ITEM 3. LEGAL PROCEEDINGS
Applied Drilling Technology Inc. ("ADTI"), a wholly owned subsidiary of the Company, was a defendant in a civil lawsuit filed in September 2001 by Newfield Exploration Co. ("Newfield") and its insurance underwriters in the United States District Court for the Eastern District of Louisiana. The lawsuit arose out of damage caused to an offshore well owned by Newfield, which had been drilled by ADTI pursuant to a turnkey contract. The lawsuit has been dismissed with prejudice by the court, and Newfield has waived its right to appeal.
In 1998, the Company entered into fixed-price contracts with Harland and Wolff Shipbuilding and Heavy Industries Limited (the "Shipbuilder") totaling $315 million for the construction of two dynamically positioned, ultra- deepwater drillships, the Glomar C.R. Luigs and the Glomar Jack Ryan, originally scheduled for delivery in the fourth quarter of 1999 and first quarter of 2000, respectively. Pursuant to two 20-year capital lease agreements, the Company subsequently novated the construction contracts for the drillships to two financial institutions (the "Lessors"), which now own the drillships and lease them to the Company. The Company acted as the Lessors' construction supervisor and has paid on behalf of the Lessors, or provided for the Lessors' payment of, all amounts it believes were required under the terms of the contracts, including payments for all approved change orders.
In November 1999, because the Company was concerned about the Shipbuilder's financial viability and the satisfactory completion of the drillships in a timely manner, the Company agreed to provide additional funding to the Shipbuilder for completion of the two drillships in exchange for certain assurances by the Shipbuilder and its parent, Fred. Olsen Energy ASA (the "Funding Agreement"). The Company ultimately provided a total of $103.1 million under the Funding Agreement.
The Lessors and the Company were involved in arbitration proceedings with the Shipbuilder, in which the Shipbuilder claimed breach of contract in connection with the Company's obligations regarding design of the drillships, the timely delivery to the Shipbuilder of owner furnished equipment and information relating thereto, change orders and additional compensation for increased steelweight. The Company was involved in an arbitration proceeding with Fred. Olsen Energy ASA ("Olsen") relating to disputes under the Funding Agreement. In February 2003, the Lessors and the Company agreed to pay an additional $8.2 million to the Shipbuilder and Olsen in exchange for settlement of all outstanding disputes between the parties. This amount is to be adjusted by reference to the award to be issued by the arbitration tribunal for the cost of completion arbitration in respect of the Glomar Jack Ryan, subject to a minimum additional payment of $7.7 million and a maximum additional payment of $10.0 million. In the event that the Company is required to pay the maximum amount of $10.0 million, total cost of construction will be $485.1 million for the two drillships.
The Company filed a claim in 1993 in the amount of $40.6 million with the United Nations Compensation Commission ("UNCC") for losses suffered as a result of the Iraqi invasion of Kuwait in 1990. The claim was for the loss of four rigs and associated equipment, lost revenue, and miscellaneous expenditures. The Governing Council of the UNCC has awarded the Company compensation in the amount of $22.1 million in a final, non-appealable, adjudication of the claim. The Company has been advised that the funds will be paid upon receipt of a formal request, which has now been made. As a result of this award, the Company recorded a pretax gain of $22.1 million in the first quarter of 2003.
ENVIRONMENTAL MATTERS
The Company has certain potential liabilities in the area of claims under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state acts regulating cleanup of various waste disposal sites, including those described below. CERCLA is intended to expedite the remediation of hazardous substances without regard to fault. Potentially responsible parties ("PRPs") for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several.
The Company has been named as a PRP in connection with a site located in Santa Fe Springs, California known as the Waste Disposal, Inc. site. The Company and other PRPs have agreed with the U.S. Environmental Protection Agency ("EPA") and the U.S. Department of Justice ("DOJ") to settle their potential liabilities for this site by agreeing to perform the remaining remediation required by EPA. The form of the agreement is a consent decree which has not yet been lodged or entered by the court. Although the settlement is not final until the decree is entered by the court, the Company expects the decree to be entered by the Court. The parties to the settlement have entered into a participation agreement which makes the Company liable for an estimated 7.7% of the remediation costs. Although the remediation costs cannot be determined with certainty until the remediation is complete, the consultant advising the group with respect to remediation believes that the remediation costs will be such that the Company's share of the remaining remediation costs will be less than $800,000. There are additional potential liabilities related to the site, but these cannot be quantified, and there is no reason at this time to believe that they will be material.
The Company has also been named as a PRP in connection with a site in California known as the Casmalia Resources Site. The Company and other PRPs have entered into an agreement with EPA and DOJ to resolve their potential liabilities. This agreement is also not final until the agreed-upon Consent Decree is entered by the court, but it is likely that it will be. Under the settlement, the Company is not likely to owe any substantial additional amounts for this site beyond what the Company has already paid. There are additional potential liabilities at this site, but these cannot be quantified at this time, and there is no reason to believe that they will be material.
The Company has been named as one of many PRPs in connection with a site located in Carson, California formerly maintained by Cal Compact Landfill. On February 15, 2002, the Company was served with a required 90-day notification that eight California cities, on behalf of themselves and other PRPs, intend to commence an action against the Company under the Resource Conservation and Recovery Act ("RCRA"). On April 1, 2002, a Complaint was filed by the cities against the Company and others alleging that they have liabilities in connection with the site. However, the Complaint has not been served. The site was closed in or around 1965, and the Company does not have sufficient information to enable it to assess its potential liability, if any, for this site.
Resolutions of other claims by the U.S. Environmental Protection Agency, the involved state agency and/or PRPs are at various stages of investigation. These investigations involve determinations of:
- the actual responsibility attributed to the Company and the other PRPs at the site;
- appropriate investigatory and/or remedial actions; and
- allocation of the costs of such activities among the PRPs and other site users.
The Company's ultimate financial responsibility in connection with those sites may depend on many factors, including:
- the volume and nature of material, if any, contributed to the site for which the Company is responsible;
- the numbers of other PRPs and their financial viability; and
- the remediation methods and technology to be used.
It is difficult to quantify with certainty the potential cost of these environmental matters, particularly in respect of remediation obligations. Nevertheless, based upon the information currently available, the Company believes that its ultimate liability arising from all environmental matters, including the liability for all other related pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be
asserted, is adequately accrued and should not have a material effect on the Company's financial position or ongoing results of operations. Estimated costs of future expenditures for environmental remediation obligations are not discounted to their present value.
OTHER LEGAL MATTERS
There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the Company is a party or of which any of its property is the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders during the fourth quarter of 2002.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Ordinary Shares, $.01 par value per share, are listed on the New York Stock Exchange under the symbol "GSF." The following table sets forth the high and low sales prices of the Company's Ordinary Shares as reported on the New York Stock Exchange Composite Transactions Tape for the calendar periods indicated. Data for periods prior to November 20, 2001, represents high and low prices for Santa Fe International's ordinary shares.
On February 28, 2003, the closing price of the Ordinary Shares, as reported by the NYSE, was $22.25 per share. As of February 28, 2003, there were approximately 2,885 shareholders of record of Ordinary Shares. This number does not include shareholders for whom shares are held in a nominee or street name.
DIVIDEND POLICY
On March 4, 2003, the Company's Board of Directors increased the dividend for the first quarter of 2003 to $0.0375 per share, payable on April 15, 2003, to holders of record of Ordinary Shares as of the close of business on March 31, 2003. The Company (and, prior to November 20, 2001, Santa Fe International) paid a dividend of $0.0325 per share during each period shown in the table above. The dividends paid in a given quarter relate to the immediately preceding quarter. The Company's payment of dividends in the future, if any, will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, cash requirements, future business prospects and other factors. There can be no assurance that the Company will pay dividends in the future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
In the following table, the Company's operating results for 2002 represent operations of the combined company. Operating results for 2001 include Global Marine's operations for the full year and Santa Fe International's operations from the November 2001 merger date (42 days). Selected financial data for years prior to 2001 represents the operations of Global Marine only. As a result, comparisons to prior years' data may not be meaningful. In April 2002, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on Issue 01-14, "Income Statement Characterization of Reimbursement Received for 'Out-of-Pocket' Expenses Incurred," requiring that all reimbursements received for out-of-pocket expenses incurred be characterized as revenue in the income statement. The Company previously recorded certain reimbursements received from customers as a reduction of the related expenses incurred, and in order to implement the consensus, certain reimbursements received from customers for the periods presented have been reclassified as revenues and related operating expenses. Operating income and net income for all periods presented were not affected by this reclassification. The selected financial data should be read in conjunction with "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a leading worldwide oil and gas drilling contractor, owning or operating a high quality, technologically advanced fleet of over 100 marine and land drilling rigs. The Company's fleet currently includes 13 floating rigs, 44 cantilevered jackup rigs, 31 land rigs and one platform rig. In addition, the Company or its affiliates operate 11 platform rigs for third parties and it participates in a joint venture that operates two semisubmersible rigs for third parties. The Company provides offshore oil and gas contract drilling services to the oil and gas industry worldwide on a daily rate ("dayrate") basis. The Company also provides offshore oil and gas drilling management services on either a dayrate or completed-project, fixed-price ("turnkey") basis, as well as drilling engineering and drilling project management services, and it participates in oil and gas exploration and production activities.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. The following is a discussion of the Company's most significant accounting policies as well as the use of estimates.
PROPERTIES AND DEPRECIATION
Rigs and Drilling Equipment. Capitalized costs of rigs and drilling equipment include all costs incurred in the acquisition of capital assets including allocations of interest costs incurred during periods that assets are under construction. Expenditures for maintenance and repairs are charged to expense as incurred. Costs of property sold or retired and the related accumulated depreciation are removed from the accounts; resulting gains or losses are included in income.
Jackup drilling rigs and semisubmersibles are depreciated over lives ranging from 15 to 30 years, with salvage values of $0.5 million and $1.0 million, respectively, per rig. All land drilling rigs are depreciated over 15-year lives with no salvage value. Drillships, with the exception of the Glomar Explorer, are depreciated over 20-year lives, with salvage values of $1.0 million per rig. The Glomar Explorer is being depreciated over approximately 28 years, which represents the time that remained on its 30-year lease as of the date it entered service following its conversion to a drillship, with no salvage value.
The Company reviews its long-term assets for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144, among other things, requires that long-lived assets and certain intangibles to be held and used be reported at the lower of carrying amount or fair value and establishes criteria to determine when a long-lived asset is classified as available for sale. 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.
Oil and Gas Properties. The Company uses the full-cost method of accounting for oil and gas exploration and development costs. Under this method of accounting, the Company capitalizes all costs incurred in the acquisition, exploration, and development of oil and gas properties and amortizes such costs, together with estimated future development and dismantlement costs, using the units-of-production method.
REVENUE RECOGNITION
The Company's contract drilling business provides crewed rigs to customers on a dayrate basis. Dayrate contracts can be for a specified period of time or the time required to drill a specified well or number of wells. Revenues and expenses from dayrate drilling operations, which are classified under contract drilling services, are recognized on a per-day basis as the work progresses. Lump-sum fees received as compensation for the cost of
relocating drilling rigs from one major operating area to another, whether received up-front or upon termination of the drilling contract, are recognized as earned, which is generally over the term of the related drilling contract.
The Company also designs and executes specific offshore drilling or well-completion programs for customers at fixed prices under short-term "turnkey" contracts. Revenues and expenses from turnkey contracts, which are classified under drilling management services, are earned and recognized upon completion of each contract using the completed contract method of accounting.
INCOME TAXES
The Company is a Cayman Islands company. The Cayman Islands does not impose corporate income taxes. Consequently, income taxes have been provided based on the tax laws and rates in effect in the countries in which operations are conducted and income is earned. The income taxes in these jurisdictions vary substantially. The Company's effective tax rate for financial statement purposes will continue to fluctuate from year to year as the Company's operations are conducted in different taxing jurisdictions. The Company's ability to realize the benefit of its deferred tax assets requires that the Company achieve certain future earnings levels prior to the expiration of its net operating loss ("NOL") carryforwards.
The Company has not provided for U.S. deferred taxes on the unremitted earnings of its U.S. subsidiaries and their controlled foreign corporations ("U.S. Subsidiaries") that are permanently reinvested. Should the Company make a distribution from the unremitted earnings of its U.S. Subsidiaries, the Company would be required to record additional U.S. deferred taxes.
In certain circumstances, management expects that, due to the changing demands of the offshore drilling markets, the Company's mobile assets are more likely than not to be redeployed to other locations before those assets operate in certain jurisdictions long enough to give rise to future tax consequences. As a result, no deferred tax liability has been recognized on the earnings from these assets. In addition, the Company has not provided for U.S. deferred taxes on foreign earnings that could be taxed in the United States upon the occurrence of certain events in a future period. The Company plans, subject to approval by its Board of Directors, to implement a business restructuring that will better integrate the operations of the Company. This integration will change the U.S. tax classification of certain of its subsidiaries before the occurrence of any events that could give rise to a tax liability. Should management's expectations change regarding the length of time a mobile asset will be operating in a given location, or should the Company choose not to implement the planned business restructuring, the Company would be required to record additional deferred taxes that could have a material adverse effect on its financial position, results of operations and cash flows.
GOODWILL
The Company accounts for goodwill in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." The Company has defined reporting units within its contract drilling segment based upon economic and market characteristics of these units. All of the goodwill recorded in connection with the Merger has been allocated to the jackup drilling fleet reporting unit, as these rigs were the primary source of value in the Merger discussions and negotiations. The estimated fair value of this reporting unit for purposes of the Company's annual goodwill impairment testing is based upon the present value of its estimated future net cash flows, utilizing a discount rate based upon the Company's cost of capital.
STOCK-BASED COMPENSATION
The Company accounts for its stock option and stock-based compensation plans using the intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion No. 25. Accordingly, the Company computes compensation cost for each employee stock option granted as the amount by which the quoted market price of the Company's common stock on the date of grant exceeds the amount the employee must pay to acquire the stock. The amount of compensation cost, if any, is charged to income over the vesting period. No compensation cost has been recognized for any of the Company's outstanding stock options, all of which have exercise prices equal to the market price of the stock on the date of grant.
PENSION COST AND OTHER POSTRETIREMENT BENEFITS
The Company's pension costs and liabilities are actuarially determined based on certain assumptions including expected long-term rates of return on plan assets, rate of increase in future compensation levels and the discount rate used to compute future benefit obligations. The expected long-term rate of return on plan assets used to compute pension cost was 9% for 2002, 2001 and 2000. The assumed rate of increase in future compensation levels was 4.5% for 2002 and 2001, and 6.0% for 2000. The discount rate used to compute the projected benefit obligation was 6.75% for 2002, 7.25% for 2001 and 7.5% for 2000. The Company's policy is to use a discount rate comparable to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the Company's pension benefits. Actuarial gains and losses resulting from experience different from these assumptions or from changes in these assumptions are amortized over the remaining service period of active employees expected to receive benefits under the plans. Actual results could differ materially from estimated amounts. For a discussion of the components of the Company's net periodic pension cost and the funded status of the Company's pension plans, see Note 9 of Notes to the Consolidated Financial Statements.
