F&G L-780 Mod. II IC; TDS; SCR 300 20,000 10,000
Key Manhattan........ 1980/1996 MLT 116C IC; TDS; SCR 350 25,000 10,000
Galveston Key(3)..... 1978/1988 MLT 84/116C IC; TDS; SCR 300 25,000 10,000
Key Gibraltar........ 1976/1996 MLT 84/116C IC; SO; TDS; SCR 300 25,000 10,000
200-250 FOOT JACKUP RIGS
Rig 141.............. 1982 MLT 82SDC IC; TDS; SCR 250 20,000 10,000
Rig 124.............. 1980 Mitsui 200C-45 IC; TDS; SCR 250 20,000 10,000
Key Bermuda.......... 1980 Mitsui F550 IS; SD; TDS; SCR 200 20,000 10,000
Rig 127.............. 1981/1995 F&G L-780 Mod. II IC; TDS; SCR 250 20,000 10,000
Rig 105.............. 1975 MLT 52C IC; TDS; SCR 250 20,000 5,000
Key Victoria......... 1974/1996 MLT 80 IS; SD; TDS DC/DC 250 20,000 10,000
Rig 103.............. 1974/2000 MLT 52C IC; TDS; SCR 250 20,000 10,000
Britannia............ 1968/1987 Breit & Garcia IC; TDS; SCR 230 20,000 10,000
SANTA FE-OWNED PLATFORM RIG
Rig 82............... 1968/1995 National 1320 UE TDS; DC/DC N/A 20,000 5,000
</TABLE>
---------------
(1) Indicates the year we placed the rigs in service and corresponds to the year
built, except for the Parameswara, which was built in 1983, the Monarch,
which was built in 1986, and the Compact Driller, which was built in 1992.
The second date, if given, is the most recent year in which the rig
underwent a major upgrade in capacity and/or a refurbishment that extended
its useful working life. In some cases, the upgrade or refurbishment took
place over an extended period; and then the year given is the year in which
the work was completed.
(2) Attributes are abbreviated as follows:
"ATDS" means an advanced top drive system (Varco TDS 4 and above);
"DC/DC" means a power transmission system in which DC electricity is
generated by diesel engines and supplied directly to DC motors driving the
principal components of drilling equipment, for example, mud pumps,
drawworks, and rotary table;
"IC" means independent leg cantilever;
"IS" means independent leg slot rig;
"PA" means propulsion assist;
"SCR" means a highly efficient power transmission system which rectifies AC
power to DC power using a silicon controlled rectifier;
"SD" means shallow draft;
"SO" means skid-off or set-off capability; and
"TDS" means top drive drilling system.
(3) The Galveston Key and Rig 134 are owned by P.T. Santa Fe Supraco Indonesia,
a limited liability company of which we are a 95% shareholder. Before
January 1, 2000, Rig 134 was classified as a 200-250 foot jackup rig.
39
<PAGE> 40
As of May 31, 2000, the average age of our marine fleet, measured from the
date first placed in service by us, was 17.2 years. The average age for heavy
duty harsh environment jackup rigs was 6.8 years, for semisubmersible rigs was
18.9 years, for 300-350 foot premium cantilever jackup rigs was 16.5 years and
for 200-250 foot jackup rigs was 22.3 years.
LAND RIGS
Our company had its origins as a U.S. land drilling contractor and was a
pioneer in international land rig operations, especially in the Middle East and
Latin America. Although we have emphasized the development of our marine fleet,
we have maintained a substantial presence in selected international land rig
markets and continuously upgraded, modernized and enhanced these land rigs.
During the period 1996 to 1999, we selectively expanded our land rig fleet
through the addition of 13 land rigs, comprised of:
- six specialized, highly mobile rigs;
- two medium duty 2,000 horsepower rigs; and
- five heavy duty 3,000 horsepower rigs.
The majority of our land rigs are designed for use in remote desert
environments and generally include all facilities necessary to support living
and working in harsh and remote environments, including accommodation camps and
inventories of repair parts and materials. Each of the rigs is designed for
efficient disassembly, transport and reassembly. Eleven of the newer rigs are
specially designed as wheel-mounted units that can be moved quickly between well
locations. Four of the rigs are equipped with special "lift and roll" systems,
so that the rigs can be quickly moved between well locations on a pad site. Our
land rig operations in Kuwait and the Kuwait-Saudi Arabia Partitioned Neutral
Zone are supported by an extensive fleet of specialized rig transport equipment.
This equipment is comprised primarily of heavy duty trucks built and equipped
for desert service. Additionally, these operations are supported by a fleet of
heavy equipment, such as bulldozers, cranes and forklifts that prepare access
roads and drill site locations and facilitate the assembly and tear down of our
land rigs.
We historically have concentrated our land rig operations in the Middle
East, South America and North Africa. We have a longstanding operational history
in these areas, having first operated in each of them for over 25 years. As of
May 31, 2000, we had 33 land rigs in Kuwait, Venezuela, Egypt, Oman, Qatar, the
Kuwait-Saudi Arabia Partitioned Neutral Zone, the United Arab Emirates and Saudi
Arabia. As of May 31, 2000, the average age of our land rig fleet, measured from
the date first placed in service by us, was 11.2 years.
40
<PAGE> 41
Information concerning our fleet of land drilling rigs as of May 31, 2000
is set forth in the table below:
<TABLE>
<CAPTION>
MAXIMUM BLOWOUT
DRILLING PREVENTER
NAME RIG TYPE HORSEPOWER DEPTH (FT.) (PSI) POWER(1)
---- -------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
SANTA FE OWNED LAND RIGS
Rig 144 EMSCO C3 3,000 30,000 10,000 SCR
Rig 155 Oilwell E-3000 3,000 30,000 15,000 SCR
Rig 173 Gardner Denver 3000 3,000 30,000 10,000 SCR
Rig 174 EMSCO C3 3,000 30,000 10,000 SCR
Rig 176 Ideco 3000E 3,000 30,000 10,000 SCR
Rig 180 National 1625 3,000 30,000 15,000 SCR
Rig 158 Oilwell E-2000 2,000 25,000 10,000 SCR
Rig 94 National 110 UE 2,000 20,000 10,000 DC/DC
Rig 97 Oilwell E-2000 2,000 20,000 10,000 SCR
Rig 104 National 1320 UE 2,000 20,000 10,000 DC/DC
Rig 110 Oilwell E-2000 2,000 20,000 10,000 DC/DC
Rig 115 National 1320 UE 2,000 20,000 10,000 DC/DC
Rig 119 Oilwell E-2000 2,000 20,000 10,000 DC/DC
Rig 178 National 1320 2,000 17,000 5,000 SCR
Rig 179 National 1320 2,000 17,000 5,000 SCR
Rig 92 National 1320 2,000 16,000 10,000 DC/DC
Rig 157 Ideco 1700 UE 1,700 17,000 5,000 SCR
Rig 102 National 110 UE 1,500 16,000 5,000 DC/DC
Rig 147 National 110 UE 1,500 16,000 5,000 DC/DC
Rig 169 National 110 UE 1,500 16,000 5,000 SCR
Rig 170 National 110 UE 1,500 14,000 5,000 SCR
Rig 160 Dreco 1250 E 1,250 12,000 5,000 SCR
Rig 161 Dreco 1250 E 1,250 12,000 5,000 SCR
Rig 150 National 80 UE 1,000 11,500 5,000 SCR
Rig 151 National 80 UE 1,000 11,500 5,000 SCR
Rig 166 Wilson 75 900 7,000 5,000 Mech
Rig 167 Wilson 75 900 7,000 5,000 Mech
Rig 146 Kremco 750 750 10,000 5,000 SCR
Rig 171 Oilwell 660-E 750 10,000 5,000 SCR
Rig 172 Oilwell 660-E 750 10,000 5,000 SCR
Rig 159 Cooper 750 750 8,000 5,000 Mech
Rig 143 Ideco H37 ED 420 6,500 3,000 Mech
JOINT VENTURE OWNED LAND RIGS(2)
Rig 89 National 110 UE 1,500 16,000 10,000 DC/DC
QDC 3 Cooper 650 650 8,000 3,000 Mech
Rig 131 Portadril 330 1,000 None Mech
</TABLE>
---------------
(1) For purposes of this table:
"DC/DC" refers to a power transmission system in which direct current, or
DC, electricity is generated by diesel engines and supplied directly to
DC motors driving the principal components of drilling equipment, for
example mud pumps, drawworks and rotary table;
"Mech" is a power transmission system in which power to the principal
components of drilling equipment, for example mud pumps, drawworks and
rotary table, is supplied by direct mechanical linkage; and
"SCR" means a highly efficient power transmission system which rectifies
alternating current, or AC, power to DC power using a silicon controlled
rectifier.
(2) For purposes of this table, joint ventures refer only to joint ventures
which we account for on the equity method. The rigs listed are owned by
Qatar Drilling Company W.L.L., of which we are a 49% shareholder. We and
our co-venturer in Qatar Drilling Company W.L.L. have agreed to dissolve
the joint venture. The dissolution includes distribution of all of the
joint venture's ownership interest in its rigs and other equipment to us
and of the joint venture's cash to our co-venturer. For a description of
this and our other joint ventures, see "-- Joint Venture, Agency and
Sponsorship Relationships and Other Investments."
41
<PAGE> 42
RIG FLEET UTILIZATION
The following table describes our rig fleet utilization during the periods
indicated. For further discussion of our rig fleet utilization, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AVERAGE
FOR THE
AVERAGE FOR THE YEAR THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------- -------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
HEAVY DUTY HARSH ENVIRONMENT JACKUP RIGS
Total rigs(1)....................................... 4.0 4.1 5.1 5.0 6.0
Rigs under contract................................. 4.0 4.1 4.7 5.0 5.5
Utilization rate(2)................................. 99.0% 98.3% 93.0% 100.0% 91.9%
SEMISUBMERSIBLE RIGS
Total rigs.......................................... 3.0 3.0 3.0 3.0 3.0
Rigs under contract................................. 2.9 2.7 2.5 3.0 1.0
Utilization rate(2)................................. 97.2% 91.1% 84.7% 100.0% 33.3%
300-350 FOOT PREMIUM CANTILEVER JACKUP RIGS
Total rigs.......................................... 8.0 8.0 8.0 8.0 9.0
Rigs under contract................................. 7.8 7.6 5.9 7.2 6.1
Utilization rate(2)................................. 97.2% 94.7% 74.0% 89.7% 67.3%
200-250 FOOT JACKUP RIGS
Total rigs.......................................... 9.0 9.0 9.0 9.0 8.0
Rigs under contract................................. 8.9 8.0 4.3 4.9 5.8
Utilization rate(2)................................. 99.3% 88.4% 48.2% 54.2% 72.3%
OTHER MARINE RIGS(3)
Total rigs.......................................... 2.0 1.8 -- -- --
Rigs under contract................................. 2.0 1.8 -- -- --
Utilization rate(2)................................. 100.0% 100.0% -- -- --
LAND RIGS
Total rigs.......................................... 25.9 29.2 32.5 31.9 33.0
Rigs under contract................................. 23.5 25.9 22.3 23.3 22.5
Utilization rate(2)................................. 90.8% 88.8% 68.6% 73.0% 68.1%
</TABLE>
---------------
(1) We own the following six heavy duty harsh environment jackup rigs: Galaxy I,
Galaxy II, Galaxy III, Magellan, Monarch and Monitor. The other 12 heavy
duty harsh environment jackup rigs, currently in service in the industry
are: Ensco 100, Ensco 101, Maersk Endurer, Maersk Gallant, Maersk Giant,
Maersk Guardian, Rowan-Gorilla II, Rowan-Gorilla III, Rowan-Gorilla IV,
Rowan-Gorilla V, Smedvig West Epsilon and Transocean Nordic.
(2) "Utilization" means the percentage of the number of days a drilling rig is
earning a normal daily margin under a customer contract compared to the
total number of days within a specified period.
(3) During the fourth quarter of 1998, our lake barge rig, the Rey del Lago, was
retired from service. Effective January 1, 1999, we reclassified our
platform rig as a component of drilling related services.
DRILLING RELATED SERVICES
We provide drilling related services to the international oil and gas
industry, including third party rig operations, incentive drilling, and drilling
engineering and project management. These activities complement our drilling
business by enabling us to provide an expanded suite of services in response to
our customer requirements, and to enhance the utilization and financial
performance of our rig fleet. We are generally able to provide these services
with our existing workforce and infrastructure without investing significant
additional capital.
42
<PAGE> 43
THIRD PARTY RIG OPERATIONS. Our third party rig operations are presently
concentrated on oil and natural gas producing platforms in the North Sea, an
area where we also maintain substantial contract drilling operations. This
allows us to meet the needs of our customers and to make more efficient use of
our workforce and infrastructure. As of May 31, 2000, we operated or maintained
seven platform and two semisubmersible rigs for third parties.
In September 1996, we expanded our third party rig operations into the
emerging market of the Caspian Sea when we commenced operation and management of
the semisubmersible rig, Dada Gorgud. We initiated operations of a second
semisubmersible, the Istiglal, in December 1998. Both the Dada Gorgud and the
Istiglal operate under long-term bareboat charters. The Istiglal is bareboat
chartered to and operated by the joint venture Caspian Drilling Company Limited,
45% owned by us, until October 2006. The Dada Gorgud is bareboat chartered to us
until October 2006 or the later termination of our current drilling contract
with the Azerbaijan International Operating Company. We have subcontracted
operations of the Dada Gorgud to Caspian Drilling Company Limited. We currently
estimate having to spend approximately $30.0 million, of which $7.4 million has
been spent, for capital improvements to the Dada Gorgud in 2000 to meet the rig
specifications in the drilling contract.
The following table describes rigs we or our joint venture affiliates
operate for third parties as of May 31, 2000.
<TABLE>
<CAPTION>
CURRENT CONTRACT
TYPE AND NAME CUSTOMER LOCATION EXPIRATION (1)
------------- -------- -------- ----------------
<S> <C> <C> <C>
SEMISUBMERSIBLE RIGS
Dada Gorgud(2) AIOC(3) Caspian Sea Sep 05
Istiglal(4) BP Amoco Caspian Sea May 05
PLATFORM RIGS
Beatrice Alpha Talisman U.K. North Sea Evergreen(5)
Beatrice Bravo Talisman U.K. North Sea Evergreen(5)
Buchan Talisman U.K. North Sea Evergreen(5)
Clyde Talisman U.K. North Sea Evergreen(5)
Fulmar Shell U.K. North Sea Jun 02
Kittiwake Shell U.K. North Sea Jun 02
Nelson Enterprise U.K. North Sea Evergreen(5)
</TABLE>
---------------
(1) Indicates date of scheduled execution of current contract term or, if the
contract is for a fixed number of wells, date of estimated completion of
these wells at May 31, 2000.
(2) Caspian Drilling Company Limited, of which we are a 45% shareholder,
operates the Dada Gorgud for us under a drilling services subcontract. For a
further discussion of Caspian Drilling Company Limited, see
"Business -- Joint Venture, Agency and Sponsorship Relationships and Other
Investments."
(3) "AIOC" means Azerbaijan International Operating Company, a consortium led by
BP Amoco.
(4) Caspian Drilling Company Limited, of which we are a 45% shareholder,
operates the Istiglal under a drilling services contract. For a further
discussion of Caspian Drilling Company Limited, see "Business -- Joint
Venture, Agency and Sponsorship Relationships and Other Investments."
(5) Evergreen contracts are subject to termination by the customer on specified
notice.
43
<PAGE> 44
INCENTIVE DRILLING SERVICES AND ALLIANCES. We selectively pursue incentive
drilling contracts and innovative contracting opportunities. In doing so, we
seek work that rewards superior performance and drilling productivity. Types of
incentive contracts include:
Turnkey. We generally provide all services, drill bits, casings, well
consumables and logistical support to drill a well to a specified depth for a
fixed price.
Footage. We receive a predetermined lump sum per foot drilled.
Well Target Time. The contract provides that the drilling of a specified
well or portion thereof is subject to an agreed target time. If the well is
drilled ahead of schedule, then a bonus is paid in accordance with a specified
formula. If the well is drilled behind schedule, a penalty may be imposed.
Lump Sum or Bonus Arrangement. This arrangement requires us to perform a
specific task either for a lump sum payment or for a dayrate with a bonus
payable for time saved.
Alliances. An agreement under which we work with the customer and selected
parties, such as service companies, fabricators, designers and engineers, to
provide and coordinate their resources, facilities and expertise to maximize
efficiency on a specified drilling project. Alliances often involve common goals
and targets, with an incentive for the efficient execution of a project as
measured against specific time and economic goals. We have participated in
alliances involving execution of specified drilling programs as well as an
alliance involving various aspects of engineering, design and procurement of
platform rig equipment for a specific development drilling project.
DRILLING ENGINEERING AND DRILLING PROJECT MANAGEMENT. Our drilling
engineers and other engineering personnel provide drilling management services
for our operations and on a contract basis for customer projects. Additionally,
we provide drilling rig project management, including rig design, engineering,
procurement and commissioning activities as well as management of all phases of
offshore rig new construction or upgrade projects.
COMPETITION
The contract drilling industry is highly competitive with numerous industry
participants, none of which has a dominant market share. Some of our competitors
have larger rig fleets and may have greater resources than we do. Competition is
usually restricted to a particular region, although drilling rigs are mobile and
can be moved from one region to another in response to changes in demand.
Drilling contracts are traditionally awarded on a competitive bid basis.
Competition for drilling contracts generally depends on:
- the price for the drilling services;
- the availability and location of suitable equipment for the project;
- the design and technical capability of the drilling rigs;
- the ability of the drilling contractor to provide specialized services;
and
- the reputation and experience of the drilling contractor.
We believe that we compete favorably on all of these factors. Our principal
marine competitors include Diamond Offshore Drilling, Inc., ENSCO International
Incorporated, Global Marine Inc., Marine Drilling Companies, Inc., Noble
Drilling Corporation, Pride International, Inc., R&B Falcon Corporation, Rowan
Companies, Inc. and Transocean Sedco Forex Inc.
44
<PAGE> 45
CONTRACTS
Most drilling contracts are awarded through competitive bidding. However,
some contracts are a result of direct negotiations between us and the customer.
In many cases, the specifications of the bid contain requirements not met by any
of our available rigs. As a result, if we are awarded the contract, we may incur
considerable cost to upgrade and outfit a rig to meet those requirements.
We operate each of our rigs under a contract either to drill a specified
well or number of wells or for a stated period of time. The period of time
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 on specified notice at the option of the customer. Some contracts
require the customer to pay a specified early termination payment in the event
of 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 because of acts of God or some other events beyond our control or
excessive rig downtime for repairs. The contracts also contain provisions
addressing automatic termination or termination at the option of the customer in
some circumstances and may be dishonored or subject to renegotiation in
depressed market conditions. For a description of the potential risks of
termination, see "Risk Factors -- We may suffer losses if our customers
terminate or seek to renegotiate our contracts."
Most of our drilling contracts provide for compensation on a dayrate basis,
under which we receive a fixed amount per day for each day that the rig is
operating under the contract. Under a dayrate contract, we provide the drilling
rig and personnel to operate the rig and to conduct the drilling operations. We
also selectively contract on the basis that the dayrate automatically will be
adjusted periodically during the contract term pursuant to a specified formula
or index, often based upon published rig rates.
We pay the operating expenses, such as crew wages and incidental supplies,
for the contracted rig. Several of our dayrate contracts also contain incentive
terms for additional remuneration if specified performance goals are met. Most
of our drilling contracts include provisions allocating the risk, as between us
and our customers, of liabilities relating to a well, including personal injury,
property and environmental liabilities. Sometimes our dayrate contracts provide
for penalties in the form of reduced or suspended compensation if the specified
goals are not achieved. We also provide turnkey, footage and other services on
an incentive contract basis. For more information about these contracts, see
"-- Drilling Rig Fleet and Drilling Related Services -- Incentive Drilling
Services and Alliances."
