EXHIBIT 13
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HELMERICH & PAYNE, INC. ANNUAL REPORT FOR 2002
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MANAGEMENT'S DISCUSSION & ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. The Company's
future operating results may be affected by various trends and factors, which
are beyond the Company's control. These include, among other factors,
fluctuations in oil and natural gas prices, expiration or termination of
drilling contracts, currency exchange gains and losses, changes in general
economic conditions, rapid or unexpected changes in technologies, risks of
foreign operations, uninsured risks, and uncertain business conditions that
affect the Company's businesses. Accordingly, past results and trends should not
be used by investors to anticipate future results or trends.
With the exception of historical information, the matters discussed in
Management's Discussion & Analysis of Results of Operations and Financial
Condition include forward-looking statements. These forward-looking statements
are based on various assumptions. The Company cautions that, while it believes
such assumptions to be reasonable and makes them in good faith, assumed facts
almost always vary from actual results. The differences between assumed facts
and actual results can be material. The Company is including this cautionary
statement to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by, or on behalf of, the Company. The factors identified in this cautionary
statement are important factors (but not necessarily all important factors) that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company.
23
SPIN-OFF AND MERGER TRANSACTIONS
On September 30, 2002, Helmerich & Payne, Inc. completed its distribution of
100 percent of the common stock of Cimarex Energy Co. to the Company's
shareholders and the subsequent merger of Key Production Company, Inc. into a
subsidiary of Cimarex making Key a wholly-owned subsidiary of Cimarex. The
Cimarex Energy Co. stock distribution was recorded as a dividend and resulted in
a decrease to consolidated stockholders' equity of approximately $152.2 million.
As a result of this transaction, the Company and its subsidiaries will continue
to own and operate the contract drilling and real estate business, and Cimarex
Energy Co. will be a separate, publicly-traded company that will own and operate
the exploration and production business. The Company does not own any common
stock of Cimarex Energy Co. (See Note 2 of the Financial Statements for complete
description of the transaction.) As a result of the transaction, the Company is
reporting the results of its former Exploration and Production Division (Cimarex
Energy Co.) as discontinued operations.
RESULTS OF OPERATIONS
All per share amounts included in the Results of Operations discussion are
stated on a diluted basis. Helmerich & Payne, Inc.'s net income for 2002 was
$63,517,000 ($1.26 per share) compared with net income of $144,254,000 ($2.84
per share), in 2001, and $82,300,000 ($1.64 per share) in 2000. Included in net
income for each year reported was income from discontinued operations of
$9,811,000 ($0.19 per share) for 2002, $63,787,000 ($1.26 per share) for 2001,
and $45,830,000 ($0.91 per share) for 2000. Also included in the Company's net
income, but not related to its
24
operations, were after-tax gains from the sale of investment securities of
$15,206,000 ($0.30 per share) in 2002, $691,000 ($0.01 per share) in 2001, and
$8,152,000 ($0.16 per share) in 2000. In addition to income from security
sales, the Company also recorded net income during 2000 of $6,637,000 ($0.13 per
share) from gains relating to non-monetary dividends received. Also included in
net income is the Company's portion of income from its equity affiliates, which
totaled $0.06 per share in 2002, $0.04 per share in 2001, and $0.06 in 2000. The
Company's equity affiliates are Atwood Oceanics, Inc. and a 50-50 joint venture
with Atwood called Atwood Oceanics West Tuna Pty. Ltd., which owns an offshore
platform rig.
Consolidated revenues were $510,928,000 in 2002, $509,274,000 in 2001, and
$392,142,000 in 2000. Revenues increased by less than 1 percent from 2001 to
2002. Revenues from domestic operations rose by approximately 1 percent, due to
the increase in U.S. land rig revenue days recorded in 2002, as the Company
continued to complete the construction of new rigs during the year. Total H&P
U.S. land rigs available were 66 at the end of 2002, and 49 at the end of 2001.
Land rig utilization was 84 percent during 2002 and 97 percent in 2001.
Increased U.S. land rig revenues were partially offset by declines in U.S.
platform rig revenues. Total platform rig revenue days fell 8 percent from 2001
to 2002 as rig utilization fell to 83 percent in 2002, compared with 98 percent
in 2001. Revenues from international drilling operations declined by 11 percent
as the Company's rig utilization in South America fell from 56 percent in 2001
to 51 percent in 2002.
25
The 30 percent increase in revenues from 2000 to 2001 was due to a 55 percent
increase in domestic revenues and a 13 percent increase in international
revenues. Demand for drilling services increased dramatically in the U.S.
during 2001, causing average revenue per day to improve by 58 percent from 2000
to 2001. During 2000, U.S. land rig utilization was 85 percent and U.S. platform
rig utilization was 94 percent. International rig utilizations improved to 56
percent during 2001, compared with 47 percent during 2000.
Revenues from investments were $28,444,000 in 2002, $10,317,000 in 2001, and
$31,510,000 in 2000. Included in revenues were pre-tax gains from the sale of
investment securities of $24,820,000 in 2002, $1,189,000 in 2001, and
$13,295,000 in 2000. Interest income from short-term investments was $1,432,000
in 2002, $5,219,000 in 2001 and $3,733,000 in 2000. Interest income from
short-term investments was higher in 2001 and 2000 because the Company's cash
and cash equivalent balances increased in each of these years and because of
higher prevailing market short-term interest rates. Dividend income was
$2,192,000 in 2002, $3,909,000 in 2001 and $14,482,000 in 2000. Dividend income
was unusually high in 2000 because the Company recognized $10,706,000 of
non-monetary dividends when three Company investees spun-off subsidiaries to
their shareholders.
Operating costs in 2002 were $336,890,000 or 70 percent of operating revenue,
compared with $308,437,000 or 62 percent of operating income in 2001, and
$234,132,000 or 65 percent of operating income in 2000. The operating cost
percentage rose in 2002 due to lower revenue per rig day, higher direct rig
operating cost, and additional costs associated with the addition of 16 rigs to
the U.S. land fleet
26
during the year. The lower operating cost percentage in 2001, compared to 2000
was the result of higher revenue per rig day during 2001.
Depreciation expense was $61,447,000 in 2002, $49,532,000 in 2001, and
$77,317,000 in 2000. Effective October 1, 2000, the Company changed the
estimated useful life of its drilling equipment from 10 years to 15 years,
resulting in lower annual depreciation expense of approximately $30 million in
2001. Depreciation expense rose significantly during 2002, due to the addition
of 3 rigs in 2001 and 20 rigs in 2002. The Company anticipates depreciation
expense to increase again next year as a full year of depreciation is incurred
on rigs placed in service in 2002 and as new rigs are constructed and employed
in the field.
General and administrative expenses increased by approximately 22 percent from
2001 to 2002, and by 22 percent from 2000 to 2001. The most significant portion
of the increases for both 2001 and 2002 were from employee benefits relating to
medical insurance, 401(k) matching, and pension expenses. Employee salaries and
bonuses also contributed to the increases, along with increases in property and
casualty insurance. It is anticipated that general and administrative expenses
for 2003 will be higher than in 2002, due mainly to higher pension expense. The
value of pension plan assets has declined as a result of the recent decline in
the stock market. The Company lowered the expected return and discount rate
assumptions for calculation of accrued pension benefit costs. Additionally, the
Company may consider reclassifying to general and administrative expense some
costs that have been included in operating costs in prior years. Interest
expense was $980,000 in 2002, $1,701,000 in 2001, and $2,730,000 in
27
2000. Although actual cash interest expense varied only slightly during the
past three years, the variance in construction project activity during those
periods resulted in more interest being capitalized during 2001 and 2002,
thereby lowering the amount expensed. As mentioned later in this section, the
increase in the total debt of the Company through the issuance of $200,000,000
of intermediate-term debt will result in a significant increase in interest
expense during 2003.
The provision for income taxes totaled $40,573,000 in 2002, $54,689,000 in 2001,
and $31,102,000 in 2000. Effective income tax rates on income from continuing
operations were 44 percent in 2002, 41 percent in 2001, and 48 percent in 2000.
The increase in effective tax rate from 2001 to 2002 was a result of currency
fluctuations, primarily in Venezuela, resulting in additional taxes for
inflationary gains and monetary corrections in 2002. The significant reduction
in effective rates from 2000 to 2001 was a result of lower taxes in Venezuela,
as a result of monetary correction losses and a larger proportion of income in
the Company's U.S. operations where tax rates are lower than the average tax
rates in the Company's international operations.
CONTRACT DRILLING OPERATING PROFIT
Demand for contract drilling services increased significantly during 2001, after
experiencing a lull in activity from 1998 to 2000. The significant improvement
was particularly experienced in U.S. land rig drilling where high natural gas
prices prevailed during 2001, thereby spurring the significant increase in rig
activity, dayrates, and costs. During 2002 demand for drilling services
declined, causing dayrates to soften. U.S. land rig utilizations fell to 84
percent in 2002, compared to 97 percent for 2001, while the Company's U.S.
offshore platform
28
rig business realized utilizations averaging 94 percent in 2000, and 98 percent
in 2001. During 2002, the Company completed construction on 2 new platform rigs
that commenced operations during the Company's third quarter, moving its total
platform fleet to 12. However, demand for platform rig services waned during
the year moving the average utilization in that sector to 83 percent and
decreasing rig revenue days by 8 percent. Therefore, with demand for drilling
services declining in the U.S. during 2002, without a similar drop in costs,
the Company's operating profit in its domestic operations fell to $69,181,000
in 2002, compared to $107,691,000 in 2001. Operating profit during 2000 for the
U.S. sector was $35,808,000. Currently, 6 of the Company's 12 platform rigs are
active, and land rig dayrates are approximately the same as those achieved
during the fourth quarter of 2002. Should these conditions continue during 2003,
operating profit for U.S. operations will be lower than in 2002.
