Back to GetFilings.com

Table of Contents

UNITED STATES

2003 FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For the fiscal year ended December 31, 2003

Commission file number 1-14634

GlobalSantaFe Corporation

Registrant’s telephone number, including area code: (281) 925-6000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes þ

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes þ          No o

     The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2003) was approximately $4.4 billion (Kuwait Petroleum Corporation and its affiliates and the executive officers and directors of the registrant are considered affiliates for purposes of this calculation).

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: Ordinary Shares, $.01 par value, 234,569,630 shares outstanding as of February 27, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement in connection with the 2004 Annual General Meeting of Shareholders are incorporated into Part III of this Report.

TABLE OF CONTENTS

      The Company makes available on its website, free of charge, at www.gsfdrill.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. The information contained in the Company’s website does not constitute a part of this Annual Report.

      Information relating to corporate governance at the Company, including the Company’s Corporate Governance Policy; Director Independence Standards; Standards of Business Conduct; Code of Ethics for Senior Financial Officers; and information concerning the Company’s Board Committees, including Committee charters, is available on the Company’s website at www.gsfdrill.com under the “Corporate Governance” caption. The Company will provide any of the foregoing information without charge upon written request to the Secretary of the Company at 15375 Memorial Drive, Houston, Texas 77079.

EARNINGS CONFERENCE CALL

      On Wednesday, April 28, 2004, GlobalSantaFe Corporation is scheduled to release its first quarter 2004 financial results before trading opens on the New York Stock Exchange. On April 28, 2004, at 10:00 a.m. Central Daylight Time (11:00 p.m. Eastern Daylight Time), the Company is scheduled to hold an earnings conference call to discuss the results.

      Interested parties may participate in the conference by calling (913) 981-4900, confirmation code 168490. The call is also available through the Company’s website at www.gsfdrill.com. It is recommended that

Table of Contents

ANNUAL GENERAL MEETING OF SHAREHOLDERS

      The 2004 Annual General Meeting of Shareholders has been scheduled on Wednesday, June 9, 2004, at 9:00 a.m. Central Daylight time in the GlobalSantaFe Auditorium, 15375 Memorial Drive, Houston, Texas 77079-4101.

2

Table of Contents

FORWARD-LOOKING STATEMENTS

      Under the Private Securities Litigation Reform Act of 1995, companies are provided a “safe harbor” for discussing their expectations regarding future performance. The Company believes it is in the best interests of its shareholders and the investment community to use these provisions and provide such forward-looking information. The Company does so in this report and other communications. Forward-looking statements are often but not always identifiable by use of words such as “anticipate,” “believe,” “budget,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “should,” and “will.”

      The Company’s forward-looking statements include statements about the following subjects:

	•	The Company’s possible or assumed results of operations;
	•	The Company’s funding and financing plans;
	•	the dates drilling rigs will become available following completion of current contracts;
	•	the dates the Company’s rigs that are under construction are expected to be delivered;
	•	projected cash outlays, the timing of such outlays and expected sources of funding in connection with the rigs that are under construction;
	•	the Company’s belief that a Venezuelan tax lien will not impact the operations of the rigs within Venezuela;
	•	the Company’s contract drilling and drilling management services revenue backlogs and the amounts expected to be realized in 2004;
	•	the potential sale of the Company’s land rig fleet assets;
	•	the Company’s estimate of undiscounted future cash flows relating to the determination of impairment of rigs and drilling equipment;
	•	the expected outcomes of legal and administrative proceedings, their materiality, and their expected effects on the Company’s financial position and results of operations;
	•	the Company’s expectations regarding the length of time mobile assets will be operating in given locations and the Company’s resulting conclusions regarding the future tax consequences of operating in those locations;
	•	the Company’s expectation that certain rigs are more likely than not to be redeployed before operating in certain jurisdictions long enough to give rise to tax liabilities;
	•	the assumptions as to risk-free interest rates, stock volatility, dividend yield and expected lives of awards used to estimate the fair value of stock-based compensation awards;
	•	the return assumptions developed by Company consultants in determining expected long-term rate of return on pension plan assets assumption;
	•	the Company’s expectations regarding future conditions in various geographic markets in which the Company operates and the prospects for future work and dayrates in those markets;
	•	the Company’s use of critical accounting policies and the assumptions and estimates made by management during the preparation of the Company’s financial statements;
	•	expected restructuring costs in connection with the Merger between Global Marine and Santa Fe International;
	•	the fact that the Company does not have any current plans to offer securities under the registration Statement on Form S-3 filed with the SEC in September 2003;

3

Table of Contents

	•	the fact that the Company does not anticipate using stock to satisfy future purchase obligations in connection with the Company’s Zero Coupon Convertible Debentures;
	•	the Company’s estimated capital expenditures in 2004;
	•	the Company’s expectation that it will fund various commitments, primarily related to the Company’s debt and capital lease obligations, leases for office space and other property and equipment as well as commitments for construction of drilling rigs, with existing cash, cash equivalents, marketable securities and future cash flows from operations;
	•	the effect recent and prospective contract awards in the ultra-deepwater market will have on backlog and dayrates;
	•	the Company’s ability to service indebtedness;
	•	the Company’s ability to meet all of its current obligations, including working capital requirements, capital expenditures, total lease obligations, construction and development expenses, and debt service, from its existing cash, cash equivalents and marketable securities balances and future cash flow from operations;
	•	that the Company does not believe it has any VIEs within the scope of FIN 46;
	•	the results of the Company’s sensitivity analyses to assess the impact of oil price changes under certain dayrate contracts;
	•	the Company’s expectation that, if required, any additional payments made under certain fully defeased financing leases would not be material to its financial position or results of operations in any given year;
	•	the Company’s belief that its exposure to interest rate fluctuations is not material to its financial position, results of operations or cash flows;
	•	the Company’s belief that credit risk in its commercial paper, U.S. Treasury Notes, money-market funds and Eurodollar time deposits with a variety of financial institutions with strong credit ratings is minimal;
	•	the Company’s intention not to exercise its option to build two additional new ultra-deepwater semisubmersibles;
	•	the adequacy of the Company’s valuation allowance in connection with net operating loss carryforwards;
	•	the costs, adequacy and availability of insurance; and
	•	any other statements that are not historical facts.

      The Company’s forward-looking statements speak only as of the date of this report and are based on currently available industry, financial, and economic data and the Company’s operating plans. They are also inherently uncertain, and investors must recognize that events could turn out to be materially different from the Company’s expectations.