As of December 31, 2002, the Company had an unrecognized net actuarial loss of $109.9 million. This loss will be recognized in net periodic pension cost over the estimated remaining service lives of the active participants in the plans. Approximately $11 million of this loss is expected to be recognized in 2003.
The calculation of other postretirement benefits costs and liabilities includes the weighted-average annual assumed rate of increase in the per capita cost of covered medical benefits. These assumptions are based on data available to management at the time these assumptions are made. Actual results could differ materially from estimated amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the carrying values of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the period. Actual results could differ from such estimates.
Key estimates used by management in this report include:
Allowance for doubtful accounts. The Company estimates its allowance for doubtful accounts based on analysis of historical collection activity. Factors that may affect this estimate include changes in the financial position of a major customer or significant changes in the prices of oil or natural gas.
Depreciation and amortization. The Company depreciates its rigs and equipment over their remaining estimated useful lives. The Company's estimates of these remaining useful lives may be affected by such factors as changing market conditions, technological advances in the industry or changes in regulations governing the industry.
Tax estimates. The Company's ability to realize the benefit of its deferred tax assets requires that the Company achieve certain future earnings levels prior to the expiration of its NOL carryforwards. The Company has established a valuation allowance against the future tax benefit of a portion of its NOL carryforwards and could be required to record an additional valuation allowance if market conditions deteriorate and future earnings are below, or are projected to be below, its current estimates.
Turnkey drilling estimates. The Company typically relies on detailed cost estimates created by project engineering staff to compute and book profits on turnkey drilling projects based on known revenues. These cost estimates are adjusted when final actual project costs have been determined, which may result in adjustments to previously recorded amounts.
Accrued claims and liabilities. The Company estimates its accrued claims and liabilities based on the facts and circumstances specific to the claims and past experience with similar claims. The actual outcome of litigated claims could differ significantly from estimated amounts.
Fair values of financial instruments. The Company estimates the fair values of its financial instruments based on available third-party market quotes for its financial instruments or market quotes based on financial instruments with similar characteristics. Where market quotes are unavailable, the Company bases its estimates of fair values on the net present value of estimated future cash flows.
Cash flow estimates. The Company's estimates of future cash flows are based on the most recent currently available market and operating data for the applicable asset or reporting unit at the time the estimate is made. In addition to fair value calculations discussed above, cash flow estimates are also used to determine certain tax-related valuations and for asset impairment analyses. Actual results could differ materially from these estimated amounts.
MERGER WITH SANTA FE INTERNATIONAL
On November 20, 2001, Global Marine merged with a subsidiary of Santa Fe International and became a wholly owned subsidiary of Santa Fe International, which was renamed GlobalSantaFe Corporation at the time of the Merger.
The Merger was accounted for as a purchase business combination in accordance with accounting principles generally accepted in the United States of America. As the stockholders of Global Marine owned slightly over 50% of GlobalSantaFe after the Merger, Global Marine was considered the acquiring entity for accounting purposes. Accordingly, the historical basis of Global Marine in its assets and liabilities has been carried forward to the consolidated financial statements of the Company. The assets and liabilities of Santa Fe International were recorded at estimated fair market value at the date of the Merger in the consolidated financial statements of the Company, with the excess of the purchase price over the sum of such fair values recorded as goodwill.
In connection with the Merger, the Company implemented a restructuring program that included the consolidation of Santa Fe International's administrative office in Dallas, Texas, Global Marine's administrative office in Lafayette, Louisiana, and Global Marine's administrative office in Houston, Texas, into a single administrative office in Houston, the consolidation of Santa Fe International's and Global Marine's North Sea administrative offices in Aberdeen, Scotland and the separation of 167 employees from the Company. The employee functions affected were primarily corporate support in nature and included accounting, information technology, and employee benefits, among others. Approximately 60% of the affected positions were located in Dallas, 23% were located in Houston and Lafayette, and the remaining 17% were located in Aberdeen.
Estimated restructuring costs associated with Global Marine were recorded as a pretax charge in the fourth quarter of 2001. Changes in estimated costs, consisting mainly of refinements of cost estimates, and payments related to these restructuring costs for the year ended December 31, 2002, are summarized as follows:
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(1) The liability at December 31, 2002, included $2.0 million of special termination costs related to certain retirement plans, which were included in Other long-term liabilities in the Consolidated Balance Sheets.
Estimated costs associated with Santa Fe International's employee severance and closure of its Dallas and Aberdeen offices were recognized as a liability assumed in the purchase business combination and included in the cost of acquisition in accordance with the provisions of SFAS No. 141, "Business Combinations." Changes in estimated costs, consisting primarily of costs associated with employee terminations and further employee relocation costs, and payments related to this liability for the year ended December 31, 2002, are summarized as follows:
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(1) The liability at December 31, 2002, included $7.6 million related to the Dallas office lease obligation, which was included in Other long-term liabilities in the Consolidated Balance Sheets.
In addition to the amounts in the above table, Santa Fe International paid $10.0 million in 2001 to SFIC Holdings in consideration for SFIC Holdings' consent to the Merger. This consent was required pursuant to an intercompany agreement with Kuwait Petroleum Corporation and SFIC Holdings that required the consent of SFIC Holdings to, among other things, significant corporate actions by Santa Fe International, including the issuance of equity securities, sale of significant assets or a change in the corporate domicile of Santa Fe International or any of its subsidiaries.
OPERATING RESULTS
The Company's operating results for 2002 represent the first full year of operations of the combined company, while the Company's results of operations for 2001 include Global Marine's operations for the full year and Santa Fe International's operations from November 20, 2001 (42 days). The Company's results of operations for 2000 represent the operations of Global Marine only. As a result, year-to-year comparisons may not be meaningful.
In April 2002, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on Issue 01-14, "Income Statement Characterization of Reimbursement Received for 'Out-of-Pocket' Expenses Incurred." The EITF consensus requires that all reimbursements received for out-of-pocket expenses incurred be characterized as revenue in the income statement. The Company previously recorded certain reimbursements received from customers as a reduction of the related expenses incurred. In connection with the implementation of the consensus on this issue, the Company has reclassified certain reimbursements received from customers for the years ended December 31, 2001 and 2000, as revenues and related operating expenses to conform to the 2002 presentation. Operating income and net income for all periods presented were not affected by this reclassification. Amounts classified as revenues and expenses for 2002 pursuant to this consensus and the amounts of revenues and expenses reclassified by segment for each prior period presented are as follows (in millions):
SUMMARY
Data relating to the Company's operations by business segment follows:
Operating income in 2002 increased by $1.9 million to $331.8 million from $329.9 million in 2001, due primarily to the inclusion of $168.7 million attributable to the full-year operations of the Santa Fe International drilling fleet. Excluding the contribution from the Santa Fe fleet, operating income decreased by $166.8 million due primarily to lower dayrates and utilization in the U.S. Gulf of Mexico, increases in repair and maintenance expenses, reduced turnkey drilling activity, lower average oil and gas prices and an increase in corporate expenses. Operating income for 2002 included $22.7 million of transition expenses, which are costs incurred in connection with the Merger and subsequent integration of Global Marine and Santa Fe International. Such costs are not considered to be indicative of the Company's ongoing operations. Operating income for 2001 included a $22.3 million charge in connection with a restructuring program related to the Merger.
Operating income in 2001 increased by $141.4 million to $329.9 million from $188.5 million in 2000. Approximately $114.6 million of this increase was attributable to Global Marine's operating results, and $26.8 million was attributable to Santa Fe International's operating results from the date of the Merger. The increase in Global Marine's operating income in 2001 as compared to 2000 was primarily attributable to the full-year results of the Glomar C.R. Luigs and Glomar Jack Ryan drillships, which were added to the Company's fleet in April 2000 and December 2000, respectively, along with increases in average dayrates and rig utilization. These increases were offset in part by the $22.3 million restructuring charge related to the Merger noted above.
In August 2002, the existing drilling contract for the Glomar Jack Ryan ultra-deepwater drillship was assigned by the Company's customer to their Australian subsidiary to drill a series of deepwater wells on the western and southern coasts of Australia. To facilitate the assignment of this contract, the Company was paid $21.7 million, which is being amortized over the remaining contract term expiring August 1, 2003.
In February 2002, the Company sold the Key Bermuda jackup drilling rig to Nabors Drilling International Limited for approximately $29 million, less selling costs of approximately $5 million. The carrying value of the Key Bermuda was adjusted to its estimated market value in the consolidated financial statements of the Company at the time of the Merger and, therefore, no gain or loss was recorded as a result of this sale.
In June 2001, the Company completed the sale of the Glomar Beaufort Sea I concrete island drilling system to Exxon Neftegas Limited for $45.0 million, resulting in a pretax gain in the amount of $35.1 million.
PRO FORMA FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma results for the years ended December 31, 2001 and 2000, has been prepared as if the Merger had occurred on January 1, 2000. Revenues for both periods have been reclassified pursuant to EITF Issue 01-14 discussed above. If Global Marine and Santa Fe International had merged on this date, GlobalSantaFe might have performed differently. The pro forma financial information should not be relied on as an indication of the financial position or results of operations that the Company would have achieved had the Merger taken place at a different date or of the future results that the Company will achieve.
The pro forma information includes adjustments for additional revenue based on the fair market value of certain drilling contracts acquired, elimination of goodwill amortization, additional depreciation based on the fair
market value of drilling rigs and other property and equipment acquired and related adjustments for income taxes, reflecting the incremental benefit attributable to the effect of the Company's tax structure on the earnings of the combined companies.
BACKLOG
The Company's contract drilling backlog at December 31, 2002, totaled approximately $1.2 billion, of which approximately $800 million is expected to be realized in 2003. Contract drilling backlog at December 31, 2001 was $1.4 billion.
MARKET CONDITIONS
The drilling business has historically been cyclical, marked by periods of low demand, excess rig supply and low dayrates, followed by periods of high demand, short rig supply and increasing dayrates. These cycles are highly volatile and are traditionally influenced by a number of factors, including oil and gas prices, the spending plans of the Company's customers and the highly competitive nature of the offshore drilling industry. Even when rig markets appear to have stabilized at a certain level of utilization and dayrates, these markets can change swiftly, making it difficult to predict trends or conditions in the market. The relocation of rigs from weak markets to stable or strong markets may also have a significant impact on utilization and dayrates in the affected markets. A summary of current market conditions in the Company's areas of operations follows:
North Sea. The Company currently operates three semisubmersibles, five cantilevered heavy-duty harsh environment jackups, three cantilevered jackups and a platform rig in the North Sea market. Utilization and dayrates for both jackups and semisubmersibles have declined in this market following the announcement of tax law changes in the United Kingdom, the recent period of reorganization and asset sales among our clients, and the reassessment of production targets by our clients. The Company expects continued weakness in this market and anticipates that several of its rigs currently under contract in this area will either continue to receive low dayrates, or be idle when their current contracts expire. The Company also expects jackup dayrates to soften in the first quarter of 2003, and anticipates semisubmersible and jackup market weakness to continue throughout 2003, likely resulting in intermittent periods of idle time for a portion of its rigs. In the fourth quarter of 2002, the Company mobilized one of its semisubmersibles that had previously been operating in this market to a shipyard in Poland for painting and other maintenance, after which it will be cold-stacked in Scotland.
U.S. Gulf of Mexico. The Company currently operates two semisubmersibles and ten cantilevered jackups in the U.S. Gulf of Mexico market, which is characterized by short-term contracts. Although the U.S. Gulf of Mexico jackup market has historically reacted to changes in natural gas prices, recent high natural gas prices have thus far had little effect on utilization, and this market is currently experiencing significant idle capacity for both jackups and semisubmersibles. One of the Company's semisubmersibles in this market is currently committed until June 2003, and the other is operating under a contract that expires in the first quarter of 2003. Dayrates for jackup rigs marginally improved during the first half of 2002 but have weakened slightly since that time. Despite this market weakness, the Company's ten jackups in the U.S. Gulf of Mexico experienced 96% utilization in the fourth quarter of 2002 while generally maintaining market dayrates.
Ultra-deepwater drillship market. The Company currently operates three drillships in the ultra-deepwater markets in the U.S. Gulf of Mexico (two units) and Australia (one unit). The worldwide ultra-deepwater market is currently oversupplied, and the contracts of numerous units in this class worldwide are expected to expire in 2003 and 2004. There are presently fewer oil companies pursuing operations in ultra-deepwater, and several oil companies with these types of rigs under contract have offered them to other oil companies at subsidized dayrates. While the Company's ultra-deepwater drillships have been operating under long-term contracts, one contract will expire in April 2003, to be followed by a 60-day contract at a significantly reduced dayrate, and the contracts of the other two drillships will expire in the third quarter of 2003. The Company currently has no long-term commitments for its drillships following these expirations.
West Africa. The Company currently operates two semisubmersibles and nine cantilevered jackups in this market. One of the Company's semisubmersibles in this market is contracted through 2003, while the other is contracted through a substantial portion of 2003. While jackup dayrates and utilization remained firm in this market throughout most of 2002, recent jackup contract early terminations in Nigeria and possible rig relocations into this market may cause dayrates and utilization to decline in the West Africa market. Although the Company is facing the potential for lower dayrates and utilization for its nine jackups, four of its jackups in this market are contracted through 2003.
Middle East and Mediterranean. The Company currently operates six cantilevered jackups in the Middle East region and two cantilevered jackups in the Mediterranean region offshore North Africa, with one additional cantilevered jackup being mobilized to the Mediterranean. Although both markets appear to be stable, contracts on two of these rigs expire in the first quarter of 2003 and the current contract on an additional rig expires in the second quarter of 2003. The Company's moored drillship is cold-stacked in Malta.
Southeast Asia. The Company currently operates six cantilevered jackups in Southeast Asia. Four of these jackups are contracted beyond the end of 2003, with a fifth jackup rig contracted until the fourth quarter of 2003. The remaining jackup concluded a contract in the first quarter of 2003 and will undergo modifications and upgrades in a Singapore shipyard, with no contract commitment thereafter. Although the market is generally balanced in this region and utilization remains high, the Company has observed a reduction in dayrates in recent contract placements.
Other. In Northeast Canada, the Company currently operates one semisubmersible and one heavy-duty harsh environment jackup. The semisubmersible is undergoing upgrades and modifications during the first quarter of 2003 prior to the mid-2003 commencement of a two-year contract. The jackup is under contract until the fourth quarter of 2003. In Trinidad and Tobago, the Company currently operates one cantilevered jackup under a contract expiring in the second quarter of 2003.
Land drilling fleet. The Company owns 31 land drilling rigs, with 19 of these located in the Middle East (Rig 159, located in the Middle East, is held for sale), four in North Africa and eight in Venezuela. All but three of the active rigs in the Middle East were under contract at the start of 2003, but the Company anticipates that utilization and dayrates for the Middle East and North Africa land rig markets may experience some softening in the first and second quarters of 2003.