After a significant improvement in activity and profitability during the late
'90s, demand for drilling services in the Company's international sector has
declined significantly, with about half of the rigs working in South America
over the last two years compared with the number of rigs employed during the
1996 to 1999 time frame. As a result, operating profits for international
operations have declined to $13,128,000 in 2002 from $28,475,000 in 2001.
Operating profit was $9,753,000 in 2000. Utilizations were 51 percent in 2002,
56 percent in 2001, and 47 percent in 2000.
29
International operating profit declined from 2001 to 2002 due to lower rig
utilization and higher devaluation losses. International operating profits
improved during 2001 compared to 2000 mainly due to lower depreciation expenses
resulting from a change in the estimated useful life in the Company's drilling
equipment as discussed below. The impact of the change added approximately $15
million to international operating profit in 2001, compared with 2000. Over the
past three years, rig activity levels have generally improved in Ecuador where
the Company has grown from 3 rigs in 1999 to 8 rigs by the end of 2002. Overall
utilization in that country averaged 93 percent during 2002. Conversely, the rig
count and utilization have declined dramatically in Colombia where the Company
operated 10 rigs in 1999, but declined to 3 rigs by 2002. Overall utilization
for 2002 in Colombia was 31 percent. In one of the Company's main international
operations, Venezuela, the total number of Company rigs has declined from 22 in
1999 to 14 in 2002. Average utilization during 2002 in Venezuela was 41 percent.
The remainder of the Company's rigs located in South America are in Bolivia (6
rigs), where utilization during 2002 was 30 percent, and Argentina (2 rigs),
where average utilization was 59 percent. Although activity is expected to
improve slightly in Venezuela during 2003, the Company does not expect
international operating profit to improve substantially during the year.
During 2002, the Company experienced devaluation losses totaling $1,200,000 in
Argentina and $4,393,000 in Venezuela. Previous to this year devaluation losses
in Venezuela totaled $796,000 in 2001 and $687,000 in 2000. During 2002,
Argentina experienced a dramatic economic collapse. As a result, the government
stopped the outflow of dollars from the country and required that former dollar
30
obligations be paid in Argentina pesos. The $1,200,000 loss recorded by the
Company as of September 30, 2002 is an estimation of the losses it will
experience after all current receivables are collected. The Company has
completed negotiations with customers and has secured agreements that limit the
portion of the accounts receivable that will be paid in pesos, with the balance
of such accounts receivable to be paid in U.S. dollars. Based upon such
agreements, the Company does not expect significant Argentine currency losses
in fiscal 2003. In Venezuela, approximately 60 percent of the Company's
billings are in U.S. dollars and 40 percent are in bolivars, the local
currency. As a result, the Company is exposed to risk of currency devaluation
in Venezuela because of bolivar denominated receivables. The Company
anticipates additional devaluation losses in Venezuela during 2003, but it is
unable to predict the extent of the devaluation. If 2003 rig activity levels are
similar to 2002, and if a 25 percent to 100 percent devaluation would occur, the
Company could experience potential devaluation losses ranging from approximately
$1,700,000 to $4,200,000.
REAL ESTATE SEGMENT
Revenues totaled $8,525,000 for 2002, $11,018,000 for 2001, and $8,999,000 for
2000. Operating profit was $5,064,000 for 2002, $6,315,000 for 2001, and
$5,346,000 in 2000. The increase in revenues and operating profit in 2001 was
due to the sale of a small parcel of raw land. Revenues and operating profit for
2002 were down due to slight reductions in occupancy rates for both retail and
industrial properties. No material changes are anticipated in the Real Estate
Division in 2003.
31
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 critical accounting policies
related to property, plant and equipment, impairments, self-insurance accruals,
and revenue recognition. Other significant accounting policies are summarized
in Note 1 in the notes to the consolidated financial statements.
Property, plant and equipment, including renewals and betterments, are stated at
cost, while maintenance and repairs are expensed currently. Interest costs
applicable to the construction of qualifying assets are capitalized as a
component of the cost of such assets. We provide for the depreciation of
property, plant and equipment using the straight-line method over the estimated
useful lives of the assets. Upon retirement or other disposal of fixed assets,
the cost and related accumulated depreciation are removed from the respective
accounts, and any gains or losses are recorded in our results of operations.
We review our long-lived assets, including property and equipment, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss exists
when estimated undiscounted cash flows, expected to result from the use of the
asset and its eventual disposition, are less than its carrying amount. Any
impairment loss recognized represents the excess of the asset's carrying value
as compared to its estimated fair value, which is determined based on the
present value of estimated cash flows from the asset, appraisals or sales prices
of comparable assets. There were no long-lived asset impairment losses
32
in the Company's continuing operations during the years ended September 30,
2002, 2001, and 2000. However, should industry market conditions deteriorate
from those existing currently, impairment losses could be recorded. All of our
drilling rigs are transportable and are therefore not limited to one area or
country. Drilling rigs can be moved from countries where demand is low to
countries experiencing high demand for drilling services. When making
determinations of location for drilling rigs, the Company considers both long
and short-term views of demand and other reasonable business considerations.
The Company is self-insured or maintains high deductibles for certain losses
relating to worker's compensation, general, product, and auto liabilities.
Generally, deductibles are $2 million per occurrence on claims that fall under
these coverages. Insurance is also purchased on rig properties, and generally,
deductibles are $1 million per occurrence. Excess insurance is purchased over
these coverages to limit the Company's exposure to catastrophic claims, but
there can be no assurance that such coverage will respond or be adequate in all
circumstances. Retained losses are estimated and accrued based upon our
estimates of the aggregate liability for claims incurred, and using the
Company's historical loss experience and estimation methods that are believed
to be reliable and acceptable in the insurance industry.
Revenues and costs on daywork contracts are recognized daily as the work
progresses. For certain contracts, we receive lump-sum payments for the
mobilization of rigs and other drilling equipment. Revenues earned, net of
direct costs incurred for the mobilization, are deferred and recognized over the
term of the related drilling contract. Other lump-sum payments received from
customers relating to specific contracts
33
are deferred and amortized to income as services are performed. Costs incurred
to relocate rigs and other drilling equipment to areas in which a contract has
not been secured are expensed as incurred.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital spending for continuing operations was $312,064,000 in
2002, $184,668,000 in 2001, and $65,820,000 in 2000. Net cash provided from
operating activities for those same time periods were $151,774,000 in 2002,
$127,435,000 in 2001, and $97,894,000 in 2000. In addition to the net cash
provided by operating activities, the Company also generated net proceeds from
the sale of portfolio securities of $47,146,000 in 2002, $24,438,000 in 2001,
and $12,569,000 in 2000.
During 2000, the Company announced a program (FlexRig2 program) under which it
would construct 12 new FlexRigs at an approximate cost of between $7.5 and $8.25
million each. During 2001, the Company completed construction on 7 of those 12
rigs. Additionally, the Company announced in 2001 that it would embark on
another construction project (FlexRig3 program) to build an additional 25
FlexRigs at an approximate cost of $11.0 million each. During 2002, the Company
completed the remaining 5 rigs in the FlexRig2 program and the first 8 rigs in
the FlexRig3 program. The Company intends to complete the remaining 17 rigs of
that program by July 2003.
34
The Company expects to fund its 2003 capital spending of approximately
$195,000,000 with internally generated cash flow and recently arranged debt
financing. In August 2002, the Company entered into a $200 million
intermediate-term unsecured debt obligation with staged maturities from 5 to 12
years and a weighted average interest rate of 6.31 percent. Funding of the notes
occurred on August 15, 2002 and October 15, 2002 in equal amounts of $100
million. The terms of the debt obligations require the Company to maintain a
minimum ratio of debt to total capitalization. Proceeds from the
intermediate-term debt were used to repay the balance of the Company's
outstanding debt of $50 million in September 2002, pay outstanding balances in
accounts payable related to the Company's rig construction program, and for
other general corporate purposes.
At September 30, 2002, the Company had a committed unsecured line of credit
totaling $125 million. Letters of credit totaling $10,587,260 were outstanding
against the line, leaving $114,412,740 available to borrow. The line of credit
matures in July 2003 and bears interest of LIBOR + .875 percent to 1.125 percent
depending on certain financial ratios of the Company. The Company must maintain
certain financial ratios as defined including debt to total capitalization and
debt to earnings before interest, taxes, depreciation, and amortization, and
maintain certain levels of liquidity and tangible net worth.
At September 30, 2002, the company held an unassociated interest rate swap tied
to 30-day LIBOR in the amount of $50 million, which matures on October 27, 2003.
The interest rate swap instrument originally was designated as a hedge of a $50
million loan that was paid off in September 2002. The interest rate swap was
valued as a liability
35
of approximately $1.7 million on the date the $50 million debt was paid off. The
$1.7 million will be amortized over the remaining life of the interest rate
swap as interest expense. In 2002, $17,000 of this amortization was included in
interest expense. Changes to the value of the interest rate swap subsequent to
the date the $50 million debt was paid will be recorded to income.
The strength of the Company's balance sheet is substantial, with current ratios
for September 30, 2002 and 2001 at 2.5 and 3.9, respectively, and with debt to
total capitalization of 10 percent and 4.6 percent, respectively. Additionally,
the Company manages a large portfolio of marketable securities that, at the
close of 2002, had a market value of $175,668,000. The Company's investments in
Atwood Oceanics, Inc., Schlumberger, Ltd., Transocean, and ConocoPhillips make
up over 90 percent of the portfolio's market value. The portfolio is subject to
fluctuation in the market and may vary considerably over time. Excluding the
Company's equity-method investments, the portfolio is recorded at fair value on
the Company's balance sheet for each reporting period. During 2002, the Company
paid a dividend of $0.305 per share, or a total of $15,221,084, representing
the 31st consecutive year of dividend increases.
