1
EXHIBIT 13
Rowan Companies, Inc. and Subsidiaries
TWELVE YEAR FINANCIAL REVIEW
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RATIOS) 1993 1992 1991 1990
- -------------------------------------------------- ---------- ---------- ---------- ----------
OPERATIONS
Revenues:
Drilling $ 271,022 $ 162,121 $ 170,739 $ 180,118
Aircraft operations 82,174 87,877 101,433 111,992
---------- ---------- ---------- ----------
Total 353,196 249,998 272,172 292,110
---------- ---------- ---------- ----------
Costs and expenses:
Drilling operations 211,095 162,816 147,853 130,845
Aircraft operations 68,882 74,347 82,364 88,182
Depreciation, depletion and amortization 51,918 51,367 52,954 50,702
General and administrative 13,940 12,092 11,739 9,549
---------- ---------- ---------- ----------
Total 345,835 300,622 294,910 279,278
---------- ---------- ---------- ----------
Income (loss) from operations 7,361 (50,624) (22,738) 12,832
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (25,361) (26,254) (21,379) (21,601)
Less interest capitalized
Gain on disposals of property and equipment 1,955 731 1,660 3,996
Interest income 2,348 2,658 4,763 8,635
Other-net 150 165 127 178
---------- ---------- ---------- ----------
Other income (expense)-net (20,908) (22,700) (14,829) (8,792)
---------- ---------- ---------- ----------
Income (loss) before income taxes (13,547) (73,324) (37,567) 4,040
Provision (credit) for income taxes (288) 429 1,174 2,081
---------- ---------- ---------- ----------
Income (loss) before extraordinary charge (13,259) (73,753) (38,741) 1,959
Extraordinary charge from redemption of debt (5,627)
---------- ---------- ---------- ----------
Net income (loss) $ (13,259) $ (73,753) $ (44,368) $ 1,959
---------- ---------- ---------- ----------
Per share of common stock:
Net income (loss):
Primary $ (.17) $ (1.01) $ (.61)* $ .03
---------- ---------- ---------- ----------
Fully diluted $ (.17) $ (1.01) $ (.61)* $ .03
---------- ---------- ---------- ----------
Cash dividends $ - $ - $ - $ -
---------- ---------- ---------- ----------
FINANCIAL POSITION
Working capital $ 172,117 $ 61,397 $ 125,996 $ 134,393
---------- ---------- ---------- ----------
Property and equipment-at cost:
Drilling equipment 950,538 939,793 913,379 885,264
Aircraft and related equipment 166,791 162,001 158,361 138,327
Other 81,636 79,801 76,251 73,504
Construction in progress
---------- ---------- ---------- ----------
Total 1,198,965 1,181,595 1,147,991 1,097,095
---------- ---------- ---------- ----------
Property and equipment-net 507,193 537,819 552,481 549,608
Total assets 765,263 684,301 895,889 739,133
Capital expenditures 21,989 39,528 85,618 59,905
Long-term debt 207,137 212,907 220,764 153,621
Common stockholders' equity 460,300 375,754 445,368 485,748
---------- ---------- ---------- ----------
STATISTICAL INFORMATION
Current ratio 4.90 2.47 1.71** 4.00
Long-term debt/common stockholders' equity .45 .57 .50 .32
Book value per share of common stock $ 5.49 $ 5.13 $ 6.11 $ 6.69
---------- ---------- ---------- ----------
* Includes $.08 per share effect of extraordinary charge.
** At December 31, 1991, the $125,000,000 principal amount of the
Company's 133 3/4% Senior Notes had been called for redemption and
appeared as a current liability. If redemption had occurred prior to
year-end, the current ratio would have been 3.61.
2
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RATIOS) 1989 1988 1987 1986
- -------------------------------------------------- ---------- ---------- ---------- ----------
OPERATIONS
Revenues:
Drilling $ 128,818 $ 144,018 $ 90,145 $ 113,651
Aircraft operations 97,446 72,667 52,984 53,512
---------- ---------- ---------- ----------
Total 226,264 216,685 143,129 167,163
---------- ---------- ---------- ----------
Costs and expenses:
Drilling operations 119,182 126,288 113,348 139,177
Aircraft operations 75,943 62,571 48,996 52,846
Depreciation, depletion and amortization 52,062 60,324 61,312 62,525
General and administrative 7,690 7,313 6,766 7,100
---------- ---------- ---------- ----------
Total 254,877 256,496 230,422 261,648
---------- ---------- ---------- ----------
Income (loss) from operations (28,613) (39,811) (87,293) (94,485)
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (23,682) (23,920) (23,463) (17,208)
Less interest capitalized 237 319 2,013
Gain on disposals of property and equipment 2,320 27,578 1,814 962
Interest income 12,709 4,002 4,917 6,786
Other-net 161 345 407 399
---------- ---------- ---------- ----------
Other income (expense)-net (8,492) 8,242 (16,006) (7,048)
---------- ---------- ---------- ----------
Income (loss) before income taxes (37,105) (31,569) (103,299) (101,533)
Provision (credit) for income taxes 672 32 (34,009) (53,002)
---------- ---------- ---------- ----------
Income (loss) before extraordinary charge (37,777) (31,601) (69,290) (48,531)
Extraordinary charge from redemption of debt
---------- ---------- ---------- ----------
Net income (loss) $ (37,777) $ (31,601) $ (69,290) $ (48,531)
---------- ---------- ---------- ----------
Per share of common stock:
Net income (loss):
Primary $ (.52) $ (.44) $ (1.12) $ (.93)
---------- ---------- ---------- ----------
Fully diluted $ (.52) $ (.44) $ (1.12) $ (.93)
---------- ---------- ---------- ----------
Cash dividends $ - $ - $ - $ .06
---------- ---------- ---------- ----------
FINANCIAL POSITION
Working capital $ 143,963 $ 152,335 $ 76,779 $ 77,265
---------- ---------- ---------- ----------
Property and equipment-at cost:
Drilling equipment 867,540 863,450 946,127 941,726
Aircraft and related equipment 107,985 97,500 98,860 100,339
Other 70,598 88,039 88,113 90,795
Construction in progress
---------- ---------- ---------- ----------
Total 1,046,123 1,048,989 1,133,100 1,132,860
---------- ---------- ---------- ----------
Property and equipment-net 542,995 585,365 697,144 751,225
Total assets 737,826 800,684 827,785 875,004
Capital expenditures 22,945 18,318 14,123 102,094
Long-term debt 163,473 181,330 184,187 200,125
Common stockholders' equity 479,287 515,491 546,078 505,115
---------- ---------- ---------- ----------
STATISTICAL INFORMATION
Current ratio 4.55 4.07 2.88 3.46
Long-term debt/common stockholders' equity .34 .35 .34 .40
Book value per share of common stock $ 6.64 $ 7.16 $ 7.59 $ 9.28
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RATIOS) 1985 1984 1983 1982
- -------------------------------------------------- ---------- ---------- ---------- ----------
OPERATIONS
Revenues:
Drilling $ 198,937 $ 143,094 $ 161,204 $ 354,482
Aircraft operations 73,581 55,281 45,273 47,151
---------- ---------- ---------- ----------
Total 272,518 198,375 206,477 401,633
---------- ---------- ---------- ----------
Costs and expenses:
Drilling operations 151,878 109,489 118,922 146,054
Aircraft operations 57,583 46,093 31,499 34,636
Depreciation, depletion and amortization 60,504 53,750 46,394 40,448
General and administrative 8,157 8,279 8,987 7,903
---------- ---------- ---------- ----------
Total 278,122 217,611 205,802 229,041
---------- ---------- ---------- ----------
Income (loss) from operations (5,604) (19,236) 675 172,592
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (19,242) (24,443) (11,032) (15,174)
Less interest capitalized 410 13,239 10,830 8,615
Gain on disposals of property and equipment 4,857 2,026 1,798 11,273
Interest income 5,501 4,201 3,998 11,019
Other-net 192 294 280 301
---------- ---------- ---------- ----------
Other income (expense)-net (8,282) (4,683) 5,874 16,034
---------- ---------- ---------- ----------
Income (loss) before income taxes (13,886) (23,919) 6,549 188,626
Provision (credit) for income taxes (10,189) (27,149) (9,980) 70,683
---------- ---------- ---------- ----------
Income (loss) before extraordinary charge (3,697) 3,230 16,529 117,943
Extraordinary charge from redemption of debt
---------- ---------- ---------- ----------
Net income (loss) $ (3,697) $ 3,230 $ 16,529 $ 117,943
---------- ---------- ---------- ----------
Per share of common stock:
Net income (loss):
Primary $ (.07) $ .06 $ .27 $ 2.33
---------- ---------- ---------- ----------
Fully diluted $ (.07) $ .06 $ .27 $ 2.18
---------- ---------- ---------- ----------
Cash dividends $ .11 $ .08 $ .08 $ .08
---------- ---------- ---------- ----------
FINANCIAL POSITION
Working capital $ 109,805 $ 77,750 $ 88,423 $ 67,934
---------- ---------- --------- ----------
Property and equipment-at cost:
Drilling equipment 857,862 879,561 744,088 606,551
Aircraft and related equipment 98,568 99,946 96,159 94,788
Other 89,493 80,491 71,452 70,900
Construction in progress 2,075 54,443 47,852
---------- ---------- --------- ----------
Total 1,047,998 1,059,998 966,142 820,091
---------- ---------- --------- ----------
Property and equipment-net 726,366 786,071 740,939 638,760
Total assets 916,885 928,985 888,748 788,832
Capital expenditures 53,039 152,034 158,988 185,577
Long-term debt 143,750 186,549 157,766 71,536
Common stockholders' equity 561,569 569,176 576,305 506,723
---------- ---------- --------- ----------
STATISTICAL INFORMATION
Current ratio 2.60 2.46 2.96 2.06
Long-term debt/common stockholders' equity .26 .33 .28 .14
Book value per share of common stock $ 10.28 $ 10.46 $ 10.48 $ 10.48
---------- ---------- --------- ----------
* Includes $.08 per share effect of extraordinary charge.