Our contracts generally provide for payment in dollars except for amounts
required to meet local expenses. The rate of compensation specified in each
contract depends on the type of equipment required, its availability and
location, the location and nature of the operation to be performed, the duration
of the work, market conditions and other variables. The contracts may provide
for no dayrate, a reduced dayrate or lump sum payment when the rig is being
transported to the first and from the last drill site. Generally, a reduced
dayrate or no payment is applicable when operations are suspended because of
acts of God or some other events beyond our control or extended mechanical
breakdown. Reduced dayrates often also apply while a rig is on standby awaiting
a customer's directions or customer-furnished materials or services or while
moving between well locations under the same contract. When drilling rigs are
being relocated a substantial distance, we attempt to obtain either a lump sum
payment or a dayrate plus transport costs as compensation for mobilization and
demobilization expenses and the rig time incurred during the period of transit.
In a depressed market, this compensation is difficult to obtain and we may incur
the full costs of transportation and/or rig time during rig relocations.
Contracts commonly contain renewal or extension provisions exercisable at
the option of the customer that address extension for a number of wells or
specified period of time. These options
45
<PAGE> 46
may provide that the compensation for the extension period must be agreed upon
before the extension or the parties may have negotiated the extension period
compensation at the time of the initial contract. We prefer either to negotiate
provisions which require mutual agreement upon compensation for the option term
so that we obtain then-prevailing market rates or to establish a means of
increasing compensation for the option term to reflect cost escalation and
anticipated market conditions. During industry down cycles, we compete
aggressively for contracts and often we must accept less favorable contract
terms, especially in areas such as liability and indemnity provisions, rate
structure, termination and term extension options. In periods of rapid market
downturn, our customers may not honor the terms of existing contracts and may
terminate contracts or seek to renegotiate contract rates and terms to conform
with depressed market conditions.
Contract information concerning our marine and land drilling fleet, as of
May 31, 2000 is set forth in the table below:
<TABLE>
<CAPTION>
CURRENT CONTRACT
TYPE AND NAME LOCATION CUSTOMER(1) EXPIRATION(2)
------------- -------- ----------- ----------------
<S> <C> <C> <C>
HEAVY DUTY HARSH ENVIRONMENT JACKUP RIGS
Galaxy III......................... U.K. North Sea BP Amoco Dec 02
Galaxy II.......................... Canada Sable Group Nov 03
Magellan........................... U.K. North Sea Elf Mar 01(3)(4)
Galaxy I........................... U.K. North Sea Elf Dec 00(3)(4)
Monitor............................ U.K. North Sea BHP Jan 01(5)
Monarch............................ U.K. North Sea BP Amoco Nov 00
SEMISUBMERSIBLE RIGS
Rig 135............................ U.K. North Sea British Gas May 01(4)
Rig 140............................ U.K. North Sea Shell Jan 02
Aleutian Key....................... Equatorial Guinea Idle
300-350 FOOT PREMIUM CANTILEVER JACKUP RIGS
Compact Driller.................... Thailand Chevron Aug 00
Parameswara........................ Indonesia Kodeco Nov 00
Key Hawaii......................... Saudi Arabia Saudi Aramco Feb 03
Key Singapore...................... Egypt Rashpetco Oct 00(4)
Rig 134(6)......................... Indonesia Idle
Rig 136............................ Egypt Geisum Jun 00
Key Manhattan...................... Egypt Petrobel Jan 01
Galveston Key(6)................... Vietnam JVPC Apr 01
Key Gibraltar...................... Vietnam JVPC Jan 01(4)
200-250 FOOT JACKUP RIGS
Rig 141............................ Egypt Suco Jun 00(4)
Rig 124............................ Egypt Petrobel Jun 00(4)
Key Bermuda........................ Nigeria Chevron Oct 01
Rig 127............................ Qatar Occidental Jul 00
Rig 105............................ Egypt Petrobel Jun 00(4)
Key Victoria....................... Venezuela Idle
Rig 103............................ United Arab Emirates Idle
Britannia.......................... U.K. North Sea Shell Jun 02
SANTA FE OWNED PLATFORM RIG
Rig 82............................. U.K. North Sea Shell Evergreen
SANTA FE OWNED LAND RIGS
Rig 92............................. Egypt Khalda Jun 00(4)
Rig 94............................. Egypt Wepco Jun 00(7)
Rig 104............................ Egypt Geisum Jun 00(4)
Rig 143............................ Egypt Petrobel Jun 00
Rig 147............................ Kuwait Idle
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
CURRENT CONTRACT
TYPE AND NAME LOCATION CUSTOMER(1) EXPIRATION(2)
------------- -------- ----------- ----------------
<S> <C> <C> <C>
Rig 170............................ Kuwait Idle
Rig 146............................ Kuwait KOC Mar 01(4)
Rig 155............................ Kuwait KOC Mar 01(4)
Rig 157............................ Kuwait Idle(8)
Rig 158............................ Kuwait KOC Mar 01(4)
Rig 160............................ Kuwait KOC Mar 01(4)
Rig 161............................ Kuwait KOC Mar 01(4)
Rig 169............................ Kuwait KOC Jan 02(4)
Rig 172............................ Kuwait KOC Dec 00
Rig 180............................ Kuwait KOC Sep 02
Rig 102............................ Kuwait-Saudi PNZ SAT Aug 00
Rig 171............................ Kuwait-Saudi PNZ SAT Dec 00
Rig 173............................ Saudi Arabia Saudi Aramco Jun 03(4)
Rig 174............................ Saudi Arabia Saudi Aramco Aug 03(4)
Rig 144............................ United Arab Emirates BP Amoco Sep 00(9)
Rig 150............................ Oman PDO Sep 01(4)
Rig 151............................ Oman PDO Apr 03
Rig 159............................ Oman Idle
Rig 97............................. Venezuela Idle(10)
Rig 110............................ Venezuela Idle
Rig 115............................ Venezuela Idle
Rig 119............................ Venezuela Idle
Rig 166............................ Venezuela Idle
Rig 167............................ Venezuela Idle
Rig 176............................ Venezuela Arco Jan 01(4)
Rig 177............................ Venezuela Arco Oct 00(4)
Rig 178............................ Venezuela Sable Group Aug 00(4)
Rig 179............................ Venezuela Idle
JOINT VENTURE OWNED LAND RIGS
Rig 89............................. United Arab Emirates Idle
QDC 3.............................. United Arab Emirates Idle
Rig 131............................ United Arab Emirates Idle
</TABLE>
---------------
(1) Generic designation including affiliates, joint ventures and consortia.
"Geisum" means Geisum Oil Company.
"JVPC" means Japan Vietnam Petroleum Co. Ltd.
"Khalda" means Khalda Petroleum Company.
"KOC" means Kuwait Oil Company.
"Kodeco" means Kodeco Energy Company.
"PDO" means Petroleum Development Oman.
"Petrobel" means Belayim Petroleum Company.
"Rashpetco" means Rashid Petroleum Company.
"Sable Group" means Sable Offshore Energy, Inc.
"SAT" means Saudi Arabia Texaco.
"Saudi Aramco" means Saudi Arabian Oil Company.
"Suco" means Suez Oil Company.
"Wepco" means Western Desert Petroleum Company.
(2) Indicates date of scheduled expiration of current contract term, or, if
the contract is for a fixed number of wells, date of estimated
completion of those wells at May 31, 2000. Most contracts are subject to
early termination.
(3) Effective July 24, 2000, we will swap the commitments of our rigs
Magellan and Galaxy I for the remainder of their respective contracts.
(4) Contract is subject to customer term extension option(s).
47
<PAGE> 48
(5) In May 2000, Monitor commenced a contract with BHP for three firm wells
(a period of approximately five months from commencement of drilling
operations) plus options. On May 18, the Monitor sustained damage to the
starboard leg and adjoining hull while at dockside in Dundee, Scotland.
The rig currently is being moved to a shipyard in Rotterdam, Netherlands
for completion of the repairs, which were initiated in Dundee. Although
BHP could terminate the contract in response to performance delays that
will occur while the Monitor is repaired, based on discussions to date
with BHP management, we do not expect it to do so. We believe that
damage to the Monitor is an insured loss.
(6) The Galveston Key and Rig 134 are owned by P.T. Santa Fe Supraco
Indonesia, a limited liability company of which we are a 95%
shareholder. Before January 1, 2000, Rig 134 was classified as a 200-250
foot jackup rig.
(7) The customer has notified us that the term of the contract will not be
extended and Rig 94 will be released upon completion of the current
well.
(8) Rig 157 will commence a three year contract plus a one year option with
Saudi Aramco in October 2000.
(9) Following completion of the contract with BP Amoco, Rig 144 will
commence a contract with Saudi Aramco for three years plus a one year
option.
(10) On April 25, 2000, Inemaka terminated the contract for Rig 97. Inemaka
has committed to either enter into a new six month contract commencing
in July 2000 or pay Santa Fe early termination fees approximately equal
to two months revenue under the contract.
CUSTOMERS
Our customers consist primarily of major international, state owned and
large independent oil companies and their affiliates. Several major
international oil companies have recently consolidated, and we are currently
unable to predict the impact, if any, of this consolidation on our business.
During the year ended December 31, 1999, Royal Dutch/Shell Group of Companies
and its affiliates, joint ventures and consortia accounted for 14.5% of our
consolidated revenues, Total Elf Fina accounted for 13.5% of our consolidated
revenues, Exxon Mobil accounted for 13.2% of our consolidated revenues, BP Amoco
accounted for 11.9% of our consolidated revenues and Kuwait Oil Company
accounted for 9.1% of our consolidated revenues. For further information about
the concentration of our customer base, see note 10 of the notes to the
consolidated financial statements included in this prospectus. The relative
contribution from each customer has fluctuated from year to year in the past and
is expected to continue to do so in the future. The loss of any of these major
clients could, at least in the short term, have a material adverse effect on us.
MARKETS
Rigs can be moved from one region to another, but the cost of moving a rig
and the availability of rig-moving vessels may cause the supply and demand
balance to vary somewhat between regions. However, significant variations
between regions do not tend to exist long-term because of rig mobility. Rig
mobility causes supply and demand to be shaped more by water depth capability
and requirement than by the location of the rigs at a given point in time. We
have the capability of drilling in water depths from as shallow as a few feet
with our shallow water jackup rigs to as deep as 2,400 feet with our
semisubmersibles.
In recent years, oil companies have placed increased emphasis on exploring
for hydrocarbons in deeper waters. This is, in part, because of technological
developments that have made this exploration more feasible and cost-effective.
Shallow water regions have been developed much more than deep water regions
because these regions are more accessible and operations there are less costly
to conduct.
We are currently monitoring and evaluating customer and competitor plans
and activities in exploring for oil and natural gas in increasingly deeper
water. Drilling technology has developed in recent years that permits offshore
drilling in water depths up to 10,000 feet. Industry
48
<PAGE> 49
experience in building new rigs for use in deepwater and ultra-deepwater
operations has demonstrated that the capital cost and construction risks are
extremely high, often resulting in marginal economic returns to the rig owner.
Under appropriate circumstances, we may expand the scope of our operations by
entering the deepwater market.
EMPLOYEES
As of May 31, 2000, we had approximately 5,300 full time employees from
more than 40 nations, over 95% of whom work outside the United States.
Approximately two-thirds of our employees are citizens of countries outside
North America and Europe. Approximately 380 of our employees in Venezuela and
100 of our employees in Nigeria are represented by labor unions. In June 2000,
through our membership in the UK Drilling Contractors Association, we entered
into a recognition agreement with a union representing approximately 900 of our
employees in the U.K. sector of the North Sea. The association and the union are
currently negotiating a definitive labor agreement for the represented
employees.
JOINT VENTURE, AGENCY AND SPONSORSHIP RELATIONSHIPS AND OTHER INVESTMENTS
In some areas of the world, local custom and practice or governmental
requirements require the formation of joint ventures with local participation.
We are an active participant in several joint venture drilling companies,
principally in Azerbaijan, Indonesia, Malaysia, Nigeria, Oman, Qatar and Saudi
Arabia. We have agreed with our co-venturer in Qatar Drilling Company W.L.L. to
dissolve the joint venture and as part of the dissolution, to distribute all of
the joint venture's ownership interest in its rigs and other equipment to us and
to distribute all of the joint venture's cash to our co-venturer.
In Azerbaijan, the semisubmersibles Istiglal and Dada Gorgud operate under
long-term bareboat charters. The Istiglal is bareboat chartered to and operated
by the joint venture Caspian Drilling Company Limited, 45% owned by us, until
October 2006. The Dada Gorgud is bareboat chartered to us until October 2006 or
the later termination of our current drilling contract with the Azerbaijan
International Operating Company. We have subcontracted operations of the Dada
Gorgud to Caspian Drilling Company Limited.
We participate in a joint venture that operates a petroleum supply base in
Indonesia. The Indonesian supply base, 42% owned by us, is located at Merak
Point on the island of West Java. It provides open and covered storage and bulk
chemical trans-shipment facilities. We have co-owned and managed this supply
base for nearly 30 years. The land lease for the supply base, which was
previously scheduled to expire in 2000, has been renewed for an additional 30
years. We also have a passive minority investment in a Libyan drilling company
that is accounted for on the cost basis.
Local law or custom in some areas of the world also effectively mandates
establishment of a relationship with a local agent or sponsor. When necessary or
appropriate in these areas, we enter into agency or sponsorship agreements.
GOVERNMENTAL REGULATION
Many aspects of our operations are affected periodically by political
developments and by both domestic and foreign governmental regulations,
including those relating to the construction, equipment and operation of
drilling rigs, drilling practices and methods and levels of taxation. Additional
hazards and uncertainties include:
- the risk of expropriation;
- foreign exchange restrictions;
- fluctuations in currency exchange rates;
49
<PAGE> 50
- foreign and domestic monetary, economic and trade policies;
- changes in import or export duties; and
- environmental regulation.
The energy service industry is dependent on demand for its services from the oil
and gas industry and, accordingly, is affected by changing taxes, price controls
and other laws relating to the energy business generally. Governments may, from
time to time, suspend or curtail drilling operations or leasing activities when
these operations are considered to be detrimental to the environment or to
jeopardize public safety. Many jurisdictions have at various times imposed
limitations on the production of oil and natural gas by restricting the rate of
flow for oil and natural gas wells below their natural capacity. We cannot
assure you that present or future regulation will not adversely affect our
operations.
As of May 31, 2000, all of our rigs were located outside the United States
and its territorial waters. Our worldwide operations are also subject to a
variety of laws and regulations designed to improve safety in the businesses in
which we operate. International conventions, including Safety of Life at Sea,
also referred to as SOLAS, the Convention for Prevention of Oil Pollution by
Ships at Sea, also referred to as MARPOL, and the Code for Construction of
Mobile Offshore Drilling Units, also referred to as MODU CODE, generally are
applicable to our offshore operations. Our operations in the U.K. sector of the
North Sea are also subject to strict regulatory requirements, including the
Mineral Workings Act of 1971, also referred to as MWA, and the Health and Safety
at Work Act of 1974, also referred to as HASAWA. Historically, we have made
significant capital expenditures and incurred additional expenses to ensure that
our marine rigs comply with applicable local and international health and safety
regulations. Our future efforts to comply with these regulations and standards
may increase our costs and may affect the demand for our services by influencing
energy prices or limiting the areas in which we may drill.
INSURANCE AND INDEMNIFICATION
We emphasize ongoing safety and training programs and have installed
significant safety equipment, all designed to promote a safe working
environment. Nevertheless, our operations are subject to the many hazards
inherent in the drilling business.
While we maintain broad insurance coverage, this insurance generally does
not cover all types of losses, including loss of charter hire/dayrate revenue,
war, internal disturbances, expropriation, nationalization or business
interruption. Losses and liabilities arising from uninsured or underinsured
events would reduce our revenues and increase our costs. In addition, pollution
and similar environmental risks generally are not fully insurable. As a result,
our existing insurance coverage may not be sufficient to protect us from all of
our operational risks or against liability from all consequences of well
disasters, maritime casualties or damage to the environment resulting from
operations or hazardous waste disposal. It is also not sufficient to protect us
for the full market or replacement value of lost assets. We may be liable for
oil spills, costs of controlling a wild well, well loss or damage and similar
matters if not indemnified by our customers or insured. When appropriate, for
example when contracting on a turnkey basis, we may separately insure
well-related risks, which may include well loss or damage, wild well control and
pollution.
We believe our policy of purchasing insurance coverage is consistent with
industry practice for the types, amounts and limits of insurance maintained.
Occasionally, we review our coverage levels and adjust them commensurate with
industry conditions and perceived rig values. However, we cannot assure you that
the desired insurance coverage will continue to be available at rates considered
reasonable or that the types of coverage we need will be available at any cost.
50
<PAGE> 51
If we determine our insurance to be inadequate, uneconomic or unavailable,
we evaluate our exposure to uninsurable risks before participating in any
projects. To the extent permitted by market conditions, we contract with our
customers to provide us with indemnification or other protection against risks
not generally covered by insurance and against losses in excess of applicable
insurance limits. We generally have been able to obtain contractual
indemnification from our customers which protects and indemnifies us to some
degree from liability arising out of damages to customer property and injuries
to specified personnel, reservoir, pollution and environmental damages and wild
well control. However, we are not able to obtain this indemnification in all of
our contracts.
LEGAL PROCEEDINGS
We are involved in various legal proceedings incidental to our business. In
the opinion of our management, based upon information presently available, the
ultimate resolution of these legal proceedings will not have a material adverse
effect on our financial condition or results of operations.
We have been named as a potentially responsible party in connection with a
Superfund site located in Santa Fe Springs, California and maintained by Waste
Disposal, Inc., also referred to as WDI. On August 18, 1994, the U.S.
Environmental Protection Agency, or EPA, issued an administrative order for
remedial design against eight potentially responsible parties not including us.
This order alleges that the potentially responsible parties are responsible for
costs associated with the cleanup of the WDI site and requests that these
parties consent to undertake specific investigative and remedial measures for
the site. On March 31, 1997, the EPA amended the administrative order to modify
the scope of remedial work to be performed at the site and to add 13 additional
parties, including us. On April 29, 1997, we advised the EPA of our intention to
comply with the administrative order. In an effort to minimize costs associated
with our involvement in the site, we have entered into a participation agreement
with the other named potentially responsible parties. Under the agreement, we
and the other potentially responsible parties will provide monetary credit to
some potentially responsible parties for costs incurred before the 1997 amended
order, will cooperate in common response to any claims arising out of the
administrative order, and will allocate among ourselves costs associated with
our involvement with the site. We and the other potentially responsible parties
have agreed to a specific allocation arrangement, which, subject to resolution
of pending appeals by some potentially responsible parties, makes us responsible
for approximately 7.7% of costs related to site remediation. Under the
allocation arrangement, this amount is reduced by recoveries from other parties,
including landowners, non-participating potentially responsible parties and any
contributions from the EPA under its orphan share program. The amount of damages
or remediation costs to be shared under the allocation arrangement will depend
on an agreement between the EPA and the potentially responsible parties
concerning the most cost effective and appropriate remediation of the site.
Based on information presently available, we do not believe that any
liability imposed in connection with the WDI site will have a material adverse
effect on our financial condition or ongoing results of operations given the
nature and extent of our involvement at the site and available resources.