      Factors that could cause or contribute to such differences include, but are not limited to:

	•	higher than anticipated accruals for performance-based compensation due to better than anticipated Company performance, higher than anticipated severance expenses due to unanticipated employee terminations, higher than anticipated legal and accounting fees due to unanticipated financing or other corporate transactions, and other factors that could increase G&A expenses;

4

Table of Contents

	•	a material or extended decline in expenditures by the oil and gas industry, which is significantly affected by indications and expectations regarding the level and volatility of oil and natural gas prices, which in turn are affected by such things as political, economic and weather conditions affecting or potentially affecting regional or worldwide demand for oil and natural gas, actions or anticipated actions by OPEC, inventory level, deliverability constraints, and futures market activity;
	•	if a competitor succeeds in enjoining the Company from using its dual drilling activity structure and method;
	•	the extent to which customers and potential customers continue to pursue ultra-deepwater drilling;
	•	the extent to which the Company is required to idle rigs or to enter into lower dayrate contracts in response to future market conditions;
	•	exploration success or lack of exploration success by the Company’s customers and potential customers;
	•	the Company’s ability to enter into and the terms of future drilling contracts;
	•	the Company’s ability to win bids for turnkey drilling operations;
	•	rig availability and the Company’s ability to hire suitable rigs at acceptable rates;
	•	the availability of qualified personnel;
	•	the availability of adequate insurance at a reasonable cost;
	•	the occurrence of an uninsured or unidentified event;
	•	the risks of failing to complete a well or wells under turnkey contracts;
	•	other risks inherent in turnkey contracts;
	•	the Company’s failure to retain the business of one or more significant customers;
	•	the termination or renegotiation of contracts by customers;
	•	the operating hazards inherent in drilling for oil and natural gas;
	•	the risks of international operations and compliance with foreign laws;
	•	political and other uncertainties inherent in non-U.S. operations, including exchange and currency fluctuations and the limitations on the ability to repatriate income or capital to the U.S.;
	•	compliance with or breach of environmental laws;
	•	proposed United States tax law changes;
	•	changes in employee demographics that impact the estimated remaining service lives of the active participants in the Company’s pension plans;
	•	the impact of governmental laws and regulations and the uncertainties involved in their administration, particularly in some foreign jurisdictions;
	•	the highly competitive and cyclical nature of the Company’s business, with periods of low demand and excess rig availability;
	•	the outbreak of war, other armed conflicts or terrorist attacks;
	•	the effect of SARS or other public health threats on the Company’s international operations;
	•	political or social disruptions that limit oil and/or gas production;
	•	the actions of the Company’s competitors in the oil and gas drilling industry, which could significantly influence rig dayrates and utilization;

5

Table of Contents

	•	delays or cost overruns in the Company’s construction projects caused by such things as shortages of materials or skilled labor, unforeseen engineering problems, unanticipated actual or purported change orders, work stoppages, shipyard financial or operating difficulties, adverse weather conditions or natural disasters, unanticipated cost increases, and the inability to obtain requisite permits or approvals;
	•	the occurrence or nonoccurrence of anticipated changes in the Company’s revenue mix between domestic and international drilling markets due to changes in the Company’s customers’ oil and gas drilling plans, which can be the result of such things as changes in regional or worldwide economic conditions and fluctuations in the prices of oil and natural gas, which in turn could change or stabilize effective tax rates;
	•	the vagaries of the legislative process due to the unpredictable nature of politics and national and world events, among other things;
	•	currently unknown rig repair needs and/or additional opportunities to accelerate planned maintenance expenditures due to presently unanticipated rig downtime;
	•	changes in oil and natural gas drilling technology or in the Company’s competitors’ drilling rig fleets that could make the Company’s drilling rigs less competitive or require major capital investments to keep them competitive;
	•	the adequacy of sources of liquidity;
	•	the incurrence of secured debt or additional unsecured indebtedness or other obligations by the Company or its subsidiaries;
	•	the uncertainties inherent in dealing with financial and other third-party institutions that could have internal weaknesses unknown to the Company;
	•	changes in accepted interpretations of accounting guidelines and other accounting pronouncements;
	•	the effects and uncertainties of legal and administrative proceedings and other contingencies; and
	•	such other factors as may be discussed in this report in the “Risk Factors” section under Items 1 and 2 and elsewhere, and in the Company’s other reports filed with the U.S. Securities and Exchange Commission.

      You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the Company disclaims any obligation or undertaking to disseminate any updates or revisions to these statements, forward-looking or otherwise, to reflect changes in the Company’s expectations or any change in events, conditions or circumstances on which any such statements are based.

6

Table of Contents

PART I

Items 1. and 2.	Business and Properties

      GlobalSantaFe Corporation (“GlobalSantaFe” or the “Company”) is a worldwide oil and gas drilling contractor, owning or operating a fleet of over 90 marine and land drilling rigs. The Company’s owned fleet currently includes 13 floating rigs, 45 cantilevered jackup rigs (including the GSF Constellation I, which was delivered in June 2003), 31 land rigs and one platform rig. In addition, the Company or its affiliates currently maintain two platform rigs for third parties, and it participates in a joint venture that operates two semisubmersible rigs for third parties.

      As part of the Company’s goal of enhancing long-term shareholder value, the Company is currently considering the possibility of selling its land rig fleet assets provided that the Company receives value from such a sale, if any, that the Company deems fair in light of the quality of these assets and the Company’s long-term market outlook for these assets. The net book value of the Company’s land drilling fleet totaled $190.9 million at December 31, 2003.

      The Company provides offshore oil and gas contract drilling services to the oil and gas industry worldwide on a daily rate (“dayrate”) basis. The Company also provides offshore oil and gas drilling management services on either a dayrate or completed-project, fixed-price (“turnkey”) basis, as well as drilling engineering and drilling project management services, and it participates in oil and gas exploration and production activities. Business segment and geographic information is set forth in Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The Company is a Cayman Islands company, with its executive offices in Houston, Texas.

      Unless otherwise provided, the term “Company” refers to GlobalSantaFe Corporation and, unless the context otherwise requires, to its predecessors and consolidated subsidiaries. Substantially all of the Company’s businesses are conducted by subsidiaries of GlobalSantaFe Corporation.

Merger of Santa Fe International Corporation and Global Marine Inc.

      On November 20, 2001, Santa Fe International Corporation (“Santa Fe International”) and Global Marine Inc. (“Global Marine”) consummated their business combination with the merger (the “Merger”) of an indirect wholly owned subsidiary of Santa Fe International with and into Global Marine, with Global Marine surviving the Merger as a wholly owned subsidiary of Santa Fe International. In connection with the Merger, Santa Fe International was renamed GlobalSantaFe Corporation. The Merger was accounted for as a purchase business combination in accordance with accounting principles generally accepted in the United States of America. As the stockholders of Global Marine owned slightly over 50% of GlobalSantaFe after the Merger and Global Marine officers filled the majority of senior management positions, Global Marine was considered the acquiring entity for accounting purposes.