** At December 31, 1991, the $125,000,000 principal amount of the
Company's 133 3/4% Senior Notes had been called for redemption and
appeared as a current liability. If redemption had occurred prior to
year-end, the current ratio would have been 3.61.
3
Rowan Companies, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following analysis highlights the Company's operating results for the years
indicated (in millions):
1993 1992 1991
-------- ------- -------
Revenues:
Drilling $ 271.0 $ 162.1 $ 170.8
Aviation 82.2 87.9 101.4
-------- ------- -------
Total $ 353.2 $ 250.0 $ 272.2
-------- ------- -------
Operating Profit
(Loss)*:
Drilling $ 19.1 $ (40.4) $ (17.7)
Aviation 2.2 1.9 6.7
------- ------- -------
Total $ 21.3 $ (38.5) $ (11.0)
------- ------- -------
Net Income (Loss) $ (13.3) $ (73.8) $ (44.4)
======= ======= =======
* Income (loss) from operations before deducting general and administrative
expenses.
The state of fluctuation and continuing depressed conditions
prevailing in the drilling and aviation markets is reflected in all three
categories of financial data shown above. Factors adversely affecting the
drilling and aviation markets in which the Company operates, thereby depressing
its operating results during the three year period, included corporate
reorganizations and downsizings by major energy companies, increasing
regulations and drilling moratoriums by governments and volatile energy prices.
The decrease in the Company's net loss in 1993 in comparison to 1992 resulted
primarily from a significant increase in drilling revenues, spurred by improved
natural gas prices, which more than offset the increase in drilling expenses.
Also positively affecting the bottom line results were the $90.0 million in
revenues and $9.7 in incremental operating profit contributed by Total Project
Management, principally turnkey drilling. Operating results for 1992 were worse
than 1991 primarily because of the previously mentioned corporate
reorganizations and downsizings, increasing regulations and drilling
moratoriums and unusually low natural gas prices. The negative impact of these
factors in 1992, was partially offset by turnkey drilling, which generated
$15.5 million in revenues and an incremental operating profit of $2.9 million
in that year.
DRILLING OPERATIONS. The Company's drilling operating results are dependent on
rig rates and the level of utilization in its offshore drilling business
conducted primarily in the Gulf of Mexico and the North Sea. In turn, the rates
for and utilization of the Company's offshore rigs are impacted by the level of
offshore expenditures by energy companies.
The offshore drilling industry experienced a series of fluctuations
during the 1991-1993 period. In 1991, demand weakened in the two primary
markets in which the Company operates due to depressed energy prices. In the
Gulf of Mexico, curtailed drilling activity by energy companies as a result of
low natural gas prices significantly reduced utilization and day rates
beginning in the first quarter of 1991. In the North Sea, energy prices
remained more stable and, as a result, utilization and day rates were not
affected to the same extent during 1991 and early 1992. In late 1992,
conditions in the two markets moved in opposite directions. An improvement in
natural gas prices brought about an improvement in utilization levels and day
rates in the Gulf of Mexico, which has continued into the first quarter of
1994. Meanwhile, utilization and day rates declined in the North Sea due to
energy companies downsizing their drilling programs because of uncertainty
created by the changes in energy policies in the United Kingdom.
The effects of fluctuations in utilization and drilling rates are
reflected in the following analysis of contract drilling revenue changes (in
millions):
1992 to 1993 1991 to 1992
------------ ------------
Utilization $ 25.4 $ (9.1)
Drilling Rates 9.3 (11.2)
------ ------
These fluctuations combined with the growth of Total Project
Management operations resulted in a 67% increase in 1993 drilling revenues
compared to 1992. The effect of these fluctuations in 1992 more than offset
Total Project Management operations resulting in a 5% decrease in drilling
revenues compared to 1991.
The percentage changes in drilling operations expenses were a 30% and
10% increase in 1993 and 1992, respectively, primarily due to growth in Total
Project Management operations.
The number of marine rigs operated by the Company at the end of each
year in the 1991-1993 period and the rig utilization percentages (number of
days under contract as a percent of days the rig was available for service) for
each of those years are reflected in the schedule below:
1993 1992 1991
---- ---- ----
Jack-ups:
Number 20 20 20
Utilization 85% 70% 67%
Semi-submersible:
Number 1 1 1
Utilization 94% 37% 73%
Submersible Barges:
Number 3 3 3
Utilization 30% 22% 30%
In the Gulf Of Mexico drilling market, where the Company currently has
16 of its 24 marine rigs, three notable changes have been occurring. First, the
Gulf of Mexico is now the only domestic market in which large scale drilling
activity is occurring, because the U.S. government has imposed moratoriums on
drilling in most other domestic offshore areas. Second, many major
4
energy companies have downsized their domestic drilling organizations and have
generally exited the United States market for international markets,
notwithstanding improved domestic natural gas prices. Third, a growing number
of independent energy companies have become operators in this market, in part
because the Minerals Management Service of the U.S. government has modified the
process by which such companies are permitted to farm-in on existing leases. As
a result of the these changing conditions, the Company has moved towards Total
Project Management, an approach to drilling operations which emphasizes
drilling and completing wells on a turnkey basis.
Perceptible trends existing in the offshore drilling markets in which
the Company operates are shown below:
- --------------------------------------------------------------------------------
GULF OF MEXICO-Improving levels of exploration and development activity due to
generally stable natural gas prices remaining above $2.00 per Mcf
NORTH SEA-Generally stable drilling activity for jack-up rigs used in the
exploration and development of natural gas
EASTERN CANADA-Generally stable demand
TRINIDAD-Generally stable demand
- --------------------------------------------------------------------------------
The volatile nature of the various factors affecting the level of
offshore expenditures by major energy companies and shifts of such expenditures
between domestic and international markets prevent the Company from being able
to predict whether these market trends will continue, or their impact on the
results of drilling operations for 1994.
The drilling markets in which the Company competes frequently
experience significant changes in supply and demand. Drilling utilization and
day rates achievable in offshore markets are affected by changes in overall
exploration and development expenditures, as well as by shifts of such
expenditures between markets. These expenditures, in turn, are driven by
discoveries of oil and natural gas reserves, shifts in the political climate,
regulatory changes, seasonal weather patterns, contractual requirements under
leases or concessions and changes in oil and natural gas prices, the last being
perhaps the most disruptive of all. The Company can, as it has done in the
past, relocate its drilling rigs from one geographic area to another in
response to such changing market dynamics, but only when these moves are
economically justified.
Five of the Company's land rigs were under contract in northeast
Venezuela during all of 1993. One of the Company's arctic land rigs in Alaska
worked during the first quarter of 1993. The remaining four arctic land rigs
and the seven rigs in western Texas and Oklahoma were idle in 1993. The cost of
maintaining the idle land rigs is modest and the remaining investment in the
rigs is not significant.