51
<PAGE> 52
MANAGEMENT
Currently, our board of directors has nine members. Our articles divide our
board into three classes having staggered terms of three years each. The term of
our Class I directors expires at the annual general meeting of shareholders in
2001. The term of our Class II directors expires at the annual general meeting
of shareholders in 2002. The term of our Class III directors expires at the
annual general meeting of shareholders in 2003. Our articles also provide that
our board will determine our number of directors, except that we must have at
least nine, but not more than 15 directors. The following table presents
information regarding our directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gordon M. Anderson........................ 68 Chairman of the Board and Class I director
C. Stedman Garber, Jr. ................... 56 President, Chief Executive Officer and
Class III director
Richard N. Haass.......................... 48 Class I director
Khaled R. Al-Haroon....................... 50 Class I director
Ferdinand A. Berger....................... 62 Class II director
Stephen J. Solarz......................... 59 Class II director
Nader H. Sultan........................... 52 Class II director
Maha A. R. Razzuqi........................ 44 Class III director
Robert E. Wycoff.......................... 69 Class III director
Roger B. Hunt............................. 51 Senior Vice President, Commercial Manager
Seals M. McCarty.......................... 53 Senior Vice President and Chief Financial
Officer
Tom L. Seeliger........................... 56 Senior Vice President, Drilling Operations
Ali Awad.................................. 59 Vice President and Regional Manager
James A. Blue............................. 54 Vice President and Regional Manager
Roger K. P. De Freitas.................... 45 Vice President and Regional Manager
Steven J. Gangelhoff...................... 48 Vice President and Regional Manager
Cary A. Moomjian, Jr. .................... 53 Vice President, General Counsel and
Secretary
James E. Oliver........................... 50 Vice President, Controller and Treasurer
</TABLE>
GORDON M. ANDERSON has served as a director since 1969. Mr. Anderson was
appointed our President and Chief Executive Officer in 1991 and became Chairman
of our board of directors in 1993. Mr. Anderson has worked with us since June
1954. Following several international assignments, he was appointed President of
Santa Fe Drilling Company in 1972. Mr. Anderson retired as Chief Executive
Officer in December 1997 and currently serves as a non-employee director and
Chairman of our board.
C. STEDMAN GARBER, JR. has served as a director since 1989. Mr. Garber was
employed by Getty Oil Company between 1977 and 1984. Mr. Garber joined us in
1984 as Vice President of Planning and Acquisition and in 1989 was appointed
President of Santa Fe Minerals, Inc., one of our former subsidiaries. Mr. Garber
was named Executive Vice President and Chief Operating Officer in 1991, was
appointed President and Chief Operating Officer in December 1995 and was
appointed Chief Executive Officer effective January 1, 1998. Mr. Garber serves
as director of the American Petroleum Institute, as Secretary-Treasurer of the
International Association of Drilling Contractors and as a Trustee of the
American University in Cairo.
RICHARD N. HAASS has served as a director since November 1998. Dr. Haass is
Director of Foreign Policy Studies at the Brookings Institution. Dr. Haass is a
widely quoted expert on contemporary American foreign policy. Dr. Haass also
consults for NBC News, contributes frequently to foreign affairs journals and
major newspapers and has authored several books.
52
<PAGE> 53
Dr. Haass has extensive government experience and served as Special Assistant to
President George Bush and as senior director on the staff of the National
Security Council. He was awarded the Presidential Citizens Medal for his
contribution to the development of U.S. policy during Operations Desert Shield
and Desert Storm, has held various posts in the Departments of State and
Defense, and was a legislative aide in the U.S. Senate.
KHALED R. AL-HAROON has served as a director since November 1998. Mr.
Al-Haroon serves on the Board of Kuwait Petroleum Corporation and as its
Managing Director of International Operations. He also serves as the
Chairman -- Oils Sector Loss Assessment Committee and is the Deputy Chairman of
Kuwait Petroleum Corporation's Higher Tender Committee. Since 1980, Mr.
Al-Haroon has held various management positions at Kuwait Petroleum Corporation.
His career began in 1974 with the International Marketing Group of the Kuwait
National Petroleum Company. Mr. Al-Haroon also serves as a director of SFIC
Holdings (Cayman), Inc., the selling shareholder in this offering.
FERDINAND A. BERGER has served as a director since September 1997. Mr.
Berger retired from the Shell Group of Companies at the end of 1996, having
served in various management positions in South America, the Middle East and
Europe since 1965. Mr. Berger served as a director of Shell International
Petroleum Company Limited, with responsibility for overall Shell Group
activities in the Middle East, Africa and South Asia from 1992 until his
retirement. He served as Senior Vice President of Shell International Trading
Company from 1987 to 1992. He is also a director of Xpronet Inc., a privately
owned oil and gas exploration and production company.
STEPHEN J. SOLARZ has served as a director since November 1998. Mr. Solarz
is President of Solarz Associates, an international consulting firm. He also is
a director of the George Washington University Foreign Policy Forum, Vice
Chairman of the International Crisis Group, and a Senior Counselor at APCO
Associates, Inc. Mr. Solarz serves on the board of several corporations,
including Samsonite, IRI International and the First Philippine Fund. Mr. Solarz
is a director of the National Endowment for Democracy, the International Rescue
Committee, the National Democratic Institute and the Balkan Action Council
Steering Committee. Mr. Solarz has served in public office for 24 years, both in
the New York Assembly and in the U.S. House of Representatives. As a
Congressman, Mr. Solarz served on various committees, including the House
Foreign Affairs Committee where he chaired the Subcommittee on Africa and the
Subcommittee on Asian and Pacific Affairs. He was appointed by President Clinton
as Chairman of the Board of the Central Asian-American Enterprise Fund, served
as President Clinton's special envoy to Cambodia and co-chaired the National
Democratic Institute's election observer delegation.
NADER H. SULTAN has served as a director since January 1995. Mr. Sultan has
been the Chief Executive Officer of Kuwait Petroleum Corporation since 1998.
Since 1993, he has also served as Deputy Chairman and Managing Director,
Planning and International Operations, of Kuwait Petroleum Corporation. Mr.
Sultan also serves as a director of Kuwait Petroleum Corporation and SFIC
Holdings (Cayman), Inc., the selling shareholder in this offering.
MAHA A. R. RAZZUQI has served as a director since August 1999. Mrs. Razzuqi
is the Kuwait Petroleum Corporation Executive Assistant Managing Director for
International Business Development. Mrs. Razzuqi has been associated with Kuwait
Petroleum Corporation's international operations since 1996, including service
on the Kuwait Foreign Petroleum Exploration Company Board of Directors, and has
held various management positions in planning and marketing between 1986 and
1996. Mrs. Razzuqi also serves as a director of SFIC Holdings (Cayman), Inc.,
the selling shareholder in this offering.
ROBERT E. WYCOFF has served as a director since September 1997. Mr. Wycoff
retired from the Atlantic Richfield Company in 1993, having served there since
1953. Mr. Wycoff served as a director, President and Chief Operating Officer of
Atlantic Richfield Company from 1986 to 1993. After holding various engineering
and management positions, he was named Vice President and
53
<PAGE> 54
Resident Manager of Atlantic Richfield Company's Alaska Region in 1973. He is
also a director of MagneTek, Inc., a publicly traded company engaged in
electronic equipment and controls.
ROGER B. HUNT has been our Senior Vice President, Commercial Manager, since
September 1997. From 1988 to 1997, Mr. Hunt had regional operations
responsibilities as Vice President and Regional Manager for Asia, Australia,
Venezuela, Azerbaijan, West Africa and the Gulf of Mexico. From 1983 to 1988, he
was our Vice President and Manager of International Sales. From 1977 through
1982, Mr. Hunt was assigned to Venezuela as Assistant Zone Manager. Mr. Hunt
first joined us in 1970.
SEALS M. MCCARTY has been our Senior Vice President and Chief Financial
Officer since January 2000. From 1985 to January 2000, Mr. McCarty held various
financial positions with us, including Vice President and Controller. From 1982
to 1985, he served as Vice President of Finance for Keydril Company. Mr. McCarty
joined us in 1985 at the time of our purchase of Keydril Company from
Gulf/Chevron.
TOM L. SEELIGER has been our Senior Vice President, Drilling Operations,
since January 2000. Mr. Seeliger served as Vice President and Area Manager for
North Sea operations from 1993 until January 2000. He has worked in
progressively more senior management positions, primarily internationally,
including assignments in Nigeria, the North Sea, Libya, Argentina, Trinidad,
Venezuela and London since he joined us in 1965.
ALI AWAD has been our Vice President and Regional Manager with
responsibility for all operations in the Middle East, North Africa and
Mediterranean region since March 1999. Mr. Awad served as our Vice President and
Area Manager for all offshore and land operations in Egypt and the Mediterranean
area from 1993 to March 1999. He held several managerial positions with us in
Egypt, including Zone Manager, from 1979 to 1993. Mr. Awad joined us in 1974
following a distinguished career with major oil companies operating locally in
Egypt.
JAMES A. BLUE has been our Vice President and Regional Manager with
responsibility for operations in Azerbaijan, the Gulf of Mexico, Venezuela and
West Africa since 1997. Mr. Blue was our Vice President and Regional Operations
Manager from 1989 to 1997. He joined us in 1965 and initially served in various
assignments in England, Egypt, Libya, Scotland and Venezuela.
ROGER K. P. DE FREITAS served as Operations Manager in the North Sea and
Zone Manager in Trinidad before assuming his current position as Vice President
and Regional Manager for Western Europe/Canada in January 2000. He joined us in
1974 and initially served in various operational and supervisory assignments in
Trinidad, Scotland, Great Yarmouth, Egypt, Yemen and Singapore.
STEVEN J. GANGELHOFF became our Vice President and Regional Manager for
Southeast Asia in January 2000. Mr. Gangelhoff served as our Regional Marketing
Manager Southeast Asia/ Australia from 1991 to 1996. From 1985 to 1991, he held
operations and management positions with us in the U.S., South America, Malaysia
and Indonesia. Mr. Gangelhoff joined us in 1985 concurrently with the purchase
of Keydril Company from Gulf/Chevron. He served as Regional Manager, Eastern
Hemisphere for Keydril from 1982 to 1985. Before 1982, he held various
operations positions with Keydril.
CARY A. MOOMJIAN, JR. has been our Vice President, General Counsel and
Secretary since January 1994. From 1983 to January 1994, Mr. Moomjian was Vice
President, Contracts for Santa Fe Drilling Company. From 1978 to 1983, he served
as Santa Fe Drilling Company's Senior Counsel and then as Vice President,
General Counsel. From 1976 to 1978, Mr. Moomjian served as our Corporate Marine
Counsel.
JAMES E. OLIVER has been our Vice President, Controller and Treasurer since
January 2000. From 1993 to January 2000, Mr. Oliver was our Vice President and
Treasurer. He joined Santa Fe Minerals, Inc., a former subsidiary of Santa Fe,
in 1985 and served as Vice President -- Finance for Santa Fe Minerals, Inc. from
1987 to 1993.
54
<PAGE> 55
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the beneficial ownership of our ordinary
shares as of May 31, 2000 by:
- SFIC Holdings (Cayman), Inc., the selling shareholder;
- each person who is known by us to own beneficially more than 5% of our
ordinary shares; and
- all directors and executive officers as a group.
Except as indicated in the footnotes to the table below, each entity or
group named in the table has sole voting and investment power with respect to
all ordinary shares shown as beneficially owned by it.
We determine beneficial ownership in accordance with SEC rules. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, we deem outstanding shares subject to options,
warrants and securities convertible into ordinary shares to be held by that
person if the options, warrants or conversion rights are currently exercisable
or exercisable within 60 days. Except as we indicate in the footnotes to this
table, we believe that each shareholder named in the table has sole voting and
investment power for the shares set forth opposite that shareholder's name,
except to the extent shared by a spouse under applicable law.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
ORDINARY SHARES ORDINARY SHARES ORDINARY SHARES ORDINARY SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED OWNED SHARES OFFERED OWNED OWNED
NAME AND ADDRESS PRE-OFFERING PRE-OFFERING IN OFFERING POST-OFFERING POST-OFFERING
---------------- --------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
SFIC Holdings
(Cayman), Inc.(1)
c/o Kuwait Petroleum
Corporation
P.O. Box 2656
13126 Safat, Kuwait..... 74,500,000 64.7% 30,000,000(2) 44,500,000(3) 38.6%(4)
All directors and
executive officers as
a group (18
persons).............. 274,418(5) * -0- 274,418(5) *
</TABLE>
---------------
* Less than 1.0%
(1) SFIC Holdings (Cayman), Inc. is a wholly owned subsidiary of Kuwait
Petroleum Corporation, which is wholly owned by the State of Kuwait.
(2) Aggregate of 34,500,000 shares if the underwriters' overallotment option is
exercised in full.
(3) Aggregate of 40,000,000 shares if the underwriters' overallotment option is
exercised in full.
(4) Approximately 34.7% if the underwriters' overallotment option is exercised
in full.
(5) Does not include 44,600 restricted shares or 1,004,088 options that are not
exercisable within 60 days. Includes 15,267 shares held by our investment
savings and profit sharing plan and 250 shares held by a spouse in a
custodial account for the benefit of a minor child. Does not include 800
shares held of record by the spouse of Mr. Ferdinand A. Berger, one of our
directors. Mr. Berger disclaims beneficial ownership of these 800 shares.
55
<PAGE> 56
OUR RELATIONSHIP WITH KUWAIT PETROLEUM CORPORATION
Kuwait Petroleum Corporation has supported a business strategy for us which
envisions continued growth through economically justified investment in
expansion, upgrades, modernization and enhancement of our fleet, entry into
additional geographic markets and continued development of our technical skills.
After completion of this offering, Kuwait Petroleum Corporation, through SFIC
Holdings (Cayman), Inc., will own approximately 38.6% of the outstanding
ordinary shares, or 34.7% if the underwriters' overallotment option is exercised
in full. While Kuwait Petroleum Corporation has advised us that it intends to
sell its remaining interest in our ordinary shares, Kuwait Petroleum Corporation
may decide to sell only a portion of the ordinary shares it beneficially owns or
may continue to hold those ordinary shares. Kuwait Petroleum Corporation intends
to make any future sales of our ordinary shares at times and in a manner
consistent with its evaluation of price levels and market conditions, the
maintenance of an orderly market for our ordinary shares and the lock-up
agreement with the underwriters of this offering. These transactions may include
private sales or public offerings through underwriters, dealers or agents, or a
combination of any of these.
SFIC Holdings (Cayman), Inc. presently owns approximately 64.7% of the
outstanding ordinary shares. As a result of this offering, SFIC Holdings
(Cayman), Inc. will own approximately 38.6% of the outstanding ordinary shares,
or 34.7% if the underwriters' overallotment option is exercised in full. After
completion of this offering, Kuwait Petroleum Corporation, through SFIC Holdings
(Cayman), Inc., will continue to be able to significantly influence the
management and affairs of our company and all matters requiring shareholder
approval, including the election of our board of directors and significant
corporate transactions. Although Kuwait Petroleum Corporation has not exercised
all of the rights offered to it under the intercompany agreement and our
articles of association, so long as it remains a significant indirect
shareholder, it plans to monitor its investment in us, and, if and when
appropriate, exercise its rights under the intercompany agreement and our
articles of association. For a description of these rights, see "-- Related
Party Agreements."
This section describes some transactions among Kuwait Petroleum
Corporation, SFIC Holdings (Cayman), Inc. and us that occurred before our
initial public offering in 1997 and some arrangements made at the time of our
initial public offering that are still in effect. Because Kuwait Petroleum
Corporation controls us, these transactions and arrangements were not the result
of arm's-length negotiations. For additional information concerning related
party transactions, see note 11 of the notes to the consolidated financial
statements included in this prospectus.
SPECIAL DISTRIBUTIONS TO KUWAIT PETROLEUM CORPORATION
We made distributions for our contract drilling operations and our drilling
related services in cash or cash equivalents to SFIC Holdings (Cayman), Inc.
with a net value of $46.5 million during the fiscal year ended June 30, 1994,
$72.5 million during the fiscal year ended June 30, 1995, $50.0 million during
the fiscal year ended June 30, 1996 and $3.8 million during the six months ended
December 31, 1996. We paid additional cash dividends to SFIC Holdings (Cayman),
Inc. of $55.1 million on June 9, 1997 and $816.5 million on June 13, 1997. We
also purchased 10,000,000 ordinary shares from SFIC Holdings (Cayman), Inc. on
June 13, 1997 for $272.2 million.
CONTRACT DRILLING SERVICES
We provide contract drilling and associated services in Kuwait to the
Kuwait Oil Company (K.S.C.), also referred to as KOC, a subsidiary of Kuwait
Petroleum Corporation. We also provide contract drilling services in the
Kuwait-Saudi Arabia Partitioned Neutral Zone of which the State of Kuwait is a
beneficiary. We perform services under drilling contracts that have terms and
conditions and rates of compensation that are materially approximate to the
terms and
56
<PAGE> 57
conditions and rates of compensation that are customarily included in our
arm's-length contracts of a similar nature. In connection with these drilling
contracts, KOC provides us rent-free use of land and maintenance facilities. KOC
has committed to continue providing this use to us, if the maintenance
facilities are available, through the current March 2001 term of the drilling
contracts. As part of our drilling business in Kuwait, we have an agency
agreement with a subsidiary of Kuwait Petroleum Corporation which obligates us
to pay an agency fee based on a percentage of revenues. We recently received a
request to increase this agency fee. We believe the terms of this agreement are
more favorable to us than the terms that could be obtained with an unrelated
third party in an arm's-length negotiation. The value of these favorable terms
and the proposed fee increase are currently immaterial to our results of
operations.
We earned revenues from Kuwait Petroleum Corporation affiliated companies
in the ordinary course of business of $56.1 million for the year ended December
31, 1999. We paid agency fees to a subsidiary of Kuwait Petroleum Corporation of
approximately $0.3 million during the year ended December 31, 1997, $0.6 million
during the year ended December 31, 1998 and $0.6 million during the year ended
December 31, 1999. We had accounts receivable from Kuwait Petroleum Corporation
affiliated companies of $6.1 million at December 31, 1998 and $5.9 million at
December 31, 1999.
We have experienced increased competition for drilling services in Kuwait
and expect additional competition from new entrants into the market. The Kuwait
Oil Company is expected to solicit competitive bids for future drilling
services, and competition may be intense. We are unable to forecast the impact
of increased competition in Kuwait upon our results of operations.
REORGANIZATION
In a series of transactions during the four years ended December 31, 1996,
SFIC Holdings (Cayman), Inc. and its subsidiaries were reorganized so that we
owned all of the drilling assets and direct and indirect subsidiaries of SFIC
Holdings (Cayman), Inc. and Kuwait Petroleum Corporation that provide us with
contract drilling and drilling related services. Under this reorganization, we
made distributions to SFIC Holdings (Cayman), Inc. during the four years ended
December 31, 1996. The distributions were principally some of our subsidiaries
that conducted our former non-drilling operations and services and some
additional non-drilling assets, including real estate, cash and cash
equivalents. The operations and services formerly conducted by these
non-drilling subsidiaries included oil and natural gas production and
exploration activities, pipelaying and other onshore and offshore heavy
construction activities, engineering activities and geothermal electrical
production activities. As part of the reorganization, SFIC Holdings (Cayman),
Inc. also contributed to our assets involved in our contract drilling operations
during the fiscal years ended June 30, 1995, 1996 and 1997. These transactions
have been accounted for as a reorganization of entities under common control in
a manner similar to a pooling of interests.
RELATED PARTY AGREEMENTS
The following is a description of the material terms and provisions of our
memorandum of association and our articles of association and of our agreements
with SFIC Holdings (Cayman), Inc. and/or Kuwait Petroleum Corporation. We have
filed our memorandum of association and our articles of association and these
agreements as exhibits to our Annual Report on Form 20-F for the year ended
December 31, 1999, which is incorporated by reference in this prospectus.
INTERCOMPANY AGREEMENT
In connection with our initial public offering, we entered into an
intercompany agreement with SFIC Holdings (Cayman), Inc. and Kuwait Petroleum
Corporation. Some of the provisions of the
57
<PAGE> 58
intercompany agreement are summarized below. As used in this prospectus, "Kuwait
Petroleum Corporation affiliated group" means Kuwait Petroleum Corporation and
its affiliates, including SFIC Holdings (Cayman), Inc., other than us and our
subsidiaries.