STOCK PORTFOLIO HELD BY THE COMPANY
<Table>
<Caption>
SEPTEMBER 30, 2002 NUMBER OF SHARES BOOK VALUE COST MARKET VALUE
------------------ ---------------- --------------- ------------
(in thousands, except share amounts)
Atwood Oceanics, Inc. 3,000,000 $ 58,937 $ 87,750
Schlumberger, Ltd. 1,480,000 23,511 56,921
Transocean Sedco Forex, Inc. 286,528 9,509 5,960
ConocoPhillips 240,000 5,976 11,098
Other 8,849 13,939
--------- ---------
Total $ 106,782 $ 175,668
========= =========
</Table>
36
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company has international operations in several South American countries and
a labor contract for work off the coast of Equatorial Guinea. With the exception
of Venezuela, the Company's exposure to currency valuation losses is usually
minimal, due to the fact that virtually all billings and payments in other
countries are in U.S. dollars. Even though the Company's contract with its
customers in Argentina were in U.S. dollars, Argentina experienced a dramatic
economic collapse. As a result, the government stopped the outflow of dollars
from the country and required that former dollar obligations be paid in
Argentina pesos, resulting in the Company recording a $1,200,000 loss for 2002.
At the present time, the Company is not engaged in performing contract drilling
services in Argentina, even though 2 rigs remain in that country.
In Venezuela, approximately 60 percent of the Company's billings are in U.S.
dollars and 40 percent are in bolivars, the local currency. As a result, the
Company is exposed to risks of currency devaluation in Venezuela because of the
bolivar denominated receivables. During 2002, the Company experienced
devaluation losses in Venezuela of $4,393,000, and losses of $796,000 in 2001,
and $687,000 in 2000. The Company anticipates additional devaluation losses in
Venezuela in 2003, but it is unable to predict the extent of the devaluation or
its financial impact. Should Venezuela experience a 25 to 100 percent
devaluation, Company losses could range from approximately $1,700,000 to
$4,200,000.
37
COMMODITY PRICE RISK
The demand for contract drilling services is a result of exploration and
production companies spending money to explore and develop drilling prospects in
search for crude oil and natural gas. Their appetite for such spending is driven
by their cash flow and financial strength, which is very dependent, among other
things, on crude oil and natural gas commodity prices. Crude oil prices are
determined by a number of factors including supply and demand, worldwide
economic conditions, and geopolitical factors. Crude oil and natural gas prices
have been volatile, and very difficult to predict. This difficulty has led many
exploration and production companies to base their capital spending on much more
conservative estimates of commodity prices. As a result, demand for contract
drilling services are not always purely a function of the movement of commodity
prices.
INTEREST RATE RISK
As mentioned earlier, the Company has entered into a $200,000,000 intermediate
term unsecured debt obligation with stage maturities from 5 to 12 years, with
varying fixed interest rates for each maturity series. $100 million was
outstanding at September 30, 2002, of which $12.5 million is due on August 15,
2007 and the remaining $87.5 million is due 2009 through 2014. The average
interest rate during the next five years on this debt is 6.3 percent, after
which it increases to 6.4 percent. The fair value of this debt at September 30,
2002 was approximately $109.7 million.
At September 30, 2002, the Company held an interest rate swap on $50 million
face value of debt to receive variable interest payments based on 30-day LIBOR
rates and pay fixed interest payments of 5.4 percent through October 27, 2003.
The swap instrument originally was
38
designated as a hedge of a $50 million variable rate loan that was paid off in
September 2002. The swap will result in monthly payments (receipts) to the
extent 30-day LIBOR rates are less (greater) than 5.4 percent. At September 30,
2002, the fair value of the swap was a $1.7 million liability.
At September 30, 2002, the Company had in place a committed unsecured line of
credit totaling $125,000,000. Although there were letters of credit outstanding
against the line, there had been no cash borrowings against the line of credit
as of September 30, 2002. The Company's line of credit interest rate is based on
LIBOR plus .875 to 1.125 percent based on the Company's EBITDA to net debt
ratio. Should the Company need to draw on this line of credit, the Company would
be subject to the interest rates prevailing during the term at which the Company
had outstanding borrowings. Although market interest rates were at historical
lows during fiscal year 2002, interest rates could rise for a number of various
reasons in the future, and increase the Company's total interest expense.
EQUITY PRICE RISK
At September 30, 2002, the Company owned stocks in other publicly held
companies, with a total market value of $175,668,000. These securities are
subject to a wide variety and number of market-related risks that could
substantially reduce or increase the market value of the Company's holdings.
Except for the Company's holdings in its equity affiliate, Atwood Oceanics,
Inc., and its 50-50 joint venture investment with Atwood, the portfolio is
recorded at fair value on its balance sheet, with changes in unrealized
after-tax value reflected in the equity section of its balance sheet. Any
reduction in market value would have an impact on the Company's debt ratio and
financial strength.
39
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Helmerich & Payne, Inc.
We have audited the accompanying consolidated balance sheets of Helmerich &
Payne, Inc. as of September 30, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended September 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Helmerich & Payne,
Inc. at September 30, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Tulsa, Oklahoma
November 22, 2002
40
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- -------- -------- --------
(in thousands, except per share amount)
REVENUES
Operating revenues $482,484 $498,957 $360,632
Income from investments 28,444 10,317 31,510
-------- -------- --------
510,928 509,274 392,142
-------- -------- --------
COSTS AND EXPENSES
Operating costs 336,890 308,437 234,132
Depreciation 61,447 49,532 77,317
General and administrative 20,391 16,627 13,612
Interest 980 1,701 2,730
-------- -------- --------
419,708 376,297 327,791
-------- -------- --------
Income from continuing operations before income
taxes and equity in income of affiliates 91,220 132,977 64,351
Provision for income taxes 40,573 54,689 31,102
Equity in income of affiliates
net of income taxes 3,059 2,179 3,221
-------- -------- --------
Income from continuing operations 53,706 80,467 36,470
Income from discontinued operations 9,811 63,787 45,830
-------- -------- --------
NET INCOME $ 63,517 $144,254 $ 82,300
======== ======== ========
Basic earnings per common share:
Income from continuing operations $ 1.08 $ 1.61 $ 0.74
Income from discontinued operations 0.19 1.27 0.92
-------- -------- --------
Net income $ 1.27 $ 2.88 $ 1.66
======== ======== ========
Diluted earnings per common share:
Income from continuing operations $ 1.07 $ 1.58 $ 0.73
Income from discontinued operations 0.19 1.26 0.91
-------- -------- --------
Net income $ 1.26 $ 2.84 $ 1.64
======== ======== ========
Average common shares outstanding
Basic 49,825 50,096 49,534
Diluted 50,345 50,772 50,035
</Table>
The accompanying notes are an integral part of these statements.
41
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
<Table>
<Caption>
SEPTEMBER 30, 2002 2001
------------- ---------- ----------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 46,883 $ 128,826
Accounts receivable, less reserve of $1,337 in 2002 and $1,327 in 2001 92,604 116,752
Inventories 22,511 23,553
Prepaid expenses and other 16,753 31,269
---------- ----------
Total current assets 178,751 300,400
---------- ----------
Net assets of discontinued operations -- 135,257
---------- ----------
INVESTMENTS 146,855 200,286
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Contract drilling equipment 1,235,784 997,177
Construction in progress 72,303 30,838
Real estate properties 48,925 50,579
Other 82,310 78,420
---------- ----------
1,439,322 1,157,014
Less-accumulated depreciation and amortization 541,877 506,963
---------- ----------
Net property, plant and equipment 897,445 650,051
---------- ----------
OTHER ASSETS 4,262 14,127
---------- ----------
TOTAL ASSETS $1,227,313 $1,300,121
========== ==========
</Table>
The accompanying notes are an integral part of these statements.
42
LIABILITIES AND STOCKHOLDERS' EQUITY
<Table>
<Caption>
SEPTEMBER 30, 2002 2001
------------- ------------ ------------
(in thousands, except share data)
CURRENT LIABILITIES:
Accounts payable $ 41,045 $ 44,814
Accrued liabilities 31,854 31,606
------------ ------------
Total current liabilities 72,899 76,420
------------ ------------
NONCURRENT LIABILITIES:
Long-term notes payable 100,000 50,000
Deferred income taxes 131,401 126,338
Other 27,843 20,886
------------ ------------
Total noncurrent liabilities 259,244 197,224
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 80,000,000 shares authorized,
53,528,952 shares issued 5,353 5,353
Preferred stock, no par value, 1,000,000 shares authorized, no shares issued -- --
Additional paid-in capital 82,489 80,324
Retained earnings 838,929 943,105
Unearned compensation (190) (1,812)
Accumulated other comprehensive income 16,180 49,309
------------ ------------
942,761 1,076,279
Less treasury stock, 3,518,282 shares in 2002 and
3,676,155 shares in 2001, at cost 47,591 49,802
------------ ------------
Total stockholders' equity 895,170 1,026,477
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,227,313 $ 1,300,121
============ ============
</Table>
The accompanying notes are an integral part of these statements.