In March 2003, the Company suspended drilling operations and evacuated its employees from Kuwait in response to the threat of war in Iraq. Although the suspension of drilling operations is not expected to have a material impact on the Company's results of operations for the first quarter of 2003, the Company estimates, based on current contracts and commitments, that its results of operations for each subsequent quarter will be negatively impacted by approximately $0.03 per diluted ordinary share for each full quarter that operations are suspended. Should the threat of war continue, or if hostilities break out, the Company may be forced to evacuate employees in other countries in the region, possibly resulting in the termination of some contracts.
Venezuela has been experiencing labor strikes and demonstrations and in 2002 experienced an attempt to overthrow the government. The implications and results of the political, economic and social instability in Venezuela are uncertain at this time, but the instability has had and is expected to continue to have an adverse effect on this market. None of the Company's land rigs located in Venezuela are currently operating.
FUTURE MARKET FOR NEWBUILDS
The GSF Constellation I, the first of the Company's two high-performance jackups currently under construction, is scheduled for delivery during the second quarter of 2003, while the GSF Development Driller I, the first of two ultra-deepwater semisubmersibles also under construction, and the GSF Constellation II are scheduled for delivery around the end of the first quarter of 2004. Although the Company has options for construction of additional jackup and ultra-deepwater semisubmersible units beyond these four, it does not intend to exercise these options. The Company's ability to obtain contracts for its newbuild rigs and the terms of such contracts will depend on market conditions at the time these rigs are available for contract. The Company is
actively marketing the GSF Constellation I and the GSF Development Driller I. While the Company believes that its newbuild rigs will have substantial advantages in efficiency and capability over competitive equipment in the industry, it can provide no assurance that it will be able to obtain contracts for all of its new rigs or that the contract terms will be similar to those for similar equipment in current market conditions.
CONTRACT DRILLING OPERATIONS
Data with respect to the Company's contract drilling operations follows:
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(1) Includes revenues earned from affiliates.
(2) Includes the results of Global Marine for the full-year 2001 and the results of Santa Fe International from November 20, 2001 (42 days).
(3) Reflects the pre-Merger results of Global Marine only.
(4) See note (9) under "Item 6. Selected Financial Data."
Year Ended December 31, 2002, Compared to Year Ended December 31, 2001
Contract drilling revenues increased by $644.9 million to $1,619.0 million in 2002 compared to $974.1 million in 2001 due primarily to $686.8 million from the addition of the Santa Fe International rigs to the Company's drilling fleet, partially offset by lower dayrates and utilization in the U.S. Gulf of Mexico.
For 2002, 2001 and 2000, respectively, the Company's average offshore utilization for its drilling rigs in the U.S. Gulf of Mexico was 90%, 94% and 100%. The average utilization for rigs located in the North Sea was 85%, 88% and 62%, respectively, for 2002, 2001 and 2000. For the same periods, rigs located offshore West Africa averaged 86%, 97% and 77%, respectively, and rigs in South America averaged 100%, 94% and 100%, respectively. The Company's utilization rate for 2002 averaged 82% in Southeast Asia and 97% in the Middle East. Global Marine's offshore fleet did not operate in Southeast Asia or the Middle East during 2001 or 2000. The Company's land drilling utilization rates averaged 69% for 2002 and 84% for the 42 days in 2001.
The Company's operating profit margin for contract drilling operations decreased to 22% in 2002, from 35% in 2001 due primarily to the addition of land drilling operations, which have historically operated at substantially lower margins than the Company's offshore fleet, and lower average dayrates in the U.S. Gulf of Mexico, along with an increase in depreciation expense due to the adjustment of the carrying values of the Santa Fe International
rigs to their estimated market value in connection with the Merger. In addition, the Company's contract drilling operating results for 2002 were impacted by accelerated repair and maintenance expenditures on several rigs that were relocating, undergoing upgrades or idle, as well as a painting and maintenance project on one of its semisubmersibles. In accordance with its normal practice, the Company is taking advantage of idle rig time in the North Sea and elsewhere to perform repair, maintenance and upgrade work on several of its idle rigs, which will result in a continuation of this increased level of repair and maintenance costs in the first quarter of 2003.
The Company recorded approximately $14.8 million of Merger-related transition expenses in its contract drilling operations during 2002, which represent costs incurred as part of the integration of the operations of Global Marine and Santa Fe International. Such costs are not considered to be indicative of the Company's ongoing operations.
Along with the addition of the Santa Fe International drilling fleet, the mobilization of rigs between geographic areas also affected each area's revenues over the periods indicated. Subsequent to the Merger, the Company's mobilization of rigs was as follows: one jackup from the U.S. Gulf of Mexico to Trinidad in December 2001 and back to the U.S. Gulf of Mexico in August 2002; one drillship from the U.S. Gulf of Mexico to Trinidad in March 2002, back to the U.S. Gulf of Mexico in May 2002 and to Australia in September 2002; one jackup from Trinidad to the North Sea in May 2002; one jackup from Trinidad to West Africa in July 2002; one semisubmersible from the North Sea to the east coast of Canada in July 2002; and one jackup from the North Sea to West Africa in November 2002. Prior to the Merger, Global Marine mobilized one drillship from offshore Peru to West Africa in April 2000, one drillship from West Africa to the U.S. Gulf of Mexico in June 2000, one jackup from West Africa to the U.S. Gulf of Mexico in February 2001, one drillship from Trinidad to the U.S. Gulf of Mexico in May 2001, one semisubmersible from Canada to the North Sea in May 2001, one jackup from the U.S. Gulf of Mexico to West Africa in July 2001 and one jackup from the U.S. Gulf of Mexico to Trinidad in September 2001.
As of January 31, 2003, 14 of the Company's offshore drilling rigs were located in the U.S. Gulf of Mexico; 12 rigs, including its platform rig, were located in the North Sea; 11 were offshore West Africa; six were in the Middle East; six were in Southeast Asia; two were offshore North Africa with one en route; two were off the northeast coast of Canada; one was offshore Trinidad and Tobago; one was off the western coast of Australia; one was cold-stacked in Malta and one was undergoing a painting and maintenance project in a shipyard in Poland, after which it will be cold-stacked in Scotland.
As of January 31, 2003, 19 of the Company's 31 land rigs were located in the Middle East; eight were in South America and four were in North Africa.
As of January 31, 2003, 53 of the Company's 58 offshore rigs were either committed or under contract, and 19 of the Company's 31 land rigs were under contract.
Year Ended December 31, 2001, Compared to Year Ended December 31, 2000
Contract drilling revenues increased by $370.5 million in 2001 to $974.1 million compared to $603.6 million in 2000. Approximately $274.6 million of this increase was attributable to Global Marine's fleet, and $95.9 million was attributable to Santa Fe International's fleet from the Merger date. Of the $274.6 million increase in Global Marine's contract drilling revenues in 2001 as compared to 2000, $104.3 million was attributable to the addition of the Glomar C.R. Luigs drillship in April 2000 and the Glomar Jack Ryan drillship in December 2000, $95.1 million was attributable to an increase in average dayrates, $67.5 million was attributable to an increase in average rig utilization and $7.7 million was attributable to an increase in reimbursable revenues. The increase in average dayrates in 2001 as compared to 2000 was primarily due to operations in West Africa and the U.S. Gulf of Mexico, and the increase in average rig utilization was primarily due to operations in West Africa and the North Sea. Of the $95.9 million in contract drilling revenues attributable to Santa Fe International's fleet, $75.3 million was attributable to marine rigs and $20.6 million was attributable to land rigs.
Operating income and operating margin increased to $338.5 million and 35%, respectively, for 2001 compared to $184.5 million and 31%, respectively, for 2000. Operating expenses increased by $216.5 million to
$635.6 million in 2001 from $419.1 million in 2000. Approximately $148.9 million of this increase was attributable to Global Marine's fleet, and $67.6 million was attributable to Santa Fe International's fleet from the Merger date. The increase in Global Marine's contract drilling operating expenses in 2001 as compared to 2000 was primarily due to higher operating costs in connection with the full-year operations of the Glomar C.R. Luigs and the Glomar Jack Ryan drillships, an increase in rig utilization and full-year crewed operations of the GSF Arctic II (formerly the Maersk Jutlander), which was being leased from the Company under a bareboat charter for most of 2000. Under this bareboat charter, the Company provided the customer with the rig, and the customer used its own crews to operate the rig.
DRILLING MANAGEMENT SERVICES
Year Ended December 31, 2002, Compared to Year Ended December 31, 2001
Drilling management services revenues decreased by $0.5 million to $416.8 million in 2002 from $417.3 million in 2001. The decrease in revenues consisted of a $59.8 million decrease attributable to fewer turnkey projects completed, partly offset by a $32.0 million increase attributable to higher average revenues per turnkey project and a $27.3 million increase in daywork, reimbursable and other revenues. The Company completed 98 turnkey projects in 2002 (78 wells drilled and 20 well completions) as compared to 119 turnkey projects in 2001 (97 wells drilled and 22 well completions).
Drilling management services operating income decreased by $4.8 million to $28.6 million in 2002 from $33.4 million in 2001, and operating margin decreased to 6.9% in 2002 from 8.0% in 2001. These decreases were due primarily to the deferral of turnkey profit totaling $16.3 million and $9.9 million for 2002 and 2001, respectively, related to wells in which CMI was either the operator or held a working interest. Excluding the deferral of this profit, drilling management services operating income increased by $1.6 million to $44.9 million for 2002 from $43.3 million in 2001, due primarily to improved turnkey drilling performance in 2002 as compared to 2001. The Company incurred losses totaling $3.1 million on five of the 98 turnkey projects completed in 2002 compared to losses totaling $13.5 million on 11 of the 119 turnkey projects completed in 2001. The Company also recognized $2.1 million of estimated losses in the fourth quarter of 2002 related to a well in progress at December 31, 2002, that the Company completed at a loss in the first quarter of 2003.
Year Ended December 31, 2001, Compared to Year Ended December 31, 2000
Drilling management services revenues decreased by $32.8 million to $417.3 million in 2001 from $450.1 million in 2000. Approximately $33.5 million of this decrease was attributable to Global Marine's operations, offset by a $0.7 million increase attributable to operations of Santa Fe International after the Merger. The decrease in Global Marine's revenues consisted of a $77.3 million decrease attributable to a decrease in the number of turnkey projects, partly offset by a $25.3 million increase attributable to higher average revenues per turnkey project and an $18.5 million increase attributable to daywork, reimbursable and other revenues. The Company completed 119 turnkey projects in 2001 (97 wells drilled and 22 well completions) as compared to 149 projects in 2000 (122 wells drilled and 27 well completions).
Operating income for drilling management services increased by $11.8 million to $33.4 million in 2001 from $21.6 million in 2000, and operating profit margin increased to 8.0% in 2001 from 4.8% in 2000. Of the $11.8 million increase in drilling management services operating income for 2001 as compared to 2000, $11.3 million was attributable to Global Marine, and $0.5 million was attributable to the operations of Santa Fe International from the Merger date. The increase in operating margin in 2001 as compared to 2000 was due in part to the Company incurring fewer loss wells in 2001 as compared to 2000. The Company incurred losses totaling $13.5 million on 11 of the 119 turnkey projects in 2001 as compared to losses totaling $18.1 million incurred on 18 of the 149 turnkey projects during 2000.
Also contributing to the increase in the Company's operating margin in 2001 as compared to 2000 was a turnkey well drilled in the North Sea in December 2000. The turnkey drilling contract guaranteed the Company recovery of its turnkey drilling costs upon completion of the well and included a provision for additional revenue based on production from the well. The Company received $4.1 million of additional revenue from this well in the fourth quarter of 2001, all of which was operating profit.
Results of operations from the Company's drilling management services may be limited by certain factors, in particular the ability of the Company to find and retain qualified personnel, to hire suitable rigs at acceptable rates, and to obtain and successfully perform turnkey drilling contracts based on competitive bids. The Company's ability to obtain turnkey drilling contracts is largely dependent on the number of such contracts available for bid, which in turn is influenced by market prices for oil and gas, among other factors. Accordingly, results of the Company's drilling management service operations may vary widely from quarter to quarter and from year to year.
OTHER INCOME AND EXPENSE
General and administrative expenses increased to $58.4 million in 2002 as compared to $26.0 million in 2001 due primarily to increases in personnel from the inclusion of Santa Fe International operations as a result of the Merger, transition expenses and an increase in pension expense. Transition expenses included in general and administrative expenses totaled approximately $7.9 million in 2002. Transition expenses for 2001 were not material. Transition expenses, which represent costs incurred as part of the integration of the operations of Global Marine and Santa Fe International, are not considered to be indicative of the Company's ongoing operations. Pension expense included in general and administrative expenses increased to $10.1 million in 2002 as compared to $3.5 million in 2001 due primarily to the inclusion of expenses related to legacy Santa Fe International plans, lower returns on plan assets and plan changes to conform benefits under the legacy pension plans as a result of the Merger.
General and administrative expenses increased by $3.4 million to $26.0 million in 2001 from $22.6 million in 2000. Approximately $2.0 million of this increase was attributable to the operations of Santa Fe International after the Merger, and $1.4 million was attributable to Global Marine. The increase in Global Marine's general and administrative expenses was primarily due to an increase in information systems costs and professional fees, partly offset by lower compensation expense.
Interest expense was $57.1 million for 2002, $57.4 million for 2001 and $63.6 million for 2000. Interest expense was essentially flat in 2002 as compared to 2001. The decrease in interest expense from 2000 to 2001 reflects lower effective interest rates for the year 2001 due to the issuance of the Zero Coupon Convertible Debentures in June 2000 as well as lower average debt balances.
The Company capitalized approximately $20.5 million of interest costs in 2002 in connection with the Company's rig expansion program discussed in "Liquidity and Capital Resources -- Financing and Investing Activities." The Company capitalized interest costs of $1.1 million in 2001 in connection with the construction of these rigs. Global Marine capitalized interest costs of $26.4 million in 2000 in connection with the construction of the Glomar C.R. Luigs and Glomar Jack Ryan drillships.
Interest income increased to $15.1 million in 2002 from $13.9 million in 2001 due to increased average cash, cash equivalents and marketable securities balances, primarily as a result of the Merger, and cash generated from operations, offset in part by lower interest rates earned in 2002 on the Company's cash, cash equivalents and marketable securities balances. Interest income increased to $13.9 million in 2001 from $4.0 million in 2000 primarily due to higher average cash balances and short-term investments in 2001 as compared to 2000.
In June 2001, the Company completed the sale of the Glomar Beaufort Sea I concrete island drilling system to Exxon Neftegas Limited for $45.0 million, resulting in a pretax gain in the amount of $35.1 million.