Contract Drilling

      Substantially all of the Company’s domestic offshore contract drilling operations are conducted by GlobalSantaFe Drilling Company (“GSFDC”), a wholly owned subsidiary headquartered in Houston, Texas. International offshore and land contract drilling operations are conducted by subsidiaries of the Company with operations in 20 countries throughout the world.

      Offshore Rig Fleet. The Company has a modern, diversified fleet of 58 mobile offshore drilling rigs and one platform rig. The Company’s mobile offshore drilling rigs include six cantilevered heavy-duty harsh environment jackups, 39 cantilevered jackups, nine semisubmersibles, three ultra-deepwater, dynamically positioned drillships and one moored drillship. All of the Company’s offshore rigs, with the exception of the Britannia jackup and the platform rig, were placed into service in 1974 or later, and, as of February 29, 2004, the average age of the rigs in the Company’s offshore fleet was approximately 20 years.

7

Table of Contents

      The Company’s fleet is deployed in major offshore oil and gas operating areas worldwide. The principal areas in which the fleet is currently deployed are the U.S. Gulf of Mexico, the North Sea, West Africa, Southeast Asia, the Middle East, North Africa, South America and eastern Canada.

      The following table lists the rigs in the Company’s offshore drilling fleet as of February 29, 2004, indicating the year each rig was placed in service, each rig’s maximum water and drilling depth capabilities, current location, customer, and the date each rig is estimated to become available.

Offshore Rig Fleet

8

Table of Contents

(1)	As currently equipped.
(2)	Estimated based on the anticipated completion date of current commitments, including executed contracts, letters of intent, and other customer commitments for which contracts have not yet been executed.

     Rig Types. Jackup rigs have elevating legs which extend to the sea bottom, providing a stable platform for drilling, and are generally preferred in water depths of 400 feet or less. All of the Company’s jackup rigs have drilling equipment mounted on cantilevers, which allow the equipment to extend outward from the rigs’ hulls over fixed drilling platforms and enable operators to drill both exploratory and development wells. In addition, eight of the Company’s jackups have been equipped with skid-off packages, which allow the drilling equipment to be transferred to fixed production platforms.

      The Company owns one of the world’s largest fleets of heavy-duty harsh environment jackup rigs in service in the industry. Three of the Company’s rigs, the GSF Galaxy I, GSF Galaxy II and GSF Galaxy III, are Universe class rig designs capable of operating in water depths up to 400 feet and are currently qualified to operate year-round in the harsh environment of the central North Sea in water depths of up to 360 feet. The Company’s three other heavy-duty harsh environment jackup rigs, the GSF Monarch, GSF Monitor and GSF Magellan, are Monarch class rig designs capable of operating in water depths of up to 350 feet. These rigs are capable of operating year-round in the central North Sea in water depths of up to 300 feet.

9

Table of Contents

      Semisubmersible rigs are floating offshore drilling units with pontoons and columns that, when flooded with water, cause the unit to partially submerge to a predetermined depth. Most semisubmersibles are anchored to the sea bottom, but some use dynamic positioning (“DP”), which allows the vessels to be held in position by computer-controlled propellers, known as thrusters. Semisubmersibles are classified into five generations, distinguished mainly by their age, environmental rating, variable deck load and water-depth capability. The Company’s GSF Aleutian Key is a second-generation semisubmersible capable of drilling in water depths up to 2,300 feet. The GSF Arctic I, GSF Arctic II, GSF Arctic III, GSF Arctic IV, GSF Grand Banks, GSF Rig 135 and GSF Rig 140 semisubmersibles are third-generation, conventionally-moored rigs suitable for drilling in water depths ranging from 1,200 to 3,400 feet. The Company’s GSF Celtic Sea is a fourth-generation semisubmersible capable of drilling in water depths of up to 5,750 feet, and utilizes a mooring system that is DP-assisted.

      Drillships are generally preferred for deepwater drilling in remote locations with moderate weather environments because of their mobility and large load carrying capability. The Company’s GSF C.R. Luigs, Glomar Jack Ryan and Glomar Explorer are dynamically positioned, ultra-deepwater drillships capable of drilling in water depths up to 9,000 feet, 8,000 feet and 7,800 feet, respectively, as currently equipped. With modifications, maximum water depth capabilities are 12,000 feet for the GSF C.R. Luigs and Glomar Jack Ryan, and 10,000 feet for the Glomar Explorer. The Glomar Robert F. Bauer is a conventionally-moored drillship capable of drilling in maximum water depths of 2,750 feet.

      The Company’s “deepwater” rigs consist of its semisubmersibles and drillships. The Company considers rigs with a maximum water-depth capability of 7,000 feet or more, such as the GSF C.R. Luigs, Glomar Jack Ryan and Glomar Explorer, to be “ultra-deepwater” rigs.

      The Company’s platform rig consists of a number of self-contained drilling equipment packages, that, when assembled on a customer’s offshore production platform, forms a complete drilling rig.

      The Company has title to all of the offshore drilling rigs in its fleet in the table above with the exception of the Glomar Explorer, which is subject to a 30-year capital lease, and the GSF C.R. Luigs and Glomar Jack Ryan, which are subject to fully defeased, 20-year capital leases. None of the Company’s offshore drilling rigs is currently subject to any outstanding liens or mortgages.

      In January 2003, in order to take advantage of an attractive financing structure, the Company entered into a lease-leaseback arrangement with a European bank related to the Company’s Britannia cantilevered jackup. Pursuant to this arrangement, the Company leased the Britannia to the bank, which then leased the rig back to the Company, each lease being for a five-year term. The Company has classified this arrangement as a capital lease.

      The Company currently has a contract with PPL Shipyard PTE, Ltd. of Singapore (“PPL”) for construction of the GSF Constellation II, the second of two high-performance jackups ordered from PPL. In June 2003, the Company took delivery of the GSF Constellation I, at a total construction cost of $133 million, excluding an estimated $19 million of capitalized interest, capital spares, startup expenses and mobilization costs. Estimated cash outlays in connection with the construction of the GSF Constellation II, excluding capitalized interest, startup costs, capital spares and mobilization costs, are also expected to total approximately $133 million. The GSF Constellation II is expected to be delivered near the end of the first quarter of 2004.

      The Company also has contracts with PPL for the construction of two ultra-deepwater semisubmersible drilling rigs at a cost of approximately $285 million each. The Company has options for construction of two additional ultra-deepwater semisubmersibles at a similar price to the two current contracts, but does not intend to exercise these options. Construction of the first new semisubmersible, the GSF Development Driller I, commenced in the third quarter of 2001, and the rig is scheduled for delivery in the second quarter of 2004. The second ultra-deepwater semisubmersible, the GSF Development Driller II, has been under construction since November 2002 and is expected to be delivered near the end of the first quarter of 2005.