43
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<Table>
<Caption>
Common Stock Additional Treasury Stock
------------------ Paid-in Unearned Retained ------------------
Shares Amount Capital Compensation Earnings Shares Amount
-------- -------- ---------- ------------ -------- -------- --------
(in thousands, except per share amounts)
Balance, September 30, 1999 53,529 $ 5,353 $ 61,411 $ (4,487) $745,956 3,903 $(35,306)
Comprehensive Income:
Net Income 82,300
Other comprehensive income:
Unrealized gains on available-
for sale securities, net
Comprehensive income
Cash dividends ($.285 per share) (14,448)
Exercise of Stock Options 4,491 (366) 3,253
Purchase of stock for treasury 21 (450)
Tax benefit of stock-based
Awards 31
Stock issued under Restricted
Stock Award Plan 157 (248) (10) 91
Amortization of deferred
Compensation 1,458 77
-------- -------- ---------- ------------ -------- -------- --------
Balance, September 30, 2000 53,529 5,353 66,090 (3,277) 813,885 3,548 (32,412)
Comprehensive Income:
Net Income 144,254
Other comprehensive income:
Unrealized losses on available-
for sale securities, net
Derivatives instruments losses, net
Total other comprehensive loss
Comprehensive income
Cash dividends ($.30 per share) (15,047)
Exercise of Stock Options 7,965 (646) 5,808
Purchase of stock for treasury 774 (23,198)
Tax benefit of stock-based
Awards 6,269
Amortization of deferred
Compensation 1,465 13
-------- -------- ---------- ------------ -------- -------- --------
Balance, September 30, 2001 53,529 5,353 80,324 (1,812) 943,105 3,676 (49,802)
Comprehensive Income:
Net Income 63,517
Other comprehensive income:
Unrealized losses on available-
for sale securities, net
Derivatives instruments losses, net
Minimum pension liability
adjustment, net
Total other comprehensive loss
Comprehensive income
Distribution of Cimarex Energy Co. Stock (152,201)
Cash dividends ($.31 per share) (15,492)
Exercise of Stock Options 1,099 (181) 2,455
Forfeiture of Restricted Stock Award 88 156 23 (244)
Tax benefit of stock-based
awards 978
Amortization of deferred
Compensation 1,466
-------- -------- ---------- ------------ -------- -------- --------
Balance, September 30, 2002 53,529 $ 5,353 $ 82,489 $ (190) $838,929 3,518 $(47,591)
======== ======== ========== ============ ======== ======== ========
<Caption>
Accumulated
Other
Comprehensive
Income (Loss) Total
------------- ---------
Balance, September 30, 1999 $ 75,182 $ 848,109
Comprehensive Income:
Net Income 82,300
Other comprehensive income:
Unrealized gains on available-
for sale securities, net 30,882 30,882
---------
Comprehensive income 113,182
---------
Cash dividends ($.285 per share) (14,448)
Exercise of Stock Options 7,744
Purchase of stock for treasury (450)
Tax benefit of stock-based
Awards 31
Stock issued under Restricted
Stock Award Plan --
Amortization of deferred
Compensation 1,535
------------- ---------
Balance, September 30, 2000 106,064 955,703
Comprehensive Income:
Net Income 144,254
Other comprehensive income:
Unrealized losses on available-
for sale securities, net (55,769) (55,769)
Derivatives instruments losses, net (986) (986)
---------
Total other comprehensive loss (56,755)
---------
Comprehensive income 87,499
---------
Cash dividends ($.30 per share) (15,047)
Exercise of Stock Options 13,773
Purchase of stock for treasury (23,198)
Tax benefit of stock-based
Awards 6,269
Amortization of deferred
Compensation 1,478
------------- ---------
Balance, September 30, 2001 49,309 1,026,477
Comprehensive Income:
Net Income 63,517
Other comprehensive income:
Unrealized losses on available-
for sale securities, net (25,449) (25,449)
Derivatives instruments losses, net (68) (68)
Minimum pension liability
adjustment, net (7,612) (7,612)
---------
Total other comprehensive loss (33,129)
---------
Comprehensive income 30,388
---------
Distribution of Cimarex Energy Co. Stock (152,201)
Cash dividends ($.31 per share) (15,492)
Exercise of Stock Options 3,554
Forfeiture of Restricted Stock Award --
Tax benefit of stock-based
awards 978
Amortization of deferred
Compensation 1,466
------------- ---------
Balance, September 30, 2002 $ 16,180 $ 895,170
============= =========
</Table>
The accompanying notes are an integral part of these statements.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- ---------- ---------- ----------
(in thousands)
OPERATING ACTIVITIES:
Income from continuing operations $ 53,706 $ 80,467 $ 36,470
---------- ---------- ----------
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation 61,447 49,532 77,317
Equity in income of affiliates before income taxes (5,014) (3,593) (5,196)
Amortization of deferred compensation 1,122 1,135 1,200
Gain on sales of securities and non-monetary investment loss (24,347) (1,189) (24,000)
Gain on sale of property, plant and equipment (1,392) (4,201) (959)
Other - net 791 876 629
Change in assets and liabilities:
Accounts receivable 24,148 (49,405) 11,932
Inventories 1,042 (68) (40)
Prepaid expenses and other 24,381 (11,411) (7,466)
Accounts payable (3,769) 29,290 (2,301)
Accrued liabilities 955 18,435 (2,533)
Deferred income taxes 24,133 15,291 17,623
Other noncurrent liabilities (5,429) 2,276 (4,782)
---------- ---------- ----------
98,068 46,968 61,424
---------- ---------- ----------
Net cash provided by operating activities 151,774 127,435 97,894
---------- ---------- ----------
INVESTING ACTIVITIES:
Capital expenditures (312,064) (184,668) (65,820)
Acquisition of business, net of cash acquired -- (2,279) --
Proceeds from sale of property, plant and equipment 4,135 11,984 16,013
Purchase of investments (5,656) -- --
Proceeds from sale of securities 47,146 24,438 12,569
---------- ---------- ----------
Net cash used in investing activities (266,439) (150,525) (37,238)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes payable 100,000 -- --
Payments on notes payable (50,000) -- (5,000)
Dividends paid (15,221) (15,047) (14,175)
Purchases of stock for treasury -- (23,198) (450)
Proceeds from exercise of stock options 3,554 13,601 5,437
---------- ---------- ----------
Net cash provided by (used in) financing activities 38,333 (24,644) (14,188)
---------- ---------- ----------
DISCONTINUED OPERATIONS:
Net cash provided by operating activities 62,792 157,286 103,942
Net cash (used in) investing activities (55,232) (88,813) (64,081)
Cash of discontinued operations at spinoff (13,171) -- --
---------- ---------- ----------
Net cash provided by (used in) discontinued operations (5,611) 68,473 39,861
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (81,943) 20,739 86,329
Cash and cash equivalents, beginning of period 128,826 108,087 21,758
---------- ---------- ----------
Cash and cash equivalents, end of period $ 46,883 $ 128,826 $ 108,087
========== ========== ==========
</Table>
The accompanying notes are an integral part of these statements.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
September 30, 2002, 2001 and 2000
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Helmerich & Payne,
Inc. (the Company), and all of its wholly-owned subsidiaries. Fiscal years of
the Company's foreign consolidated operations end on August 31 to facilitate
reporting of consolidated results.
BASIS OF PRESENTATION
On September 30, 2002, the Company distributed 100 percent of the common stock
of Cimarex Energy Co. to the Company's stockholders. Cimarex Energy Co. held the
Company's exploration and production business and has been accounted for as
discontinued operations in the accompanying consolidated financial statements.
Unless indicated otherwise, the information in the notes to consolidated
financial statements relates to the continuing operations of the Company (see
Note 2).
TRANSLATION OF FOREIGN CURRENCIES
The Company has determined that the functional currency for its foreign
subsidiaries is the U.S. dollar. The foreign currency transaction loss for 2002,
2001 and 2000 was $5,473,000, $494,000, and $664,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company recognizes impairment losses for long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows expected to be generated by the asset are not sufficient
to recover the carrying amount of the asset. The impairment loss is calculated
as the difference between fair value and carrying amount of the long-lived
asset. Fair value on all long-lived assets are based on discounted future cash
flows or information provided by sales and purchases of similar assets.
Substantially all property, plant and equipment is depreciated using the
straight-line method based on the following estimated useful lives:
<Table>
<Caption>
YEARS
-----
Contract drilling equipment 4-15
Real estate buildings and equipment 10-50
Other 3-33
</Table>
46
As the result of an economic evaluation of useful lives of its drilling
equipment, the Company extended the depreciable life of its rig equipment from
10 to 15 years. This change provides a better matching of revenues and
depreciation expense over the useful life of the equipment. This change,
effective October 1, 2000, reduced depreciation expense for 2002 and 2001 by
approximately $30.0 million each year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks and investments readily
convertible into cash which mature within three months from the date of
purchase.
INVENTORIES AND SUPPLIES
Inventory and supplies are primarily replacement parts and supplies held for use
in our drilling operations. Inventory and supplies are valued at the lower of
cost (moving average or actual) or market value.
DRILLING REVENUES
Contract drilling revenues are comprised primarily of daywork drilling contracts
for which the related revenues and expenses are recognized as work progresses.
Fiscal 2000 contract drilling revenues also include revenues of $4,109,000 from
a rig construction contract for which revenues were recognized based on the
percentage-of-completion method, measured by the percentage that incurred costs
to date bear to total estimated costs. The Company does not currently have any
third party rig construction contracts. For certain contracts, the Company
receives lump-sum payments for the mobilization of rigs and other drilling
equipment. Revenues earned, net of direct costs incurred for the mobilization,
are deferred and recognized over the term of the related drilling contract.
Costs incurred to relocate rigs and other drilling equipment to areas in which a
contract has not been secured are expensed as incurred.