Other income totaled $2.3 million in 2002, due primarily to net gains totaling $4.0 million recorded on embedded derivative financial instruments associated with two-year variable-dayrate contracts for two of the Company's cantilevered jackups. See discussion in "Item 7A
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
Two of the Company's cantilevered jackup rigs are currently operating under similar dayrate contracts that expose the Company to commodity price risk. These two-year agreements, expiring in May 2004 and October 2004, respectively, each contain a variable-dayrate formula linked to crude oil prices, whereby dayrates earned
under these contracts increase or decrease in response to increases or decreases in oil prices. Dayrates under these agreements are calculated using a sliding scale formula based on the arithmetic average of the daily closing price of Light Sweet Crude on the New York Mercantile Exchange ("NYMEX"), subject to a maximum of $28.00 per barrel and a minimum of $12.00 per barrel.
The variable-dayrate formula contained in these agreements is comprised of multiple embedded derivative financial instruments as defined in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The fair value of these embedded derivatives fluctuate in response to changes in oil prices.
The Company has performed sensitivity analyses to assess the impact of these risks based on a hypothetical ten percent increase or decrease in NYMEX Light Sweet Crude futures prices over the remaining lives of these agreements at December 31, 2002. Oil prices are dependent on many factors that are impossible to forecast, and actual oil price increases or decreases could be greater than the hypothetical ten percent change.
The Company estimates that if average oil prices over the remaining lives of these agreements increase by ten percent, undiscounted cash flows received for these agreements over their respective lives would increase by approximately $3.8 million and $4.0 million, respectively. Conversely, a ten percent decrease in oil prices over the life of the agreements would decrease cash flows over their respective lives by approximately $2.8 million and $3.0 million, respectively. A hypothetical ten percent increase in NYMEX oil prices over the lives of these agreements would increase the net fair values of the embedded derivatives contained in these contracts by $3.2 million and $3.5 million, respectively. Conversely, a ten percent decrease in oil prices over the lives of these agreements would decrease the net fair value of the embedded derivatives by approximately $2.4 million and $2.7 million, respectively. An 11% discount rate was applied to the future cash flows of the contracts to determine the net fair values discussed above. The net fair value, based upon market price, of the embedded derivatives in each of these contracts was an asset of approximately $2.5 million at December 31, 2002, or $5.0 million in the aggregate.
As part of the Company's overall risk management strategy, the Company has entered into a number of commodity caps, swaps and floors designed to mitigate its exposure to fluctuations in fair values of the embedded derivatives in these contracts resulting from changes in oil prices. The net fair values of these derivative financial instruments represented a total obligation of $5.0 million at December 31, 2002.
INTEREST RATE RISK
In 1998 the Company entered into fixed-price contracts with Harland and Wolff Shipbuilding and Heavy Industries Limited totaling $315 million for the construction of two dynamically positioned, ultra-deepwater drillships, the Glomar C.R. Luigs and the Glomar Jack Ryan. Pursuant to two 20-year, capital lease agreements, the Company subsequently novated the construction contracts for the drillships to two financial institutions (the "Lessors"), which now own the drillships and lease them to the Company. The Company has deposited with three large foreign banks (the "Payment Banks") amounts equal to the progress payments that the Lessors were required to make under the construction contracts, less a lease benefit of approximately $62 million (the "Defeasance Payment"). In exchange for the deposits, the Payment Banks have assumed liability for making rental payments required under the leases and the Lessors have legally released the Company as the primary obligor of such rental payments. Accordingly, the Company has recorded no capital lease obligations on its balance sheet with respect to the two drillships. The Glomar C.R. Luigs and the Glomar Jack Ryan began operating under contract in April and December 2000, respectively.
The Company has interest rate risk in connection with its fully defeased financing leases for the Glomar Jack Ryan and Glomar C.R. Luigs. The Defeasance Payment earns interest based on the British Pound Sterling three-month LIBOR, which approximated 8.00% at the time of the agreement. Should the Defeasance Payment earn less than the assumed 8.00% rate of interest, the Company will be required to make additional payments as necessary to augment the annual payments made by the Payment Banks pursuant to the agreements. If the December 31, 2002, LIBOR rate of 4.02% were to continue over the next ten years, the Company would be required to fund an additional estimated $50 million during that period. Any additional payments made by the Company pursuant to the financing leases would increase the carrying value of its leasehold interest in the rigs and therefore be reflected in higher depreciation expense over their then-remaining useful lives. The Company
does not expect that, if required, any additional payments made under these leases would be material to its financial position or results of operations in any given year.
The Company does not consider its exposure to interest rate fluctuations to be material to its financial position, results of operations or cash flows.
FAIR VALUE RISK
The objectives of the Company's short-term investment strategy are safety of principal, liquidity maintenance, yield maximization and full investment of all available funds. As a result, the Company's investment portfolio at December 31, 2002, consists primarily of high credit quality commercial paper, Eurodollar debt securities and money market funds, all with original maturities of less than nine months. The Company believes that the carrying value of these investments approximates market value at December 31, 2002, due to the short-term nature of these instruments.
The Company manages its fair value risk related to its long-term debt by using interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. Under these interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between the fixed-rate and floating-rate amounts, calculated by reference to an agreed-upon notional amount.
In October 2002, the Company entered into a fixed-for-floating interest rate swap with a notional amount of $50 million, effective October 2002 through September 2007. This interest rate swap is intended to manage a portion of the fair value risk related to the Company's 7 1/8% Notes due 2007. Under the terms of this swap, the Company has agreed to pay the counterparty an interest rate equal to the six-month LIBOR rate plus 330 basis points on the notional amount, and the Company will receive the fixed 7 1/8% rate. The estimated fair value of this swap was an asset of approximately $1.6 million at December 31, 2002. The Company has designated this swap as a fair value hedge.
The estimated fair value of the Company's $300 million principal amount 7 1/8% Notes due 2007, based on quoted market prices, was $342.4 million at December 31, 2002, compared to the carrying amount of $301.3 million. The estimated fair value of the Company's $300 million principal amount 7% Notes due 2028, based on quoted market prices, was $333.9 million at December 31, 2002, compared to the carrying amount of $296.7 million. The estimated fair value of the Company's $600 million Zero Coupon Convertible Debentures due 2020, based on quoted market prices, was $326.2 million at December 31, 2002, compared to the carrying amount of $327.2 million.
The Company's long-term debt is subject to fair value risk due to changes in market interest rates. In addition, the fair value of the Company's zero coupon convertible debt is subject to changes in the market price of the Company's ordinary shares. The Company has performed sensitivity analyses to assess the impact of these changes in interest rates and share prices on the fair values of its long-term debt based on a hypothetical ten-percent increase in market interest rates and a hypothetical ten-percent decrease in the price of its ordinary shares. Market interest rate and share price volatility are dependent on many factors that are impossible to forecast, and actual interest rate increases and share price decreases could be more severe than the hypothetical ten-percent change.
The Company estimates that if prevailing market interest rates had been ten percent higher at December 31, 2002, and all other factors affecting the Company's debt remained the same, the fair value of the Company's 7 1/8% Notes due 2007, as determined on a present-value basis using prevailing market interest rates, would have decreased by $5.2 million or 1.5%, the fair value of the Company's 7% Notes due 2028 would have decreased by $24.1 million or 7.2%, and the fair value of the Company's zero coupon convertible debt would have decreased by $19.1 million or 5.9%. With respect to the Company's zero coupon convertible debt, if the market price of the Company's ordinary shares had been ten percent lower at December 31, 2002, and all other factors remained the same, the decrease in the fair value of the zero coupon convertible debt would have been less than one percent.
With respect to the Company's fixed-for-floating interest rate swap, if prevailing market interest rates had been ten percent higher at December 31, 2002, and all other factors had remained the same, the fair value of the
Company's $50 million notional amount fixed-for-floating interest rate swap, as determined on a present-value basis, would have decreased by $0.7 million or 41.3%.
FOREIGN CURRENCY RISK
The Company, through its international operations, is subject to foreign currency risk. This risk arises from holding net monetary assets (cash and receivables in excess of payables) denominated in foreign currencies during periods of a strengthening U.S. dollar. The Company attempts to minimize this currency risk by seeking international drilling contracts payable in local currency in amounts equal to its estimated local currency-based operating costs and in U.S. dollars for the balance of the contract. Due to this strategy, the Company has minimized its net asset or liability positions denominated in local currencies and has not experienced significant gains or losses associated with changes in currency exchange rates. Accordingly, the Company has not entered into financial hedging transactions to manage risks relating to fluctuations in currency exchange rates. The Company may, however, enter into such transactions in the future should the Company assume significant foreign currency risks.
CREDIT RISK
The market for the Company's services and products is the offshore oil and gas industry, and the Company's customers consist primarily of major integrated international oil companies and independent oil and gas producers. The Company performs ongoing credit evaluations of its customers and has not historically required material collateral. The Company maintains reserves for potential credit losses, and such losses have been within management's expectations.
The Company's cash deposits were distributed among various banks in the areas of the Company's operations throughout the world as of December 31, 2002. In addition, the Company had commercial paper, money-market funds and Eurodollar time deposits with a variety of financial institutions with strong credit ratings. As a result, the Company believes that credit risk in such instruments is minimal.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of GlobalSantaFe Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of GlobalSantaFe Corporation and subsidiaries (the "Company") at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas March 21, 2003
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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(1) Results for 2001 include the operations of the Company since the November 2001 merger date (42 days). Results for 2000 reflect the operations of Global Marine Inc. only.
(2) Earnings per ordinary share for 2000 have been restated to reflect the effect of the exchange ratio of 0.665 established in the Merger (see Note 1).
See notes to consolidated financial statements.
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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(1) Share, par value amounts and additional paid-in capital amounts prior to the merger date have been restated to reflect the exchange ratio (0.665) as outlined in the Merger.
See notes to consolidated financial statements.
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
GlobalSantaFe Corporation (the "Company" or "GlobalSantaFe") is an oil and gas drilling contractor, owning or operating a fleet of over 100 marine and land drilling rigs. The Company's fleet currently includes 13 floating rigs, 44 cantilevered jackup rigs, 31 land rigs and one platform rig. In addition, the Company or its affiliates operate 11 platform rigs for third parties, and it operates two semisubmersible rigs for third parties under a joint venture agreement. The Company provides offshore oil and gas contract drilling services to the oil and gas industry worldwide on a daily rate ("dayrate") basis. The Company also provides offshore oil and gas drilling management services on either a dayrate or completed-project, fixed-price ("turnkey") basis, as well as drilling engineering and drilling project management services, and it participates in oil and gas exploration and production activities.
MERGER OF SANTA FE INTERNATIONAL CORPORATION AND GLOBAL MARINE INC.
On November 20, 2001, Santa Fe International Corporation ("Santa Fe International") and Global Marine Inc. ("Global Marine") consummated their business combination with the merger (the "Merger") of an indirect wholly owned subsidiary of Santa Fe International with and into Global Marine, with Global Marine surviving the Merger as a wholly owned subsidiary of Santa Fe International. In connection with the Merger, Santa Fe International was renamed GlobalSantaFe Corporation. At the effective time of the Merger, each issued and outstanding share of common stock, par value $0.10 per share, of Global Marine was converted into the right to receive 0.665 ordinary shares, par value $0.01 per share, of GlobalSantaFe Corporation ("GlobalSantaFe Ordinary Shares"). Approximately 118 million GlobalSantaFe Ordinary Shares were issued in connection with the Merger.
BACKGROUND OF SANTA FE INTERNATIONAL AND GLOBAL MARINE
At the time of the Merger, Santa Fe International was an international offshore and land contract driller of oil and natural gas wells and owned and operated a fleet of 26 marine drilling rigs and 31 land drilling rigs in 16 countries throughout the world. In addition, Santa Fe International operated 13 marine drilling rigs owned by third parties. Santa Fe International primarily contracted its drilling rigs, related equipment and crews to oil and gas companies on a dayrate basis. As part of its contract drilling services, Santa Fe International also provided third-party rig operations and incentive drilling services to the international oil and gas industry. In the area of drilling management services, Santa Fe International provided drilling engineering and project management services. Santa Fe International was incorporated in its current form under the laws of the Cayman Islands in 1990.
At the time of the Merger, Global Marine was a domestic and international offshore drilling contractor, with a fleet of 33 mobile offshore drilling rigs worldwide. Global Marine provided offshore drilling services on a dayrate basis in the U.S. Gulf of Mexico and internationally. Global Marine also provided drilling management services on a turnkey basis. As part of its drilling management services, Global Marine also provided planning, engineering and management services beyond the scope of its traditional contract drilling business. Global Marine also engaged in oil and gas exploration, development and production activities principally in order to facilitate the acquisition of turnkey contracts for its drilling management services operations.
MERGER TRANSACTION
The Merger was accounted for as a purchase business combination in accordance with accounting principles generally accepted in the United States of America. As the stockholders of Global Marine owned slightly over 50% of the Company after the Merger, Global Marine was considered the acquiring entity for accounting purposes. Accordingly, the historical basis of Global Marine in its assets and liabilities has been carried forward to the consolidated financial statements of the Company. The assets and liabilities of Santa Fe International have been recorded at estimated fair market value at the date of the Merger in the consolidated financial statements of
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
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the Company, with the excess of the purchase price over the sum of such fair values recorded as goodwill. The purchase price of $2,567.1 million was calculated using the number of Santa Fe International ordinary shares outstanding immediately prior to the Merger and a $14.67 per share average trading price of Global Marine's common stock, as adjusted for the merger ratio ($22.06 per share, as adjusted), for a period of time immediately before and after the Merger was announced, plus the estimated fair value of Santa Fe International's outstanding stock options.
The following table summarizes the allocation of the purchase price to the specific assets and liabilities of Santa Fe International based on estimates of fair values and costs at the time of the Merger. All of the goodwill was assigned to the Company's contract drilling segment. Goodwill recorded in connection with the Merger is nondeductible for tax purposes.
The recording of goodwill is supported by the nature of the offshore drilling industry, the acquisition of long-lived drilling equipment and the long-standing relationships between Santa Fe International and its core customers. Subsequent to the Merger, $4.3 million of additional goodwill was recognized due primarily to additional employee separation costs incurred.
The consolidated balance sheets as of December 31, 2002 and 2001, represent the consolidated financial position of the combined company. The statements of income, cash flows and shareholders' equity for the year ended December 31, 2002, reflect the results of the combined company. The statements of income, cash flows and shareholders' equity for the year ended December 31, 2001, include the results of Global Marine for the full-year 2001 and the results of Santa Fe International from November 20, 2001 (42 days). The statements of income, cash flows and shareholders' equity for the year ended December 31, 2000, reflect the historical results of Global Marine. Share and per share data for all periods prior to the Merger have been restated to reflect the exchange ratio as outlined in the merger agreement.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited condensed consolidated pro forma results for the years ended December 31, 2001 and 2000, has been prepared as if the Merger had occurred on January 1, 2000. Revenues for both periods have been reclassified pursuant to EITF Issue 01-14 (see discussion in "Basis of Presentation"). If Global Marine and Santa Fe International had merged on this date, GlobalSantaFe might have performed differently. The pro forma financial information should not be relied on as an indication of the financial position or results of operations that
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the Company would have achieved had the Merger taken place at a different date or of the future results that the Company will achieve.