INDEMNIFICATION. As of March 31, 2000, the consolidated financial
statements of SFIC Holdings (Cayman), Inc. contained liabilities to third
parties, including tax liabilities, in the aggregate amount of approximately
$42.9 million. The liabilities were incurred by our former non-drilling
subsidiaries on or before March 31, 1997. SFIC Holdings (Cayman), Inc. maintains
a liability payment fund consisting of cash and cash equivalents which we have
used and will continue to use to satisfy those liabilities. In the intercompany
agreement we agreed that all amounts paid to claimants to satisfy those
liabilities, whether by settlement, judgment or award, including claimants'
attorneys' fees, will be paid by SFIC Holdings (Cayman), Inc. from the liability
payment fund. We are required to pay all internal and external costs and fees,
including attorneys' fees, associated with the management and resolution of
those liabilities. We believe that these costs and fees will not be material. If
any amount remains in the liability payment fund at March 31, 2002, SFIC
Holdings (Cayman), Inc. will liquidate the fund by paying us the first $10.0
million of that amount and 50% of any remaining balance. After the earlier of
March 31, 2002 or the date when all funds in the liability fund have been spent,
SFIC Holdings (Cayman), Inc. will have no further responsibility to pay those
liabilities, and we will be responsible for those liabilities and the costs and
expenses to resolve those liabilities. We will also indemnify the Kuwait
Petroleum Corporation affiliated group for these costs, fees and liabilities. We
believe that the liability payment fund is adequate to provide for these
liabilities. Accordingly, we believe that the indemnification costs, if any,
will not be material. We have not established any additional reserves for these
costs, fees and liabilities or our obligation under the intercompany agreement
relating to these costs and fees and liabilities. See also "-- Management
Services Agreement."
Under the terms of the intercompany agreement, we will indemnify the Kuwait
Petroleum Corporation affiliated group against claims by third parties based on,
or taxes arising from:
- the ownership of the assets or the operation of our business or of our
subsidiaries;
- any of our other activities or those of our subsidiaries;
- any guaranty or similar agreement by the Kuwait Petroleum Corporation
affiliated group provided to any person concerning any of our obligations
or obligations of our subsidiaries; and
- certain other matters.
In addition, we have agreed to indemnify the Kuwait Petroleum Corporation
affiliated group against some civil liabilities, including liabilities under the
U.S. federal securities laws, relating to misstatements in or omissions from the
registration statement filed as part of this offering and any other registration
statement or report that we file under the U.S. federal securities laws. SFIC
Holdings (Cayman), Inc. has also agreed to indemnify us and our subsidiaries
against losses based on the ownership or operation of the assets or properties
or the operation or conduct of the business of SFIC Holdings (Cayman), Inc. and
its subsidiaries on or after March 31, 1997.
CONSENT OF SFIC HOLDINGS (CAYMAN), INC. TO CERTAIN EVENTS. The intercompany
agreement provides that until the later to occur of (i) the date on which
members of the Kuwait Petroleum Corporation affiliated group cease to own at
least 25% of the outstanding ordinary shares, and (ii) the date on which members
of the Kuwait Petroleum Corporation affiliated group cease to
58
<PAGE> 59
own at least 25% of our outstanding voting shares, the prior consent of SFIC
Holdings (Cayman), Inc. generally will be required for:
- an asset disposition by us in excess of $50.0 million;
- the issuance of equity securities by us;
- the incurrence of indebtedness by us above $250.0 million on a
consolidated basis; and
- a change in our corporate domicile.
Analogous provisions are contained in our articles. Under this arrangement,
consents may be requested from time to time. If SFIC Holdings (Cayman), Inc.
does not respond within 30 days after receipt of our written notice requesting
consent to a proposed action, then the consent will be deemed to have been given
by SFIC Holdings (Cayman), Inc. to us. After completion of this offering, SFIC
Holdings (Cayman), Inc. will own approximately 38.6% of our outstanding shares,
or 34.7% if the underwriters' overallotment option is exercised in full, and, as
a result, the consent of SFIC Holdings (Cayman), Inc. will continue to be
required for the corporate actions described above.
REGISTRATION RIGHTS. We have granted to the Kuwait Petroleum Corporation
affiliated group demand and "piggyback" registration rights for our equity
securities that it owns. Under the demand registration rights, the Kuwait
Petroleum Corporation affiliated group may, at any time, request that we
register under the U.S. federal securities laws any or all ordinary shares held
by the Kuwait Petroleum Corporation affiliated group whenever it wishes to sell
ordinary shares in a transaction it reasonably expects will yield gross proceeds
of at least $250.0 million. We have agreed to use our best efforts to effect any
demand registrations requested by the Kuwait Petroleum Corporation affiliated
group. We also agreed to register under the U.S. federal securities laws a
specified amount of ordinary shares held by the Kuwait Petroleum Corporation
affiliated group when we initiate other registrations of our equity securities
on our own behalf or on behalf of any of our other shareholders. These
registration rights are transferable by the Kuwait Petroleum Corporation
affiliated group. We have agreed to pay all costs and expenses in connection
with each of these registrations, except underwriting discounts and commissions
applicable to the equity securities sold by the Kuwait Petroleum Corporation
affiliated group and its transferees. The intercompany agreement also contains
specified restrictions on the ability of the Kuwait Petroleum Corporation
affiliated group to exercise its demand and piggyback registration rights. In
addition, the intercompany agreement contains customary terms and provisions
about registration procedures and indemnification for damages arising from our
registration of ordinary shares. We are registering the ordinary shares being
offered by this prospectus and are paying all of the expenses of the offering,
other than underwriting discounts and commissions, under the registration rights
provisions in the intercompany agreement.
OTHER PROVISIONS. Until the end of the first Kuwait Petroleum Corporation
fiscal year in which the Kuwait Petroleum Corporation affiliated group owns less
than 25% of the outstanding ordinary shares and less than 25% of our outstanding
voting shares, we have agreed to furnish extensive financial information to SFIC
Holdings (Cayman), Inc., including some information before it becomes publicly
available. So long as the Kuwait Petroleum Corporation affiliated group owns 10%
of the outstanding ordinary shares or 10% of our outstanding voting shares, we
have agreed to discuss our affairs, finances and accounts with SFIC Holdings
(Cayman), Inc. and to permit SFIC Holdings (Cayman), Inc. to inspect our
properties, corporate books and financial and other records.
MANAGEMENT SERVICES AGREEMENT
We also have entered into a management services agreement with SFIC
Holdings (Cayman), Inc. to provide asset management services, general and
administrative services and
59
<PAGE> 60
liability management and resolution services to SFIC Holdings (Cayman), Inc.,
our former non-drilling subsidiaries and the inactive subsidiaries of SFIC
Holdings (Cayman), Inc. The management services agreement authorizes us to
resolve the liabilities of our former non-drilling subsidiaries described under
"Intercompany Agreement" using the liability payment fund. Although SFIC
Holdings (Cayman), Inc. retains the right to reduce or expand the scope of
services to be performed by us under the management services agreement, our
liability management and resolution services may not be reduced or terminated.
The management services agreement also provides for payment of an initial asset
management fee to us of $173,000 per year as well as reimbursement of
out-of-pocket costs in respect of asset management services, subject to
negotiation on an annual basis and on any reduction in or expansion of the scope
of the services we provide. By mutual agreement, the asset management fee was
discontinued effective January 1, 2000. We pay all internal and external costs
and fees, including attorneys' fees, associated with our liability management
and resolution services and all internal and external costs and fees associated
with the provision of general and administrative services under the management
services agreement. We believe these costs and fees have not been and will not
be material.
CHARTER PROVISIONS RELATING TO CORPORATE OPPORTUNITIES AND INTERESTED
DIRECTORS
Our board of directors currently includes three persons who are also
directors or officers of SFIC Holdings (Cayman), Inc. or Kuwait Petroleum
Corporation. As a result, our directors who are also directors or officers of
Kuwait Petroleum Corporation or SFIC Holdings (Cayman), Inc. may be faced with
conflicts of interest. Potential conflicts of interest exist or could arise in
the future for these directors in a number of areas, including our contract
drilling activities in Kuwait and our other business relationships with Kuwait
Petroleum Corporation subsidiaries.
To address potential conflicts of interest between us and the Kuwait
Petroleum Corporation affiliated group, our articles of association contain
provisions regulating and defining the conduct of our affairs involving the
Kuwait Petroleum Corporation affiliated group and their directors and officers.
In general, these provisions recognize that we and the Kuwait Petroleum
Corporation affiliated group may engage in the same line of business and have an
interest in the same areas of corporate opportunities. These provisions also
recognize that we and the Kuwait Petroleum Corporation affiliated group will
continue to have contractual and business relations with each other, including
the service of directors and officers of the Kuwait Petroleum Corporation
affiliated group as our directors.
Our articles of association provide that the Kuwait Petroleum Corporation
affiliated group will have no duty to refrain from engaging in our lines of
business, and they may do business with any of our customers or employ any of
our employees. The articles of association also provide that the Kuwait
Petroleum Corporation affiliated group is not under any duty to present any
corporate opportunity to us that may be a corporate opportunity for both the
Kuwait Petroleum Corporation affiliated group and us.
When corporate opportunities are offered to persons who are directors or
officers of us and of the Kuwait Petroleum Corporation affiliated group, our
articles of association provide that the directors or officers will not be
liable to us or to our shareholders if members of the Kuwait Petroleum
Corporation affiliated group pursue the corporate opportunities for themselves
or do not present the corporate opportunities to us as long as the directors or
officers act in a manner consistent with a policy that provides for allocation
based principally on the capacities in which the director or officer is offered
the opportunity. However, the directors or officers may be liable to us or our
shareholders if they engaged in willful default or fraud in not presenting the
corporate opportunities to us.
The articles of association also provide that no arrangement between us and
the Kuwait Petroleum Corporation affiliated group or another related party will
be voidable, and no liability
60
<PAGE> 61
will be imposed, solely because a member of the Kuwait Petroleum Corporation
affiliated group is a party thereto, or solely because any directors or officers
who are related parties are present at, participate in or vote regarding, the
authorization of the arrangement as long as the material facts as to the
arrangement are disclosed to our board of directors or the holders of the
ordinary shares who approve the arrangement. However, the directors or officers
may be liable to us or our shareholders if they engaged in willful default or
fraud in voting on arrangements between us and the Kuwait Petroleum Corporation
affiliated group.
The affirmative vote of a two-thirds majority of the shares entitled to
vote and voting at a meeting of shareholders is required to amend the articles
of association. This majority is required to amend the provisions of our
articles of association on corporate opportunity and interested directors
described above and the provisions requiring the consent of SFIC Holdings
(Cayman), Inc. to corporate actions described in "-- Intercompany
Agreement -- Consent of SFIC Holdings (Cayman), Inc. to Certain Events." So long
as the Kuwait Petroleum Corporation affiliated group controls more than one
third of this voting power, it can prevent this type of amendment.
61
<PAGE> 62
DESCRIPTION OF SHARE CAPITAL
The following is a brief description of our share capital. At May 31, 2000,
an aggregate of 115,144,252 ordinary shares were issued and outstanding. The
following summary description of our share capital is qualified in its entirety
by reference to the form of our memorandum of association and articles of
association filed as exhibits to this registration statement and to the relevant
provisions of the Companies Law (2000 Revision) of the Cayman Islands.
ORDINARY SHARES
Our memorandum of association authorizes the issuance of an aggregate of
600,000,000 ordinary shares, par value $0.01 per share. All of the issued
ordinary shares are credited as fully paid and nonassessable. Under Cayman
Islands law, nonresidents of the Cayman Islands may freely hold, vote and
transfer ordinary shares in the same manner as Cayman Islands residents.
DIVIDENDS
Holders of ordinary shares are entitled to dividends. Under Cayman Islands
law, we may pay dividends in amounts as the board of directors deems appropriate
from our retained earnings or our share premium account, which is equivalent to
additional paid in capital, if after the payment of the dividend we are able to
pay our debts as they come due. Cash dividends, if any, are paid in U.S.
dollars.
For a description of laws or regulations affecting dividends and other
payments in respect of the ordinary shares, see "Taxation" and "Exchange
Controls."
VOTING RIGHTS
The holders of ordinary shares have full voting power for the election of
directors and for all other purposes. Each holder of ordinary shares has one
vote per share. Our ordinary shares do not have cumulative voting rights.
After completion of this offering, SFIC Holdings (Cayman), Inc. will own
approximately 38.6% of our outstanding ordinary shares, or 34.7% if the
underwriters' overallotment option is exercised in full. As a result, after
completion of this offering, Kuwait Petroleum Corporation through SFIC Holdings
(Cayman), Inc. will continue to be able to significantly influence the
management and affairs of our company in all matters requiring shareholder
approval, including the election of our board of directors and significant
corporate transactions.
In addition, under our articles of association, we cannot take some
corporate actions without the prior consent of SFIC Holdings (Cayman), Inc.,
even if our shareholders have approved the matter. For a more detailed
description of the corporate actions subject to this consent right, see "Our
Relationship with Kuwait Petroleum Corporation -- Related Party
Agreements -- Intercompany Agreement -- Consent of SFIC Holdings (Cayman), Inc.
to Certain Events."
DIRECTORS
Under our articles of association, the number of directors on our board may
not be less than nine nor more than 15. Directors may be elected by the
shareholders or appointed by the directors to fill a vacancy or as an addition
to the existing directors. Directors may be removed for cause by a resolution of
our shareholders. See "Management" for further information regarding the
division of the board of directors into three classes.
QUORUM
The presence at a shareholder meeting, in person or by proxy, of the
holders of a majority of the ordinary shares will constitute a quorum and permit
the conduct of shareholder business. If a
62
<PAGE> 63
meeting is adjourned for lack of a quorum, it will stand adjourned until the
directors determine the day, time and place of the reconvened meeting.
Shareholders holding more than 25% of our outstanding voting shares may call
special meetings of shareholders. After completion of this offering, SFIC
Holdings (Cayman), Inc. will own approximately 38.6% of our outstanding shares,
or 34.7% if the underwriters' overallotment option is exercised in full, and
therefore will continue to be able to call a meeting of shareholders.
RESOLUTIONS
Resolutions, other than special resolutions, may be adopted at
shareholders' meetings by the affirmative vote of a simple majority of the
shares entitled to vote thereon and voting at the meeting in question. To be
adopted, a special resolution requires the affirmative vote of a two-thirds
majority of the shares entitled to vote thereon and voting at the meeting in
question. After completion of this offering, SFIC Holdings (Cayman), Inc. will
own approximately 38.6% of our outstanding shares, or 34.7% if the underwriters'
overallotment option is exercised in full, and therefore will continue to be
able to prevent the adoption of a special resolution.
RIGHTS IN A WINDING-UP
Holders of ordinary shares are entitled to participate in proportion to
their holdings in any distribution of assets in a winding-up after satisfaction
of liabilities to creditors.
ADDITIONAL ISSUANCES OF ORDINARY SHARES
At May 31, 2000, there were 484,855,748 authorized but unissued ordinary
shares, including 6,225,748 ordinary shares reserved for issuance under our
equity incentive plans. For more information about these plans, see note 7 of
the notes to the consolidated financial statements included in this prospectus.
We may issue additional authorized but unissued ordinary shares for a variety of
corporate purposes, including acquisitions and future public offerings or
private placements to raise additional capital. Subject to any resolution of
shareholders and to restrictions in the intercompany agreement and our articles
of association, our board of directors is authorized to exercise the power to
issue all of the remaining unissued ordinary shares. We do not currently have
any plans to issue additional ordinary shares, except in connection with our
employee and director benefit plans. Subject to restrictions contained in the
intercompany agreement and our articles of association, our board of directors
may, without shareholder action, issue ordinary shares out of the already
existing authorized share capital. For more information about these
restrictions, see "Our Relationship with Kuwait Petroleum Corporation -- Related
Agreements -- Intercompany Agreement."
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. serves as the transfer agent and
registrar for the ordinary shares.
COMPARISON OF U.S. AND CAYMAN ISLANDS CORPORATE LAWS
Under the laws of many jurisdictions in the United States, majority and
controlling shareholders generally have "fiduciary" responsibilities to the
minority shareholders. However, minority shareholders in a Cayman Islands
company may not have the same protections that minority shareholders in a U.S.
company would have.
63
<PAGE> 64
As a matter of Cayman Islands law, a company may bring suit for breaches of
duty owed to it. A minority shareholder of a Cayman Islands company can file a
lawsuit in its name or can cause that company to bring suit in respect of:
- an obligation owed by directors and officers to us in circumstances where
those who control our company are acting unconscionably or perpetrating a
fraud on the minority;
- actions we are taking which we do not have the power to take;
- actions that have purported to have been taken without shareholder
approval, if such approval is required; or
- the personal rights of the shareholder that have been infringed or are
about to be infringed.
As in most U.S. jurisdictions, the board of directors of a Cayman Islands
company is charged with the management of our company affairs. In most U.S.
jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care and a duty of loyalty. The duty of care
requires directors to properly apprise themselves of all reasonably available
information. The duty of loyalty requires directors to protect the interests of
the corporation and refrain from conduct that injures the corporation or its
shareholders or that deprives the corporation or its shareholders of any profit
or advantage.
The board of directors of a Cayman Islands company owes our company the
duties of care and skill and the fiduciary duties of loyalty and good faith. The
duties of loyalty and good faith are owed by each director individually to our
company and to our company alone. In the exercise of their fiduciary duties, the
directors must act in what they believe to be the interests of our company. In
addition, directors must not restrict their discretion to exercise their powers
from time to time and must not, without our consent, place themselves in a
position where there is a conflict between their duties and personal interests.
The duties of care and skill do not require a director to exercise any
greater degree of skill than may be reasonably expected from a person of his
knowledge and experience. Although a director should give continuous attention
to the affairs of our company when able, a director is not required to give
continuous attention to our company. In the discharge of his duties of care and
skill, a director may delegate duties to another if the director is justified in
trusting that person to perform the duties honestly.
Many U.S. jurisdictions have enacted various statutory provisions which
permit the monetary liability of directors to be eliminated or limited but no
similar provisions exist under Cayman Islands law.
Cayman Islands law provides that a reconstruction and amalgamation of a
Cayman Islands company requires the consent of a majority in number holding
three-fourths in value of the shares affected (and a similar majority of any
creditors if their interests are affected), present and voting in person or by
proxy at the meeting and subsequent court approval.
The foregoing description of differences between U.S. and Cayman Islands
corporate laws is only a summary and is not complete. For a further description,
see "Enforceability of Civil Liabilities" and "Risk Factors -- Our shareholders
have limited rights under Cayman Islands law."
INDEMNIFICATION PROVISIONS
Our articles of association require that we indemnify our directors and
officers to the fullest extent authorized or permitted by law. In addition, we
will advance the expenses of defending a proceeding to the fullest extent
authorized or permitted by law. Directors and officers are not entitled to
indemnification for acts of willful default or fraud. This indemnification and
64
<PAGE> 65
advancement of expenses are not exclusive of any other right to indemnification
or advancement of expenses provided by law or otherwise. We have also entered
into indemnification agreements with our directors and executive officers.
TAXATION
The following summarizes the material U.S. federal income tax consequences
and Cayman Islands tax consequences of an investment in the ordinary shares and
taxation of our company under current law. The opinion of Mayer, Brown & Platt
with respect to the U.S. federal income tax consequences of an investment in the
ordinary shares is set forth below under the heading "-- U.S. Federal Income
Taxation of Shareholders." The opinion of Maples and Calder with respect to the
Cayman Islands tax consequences of that investment is set forth below under the
heading "-- Cayman Islands Tax Consequences." The following discussion does not
deal with all possible tax consequences relating to an investment in the
ordinary shares and does not purport to deal with the tax consequences
applicable to all categories of investors, some of which (such as dealers in
securities, insurance companies, individual retirement and other tax deferred
accounts and other tax-exempt entities) may be subject to special rules. In
particular, the discussion does not address the tax consequences under state,
local and other national (i.e., non-U.S. and non-Cayman Islands) tax laws. The
following discussion is based upon laws and relevant interpretations thereof in
effect as of the date of this prospectus, all of which are subject to change,
possibly with retroactive effect. Accordingly, each prospective investor should
consult its own tax advisor regarding the particular tax consequences to it of
an investment in the ordinary shares.