INVESTMENTS
The cost of securities used in determining realized gains and losses is based on
the average cost basis of the security sold. Net income in 2002 and 2001
includes a loss of approximately $0.5 million, $0.01 per share on a diluted
basis, and $1.4 million, $0.03 per share on a diluted basis, respectively,
resulting from the Company's assessment that the decline in market value of
certain available-for-sale securities below their financial cost basis was other
than temporary. There were no similar losses incurred in 2000.
Investments in companies owned from 20 to 50 percent are accounted for using the
equity method with the Company recognizing its proportionate share of the income
or loss of each investee. The Company owned approximately 22% of Atwood
Oceanics, Inc. (Atwood) at both September 30, 2002 and 2001. The quoted market
value of the Company's investment was $87,750,000 and $78,000,000 at September
30, 2002 and 2001, respectively. Retained earnings at September 30, 2002
includes approximately $29,720,000 of undistributed earnings of Atwood.
47
Summarized financial information of Atwood is as follows:
<Table>
<Caption>
SEPTEMBER 30, 2002 2001 2000
------------- ---------- ---------- ----------
(in thousands)
Gross revenues $ 149,157 $ 147,541 $ 134,514
Costs and expenses 120,872 120,195 111,366
---------- ---------- ----------
Net income $ 28,285 $ 27,346 $ 23,148
========== ========== ==========
Helmerich & Payne, Inc.'s equity in net income,
net of income taxes $ 4,206 $ 3,596 $ 3,221
========== ========== ==========
Current assets $ 71,771 $ 45,891 $ 64,917
Noncurrent assets 372,715 304,857 248,334
Current liabilities 24,417 19,144 17,484
Noncurrent liabilities 143,967 85,948 77,562
Shareholders' equity 276,102 245,656 218,205
========== ========== ==========
Helmerich & Payne, Inc.'s investment $ 58,937 $ 52,153 $ 46,353
========== ========== ==========
</Table>
INCOME TAXES
Deferred income taxes are computed using the liability method and are provided
on all temporary differences between the financial basis and the tax basis of
the Company's assets and liabilities.
OTHER POST EMPLOYMENT BENEFITS
The Company sponsors a health care plan that provides post retirement medical
benefits to retired employees. Employees who retire after November 1, 1992 and
elect to participate in the plan pay the entire estimated cost of such benefits.
The Company has accrued a liability for estimated workers compensation claims
incurred. The liability for other benefits to former or inactive employees after
employment but before retirement is not material.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted-average number of common
shares outstanding during the period. Diluted earnings per share includes the
dilutive effect of stock options and restricted stock.
EMPLOYEE STOCK-BASED AWARDS
Employee stock-based awards are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
information. Fixed plan common stock options do not result in compensation
expense, because the exercise price of the stock equals the market price of the
underlying stock on the date of grant.
48
TREASURY STOCK
Treasury stock purchases are accounted for under the cost method whereby the
entire cost of the acquired stock is recorded as treasury stock. Gains and
losses on the subsequent reissuance of shares are credited or charged to
additional paid-in-capital using the average-cost method.
CAPITALIZATION OF INTEREST
The Company capitalizes interest on major projects during construction. Interest
is capitalized on borrowed funds, with the rate based on the average interest
rate on related debt. Capitalized interest for 2002, 2001 and 2000 was $2.5
million, $1.3 million and $0.1 million, respectively.
INTEREST RATE RISK MANAGEMENT
The Company uses derivatives as part of an overall operating strategy to
moderate certain financial market risks and is exposed to interest rate risk
from long-term debt. To manage this risk, in October 1998, the Company entered
into an interest rate swap to exchange floating rate for fixed rate interest
payments through October 2003, the remaining life of the debt. The difference to
be paid or received is accrued and recognized as an adjustment of interest
expense. As of September 30, 2002, the Company's interest rate swap had a
notional principal amount of $50 million.
The Company's accounting policy for these instruments is based on its
designation of such instruments as hedging transactions. An instrument is
designated as a hedge based in part on its effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions. The
Company records all derivatives on the balance sheet at fair value.
For derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure of variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income in stockholders' equity and reclassified into earnings in the same period
or periods during which the hedged transaction affects earnings. The change in
value of the derivative instrument in excess of the cumulative change in the
present value of the future cash flows of the risk being hedged, if any, is
recognized in the current earnings during the period of change.
Gains and losses from termination of interest rate swap agreements are deferred
and amortized as an adjustment to interest expense over the original term of the
terminated swap agreement.
The company has one derivative, an interest rate swap, that is discussed further
in Note 3.
49
NOTE 2 DISCONTINUED OPERATIONS
On February 22, 2002, the Company's board of directors approved and on February
23, 2002, the Company entered into an Agreement and Plan of Merger and related
agreements with Key Production Company, Inc., including a Distribution Agreement
between the Company and Cimarex Energy Co. The agreements provided for the
consolidation of the Company's exploration and production business under Cimarex
Energy Co.; the distribution of 100 percent of the Cimarex Energy Co. common
stock to the Company's stockholders; and the merger of Key Production Company,
Inc. with a subsidiary of Cimarex Energy Co.
In July of 2002, the Company obtained a Private Letter Ruling from the Internal
Revenue Service to the effect that the contribution and transfer of the assets
and liabilities of the Company's exploration and production business to Cimarex
Energy Co. and the distribution by the Company of all shares of Cimarex Energy
Co. common stock to the holders of the Company's common stock would generally be
treated as a tax-free transaction for U.S. federal income tax purposes. Although
private letter rulings are generally binding on the IRS, the Company will not be
able to rely on this ruling if any of the factual representations or assumptions
that were made to obtain the ruling are, or become, incorrect or untrue in any
material respect. However, the Company is not aware of any facts or
circumstances that would cause any of the representations or assumptions to be
incorrect or untrue in any material respect. The distribution could also become
taxable to the Company, but not the Company's stockholders, under the Internal
Revenue Code (IRC) in the event the Company's subsequent business combinations
were deemed to be part of a plan contemplated at the time of distribution and
would constitute a total cumulative change of more than 50 percent of the equity
interest in either company.
On September 30, 2002, the Company's distribution of 100 percent of the common
stock of Cimarex Energy Co. and the subsequent merger of Key Production Company,
Inc. was completed. Upon completion of the merger, approximately 26.6 million
shares of the Cimarex Energy Co. common stock on a diluted basis was distributed
to stockholders of the Company of record on September 27, 2002. The Cimarex
Energy Co. stock distribution was recorded as a dividend and resulted in a
decrease to consolidated stockholders' equity of approximately $152.2 million.
Following this transaction, the Company and its subsidiaries will continue to
own and operate the contract drilling and real estate businesses, and Cimarex
Energy Co. will be a separate, publicly-traded company that will own and operate
the exploration and production business. The company does not own any common
stock of Cimarex Energy Co.
50
Under terms of a tax sharing agreement, each party has agreed to indemnify the
other in respect of all taxes for which it is responsible under the tax sharing
agreement. Cimarex is responsible for all taxes related to the exploration and
production business for all of past and future periods, including all taxes
arising from the Cimarex business prior to the time that Cimarex was formed, and
agrees to hold the Company harmless in respect of those taxes. Cimarex is
entitled to receive all refunds and credits of taxes previously paid with
respect to the exploration and production business. Cimarex will not receive the
benefit of any loss or similar tax attribute arising during the time that losses
from the Cimarex business are included in the Company's consolidated federal
income tax return. The Company remains responsible for all taxes related to the
business of the Company other than the exploration and production business and
has agreed to indemnify Cimarex in respect of any liability for any such taxes.
Summarized results of discontinued operations for the years ended September 30,
2002, 2001 and 2000, are as follows:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
(in thousands)
Revenues $172,827 $317,580 $238,953
Income from operations:
Income before income taxes 15,138 102,125 72,412
Tax provision 5,327 38,338 26,582
-------- -------- --------
Income from discontinued operations $ 9,811 $ 63,787 $ 45,830
======== ======== ========
</Table>
Net assets of discontinued operations as of September 30, 2001 are as follows:
<Table>
<Caption>
2001
---------
(in thousands)
Current assets $ 31,012
Property, plant and equipment - net 168,353
Other assets 278
---------
Total assets 199,643
---------
Current liabilities 44,801
Deferred income taxes 18,101
Other liabilities and deferred income 1,484
---------
Total liabilities 64,386
---------
Net assets of discontinued operations $ 135,257
=========
</Table>
51
NOTE 3 NOTES PAYABLE AND LONG-TERM DEBT
In August 2002, the Company entered into a $200 million intermediate-term
unsecured debt obligation with staged maturities from 5 to 12 years. At
September 30, 2002, the Company had $100 million in debt outstanding at fixed
rates and maturities as summarized in the following table.
<Table>
<Caption>
ISSUE AMOUNT MATURITY DATE INTEREST RATE
------------ ------------- -------------
$12,500,000 August 15, 2007 5.51%
$12,500,000 August 15, 2009 5.91%
$37,500,000 August 15, 2012 6.46%
$37,500,000 August 15, 2014 6.56%
</Table>
On October 15, 2002, the Company received an additional $100 million in
long-term debt proceeds under the same debt agreements and with identical issue
amounts, maturity dates, and interest rates as listed above. The terms of the
debt obligations require the Company to maintain a minimum ratio of debt to
total capitalization.
Proceeds from the intermediate-term debt was used to repay the balance of the
Company's outstanding debt of $50 million in September 2002, pay outstanding
balances in accounts payable related to the Company's rig construction program
and for other general corporate purposes.