      The Company anticipates that this rig building program will be funded through the Company’s existing cash and marketable securities balances and future cash flow from operations.

10

Table of Contents

      Land Rig Fleet. The majority of the Company’s 31 land rigs are designed for use in remote desert environments and generally include all facilities necessary to support living and working in harsh and remote environments, including accommodation camps and inventories of repair parts and materials. Each rig is designed for efficient disassembly, transport and reassembly. Eleven of the newer rigs are specially designed as wheel-mounted units that can be moved quickly between well locations. Three of the rigs are equipped with special “lift and roll” systems so the rigs can be quickly moved between well locations on a pad site. An extensive fleet of specialized rig transport equipment supports land rig operations in Kuwait and the Kuwait-Saudi Arabia Partitioned Neutral Zone. This equipment consists primarily of heavy-duty trucks built and equipped for desert service. These operations are also supported by a fleet of heavy equipment, including bulldozers, cranes and forklifts that prepare access roads and drill site locations and facilitate the assembly and disassembly of the land rigs.

      The Company has historically concentrated its land rig operations in the Middle East, South America and North Africa. All of the Company’s land rigs were placed into service in 1972 or later, and, as of February 29, 2004, their average age was approximately 14 years.

      The following table lists the rigs in the Company’s land drilling fleet as of February 29, 2004, indicating the year each rig was placed in service, rig type, each rig’s drilling depth capabilities, current location, customer, and the date each rig is estimated to become available.

Land Rig Fleet

11

Table of Contents

(1)	Estimated based on the anticipated completion date of current commitments, including executed contracts, letters of intent, and other customer commitments for which contracts have not yet been executed.
(2)	Rig 159 was returned to the Company’s operating fleet in the third quarter of 2003. This rig was designated as held for sale at December 31, 2002.

     The Company has title to all of the land drilling rigs in its fleet. The Company’s Rig 187 land rig in Venezuela is presently encumbered by a lien asserted by the Venezuelan tax authorities in connection with certain assessed retroactive tax liabilities. Although this claim restricts the Company’s ability to export the rig from Venezuela, the Company does not believe that the claim will impact the operations of the rig within Venezuela. The Company is contesting the imposition of the lien and the various assertions of the tax authorities. The Company has the option of posting a bond with the Venezuelan authorities to release this claim. None of the Company’s other land rigs is currently subject to any outstanding liens or mortgages.

      Third-Party Rig Operations. The Company’s third-party rig operations consist primarily of semisubmersible rig operations in the Caspian Sea. See “— Joint Venture, Agency and Sponsorship Relationships and Other Investments.” Effective November 1, 2003, the Company discontinued its maintenance operations related to nine third-party owned oil and gas platforms in the North Sea, and, as of February 29, 2004, the Company maintained two platform rigs in the North Sea for third parties. Platform rig operations have historically not had a material effect on the Company’s consolidated operating results.

      Backlog. The Company’s contract drilling backlog at December 31, 2003, was $996.6 million, consisting of $930.8 million related to executed contracts and $65.8 million related to customer commitments for which contracts had not yet been executed as of December 31, 2003. Approximately $513.7 million of the backlog is expected to be realized in 2004. The Company’s contract drilling backlog at December 31, 2002, was $1.2 billion and included $132.2 million attributable to customer commitments for which contracts had not yet been executed as of that date.

      Drilling Contracts and Major Customers. Contracts to employ the Company’s drilling rigs extend over a specified period of time or the time required to drill a specified well or number of wells. While the final contract for employment of a rig is the result of negotiations between the Company and the customer, most contracts are awarded based upon competitive bidding. The rates specified in drilling contracts are generally on a dayrate basis and vary depending upon the type of rig employed, equipment and services supplied, geographic location, term of the contract, competitive conditions and other variables. Each contract provides for a basic dayrate during drilling operations, and may also include performance premiums or lower rates or provision for no payment for periods of equipment breakdown, adverse weather or other conditions which may be beyond the Company’s control. When a rig mobilizes to or demobilizes from an operating area, a contract may provide for different dayrates, specified fixed amounts or no payment during the mobilization or demobilization. In some cases, a contract may be terminated by the customer if drilling operations are suspended for a specified period of time due to a breakdown of major equipment, in the event of poor operational, safety or environmental performance not remedied by the Company within a specified period, or if other events occur that are beyond either party’s control. A contract may also be terminated by the customer if the rig is destroyed. In addition, certain contracts are cancellable upon specified notice at the option of the customer.

      The Company’s business is subject to the usual risks associated with having a limited number of customers for its services. Two customers each accounted for more than 10% of consolidated revenues in 2003: Total S.A. (“Total”) provided $234.2 million of contract drilling revenues, and ExxonMobil provided

12

Table of Contents

Drilling Management Services

      The Company provides drilling management services, including turnkey, project management and daywork services, primarily through a wholly owned subsidiary, Applied Drilling Technology Inc. (“ADTI”), and through ADT International, a division of one of the Company’s U.K. subsidiaries. ADTI operates primarily in the U.S. Gulf of Mexico, and ADT International operates internationally. Under a turnkey arrangement, the Company will assume responsibility for the design and execution of a well and deliver a logged or cased hole to an agreed depth for a guaranteed price. Compensation is contingent upon satisfactory completion of the drilling program. Under the Company’s turnkey drilling operations, the Company provides planning, engineering and management services beyond the scope of its traditional contract drilling business and thereby assumes greater risk. In the Company’s project management operations, the Company provides certain planning, management and engineering services, purchases equipment and provides personnel and other logistical services to customers. Project management services differ from turnkey drilling services in that the customer retains control of the drilling operations and thus retains the risk associated with the project.

      The Company’s drilling management services business is also subject to the usual risks associated with having a limited number of customers for its services. One customer, BG Group, accounted for $98.9 million, or 18.7%, of drilling management services revenues in connection with project management operations in the North Sea in 2003, substantially all of which were reimbursable revenues. Reimbursable revenues represent reimbursements received from the client for certain out-of-pocket expenses and have no effect on operating income. No turnkey drilling customer accounted for more than 10% of drilling management services revenues for 2003. One customer, Encana (U.K.) Ltd., accounted for $44.3 million, or 10.6%, of drilling project management services revenues in connection with project management operations in the North Sea in 2002, substantially all of which were reimbursable revenues. No turnkey drilling customer accounted for more than 10% of drilling management services revenues for 2002. See “Risk Factors — The Company Relies Heavily on a Small Number of Customers and the Loss of a Significant Customer Could Have a Material Adverse Impact on the Company’s Financial Results.”

      As of December 31, 2003, the Company’s drilling management services revenue backlog was an estimated $42 million, all of which is expected to be realized in 2004. The Company’s drilling management services backlog was an estimated $118 million at December 31, 2002.