The pro forma information includes adjustments for additional revenue based on the fair market value of certain drilling contracts acquired, additional depreciation based on the fair market value of drilling rigs and other property and equipment acquired, elimination of goodwill amortization and related adjustments for income taxes, reflecting the incremental benefit attributable to the effect of the Company's tax structure on the earnings of the combined companies.
RESTRUCTURING COSTS
In connection with the Merger, the Company implemented a restructuring program that included the consolidation of Santa Fe International's administrative office in Dallas, Texas, Global Marine's administrative office in Lafayette, Louisiana, and Global Marine's administrative office in Houston, Texas, into a single administrative office in Houston, the consolidation of Santa Fe International's and Global Marine's North Sea administrative offices in Aberdeen, Scotland and the separation of 167 employees from the Company. The employee functions affected were primarily corporate support in nature and included accounting, information technology, and employee benefits, among others. Approximately 60% of the affected positions were located in Dallas, 23% were located in Houston and Lafayette, and the remaining 17% were located in Aberdeen.
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Estimated restructuring costs associated with Global Marine were recorded as a pretax charge in the fourth quarter of 2001. Changes in estimated costs, consisting mainly of refinements of cost estimates, and payments related to these restructuring costs for the year ended December 31, 2002, are summarized as follows:
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(1) The liability at December 31, 2002, included $2.0 million of special termination costs related to certain retirement plans, which were included in Other long-term liabilities in the Consolidated Balance Sheets.
Estimated costs associated with Santa Fe International's employee severance and closure of its Dallas and Aberdeen offices were recognized as a liability assumed in the purchase business combination and included in the cost of acquisition in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." Changes in estimated costs, consisting primarily of costs associated with employee terminations and further employee relocation costs, and payments related to this liability for the year ended December 31, 2002, are summarized as follows:
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(1) The liability at December 31, 2002, included $7.6 million related to the Dallas office lease obligation, which was included in Other long-term liabilities in the Consolidated Balance Sheets.
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All remaining accrued estimated restructuring costs associated with Global Marine and costs associated with Santa Fe International's employee severance and closure of its Dallas and Aberdeen offices are included in Other accrued liabilities on the Consolidated Balance Sheets, except for special termination costs and long-term office lease obligations noted in the tables above.
In addition to the amounts in the above table, Santa Fe International paid $10.0 million to SFIC Holdings (Cayman), Inc. ("SFIC Holdings") in consideration for SFIC Holdings' consent to the Merger. This consent was required pursuant to an intercompany agreement with Kuwait Petroleum Corporation and SFIC Holdings that required the consent of SFIC Holdings to, among other things, significant corporate actions by Santa Fe International, including the issuance of equity securities, sale of significant assets or a change in the corporate domicile of Santa Fe International or any of its subsidiaries (see Note 14).
DIVIDENDS
Holders of GlobalSantaFe Ordinary Shares are entitled to participate in the payment of dividends in proportion to their holdings. Under Cayman Islands law, the Company may pay dividends or make other distributions to the Company's shareholders, in such amounts as the Board of Directors deems appropriate from the profits of the Company or out of the Company's share premium account (equivalent to additional paid-in capital) if the Company thereafter has the ability to pay its debts as they come due. Cash dividends, if any, will be declared and paid in U.S. dollars. The Company has declared cash dividends of $7.6 million that were unpaid as of December 31, 2002.
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related footnotes are presented in U.S. dollars and in accordance with accounting principles generally accepted in the United States of America. Certain prior period amounts have been reclassified to conform to the current presentation.
In April 2002, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on Issue 01-14, "Income Statement Characterization of Reimbursement Received for 'Out-of-Pocket' Expenses Incurred." The EITF consensus requires that all reimbursements received for out-of-pocket expenses incurred be characterized as revenue in the income statement. The Company previously recorded certain reimbursements received from customers as a reduction of the related expenses incurred. As part of the implementation of the consensus in this issue, the Company has reclassified certain reimbursements received from customers for the years ended December 31, 2001 and 2000, as revenues and related operating expenses to conform to the current presentation. Operating income and net income for all periods presented were not affected by this reclassification. Amounts classified as revenues and expenses for 2002 pursuant to this consensus and the amounts of revenues and expenses reclassified by segment for each prior period presented are as follows (in millions):
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NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company consolidates all of its majority-owned subsidiaries and 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.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents include highly liquid debt instruments with remaining maturities of three months or less at the time of purchase. The Company's marketable securities, consisting of investment grade securities with relatively short-term maturities, are classified as held-to-maturity. The carrying value of these securities approximates market value due to the short-term nature of these securities. The Company also holds investment grade securities in connection with certain nonqualified pension plans (see Note 3), which are classified as available-for-sale. These investments are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity.
PROPERTIES AND DEPRECIATION
Rigs and Drilling Equipment. Capitalized costs of rigs and drilling equipment include all costs incurred in the acquisition of capital assets including allocations of interest costs incurred during periods that assets are under construction or refurbishment. Expenditures for maintenance and repairs are charged to expense as incurred. Costs of property sold or retired and the related accumulated depreciation are removed from the accounts; resulting gains or losses are included in income.
Jackup drilling rigs and semisubmersibles are depreciated over lives ranging from 15 to 30 years, with salvage values of $0.5 million and $1.0 million, respectively, per rig. All land drilling rigs are depreciated over 15-year lives with no salvage value. Drillships, with the exception of the Glomar Explorer, are depreciated over 20-year lives, with salvage values of $1.0 million per rig. The Glomar Explorer is being depreciated over the time that remained on its 30-year lease as of the date it entered service following its conversion to a drillship, or approximately 28 years, with no salvage value.
Rigs and drilling equipment included $1.0 billion of assets recorded under capital leases at both December 31, 2002 and 2001. Accumulated amortization of assets under capital leases totaled $134.2 million and $84.8 million at December 31, 2002 and 2001, respectively.
The Company reviews its long-term assets for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment and Disposal of Long-lived Assets." SFAS No. 144 requires that long-lived assets and certain intangibles to be held and used be reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell. The Company recorded no impairment charges during the years ended December 31, 2002, 2001 or 2000.
Oil and Gas Properties. The Company uses the full-cost method of accounting for oil and gas exploration and development costs. Under this method of accounting, the Company capitalizes all costs incurred in the acquisition, exploration and development of oil and gas properties and amortizes such costs, together with estimated future development and dismantlement costs, using the units-of-production method.
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GOODWILL
The Company accounts for goodwill in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The key provisions of SFAS No. 142:
- Eliminate the amortization of goodwill and indefinite-lived intangible assets;
- Require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired); and
- Require that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
At December 31, 2002, Goodwill in the Company's Condensed Consolidated Balance Sheet totaled approximately $386.9 million, substantially all of which was recorded in connection with the Merger (see Note 1). The Company has defined reporting units within its contract drilling segment based upon economic and market characteristics of these units. All of the goodwill recorded in connection with the Merger has been allocated to the jackup drilling fleet reporting unit, as these rigs were the primary source of value in the Merger discussions and negotiations. The estimated fair value of this reporting unit for purposes of the Company's annual goodwill impairment testing is based upon the present value of its estimated future net cash flows, utilizing a discount rate based upon the Company's cost of capital. The Company has completed its goodwill impairment testing for 2002 and was not required to record a goodwill impairment loss. The amortization of goodwill existing before the Merger was immaterial.
REVENUE RECOGNITION
The Company's contract drilling business provides crewed rigs to customers on a daily rate (i.e., "dayrate") basis. Dayrate contracts can be for a specified period of time or the time required to drill a specified well or number of wells. Revenues and expenses from dayrate drilling operations, which are classified under contract drilling services, are recognized on a per-day basis as the work progresses. Lump-sum fees received as compensation for the cost of relocating drilling rigs from one major operating area to another, whether received up-front or upon termination of the drilling contract, are recognized as earned, which is generally over the term of the related drilling contract.
The Company also designs and executes specific offshore drilling or well-completion programs for customers at fixed prices under short-term "turnkey" contracts. Revenues and expenses from turnkey contracts, which are classified under drilling management services, are earned and recognized upon completion of each contract using the completed contract method of accounting.
DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the Company may make use of derivative financial instruments to manage its exposure to fluctuations in cash flows, interest rates or foreign currency exchange rates. The Company accounts for its derivative financial instruments pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities -- an amendment of FASB Statement No. 133." Derivative instruments held by the Company at December 31, 2002, include dayrate contracts on two of the Company's drilling rigs that are indexed to exchange-traded oil futures contracts, various commodity caps, swaps and floors used to mitigate the Company's exposure to fluctuations in the fair values of these dayrate contracts, and an interest rate swap related to the Company's 7 1/8% Notes due 2007 (see Note 7).
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FOREIGN CURRENCY TRANSACTIONS
The United States dollar is the functional currency for all of the Company's operations. Realized and unrealized foreign currency transaction gains and losses are recorded in income.
The Company may be exposed to the risk of foreign currency exchange losses in connection with its foreign operations. Such losses are the result of holding net monetary assets (cash and receivables in excess of payables) denominated in foreign currencies during periods of a strengthening U.S. dollar. The Company attempts to lessen the impact of exchange rate changes by requiring customer payments to be primarily in U.S. dollars, by keeping foreign cash balances at minimal levels and by not speculating in foreign currencies.
INCOME TAXES
The Company is a Cayman Islands company. The Cayman Islands does not impose corporate income taxes. Consequently, income taxes have been provided based on the tax laws and rates in effect in the countries in which the operations are conducted and income is earned. The income taxes in these jurisdictions vary substantially. The Company's effective tax rate for financial statement purposes will continue to fluctuate from year to year as the Company's operations are conducted in different taxing jurisdictions. The Company's ability to realize the benefit of its deferred tax assets requires that the Company achieve certain future earnings levels prior to the expiration of its NOL carryforwards.
The Company has not provided for U.S. deferred taxes on the unremitted earnings of its U.S. subsidiaries and their controlled foreign corporations ("U.S. Subsidiaries") that are permanently reinvested. Should the Company make a distribution from the unremitted earnings of its U.S. Subsidiaries, the Company would be required to record additional U.S. deferred taxes.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock option and stock-based compensation plans using the intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion No. 25. Accordingly, the Company computes compensation cost for each employee stock option granted as the amount by which the quoted market price of the Company's common stock on the date of grant exceeds the amount the employee must pay to acquire the stock. The amount of compensation cost, if any, is charged to income over the vesting period. No compensation cost has been recognized for options granted under the Company's Employee Share Purchase Plan or for any of the Company's outstanding stock options, all of which have exercise prices equal to the market price of the stock on the date of grant. The Company does, however, recognize compensation cost for all grants of performance-based stock awards (see Note 8).
Had compensation cost for the Company's stock-based compensation plans been determined based on fair values as of the dates of grant, the Company's net income and earnings per share would have been reported as
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follows (earnings per share amounts for 2000 have been restated to reflect the effect of the exchange ratio as outlined in the Merger):
The pro forma figures in the preceding table may not be representative of pro forma amounts in future years.
The weighted average per share fair value of stock options as of the grant date was $15.82 in 2002, $13.29 in 2001 and $11.73 in 2000. The weighted average per share fair value of the outstanding Santa Fe International stock options at November 20, 2001 was $4.94. The per share value of options granted under the Employee Share Purchase Plan was $9.61 for 2002. The per share fair value of the Company's performance-based stock awards as of the grant date was $23.92 in 2002, $29.36 in 2001 and $19.32 in 2000.
Estimates of fair values of stock options, options granted under the Employee Share Purchase Plan and performance-based stock awards on the grant dates for purposes of calculating the pro forma data in the table above were computed using the Black-Scholes option-pricing model based on the following assumptions:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the carrying values of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the period. Actual results could differ from such estimates.
NOTE 3 -- INVESTMENTS
At December 31, 2002 and 2001, the Company had investments in commercial paper, money market funds and Eurodollar time deposits that were classified as held-to-maturity and carried at amortized cost. These investments are classified as Marketable securities on the Consolidated Balance Sheets. Due to the short-term
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maturities of these instruments, the fair value of these investments in debt securities approximated their carrying value; therefore, there were no unrealized holding gains or losses as of December 31, 2002 or 2001.
In addition, the Company had other investments in debt and equity securities classified as available-for-sale held in connection with certain nonqualified pension plans. These investments, which were included in Other assets at December 31, are disclosed in the table that follows:
NOTE 4 -- LONG-TERM DEBT
Long-term debt as of December 31 consisted of the following:
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(1) The balance at December 31, 2002, includes a mark-to-market adjustment of $1.6 million as part of fair value hedge accounting related to the Company's fixed-for-floating interest rate swap (see Note 7).
The Zero Coupon Convertible debentures were issued at a price of $499.60 per debenture, which represents a yield to maturity of 3.5% per annum to reach an accreted value at maturity of $1,000 per debenture. The Company has the right to redeem the debentures in whole or in part on or after June 23, 2005, at a price equal to the issuance price plus accrued original issue discount through the date of redemption. Each debenture is convertible into 8.125103 GlobalSantaFe ordinary shares (4,875,062 total shares, as restated to reflect the effect of the exchange ratio established in the Merger) at the option of the holder at any time prior to maturity, unless previously redeemed. Holders have the right to require the Company to repurchase the debentures on June 23, 2005, June 23, 2010, and June 23, 2015, at a price per debenture of $594.25 on June 23, 2005, $706.82 per debenture on June 23, 2010, and $840.73 per debenture on June 23, 2015. These prices represent the accreted value through the date of repurchase. The Company may pay the repurchase price with either cash or shares or a combination thereof.
No principal payments are required with respect to either the 7 1/8% Notes or the 7% Notes prior to their final maturity date. The Company may redeem the 7 1/8% Notes and the 7% Notes in whole at any time, or in part from time to time, at a price equal to 100% of the principal amount thereof plus accrued interest, if any, to the date of
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redemption, plus a premium, if any, relating to the then-prevailing Treasury Yield and the remaining life of the notes.
The indentures relating to the Zero Coupon Convertible Debentures, 7 1/8% Notes and 7% Notes contain limitations on Global Marine's ability to incur indebtedness for borrowed money secured by certain liens and to engage in certain sale/leaseback transactions. The Zero Coupon Convertible Debentures, 7 1/8% Notes and 7% Notes continue to be obligations solely of Global Marine. The Company has not guaranteed the Notes.
All of the Company's debt is unsecured and unsubordinated and ranked equally in right of payment with all other unsecured and unsubordinated obligations of the Company.