AVIATION OPERATIONS. Although the Company continues to offer a diversity of
flight services, such as forest fire control, crew changes for commercial
fishing, flightseeing, airborne environmental surveys, commuter airline
services, medivac services, etc., the aviation division's operating results are
still heavily dependent upon helicopter activity associated with oil and
natural gas exploration and production, principally in Alaska and the Gulf of
Mexico. Thus, like the drilling division, the aviation division's level of
activity and rates for its services depend largely upon the level of
expenditures by energy companies.
Aviation revenues declined $5.7 million or 6% in 1993 compared to 1992
and $13.6 million or 13% in 1992 compared to 1991. Activity associated with
support for production facilities in the Gulf of Mexico declined during the
1991-1993 period due to depressed drilling activity, resulting from
reorganizations and downsizing of major energy companies coupled with their
concentration of drilling activities outside the United States.
Aviation division expenses declined 7% in 1993 compared to 1992 and
10% in 1992 compared to 1991. These changes are consistent with the decline in
revenues during the periods. The division has not been significantly impacted
by fluctuating fuel costs because its contracts generally provide for fuel cost
adjustments.
The number of aircraft operated by the aviation division of the
Company at the end of each year in the 1991-1993 period and the revenue hours
for each of those years are reflected in the schedule below:
1993 1992 1991
------ ------ ------
Twin Engine
Helicopters:
Number 63 64 67
Revenue Hours 29,715 31,370 45,262
Single Engine
Helicopters:
Number 31 30 26
Revenue Hours 10,150 10,700 8,773
Fixed-Wing
Aircraft:
Number 15 13 16
Revenue Hours 22,728 21,426 20,098
------ ------ ------
Excluded above are twin engine helicopters owned by the Company's
Dutch affiliate. The comparable statistics for those helicopters are: 1993-11
helicopters recording 8,420 revenue hours; 1992-11 helicopters recording 9,800
revenue hours and 1991-12 helicopters recording 1,750 revenue hours over the
last two months of that year.
Perceptible trends existing in the aviation markets in which the
Company operates are shown below:
- --------------------------------------------------------------------------------
ALASKA-Generally stable market conditions
GULF OF MEXICO-Moderately improving market conditions
NORTH SEA-Moderately reduced flight support activity
- --------------------------------------------------------------------------------
The Company cannot predict whether these market trends will continue.
Increases or decreases in energy company exploration and production activities,
as well as shifts of such activities from one market to another, can result in
changes in demand for flight services in the aviation markets in which the
Company competes. Seasonal weather patterns can also affect demand. To address
these market fluctuations, the Company can, as it has done in the past, move
aircraft from one market to another, but only when the likelihood of higher
returns makes such action economical.
5
MANUFACTURING OPERATIONS. In February 1994, the Company purchased the net
assets of Marathon LeTourneau Company for $52.1 million with $10.4 million cash
paid at the time of the purchase and the balance being seller-financed by
promissory notes bearing interest at 7% and payable at the end of five years.
The company operates a mini-steel mill that recycles scrap and produces alloy
steel and steel plate; a manufacturing facility that produces heavy equipment
for the mining and timber industries including, among other things, front-end
loaders up to 50 ton capacity and trucks under the registered trademark, Titan,
up to 240 ton capacity; and a marine division that has built over one-third of
all mobile offshore jack-up drilling rigs, including all twenty operated by
Rowan.
With revenues in excess of $95 million in 1993, LeTourneau was
profitable and generated a positive cash flow from operations. Management is
currently evaluating the product and service lines with the intention of
enhancing operating results in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Key balance sheet amounts and ratios for 1993 and 1992 were as follows (dollars
in millions):
December 31, 1993 1992
- ------------ ------- -------
Cash and cash equivalents $ 116.8 $ 29.6
Current assets $ 216.3 $ 103.1
Current liabilities $ 44.2 $ 41.7
Current ratio 4.90 2.47
Current maturities of
long-term debt $ 8.1 $ 7.9
Long-term debt $ 207.1 $ 212.9
Stockholders' equity $ 460.3 $ 375.8
Long-term debt/
stockholders' equity .45 .57
------- -------
In 1991, the Company entered into several financial transactions as
follows: the issuance of $200 million of 117-8% Senior Notes due 2001, the
obtaining of a $35 million unsecured revolving line of credit, the call for
redemption in January 1992 of $125 million of 133-4% Senior Notes due 1996 and
the purchase of a 49% interest in KLM Helikopters for approximately $26
million. See Note 2 of the Notes to Consolidated Financial Statements for
additional information pertinent to the redemption of the 133-4% Senior Notes.
In 1993, the Company sold 10 million shares of common stock using the
$92 million of net proceeds to expand the Company's turnkey drilling operations
and increase working capital. Also during 1993, the Company repaid $10 million
outstanding under the $35 million unsecured revolving line of credit, canceling
the line at the time of such repayment, and entered into a $3.6 million
nonrecourse bank loan agreement to finance the purchase of two fixed-wing
aircraft in conjunction with a five-year medivac service contract requiring the
use of three aircraft.
The Company estimates 1994 capital expenditures will be between $25
million and $35 million. These expenditures are in addition to the $52.1
million purchase of the net assets of Marathon LeTourneau. The Company may also
spend amounts to acquire additional aircraft as market conditions justify and
to upgrade existing offshore rigs.
Cash flow from operations has fluctuated during the three years ended
December 31, 1993 as a result of the operational fluctuations discussed
previously. Net cash provided by (used in) operations was $18.4 million in
1993, ($29.9 million) in 1992 and $26.3 million in 1991. Based on the current
level of operations and the previously discussed operational trends, it is
management's opinion that cash provided by operations and existing working
capital will be adequate to sustain planned capital expenditures and debt
service requirements for the foreseeable future. At January 31, 1994, the
Company had working capital of approximately $170 million.
At December 31, 1993, the provisions of the Company's existing
indebtedness would allow the Company to enter into sale/leaseback transactions
with a maximum value of approximately $72.2 million.
In 1991, 1992 and through the first five months of 1993, the Company
was prohibited from paying dividends on its common stock under the terms of its
Senior Notes. With the addition of the proceeds from the public offering of 10
million shares of common stock in June 1993, the Company's ability to pay cash
dividends was restored, although no dividends were paid. Furthermore, the
Company does not intend to pay dividends on its common stock until it achieves
and sustains a suitable level of profitability. See Note 5 of the Notes to
Consolidated Financial Statements.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions," which requires accrual of the cost of retiree
health care and other postretirement benefits during the years an employee
provides services. Prior to 1993, the Company recognized the cost of these
benefits as they were paid. The effect of adopting the statement for the year
ended December 31, 1993 was to increase net periodic postretirement benefit
cost and the net loss by approximately $3 million. See Note 6 of the Notes to
Consolidated Financial Statements.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," under which
deferred income tax assets and liabilities reflect the future tax consequences
of differences between the financial statement and tax bases of assets and
liabilities. The effect of adopting the statement on the Company's 1993
consolidated financial statements was not significant due to the expected
realization of sufficient tax loss carryforwards and other future deductible
amounts to offset future taxable amounts, based on the projected reversal of
such differences. See Note 7 of the Notes to Consolidated Financial Statements.
6
FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT
15 INDEPENDENT Rowan Companies, Inc. and Subsidiaries:
AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Rowan Companies,
16 CONSOLIDATED Inc. and Subsidiaries (the "Company") as of December 31, 1993 and 1992, and the
BALANCE SHEET related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
17 CONSOLIDATED STATEMENT 1993. These financial statements are the responsibility of the Company's
OF OPERATIONS management. Our responsibility is to express an opinion on these financial
statements based on our audits.
18 CONSOLIDATED STATEMENT
OF CHANGES IN We conducted our audits in accordance with generally accepted auditing
STOCKHOLDERS' EQUITY standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
19 CONSOLIDATED STATEMENT material misstatement. An audit includes examining, on a test basis, evidence
OF CASH FLOWS supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
20 NOTES TO CONSOLIDATED estimates made by management, as well as evaluating the overall financial
FINANCIAL STATEMENTS statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 1993 and 1992, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1993 in conformity
with generally accepted accounting principles.
As described in Notes 1 and 6 to the Consolidated Financial Statements,
the Company changed its methods of accounting for income taxes and the cost of
retiree health care effective January 1, 1993 to conform with the provisions of
Statements of Financial Accounting Standards Nos. 109 and 106, respectively.