U.S. FEDERAL INCOME TAXATION OF SHAREHOLDERS
The following discussion only addresses the U.S. federal income taxation of
a U.S. Investor (as defined below) making an investment in the ordinary shares.
This discussion does not address the tax consequences to U.S. Investors who
directly or by attribution own 10% or more of the ordinary shares. For purposes
of this discussion, the term "U.S. Investor" means a holder of ordinary shares
who is a citizen or resident of the U.S., a U.S. corporation or partnership
(including an entity treated as a corporation or partnership for U.S. tax
purposes) or other entity created or organized under the laws of the U.S. or any
political subdivision thereof, an estate the income of which is subject to U.S.
federal income taxation regardless of its source, any trust if a court within
the U.S. has primary supervision over its administration and U.S. fiduciaries
have authority to control all substantial decisions of the trust, and any other
holder whose ownership of ordinary shares is effectively connected with the
conduct of a trade or business in the U.S.
A U.S. Investor receiving a distribution with respect to the ordinary
shares will be required to include that distribution in gross income as a
taxable dividend to the extent the distribution is paid from our current or
accumulated earnings and profits as determined under U.S. federal income tax
principles. Any distributions in excess of our current or accumulated earnings
and profits will first be treated, for U.S. federal income tax purposes, as a
nontaxable return of capital to the extent of the U.S. Investor's basis in the
ordinary shares, and then as gain from the sale or exchange of a capital asset,
provided that the ordinary shares constitute capital assets in the hands of the
U.S. Investor. Generally, dividends paid by us should constitute income from
sources outside the United States. U.S. corporate shareholders will not be
entitled to any deduction for distributions received as dividends on the
ordinary shares.
Gain or loss on the sale or exchange of ordinary shares will be treated as
capital gain or loss if the ordinary shares are held as a capital asset by the
U.S. Investor. This capital gain or loss will be long-term capital gain or loss
if the U.S. Investor has held the ordinary shares for more than one year at the
time of the sale or exchange. Under most circumstances, gain or loss
65
<PAGE> 66
from the sale or exchange of ordinary shares by a U.S. Investor will be treated
as U.S. source gain or loss for foreign tax credit purposes.
APPLICABILITY OF SPECIAL U.S. TAX RULES APPLICABLE TO U.S. SHAREHOLDERS OF
CERTAIN FOREIGN CORPORATIONS
The Internal Revenue Code of 1986 imposes special rules on U.S.
shareholders of a foreign corporation that is, for U.S. federal income tax
purposes, a "controlled foreign corporation" ("CFC"), "passive foreign
investment company" ("PFIC") or "foreign personal holding company" ("FPHC").
Whether a foreign corporation will be treated as a CFC, PFIC or FPHC depends on
the ownership of the foreign corporation by the U.S. persons (in the case of a
CFC), the type of income earned or type of assets held by the foreign
corporation (in the case of the PFIC) or a combination of the income earned and
assets held by the corporation and its ownership by U.S. persons (in the case of
a FPHC). Based upon the expected ownership of the ordinary shares and our
current and projected income, business investment plan, assets and activities,
we do not expect to be considered a CFC, PFIC or FPHC for our current taxable
year or for future years, but we cannot assure you of this. U.S. Investors
should consult their advisors regarding the consequences to them if we were to
be classified as one of these special classes of foreign corporations.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividend payments with respect to ordinary shares and proceeds from the
disposition of ordinary shares may be subject to information reporting to the
U.S. Internal Revenue Service and possible U.S. backup withholding at a rate of
31%. Backup withholding will not apply to a holder of ordinary shares that
furnishes a correct taxpayer identification number and makes any other required
certification or otherwise is exempt from backup withholding. If a holder is
required to establish its exempt status, it generally must provide this
certification on U.S. Internal Revenue Service Form W-9.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded, or credited against the holder's U.S. federal income
tax liability, if any, provided that the required information is furnished to
the U.S. Internal Revenue Service.
In addition to any other returns required by U.S. tax laws, all U.S.
Investors who become owners of 10% or more of our ordinary shares will be
required to file certain informational returns with the U.S. Internal Revenue
Service (including U.S. Internal Revenue Service Form 5471).
OUR FEDERAL INCOME TAXATION
As a Cayman Islands company, we are subject to U.S. federal income tax at a
30% rate on gross amounts of certain types of passive income received from U.S.
sources, including interest (except portfolio interest and interest on bank
deposits), dividends, rents and royalties. In addition, if and to the extent we
are treated as engaged in a U.S. trade or business, our net income deemed to be
effectively connected with that U.S. trade or business will be subject to U.S.
income tax at regular corporate rates and we generally will also be subject to a
30% "branch profits" tax on our earnings and profits effectively connected with
the U.S. trade or business (subject to certain adjustments).
The determination of whether a company is engaged in a U.S. trade or
business and whether income is effectively connected with such business in any
year is based on all the facts and circumstances. Our operations have been
almost exclusively conducted outside the U.S. However, we have maintained an
office in Dallas, Texas in which are based various members of senior management
who generally oversee, supervise and control the policies of our worldwide
operations. We have reported and paid U.S. taxes on income attributable to the
services performed by personnel in our U.S. offices on behalf of some of our
affiliates as income
66
<PAGE> 67
effectively connected with a U.S. trade or business. The amount of service
income for this purpose is based on studies of comparable arm's-length fees
normally charged for similar services. The Internal Revenue Service may not
agree with the positions taken by us regarding the amount of these fees or may
argue that a share of the profits from our worldwide operations (and not merely
the services performed on behalf of our affiliates) is effectively connected
with our U.S. operations and therefore subject to U.S. tax. In either event,
more of our income could be subject to U.S. federal income and branch profits
taxes. We have conducted and intend to conduct our activities in the future so
as to minimize the risk our being treated as having a U.S. trade or U.S.
business, but the existence or scope of such business and the amount of income
attributable thereto requires complex factual determinations and accordingly we
cannot assure you that the positions taken by us would not be successfully
challenged by the Internal Revenue Service, or that changes in law or facts will
not affect the continued validity of this position. If we are subject to U.S.
taxes on additional income, our operating results could be materially adversely
affected.
CAYMAN ISLANDS TAX CONSEQUENCES
At the present time there is no Cayman Islands income or profits tax,
withholding tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax payable by a Cayman Islands company or its shareholders. We have
obtained an assurance from the Cayman Islands Government under the Tax
Concessions Law (2000 Revision) that, if any legislation is enacted in the
Cayman Islands imposing tax computed on profits or income, or computed on any
capital assets, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, such tax shall not until February 13, 2010 be applicable to us
or to any of our operations or to the ordinary shares, our debentures or our
other obligations. Therefore, under present law, there will be no Cayman Islands
tax consequences with respect to distributions in respect to the ordinary
shares.
EXCHANGE CONTROLS
There are currently no exchange control restrictions on remittances of
dividends on the ordinary shares or on the conduct of our operations in the
Cayman Islands, where we are incorporated.
67
<PAGE> 68
UNDERWRITING
Santa Fe, the selling shareholder and the underwriters named below have
entered into an underwriting agreement with respect to the shares being offered
in the United States and elsewhere. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated,
Credit Suisse First Boston Corporation and Salomon Smith Barney Inc. are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ....................................... 6,018,750
Morgan Stanley & Co. Incorporated........................... 6,018,750
Credit Suisse First Boston Corporation...................... 6,018,750
Salomon Smith Barney Inc. ................................. 6,018,750
ABN AMRO Incorporated....................................... 300,000
Banc of America Securities LLC.............................. 300,000
CIBC World Markets Corp. ................................... 300,000
Dain Rauscher Incorporated.................................. 300,000
Deutsche Banc Securities Inc. .............................. 300,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 300,000
A.G. Edwards & Sons, Inc. .................................. 300,000
Edward D. Jones & Co., L.P. ................................ 300,000
Lehman Brothers Inc. ....................................... 300,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 300,000
PaineWebber Incorporated.................................... 300,000
Prudential Securities Incorporated.......................... 300,000
RBC Dominion Securities Corporation......................... 300,000
Wasserstein Perella Securities, Inc. ....................... 300,000
HOWARD WEIL, a division of Legg Mason Wood Walker, Inc. .... 150,000
Simmons & Company International............................. 150,000
Blaylock & Partners, L.P. .................................. 150,000
Frost Securities Inc. ...................................... 150,000
Gulf Investment Corporation................................. 150,000
Jefferies & Company, Inc. .................................. 150,000
Johnson Rice & Company L.L.C. .............................. 150,000
National Bank of Kuwait S.A.K. ............................. 150,000
Sanders Morris Harris Inc. ................................. 150,000
Southwest Securities, Inc. ................................. 150,000
Stifel, Nicolaus & Company, Incorporated.................... 150,000
May Davis Group Inc. ....................................... 75,000
----------
Total............................................. 30,000,000
==========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
4,500,000 shares from the selling shareholder to cover such sales. They may
exercise that option for 30 days. If any shares are purchased under this option,
the underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
68
<PAGE> 69
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by the selling shareholder. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase 4,500,000 additional shares.
Paid by SFIC Holdings (Cayman), Inc.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share................................................... $ 0.949 $ 0.949
Total....................................................... $28,470,000 $32,740,500
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $0.57 per share from the initial price to public. Any securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $0.10 per share from the initial price
to public. If all the shares are not sold at the initial price to public, the
representatives may change this offering price and the other selling terms.
Santa Fe has been advised by the representatives, on behalf of the
underwriters, that certain of the underwriters are expected to make offers and
sales outside the United States through their respective selling agents.
The underwriters have agreed to restrictions on where and to whom they and
any dealer purchasing from them may offer ordinary shares as a part of the
distribution of the ordinary shares.
Each underwriter has represented and agreed that (a) it has not offered or
sold and during the period of six months immediately following the consummation
of the offering, will not offer or sell, any ordinary shares to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom for the purposes of the
Public Offers of Securities Regulations 1995, (b) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the ordinary shares, from or
otherwise involving the United Kingdom and (c) it has only issued or passed on,
and will only issue or pass on, in the United Kingdom any document received by
it in connection with the issue or sale of the ordinary shares to a person who
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) or to a person
to whom the document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction other than the
United States that would permit a public offering of the ordinary shares or the
possession, circulation or distribution of this prospectus in any jurisdiction
where action for that purpose is required. Accordingly, the ordinary shares may
not be offered or sold, directly or indirectly, and neither this prospectus nor
any other offering material or advertisements in connection with the ordinary
shares may be distributed or published in or from any country or jurisdiction
except under circumstances that will result in compliance with any applicable
rules and regulations of any such country or jurisdiction.
Santa Fe, the selling shareholder and Kuwait Petroleum Corporation have
agreed with the underwriters not to dispose of or hedge any of their ordinary
shares or securities convertible into or exchangeable for shares during the
period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, except with the prior written consent of
69
<PAGE> 70
Goldman, Sachs & Co. This agreement does not apply to the issuance of shares by
us under Santa Fe's existing employee benefit plans. In addition, this agreement
does not apply to a transfer of shares by the selling shareholder or Kuwait
Petroleum Corporation to affiliates of the selling shareholder or Kuwait
Petroleum Corporation, or the disposition of shares by the selling shareholder
or Kuwait Petroleum Corporation in a transaction not involving a public
offering, if the acquiring entity or transferee agrees in writing before the
transfer to be bound by this restriction for the remainder of the 90-day period.
In connection with this offering, the underwriters may purchase and sell
shares in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the shares while this
offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the shares. As a result, the price of the shares may
be higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected on the New York Stock Exchange, in the
over-the-counter market or otherwise.
Santa Fe estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $1.7
million.
Santa Fe and the selling shareholder have each agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offering being made outside of the
United States, to persons located in the United States.
Some of the underwriters have engaged, and may in the future engage, in
transactions with and perform services for Santa Fe and Kuwait Petroleum
Corporation in the ordinary course of business.
70
<PAGE> 71
LEGAL MATTERS
The validity of the ordinary shares offered hereby will be passed upon for
Santa Fe by Maples and Calder. Certain U.S. legal matters will be passed upon
for Santa Fe by Haynes and Boone, LLP and certain U.S. tax matters will be
passed upon for Santa Fe by Mayer, Brown & Platt. The underwriters are being
advised as to U.S. matters by Sullivan & Cromwell and as to Cayman Islands
matters by Walkers. SFIC Holdings (Cayman), Inc. and Kuwait Petroleum
Corporation are being advised as to Cayman Islands matters by Maples and Calder
and as to U.S. matters by Skadden, Arps, Slate, Meagher & Flom LLP.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and 1998, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual and special reports and other information with the SEC under
the Securities Exchange Act of 1934. Our SEC filings are available to the public
over the Internet at the SEC's web site on the worldwide web at sec.gov. You may
also read and copy any document we file at the SEC's public reference rooms at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at 7 World Trade Center, Suite 1300, New York 10048. Please call the SEC at
(800) SEC-0330 for further information on the public reference room. Our
Internet web site is on the world wide web at sfdrill.com. Neither the
information on our web site nor the SEC's web site is part of this prospectus
and references in this prospectus to our web site or any other web site are
inactive textual references only.
We have filed with the SEC a registration statement on Form F-3 under the
U.S. federal securities laws with respect to the selling shareholder's offering
of ordinary shares. This prospectus, which constitutes a part of the
registration statement, does not contain all the information set forth in the
registration statement and the attached schedules and exhibits.
You may also inspect and copy any of our SEC filings at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, on
which our ordinary shares are traded.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and information that we file later with the SEC
will automatically update and supersede the information in this prospectus.
Accordingly, we incorporate by reference the documents listed below:
1. Our Annual Report on Form 20-F for the year ended December 31,
1999; and
2. The description of our ordinary shares contained in the
registration statement on Form 8-A (No. 1-14634) filed on May 14,
1997.
All reports and other documents we subsequently file on Form 20-F, Form
40-F, Form 10-K, Form 10-Q or Form 8-K pursuant to the Securities Exchange Act
of 1934 after the date of this
71
<PAGE> 72
prospectus and before the termination of this offering shall be incorporated by
reference into this prospectus and deemed to be part of this prospectus from the
date of the filing of such reports and documents. In addition, we may
incorporate reports and other documents filed on Form 6-K after the date of this
prospectus and before the termination of this offering by identifying in the
Form 6-K that these reports and documents are being incorporated by reference
into this prospectus from the date of the filing of such reports and documents.
We will provide our SEC filings to any person, including any beneficial
owner, to whom this prospectus is delivered, at no cost, upon written or oral
request to us at Santa Fe International Corporation, Two Lincoln Centre, Suite
1100, 5420 LBJ Freeway, Dallas, Texas 75240-2648, Attention: Vice
President -- Investor Relations. You may call our Vice President of Investor
Relations at (972) 701-7300 to request filings.