Subsequent to the balance sheet date, on February 11, 2003, the Company issued $250 million of 5% Notes due 2013 (the "5% Notes") in a private placement and received cash proceeds of approximately $247.6 million after deduction for discount, underwriting fees and estimated expenses. The Company plans to use the funds for general corporate purposes. The 5% Notes are unsecured senior obligations of the Company and rank equally with all other senior unsecured indebtedness of the Company. The 5% Notes, however, have a junior position to the claims of holders of the indebtedness and capital lease obligations of Global Marine and its subsidiaries on Global Marine's assets and earnings. The indenture relating to the 5% Notes contains limitations on the Company's ability to incur indebtedness for borrowed money secured by certain liens and on its ability to engage in certain sale/leaseback transactions. The indenture, however, does not restrict the Company's ability to incur additional senior indebtedness. Interest on the 5% Notes is payable on February 15 and August 15 of each year beginning on August 15, 2003. No principal payments are required with respect to the 5% Notes prior to their final maturity date.
The Company may redeem the 5% Notes in whole or in part, at any time and from time to time, at a price equal to 100% of the principal amount plus accrued interest to the redemption date, plus a premium relating to the then-prevailing Treasury Yield and the remaining life of the notes. The Company has agreed to file a registration statement with the Securities and Exchange Commission relating to an exchange offer to exchange the 5% Notes for registered notes having substantially identical terms.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
At December 31, 2002, the Company had office space and equipment under operating leases with remaining terms ranging from approximately one to seven years. Certain of the leases may be renewed at the Company's option, and some are subject to rent revisions based on the Consumer Price Index or increases in building operating costs. In addition, at December 31, 2002, the Company had the Glomar Explorer drillship under capital lease through 2026. Total rent expense was $73.9 million for 2002, $116.9 million for 2001, and $114.4 million for 2000. Included in rent expense was the rental of offshore drilling rigs used in the Company's turnkey operations totaling $55.0 million for 2002, $109.9 million for 2001, and $108.4 million for 2000.
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Future minimum rental payments with respect to the Company's lease obligations as of December 31, 2002, were as follows:
As of December 31, 2002, the Company had operating leases in place for Santa Fe International's offices in Dallas, Texas and Aberdeen, Scotland and Global Marine's office in Lafayette, Louisiana, which have been closed as part of the restructuring program described in Note 1. These costs are included in the table above. Costs associated with the closure of Santa Fe International's offices in Dallas and Aberdeen totaling approximately $11.5 million were recognized as a liability assumed in the Merger and included in the cost of acquisition in accordance with SFAS No. 141, "Business Combinations." Estimated costs related to the closure of Global Marine's Lafayette office along with the consolidation of the Company's offices in Aberdeen and Houston totaling approximately $4.3 million were accrued as part of Restructuring costs in the consolidated financial statements for the year ended December 31, 2001. These estimated costs assumed that Global Marine's Houston office would be subleased to a third party. The Company, however, has not yet entered into such a transaction. Consequently, the Company has revised its original estimate of closure costs associated with Global Marine's former office space to $7.2 million.
In March 2002, the Company entered into a sublease agreement with BP America Inc. for the Company's current executive offices located at 15375 Memorial Drive, Houston, Texas. This sublease expires in September 2009. Lease payments pursuant to this sublease total $2.3 million per year. The Company has also entered into an 11-year lease for the Company's Aberdeen, Scotland office. Payments pursuant to this lease total GBP597,000 (approximately $1 million) per year.
Subsequent to the balance sheet date, in January 2003, the Company entered into a lease-leaseback arrangement with a European bank related to the Company's Britannia cantilevered jackup. Pursuant to this arrangement, the Company leased the Britannia to the bank for a five-year term for a lump-sum payment of approximately $37 million, net of origination fees of $1.5 million. The bank then leased the rig back to the Company for a five-year term, under which the Company will make annual lease payments of $8.0 million. The Company has classified this arrangement as a capital lease.
CAPITAL COMMITMENTS
The Company has definitive contracts with PPL Shipyard PTE, Ltd. of Singapore for construction of two ultra-deepwater semisubmersibles and two high-performance jackups, with options for two additional similarly
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priced semisubmersibles, and up to four additional jackups, the first two of which are similarly priced. The Company does not intend to exercise any of these options. Contractual obligations in connection with construction of the two ultra-deepwater semisubmersibles, excluding capitalized interest, capital spares, startup expenses and mobilization costs, are expected to total approximately $570 million, or $285 million per rig. Of the $570 million, $297 million had been incurred as of December 31, 2002. Contractual obligations in connection with construction of the two high-performance jackups, excluding capitalized interest, capital spares, startup expenses and mobilization costs, are expected to total approximately $264 million, or $132 million per rig. Of the $264 million, $154 million had been incurred as of December 31, 2002.
LEGAL PROCEEDINGS
Applied Drilling Technology Inc. ("ADTI"), a wholly owned subsidiary of the Company, was a defendant in a civil lawsuit filed in September 2001 by Newfield Exploration Co. ("Newfield") and its insurance underwriters in the United States District Court for the Eastern District of Louisiana. The lawsuit arose out of damage caused to an offshore well owned by Newfield, which had been drilled by ADTI pursuant to a turnkey contract. The lawsuit has been dismissed with prejudice by the court, and Newfield has waived its right to appeal.
In 1998, the Company entered into fixed-price contracts with Harland and Wolff Shipbuilding and Heavy Industries Limited (the "Shipbuilder") totaling $315 million for the construction of two dynamically positioned, ultra- deepwater drillships, the Glomar C.R. Luigs and the Glomar Jack Ryan, originally scheduled for delivery in the fourth quarter of 1999 and first quarter of 2000, respectively. Pursuant to two 20-year capital lease agreements, the Company subsequently novated the construction contracts for the drillships to two financial institutions (the "Lessors"), which now own the drillships and lease them to the Company. The Company acted as the Lessors' construction supervisor and has paid on behalf of the Lessors, or provided for the Lessors' payment of, all amounts it believes were required under the terms of the contracts, including payments for all approved change orders.
In November 1999, because the Company was concerned about the Shipbuilder's financial viability and the satisfactory completion of the drillships in a timely manner, the Company agreed to provide additional funding to the Shipbuilder for completion of the two drillships in exchange for certain assurances by the Shipbuilder and its parent, Fred. Olsen Energy ASA (the "Funding Agreement"). The Company ultimately provided a total of $103.1 million under the Funding Agreement.
The Lessors and the Company were involved in arbitration proceedings with the Shipbuilder, in which the Shipbuilder claimed breach of contract in connection with the Company's obligations regarding design of the drillships, the timely delivery to the Shipbuilder of owner furnished equipment and information relating thereto, change orders and additional compensation for increased steelweight. The Company was involved in an arbitration proceeding with Fred. Olsen Energy ASA ("Olsen") relating to disputes under the Funding Agreement. In February 2003, the Lessors and the Company agreed to pay an additional $8.2 million to the Shipbuilder and Olsen in exchange for settlement of all outstanding disputes between the parties. This amount is to be adjusted by reference to the award to be issued by the arbitration tribunal for the cost of completion arbitration in respect of the Glomar Jack Ryan, subject to a minimum amount of $7.7 million and a maximum amount of $10.0 million. In the event that the Company is required to pay the maximum amount of $10.0 million, total cost of construction will be $485.1 million for the two drillships.
The Company filed a claim in 1993 in the amount of $40.6 million with the United Nations Compensation Commission ("UNCC") for losses suffered as a result of the Iraqi invasion of Kuwait in 1990. The claim was for the loss of four rigs and associated equipment, lost revenue, and miscellaneous expenditures. The Governing Council of the UNCC has awarded the Company compensation in the amount of $22.1 million in a final, non-appealable, adjudication of the claim. The Company has been advised that the funds will be paid upon receipt of a formal request, which has now been made.
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ENVIRONMENTAL MATTERS
The Company has certain potential liabilities in the area of claims under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state acts regulating cleanup of various waste disposal sites, including those described below. CERCLA is intended to expedite the remediation of hazardous substances without regard to fault. Potentially responsible parties ("PRPs") for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several.
The Company has been named as a PRP in connection with a site located in Santa Fe Springs, California known as the Waste Disposal, Inc. site. The Company and other PRPs have agreed with the U.S. Environmental Protection Agency ("EPA") and the U.S. Department of Justice ("DOJ") to settle their potential liabilities for this site by agreeing to perform the remaining remediation required by EPA. The form of the agreement is a consent decree which has not yet been lodged or entered by the court. Although the settlement is not final until the decree is entered by the court, the Company expects the decree to be entered by the Court. The parties to the settlement have entered into a participation agreement which makes the Company liable for an estimated 7.7% of the remediation costs. Although the remediation costs cannot be determined with certainty until the remediation is complete, the consultant advising the group with respect to remediation believes that the remediation costs will be such that the Company's share of the remaining remediation costs will be less than $800,000. There are additional potential liabilities related to the site, but these cannot be quantified, and there is no reason at this time to believe that they will be material.
The Company has also been named as a PRP in connection with a site in California known as the Casmalia Resources Site. The Company and other PRPs have entered into an agreement with EPA and DOJ to resolve their potential liabilities. This agreement is also not final until the agreed-upon Consent Decree is entered by the court, but it is likely that it will be. Under the settlement, the Company is not likely to owe any substantial additional amounts for this site beyond what the Company has already paid. There are additional potential liabilities at this site, but these cannot be quantified at this time, and there is no reason to believe that they will be material.
The Company has been named as one of many PRPs in connection with a site located in Carson, California formerly maintained by Cal Compact Landfill. On February 15, 2002, the Company was served with a required 90-day notification that eight California cities, on behalf of themselves and other PRPs, intend to commence an action against the Company under the Resource Conservation and Recovery Act ("RCRA"). On April 1, 2002, a Complaint was filed by the cities against the Company and others alleging that they have liabilities in connection with the site. However, the Complaint has not been served. The site was closed in or around 1965, and the Company does not have sufficient information to enable it to assess its potential liability, if any, for this site.
Resolutions of other claims by the U.S. Environmental Protection Agency, the involved state agency and/or PRPs are at various stages of investigation. These investigations involve determinations of:
- the actual responsibility attributed to the Company and the other PRPs at the site;
- appropriate investigatory and/or remedial actions; and
- allocation of the costs of such activities among the PRPs and other site users.
The Company's ultimate financial responsibility in connection with those sites may depend on many factors, including:
- the volume and nature of material, if any, contributed to the site for which the Company is responsible;
- the numbers of other PRPs and their financial viability; and
- the remediation methods and technology to be used.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
It is difficult to quantify with certainty the potential cost of these environmental matters, particularly in respect of remediation obligations. Nevertheless, based upon the information currently available, the Company believes that its ultimate liability arising from all environmental matters, including the liability for all other related pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, is adequately accrued and should not have a material effect on the Company's financial position or ongoing results of operations. Estimated costs of future expenditures for environmental remediation obligations are not discounted to their present value.
CONTINGENCIES AND OTHER LEGAL MATTERS
Pursuant to the capital lease agreements on the Company's two dynamically positioned, ultra-deepwater drillships, the Glomar C.R. Luigs and the Glomar Jack Ryan discussed above in "Legal Proceedings," the Company has deposited with three large foreign banks (the "Payment Banks") amounts equal to the progress payments that the Lessors were required to make under the construction contracts, less a lease benefit of approximately $62 million (the "Defeasance Payment"). In exchange for the deposits, the Payment Banks have assumed liability for making rental payments required under the leases and the Lessors have legally released the Company as the primary obligor of such rental payments. Accordingly, the Company has recorded no capital lease obligations on its balance sheet with respect to the two drillships. The Glomar C.R. Luigs and the Glomar Jack Ryan began operating under contract in April and December 2000, respectively.
The Company has interest rate risk in connection with its fully defeased financing leases for the Glomar Jack Ryan and Glomar C. R. Luigs. The Defeasance Payment earns interest based on the British Pound Sterling three-month LIBOR, which approximated 8.00% at the time of the agreement. Should the Defeasance Payment earn less than the assumed 8.00% rate of interest, the Company will be required to make additional payments as necessary to augment the annual payments made by the Payment Banks pursuant to the agreements. If the December 31, 2002, LIBOR rate of 4.02% were to continue over the next ten years, the Company would be required to fund an additional estimated $50 million during that period. Any additional payments made by the Company pursuant to the financing leases would increase the carrying value of its leasehold interest in the rigs and therefore be reflected in higher depreciation expense over their then-remaining useful lives. The Company does not expect that, if required, any additional payments made under these leases would be material to its financial position or results of operations in any given year.
There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the Company is a party or of which any of its property is the subject.
NOTE 6 -- ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of the Company's accumulated other comprehensive loss were as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The minimum pension liability adjustments in the table above are shown net of a tax benefit of $14.8 million in 2002 and a tax benefit of $6.4 million in 2001. The tax effect of the unrealized holding gains and losses was immaterial for all periods presented.
NOTE 7 -- DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS
Two of the Company's cantilevered jackup rigs are currently operating under similar dayrate contracts that expose the Company to commodity price risk. These two-year agreements, expiring in May 2004 and October 2004, respectively, each contain a variable-dayrate formula linked to crude oil prices, whereby dayrates earned under these contracts increase or decrease in response to increases or decreases in oil prices. Dayrates under these agreements are calculated using a sliding scale formula based on the arithmetic average of the daily closing price of Light Sweet Crude on the New York Mercantile Exchange ("NYMEX"), subject to a maximum of $28.00 per barrel and a minimum of $12.00 per barrel.
The variable-dayrate formula contained in these agreements is comprised of multiple embedded derivative financial instruments as defined in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The fair values of these embedded derivatives fluctuate in response to changes in oil prices. The net fair value of the embedded derivatives in each of these contracts was an asset of approximately $2.5 million at December 31, 2002, or $5.0 million in the aggregate.
As part of the Company's overall risk management strategy, the Company has entered into a number of commodity caps, swaps and floors designed to mitigate its exposure to fluctuations in fair values of the embedded derivatives in these contracts resulting from changes in oil prices. The fair values of these derivative financial instruments represented a total liability of $5.0 million at December 31, 2002.
The Company manages its fair value risk related to its long-term debt by using interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. Under these interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between the fixed-rate and floating-rate amounts, calculated by reference to an agreed upon notional amount.
In October 2002, the Company entered into a fixed-for-floating interest rate swap with a notional amount of $50 million, effective October 2002 through September 2007. This interest rate swap is intended to manage a portion of the fair value risk related to the Company's 7 1/8% Notes due 2007. Under the terms of this swap, the Company has agreed to pay the counterparty an interest rate equal to the six-month LIBOR rate plus 330 basis points on the notional amount and the Company will receive the fixed 7 1/8% rate. The estimated fair value of this swap was an asset of approximately $1.6 million at December 31, 2002. The Company has designated this swap as a fair value hedge.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's $300 million principal amount 7 1/8% Notes due 2007, based on quoted market prices, was $342.4 million at December 31, 2002, compared to the carrying amount of $301.3 million. The estimated fair value of the Company's $300 million principal amount 7% Notes due 2028, based on quoted market prices, was $333.9 million at December 31, 2002, compared to the carrying amount of $296.7 million. The estimated fair value of the Company's $600 million Zero Coupon Convertible Debentures due 2020, based on quoted market prices, was $326.2 million at December 31, 2002, compared to the carrying amount of $327.2 million.