DELOITTE & TOUCHE
Deloitte & Touche
Houston, Texas
March 7, 1994
7
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31,
--------------------------
(In thousands except share amounts) 1993 1992
- ----------------------------------- --------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 116,778 $ 29,550
Receivables-trade and other 83,429 54,562
Materials and supplies-at cost 14,002 14,672
Prepaid expenses 1,312 980
Costs of turnkey drilling contracts in progress 785 3,374
---------- ----------
Total current assets 216,306 103,138
---------- ----------
Investment In and Advances To 49% Owned Companies 33,569 33,596
---------- ----------
Property and Equipment-at cost:
Drilling equipment 950,538 939,793
Aircraft and related equipment 166,791 162,001
Other property and equipment 81,636 79,801
---------- ----------
Total 1,198,965 1,181,595
Less accumulated depreciation and amortization 691,772 643,776
---------- ----------
Property and equipment-net 507,193 537,819
---------- ----------
Other Assets and Deferred Charges 8,195 9,748
---------- ----------
Total $ 765,263 $ 684,301
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (Note 2) $ 8,127 $ 7,857
Accounts payable-trade 15,887 13,012
Other current liabilities (Note 4) 20,175 20,872
---------- ----------
Total current liabilities 44,189 41,741
---------- ----------
Long-Term Debt-less current maturities (Note 2) 207,137 212,907
---------- ----------
Other Liabilities (Notes 6 and 9) 30,409 26,449
---------- ----------
Deferred Credits:
Income taxes (Note 7) 4,314 5,117
Gain on sale/leaseback transactions (Note 9) 18,742 21,941
Other 172 392
---------- ----------
Total deferred credits 23,228 27,450
---------- ----------
Commitments and Contingent Liabilities (Note 9)
Stockholders' Equity:
Preferred stock, $1.00 par value:
Authorized 5,000,000 shares issuable in series:
Series I Preferred Stock, authorized 6,500 shares, none issued
Series II Preferred Stock, authorized 6,000 shares, none issued
Series A Junior Preferred Stock, authorized 1,500,000 shares, none issued
Common stock, $.125 par value; authorized 150,000,000 shares; issued 85,349,906
shares at December 31, 1993 and 74,645,344 shares at December 31, 1992 (Note 3) 10,669 9,331
Additional paid-in capital 385,937 289,470
Retained earnings (Note 5) 66,179 79,438
Less cost of treasury stock-1,457,919 shares in 1993 and 1992 2,485 2,485
Total stockholders' equity 460,300 375,754
---------- ----------
Total $ 765,263 $ 684,301
---------- ----------
See Notes to Consolidated Financial Statements.
8
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31,
--------------------------------------------
(In thousands except per share amounts) 1993 1992 1991
- --------------------------------------- ---------- ----------- -----------
Revenues:
Drilling operations $ 271,022 $ 162,121 $ 170,739
Aircraft operations 82,174 87,877 101,433
---------- ----------- -----------
Total 353,196 249,998 272,172
---------- ----------- -----------
Costs and Expenses:
Drilling operations 211,095 162,816 147,853
Aircraft operations 68,882 74,347 82,364
Depreciation and amortization 51,918 51,367 52,954
General and administrative 13,940 12,092 11,739
---------- ----------- -----------
Total 345,835 300,622 294,910
---------- ----------- -----------
Income (Loss) From Operations 7,361 (50,624) (22,738)
---------- ----------- -----------
Other Income (Expense):
Interest expense (25,361) (26,254) (21,379)
Gain on disposals of property and equipment 1,955 731 1,660
Interest income 2,348 2,658 4,763
Other-net 150 165 127
---------- ----------- -----------
Other income (expense)-net (20,908) (22,700) (14,829)
---------- ----------- -----------
Income (Loss) Before Income Taxes (13,547) (73,324) (37,567)
Provision (credit) for income taxes (Note 7) (288) 429 1,174
---------- ----------- -----------
Income (Loss) Before Extraordinary Charge (13,259) (73,753) (38,741)
Extraordinary charge from redemption of debt (Note 2) (5,627)
---------- ----------- -----------
Net Income (Loss) $ (13,259) $ (73,753) $ (44,368)
---------- ----------- -----------
Earnings (Loss) Per Share of Common Stock (Note 1):
Income (loss) before extraordinary charge $ (.17) $ (1.01) $ (.53)
Extraordinary charge (.08)
---------- ----------- -----------
Net Income (Loss) $ (.17) $ (1.01) $ (.61)
---------- ----------- -----------
See Notes to Consolidated Financial Statements.
9
Rowan Companies, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 1993, 1992 and 1991
------------------------------------------------------------------------
Common Stock
------------------------------------------
Issued In Treasury Additional
---------------- -------------------- Paid-in Retained
(In thousands) Shares Amount Shares Amount Capital Earnings
- -------------- ------ ------ ------ ------ ---------- --------
Balance, January 1, 1991 74,087 $ 9,261 1,458 $ 2,485 $ 281,413 $197,559
Exercise of stock options 240 30 209
Value of services rendered by
participants in the Nonqualified
Stock Option Plans (Note 3) 3,749
Net loss (44,368)
------ ------- ----- ------- --------- --------
Balance, December 31, 1991 74,327 9,291 1,458 2,485 285,371 153,191
Exercise of stock options 318 40 279
Value of services rendered by
participants in the Nonqualified
Stock Option Plans (Note 3) 3,820
Net loss (73,753)
------ ------- ----- ------- --------- --------
Balance, December 31, 1992 74,645 9,331 1,458 2,485 289,470 79,438
Exercise of stock options 531 66 464
Value of services rendered by
participants in the Nonqualified
Stock Option Plans (Note 3) 4,282
Conversion of subordinated debentures 174 22 978
Sale of common stock (Note 3) 10,000 1,250 90,743
Net loss (13,259)
------ ------- ----- ------- --------- --------
Balance, December 31, 1993 (Notes 3 and 5) 85,350 $10,669 1,458 $ 2,485 $ 385,937 $ 66,179
------ ------- ----- ------- --------- --------
See Notes to Consolidated Financial Statements.
10
Rowan Companies, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Years Ended December 31,
--------------------------------------------
(In thousands) 1993 1992 1991
- -------------- ----------- ----------- -----------
Cash Provided By (Used In):
Operations:
Net income (loss) $ (13,259) $ (73,753) $ (44,368)
Noncash charges (credits) to net income (loss):
Depreciation and amortization 51,918 51,367 52,954
Gain on disposals of property and equipment (1,955) (731) (1,660)
Compensation expense 4,282 3,820 3,749
Change in sale/leaseback payable (273) 1,668 1,360
Amortization of sale/leaseback gain (3,198) (3,207) (3,198)
Provision for pension and postretirement benefits 5,637 2,881 1,907
Other-net (785) (1,936) 2,545
Changes in current assets and liabilities:
Receivables-trade and other (28,867) (3,815) 2,789
Other current assets 2,927 (1,410) (365)
Current liabilities 774 (6,457) 7,093
Net changes in other noncurrent assets and liabilities 1,165 1,628 3,450
---------- ----------- -----------
Net cash provided by (used in) operations 18,366 (29,945) 26,256
---------- ----------- -----------
Investing activities:
Capital expenditures:
Property and equipment additions (21,989) (39,528) (57,619)
Investment in subsidiaries and affiliates (27,999)
Advances to affiliates (100) (1,956) (5,074)
Proceeds from disposals of property and equipment 2,929 2,686 2,602
---------- ----------- -----------
Net cash provided by (used in) investing activities (19,160) (38,798) (88,090)
---------- ----------- -----------
Financing activities:
Proceeds from issuance of 117-8% Senior Notes,
net of issue costs 195,572
Proceeds from common stock offering, net of issue costs 91,993
Proceeds from revolving credit arrangements 10,000 15,000
Payments on revolving credit arrangements (10,000) (15,000)
Proceeds from other borrowings 3,560
Repayments of other borrowings (8,061) (132,857) (7,857)
Premium on redemption of debt (3,750)
Other-net 530 319 239
---------- ----------- -----------
Net cash provided by (used in) financing activities 88,022 (136,288) 187,954
---------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 87,228 (205,031) 126,120
Cash and Cash Equivalents, Beginning of Year 29,550 234,581 108,461
---------- ----------- -----------
Cash and Cash Equivalents, End of Year $ 116,778 $ 29,550 $ 234,581
---------- ----------- -----------
See Notes to Consolidated Financial Statements.