At September 30, 2002, the Company had a committed unsecured line of credit
totaling $125 million. Letters of credit totaling $10.6 million were outstanding
against the line, leaving $114.4 million available to borrow. Under terms of the
line of credit, the Company must maintain certain financial ratios as defined
including debt to total capitalization and debt to earnings before interest,
taxes, depreciation, and amortization, and maintain certain levels of liquidity
and tangible net worth. Commitment fees of $175,000 were paid on the facility in
July 2002. A non-use fee of 0.15 percent per annum is calculated on the average
daily unused amount, payable quarterly. The interest rate varies based on LIBOR
plus .875 to 1.125 depending on ratios described above. The line of credit
matures in July, 2003.
At September 30, 2002, the Company held an unassociated interest rate swap tied
to 30-day LIBOR in the amount of $50 million which matures on October 27, 2003.
The swap instrument was originally designated as a hedge of a $50 million loan
that was paid-off in September 2002. The swap liability was valued at $1.7
million on September 30, 2002.
The interest rate swap liability was valued at approximately $1.7 million on the
date the $50 million debt was paid-off. The $1.7 million will be amortized over
the remaining life of the swap as interest expense. In 2002, $17,000 of this
amortization was included in interest expense. Changes to the value of the
interest rate swap subsequent to the date the $50 million debt was paid will be
recorded to income.
52
NOTE 4 INCOME TAXES
The components of the provision for income taxes from continuing operations are
as follows:
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- -------- -------- --------
(In thousands)
CURRENT:
Federal $ 13,324 $ 28,911 $ 5,316
Foreign 5,080 8,870 8,766
State 1,022 2,651 714
-------- -------- --------
19,426 40,432 14,796
-------- -------- --------
DEFERRED:
Federal 16,019 8,850 9,085
Foreign 3,732 4,701 6,146
State 1,396 706 1,075
-------- -------- --------
21,147 14,257 16,306
-------- -------- --------
TOTAL PROVISION: $ 40,573 $ 54,689 $ 31,102
======== ======== ========
</Table>
The amounts of domestic and foreign income from continuing operations are as
follows:
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- -------- -------- --------
(In thousands)
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EQUITY IN INCOME OF AFFILIATES:
Domestic $ 82,012 $106,163 $ 56,961
Foreign 9,208 26,814 7,390
-------- -------- --------
$ 91,220 $132,977 $ 64,351
======== ======== ========
</Table>
Effective income tax rates on income from continuing operations as compared to
the U.S. Federal income tax rate are as follows:
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- -------- -------- --------
(In thousands)
U.S. Federal income tax rate 35% 35% 35%
Effect of foreign taxes 7 4 12
Other, net 2 2 1
-------- -------- --------
Effective income tax rate 44% 41% 48%
======== ======== ========
</Table>
The components of the Company's net deferred tax liabilities are as follows:
<Table>
<Caption>
SEPTEMBER 30, 2002 2001
------------- --------- --------
(In thousands)
DEFERRED TAX LIABILITIES:
Property, plant and equipment $ 111,822 $ 81,677
Available-for-sale securities 25,221 33,937
Equity investments 11,165 15,637
Other -- 505
--------- --------
Total deferred tax liabilities 148,208 131,756
--------- --------
DEFERRED TAX ASSETS:
Financial accruals 9,998 3,031
Other 6,809 2,387
--------- --------
Total deferred tax assets 16,807 5,418
--------- --------
NET DEFERRED TAX LIABILITIES $ 131,401 $126,338
========= ========
</Table>
53
NOTE 5 STOCKHOLDERS' EQUITY
In December 2001, the board of directors authorized the repurchase of up to
2,000,000 shares per calendar year of the Company's common stock in the open
market or private transactions. The repurchased shares will be held in treasury
and used for general corporate purposes including use in the Company's benefit
plans. During fiscal 2001 the Company purchased 773,800 shares at a cost of
approximately $23,198,000, and in fiscal 2000 the Company purchased 20,600
shares at a cost of approximately $450,000. The Company did not purchase any
shares in fiscal 2002.
The Company has several plans providing for common-stock based awards to
employees and to non-employee directors. The plans permit the granting of
various types of awards including stock options and restricted stock. Awards may
be granted for no consideration other than prior and future services. The
purchase price per share for stock options may not be less than market price of
the underlying stock on the date of grant. Stock options expire ten years after
grant.
In March 2001, the Company adopted the 2000 Stock Incentive Plan (the "Stock
Incentive Plan"). The Stock Incentive Plan was effective December 6, 2000 and
will terminate December 6, 2010. Under this plan, the Company is authorized to
grant options for up to 3,000,000 shares of the Company's common stock at an
exercise price not less than the fair market value of the common stock on the
date of grant. Up to 450,000 shares of the total authorized may be granted to
participants as restricted stock awards. In fiscal 2002, 819,800 options were
granted under the 2000 plan. There were no restricted stock grants in fiscal
2002.
On September 30, 2002, the Company distributed 100 percent of the common stock
of Cimarex Energy Co. to the Company's stockholders. The distribution was
recorded as a dividend and resulted in a decrease to consolidated stockholders'
equity of approximately $152.2 million. Any options held by Cimarex employees at
the distribution date were automatically forfeited per the terms of the
Company's stock incentive plans. Both vested and unvested options held by
remaining participants at September 30, 2002 were adjusted (the number of
options and exercise price) to reflect the change in the value of Company stock
as the result of the spin-off of Cimarex. The adjustment was made in such a way
that aggregate intrinsic value of the options and the ratio of the exercise
price per share to the market value per share remained the same.
54
The following summary reflects the stock option activity for the Company's
common stock and related information for 2002, 2001, and 2000 (shares in
thousands):
<Table>
<Caption>
2002 2001 2000
-------------------------- -------------------------- -------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
Outstanding at October 1, 3,136 $25.78 2,955 $22.94 2,574 $21.34
Granted 820 29.89 844 32.36 767 24.75
Exercised (181) 19.61 (644) 21.34 (364) 15.44
Adjustment for Cimarex spinoff 926 -- -- -- -- --
Forfeited/Expired (826) 28.15 (19) 25.57 (22) 23.00
------- ------ ------- ------ ------- ------
Outstanding on September 30, 3,875 $20.28 3,136 $25.78 2,955 $22.94
------- ------ ------- ------ ------- ------
Exercisable on September 30, 1,935 $19.07 1,078 $23.82 1,046 $22.40
Shares available to grant 2,195 3,000 1,077
</Table>
The following table summarizes information about stock options at September 30,
2002 (shares in thousands):
<Table>
<Caption>
Outstanding Stock Options Exercisable Stock Options
--------------------------------------------- -------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Prices Options Remaining Life Exercise Prices Options Remaining Life
- ----------------- ------- ---------------- ---------------- ------- ----------------
$10.22 to $12.78 397 2.9 $10.58 363 $10.58
$12.79 to $19.84 1,460 6.2 $16.94 927 $16.91
$19.85 to $28.04 2,018 7.9 $24.60 645 $26.96
- ----------------- ------- ---------------- ---------------- ------- ----------------
$10.22 to $28.04 3,875 6.8 $20.28 1,935 $19.07
- ----------------- ------- ---------------- ---------------- ------- ----------------
</Table>
The following table reflects pro forma net income and earnings per share had the
Company elected to adopt the fair value method of SFAS No. 123, "Accounting for
Stock-Based Compensation", in measuring compensation cost beginning with 1997
employee stock-based awards.
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- -------- -------- --------
(in thousands, except per share data)
Net income:
As reported $ 63,517 $144,254 $ 82,300
Pro forma $ 61,072 $139,211 $ 78,788
Basic earnings per share:
As reported $ 1.27 $ 2.88 $ 1.66
Pro forma $ 1.23 $ 2.78 $ 1.59
Diluted earnings per share:
As reported $ 1.26 $ 2.84 $ 1.64
Pro forma $ 1.21 $ 2.74 $ 1.57
</Table>
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.
55
The weighted-average fair values of options at their grant date during 2002,
2001 and 2000 were $12.47, $13.01, and $10.80, respectively. The estimated fair
value of each option granted is calculated using the Black-Scholes
option-pricing model. The following summarizes the weighted-average assumptions
used in the model:
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Expected years until exercise 4.5 4.5 5.5
Expected stock volatility 48% 43% 41%
Dividend yield .8% .8% .8%
Risk-free interest rate 4.0% 5.2% 6.0%
</Table>
On September 30, 2002, the Company had 50,010,670 outstanding common stock
purchase rights ("Rights") pursuant to terms of the Rights Agreement dated
January 8, 1996. Under the terms of the Rights Agreement each Right entitled the
holder thereof to purchase from the Company one half of one unit consisting of
one one-thousandth of a share of Series A Junior Participating Preferred Stock
("Preferred Stock"), without par value, at a price of $90 per unit. The exercise
price and the number of units of Preferred Stock issuable on exercise of the
Rights are subject to adjustment in certain cases to prevent dilution. The
Rights will be attached to the common stock certificates and are not
exercisable or transferrable apart from the common stock, until ten business
days after a person acquires 15% or more of the outstanding common stock or ten
business days following the commencement of a tender offer or exchange offer
that would result in a person owning 15% or more of the outstanding common
stock. In the event the Company is acquired in a merger or certain other
business combination transactions (including one in which the Company is the
surviving corporation), or more than 50% of the Company's assets or earning
power is sold or transferred, each holder of a Right shall have the right to
receive, upon exercise of the Right, common stock of the acquiring company
having a value equal to two times the exercise price of the Right. The Rights
are redeemable under certain circumstances at $0.01 per Right and will expire,
unless earlier redeemed, on January 31, 2006. As long as the Rights are not
separately transferrable, the Company will issue one half of one Right with each
new share of common stock issued.