Oil and Gas Operations

      The Company conducts oil and gas exploration, development and production activities through its wholly owned subsidiary, Challenger Minerals Inc. (“CMI”). CMI acquires its interests in oil and gas properties principally in order to facilitate the acquisition of turnkey contracts for the Company’s drilling management services operations. In this capacity, CMI facilitated the acquisition of 24 projects (15 turnkey wells and nine completions) in 2003. CMI participated in 14 of these turnkey wells, of which 7 proved successful. In certain circumstances, CMI also acquires interests in oil and gas properties to facilitate the acquisition of dayrate contracts for the Company’s offshore rigs. The Company’s oil and gas activities are conducted primarily in the North Sea and in the United States offshore Louisiana and Texas. In December 2003, CMI participated in a drilling project in West Africa off the coast of Mauritania. The results of this drilling project are currently being evaluated.

13

Table of Contents

Joint Venture, Agency and Sponsorship Relationships and Other Investments

      In some areas of the world, local customs and practice or governmental requirements necessitate the formation of joint ventures with local participation, which the Company may or may not control. The Company is a participant in several joint venture drilling companies, principally in Azerbaijan, Indonesia, Malaysia, Nigeria and Oman.

      In Azerbaijan, the semisubmersibles Istiglal and Dada Gorgud operate under long-term bareboat charters. The Istiglal is bareboat chartered to and operated by the joint venture Caspian Drilling Company Limited, in which the Company holds a 45% ownership interest, until October 2006. The Dada Gorgud is bareboat chartered to the Company until October 2006 or the later termination of the Company’s current drilling contract with the Azerbaijan International Operating Company. The Company has subcontracted operations of the Dada Gorgud to Caspian Drilling Company Limited.

      The Company also participates in a joint venture that operates a petroleum supply base in Indonesia. The Indonesian supply base, in which the Company holds a 42% ownership interest, is located at Merak Point on the western portion of the island of Java. It provides both open and covered storage and bulk chemical trans-shipment facilities. The land lease for this supply base extends through 2030. The joint venture is currently offering this supply base for sale.

      The Company also has a passive minority interest in a Libyan drilling company managed by non-U.S. persons that is and has been managed in accordance with applicable trade laws and regulations and is accounted for on the cost basis.

      Local laws or customs in some areas of the world also effectively mandate establishment of a relationship with a local agent or sponsor. When appropriate in these areas, the Company enters into agency or sponsorship agreements.

Risk Factors

      The Company’s business depends on the level of offshore and onshore oil and natural gas exploration, development and production activity in markets worldwide. Prices and demand for oil and natural gas, and market expectations of potential changes in demand and prices, significantly affect this level of activity. Worldwide military, political and economic events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. Numerous factors may affect oil and natural gas prices and, accordingly, the level of demand for the Company’s services, including:

	•	worldwide demand for oil and natural gas;
	•	the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels and pricing;
	•	the level of production by non-OPEC countries;
	•	Changes in supply and demand resulting from the development of liquefied natural gas markets;
	•	the worldwide military or political environment, including uncertainty or instability resulting from the situation in Iraq or other armed hostilities in the Middle East or other geographic areas in which the Company operates, or further acts of terrorism in the United States or elsewhere;
	•	labor, political or other disruptions that limit exploration, development and production in oil-producing countries, such as has been experienced from time to time in various developing countries;
	•	domestic and foreign tax policy;

14

Table of Contents

	•	laws and governmental regulations that restrict exploration and development of oil and natural gas in various jurisdictions;
	•	advances in exploration and development technology; and
	•	further consolidation of the Company’s customer base.

      Depending on the market prices of oil and natural gas, companies exploring for oil and gas may cancel or curtail their drilling programs, thereby reducing demand for drilling services. Even during periods of high prices for oil and natural gas, companies exploring for oil and gas may cancel or curtail programs, or reduce their levels of capital expenditures for exploration and production for a variety of reasons. Any reduction in the demand for drilling services may materially erode dayrates and utilization rates for the Company’s rigs and adversely affect its financial results.

      The contract drilling business is highly competitive with numerous industry participants. The industry has experienced consolidation in recent years and may experience additional consolidation. Recent mergers among oil and natural gas exploration and production companies have reduced the number of available customers.

      Drilling contracts are, for the most part, awarded on a competitive bid basis. Price competition is often the primary factor in determining which qualified contractor is awarded a job, although rig availability and the quality and technical capability of service and equipment are also factors. The Company competes with numerous offshore drilling contractors, one of which is larger and has greater resources than the Company. Further, the Company’s business is subject to the risks associated with having a limited number of customers for its services.

      The Company may be required to idle rigs or to enter into lower dayrate contracts in response to market conditions in the future. The industry in which the Company operates historically has been cyclical, marked by periods of low demand, excess rig supply and low dayrates, followed by periods of high demand, short rig supply and increasing dayrates. Periods of excess rig supply intensify the competition in the industry and often result in rigs being idled. Several markets in which the Company operates are currently oversupplied. Lower utilization and dayrates in one or more of the regions in which the Company operates would adversely affect its revenues and profitability. Prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges on certain of the Company’s drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these rigs may not be recoverable.

      The continuing unrest in Iraq, increasing tension with regard to North Korea, as well as the terrorist attacks of September 11, 2001, and subsequent terrorist attacks and unrest have significantly increased political and economic instability in some of the geographic areas in which the Company operates and have caused instability in the world’s financial and insurance markets. The Company’s operations in Kuwait, Saudi Arabia and elsewhere in the Middle East could be adversely affected by post-war conditions in Iraq if armed hostilities, acts of terrorism or other unrest persist. Acts of terrorism and threats of armed conflicts elsewhere in the Middle East and in or around various other areas in which the Company operates, such as Indonesia, could also limit or disrupt its markets and operations. Further hostilities or additional acts of terrorism in these regions could result in the evacuation of personnel, cancellation of drilling contracts or the loss of personnel or assets. In addition, the attacks of September 11, 2001, led to war in Afghanistan and may lead to armed hostilities or to further acts of terrorism in the United States or elsewhere, and such acts of terrorism could be directed against companies such as ours. Armed conflicts, terrorism and their effects on the Company or its markets could significantly affect its business in the future. United States government regulations effectively

15

Table of Contents

      The Company currently has one premium jackup rig and two ultra-deepwater semisubmersible rigs under construction. The Company has a three-year contract with BP America Production Company (“BP”) for the use of the semisubmersible GSF Development Driller II for BP’s Atlantis project in the U.S. Gulf of Mexico beginning in July 2005. The Company has also received a commitment from Total to use the premium jackup rig GSF Constellation II for a six-well project off the coast of Argentina beginning in August 2004. The Company is actively marketing the semisubmersible GSF Development Driller I, but this vessel has not secured a contract for deployment upon completion, which is scheduled for the second quarter of 2004. The Company’s ability to obtain a contract for this rig and the terms of any such contract will depend on market conditions. Historically, the industry has experienced prolonged periods of overcapacity, during which many rigs were idle for long periods of time. The Company may not be able to obtain contracts for all of its new or existing rigs and future contract terms may not be similar to those for similar equipment in current market conditions.