72
<PAGE> 73
SANTA FE INTERNATIONAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and for the three months
ended March 31, 1999 and 2000 (Unaudited)................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1999
and March 31, 2000 (Unaudited)............................ F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999 and for the
three months ended March 31, 1999 and 2000 (Unaudited).... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and for the three months
ended March 31, 1999 and 2000 (Unaudited)................. F-6
Notes to the Consolidated Financial Statements.............. F-7
</TABLE>
F-1
<PAGE> 74
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Santa Fe International Corporation
We have audited the accompanying consolidated balance sheets of Santa Fe
International Corporation and subsidiary companies (the Company) as of December
31, 1998 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Santa Fe
International Corporation and subsidiary companies at December 31, 1998 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Dallas, Texas
January 26, 2000
F-2
<PAGE> 75
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues (Notes 10 and
11)............................... $ 688,957 $ 811,346 $ 614,241 $ 185,516 $ 132,548
Operating costs..................... 373,833 414,022 355,763 93,513 88,643
----------- ----------- ----------- ----------- -----------
Operating margin.................. 315,124 397,324 258,478 92,003 43,905
Other operating costs and expenses:
Depreciation and amortization
(Note 3)........................ 46,197 55,807 71,631 17,658 20,359
General and administrative........ 20,149 22,161 18,596 5,189 4,121
Gain on sale of assets............ (626) (5,988) (805) (200) (284)
----------- ----------- ----------- ----------- -----------
Operating income.................... 249,404 325,344 169,056 69,356 19,709
Other income (expense):
Investment income................. 4,518 5,583 10,473 1,431 3,590
Other, net........................ (1,650) (4,263) (1,070) (1,114) (1,128)
----------- ----------- ----------- ----------- -----------
Income before provision for taxes on
income............................ 252,272 326,664 178,459 69,673 22,171
Provision for taxes on income (Note
5)................................ 27,486 39,520 28,635 11,217 3,902
----------- ----------- ----------- ----------- -----------
Net income.......................... $ 224,786 $ 287,144 $ 149,824 $ 58,456 $ 18,269
=========== =========== =========== =========== ===========
Net income per Ordinary Share:
Basic............................. $ 1.96 $ 2.51 $ 1.31 $ 0.51 $ 0.16
=========== =========== =========== =========== ===========
Diluted........................... $ 1.96 $ 2.50 $ 1.30 $ 0.51 $ 0.16
=========== =========== =========== =========== ===========
Weighted average shares used in per
Ordinary Share computations:
Basic............................. 114,500,000 114,500,249 114,735,287 114,728,491 114,910,836
=========== =========== =========== =========== ===========
Diluted........................... 114,608,000 114,812,234 115,442,597 115,090,366 116,371,456
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 76
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1998 1999 2000
---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 124,314 $ 99,692 $ 248,268
Marketable securities........................... -- 147,749 13,008
Accounts receivable (Note 11)................... 161,728 107,741 115,740
Inventories..................................... 51,481 42,083 36,426
Prepaid expenses and other current assets....... 14,913 11,427 9,019
---------- ----------- -----------
Total current assets.................... 352,436 408,692 422,461
---------- ----------- -----------
Property and equipment, at cost (Note 3).......... 2,030,756 2,152,094 2,159,935
Less accumulated depreciation and
amortization................................. (981,555) (1,049,530) (1,068,871)
---------- ----------- -----------
Property and equipment, net..................... 1,049,201 1,102,564 1,091,064
Other noncurrent assets (Notes 5 and 7)........... 52,099 52,286 52,672
---------- ----------- -----------
Total assets............................ $1,453,736 $ 1,563,542 $ 1,566,197
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 74,603 $ 49,212 $ 44,109
Accrued liabilities (Note 4).................... 107,057 100,214 92,778
---------- ----------- -----------
Total current liabilities............... 181,660 149,426 136,887
Other noncurrent liabilities (Note 6)............. 44,852 48,091 46,148
---------- ----------- -----------
Total liabilities....................... 226,512 197,517 183,035
Commitments and contingencies (Note 9)
Shareholders' equity (Notes 1 and 8):
Ordinary Shares par value $0.01; 600,000,000
shares authorized, 114,762,469, 114,971,177
and 115,144,552 shares issues and outstanding
at December 31, 1998 and 1999 and March 31,
2000, respectively........................... 1,148 1,150 1,151
Additional paid-in capital...................... 667,816 671,707 674,309
Retained earnings............................... 558,260 693,168 707,702
---------- ----------- -----------
Total shareholders' equity.............. 1,227,224 1,366,025 1,383,162
---------- ----------- -----------
Total liabilities and shareholders'
equity................................ $1,453,736 $ 1,563,542 $ 1,566,197
========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 77
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ORDINARY SHARES ADDITIONAL TOTAL
----------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS EQUITY
----------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996............ 84,500,000 $ 845 $ 728,418 68,658 $ 797,921
Ordinary Shares issued for cash, net
(Note 1).............................. 40,000,000 400 1,080,320 -- 1,080,720
Purchase of Ordinary Shares from
Holdings (Note 1)..................... (10,000,000) (100) (272,080) -- (272,180)
Distributions to parent................. -- -- (871,604) -- (871,604)
Ordinary Shares issued pursuant to
employee benefit plans, net of
forfeitures........................... 246,550 2 815 -- 817
Dividends............................... -- -- -- (7,443) (7,443)
Net income...................... -- -- -- 224,786 224,786
----------- ------ ---------- -------- ----------
BALANCE AT DECEMBER 31, 1997............ 114,746,550 1,147 665,869 286,001 953,017
Ordinary Shares issued pursuant to
employee benefit plans, net of
forfeitures........................... 15,919 1 1,947 -- 1,948
Dividends............................... -- -- -- (14,885) (14,885)
Net income...................... -- -- -- 287,144 287,144
----------- ------ ---------- -------- ----------
BALANCE AT DECEMBER 31, 1998............ 114,762,469 1,148 667,816 558,260 1,227,224
Ordinary Shares issued pursuant to
employee benefit plans, net of
forfeitures........................... 208,708 2 3,891 3,893
Dividends............................... (14,916) (14,916)
Net income...................... -- -- -- 149,824 149,824
----------- ------ ---------- -------- ----------
BALANCE AT DECEMBER 31, 1999............ 114,971,177 1,150 671,707 693,168 1,366,025
Ordinary shares issued pursuant to
employee benefit plans................ 173,375 1 2,602 2,603
Dividends............................... (3,735) (3,735)
Net Income...................... -- -- -- 18,269 18,269
----------- ------ ---------- -------- ----------
BALANCE AT MARCH 31, 2000 (UNAUDITED)... 115,144,552 $1,151 $ 674,309 $707,702 $1,383,162
=========== ====== ========== ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 78
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------------------- -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 224,786 $ 287,144 $ 149,824 $ 58,456 $ 18,269
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 46,197 55,807 71,631 17,658 20,359
Gain on sale of assets............................ (626) (5,988) (805) (200) (284)
Accretion of interest income and gains on sales of
marketable securities........................... (2,356) (127) (4,400) (365) 1,325
Deferred provision (benefit) for taxes on
income.......................................... 3,422 (785) (71) (43) --
Changes in operating assets and liabilities:
Accounts receivable............................. (12,908) (12,460) 53,987 6,708 (7,999)
Inventories..................................... (1,399) (299) 9,398 311 5,657
Prepaid expenses and other current assets....... (7,015) 2,546 3,486 268 2,407
Accounts payable................................ 35,280 (17,411) (25,391) (23,401) (5,103)
Accrued liabilities............................. 14,220 27,316 (6,843) 456 (6,684)
Other, net........................................ (1,807) 7,478 4,040 1,574 (2,647)
---------- --------- --------- -------- --------
Net cash provided by operating activities... 297,794 343,221 254,856 61,422 25,300
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (229,192) (277,400) (124,608) (38,264) (8,740)
Advance payments for drilling rigs.................. (23,111) (18,532) -- --
Proceeds from sales of property and equipment....... 911 1,406 1,257 296 365
Maturities of marketable securities................. 68,491 8,220 90,774 -- 148,254
Purchases of marketable securities.................. (52,747) -- (234,123) (51,488) (14,838)
Proceeds from insurance settlement.................. -- 13,831 -- --
---------- --------- --------- -------- --------
Net cash used for investing activities...... (235,648) (272,475) (266,700) (89,456) 125,041
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Ordinary Shares, net........................ 1,080,720 -- 2,130 2,099 1,964
Purchase of Ordinary Shares from Holdings........... (272,180) -- -- -- --
Distributions to parent, net........................ (871,604) -- -- -- --
Dividends paid...................................... (3,721) (14,885) (14,908) (3,721) (3,729)
---------- --------- --------- -------- --------
Net cash used for financing activities...... (66,785) (14,885) (12,778) (1,622) (1,765)
---------- --------- --------- -------- --------
Net change in cash and cash equivalents............. (4,639) 55,861 (24,622) (29,656) 148,576
Cash and cash equivalents at beginning of period.... 73,092 68,453 124,314 124,314 99,692
---------- --------- --------- -------- --------
Cash and cash equivalents at end of period.......... $ 68,453 $ 124,314 $ 99,692 $ 94,658 $248,268
========== ========= ========= ======== ========
Supplemental disclosures of cash flows information:
Income taxes paid................................. $ 15,199 $ 28,005 $ 31,592 $ 3,985 $ 4,663
========== ========= ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 79
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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. The
Company owns and operates a high quality, technologically advanced fleet of 27
marine drilling rigs and 33 land drilling rigs and provides drilling related
services to the petroleum industry worldwide.
On May 27, 1997, the Company was recapitalized, resulting in the Company's
900,000 authorized ordinary shares, par value $1.00 per share, with 1,003
ordinary shares issued and outstanding, being recapitalized into 600,000,000
authorized ordinary shares, par value $0.01 per share ("Ordinary Shares"), with
84,500,000 Ordinary Shares issued and outstanding. The accompanying consolidated
financial statements have been adjusted to reflect this recapitalization
retroactively.
On June 9 and 13, 1997, respectively, the Company commenced and completed
an initial public offering (the "Offering") of Ordinary Shares. Upon the
issuance of 40,000,000 Ordinary Shares in the Offering and consummation of the
purchase described below of Ordinary Shares from Holdings, the Company had
114,500,000 Ordinary Shares outstanding. Immediately following the Offering,
Holdings held 65.1% of the outstanding Ordinary Shares of the Company. The
Offering price was $28.50 per share, resulting in net proceeds of approximately
$1,088,720,000 after deducting underwriting discounts and commissions. The
Company also incurred approximately $8 million of expenses in connection with
the Offering which has been charged to additional paid-in-capital. Upon receipt
of proceeds from the sale of the first 30,000,000 Ordinary Shares sold in the
Offering, the Company paid a cash dividend to Holdings in an amount equal to
those proceeds. All of the proceeds the Company received from the sale in the
Offering of Ordinary Shares in excess of that amount were used to purchase a
like number of Ordinary Shares from Holdings.
The Company's current dividend policy contemplates the payment of quarterly
dividends of $0.0325 per Ordinary Share. 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, are declared and paid in U.S. dollars. At December 31, 1999, the Company
had declared dividends which had not been paid amounting to $3,729,000.
The accompanying consolidated financial statements are presented in U.S.
dollars and in accordance with accounting principles generally accepted in the
United States.
The consolidated financial statements for the three months ended March 31,
1999 and 2000 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 period ended
F-7
<PAGE> 80
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 2000 are not necessarily indicative of the results of operations that
will be realized for the year ending December 31, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The Company consolidates all of its majority-owned subsidiaries. The
Company also consolidates joint ventures over which the Company exercises
control through the joint venture agreement or related operating and financing
agreements. The Company accounts for its interest in other joint ventures using
the equity method. All material intercompany accounts and transactions are
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid short-term investments that are
readily convertible into cash and which at the date of purchase were so near
their maturity that they expose the Company to an insignificant risk from
changes in interest rates. Cash equivalents are carried at cost plus accrued
interest, which approximates fair value. The interest method is used to account
for any premium or discount on cash equivalents. The Company's policy is to
place its temporary cash investments with high credit quality financial
institutions and by policy limit the amount of credit exposure to any one
financial institution.
The Company's marketable securities and long-term investments are
classified as available-for-sale securities. Unrealized holding gains and losses
on securities available-for-sale are recorded as a component of other
comprehensive income, net of tax effect. The fair values for marketable
securities are based on quoted market prices. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in investment
income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The Company does not believe that it is exposed to any significant risks
on its investments.
At December 31, 1999, marketable securities consisted primarily of
Eurodollar debt securities and commercial paper for which cost approximates
market value.
INVENTORIES
Inventories consist primarily of materials and supplies which are used in
operations and are stated at the lower of cost (determined principally by the
average cost or specific identification method) or estimated net realizable
value.
F-8
<PAGE> 81
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
The Company's customers consist primarily of major international, state
owned and large independent oil companies and their affiliates. The Company
provides allowances for potential credit losses when necessary. The Company did
not incur any charges for credit losses during the periods presented. Accounts
receivable from the Company's customers are generally unsecured.
PROPERTY AND EQUIPMENT
Property and equipment, composed primarily of marine and land drilling
rigs, is carried at cost. Maintenance and repairs are charged to expense as
incurred. Major replacements and upgrades are capitalized, as is the cost of
initial mobilization of a newly constructed rig. Upon retirement or other
disposal of fixed assets, the cost and related accumulated depreciation and
amortization are removed from the respective accounts and any gains or losses
are included in the results of operations. Property and equipment is depreciated
on the straight-line method, after allowing for salvage values, over the
remaining estimated useful lives from the date the asset is placed into service.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the Company reviews its long-term assets for
impairment when changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used be reported at the lower of
carrying amount or fair value. Assets to be disposed of and assets not expected
to provide any future service potential to the Company are recorded at the lower
of carrying amount or fair value less cost to sell. No impairment charges were
recorded by the Company during the years ended December 31, 1997, 1998 or 1999.
OPERATING REVENUES AND COSTS
The majority of the Company's drilling contracts are performed on a dayrate
basis, with revenues and expenses recognized as work is performed. The Company
also operates under incentive-based contracts, such as turnkey drilling and
footage contracts, under the terms of which the Company may earn additional
revenues by exceeding preset conditions of job performance. The Company
recognizes incremental revenues from these incentive-based contracts when such
conditions of the contract have been achieved. Under certain incentive-based
contracts, the Company may incur penalties or reduced remuneration if preset
conditions are not achieved. The Company recognizes the effect of such penalties
or reduced remuneration, which historically has been immaterial, as an
adjustment to incentive revenues when the amount reasonably can be estimated.
In connection with drilling contracts, the Company may receive lump sum
fees for the mobilization of equipment and personnel or for capital improvements
to rigs. In connection with mobilization reimbursements, the net of mobilization
fees received and expenses incurred is recognized over the term of the drilling
contract. Costs of relocating drilling units without contracts are expensed as
incurred. Demobilization fees received are reflected in income, net of any
related expense. Capital upgrade fees received from the client are deferred and
recognized as revenue over the period of the drilling contract. The actual cost
incurred for the capital upgrade is capitalized and depreciated over the
estimated useful life of the asset.
F-9
<PAGE> 82
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also earns revenue by providing drilling related services.
Revenues from third party rig operations, drilling engineering and integrated
well services are recognized as the services are performed. Revenues from
drilling project management contracts are recognized using the percentage of
completion method based on the ratio of costs incurred to total estimated
contract costs. Provisions for losses are recorded for contracts in progress
when losses are anticipated.
INCOME TAXES
The Company is not subject to income taxes in the Cayman Islands. The
current provision for taxes on income consists primarily of income taxes based
on the tax laws and rates of the countries in which operations were conducted
during the periods presented. Certain of the Company's operations were included
in consolidated income tax returns of affiliates during the periods presented.
Under tax sharing agreements, the Company provides for income taxes payable to
such affiliates as if it filed separate income tax returns.
The Company computes its provision for deferred income taxes using the
liability method. Under the liability method, deferred income tax assets and
liabilities are determined based on differences between financial reporting and
income tax bases of assets and liabilities and are measured using the enacted
tax rates and laws. The measurement of deferred tax assets is adjusted by a
valuation allowance, if necessary, to recognize the future tax benefits to the
extent, based on available evidence, it is more likely than not they will be
realized.
FOREIGN CURRENCY TRANSLATION
The functional currency of the primary economic environments in which the
Company operates is the U.S. dollar. Gains and losses resulting from the
remeasurement of local currencies into U.S. dollars are included in the
consolidated results of operations of the current period. The Company
periodically reviews the operations of its entities to ensure the functional
currency of each entity is the currency of the primary economic environment in
which it operates.
SHARE OPTIONS AND AWARDS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee share options. Under APB 25, if the exercise price of an employee's
share option equals or exceeds the market price of the underlying share on the
date of grant, no compensation expense is recognized.
F-10
<PAGE> 83
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME PER ORDINARY SHARE
The following table sets forth the computation of basic and diluted net
income per ordinary share in accordance with SFAS No. 128, "Earnings Per Share"
(in thousands except share and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income...................... $ 224,786 $ 287,144 $ 149,824
============ ============ ============
Denominator:
Denominator for basic net income per
Ordinary Share -- weighted-average
shares............................... 114,500,000 114,500,249 114,735,287
Effect of dilutive securities
Employee stock options.................. 108,000 311,985 707,310
------------ ------------ ------------
Dilutive potential common shares.......... 108,000 311,985 707,310
Denominator for diluted net income per
Ordinary Share -- adjusted weighted-
average shares and assumed
conversions.......................... 114,608,000 114,812,234 115,442,597
============ ============ ============
Basic net income per Ordinary Share....... $ 1.96 $ 2.51 $ 1.31
Diluted net income per Ordinary Share..... $ 1.96 $ 2.50 $ 1.30
</TABLE>
For additional disclosures regarding employee stock options, see Note 8.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 established standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. For the years ended
December 31, 1997, 1998 and 1999, the Company realized no transactions other
than those reported in net income.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company accounts for derivative instruments and hedging activities in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain of those imbedded in other contracts,
and for hedging activities by requiring that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. At December 31, 1997, 1998 and 1999,
the Company had no material derivative instruments or hedging activities that
would require disclosure or measurement under SFAS No. 133.
F-11
<PAGE> 84
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS CONDITIONS AND RISK FACTORS
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 and drilling budgets of
oil and gas companies.
During industry down cycles, drilling companies compete aggressively for
contracts at depressed rates and often are compelled to accept contract terms
which are less favorable than those which normally prevail, especially in areas
such as liability and indemnity provisions, rate structure, termination and term
extension options. Low rig utilization in weak markets causes drilling companies
to lay-up or "stack" idle rigs, which often results in termination of employment
of all or part of the associated rig crews.
The volatile and cyclical nature of the industry may be further exacerbated
as newly built rigs enter the market and drilling companies aggressively compete
for the opportunities to contract offshore and land rigs.
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -----------------------
USEFUL LIVES 1998 1999
------------ ---- ----
<S> <C> <C> <C>
Drilling rigs and equipment................ 3 to 30 years $1,764,359 $2,025,629
Buildings, facilities, and camps........... 4 to 10 years 52,094 57,617
Transportation equipment................... 3 to 5 years 18,421 19,828
Land....................................... 316 316
Construction in progress................... 195,566 48,704
---------- ----------
$2,030,756 $2,152,094
========== ==========
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C> <C>
Compensation and benefits................................. $ 29,182 $ 27,653
Deferred revenue.......................................... 14,409 9,544
Income taxes (Note 5)..................................... 54,323 50,582
Accrued insurance......................................... 1,656 2,360
Other..................................................... 7,487 10,075
---------- ----------
$ 107,057 $ 100,214
========== ==========
</TABLE>
5. INCOME TAXES
The Company is not subject to income taxes in the Cayman Islands. All of
the Company's income before provision for taxes on income and the related
provision for taxes on income relates to operations in jurisdictions other than
the Cayman Islands. The relationship between income before provision for taxes
on income and the provision for taxes on income varies from
F-12
<PAGE> 85
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period to period because each jurisdiction in which the Company operates has its
own system of taxation (not only with respect to the nominal rate, but also with
respect to the allowability of deductions, credits and other benefits) and
because the amounts earned in, and subject to tax by, each jurisdiction changes
from period to period.
The reconciliation of income taxes computed at the applicable statutory
rates of the jurisdictions in which the Company's operations are located and the
provision for taxes on income is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Provision for taxes on income at the applicable
statutory rates of the jurisdictions in which the
Company's operations are located.................. $ 91,446 $108,708 $16,763
Effect of income taxed at rates other than the
statutory rates of jurisdictions in which the
Company's operations are located.................. (53,852) (66,336) 11,070
Benefit of additional tax depreciation.............. (16,461) (10,114) (7,114)
Taxes on income resulting from indexation........... 2,629 720 --
Benefit of net operating loss carryforwards......... (127) (2,827) (4,012)
Benefit of net operating losses not recognized...... 3,851 8,743 11,178
Other............................................... -- 626 750
-------- -------- -------
Provision for taxes on income....................... $ 27,486 $ 39,520 $28,635
======== ======== =======
</TABLE>
The components of the provision for taxes on income are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current provision................................... $ 24,064 $ 40,305 $28,706
Deferred provision (benefit)........................ 3,422 (785) (71)
-------- -------- -------
Provision for taxes on income....................... $ 27,486 $ 39,520 $28,635
======== ======== =======
</TABLE>
F-13
<PAGE> 86
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net deferred tax liabilities and assets consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
---- ----
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.................................... $(8,739) $(12,298)
Other..................................................... 2,216 3,943
------- --------
(6,523) (8,355)
Deferred tax assets:
Net operating loss carryforwards:
Australia.............................................. 4,016 4,016
Egypt.................................................. -- 2,743
Venezuela.............................................. 3,902 209
Oman................................................... 1,741 4,126
Qatar.................................................. 2,448 3,339
Indonesia.............................................. 420 4,621
Tunisia................................................ 3,305 3,305
Ireland................................................ 81 2,662
U.S. .................................................. 2,031 1,812
U.S. credit carryover.................................. 240 168
------- --------
Total deferred income tax assets.................. 18,184 27,001
Valuation allowance......................................... (12,852) (19,736)
------- --------
5,332 7,265
------- --------
Net deferred income tax liabilities............... $(1,191) $ (1,090)
======= ========
</TABLE>
The Company's net operating loss carryforwards include tax effected losses
of $20,155,000 that expire between 2001 and 2013. The remaining $6,678,000 of
net operating losses do not expire.
The Company's income tax returns are subject to review and examination in
the various jurisdictions in which the Company operates. At December 31, 1998
and 1999, accrued income taxes include $24,613,000 and $30,799,000,
respectively, representing estimated liabilities which will result from final
settlements of such reviews and examinations. The Company believes that all
income tax issues which have been or may be raised as a result of such reviews
and examinations will be resolved with no material impact on the Company's
financial position or results of operations.
F-14
<PAGE> 87
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
---- ----
<S> <C> <C>
Pension benefits (Note 7)................................... $10,214 $ 7,210
Postretirement health and insurance benefits (Note 7)....... 14,054 13,806
Deferred mobilization revenue............................... 3,460 10,442
Deferred Taxes.............................................. 1,191 1,090
Other....................................................... 15,933 15,543
------- -------
$44,852 $48,091
======= =======
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company sponsors several qualified and non-qualified benefit plans and
other postretirement benefit plans for its employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligations and
fair value of plan assets at December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------------- -------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
period............................... $ 88,631 $101,216 $ 8,855 $ 9,008
Service cost........................... 5,137 5,630 65 63
Interest cost.......................... 6,967 7,829 621 661
Plan participants' contributions....... 958 1,087 354 407
Actuarial (gains) losses............... 5,667 (5,239) 468 241
Benefits paid.......................... (2,903) (2,237) (1,355) (1,049)
Settlements............................ (3,241) (1,544) -- --
-------- -------- -------- --------
Benefit obligation at end of period.... $101,216 $106,742 $ 9,008 $ 9,331
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of period............................ $ 94,942 $109,739 $ -- $ --
Actual return on plan assets........... 13,723 12,939 -- --
Company contributions.................. 6,260 4,706 1,001 642
Plan participants' contributions....... 958 1,087 354 407
Benefits paid.......................... (2,903) (2,237) (1,355) (1,049)
Settlements............................ (3,241) (1,544) -- --
-------- -------- -------- --------
Fair value of plan assets at end of
period............................... $109,739 $124,690 $ -- $ --
======== ======== ======== ========
FUNDED STATUS
Funded status of the plan
(underfunded)........................ $ 8,523 $ 17,948 $ (9,008) $ (9,331)
Unrecognized net actuarial gains....... (9,894) (21,581) (4,990) (4,425)
Unrecognized prior service cost........ 1,655 2,340 (56) (50)
Unrecognized net transition
liability............................ (290) (295) -- --
-------- -------- -------- --------
Aggregate accrued benefit cost......... $ (6) $ (1,588) $(14,054) $(13,806)
======== ======== ======== ========
</TABLE>
F-15
<PAGE> 88
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the amounts recognized in the statement of
financial position as of December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------------ -------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Prepaid benefit cost.................... $ 8,929 $ 10,033 $ -- $ --
Accrued benefit liability............... (8,935) (11,621) (14,054) (13,806)
Additional minimum liability............ (1,279) (2,250) -- --
Intangible asset........................ 1,279 2,250 -- --
------- -------- -------- --------
Net amount recognized................... $ (6) $ (1,588) $(14,054) $(13,806)
======= ======== ======== ========
</TABLE>
Certain of the Company's nonqualified supplemental retirement plans had
accumulated benefit obligations in excess of plan assets. These plans'
accumulated and projected benefit obligations were $10,214,000 and $14,198,000
at December 31, 1998 and $13,871,000 and $17,488,000 at December 31, 1999,
respectively. There are no plan assets in these plans. All of the Company's
plans for postretirement benefits other than pensions also have no plan assets.