The fair values of the Company's cash equivalents, marketable securities, trade receivables, and trade payables approximated their carrying values due to the short-term nature of these instruments (see Note 3).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
The market for the Company's services and products is the offshore oil and gas industry, and the Company's customers consist primarily of major integrated international oil companies and independent oil and gas producers. The Company performs ongoing credit evaluations of its customers and has not historically required material collateral. The Company maintains reserves for potential credit losses, and such losses have been within management's expectations.
The Company's cash deposits were distributed among various banks in the areas of the Company's operations throughout the world as of December 31, 2002. In addition, the Company had commercial paper, money-market funds and Eurodollar time deposits with a variety of financial institutions with strong credit ratings. As a result, the Company believes that credit risk in such instruments is minimal.
NOTE 8 -- STOCK-BASED COMPENSATION PLANS
The Company has stock-based compensation plans under which it may grant shares of the Company's ordinary shares or options to purchase a fixed number of shares. Vesting periods for stock options and performance-based stock awards granted under the Company's various stock-based compensation plans range from two to four years. Stock options expire ten years after the grant date.
As a result of the Merger, all options to purchase Global Marine stock outstanding as of November 20, 2001, the effective date of the Merger, became immediately exercisable and were converted into options to purchase GlobalSantaFe Ordinary Shares. The number of GlobalSantaFe Ordinary Shares issuable upon exercise of these options is calculated by multiplying the number of shares of Global Marine originally issuable upon exercise of the option by the conversion ratio (0.665) as outlined in the merger agreement. The exercise price is calculated by dividing the original exercise price of the Global Marine options by the conversion ratio. All options to purchase Santa Fe International ordinary shares that were outstanding as of the Merger date also became immediately exercisable pursuant to the terms of the merger agreement.
At December 31, 2002, there were a total of 6,528,801 shares available for future grants under the Company's various stock-based compensation plans, including 327,486 shares reserved for issuance under the Company's Employee Share Purchase Plan.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
A summary of the status of stock options granted, as adjusted for the conversion ratio as outlined in the merger agreement, is presented below:
All stock options granted in 2000 through 2002 had exercise prices equal to the market price of the Company's ordinary shares on the date of grant.
The weighted average per share fair value of options as of the grant date was $15.82 in 2002, $13.29 in 2001 and $11.73 in 2000. The weighted average per share fair value of the outstanding Santa Fe International options at November 20, 2001 was $4.94.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information with respect to stock options outstanding at December 31, 2002:
EMPLOYEE SHARE PURCHASE PLAN
The Company maintains the GlobalSantaFe Corporation 1997 Employee Share Purchase Plan (the "Share Purchase Plan"). The Share Purchase Plan 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, substantially all covered employees 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 the grant, or the date of exercise, whichever is less. Options granted under the Share Purchase Plan are exercisable on the date one year after the date of grant. Generally, participants pay option exercise prices through payroll deductions made ratably throughout the year. The Company granted options to purchase a total of 263,713 ordinary shares in 2002 under the Share Purchase Plan. The fair value of options granted under the Share Purchase Plan as of the grant date was $9.61 per share for 2002.
PERFORMANCE-BASED STOCK AWARDS
The Company offers ordinary shares to certain key employees at nominal or no cost to the employee. Under the Company's current plan, which covers grants for 2002 in the table below, the exact number of shares that each employee receives is dependent on Company performance over a one-year period as measured against performance goals with respect to operating performance and cash flow, among other measures. The performance period applicable to each offer ends on December 31 of the year of the grant. Data for 2001 and 2000 represent
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares granted under the Global Marine plan. A summary of the status of performance-based stock awards (prior year periods have been adjusted for the conversion ratio) is presented in the table that follows:
The amount of compensation cost included in income for the Company's performance-based stock awards was $1.3 million in 2002, $4.6 million in 2001, and $3.4 million in 2000.
NOTE 9 -- RETIREMENT PLANS
PENSIONS
The Company has defined benefit pension plans covering all of its U.S. employees and a portion of its non-U.S. employees. For the most part, benefits are based on the employee's length of service and average earnings for the highest consecutive 60 months of compensation during the last ten years of service. Substantially all benefits are paid from funds previously provided to trustees. The Company is the sole contributor to the plans, with the exception of one of the Company's plans in the U.K., and its funding objective is to fund participants' benefits under the plans as they accrue, taking into consideration future salary increases. Net periodic pension cost for 2002 includes full-year costs related to the Santa Fe International plans. The components of net periodic pension benefit cost for the Company's pension plans were as follows:
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(1) Special termination costs related to certain pension plans are included in Restructuring costs in 2001. See discussion in Note 1.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the changes in the projected benefit obligation and assets for all plans for the year ended December 31 and a reconciliation of the plans' funded status at year-end.
During 2002, the Company made certain amendments to its pension plans, including, among other things, calculations of retirement benefit formulas, the amount of compensation included in these calculations and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
formulas used for the determination of early retirement benefits. These amendments were made to conform benefits received under the Global Marine and Santa Fe International plans. Benefits paid for 2002 included approximately $11.4 million of lump-sum termination payments made as a result of the Merger.
The following table provides information related to those plans that were underfunded as of December 31. In the table, the projected benefit obligation ("PBO") is the actuarially computed present value of earned benefits based on service to date and includes the estimated effect of future salary increases. The accumulated benefit obligation ("ABO") is the actuarially computed present value of earned benefits based on service to date, but differs from the PBO in that it is based on current salary levels.
The Company has established grantor trusts to provide funding for benefits payable under certain nonqualified plans. Assets in the trusts, which are irrevocable and can only be used to pay such benefits, with certain exceptions, are excluded from plan assets in the preceding tables in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." The fair market value of such assets was $27.3 million at December 31, 2002, and $19.2 million at December 31, 2001 (see Note 3).
The expected long-term rate of return on plan assets used to compute pension cost was 9% for 2002, 2001 and 2000. The assumed rate of increase in future compensation levels was 4.5% for 2002 and 2001, and 6.0% for 2000. The discount rate used to compute the projected benefit obligation was 6.75% for 2002, 7.25% for 2001 and 7.5% for 2000.
The Company has a defined contribution ("401(k)") savings plan in which substantially all of the Company's U.S. employees are eligible to participate. Company contributions to the 401(k) savings plan are based on the amount of employee contributions. The Company matches 100% of each participant's first six percent of compensation contributed to the plan. Charges to expense with respect to this plan totaled $7.4 million for 2002, $5.2 million for 2001 and $3.9 million for 2000.
OTHER POSTRETIREMENT BENEFITS
The Company provides health care benefits to all retirees who are U.S. citizens and to certain non-U.S. citizen employees who were participants in a U.S. based health care plan at the time of their retirement and elect to enroll for continued coverage. Generally, employees who have reached the age of 55 and have rendered a minimum of five years of service are eligible for health care benefits. For the most part, health care benefits require a contribution from the retiree. Prior to July 1, 2002, the Company also provided term life insurance to certain retirees, both U.S. citizens and non-U.S. citizens. Liabilities for postretirement health care and life insurance benefits were $13.9 million at December 31, 2002, and $13.3 million at December 31, 2001.
The weighted-average annual assumed rate of increase in the per capita cost of covered medical benefits was 11% in 2002 and 2001, and 7% in 2000. This 11% rate is expected to decrease ratably to 5% in 2009 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, 2002, 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 $0.6 million and $0.5 million, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit by approximately $35,000 and $32,000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- INCOME TAXES
Income before income taxes was comprised of the following:
Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. The Company is a Cayman Islands company. The Cayman Islands does not impose corporate income taxes. The Company's U.S. subsidiaries are subject to a U.S. tax rate of 35%.
At December 31, the provision for income taxes consisted of the following:
A reconciliation of the differences between the Company's income tax provision computed at the appropriate statutory rate and the Company's reported provision for income taxes follows:
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(1) The 2001 amount is comprised of the net change in the valuation allowance for the year of $105.9 million less $25.4 million of valuation allowance acquired from Santa Fe International at the time of the Merger.
The Company intends to permanently reinvest all of the unremitted earnings of its U.S. Subsidiaries in their businesses. As a result, the Company has not provided for deferred taxes on $1.2 billion of cumulative unremitted
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings at December 31, 2002. Should the Company make a distribution from the unremitted earnings of its U.S. Subsidiaries, the Company would be required to record additional U.S. deferred taxes. It is not practicable to estimate the amount of deferred tax liability associated with these unremitted earnings.
In certain circumstances, management expects that, due to the changing demands of the offshore drilling markets, the Company's mobile assets are more likely than not to be redeployed to other locations before those assets operate in certain jurisdictions long enough to give rise to future tax consequences. As a result, no deferred tax liability has been recognized on the earnings from these assets. In addition, the Company has not provided for U.S. deferred taxes on foreign earnings that could be taxed in the United States upon the occurrence of certain events in a future period. The Company plans, subject to approval by its Board of Directors, to implement a business restructuring that will better integrate the operations of the Company. This integration will change the U.S. tax classification of certain of its subsidiaries before the occurrence of any events that could give rise to a tax liability. Should management's expectations change regarding the length of time a mobile asset will be operating in a given location, or should the Company choose not to implement the planned business restructuring, the Company would be required to record additional deferred taxes that could have a material adverse effect on its financial position, results of operations and cash flows.
Deferred tax assets and liabilities are recorded in recognition of the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
In 2002, based upon currently anticipated market conditions in the United States, the Company did not adjust the valuation allowance against the U.S. NOL carryforwards.
In 2001, the valuation allowance increased by approximately $105.9 million, of which $102.9 million related to U.S. NOL carryforwards. The $102.9 million increase in the valuation allowance was partially offset by a $55.7 million adjustment to prior years' tax contingencies, resulting in a net charge in the fourth quarter of 2001 of $47.2 million. The Company recorded a valuation allowance against its U.S. NOL carryforwards because the Company believes it is more likely than not that it will not generate sufficient U.S. taxable income to fully utilize its NOL carryforwards before they expire. Reduced activity levels in the U.S. Gulf of Mexico in 2001 contributed
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to a decrease in the expected future earnings of the Company's U.S. subsidiaries. Also, as a result of the Merger, the expiration dates of the Company's NOL carryforwards were accelerated by one year, decreasing the number of years available to fully utilize the NOL carryforwards before they expire. In addition, the Company had previously recorded a valuation allowance against the net deferred tax assets in certain foreign jurisdictions. These net deferred tax assets decreased by approximately $22.4 million in 2001 and increased by $21.1 million in 2002. The valuation allowance recorded against the net deferred tax asset changed accordingly in each respective year.
At December 31, 2002, the Company had $540.4 million of U.S. NOL carryforwards. In addition, the Company has $15.2 million of non-expiring U.S. alternative minimum tax credit carryforwards. Both the NOL carryforwards and the U.S. alternative minimum tax credit carryforwards can be used to reduce the Company's U.S. federal income taxes payable in future years. The NOL carryforwards subject to expiration expire as follows (in millions):
In addition, the Company also had $63.5 million and $75.6 million of non-expiring NOL carryforwards in the United Kingdom and Trinidad and Tobago, respectively.
The Company's ability to realize the benefit of its deferred tax asset requires that the Company achieve certain future earnings levels prior to the expiration of its NOL carryforwards. The Company has established a valuation allowance against the future tax benefit of a portion of its NOL carryforwards and could be required to further adjust that valuation allowance if market conditions change materially and future earnings are, or are projected to be, significantly different from its current estimates. The Company's NOL carryforwards are subject to review and potential disallowance upon audit by the tax authorities in the jurisdictions where the loss was incurred.
As of December 31, 2002, Global Marine and its U.S. subsidiaries had approximately $540.4 million of NOL carryforwards for United States federal income tax purposes. This amount included an NOL carryforward of $408.4 million at November 19, 2001, related to Global Marine. The Company also had approximately $168.4 million of NOL carryforwards from foreign jurisdictions. The Company can provide no assurance that the full amount of its NOL carryforwards will be allowed. The NOL carryforwards are scheduled to expire from 2003 to 2023. Section 382 of the U.S. Internal Revenue Code could limit the future use of the NOL carryforwards if the direct and indirect ownership of stock of the relevant company changes by more than 50% in certain circumstances over a prescribed testing period. The Internal Revenue Service may take the position that the Merger caused a greater-than-50% ownership change with respect to Global Marine (see Note 1). If the Merger did not result in such an ownership change, changes in the ownership of the Company's stock following the Merger could result in such an ownership change. In the event of such an ownership change, the Section 382 rules would limit the utilization of the NOL carryforwards of Global Marine in each taxable year ending after the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ownership change to an amount equal to a federal long-term tax-exempt rate published monthly by the Internal Revenue Service, multiplied by the fair market value of all of Global Marine's stock at the time of the ownership change. For this purpose, the value of Global Marine's stock could also be subject to adjustments, thereby further limiting the ability of the Company to utilize its NOL carryforwards in each taxable year thereafter.
NOTE 11 -- EARNINGS PER ORDINARY SHARE
A reconciliation of the numerators and denominators of the basic and diluted per share computations for net income follows:
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(1) Earnings per share data for 2000 has been restated to reflect the effect of the exchange ratio of 0.665 established in the Merger.
The computation of diluted earnings per share excludes outstanding stock options with exercise prices greater than the average market price of the Company's ordinary shares for the year, because the inclusion of such options would be antidilutive. The number of antidilutive options that were excluded from diluted earnings per ordinary share and could potentially dilute basic earnings per ordinary share in the future were 9,401,866 shares in 2002, 4,668,834 shares in 2001, and 610,641 shares in 2000. Antidilutive options for 2000 have been restated to reflect the effect of the exchange ratio of 0.665 established in the merger agreement.
As discussed in Note 4, holders of the Zero Coupon Convertible Debentures have the right to require the Company to repurchase the debentures on June 23, 2005, June 23, 2010, and June 23, 2015. The Company may pay the repurchase price with either cash or shares or a combination thereof. The Company does not anticipate using ordinary shares to satisfy any such future purchase obligation.
NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 2002, the Company incurred approximately $12.8 million of capital expenditures related to its rig building program that had been accrued but not paid as of December 31, 2002. These amounts are included in Accounts payable in the Consolidated Balance Sheet at December 31, 2002.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 2002, the Company's Board of Directors declared a regular quarterly cash dividend in the amount of $0.0325 per ordinary share. The dividend in the amount of $7.6 million was paid on January 15, 2003, to shareholders of record as of the close of business on December 31, 2002.
On November 20, 2001, Global Marine merged with a subsidiary of Santa Fe International. The following table summarizes the allocation of the purchase price to the specific assets and liabilities of Santa Fe International based on estimates of fair values and costs at the time of the Merger.
In June 2001, the Company completed the sale of the Glomar Beaufort Sea I concrete island drilling system to Exxon Neftegas Limited for $45.0 million. The Company received $5.0 million in cash at closing with the remainder of the purchase price in the amount of $40.0 million, plus interest, being due on or before March 1, 2003. The Company received approximately $35 million (including accrued interest), net of $7 million in sales commissions and payments to minority owners, during the first quarter of 2002, representing full payment of the remaining purchase price.