      The Company and two of its subsidiaries are defendants in a lawsuit filed on July 28, 2003, by Transocean Inc. (“Transocean”) in the United States District Court for the Southern District of Texas, Houston Division. The lawsuit alleges that the dual drilling structure and method utilized by the Company’s two ultra-deepwater semisubmersibles under construction in Singapore infringe on United States patents granted to Transocean. The lawsuit seeks damages, royalties and attorney’s fees, together with an injunction preventing the Company’s use of the dual drilling activity structure and method in the U.S. The dual drilling activity structure of these semisubmersibles consists of multiple activity features which enable dual simultaneous drilling operations on the drill floor and on the main deck and are designed to deliver improved performance efficiencies. If granted, this injunction would preclude the use of the dual drilling capabilities in U.S. waters by the Company’s two ultra-deepwater semisubmersibles currently under construction. If that occurs, it may be more difficult for the Company to market and obtain contracts for the rigs or it may have an adverse effect on the terms of any contracts for those rigs which are obtained, including on the dayrate of the contract. Accordingly, if Transocean is successful in its action, the revenues generated from the semisubmersibles may be adversely affected. Transocean has patents in most other jurisdictions in which the Company might choose to market the rigs and, if it brings similar actions in one or more of these jurisdictions and is successful, the Company’s ability to use the dual drilling activity structure and method in those jurisdictions would be restricted as well.

16

Table of Contents

      The Company’s results of operations from its drilling management services may be limited by the Company’s ability to obtain and successfully perform turnkey drilling contracts based on competitive bids, as well as other factors. The Company’s ability to obtain turnkey drilling contracts will largely depend on the number of these contracts available for bid, which in turn will be influenced by market prices for oil and natural gas, among other factors. Accordingly, results of the Company’s drilling management service operations may vary widely from quarter to quarter and from year to year. Furthermore, its ability to enter into turnkey drilling contracts may be constrained from time to time by the availability of GlobalSantaFe or third party drilling rigs.

      The Company enters into a significant number of turnkey contracts each year. The Company’s compensation under turnkey contracts depends on whether it successfully drills to a specified depth or, under some of its contracts, completes the well. Unlike dayrate contracts, where ultimate control is exercised by the operator, the Company will be exposed to additional risks when serving as a turnkey drilling contractor because the Company will make all critical decisions. Under a turnkey contract, the amount of the Company’s compensation will be fixed at the amount it bids to drill the well. Thus, the Company will not be paid if operational problems prevent performance unless the Company chooses to drill a new well at its own expense. Further, the Company must absorb the loss if unforeseen problems arise that cause the cost of performance to exceed the turnkey price. By contrast, in a dayrate contract, the customer generally retains these risks. The cost of contingencies could exceed budgeted amounts. The Company is not insured against all of these risks associated with turnkey drilling operations.

      The Company requires highly skilled personnel to operate and provide technical services and support for its business. Competition for the skilled and other labor required for deepwater and other drilling operations intensifies as the number of rigs activated or added to worldwide fleets or under construction increases. The Company currently has one premium jackup rig and two deepwater semisubmersible rigs under construction. The Company must hire full crews for these rigs before they commence operations in addition to its routine requirements for drilling crews. In periods of high utilization the Company has found it more difficult to find qualified individuals, and the possibility exists that competition for skilled and other labor for deepwater and other operations could limit the Company’s results of operations.

      The Company’s contract drilling business is subject to the usual risks associated with having a limited number of customers for its services. Total S.A. and ExxonMobil each provided approximately 12% of the Company’s consolidated revenues in 2003. The Company’s five next largest customers for 2003 (ChevronTexaco, BP, BG, BHP and AGIP), none of which individually represented more than 10% of revenues, accounted in the aggregate for approximately 27% of the Company’s 2003 consolidated revenues. ExxonMobil provided approximately 13% of the Company’s consolidated revenues in 2002. The Company’s five next largest customers for 2002 (ChevronTexaco, BP, Shell, Total and BHP), none of which individually represented more than 10% of consolidated revenues, accounted in the aggregate for approximately 35% of the Company’s 2002 consolidated revenues. The Company’s results of operations could be materially adversely affected if any of its major customers terminates its contracts with the Company, fails to renew its existing contracts or refuses to award new contracts to the Company.

17

Table of Contents

      The Company’s drilling management services business is also subject to the usual risks associated with having a limited number of customers for its services. One customer, BG Group, accounted for $98.9 million, or 18.7%, of drilling management services revenues in connection with project management operations in the North Sea in 2003, substantially all of which were reimbursable revenues. Reimbursable revenues represent reimbursements received from the client for certain out-of-pocket expenses and have no effect on operating income. The Company’s five next largest drilling management services customers, none of which individually represented more than 10% of drilling management services revenues, accounted in the aggregate for approximately 27% of the Company’s drilling management services revenues for 2003. One customer, Encana (U.K.) Ltd., accounted for $44.3 million, or 10.6%, of drilling management services revenues in connection with project management operations in the North Sea in 2002, substantially all of which were reimbursable revenues. The Company’s five next largest drilling management services customers, none of which individually represented more than 10% of drilling management services revenues, accounted in the aggregate for approximately 32% of the Company’s drilling management services revenues for 2002.

      Certain of the Company’s contracts with customers may be cancellable upon specified notice at the option of the customer. Other contracts require the customer to pay a specified early termination payment upon cancellation, which payments may not fully compensate the Company for the loss of the contract. Contracts customarily provide for either automatic termination or termination at the option of the customer in the event of total loss of the drilling rig or if drilling operations are suspended for extended periods of time by reason of acts of God or excessive rig downtime for repairs, or other specified conditions. Early termination of a contract may result in a rig being idle for an extended period of time. The Company’s revenues may be adversely affected by customers’ early termination of contracts, especially if the Company is unable to recontract the affected rig within a short period of time. During depressed market conditions, a customer may no longer need a rig that is currently under contract or may be able to obtain a comparable rig at a lower daily rate. As a result, customers may seek to renegotiate the terms of their existing drilling contracts or avoid their obligations under those contracts. The renegotiation of a number of the Company’s drilling contracts could adversely affect the Company’s financial position, results of operations and cash flows.