The following table provides the components of net periodic benefit costs
for the plans for the periods presented (in thousands):
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------------- ---------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost..................... $ 4,246 $ 5,127 $ 5,635 $ 55 $ 65 $ 63
Interest cost.................... 5,870 6,957 7,833 670 621 661
Expected return on plan assets... (7,067) (7,856) (8,962) -- -- --
Amortization of transition
obligation..................... 19 19 20 -- -- --
Amortization of prior service
cost........................... (114) 26 97 (6) (5) (5)
Amortization of net (gain)
loss........................... 969 204 (296) (588) (508) (324)
Settlement charge................ -- 971 1,852 -- -- --
------- ------- ------- ----- ----- -----
Net periodic benefit cost........ $ 3,923 $ 5,448 $ 6,179 $ 131 $ 173 $ 395
======= ======= ======= ===== ===== =====
</TABLE>
Prior service costs are amortized on a straight-line basis over the average
remaining service period of active participants. Gains and losses in excess of
10% of the greater of the benefit obligation and the market value of assets are
amortized over the remaining service period of active participants.
F-16
<PAGE> 89
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
BENEFITS
PENSION BENEFITS ---------------------
---------------------------------- YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------- ---------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate.................. 8.0%-9.0% 7.0%-9.0% 7.75%-8.0% 8.0% 7.0% 7.75%
Increase in future compensation
levels....................... 4.5%-7.0% 4.5%-7.0% 4.5%-6.0% N/A N/A N/A
Expected long-term rate of
return on assets............. 8.0%-9.0% 8.0%-9.0% 8.0% N/A N/A N/A
</TABLE>
The Company provides postretirement medical benefits to all employees who
are U.S. citizens and certain non-U.S. citizen employees. Postretirement life
insurance benefits are provided to certain U.S. and non-U.S. citizen employees.
The Company's policy is to fund the cost of these benefits as claims are
incurred. The Company allocates benefit costs to affiliates based on the ratio
of active employees of affiliates to total employees.
The weighted-average annual assumed rate of increase in the per capita cost
of covered medical benefits is 8% for the years ended December 31, 1997, 1998
and 1999, respectively. This rate is assumed to decrease to 7% in 2000, then to
6% in 2005 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example, as of
and for the year ended December 31, 1999, increasing or decreasing the assumed
health care cost trend rates by one percentage point each year would change the
accumulated postretirement benefit obligation by approximately $487,000 and
$436,000, respectively, and the aggregate of the service and interest cost
components of net periodic postretirement benefit by approximately $34,000 and
$31,000, respectively.
ANNUAL INCENTIVE COMPENSATION PLAN
The Company maintains an Annual Incentive Compensation Plan ("AIP"), which
provides for payment of additional compensation to participating employees,
including executive officers, based on individual contributions and performance
measures of the Company as defined in the plan. During the term of the AIP, an
aggregate amount of 286,250 Ordinary Shares will be available for awards granted
wholly or partly in Ordinary Shares under the AIP. Amounts charged to expense
related to awards under the Annual Incentive Compensation Plan aggregated
$2,520,000, $2,100,000 and $1,100,000 for the years ended December 31, 1997,
1998 and 1999, respectively.
PERFORMANCE UNIT PLAN
The Company's Performance Unit Plan provides incentives to certain members
of management through performance share units to foster and promote the
long-term financial success of the Company. The performance share units vest,
and the related compensation expense is accrued, over a three year performance
period based on performance measures of the Company as defined in the plan.
Amounts charged to expense related to awards under the Performance Unit Plan
aggregated $2,998,000, $2,090,000, and $800,000 for the years ended December 31,
1997, 1998 and 1999, respectively. The last awards under the Performance Unit
F-17
<PAGE> 90
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan were granted in December 1996, and no further awards will be made under the
Plan. The Performance Unit Plan remained in existence until the last performance
cycle had elapsed and payouts were made to participants. The Performance Unit
Plan was terminated in September 1999, shortly after the results had been
finalized for the third plan year ending June 30, 1999.
INVESTMENT SAVINGS AND PROFIT SHARING PLAN
The Company maintains an Investment Savings and Profit Sharing Plan, a
defined contribution 401(k) plan that allows U.S. dollar payroll employees to
make both pre-tax and after-tax employee contributions. The Company matches
these employee contributions up to a maximum of 5% of a participant's base
salary subject to the limitations of eligible salary. Employees are vested in
all contributions made. Additionally, although it has not done so since 1984 and
currently does not expect to do so in the future, the Company may also make
additional employer contributions in any year from profits. Matching
contributions totaled $1,660,000, $1,756,000 and $1,392,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
1997 EMPLOYEE SEVERANCE PROTECTION PLAN
The Company maintains the 1997 Employee Severance Protection Plan (the
"Severance Protection Plan") to retain the services of its employees in the
event of an unsolicited takeover of the Company or in the event of a threat of a
Change of Control, as defined, of the Company. The Severance Protection Plan is
intended to ensure the continued dedication and efforts of the Company's
employees in such events without undue concern for their personal financial and
employment security. The Severance Protection Plan covers all full-time
U.S.-based payroll employees. Severance is only payable in the event of a
termination of employment by the Company other than for "cause" or voluntary
termination by the Employee for "good reason", each as defined in the Severance
Protection Plan, within a specific period following a Change in Control. A
participant will also receive severance if the employee is terminated by the
Company without "cause" or for "good reason" at the request or direction of the
third party involved in the Change in Control or otherwise in connection with or
in anticipation of a Change in Control.
EXECUTIVE SEVERANCE PROTECTION AGREEMENTS
Commencing in 1999, the Company entered into Executive Severance Protection
Agreements (the "Executive Agreements") with certain of its officers
supplementing the provisions of the Severance Protection Plan for purposes of
insuring the continued dedication and efforts of the Company's executives. The
Executive Agreements provide certain benefits supplemental to and in lieu of the
Severance Protection plan in the event of termination of employment (other than
for "cause") or voluntary termination for "good reason" following a Change in
Control of the Company, each as defined in the Severance Protection Plan, within
two years following a Change in Control. The benefits applicable upon a Change
in Control and termination of the executive's employment include severance
compensation based upon three times annual salary and AIP bonus, a gross-up for
any applicable excise tax, extension of welfare benefits for three years or
until employment affording such benefits is secured, and an addition of three
years service time and three years age for purposes of calculating the
executive's pension plan benefits. In consideration for such supplemental
severance protection, the Executive Agreements contain a one year worldwide
non-compete provision, confidentiality undertakings and provisions limiting the
application of "good reason" in respect of a relocation to another office of the
Company or
F-18
<PAGE> 91
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its successor. Executive Agreements have been entered into with fourteen of the
Company's officers.
8. SHARE AWARDS AND OPTIONS
1997 LONG-TERM INCENTIVE PLAN
The Company has adopted the 1997 Long Term Incentive Plan (the "LTIP"),
which is designed to retain key executives and other selected employees by
rewarding them for making major contributions to the success of the Company and
to provide participants with a proprietary interest in the growth and
performance of the Company.
Employees of the Company eligible for awards under the LTIP are executive
officers, other officers and key management personnel selected by the
Compensation Committee (including employees who are Directors), and whose
performance, in the judgment of the Compensation Committee, can have a
significant effect on the success of the Company. Awards under the LTIP may
consist of the grant of stock options, share appreciation rights, restricted
and/or performance-based share awards and/or restricted and/or performance-based
cash awards, granted singly, in combination or in tandem. The exercise price for
stock options shall not be less than 85% of the fair market value of the stock
on the date of the option grant (100% in the case of incentive stock options).
The Compensation Committee can also award supplemental payments up to the amount
necessary to pay the federal income tax payable with respect to exercise of
non-qualified stock options, share appreciation rights, restricted shares and
performance units. If approved by the Compensation Committee, the Company may
also make loans to participants to purchase shares pursuant to the exercise of
an award. During the term of the LTIP, an aggregate of 5,725,000 Ordinary Shares
will be available for awards granted wholly or partly in Ordinary Shares under
the LTIP. No participant may receive during a fiscal year incentive awards
covering an aggregate of more than 150,000 Ordinary Shares.
As of December 31, 1999, an aggregate of 3,674,800 options to purchase the
Company's Ordinary Shares (net of cancelled or expired options) had been granted
under the LTIP at prices ranging between $12.25 to $45.00 per Ordinary Share. In
addition, the Company had granted restricted share awards for an aggregate of
235,199 Ordinary Shares (net of forfeited or issued shares) under the LTIP. The
options will vest over periods ranging from two to four years and expire seven
to ten years from the date of grant. The restricted share awards will vest over
periods ranging from two to five years from the date of grant.
1997 EMPLOYEE SHARE PURCHASE PLAN
The Company has also adopted the 1997 Employee Share Purchase Plan (the
"Share Purchase Plan"), which is designed to furnish eligible employees of the
Company and designated subsidiaries of the Company an incentive to advance the
best interests of the Company by providing a formal program whereby they may
voluntarily purchase Ordinary Shares of the Company at a favorable price and
upon favorable terms. Generally speaking, all covered employees of a
participating company who are scheduled to work an average of at least 20 hours
per week are eligible to participate in the Share Purchase Plan.
Once a year, participants in the Share Purchase Plan will be granted
options to purchase Ordinary Shares with a fair market value equal to the lesser
of 10% of the participant's eligible compensation (as defined in the Share
Purchase Plan) and the amount specified in Section 423(b) of the Code
(currently, $25,000). The exercise price of the options is 85% of the fair
market value of the Ordinary Shares on the date of grant or the date of
exercise, whichever
F-19
<PAGE> 92
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is less. Options granted under the Share Purchase Plan are exercisable on the
date one year after the date of grant. Generally, participants pay option
exercise prices through payroll deductions made ratably throughout the year. An
aggregate of 572,500 Ordinary Shares are available for grants of options under
the Share Purchase Plan. The Share Purchase Plan, which became effective January
1, 1998, is administered by the Administrative Committee for the Employee
Benefit Plans of the Santa Fe International Corporations. An aggregate of
192,938 and 159,411 Ordinary Shares were issued in January of the following year
to participating employees for the years ended December 31, 1998 and 1999,
respectively, at exercise prices of $10.997 and $12.325 per Ordinary Share.
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has also adopted the 1997 Non-Employee Director Stock Option
Plan (the "Director Plan"). The Director Plan is designed to attract and retain
the services of experienced and knowledgeable non-employee Directors and to
provide non-employee Directors with a proprietary interest in the growth and
performance of the Company. Awards under the Director Plan consist of a grant of
stock options. The purchase price for the shares as to which the option is
exercised will be payable in full upon exercise, in cash or, if permitted by the
Compensation Committee, by tender of Ordinary Shares, valued at "fair market
value." During the term of the Director Plan, an aggregate of 286,250 Ordinary
Shares will be available for awards granted wholly or partly in Ordinary Shares.
No option will be granted under the Director Plan after 10 years following
consummation of the Offering. The Compensation Committee is responsible for
administration and interpretation of the Director Plan.
As of December 31, 1999, an aggregate of 97,000 options to purchase the
Company's Ordinary Shares (net of cancelled or expired options) had been granted
under the Director Plan to eight non-employee Directors who participated in the
Director Plan. Such options were granted at exercise prices ranging from $12.25
to $45.50 per Ordinary Share. Any new non-employee Director will be granted a
one-time award of a right to purchase 10,000 Ordinary Shares (increased from
4,000 by amendment of the Director Plan in March 1999). Each non-employee
Director who continues in office immediately following the Annual General
Meeting of Shareholders in any year (commencing in 1998) will automatically be
granted an option to purchase 5,000 shares of Ordinary Shares (increased from
2,000 by amendment of the Director Plan in March 1999). The Board may increase
the number of options granted, provided that a non-employee Director cannot
receive more than 22,000 options (increased from 10,000 by amendment of the
Director Plan in December 1998) in any year. The exercise price of options
granted under the Director Plan is the fair market value of the Ordinary Shares
on the date of the grant. Options granted pursuant to the Director Plan are
exercisable in installments of 33 1/3% upon each anniversary of the date of
grant. The term of each option is for a period not exceeding 10 years from the
date of grant.
ACCOUNTING TREATMENT AND DISCLOSURES RELATED TO SHARE AWARDS AND OPTIONS
The Company follows APB Opinion No. 25, "Accounting for Stock Issued to
Employees", in accounting for its plans. Compensation cost charged against
income in connection with stock plans totaled $815,000, $1,947,000 and
$3,891,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Differences between the quoted market price as of the date of the grant and the
purchase price of restricted share grants is charged to operations over the
vesting period. No compensation cost has been recognized for stock option grants
as the Company routinely grants options with exercise prices equal to the market
prices of the underlying stock on the date of grant.
F-20
<PAGE> 93
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of all of the Company's share option activity,
and related information for the above plans for the years ended December 31,
1997, 1998 and 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
OUTSTANDING AT DECEMBER 31, 1996.................... -- --
Granted............................................. 950,400 $39.94
Cancelled........................................... (7,800) 41.19
--------- ------
OUTSTANDING AT DECEMBER 31, 1997.................... 942,600 $39.93
Granted............................................. 1,483,125 12.55
Cancelled........................................... (49,725) 39.18
--------- ------
OUTSTANDING AT DECEMBER 31, 1998.................... 2,376,000 $22.85
Granted............................................. 1,544,350 20.89
Cancelled........................................... (147,900) 27.65
Exercised........................................... (650) 12.25
--------- ------
OUTSTANDING AT DECEMBER 31, 1999.................... 3,771,800 $21.86
========= ======
</TABLE>
There were no options exercisable at December 31, 1997 and 29,708 and
512,233 options exercisable at December 31, 1998 and 1999, respectively.
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING NUMBER OF SHARES
CONTRACTUAL LIFE -------------------------
EXERCISE PRICE (YEARS) OUTSTANDING EXERCISABLE
-------------- ---------------- ----------- -----------
<S> <C> <C> <C>
$28.50.............................. 7.44 260,950 109,367
45.50.............................. 7.69 8,000 5,333
45.00.............................. 7.94 556,550 231,707
39.75.............................. 8.35 8,000 2,667
12.25.............................. 8.95 1,398,950 152,492
15.19.............................. 9.01 13,175 10,667
20.38.............................. 9.44 35,000 --
22.94.............................. 9.73 10,000 --
20.94.............................. 9.95 1,481,175 --
--------- -------
Total..................... 8.75 3,771,800 512,233
========= =======
</TABLE>
F-21
<PAGE> 94
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation", ("SFAS 123") requires the disclosure of pro forma net
income and net income per Ordinary Share information computed as if the Company
had accounted for its employee share options under the fair value method set
forth in SFAS 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (in years).................................. 3.74 3.74 3.73
Risk-free interest rate................................... 6.00% 5.00% 6.00%
Volatility................................................ 0.40 0.55 0.66
Dividend yield............................................ 0.46% 0.46% 0.29%
</TABLE>
The weighted average estimated fair value of options granted during the
years ended December 31, 1997, 1998 and 1999 was $14.43, $5.94 and $10.81,
respectively. The fair value of these options was estimated based on an expected
life of the vesting period plus one year. For purposes of pro forma disclosures,
the estimated fair value of stock based compensation plans and other options is
amortized to expense over the vesting period. The Company's pro forma net income
and net income per Ordinary Share is as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income
As reported................................... $224,786 $287,144 $149,824
Pro forma..................................... $224,100 $281,658 $142,501
Basic net income per Ordinary Share
As reported................................... $ 1.96 $ 2.51 $ 1.31
Pro forma..................................... $ 1.96 $ 2.46 $ 1.24
Diluted net income per Ordinary Share
As reported................................... $ 1.96 $ 2.50 $ 1.30
Pro forma..................................... $ 1.96 $ 2.45 $ 1.23
</TABLE>
The Black-Scholes option valuation was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected share price volatility. Because
the Company's employee share options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee share options.
9. 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.
F-22
<PAGE> 95
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 commenced
work on a three year drilling contract December 5, 1999. The final cost of the
rig, excluding initial mobilization costs, totaled approximately $178 million.
On July 10, 1998, Rig 162, one of the Company's land rigs operating in
Saudi Arabia, was severely damaged following a blowout and subsequent fire.
There were no personnel injuries. As provided for in the drilling contract, the
customer elected to cancel the remaining term of the contract and the Company
determined that the rig would not be rebuilt. An unrepaired partial loss
settlement of $13.8 million was negotiated with the Company's insurance
carriers. All proceeds from this settlement were received during 1998. The
Company recognized a gain of $4.8 million in connection with the insurance
settlement.
The Company has an uncommitted credit facility with a major bank which
provides for advances and letters of credit up to a maximum of $35,000,000,
denominated in U.S. dollars. This credit facility expires on June 29, 2000. At
the Company's election, advances under this credit facility bear interest at the
higher of (a) 0.50% per annum above the latest Federal Funds Rate and (b) the
bank's publicly announced Reference Rate, or at the LIBOR rate plus 0.25%. The
fee for letters of credit is 0.375% per annum. At December 31, 1999, none of the
credit facility was drawn or used for standby letters of credit.
10. SEGMENT INFORMATION AND RELATED DISCLOSURES
The Company has seven reportable segments, defined as different equipment
classifications, or by contract terms in the case of drilling related services,
as follows: heavy duty harsh environment jackup rigs, semisubmersible rigs,
300-350 foot premium cantilever jackup rigs, 200-250 foot jackup rigs, other
marine rigs, land rigs and drilling related services. The Company's heavy duty
harsh environment jackup rig fleet consists of six rigs capable of operating in
water depths of 350-400 feet. The semisubmersible segment is comprised of three
rigs capable of operating in water depths of up to 2,400 feet. Eight rigs
capable of operating in water depths of 300-350 feet make up the 300-350 foot
premium cantilever jackup rig segment. The 200-250 foot jackup rig segment
consists of nine rigs capable of operating in water depths of 200-250 feet,
seven of which are cantilevered and two of which are specially designed to
operated in shallow water. One of the Company's 200-250 foot jackup rigs, Rig
134, is being upgraded to 300-foot depth capability and was reclassified as a
300-350 foot premium cantilever jackup rig effective January 1, 2000.
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. The land rig segment includes 33 rigs, all of which
are specially designed to operate in remote areas. Through its drilling related
services segment, the Company provides third party rig operations, incentive
drilling and drilling engineering and project management services.
The Company evaluates performance and allocates resources based upon the
operating margin (operating revenues less operating expenses) generated by the
segment. The accounting policies of the segments are the same as those described
in the summary of significant policies (Note 2). There are no intersegment sales
and transfers due to the nature of the business of the segments.