11
Rowan Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Rowan Companies, Inc. and all of its wholly and majority owned
subsidiaries (the "Company").
The Company accounts for its investment in less-than-50% owned
companies using the equity method.
The excess of cost over the net assets of subsidiaries at dates of
acquisitions ($8,452,000) is being amortized over a thirty-year period. At
Decem-ber 31, 1993, the unamortized excess cost was $3,521,000.
Material intercompany transactions are eliminated in consolidation.
REVENUE RECOGNITION. Most drilling contracts are on a day rate basis, and
revenues and expenses are recognized as the work progresses. The Company also
utilizes turnkey contracts for certain of its drilling operations. Under these
short-term, fixed price arrangements, revenues and expenses are recognized on a
completed contract basis.
The Company's aviation services generally are provided under master
service agreements (which provide for incremental payments based on usage),
term contracts, or day-to-day charter arrangements. Aviation revenues and
expenses are recognized as services are rendered.
RECLASSIFICATIONS. Certain reclassifications have been made in the 1992 and
1991 amounts to conform with 1993 presentations.
STATEMENT OF CASH FLOWS. The Company generally considers all highly liquid
instruments with a maturity of three months or less when purchased to be cash
equivalents.
Noncash financing activities consisted of the conversion of $1,000,000
princi-pal amount of Series I Floating Rate Convertible Subordinated Debentures
into 173,913 shares of common stock in 1993. See Notes 2 and 3.
PROPERTY AND DEPRECIATION. For financial reporting purposes, the Company
computes depreciation using the straight-line method over the estimated useful
lives of the related assets as follows:
Salvage
Years Value
- ---------------------------------------------------------
Marine drilling equipment:
Semi-submersible 15 20%
Cantilever jack-ups 15 20%
Conventional jack-ups 12 20%
Barges 12 20%
Land drilling equipment 8 to 12 20%
Drill pipe and
tubular equipment 4 10%
Aviation equipment:
Aircraft 7 to 10 15% to 25%
Other 2 to 10 various
Other property and equipment 3 to 40 various
- ---------------------------------------------------------
The Company depreciates its equipment from the date placed in service
until the equipment is sold or becomes fully depreciated.
The Company capitalizes, during the construction period, an allocation
of the interest cost incurred during the period required to complete the asset.
Engineering salaries and other expenses related to the construction of drilling
equipment are also capitalized.
Expenditures for betterments are capitalized. Costs of assets sold or
retired and related amounts of accumulated depreciation and amortization are
eliminated from the accounts and the resulting gains or losses on disposal of
the assets are recorded in operations. Expenditures for maintenance and repairs
are charged to operations as incurred. Maintenance and repairs for 1993, 1992
and 1991 amounted to $32,326,000, $33,233,000 and $38,310,000, respectively.
INCOME TAXES. Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109")under which deferred income tax assets and liabilities reflect the future
tax consequences of differences between the financial statement and tax bases
of assets and liabilities. The cumulative effect of adopting SFAS 109 on the
Company's 1993 consolidated financial statements was not significant. In 1992
and 1991, the Company provided for income taxes based upon timing differences
between financial and taxable income under Accounting Principles Board Opinion
No. 11, which was superseded by SFAS 109.
EARNINGS (LOSS) PER COMMON SHARE. Earnings (loss) per share amounts are
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the year. Shares issuable upon conversion of the
Series I and Series II Floating Rate Convertible Subordinated Debentures are
excluded from the average number of shares for the computation of per share
amounts because their effect is antidilutive. Additionally, shares issuable
upon the exercise of stock options are excluded because their effect is
insignificant.
2. LONG-TERM DEBT
Long-term debt consisted of (in thousands):
December 31, 1993 1992
- ------------ --------- --------
117-8% Senior Notes due 2001 $ 200,000 $200,000
Nonrecourse note payable in
quarterly installments
through 1994 at various rates
collateralized by the drilling
rig Rowan Gorilla IV costing
approximately $81,500,000 7,857 15,714
Nonrecourse note payable
in quarterly installments
through 1998 with a final
balloon payment due at
maturity; bearing interest
at 7% and collateralized
by two aircraft costing
approximately 3,600,000 3,357
Series I subordinated
convertible debentures
due 1996 bearing interest
at 1-2% above prime rate 450 1,450
Series II subordinated
convertible debenture
due 1997 bearing interest
at 1-2% above prime rate 3,600 3,600
--------- --------
Total 215,264 220,764
Less current maturities 8,127 7,857
--------- --------
Remainder $ 207,137 $212,907
--------- --------
12
Maturities of long-term debt for the five years ending December 31,
1998 are as follows: 1994--$8,127,000, 1995--$289,000, 1996--$759,000,
1997--$3,932,000 and 1998--$2,157,000.
In December 1991, the Company concurrently issued $200,000,000
principal amount of 11 7/8% Senior Notes maturing in December 2001 (the "11
7/8% Notes") and called its outstanding 13 3/4% Senior Notes due 1996 (the "13
3/4% Notes"). The 13 3/4% Notes were redeemed in January 1992 at an aggregate
redemption price of $128,750,000 from the net proceeds from the sale of the 11
7/8% Notes. This redemption of the 13 3/4% Notes resulted in an extraordinary
charge of $5,627,000, or $.08 per share, comprised of a $3,750,000 call premium
and unamortized issue costs of $1,877,000.
The 11 7/8% Notes may be redeemed early, in whole or in part from time
to time at the Company's option, beginning December 1, 1996, upon payment of a
premium of 6% and descending 2% annually from that date to December 1, 1999,
when the Company may redeem them at the principal amount.
The nonrecourse note payable collateralized by the drilling rig, Rowan
Gorilla IV, bears interest at the following rates, depending on the Company's
election: a) 3/8% above the London Interbank offered rate, b) 5/8% to 7/8%
above the New York certificate of deposit dealer rate, or c) 1-4% above the
prime rate. At December 31, 1993, the interest rate was 3 3/4%.
In January 1993, the Company entered into a five-year nonrecourse loan
agreement with a bank to finance the purchase of two fixed-wing aircraft for
$3,560,000. The resulting notes payable are collateralized by the aircraft and
bear a fixed interest rate of 7%. The notes will be repaid in quarterly
installments through 1998, with a final balloon payment due at maturity.
The $450,000 principal amount of Series I Floating Rate Convertible
Subordinated Debentures is convertible into $450,000 Series I Preferred Stock,
which may be converted into an aggregate of 78,260 shares of the Company's
common stock at an initial conversion price of $5.75 per share. At December 31,
1993 the interest rate was 61-2%. See Note 3 for further information.
The $3,600,000 principal amount of the Series II Floating Rate
Convertible Subordinated Debenture is convertible into $3,600,000 Series II
Preferred Stock, which may be converted into an aggregate of 400,000 shares of
the Company's common stock at an initial conversion price of $9.00 per share.
At December 31, 1993, the interest rate was 61-2%. See Note 3 for further
information.
In May 1991, the Company guaranteed the indebtedness of an
unconsolidated affiliate under a $3,000,000 revolving credit agreement. At
December 31, 1993, $500,000 was outstanding under this agreement. Subsequent to
year-end, the $500,000 was repaid and the revolving credit agreement and
guarantee were canceled.
Interest payments for 1993, 1992 and 1991, were $24,867,000,
$32,965,000 and $19,780,000, respectively.
Certain debt agreements of the Company contain various provisions that
require an excess of current assets over current liabilities, require an excess
of stockholders' equity over consolidated funded indebtedness, and restrict
investments, sale/leaseback transactions, mergers, consolidations, sales of
assets, borrowings, creation of liens, purchases of the Company's capital
stock, and present and future common stock dividend payments. See Note 5 for
further information.
3. STOCKHOLDERS' EQUITY
The Company has two nonqualified stock option plans through which options have
been granted to certain key employees.
Under the terms of the Company's 1980 Nonqualified Stock Option Plan
(the "1980 Plan"), the Board of Directors granted options to purchase a total
of 1,000,000 shares of the Company's common stock. The Board of Director's
authority to grant additional options under the 1980 Plan expired on January
25, 1990.
Under the original terms of the 1988 Nonqualified Stock Option Plan
(the "1988 Plan"), the Board of Directors could grant before January 21, 1998
options to purchase a total of 2,000,000 shares of the Company's common stock.
Subsequently, at the April 1992 Annual Stockholders Meeting, the stockholders
of the Company approved an amendment to extend the term of the 1988 Plan to
January 21, 2003 and to increase to 7,000,000 the number of shares of common
stock that could be issued pursuant to options granted thereunder. At December
31, 1993, options for 3,816,504 shares had been granted at an exercise price of
$1.00 per share.