      The Company currently has two ultra-deepwater semisubmersible rigs and one premium jackup rig under construction. In addition, the Company may make major upgrade and refurbishment expenditures for its fleet. Rig upgrade, refurbishment and construction projects are subject to the risks of delay or cost overruns inherent in any large construction project, including the following:

	•	shortages of materials or skilled labor;
	•	unforeseen engineering problems;
	•	unanticipated actual or purported change orders;
	•	work stoppages;
	•	financial or operating difficulties of the shipyard upgrading, refurbishing or constructing the rig;
	•	adverse weather conditions;
	•	unanticipated cost increases; and
	•	inability to obtain any of the requisite permits or approvals.

      Significant cost overruns or delays could materially and adversely affect the Company’s financial condition and results of operations. In addition, the Company’s premium jackup and ultra-deepwater semisubmersibles currently under construction will employ advancements in technology that may lead to

18

Table of Contents

      The Company’s operations are subject to the usual hazards incident to the drilling of oil and natural gas wells, including blowouts, explosions, oil spills and fires. The Company’s activities are also subject to hazards peculiar to marine operations, such as collision, grounding, and damage or loss from severe weather.

      All of these hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. The Company insures against, or will have indemnification from customers for some, but not all, of these risks. The Company does not generally insure against loss of revenue for rigs that are damaged or destroyed. The Company’s insurance contains various deductibles and limitations on coverage and deductibles. In light of the current volatility in the insurance markets and recent significant increases in rates, the Company may elect to change its insurance coverage, including by increasing deductibles, retentions and other limitations on coverage. Changes in coverage such as those would effectively increase the amount of risk against which the Company is not insured.

      As a result of poor underwriting results suffered by the insurance industry over the past few years and the catastrophic events of September 11, 2001, the Company has been faced with the prospect of paying significantly higher insurance premiums and/or significantly increasing its deductibles in order to offset or mitigate premium increases. As compared with its insurance obtained in the summer of 2001, the Company’s current insurance has a similar annual premium, but it is subject to significantly higher deductibles. Most notably, the Company’s deductible for insurance for rig physical damage increased from less than $500,000 to $10 million per occurrence, subject to a $20 million aggregate deductible. The Company may face increases in premiums or deductibles or both in the future.

      The occurrence of a significant event, including terrorist acts, war, civil disturbances, pollution or environmental damage, not fully insured or indemnified against or the failure of a customer to meet its indemnification obligations, could materially and adversely affect the Company’s operations and financial condition. The Company may not be able to maintain adequate insurance in the future at rates it considers reasonable or be able to obtain insurance against certain risks.

      Risks associated with the Company’s international operations, any of which could limit or disrupt its markets or operations, include heightened risks of:

	•	terrorist acts, war and civil disturbances;
	•	expropriation or nationalization of assets;
	•	renegotiation or nullification of existing contracts;
	•	foreign taxation, including changes in law or interpretation of existing law;
	•	assaults on property or personnel;
	•	changing political conditions;
	•	foreign and domestic monetary policies; and

19

Table of Contents

	•	travel limitations or operational problems caused by Severe Acute Respiratory Syndrome (SARS) or other public health threats.

      Additionally, the Company’s ability to compete in the international drilling market may be adversely affected by non-U.S. governmental regulations favoring or requiring the awarding of drilling contracts to local contractors or requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. Furthermore, foreign governmental regulations, which may in the future become applicable to the oil and natural gas industry, could reduce demand for the Company’s services, or such regulations could directly affect the Company’s ability to compete for customers.

      Eight of the Company’s land drilling rigs are located in Venezuela, which has been experiencing labor strikes and demonstrations, and in 2002 experienced an attempt to overthrow the government. The implications and results of the political, economic and social instability in Venezuela are uncertain at this time, but the instability has had and could continue to have an adverse effect on the Company’s business.

      Due to the Company’s structure and extensive foreign operations, the Company’s effective tax rate is based on the provisions of numerous tax treaties, conventions and agreements between various countries and taxing jurisdictions, as well as the tax laws of many jurisdictions. Changes in one or more of these tax regimes or changes in the interpretation of existing laws in these regimes could also have a material adverse effect on the Company.

      SARS is a highly communicable disease, outbreaks of which occurred early in 2003 in Southeast Asia and other parts of the world in which the Company operates. Travel restrictions and quarantines imposed primarily in Southeast Asia posed some interference with the Company’s operations during 2003. Scientists are predicting that SARS may reappear. The reappearance of SARS or other public health threats could adversely impact the global economy, the worldwide demand for oil and natural gas and the level of demand for the Company’s services. SARS or other public health threats could also bring about quarantines of Company personnel, the inability to access the Company’s offices or rigs, or restrictions on travel to or through countries in which the Company operates. These restrictions could curtail the Company’s ability to operate its rigs. The SARS outbreak early in 2003 was most severe in Southeast Asia where the Company conducts operations and maintains offices (in Indonesia, Malaysia, Thailand and Vietnam). The Company also has two deepwater semisubmersible rigs and a premium jackup rig under construction in Singapore. Any quarantine of personnel or inability to access the Company’s offices or rigs could adversely affect the Company’s operations, including delaying the delivery of the three rigs under construction. Travel restrictions or operational problems in any part of the world in which the Company operates, or any reduction in the demand for drilling services caused by SARS or other public health threats in the future, may materially impact operations and adversely affect the Company’s financial results.

      A majority of the Company’s international drilling and services contracts are partially payable in local currency in amounts that are generally intended to approximate the Company’s estimated local operating costs, with the balance of the payments under the contract payable in U.S. dollars (except in Kuwait, Malaysia and Saudi Arabia, where the Company will likely be paid entirely in local currency). In certain jurisdictions, including Egypt and Nigeria, regulations exist which determine the amounts payable in local currency. Those amounts can exceed the local currency costs being incurred, leading to accumulations of excess local currency, which in certain instances can be subject to either temporary blocking or difficulties in converting to U.S. dollars. To the extent that the Company’s revenues denominated in local currency do not equal its local operating expenses, or during periods of idle time when no revenue is earned, the Company is exposed to currency exchange transaction losses, which could materially and adversely affect the Company’s

20

Table of Contents

      The Company’s business is affected by changes in public policy and by federal, state, foreign and local laws and regulations relating to the energy industry. The drilling industry is dependent on demand for services from the oil and natural gas exploration and production industry and, accordingly, the Company will be directly affected by the adoption of laws and regulations curtailing exploration and development drilling for oil and natural gas for economic, environmental and other policy reasons. The Company may be required to make significant capital expenditures to comply with governmental laws and regulations. It is also possible that these laws and regulations may in the future add significantly to the Company’s operating costs or may significantly limit drilling activity.

      Governments in some non-U.S. countries have become increasingly active in regulating and controlling the ownership of concessions, companies holding concessions, the exploration of oil and natural gas and other aspects of the oil and natural gas industries in these countries. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so.