Cash payments for interest, net of amounts capitalized, totaled $21.9 million, $41.3 million and $29.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. Cash payments for income taxes, net of refunds, totaled $51.8 million, $14.5 million and $6.6 million for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE 13 -- SEGMENT AND GEOGRAPHIC INFORMATION
The Company has three lines of business, each organized along the basis of services and products and each with a separate management team. The Company's three lines of business are reported as separate operating segments and consist of contract drilling, drilling management services and oil and gas. The Company's contract drilling business provides crewed, mobile offshore and land drilling rigs to oil and gas operators on a daily rate basis and is also referred to as dayrate drilling. The drilling management services business, also referred to as turnkey drilling, designs, develops, and executes specific offshore drilling programs and delivers a logged or cased hole to an agreed depth for a guaranteed price. The Company's oil and gas business participates in exploration and production activities, principally in order to facilitate the acquisition of turnkey contracts for the Company's drilling management services operations.
The Company evaluates and measures segment performance on the basis of operating income. Segment operating income is inclusive of intersegment revenues. Such revenues, which have been eliminated from the consolidated totals, are recorded at transfer prices, which are intended to approximate the prices charged to external customers. Segment operating income consists of revenues less the related operating costs and expenses and excludes interest expense, interest income and corporate expenses. Segment assets consist of all current and long-lived assets, exclusive of affiliate receivables and investments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information by operating segment, together with reconciliations to the consolidated totals, is presented in the following table:
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(1) Revenues for prior periods have been reclassified to include certain reimbursements received for out-of-pocket expenditures as revenues (Note 1).
(2) Restructuring costs are discussed in Note 1.
(3) Capital expenditures for 2002 include approximately $12.8 million of capital expenditures related to the Company's rig building program that had been accrued but not paid as of December 31, 2002 (Note 12).
One customer accounted for more than 10% of consolidated revenues for 2002: ExxonMobil provided $267.7 million of contract drilling revenues and $0.1 million of drilling management services revenues. In 2001, two customers each accounted for more than 10% of consolidated revenues: ExxonMobil provided $180.1 million of contract drilling revenues, and BP provided $146.0 million of contract drilling revenues and $1.6 million
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of drilling management services revenues. No single customer accounted for more than ten percent of consolidated revenues in 2000.
The Company is incorporated in the Cayman Islands; however, all of its operations are located in countries other than the Cayman Islands. Revenues and assets by geographic area in the tables that follow were attributed to countries based on the physical location of the assets. The mobilization of rigs among geographic areas has affected area revenues and long-lived assets over the periods presented. Revenues from external customers by geographic areas were as follows:
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(1) Individually less than 5% of consolidated revenues for 2002, 2001 and 2000.
Long-lived assets by geographic areas, based on their physical location at December 31, were as follows:
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(1) Individually less than 10% of consolidated long-lived assets at December 31, 2002 and 2001.
NOTE 14 -- TRANSACTIONS WITH AFFILIATES
In connection with its initial public offering, Santa Fe International entered into an intercompany agreement with Kuwait Petroleum Corporation and SFIC Holdings, which agreement was amended in connection with the Merger. The intercompany agreement, as amended, provides that, as long as Kuwait Petroleum Corporation and its affiliates, in the aggregate, own at least 10% of the Company, the consent of SFIC Holdings is required to change the jurisdiction of any existing subsidiary of the Company or incorporate a new subsidiary in any jurisdiction in a manner materially adversely affecting the rights or interests of Kuwait Petroleum Corporation and its affiliates or reincorporate the Company in another jurisdiction. The intercompany agreement, as amended,
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also provides SFIC Holdings the right to designate up to three representatives to the Company's Board of Directors based on SFIC Holdings' ownership percentage in the Company and provides SFIC Holdings rights to access certain information concerning the Company. SFIC Holdings currently holds approximately 18.7% of the outstanding ordinary shares of the Company.
The Company provides contract drilling services in Kuwait to the Kuwait Oil Company, K.S.C. ("KOC"), a subsidiary of Kuwait Petroleum Corporation, 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 containing terms and conditions and rates of compensation that materially approximate those 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 providing same, subject to the availability of the maintenance facilities, through the current term of the drilling contracts and extensions thereof as may be agreed. In relation to its drilling business in Kuwait, the Company has an agency agreement with a subsidiary of Kuwait Petroleum Corporation 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.
During the year ended December 31, 2002, the Company earned revenues from KOC and its affiliate for performing contract drilling services in the ordinary course of business totaling $62.7 million and paid $586,000 of agency fees pursuant to such agency agreement. During the period following the Merger until December 31, 2001, the Company earned revenues from KOC and its affiliate totaling $6.9 million and paid $80,000 of agency fees. At December 31, 2002 and 2001, the Company had accounts receivable from affiliates of Kuwait Petroleum Corporation of $11.1 million and $9.9 million, respectively.
NOTE 15 -- SUMMARIZED FINANCIAL DATA -- GLOBAL MARINE INC. AND SUBSIDIARIES
Global Marine Inc. ("Global Marine"), a wholly owned subsidiary of GlobalSantaFe Corporation, is a domestic and international offshore drilling contractor, with a fleet of 33 mobile offshore drilling rigs worldwide. Global Marine, through its subsidiaries, provides offshore drilling services on a dayrate basis in the U.S. Gulf of Mexico and internationally, provides drilling management services on a turnkey basis, and also engages in oil and gas exploration, development and production activities, principally in order to facilitate the acquisition of turnkey contracts for its drilling management services operations.
Summarized financial information for Global Marine and its consolidated subsidiaries follows:
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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(1) Prior period amounts have been reclassified to include certain reimbursements received for out-of-pocket expenses as revenues per EITF Issue 01-14 (Note 1). These amounts were previously recorded as a reduction of the related expenses incurred.
(2) Includes capitalized lease obligation.
NOTE 16 -- RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets," SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted the provisions of SFAS No. 142 and SFAS No. 144 effective January 1, 2002.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The key provisions of SFAS No. 142:
- Eliminate the amortization of goodwill and indefinite-lived intangible assets;
- Require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired); and
- Require that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
At December 31, 2002, Goodwill in the Company's Condensed Consolidated Balance Sheet totaled approximately $386.9 million, substantially all of which was recorded in connection with the Merger (see Note 1). The Company has defined reporting units within its contract drilling segment based upon economic and market characteristics of these units. All of the goodwill recorded in connection with the Merger has been allocated to the jackup drilling fleet reporting unit, as these rigs were the primary source of value in the Merger discussions and negotiations. The estimated fair value of this reporting unit for purposes of the Company's annual goodwill impairment testing is based upon the present value of its estimated future net cash flows, utilizing a discount rate based upon the Company's cost of capital. The Company has completed its goodwill impairment testing for 2002 and was not required to record a goodwill impairment loss. The amortization of goodwill existing before the Merger was immaterial.
SFAS No. 143 establishes accounting standards for the recognition and measurement of liabilities in connection with asset retirement obligations, and is effective for fiscal years beginning after June 15, 2002. The Company does not anticipate that the required adoption of SFAS No. 143 in 2003 will have a material effect on its results of operations, financial position or cash flows.
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144, among other things:
- Establishes criteria to determine when a long-lived asset is held for sale, including a group of assets and liabilities that represents the unit of accounting for a long-lived asset classified as held for sale;
- Provides guidance on the accounting for a long-lived asset if the criteria for classification as held for sale are met after the balance sheet date but before the issuance of the financial statements; and
- Provides guidance on the accounting for a long-lived asset classified as held for sale.
The adoption of SFAS No. 144 did not have a material impact on the Company's results of operations, financial position or cash flows.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The Company adopted SFAS No. 145 in the second quarter of 2002. SFAS No. 145, among other things, addresses the criteria for the classification of extinguishment of debt as an extraordinary item and addresses the accounting treatment of certain sale-leaseback transactions. The adoption of SFAS No. 145 did not have a material impact on the Company's results of operations, financial position or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not anticipate that the required adoption of SFAS No. 146 will have a material effect on its results of operations, financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides three alternative methods of transition and disclosure requirements for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The three alternative methods available are: (1) the prospective method, (2) the modified prospective method, and (3) the retroactive restatement method. Under the prospective method, which is available only for companies converting to SFAS No. 123 prior to December 16, 2003, compensation cost is recognized for awards granted, modified or settled after the beginning of the year of adoption. The modified prospective method recognizes compensation costs from the beginning of the year of adoption as if the fair value method had been used for all grants awarded, modified or settled in fiscal years beginning after December 15, 1994. The retroactive restatement method provides that all periods presented are restated to reflect compensation costs as if the fair value method had been used for all grants awarded, modified or settled in fiscal years beginning after December 15, 1994. In addition to providing compensation cost recognition methods, SFAS No. 148 also requires certain disclosures, including method used for each period presented, a description of the method used to report the change in accounting principle and continuing tabular presentation of proforma net income and earnings per share effects for any awards outstanding under the intrinsic method of Accounting Principles Board Opinion No. 25. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148, and is currently evaluating the potential effects of the implementation of the transition requirements of this Statement on its financial position and results of operations.
In November 2002, the FASB issued Interpretation No. 45; "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This Interpretation provides disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued and clarifies that a liability for the fair value of the obligation undertaken in issuing certain guarantees shall be recognized at inception of the guarantee. FIN 45 does
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not, however, prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes that it has no material guarantees within the scope of FIN 45 other than the fully defeased financing leases for two of its drillships (see Note 5).
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This interpretation provides guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights, or variable-interest entities ("VIEs"). FIN 46 is effective for public entities with VIEs created before February 1, 2003, at the beginning of the first interim or annual reporting period starting after June 15, 2003. For VIEs created after January 31, 2003, FIN 46 is effective immediately. Upon the applicable effective date, FIN 46 will become the guidance that determines whether consolidation is required or whether the variable-interest accounting model must be used to account for existing and new entities. The Company does not believe that it currently has any VIEs within the scope of FIN 46.
CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
In the following table, the Company's operating results for 2002 reflect the operations of the combined company. The Company's operating results for the fourth quarter of 2001 include Global Marine's operations for the full quarter and Santa Fe International's operations from the merger date (42 days), while the Company's quarterly operating results for the first three quarters of 2001 represent Global Marine only. The consolidated selected quarterly financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and the notes thereto included under "Item 8. Financial Statements and Supplementary Data."
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(1) Revenues for the first quarter of 2002 and all 2001 periods have been reclassified pursuant to EITF Issue 01-14 (Note 1).
(2) Per share data of Global Marine prior to the Merger has been restated to reflect the effect of the exchange ratio of 0.665 established in the merger agreement.
(3) The Company established a valuation allowance in the fourth quarter 2001 against a tax asset related to its United States net operating loss (NOL) carryforwards. As a result of the Merger, the Company's NOL expirations were accelerated by a year. In addition, reduced activity levels in the U.S. Gulf of Mexico in 2001 contributed to a decrease in the expected future earnings of the Company's U.S. subsidiaries.
(4) In the fourth quarter 2001, the Company's Board of Directors declared a regular quarterly cash dividend of $0.0325 per ordinary share. Global Marine historically did not pay dividends on its common stock.
(5) Data for 2001 represents the high and low share prices of Global Marine common shares up to the merger date, as adjusted to reflect the exchange ratio of 0.665 established in the Merger.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of GlobalSantaFe Corporation:
Our audits of the consolidated financial statements referred to in our report dated March 21, 2003, appearing in the 2002 Annual Report on Form 10-K of GlobalSantaFe Corporation and subsidiaries also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas March 21, 2003
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As permitted by General Instruction G, the information called for by this item with respect to the Company's directors, and the information required by this item and Item 405 of Regulation S-K with respect to filings under Section 16 of the 1934 Securities Exchange Act, is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. Information with respect to the Company's executive officers required by Item 401 of Regulation S-K is set forth in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
As permitted by General Instruction G, the information called for by this item is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As permitted by General Instruction G, the information called for by this item is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As permitted by General Instruction G, the information called for by this item is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company completed its evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following are included as exhibits to this Annual Report on Form 10-K (Commission File No. 1-14634). Exhibits filed herewith are so indicated by a "+". Exhibits incorporated by reference are so indicated by parenthetical information.
*10.47 Trust Under Santa Fe International Corporation Nonqualified Plans, dated January 3, 1995, between the Company and Wachovia Bank of North Carolina, N.A. (incorporated herein by this reference to Exhibit 10.57 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). *10.48 Amendment to Trust under Santa Fe International Corporation Nonqualified Plans, dated December 1, 1999 (incorporated herein by this reference to the Company's Annual Report on Form 20-F for the calendar year ended December 31, 1999). *10.49 GlobalSantaFe Annual Incentive Management Plan for 2002 (incorporated herein by this reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). *10.50 Global Marine Personal Financial Planning Assistance Program for Senior Executive Officers, adopted August 16, 2001 Amendment (incorporated herein by this reference to Exhibit 10.1 of Global Marine Inc.'s Quarterly Report on Form 10-Q (Commission File No. 1-5471) for the quarter ended September 30, 2001). +*10.51 Employment Agreement dated as of January 8, 2002, by and among Global SantaFe Corporate Services Inc., GlobalSantaFe Corporation and Douglas C. Stegall; and Employment Agreement Amendment thereto dated as of November 22, 2002. +21.1 List of Subsidiaries. +23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 99.1 Corporate Governance Policy of GlobalSantaFe Corporation, adopted May 14, 2002 (incorporated herein by this reference to Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 99.2 Press Release dated August 6, 2002, announcing a share repurchase program (incorporated herein by this reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated August 7, 2002).
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+ Filed herewith.
* Indicates management contract or compensatory plan or arrangement.
The Company hereby undertakes, pursuant to Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to the Securities and Exchange Commission on request agreements defining the rights of holders of long-term debt of the Company and its consolidated subsidiaries not filed herewith in accordance with said Item.
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the last quarter of 2002:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GLOBALSANTAFE CORPORATION (Registrant)
Date: March 26, 2003 By: /s/ W. MATT RALLS ------------------------------------ (W. Matt Ralls) Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CERTIFICATIONS
I, C. Stedman Garber, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of GlobalSantaFe Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ C. STEDMAN GARBER, JR. -------------------------------------- C. Stedman Garber, Jr. President and Chief Executive Officer
Date: March 26, 2003
CERTIFICATIONS
I, W. Matt Ralls, certify that:
1. I have reviewed this annual report on Form 10-K of GlobalSantaFe Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ W. MATT RALLS -------------------------------------- W. Matt Ralls Senior Vice President and Chief Financial Officer
Date: March 26, 2003
EXHIBIT INDEX
1. Copies of the exhibits listed below are submitted with this Annual Report on Form 10-K, immediately following this index.
2. All other exhibits listed in Item 14(a)(3) are incorporated by reference in this Annual Report on Form 10-K, as stated in Item 14(a)(3). Descriptions of these exhibits are incorporated herein by this reference to Item 14(a)(3) of this Report.