At December 31, 1993, 254 active, key employees had been granted
options. Options are exercisable to the extent of 25% after one year from date
of grant, 50% after two years, 75% after three years and 100% after four years.
For both the 1980 Plan and the 1988 Plan, all options not exercised expire ten
years after the date of grant.
For financial accounting purposes, the Company recognizes compensation
expense with respect to any given nonqualified option in an amount equal to the
difference between the market price per share and the option price per share on
the date of grant, multiplied by the number of shares granted. The compensation
is recorded as expense to the Company over the period of time during which the
employee performs services to earn the right to exercise the option and an
equal amount is credited to additional paid-in capital. The income tax effect
related to this compensation is recorded as an increase or decrease to the
provision for income taxes in the same period the compensation is recorded as
expense.
13
Stock option activity during 1993, 1992 and 1991 was as follows:
Number of Shares
----------------
1993 1992 1991
---- ---- ----
Stock options
outstanding,
beginning of year,
at $1.00 per share 1,490,475 1,492,900 1,357,375
Changes during
the year:
Granted,
at $1.00
per share 707,250 344,750 444,000
Exercised (530,650) (318,675) (239,225)
Expired (50,750) (28,500) (69,250)
---------- ---------- ---------
Stock options
outstanding,
end of year 1,616,325 1,490,475 1,492,900
--------- --------- ---------
Stock options
exercisable,
end of year 317,137 389,975 263,900
--------- --------- ---------
Stock options
available for grant,
end of year:
1988 Plan 4,417,821 5,074,321 393,571
--------- --------- ---------
The Rowan Companies, Inc. 1986 Convertible Debenture Incentive Plan
(the "Plan") provides for the issuance to key employees of up to $20,000,000 in
aggregate principal amount of the Company's floating rate convertible
subordinated debentures. The debentures are initially convertible into
preferred stock which has no voting rights (except as required by law or the
Company's charter), no dividend and a nominal liquidation preference. The
preferred stock is immediately convertible into common stock.
Since inception of the plan, debentures in the aggregate principal
amount of $9,625,000 have been issued by the Company. Out of the initial issue
of $5,125,000 principal amount of debentures in 1986, $450,000 were outstanding
at December 31, 1993 and are ultimately convertible into common stock at $5.75
per share for each $1,000 principal amount of debenture at any time through
June 13, 1996, unless earlier redeemed or the conversion privilege is
terminated. In 1987, the Company issued a debenture in the principal amount of
$4,500,000, of which $3,600,000 was outstanding at December 31, 1993. This
residual amount is ultimately convertible into common stock at $9.00 per share
for each $1,000 principal amount of the debenture at any time through September
10, 1997, unless earlier redeemed or the conversion privilege is terminated.
On February 25, 1992, the Company adopted a Stockholders Rights
Agreement to protect against coercive takeover tactics. The agreement provides
for the distribution to the Company's stockholders of one Right for each
outstanding share of common stock. Each Right entitles the holder to purchase
from the Company one one-hundredth of a share of new Series A Junior Preferred
Stock of the Company at an exercise price of $30. In addition, under certain
circumstances, each Right will entitle the holder to purchase securities of the
Company or an acquiring entity at 1/2 market value. The Rights are exercisable
only if a person or group acquires 15% or more of the Company's outstanding
common stock or makes a tender offer for 30% or more of the Company's
outstanding common stock. The Rights will expire on February 25, 2002. The
Company may generally redeem the Rights at a price of $.01 per Right at any
time until the 10th day following public announcement that a 15% position has
been acquired. One million five hundred thousand shares of the Company's
preferred stock have been designated Series A Junior Preferred Stock and
reserved for issuance upon exercise of the Rights.
In June 1993, the Company sold 10,000,000 shares of its common stock
in a public offering. Net proceeds from the sale were $91,993,000 after
deducting underwriting commissions of $3,850,000 and direct offering costs of
$407,000.
4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of (in thousands):
December 31, 1993 1992
- ------------ -------- -------
Gain on sale/leaseback
transactions $ 3,198 $ 3,198
Customer advances 1,039
Accrued liabilities:
Income taxes 596 802
Compensation and related
employee costs 9,082 9,507
Interest 2,018 1,979
Taxes and other 5,281 4,347
-------- --------
Total $ 20,175 $ 20,872
======== ========
5. RESTRICTIONS ON RETAINED EARNINGS
Under the terms of certain debt agreements, the Company has agreed not to
declare dividends or make any distribution on its common stock unless the total
dividends or distributions subsequent to December 31, 1991 are less than the
sum of a) $20,000,000, plus b) 50% of cumulative consolidated net income, if
positive, subsequent to December 31, 1991, plus c) the net proceeds from the
sale of any class of capital stock after December 31, 1991, less d) 100% of
cumulative consolidated net income, if negative, subsequent to December 31,
1991. Under this dividend restriction, the Company had a computed positive
balance of $24,981,000 at December 31, 1993. Subject to these restrictions,
the Board of Directors will determine payment, if any, of future dividends or
distributions, in light of conditions then existing, including the Company's
earnings, financial condition and requirements, opportunities for reinvesting
earnings, business conditions and other factors.
6. BENEFIT PLANS
Since 1952, the Company has sponsored a defined benefit pension plan covering
substantially all of its employees. The benefits are based on an employee's
years of service and average earnings for the five highest consecutive calendar
years of compensation during the ten years immediately preceding retirement.
The Company's policy is to fund the minimum amount required by the Internal
Revenue Code. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
14
The following table sets forth the plan's status and the amounts
recognized in the Company's consolidated balance sheet (in thousands):
1993 1992 1991
---- ---- ----
Actuarial present
value of benefit
obligations:
Accumulated
benefit
obligation,
Vested benefits $ 76,974 $ 65,519 $ 56,954
-------- -------- --------
Total benefits $ 83,960 $ 68,556 $ 61,296
-------- -------- --------
Plan assets at
fair value $ 89,843 $ 85,183 $ 78,883
Projected benefit
obligation for
service rendered
to date 98,263 83,889 74,778
-------- -------- --------
Plan assets in excess
of (less than)
projected benefit
obligation (8,420) 1,294 4,105
Unrecognized
net (gain) loss 4,091 (2,351) (1,759)
Unrecognized net
benefits being
recognized over
15 years (7,268) (8,479) (9,691)
Unrecognized prior
service cost 892 1,024 1,156
Accrued pension cost
included in
Other Liabilities $(10,705) $ (8,512) $ (6,189)
-------- -------- --------
Plan assets consist primarily of equity securities and U.S. Treasury
bonds and notes. At December 31, 1993, equity securities included 1,500,000
shares of the Company's common stock at an average cost of $4.81 per share.
At December 31, 1993, $14,200,000 of plan assets were invested in a
dedicated bond fund. The plan had a basis in these assets of $11,100,000
yielding approximately 5.6% to maturity.
Net pension costs included the following components (in thousands):
1993 1992 1991
---- ---- ----
Service cost-benefits
earned during
the period $ 3,982 $ 3,632 $ 3,743
Interest cost on
projected benefit
obligation 6,796 6,334 6,007
Actual return on
plan assets (8,580) (9,590) 157
Net amortization
and deferral (5) 1,948 (8,153)
------- ------- -------
Net periodic
pension cost $ 2,193 $ 2,324 $ 1,754
======= ======= =======
Assumptions used in calculations were:
1993 1992 1991
---- ---- ----
Discount rate 7.5% 8.5% 9.0%
Rate of compensation
increase 4.5% 4.5% 6.0%
Expected rate of return
on plan assets 9.0% 9.0% 8.5%
--- --- ---
In 1991 the Company established the Rowan Companies, Inc. Pension
Restoration Plan for certain key executives. This plan supplements the benefits
that are otherwise limited by section 415 of the Internal Revenue Code. The
plan is unfunded and had a projected benefit obligation at December 31, 1993 of
$2,246,000. The net pension liability as of that date was $1,118,000. Net
pension cost was $408,000 in 1993, $557,000 in 1992 and $153,000 in 1991.
In addition to providing pension benefits, the Company provides
certain health care and life insurance benefits for retired employees.