56
NOTE 6 EARNINGS PER SHARE
A reconciliation of the weighted-average common shares outstanding on a basic
and diluted basis is as follows:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
(in thousands)
Basic weighted-average shares 49,825 50,096 49,534
Effect of dilutive shares:
Stock options 508 644 492
Restricted stock 12 32 9
-------- -------- --------
520 676 501
-------- -------- --------
Diluted weighted-average shares 50,345 50,772 50,035
======== ======== ========
</Table>
Restricted stock of 44,675 shares at a weighted-average price of $30.38 and
options to purchase 451,421 shares of common stock at a weighted-average price
of $27.98 were outstanding at September 30, 2002 but were not included in the
computation of diluted earnings per common share. Inclusion of these shares
would be antidilutive.
At September 30, 2001, restricted stock of 120,018 shares at a weighted-average
price of $37.73 and options to purchase 1,250,750 shares of common stock at a
price of $33.84 were outstanding but were not included in the computation of
diluted earnings per common share. Inclusion of these shares would be
antidilutive.
At September 30, 2000, restricted stock of 180,000 shares at a weighted-average
price of $37.73 and options to purchase 533,000 shares of common stock at a
price of $36.84 were outstanding but were not included in the computation of
diluted earnings per common share. Inclusion of these shares would be
antidilutive.
57
NOTE 7 FINANCIAL INSTRUMENTS
The Company had $100 million of intermediate-term debt outstanding at September
30, 2002, which had an estimated fair value of $109.7 million. The debt was
valued based on the prices of similar securities with similar terms and credit
ratings. The Company used the expertise of an outside investment banking firm to
assist with the estimate of the fair value of the intermediate-term debt. The
Company's line of credit and notes payable bear interest at market rates and are
carried at cost which approximates fair value. The estimated fair value of the
Company's interest rate swap is a liability of $1.7 million at September 30,
2002, based on forward-interest rates derived from the year-end yield curve as
calculated by the financial institution that is a counterparty to the swap. The
estimated fair value of the Company's available-for-sale securities is primarily
based on market quotes.
The following is a summary of available-for-sale securities, which excludes
those accounted for under the equity method of accounting (see Note 1):
<Table>
<Caption>
Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
-------- ---------------- ---------------- --------------
(in thousands)
Equity Securities:
September 30, 2002 $ 46,325 $ 43,846 $ 3,772 $ 86,399
September 30, 2001 $ 63,778 $ 84,257 $ 3,136 $ 144,899
</Table>
During the years ended September 30, 2002, 2001, and 2000, marketable equity
available-for-sale securities with a fair value at the date of sale of
$46,692,000, $24,439,000, and $12,640,000, respectively, were sold. The gross
realized gains on such sales of available-for-sale securities totaled
$25,661,000, $3,314,000, and $12,576,000, respectively.
58
NOTE 8 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below presents changes in the components of accumulated other
comprehensive income (loss).
<Table>
<Caption>
Unrealized Appreciation
(Depreciation) Interest Rate Minimum
on Securities Swap Pension Liability Total
----------------------- ------------- ----------------- ---------
(in thousands)
Balance at September 30, 1999 $ 75,182 $ -- $ -- $ 75,182
2000 Change:
Pre-income tax amount 73,810 -- -- 73,810
Income tax provision (28,048) -- -- (28,048)
Realized gains in net income
(net of $9,120 income tax) (14,880) -- -- (14,880)
--------- ------------- --------- ---------
30,882 -- -- 30,882
--------- ------------- --------- ---------
Balance at September 30, 2000 106,064 -- -- 106,064
--------- ------------- --------- ---------
2001 Change:
Pre-income tax amount (88,762) (1,590) -- (90,352)
Income tax provision 33,730 604 -- 34,334
Realized gains in net income
(net of $452 income tax) (737) -- -- (737)
--------- ------------- --------- ---------
(55,769) (986) -- (56,755)
--------- ------------- --------- ---------
Balance at September 30, 2001 50,295 (986) -- 49,309
--------- ------------- --------- ---------
2002 Change:
Pre-income tax amount (16,228) (127) (12,277) (28,632)
Income tax provision 6,167 48 4,665 10,880
Amortization of swap
(net of $7 income tax benefit) -- 11 -- 11
Realized gains in net income
(net of $9,431 income tax) (15,388) -- -- (15,388)
--------- ------------- --------- ---------
(25,449) (68) (7,612) (33,129)
--------- ------------- --------- ---------
Balance at September 30, 2002 $ 24,846 $ (1,054) $ (7,612) $ 16,180
========= ============= ========= =========
</Table>
59
NOTE 9 EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
The following tables set forth the Company's disclosures required by SFAS No.
132, "Employers' Disclosures About Pensions and Other Postretirement Benefits".
CHANGE IN BENEFIT OBLIGATION:
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001
------------------------- -------- --------
(in thousands)
Benefit obligation at beginning of year $ 51,733 $ 44,838
Service cost 4,769 3,851
Interest cost 3,835 3,330
Curtailment (1,232) --
Actuarial loss 11,036 903
Benefits paid (2,007) (1,189)
-------- --------
Benefit obligation at end of year $ 68,134 $ 51,733
======== ========
</Table>
CHANGE IN PLAN ASSETS:
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001
------------------------- -------- --------
(in thousands)
Fair value of plan assets at beginning of year $ 53,987 $ 60,611
Actual loss on plan assets (3,694) (5,435)
Benefits paid (2,007) (1,189)
-------- --------
Fair value of plan assets at end of year $ 48,286 $ 53,987
======== ========
Funded status of the plan $(19,848) $ 2,254
Unrecognized net actuarial (gain) loss 24,929 6,720
Unrecognized prior service cost 284 548
Unrecognized net transition asset -- (540)
Accumulated other comprehensive income
(before tax) (12,277) --
-------- --------
Prepaid (accrued) benefit cost $ (6,912) $ 8,982
======== ========
</Table>
WEIGHTED-AVERAGE ASSUMPTIONS:
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- ------ ------ ------
Discount rate 6.75% 7.50% 7.50%
Expected return on plan 8.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 5.00%
</Table>
60
COMPONENTS OF NET PERIODIC PENSION EXPENSE:
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- -------- -------- --------
(in thousands)
Service cost $ 4,769 $ 3,851 $ 3,427
Interest cost 3,835 3,330 2,741
Expected return on plan assets (4,804) (5,415) (5,226)
Amortization of prior service cost 238 238 238
Amortization of transition asset (540) (540) (540)
Recognized net actuarial (gain) loss 120 17 (303)
-------- -------- --------
Net pension expense $ 3,618 $ 1,481 $ 337
======== ======== ========
</Table>
Defined Contribution Plan:
Substantially all employees on the United States payroll of the Company may
elect to participate in the Company sponsored Thrift/401(k) Plan by contributing
a portion of their earnings. The Company contributes amounts equal to 100
percent of the first five percent of the participant's compensation subject to
certain limitations. Expensed Company contributions were $5,226,000, $4,499,000,
and $3,188,000 in 2002, 2001, and 2000, respectively.
61
NOTE 10 OTHER CURRENT ASSETS AND ACCRUED LIABILITIES
Prepaid expenses and other consist of the following:
<Table>
<Caption>
SEPTEMBER 30, 2002 2001
------------- --------- --------
(In thousands)
Time deposits $ 337 $ 5,253
Prepaid income tax 9,304 11,218
Prepaid - other 7,112 14,798
--------- --------
$ 16,753 $ 31,269
========= ========
</Table>
Accrued liabilities consist of the following:
<Table>
<Caption>
SEPTEMBER 30, 2002 2001
------------- --------- --------
(In thousands)
Taxes payable - operations $ 7,660 $ 5,123
Income taxes payable -- 739
Workers compensation claims 2,506 2,585
Payroll and employee benefits 7,032 5,676
Loss contingency (see note 14) -- 10,000
Deferred income 6,016 --
Other 8,640 7,483
--------- --------
$ 31,854 $ 31,606
========= ========
</Table>
NOTE 11 SUPPLEMENTAL CASH FLOW INFORMATION
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- -------- -------- --------
(in thousands)
Interest paid $ 2,929 $ 2,668 $ 2,851
Income taxes paid $ 9,779 $ 42,523 $ 34,295
</Table>
62
NOTE 12 RISK FACTORS
CONCENTRATION OF CREDIT
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of temporary cash investments and trade
receivables. The Company places temporary cash investments with established
financial institutions and invests in a diversified portfolio of highly rated,
short-term money market instruments. The Company's trade receivables are
primarily with companies in the oil and gas industry.
CONTRACT DRILLING OPERATIONS
International drilling operations are significant contributors to the Company's
revenues and net profit. It is possible that operating results could be affected
by the risks of such activities, including economic conditions in the
international markets in which the Company operates, political and economic
instability, fluctuations in currency exchange rates, changes in international
regulatory requirements, international employment issues, and the burden of
complying with foreign laws. These risks may adversely affect the Company's
future operating results and financial position.
The Company believes that its rig fleet is not currently impaired based on an
assessment of future cash flows of the assets in question. However, it is
possible that the Company's assessment that it will recover the carrying amount
of its rig fleet from future operations may change in the near term.
NOTE 13 NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and amends FASB Statement No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies." The Statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made, and that the associated asset retirement costs be
capitalized as part of the carrying amount of the long-lived asset. The
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company anticipates no impact on the
Company's results of operations and financial position upon adopting SFAS No.
143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and amends Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The Statement retains the basic framework of SFAS No.