F-23
<PAGE> 96
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Santa Fe's reportable segments are managed separately due to the distinct
capabilities of each of the underlying equipment classifications or the
particular contract requirements in the case of drilling related services. The
following table sets forth the operating margin for each of the reportable
segments and reconciles total operating revenues and operating expenses to
amounts reported in the accompanying consolidated statements of operations (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ --------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues
Heavy duty harsh environment jackup
rigs................................. $135,931 $148,997 $181,662 $ 45,262 $ 55,395
Semisubmersibles....................... 87,787 114,952 88,702 28,917 5,364
300-350 foot premium cantilever jackup
rigs................................. 121,854 150,602 81,015 34,067 13,699
200-250 foot jackup rigs............... 122,817 143,164 58,351 20,794 14,419
Other marine rigs...................... 11,984 11,836 -- -- --
-------- -------- -------- -------- --------
Total marine rigs............... 480,373 569,551 409,730 129,040 88,877
Land rigs.............................. 125,527 147,880 143,227 34,801 34,592
Drilling related services.............. 81,472 92,746 60,143 21,373 8,787
Other.................................. 1,585 1,169 1,141 302 292
-------- -------- -------- -------- --------
Total operating revenues........ 688,957 811,346 614,241 185,516 132,548
Operating costs
Heavy duty harsh environment jackup
rigs................................. 47,091 49,549 62,175 14,437 17,385
Semisubmersibles....................... 41,694 63,712 43,969 10,715 13,181
300-350 foot premium cantilever jackup
rigs................................. 59,645 58,373 48,459 13,238 12,664
200-250 foot jackup rigs............... 59,260 66,982 49,992 12,243 13,686
Other marine rigs...................... 8,477 8,659 -- -- --
-------- -------- -------- -------- --------
Total marine rigs............... 216,167 247,275 204,595 50,633 56,916
Land rigs.............................. 86,547 97,966 95,255 23,606 23,632
Drilling related services.............. 61,641 65,665 42,437 15,633 6,081
Other.................................. 9,478 3,116 13,476 3,641 2,014
-------- -------- -------- -------- --------
Total operating costs........... 373,833 414,022 355,763 93,513 88,643
Operating margin
Heavy duty harsh environment jackup
rigs................................. 88,840 99,448 119,487 30,825 38,010
Semisubmersibles....................... 46,093 51,240 44,733 18,202 (7,817)
300-350 foot premium cantilever jackup
rigs................................. 62,209 92,229 32,556 20,829 1,035
200-250 foot jackup rigs............... 63,557 76,182 8,359 8,551 733
Other marine rigs...................... 3,507 3,177 -- -- --
-------- -------- -------- -------- --------
Total marine rigs............... 264,206 322,276 205,135 78,407 31,961
Land rigs.............................. 38,980 49,914 47,972 11,195 10,960
Drilling related services.............. 19,831 27,081 17,706 5,740 2,706
Other.................................. (7,893) (1,947) (12,335) (3,339) (1,722)
-------- -------- -------- -------- --------
Total operating margin.......... $315,124 $397,324 $258,478 $ 92,003 $ 43,905
======== ======== ======== ======== ========
</TABLE>
F-24
<PAGE> 97
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables reconcile operating margin for each of the reportable
segments to consolidated income before provision for taxes on income as reported
in the accompanying consolidated statements of operations and presents capital
spending for each reportable segment (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -----------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating margin................ $315,124 $397,324 $258,478 $92,003 $43,905
-------- -------- -------- ------- -------
Depreciation/(gain) loss on sale
of assets
Heavy duty harsh environment
jackup rigs................ 10,974 12,423 18,034 4,545 6,292
Semisubmersibles.............. 3,752 4,975 6,558 1,518 1,821
300-350 foot premium
cantilever jackup rigs..... 9,625 9,836 10,535 2,679 2,853
200-250 foot jackup rigs...... 7,185 9,011 9,378 2,295 2,092
Other marine rigs............. 321 231 -- -- --
-------- -------- -------- ------- -------
Total marine rigs..... 31,857 36,476 44,505 11,037 13,058
Land rigs..................... 12,138 10,387 23,219 5,715 6,169
Drilling related services..... 322 1,102 912 242 225
Other......................... 1,254 1,854 2,190 464 623
-------- -------- -------- ------- -------
Total depreciation/
(gain) loss on sale
of assets........... 45,571 49,819 70,826 17,458 20,075
Unallocated amount:
General and administrative.... 20,149 22,161 18,596 5,189 4,121
-------- -------- -------- ------- -------
Operating income...... 249,404 325,344 169,056 69,356 19,709
-------- -------- -------- ------- -------
Other income (expense)........ 2,868 1,320 9,403 317 2,462
-------- -------- -------- ------- -------
Income before provision for
taxes on income............... $252,272 $326,664 $178,459 $69,673 $22,171
======== ======== ======== ======= =======
Capital spending by segment
Heavy duty harsh environment
jackup rigs................ $121,096 $145,411 $ 60,533 $21,879 $ 911
Semisubmersibles.............. 11,418 14,329 8,154 1,000 1,310
300-350 foot premium
cantilever jackup rigs..... 16,273 5,223 4,530 (133) 361
200-250 foot jackup rigs...... 15,430 19,615 26,825 937 548
Other marine rigs............. -- 293 -- -- --
-------- -------- -------- ------- -------
Total marine rigs..... 164,217 184,871 100,042 23,683 3,130
Land rigs..................... 54,215 88,906 19,750 5,636 1,348
Drilling related services..... -- 79 603 16 243
Other......................... 10,760 3,544 4,213 8,929 4,019
-------- -------- -------- ------- -------
Total capital spending
by segment.......... $229,192 $277,400 $124,608 $38,264 $ 8,740
======== ======== ======== ======= =======
</TABLE>
F-25
<PAGE> 98
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment assets for each of the reportable segments is defined as the net
book value of the property and equipment for each classification. The following
table presents assets for each of the Company's reportable segments and
reconciles such segment assets to total consolidated assets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999 MARCH 31, 2000
---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment, net
Heavy duty harsh environment jackup
rigs................................. $ 538,207 $ 580,480 $ 575,062
Semisubmersibles........................ 65,745 67,520 67,027
300-350 foot premium cantilever jackup
rigs................................. 147,041 141,734 161,060
200-250 foot jackup rigs................ 75,069 88,573 65,252
Other marine rigs....................... 340 -- --
---------- ---------- ----------
Total marine rigs............... 826,402 878,307 868,401
Land rigs............................... 200,216 197,237 191,950
Drilling related services............... 3,103 3,314 3,339
Other................................... 19,480 23,706 27,374
---------- ---------- ----------
Total property and equipment,
net........................... 1,049,201 1,102,564 1,091,064
---------- ---------- ----------
Unallocated amounts:
Total current assets............ 352,436 408,692 422,461
Other noncurrent assets......... 52,099 52,286 52,672
---------- ---------- ----------
Total assets.................... $1,453,736 $1,563,542 $1,566,197
========== ========== ==========
</TABLE>
All of the Company's operations are located outside of the Cayman Islands.
The following table summarizes, by geographical area, the identifiable assets of
the Company (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999 MARCH 31, 2000
---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C>
North Sea................................. $ 401,243 $ 545,000 $ 539,746
North Africa.............................. 121,717 90,766 89,275
West Africa............................... 38,902 33,649 29,114
Southeast Asia and Pacific................ 131,234 133,025 131,347
Middle East and Azerbaijan................ 163,704 178,776 196,356
South America............................. 110,597 121,688 116,452
North America............................. 201,525 195,953 197,759
Corporate assets(1)....................... 284,814 264,685 266,148
---------- ---------- ----------
Total assets.................... $1,453,736 $1,563,542 $1,566,197
========== ========== ==========
</TABLE>
---------------
(1) Consists primarily of cash equivalents, marketable securities, construction
in progress, and other corporate assets.
F-26
<PAGE> 99
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes, by geographical area, operating revenues
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
North Sea..................... $251,369 $308,802 $242,510 $ 77,818 $ 58,722
North Africa.................. 117,377 142,468 48,443 21,657 10,476
West Africa................... 66,187 71,480 38,331 13,549 4,083
Southeast Asia and Pacific.... 67,412 84,760 54,622 19,914 9,411
Middle East and Azerbaijan.... 115,177 132,003 103,909 28,051 26,069
South America................. 48,042 58,366 78,424 13,261 11,838
North America................. 23,393 13,467 48,002 11,266 11,949
-------- -------- -------- -------- --------
Total operating
revenues.......... $688,957 $811,346 $614,241 $185,516 $132,548
======== ======== ======== ======== ========
</TABLE>
The Company's operations in the North Sea are presently all conducted
within the U.K. sector of the North Sea. The Company's operations in North
Africa consist principally of operations in Egypt. The Company's operations in
the Middle East include significant operations in Kuwait. See Note 11.
A substantial portion of the Company's assets are mobile. Asset locations
at the end of the period are not necessarily indicative of the geographic
distribution of the earnings generated by such assets during the periods.
General corporate assets are principally cash and cash equivalents and other
nonoperating assets.
The Company's operations are geographically dispersed and are therefore
subject to certain political and other uncertainties not encountered in domestic
operations, including risks of war, expropriation of equipment, renegotiation or
modification of existing contracts, taxation policies, and the general hazards
associated with foreign sovereignty over certain areas in which operations are
conducted.
Operational risks and hazards may result in extensive damage to or total
loss of drilling rigs, with associated personal injuries and loss of life,
pollution, well loss, well control expenses and/ or wreck removal or other
requirements. Such losses, liabilities or obligations may be uninsured or
underinsured. In the event of a major incident or incidents resulting from
operational risks and hazards, the Company will sustain a loss of revenue by
reason of the rig loss or damage and may be subject to significant additional
expenses in respect of uninsured or underinsured losses, liabilities or
obligations.
F-27
<PAGE> 100
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes revenues from major customers of the Company
as a percentage of total operating revenues for the period indicated.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shell......................................... 12.7% 13.2% 14.5% 15.4% 13.2%
Total Elf Fina(1)............................. 4.5% 10.5% 13.5% 10.9% 15.6%
Exxon Mobil................................... 4.7% 7.4% 13.2% 13.5% 13.6%
BP Amoco...................................... 11.8% 9.9% 11.9% 10.4% 16.1%
Kuwait Oil Company (Note 11).................. 4.3% 5.5% 9.1% 6.8% 11.0%
British Gas................................... 8.8% 0.5% 6.4% 2.9% 0.1%
AGIP.......................................... 6.3% 5.7% 2.1% 2.5% --
Texaco........................................ 5.4% 2.7% 1.5% 0.7% --
</TABLE>
---------------
(1) Pending EU approval of merger.
11. TRANSACTIONS WITH AFFILIATES
The Company provides contract drilling services in Kuwait to the Kuwait Oil
Company, K.S.C. ("KOC"), a subsidiary of KPC, and also provides contract
drilling services to a partially owned affiliate of KOC in the Kuwait-Saudi
Arabian Partitioned Neutral Zone. Such services are performed pursuant to
drilling contracts which contain terms and conditions and rates of compensation
which materially approximate those which are customarily included in
arm's-length contracts of a similar nature. In connection therewith, KOC
provides the Company rent free use of certain land and maintenance facilities
and has committed to continue providing same, subject to availability of the
maintenance facilities, through the current February 2001 term of the drilling
contracts. In relation to its drilling business in Kuwait, the Company has an
agency agreement with a subsidiary of KPC that obligates the Company to pay an
agency fee based on a percentage of revenues. The Company believes the terms of
this agreement are more favorable than those which could be obtained with an
unrelated third party in an arm's-length negotiation, but the value of such
terms is currently immaterial to the Company's results of operations.
The Company earned revenues from KPC affiliated companies in the ordinary
course of business of $29,818,000, $44,800,000 and $56,084,000 for the years
ended December 31, 1997, 1998 and 1999, respectively. The Company paid agency
fees to a subsidiary of KPC of $274,905, $563,028 and $647,995 during the years
ended December 31, 1997, 1998 and 1999, respectively. The Company had accounts
receivable from KPC affiliated companies of $6,072,000 and $5,902,000 at
December 31, 1998 and 1999, respectively.
In connection with the reorganization of Holdings and its subsidiaries
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 Company made
distributions to Holdings during the three years ended December 31, 1997
comprised principally of certain subsidiaries which conducted the Company's
former non-drilling operations and services (the "Non-Drilling Subsidiaries")
and certain additional non-drilling assets, including real estate, cash and cash
equivalents.
F-28
<PAGE> 101
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company, Holdings and KPC entered into an Intercompany Agreement before
the consummation of the Offering (the "Intercompany Agreement"), certain
provisions of which are summarized below. As used herein, "KPC Affiliated Group"
means KPC and its affiliates, including Holdings, other than the Company and its
subsidiaries.
As of December 31, 1999, the consolidated financial statements of Holdings
contained liabilities to third parties, including tax liabilities, aggregating
approximately $51 million incurred by the Non-Drilling Subsidiaries on or before
March 31, 1997. As of December 31, 1999, Holdings maintained cash and cash
equivalents (the "Liability Payment Fund") sufficient to satisfy those
liabilities remaining after such date. The Company, Holdings and KPC have agreed
in the Intercompany Agreement that all amounts paid to claimants to satisfy
those liabilities, whether by settlement, judgment or award (including
claimants' attorneys' fees), will be paid by Holdings from the Liability Payment
Fund. The Company will pay all internal and external costs and fees (including
the Company's and Holdings' attorneys' fees) associated with management and
resolution of those liabilities, and believes such costs and fees will not be
material. If any amount remains in the Liability Payment Fund at March 31, 2002,
Holdings will pay the Company the first $10 million of such amount and 50% of
any amount in excess of $10 million. Thereafter, or if the resolution of those
liabilities earlier exhausts the Liability Payment Fund, Holdings will have no
further responsibility for those liabilities, and the Company will be
responsible for all costs, fees and amounts paid to resolve those liabilities
and will indemnify the KPC Affiliated Group in respect of such costs and fees
and those liabilities. The Company believes that the Liability Payment Fund is
adequate to provide for such costs and fees and those liabilities. Accordingly,
the Company believes that the indemnification costs, if any, will not be
material and no additional reserves have been established by the Company in
respect of such costs and fees and those liabilities or the Company's obligation
under the Intercompany Agreement relating to such costs and fees and those
liabilities.
The Intercompany Agreement also provides that, except as may be provided in
a separate agreement, the Company will indemnify the KPC Affiliated Group
against losses based on, or taxes arising from, the following: (i) the ownership
of the assets or the operation of the business of the Company or its
subsidiaries, (ii) any other activities of the Company or its subsidiaries,
(iii) any guaranty or similar agreement by the KPC Affiliated Group provided to
any person with respect to any obligation of the Company or its subsidiaries,
and (iv) certain other matters. In addition, the Company has agreed to indemnify
the KPC Affiliated Group against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended ("the Securities Act"),
relating to misstatements in or omissions from any registration statement or
report that the Company files under the Securities Act. Holdings has also agreed
to indemnify the Company and its subsidiaries against losses based on the
ownership or operation of the assets or properties or the operation or conduct
of the business of Holdings and its subsidiaries on or after March 31, 1997.
The Company also entered into a Management Services Agreement with Holdings
(the "Management Services Agreement"), for the purpose of providing asset
(primarily real estate) management services, general and administrative services
and liability management and resolution services to Holdings, the Non-Drilling
Subsidiaries and inactive subsidiaries of Holdings. The Management Services
Agreement authorizes the Company to resolve the liabilities of the Non-Drilling
Subsidiaries under the Intercompany Agreement using the Liability Payment Fund.
Although Holdings retains the right to reduce or expand the scope of services to
be performed by the Company pursuant to the Management Services Agreement, the
Company's liability management and resolution service may not be reduced or
terminated. The Management Services Agreement also provides for payment of an
asset management fee to the Company of
F-29
<PAGE> 102
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$173,000 per year as well as reimbursement of out-of-pocket costs in respect of
asset management services. By mutual agreement, the asset management fee was
discontinued effective January 1, 2000. The Company will pay all internal and
external costs and fees (including the Company's and Holdings' attorney's fees)
associated with the Company's liability management and resolution services and
all internal and external costs and fees associated with the provision of
general and administrative services pursuant to the Management Services
Agreement. The Company believes such costs and fees will not be material.
12. QUARTERLY RESULTS (UNAUDITED)
Shown below are selected unaudited quarterly data (in thousands), except
per share data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Operating revenues.................. $149,253 $164,519 $176,787 $198,398
======== ======== ======== ========
Operating income.................... $ 47,134 $ 58,046 $ 67,058 $ 77,166
======== ======== ======== ========
Net income.......................... $ 42,923 $ 53,335 $ 59,322 $ 69,206
======== ======== ======== ========
Basic net income per Ordinary
Share............................. $ 0.37 $ 0.47 $ 0.52 $ 0.60
======== ======== ======== ========
Diluted net income per Ordinary
Share............................. $ 0.37 $ 0.47 $ 0.52 $ 0.60
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1998
Operating revenues.................. $196,281 $202,646 $201,085 $211,334
======== ======== ======== ========
Operating income.................... $ 78,103 $ 72,596 $ 81,565 $ 93,080
======== ======== ======== ========
Net income.......................... $ 67,759 63,980 $ 72,734 $ 82,671
======== ======== ======== ========
Basic net income per Ordinary
Share............................. $ 0.59 $ 0.56 $ 0.64 $ 0.72
======== ======== ======== ========
Diluted net income per Ordinary
Share............................. $ 0.59 $ 0.56 $ 0.64 $ 0.72
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1999
Operating revenues.................. $185,516 $160,002 $143,599 $125,124
======== ======== ======== ========
Operating income.................... $ 69,356 $ 48,917 $ 35,062 $ 15,721
======== ======== ======== ========
Net income.......................... $ 58,456 $ 43,189 $ 31,834 $ 16,345
======== ======== ======== ========
Basic net income per Ordinary
Share............................. $ 0.51 $ 0.38 $ 0.28 $ 0.14
======== ======== ======== ========
Diluted net income per Ordinary
Share............................. $ 0.51 $ 0.37 $ 0.28 $ 0.14
======== ======== ======== ========
</TABLE>
F-30
<PAGE> 103
[RIG 179 PHOTO]
[RIG 150 PHOTO]
[RIG 104 PHOTO]
[RIG 92 PHOTO]
Santa Fe's land rig fleet operates throughout the Middle East, North Africa and
Venezuela. Santa Fe specializes in highly mobile units capable of operating in
remote, harsh environments. RIG 179, operating in Venezuela, is designed to
drill multiple wells on a single pad site, moving rapidly from well to well.
RIG 150 is a highly mobile desert unit, shown working in Oman. RIG 104 and
RIG 92 operating in Egypt. RIG 169, below is shown moving through the Great Sand
Sea to a remote location in the Egyptian Western Desert.
[PHOTOS]
<PAGE> 104
------------------------------------------------------
------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is currently only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 13
Forward-Looking Statements.......... 19
Enforceability of Civil
Liabilities....................... 20
Use of Proceeds..................... 20
Price Range of Ordinary Shares and
Dividend History.................. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
Business............................ 35
Management.......................... 52
Principal and Selling
Shareholders...................... 55
Our Relationship with Kuwait
Petroleum Corporation............. 56
Description of Share Capital........ 62
Taxation............................ 65
Exchange Controls................... 67
Underwriting........................ 68
Legal Matters....................... 71
Experts............................. 71
Where You Can Find More
Information....................... 71
Incorporation of Documents by
Reference......................... 71
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
30,000,000 Shares
SANTA FE INTERNATIONAL
CORPORATION
Ordinary Shares
----------------------
[LOGO]
----------------------
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
Representatives of the Underwriters
------------------------------------------------------
------------------------------------------------------