Substantially all of the Company's employees may become eligible for those
benefits if they reach normal retirement age while working for the Company.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 "Employer's Accounting for Postretirement Benefits
Other Than Pensions," which requires accrual of the cost of retiree health care
and other postretirement benefits during the years an employee provides
services. Prior to 1993, the Company recognized the cost of these benefits as
they were paid. The effect of adopting the statement for the year ended
December 31, 1993 was to increase net periodic postretirement benefit cost and
the net loss by approximately $3,000,000 ($.04 per share).
The following table sets forth the plan's status and the amount
recognized in the Company's consolidated balance sheet at December 31, 1993 (in
thousands):
Accumulated postretirement
benefit obligations:
Retirees $ 8,980
Fully eligible active plan participants 5,880
Other active plan participants 9,464
--------
Total benefits 24,324
Unrecognized transition obligation
being recognized over 20 years (17,967)
Unrecognized net loss (3,321)
--------
Accrued postretirement benefit cost
included in Other Liabilities $ 3,036
========
The actuarially determined accumulated postretirement benefit
obligation reflects health care cost trend rates of 14% for 1993 and decreasing
by 1% annually through 2001 and a discount rate of 7.5%. A one percentage point
increase in the assumed health care cost trend rate would increase net periodic
postretirement benefit cost by approximately $700,000 and increase the
accumulated postretirement benefit obligation by approximately $3,250,000.
Net postretirement benefit cost for 1993 included the following
components (in thousands):
Service cost $ 1,039
Interest cost 1,537
Net amortization and deferral 946
-------
Net periodic postretirement benefit cost $ 3,522
=======
Postretirement benefit costs recognized in 1992 and 1991 on a
pay-as-you-go basis were $856,000 and $1,143,000, respectively. Cash payments
for postretirement benefits in 1993 were approximately $500,000.
7. INCOME TAXES
The detail of income tax provisions (credits) is presented below (in
thousands):
1993 1992 1991
---- ---- ----
Current:
Federal $ 123 $ (82) $ 40
Foreign 501 707 1,100
State 7 3
----- ----- ------
Total current
provision 624 632 1,143
Deferred-foreign (912) (203) 31
----- ----- ------
Total $(288) $ 429 $1,174
===== ===== ======
Total income tax expense (credit) shown in the consolidated statement
of operations differs from the amount that would be computed if the income
(loss) before income taxes was multiplied by the federal income tax rate
(statutory
15
rate) applicable in each year. The reasons for this difference are as follows
(in thousands):
1993 1992 1991
---- ---- ----
Statutory rate 35% 34% 34%
Tax at statutory rate $(4,742) $(24,930) $(12,773)
Increase (decrease)
in taxes resulting
from:
Limitation on
utilization of
tax benefits 3,679 24,214 12,108
Additional taxes
on foreign
source income 551 505 1,131
Nondeductible
compensation
expense 28 609 655
Alternative
minimum tax 123
Other-net 73 31 53
------- -------- --------
Total $ (288) $ 429 $ 1,174
======= ======== ========
Temporary differences and carryforwards which gave rise to deferred
tax assets and liabilities at December 31, 1993 were as follows (in thousands):
Deferred Deferred
Tax Tax
Assets Liabilities
-------- -----------
Property $ 104,974
Deferred sale/leaseback
gain $ 7,682
Accrued pension and
postretirement
benefit costs 5,109
ESOP/PAYSOP
contributions 1,836
Net operating loss
carryforward 91,869
Investment tax credit
carryforward 58,256
Foreign income taxes
payable 2,644
Other-net 1,629 1,412
Subtotal 166,381 109,030
-------- --------
Valuation allowance (61,665)
-------- --------
Total $104,716 $109,030
======== ========
The deferred tax liabilities in excess of deferred tax assets
represents the amount of deferred income tax liability shown in the
consolidated balance sheet. The valuation allowance consists of investment tax
credit carryforwards and a portion of the net operating loss carryovers which
are forecast as not being utilized prior to their statutory expiration dates.
The sources of significant timing differences which gave rise to deferred
income tax expense and their effects were as follows (in thousands):
1993 1992 1991
---- ---- ----
Property and
equipment $(5,728) $(6,916) $(9,270)
Oil and gas
exploration costs 57 (389)
Deferred gain on
sale/leaseback of
drilling rigs 1,120 1,090 1,080
Net operating loss
carryforward 4,758 6,611 9,591
Pension and
postretirement
benefit provisions (1,792) (841) (645)
Other-net 730 (204) (336)
------- ------- -------
Total deferred
taxes $ (912) $ (203) $ 31
======= ======= =======
At December 31, 1993 the Company had $53,011,000 of regular investment
tax credits and $5,246,000 of ESOP (Employee Stock Ownership Plan) tax credits
available for application against future federal taxes payable. Total credits,
if not utilized, will expire as follows: 1994-$1,807,000, 1995-$6,954,000,
1996-$12,772,000, 1997-$11,069,000, 1998-$8,027,000, 1999-$10,110,000, 2000-
$2,017,000 and 2001-$5,501,000.
At December 31, 1993, the Company had for federal income tax purposes,
net operating loss carryforwards of approximately $262,483,000 which will
expire, if not utilized, as follows: 2001-$87,148,000, 2002-$129,123,000 and
2007-$46,212,000.
Deferred income taxes not provided for undistributed earnings of
foreign subsidiaries, because such earnings are considered permanently invested
abroad, amounted to approximately $3,700,000 at December 31, 1993.
Loss before income taxes and the extraordinary charge consisted of
$(10,346,000), $(64,158,000) and $(28,608,000) of domestic income (loss), and
$(3,201,000), $(9,166,000), and $(8,959,000) of foreign losses for 1993, 1992
and 1991, respectively.
Income tax payments exceeded refunds by $248,000 in 1993, $1,493,000
in 1992 and $1,518,000 in 1991.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Except for the 11 7/8% Notes discussed below, at December 31, 1993,
the carrying amounts approximate fair values for the Company's cash, cash
equivalents and long-term debt. For cash and cash equivalents, this is due to
the short maturity of the instruments. For long-term debt other than the 11
7/8% Notes, the fair value is estimated based on the quoted market prices for
similar issues.
The 11 7/8% Notes had a carrying amount of $200,000,000 on December
31, 1993 and a fair value of $220,250,000 as of that date. This value is based
on its quoted price on the New York Stock Exchange.
9. COMMITMENTS AND
CONTINGENT LIABILITIES
During 1984, the Company entered into a sale/leaseback transaction whereby the
Company sold the Rowan-Halifax, a cantilever jack-up, for $66,500,000 in cash
and leased the rig back under a 15-year operating lease at an effective
interest rate of about 9.3%. In 1985, the Company sold a similar jack-up, the
Cecil Provine, for $60,000,000 in cash and entered into a 15-year operating
lease at an effective interest rate of about 8.0%. Under each lease agreement,
at the end of the basic 15-year lease, the Company has an option to purchase
the rig at the then fair market value, terminate the lease, or renew the lease
at the lesser of a) a fixed rental renewal of 50% of the weighted average
amount of the semi-annual installments during the basic term, or b) a fair
market rental renewal. Each transaction has resulted in a gain which has been
deferred for financial statement purposes and is being recognized over its
respective lease term.
Total payments to be made under the sale/leaseback agreements are
being expensed on a straight-line basis. However, the payments themselves are
variable and generally increase over the respective lease terms. The excess of
inception-to-date expenses over related payments is included among Other
Liabilities on the consolidated balance sheet. At December 31, this amount was
$15,549,000 and $17,226,000 for 1993 and 1992, respectively.
The Company has operating leases covering aircraft, related hangers,
offices and computer equipment and the sale/leaseback rigs. Net rental expense
under all operating leases was $17,633,000 in 1993, $18,746,000 in 1992,
16
and $19,797,000 in 1991. As of December 31, 1993, the future minimum payments
to be made under noncancelable operating leases were (in thousands):
1994 $ 21,158
1995 20,483
1996 19,330
1997 21,850
1998 18,165
Later Years 38,475
--------
Total $139,461
========
The Company estimates 1994 capital expenditures at between $25,000,000
and $35,000,000. These expenditures are in addition to the $52,100,000 purchase
of the net assets of Marathon LeTourneau. See Note 12.
In the Company's opinion, at December 31, 1993, there were no
contingencies, claims or lawsuits against the Company which could have a
significant effect on its financial position or results of operations.