121, resolves certain implementation issues of SFAS No. 121, extends
applicability to discontinued operations, and broadens the presentation of
discontinued operations to include a component of an entity.
63
The Statement will be applied prospectively and is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company's approach for impairment under SFAS No. 121 is consistent with the
provisions under SFAS No. 144. Accordingly, adopting this statement on the
Company's results of operations and financial position will not be different
than if the Company continued to use SFAS No. 121.
NOTE 14 CONTINGENT LIABILITIES AND COMMITMENTS
LITIGATION SETTLEMENT
The Company was a defendant in Verdin v. R&B Falcon Drilling USA, Inc., et al.,
a civil action in the United States District Court, Galveston, Texas. In May
2001, the Company reached an agreement in principle with Plaintiff's counsel to
settle all claims pending court approval of the settlement. In the third quarter
of fiscal 2001, the Company incurred a net charge of $3.25 million to contract
drilling expense based on the pending settlement. The Court approved the
settlement on April 25, 2002. In June, 2002, the Company paid $10 million to
settle all claims in this litigation. The Company was reimbursed $6.75 million
in June, 2002 by the Company's insurer.
COMMITMENTS
The Company, on a regular basis, makes commitments for the purchase of contract
drilling equipment. At September 30, 2002, the Company has commitments of
approximately $150 million for the purchase of drilling equipment.
NOTE 15 SEGMENT INFORMATION
The Company operates principally in the contract drilling industry, which
includes a Domestic segment and an International segment. The contract drilling
operations consist of contracting Company-owned drilling equipment primarily to
major oil and gas exploration companies. The Company's primary international
areas of operation include Venezuela, Colombia, Ecuador, Argentina and Bolivia.
The Company also has a Real Estate segment whose operations are conducted
exclusively in the metropolitan area of Tulsa, Oklahoma. The primary areas of
operations include a major shopping center and several multi-tenant warehouses.
Each reportable segment is a strategic business unit which is managed separately
as an autonomous business. Other includes investments in available-for-sale
securities and corporate operations. The "other" component of Total Assets also
includes the Company's investment in equity-owned investments. As described in
Note 2 the Company's oil and gas operations were distributed to Company
stockholders on September 20, 2002. Such operations have been treated as
discontinued operations and have been excluded from these segment disclosures.
64
The Company evaluates performance of its segments based upon operating profit or
loss from operations before income taxes which includes revenues from external
and internal customers, operating costs, and depreciation but excludes general
and administrative expense, interest expense and corporate depreciation and
other income (expense). The accounting policies of the segments are the same as
those described in Note 1, Summary of Accounting Policies. Intersegment sales
are accounted for in the same manner as sales to unaffiliated customers.
Summarized financial information of the Company's reportable segments for
continuing operations for each of the years ended September 30, 2002, 2001, and
2000 is shown in the following table:
<Table>
<Caption>
Additions
External Inter- Total Operating Total to Long-Lived
(in thousands) Sales Segment Sales Profit Depreciation Assets Assets
- -------------- ---------- ---------- ---------- ---------- ------------ ---------- -------------
2002:
Contract Drilling
Domestic $ 335,704 $ 809 $ 336,513 $ 69,181 $ 37,120 $ 728,611 $ 284,527
International Services 138,623 -- 138,623 13,128 20,336 254,940 23,157
---------- ---------- ---------- ---------- ------------ ---------- -------------
474,327 809 475,136 82,309 57,456 983,551 307,684
---------- ---------- ---------- ---------- ------------ ---------- -------------
Real Estate 8,525 1,491 10,016 5,064 1,844 26,562 3,181
Other 28,076 -- 28,076 -- 2,147 217,200 1,199
Eliminations -- (2,300) (2,300) -- -- -- --
---------- ---------- ---------- ---------- ------------ ---------- -------------
Total $ 510,928 $ -- $ 510,928 $ 87,373 $ 61,447 $1,227,313 $ 312,064
========== ========== ========== ========== ============ ========== =============
2001:
Contract Drilling
Domestic $ 332,399 $ 4,487 $ 336,886 $ 107,691 $ 26,277 $ 506,173 $ 144,063
International Services 154,890 -- 154,890 28,475 18,838 268,947 38,022
---------- ---------- ---------- ---------- ------------ ---------- -------------
487,289 4,487 491,776 136,166 45,115 775,120 182,085
---------- ---------- ---------- ---------- ------------ ---------- -------------
Real Estate 11,018 1,545 12,563 6,315 2,284 22,621 1,190
Other 10,967 -- 10,967 -- 2,133 367,123 1,393
Eliminations -- (6,032) (6,032) -- -- -- --
---------- ---------- ---------- ---------- ------------ ---------- -------------
Total $ 509,274 $ -- $ 509,274 $ 142,481 $ 49,532 $1,164,864 $ 184,668
========== ========== ========== ========== ============ ========== =============
2000:
Contract Drilling
Domestic $ 214,531 $ 3,048 $ 217,579 $ 35,808 $ 35,355 $ 342,278 $ 40,722
International Services 136,549 -- 136,549 9,753 38,101 259,892 13,825
---------- ---------- ---------- ---------- ------------ ---------- -------------
351,080 3,048 354,128 45,561 73,456 602,170 54,547
---------- ---------- ---------- ---------- ------------ ---------- -------------
Real Estate 8,999 1,545 10,544 5,346 1,611 24,235 2,909
Other 32,063 -- 32,063 -- 2,250 436,269 8,364
Eliminations -- (4,593) (4,593) -- -- -- --
---------- ---------- ---------- ---------- ------------ ---------- -------------
Total $ 392,142 $ -- $ 392,142 $ 50,907 $ 77,317 $1,062,674 $ 65,820
========== ========== ========== ========== ============ ========== =============
</Table>
65
The following table reconciles segment operating profit per the table on page 65
to income before taxes and equity in income of affiliates as reported on the
Consolidated Statements of Income (in thousands).
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- ---------- ---------- ----------
Segment operating profit $ 87,373 $ 142,481 $ 50,907
Unallocated amounts:
Income from investments 28,444 10,317 31,510
General and administrative expense (20,391) (16,627) (13,612)
Interest expense (980) (1,701) (2,730)
Corporate depreciation (2,147) (2,133) (2,250)
Other corporate income (expense) (1,079) 640 526
---------- ---------- ----------
Total unallocated amounts 3,847 (9,504) 13,444
---------- ---------- ----------
Income before income taxes and equity in
income of affiliates $ 91,220 $ 132,977 $ 64,351
========== ========== ==========
</Table>
The following tables present revenues from external customers and long-lived
assets by country based on the location of service provided (in thousands).
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30, 2002 2001 2000
------------------------- ---------- ---------- ----------
Revenues
United States $ 372,305 $ 354,384 $ 255,593
Venezuela 47,118 43,409 34,922
Ecuador 45,433 35,793 20,422
Colombia 9,559 27,045 42,509
Other Foreign 36,513 48,643 38,696
---------- ---------- ----------
Total $ 510,928 $ 509,274 $ 392,142
========== ========== ==========
Long-Lived Assets
United States $ 698,316 $ 448,119 $ 330,711
Venezuela 72,630 84,856 37,001
Ecuador 49,353 33,520 30,636
Colombia 14,339 16,195 26,361
Other Foreign 62,807 67,361 102,014
---------- ---------- ----------
Total $ 897,445 $ 650,051 $ 526,723
========== ========== ==========
</Table>
Long-lived assets are comprised of property, plant and equipment.
Revenues from one company doing business with the contract drilling segment
accounted for approximately 15.7 percent, 24.2 percent, and 24.4 percent of the
total consolidated revenues during the years ended September 30, 2002, 2001 and
2000, respectively. Revenues from another company doing business with the
contract drilling segment accounted for approximately 14.6 percent, 12.9
percent, and 11.9 percent of total consolidated revenues in the years ended
September 30, 2002, 2001 and 2000, respectively. Revenues from another company
doing business with the contract drilling segment accounted for approximately
12.0 percent, 8.3 percent, and 7.3 percent of total consolidated revenues in the
years ended September 30, 2002, 2001 and 2000, respectively. Collectively, the
receivables from these customers were approximately $35.0 million and $40.5
million at September 30, 2002 and 2001, respectively.
66
NOTE 16 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)
<Table>
<Caption>
2002 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ---- ----------- ----------- ----------- -----------
Revenues $134,992 $120,950 $139,709 $115,277
Gross profit 33,878 19,821 44,200 14,692
Income from continuing operations 18,127 8,129 22,551 4,899
Net income 15,604 10,872 28,218 8,823
Basic earnings per common share:
Income from continuing operations .36 .16 .46 .10
Net income .31 .22 .57 .18
Diluted earnings per common share:
Income from continuing operations .36 .16 .45 .10
Net income .31 .22 .56 .17
</Table>
<Table>
<Caption>
2001 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ---- ----------- ----------- ----------- -----------
Revenues $106,009 $115,186 $141,336 $146,743
Gross profit 28,086 29,520 44,011 49,688
Income from continuing operations 13,956 14,105 24,154 28,252
Net income 33,840 41,749 40,437 28,228
Basic earnings per common share:
Income from continuing operations .28 .28 .48 .57
Net income .68 .83 .80 .57
Diluted earnings per common share:
Income from continuing operations .27 .28 .47 .56
Net income .67 .82 .79 .56
</Table>
Gross profit represents total revenues less operating costs and depreciation.
The sum of earnings per share for the four quarters may not equal the total
earnings per share for the year due to changes in the average number of common
shares outstanding.
Net income in the third quarter of 2002 includes after-tax gains on sale of
available-for-sale securities of $15.2 million, $0.30 per share, on a diluted
basis.
67