10. SEGMENTS OF BUSINESS
In 1993 and earlier years, the Company has had two principal segments of
business: drilling of oil and gas wells, both offshore and onshore
("Drilling"), and charter helicopter and fixed-wing aircraft services
("Aviation"). The first segment includes contract and turnkey drilling,
utilizing mobile drilling rigs. Beginning in 1994 the Company will have a third
segment, Manufacturing. See Note 12. Contract drilling activities are performed
in both domestic and foreign areas. Aviation operations relate primarily to oil
and gas related activities in Alaska and the Gulf of Mexico. Total revenues
reported by industry segments consist principally of revenues from unaffiliated
customers, as reported in the Company's consolidated statement of operations.
The Company had revenues, primarily from drilling operations, in
excess of 10% of consolidated revenues from one customer (17%) in 1993, from
one customer (11%) in 1992 and from two customers (23% and 12%) in 1991.
The Company believes that it has no significant concentrations of
credit risk. Its revenues are derived primarily by contracting with large
energy companies and governmental bodies, with whom the Company has never
experienced any significant credit losses. Historically, the Company has been
able to relocate its assets over significant distances on a timely basis in
response to changing market conditions.
Certain financial information for drilling and aviation operations is
summarized as follows (in thousands):
1993 1992 1991
---- ---- ----
Depreciation and
amortization:
Drilling $40,874 $39,719 $40,612
Aviation 11,044 11,648 12,342
Capital expenditures:
Drilling 12,741 31,014 36,686
Aviation 9,248 8,514 48,932
------- ------- -------
Assets are identified to a segment by their direct use. The Company
classifies its drilling rigs for segment purposes as domestic or foreign based
upon the drilling rig's country of registry. Accordingly, drilling rigs
registered in the United States are classified with domestic operations, and
revenues generated from foreign operations of these rigs are considered export
revenues. Revenues generated by foreign-registered drilling rigs from
operations offshore the United States are classified as foreign revenues.
Assuming revenues derived from all operations within the United States, onshore
and offshore, were treated as domestic revenues and export revenues were
treated as foreign revenues, revenues from foreign operations would have been
$82,125,000 in 1993.
Domestic drilling operations included export revenues of $80,515,000
in 1993, $91,563,000 in 1992 and $118,839,000 in 1991. Except for $38,434,000
in 1993, $30,552,000 in 1992 and $39,761,000 in 1991 from other foreign areas,
the export revenues were generated from North Sea operations.
At December 31, 1993, 29 drilling rigs, 17 of which were marine rigs,
with a net book value of $187,462,000 were located in the United States, and 12
drilling rigs, 7 of which were marine rigs, having a net book value of
$215,041,000 were located in foreign jurisdictions.
Information concerning the Company's operations is summarized as
follows (in thousands):
1993 1992 1991
---- ---- ----
Revenues:
Drilling operations:
Domestic $ 244,360 $ 143,818 $ 163,456
Foreign 26,662 18,303 7,283
Aviation operations 82,174 87,877 101,433
--------- --------- ---------
Consolidated $ 353,196 $ 249,998 $ 272,172
========= ========= =========
Operating profit (loss):
Drilling operations:
Domestic $ 15,888 $ (36,726) $ (7,101)
Foreign 3,165 (3,688) (10,625)
Aviation operations 2,248 1,882 6,727
--------- --------- ---------
Consolidated 21,301 (38,532) (10,999)
Gain on disposals
of property
and equipment 1,955 731 1,660
Interest and other
income 2,498 2,823 4,890
General and
administrative (13,940) (12,092) (11,739)
Interest expense (25,361) (26,254) (21,379)
--------- --------- ---------
Income (loss) before
income taxes $ (13,547) $ (73,324) $ (37,567)
========= ========= =========
Identifiable assets at
December 31:
Drilling operations:
Domestic $ 584,583 $ 491,456 $ 677,947
Foreign 41,687 50,061 67,887
Aviation operations 138,993 142,784 150,055
--------- --------- ---------
Total assets at
December 31 $ 765,263 $ 684,301 $ 895,889
========= ========= =========
11. RELATED PARTY TRANSACTIONS
A director of the Company, who did not stand for reelection to the Company's
board in 1993, is also chairman of the board of one of the Company's drilling
customers. Transactions with this customer involved dayrates and operating
costs which were comparable to those experienced in connection with third party
contracts for similar rigs. Because of the aforementioned relationship, each
drilling contract between the Company and the customer was reviewed and
ratified by the Board of Directors of the Company. Related revenues were
$3,469,000 in 1993, $5,284,000 in 1992, and $2,369,000 in 1991. In addition,
amounts included in trade receivables at December 31 were $216,000 and $1,627,
000 for 1993 and 1992, respectively.
17
In 1993, a director of the Company was an investment banker with one
of the underwriters of the Company's 10,000,000 share common stock offering
which raised $96,250,000. That underwriter received $2,876,000 in commissions
from the sale.
In 1991, a director of the Company was an investment banker with one
of the underwriters of the Company's 11 7/8% Notes. That underwriter received
$1,333,000 on commissions from the Company in connection with the sale of its
11 7/8% Notes.
12. SUBSEQUENT EVENT
On February 11, 1994, LeTourneau, Inc. ("LeTourneau"), a wholly owned
subsidiary of the Company, completed the acquisition of the net assets of
Marathon LeTourneau Company. The aquisition, which will be accounted for using
the purchase method, was financed by $10,400,000 in cash and $41,700,000 in
promissory notes bearing interest at 7% and payable at the end of five years.
Assuming LeTourneau had been acquired on January 1, 1993, the
Company's unaudited pro forma results of operations including LeTourneau from
that date would have been as follows: revenues-$449,400,000, net
loss-$10,300,000 and net loss per share of common stock-$0.13.
This unaudited pro forma information is not necessarily indicative of
the consolidated results that would have occurred had the acquisition taken
place January 1, 1993, nor are they necessarily indicative of results that may
occur in the future. LeTourneau, headquartered in Longview, Texas,
manufactures and sells three primary product lines.
LeTourneau operates a mini-steel mill that recycles scrap and produces
alloy steel and steel plate; a manufacturing facility that produces heavy
equipment for the mining and timber industries including, among other things,
front-end loaders up to 50 ton capacity and, under the registered trademark,
Titan, trucks up to 240 ton capacity; and a marine division that has built over
one-third of all mobile offshore jack-up drilling rigs, including all twenty
operated by the Company.
SELECTED QUARTERLY
FINANCIAL DATA (UNAUDITED)
The following unaudited information for the quarters ended March 31, June 30,
September 30 and December 31, 1992 and 1993 includes, in the Company's opinion,
all adjustments (which comprise only normal recurring accruals) necessary for a
fair presentation of such amounts (in thousands except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1992:
Revenues $ 53,646 $ 58,336 $ 70,564 $ 67,452
Operating
profit (loss) (13,123) (5,616) (5,467) (14,326)
Net income
(loss) (21,809) (14,237) (14,156) (23,551)
Earnings (loss)
per common
share (.30) (.20) (.19) (.32)
-------- -------- -------- --------
1993:
Revenues $ 73,540 $ 82,093 $106,629 $ 90,934
Operating
profit (loss) (4,093) 1,195 16,385 7,814
Net income
(loss) (13,509) (8,197) 8,175 272
Earnings (loss)
per common
share (.18) (.11) .10 .00
-------- -------- -------- --------
The sum of the per share amounts for the quarters may not equal the
per share amounts for the full years since the quarterly and full year per
share computations are made independently.
COMMON STOCK PRICE RANGE,
CASH DIVIDENDS AND STOCK SPLITS
The price range below is as reported by the New York Stock Exchange on the
Composite Tape. On February 23, 1994 there were approximately 4,000 holders of
record.
Quarter 1993 1992
- ------- ---- ----
High Low High Low
---- --- ---- ---
First $10.00 $6.63 $6.75 $4.63
Second 10.75 8.63 7.63 5.25
Third 10.38 7.63 8.38 5.75
Fourth 10.63 7.50 9.38 7.25
----- ---- ---- ----
The Company did not pay any dividends on its common stock during 1993
and 1992. See Note 5 of the Notes to Consolidated Financial Statements for
restrictions on dividends.
Stock splits and stock dividends since the Company became publicly
owned in 1967 have been as follows: 2 for 1 stock splits on January 25, 1973,
December 16, 1976 and May 13, 1980; 2 for 1 stock splits effected in the form
of a stock dividend February 6, 1978 and January 20, 1981; and a 5% stock
dividend May 21, 1975.
On the basis of these splits and dividends, each share acquired prior
to January 25, 1973 would be represented by 33.6 shares if still owned at
present.