      The Company’s ability to realize the benefit of its deferred tax asset requires that the Company achieve certain future earnings levels prior to the expiration of its net operating loss (“NOL”) carryforwards. The Company has established a valuation allowance against the future tax benefit of a portion of its NOL carryforwards and could be required to record an additional valuation allowance if market conditions change materially and future earnings are, or are projected to be, significantly different from the Company’s current estimates. The Company’s NOL carryforwards are subject to review and potential disallowance upon audit by the tax authorities in the jurisdictions where the loss was incurred.

      As of December 31, 2003, the Company had approximately $679.1 million of NOL carryforwards for U.S. federal income tax purposes, including an NOL carryforward of $408.4 million at November 19, 2001, related to Global Marine. The NOL carryforwards are scheduled to expire from 2004 to 2024. The Company’s NOL carryforwards are subject to review and potential disallowance upon audit by tax authorities. Section 382 of the U.S. Internal Revenue Code could limit the future use of all or some of the U.S. NOL carryforwards if the direct and indirect ownership of stock of the relevant company changes by more than 50% in certain circumstances over a prescribed testing period. The Internal Revenue Service may take the position that the Merger consummated pursuant to the business combination of Santa Fe International and Global Marine caused a greater-than-50-percent ownership change with respect to Global Marine. If the Merger did not result in such an ownership change, changes in the ownership of the Company’s ordinary shares following the Merger could result in such an ownership change. In the event of such an ownership change, the Section 382 rules would limit the utilization of the NOL carryforwards of Global Marine in each taxable year ending after the ownership change to an amount equal to a federal long-term tax-exempt rate published monthly by the Internal Revenue Service, multiplied by the fair market value of all of Global Marine’s stock at the time of the ownership change. For purposes of this calculation, the value of Global Marine’s stock could also be subject to adjustments, thereby further limiting the Company’s ability to utilize its NOL carryforwards in each taxable year thereafter.

      Starting in 2002, various changes to the U.S. federal income tax code were proposed that, if enacted, could adversely affect the Company’s United States federal income tax position. Many of the proposed changes target United States corporations that have expatriated to a foreign jurisdiction and would in certain cases treat such corporations as United States corporations for United States federal income tax purposes. Several of the proposals would have retroactive application and would treat the Company as a United States

21

Table of Contents

      At this time, it is impossible to predict what changes, if any, may be enacted and, if enacted, what effect such changes may have on the Company. However, there is a risk that changes to U.S. tax laws could substantially increase the Company’s income tax costs. If this were to occur, such changes could have a material adverse effect on the Company’s financial position and future results of operations.

      The Company has not provided for U.S. deferred taxes on the unremitted earnings of its U.S. subsidiaries and their foreign subsidiaries (“U.S. Subsidiaries”) that are permanently reinvested outside the U.S. Should the Company make a distribution from the unremitted earnings of its U.S. Subsidiaries, the Company would be required to record additional U.S. deferred taxes that, if material, would have an adverse effect on the Company’s financial position, results of operations and cash flows.

      Taxes have not been provided for in circumstances where management expects that, due to the changing demands of the offshore drilling markets, the Company’s rigs are more likely than not to be redeployed to other locations before those rigs operate in certain jurisdictions long enough to give rise to future tax consequences. In 2003, management revised its expectations relative to the continuing deployment and future tax consequences for one such rig and recorded a deferred tax liability of $24.1 million due to this change in circumstance. Should management’s expectations change regarding the length of time other rigs will be operating in a given location, the Company may be required to record additional deferred income taxes that could have a material adverse effect on its financial position, results of operations and cash flows.

      The Company’s operations are subject to numerous federal, state, and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment. As a result, the application of these laws could have a material adverse effect on the Company’s results of operations by increasing the Company’s cost of doing business, discouraging its customers from drilling for hydrocarbons or subjecting the Company to liability. For example, the Company, as an operator of mobile offshore drilling units in navigable U.S. waters and certain offshore areas, including the Outer Continental Shelf, is liable for damages and for the cost of removing oil spills for which it may be held responsible, subject to certain limitations. The Company’s operations may involve the use or handling of materials that may be classified as environmentally hazardous substances. Laws and regulations protecting the environment have generally become more stringent and may in certain circumstances impose “strict liability,” rendering a person liable for environmental damage without regard to negligence or fault. Environmental laws and regulations may expose the Company to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed. For a discussion of potential environmental liabilities affecting the Company, see “Item 3. Legal Proceedings — Environmental Matters.”

      The amount of debt that the Company can manage in some periods may not be as large as in other periods because the Company’s earnings and cash flows vary significantly from year to year following trends in its industry. The Company’s future cash flow may be insufficient to meet all of its debt obligations and commitments, and any insufficiency could negatively impact the Company’s business. The Company’s ability to generate cash flow from operations to pay its debt will depend on the Company’s future financial performance, which will be affected by a range of economic, competitive and business factors. The Company

22

Table of Contents

      If the Company does not generate sufficient cash flow from operations to satisfy its debt obligations, it may have to undertake alternative financing plans, such as refinancing or restructuring the Company’s debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. A refinancing may not be possible, the Company may be unable to sell assets for acceptable prices, and additional financing may not be obtained on acceptable terms, if at all. The Company’s inability to generate sufficient cash flow to satisfy all of its debt obligations, or to refinance its indebtedness on commercially reasonable terms, would materially adversely affect the Company’s financial position, results of operations and cash flows.

      SFIC Holdings (Cayman), Inc. (“SFIC Holdings”), a wholly owned subsidiary of Kuwait Petroleum Corporation, which is in turn wholly owned by the State of Kuwait, held approximately 18.6% of the outstanding ordinary shares of the Company at December 31, 2003.

      As long as Kuwait Petroleum Corporation and its affiliates own at least 12.5% of the outstanding ordinary shares or at least 12.5% of the outstanding voting shares, SFIC Holdings has the right to designate for election three directors of the Company. If SFIC Holdings’ interest is reduced to less than 12.5% and equal to or greater than 7.5%, the number of directors that SFIC Holdings will have the right to designate for election is reduced from three to two. If SFIC Holdings’ interest is reduced to less than 7.5% and equal to or greater than 4%, the number of directors that SFIC Holdings may designate for election is reduced from two to one. If SFIC Holdings’ interest is reduced to less than 4%, it will not have the right to designate any directors for election to the board of the Company. For purposes of determining SFIC Holdings’ ownership interest in the Company, until SFIC Holdings sells any GlobalSantaFe Ordinary Shares, only ordinary shares outstanding at the completion of the Merger are included in the calculation of the ownership percentage. Accordingly, reductions in SFIC Holdings’ percentage ownership in the Company as a result of the Company’s issuance of shares will not reduce SFIC Holdings’ board representation.

      As a result, Kuwait Petroleum Corporation, through SFIC Holdings, is able to significantly influence the management and affairs of the Company and all matters requiring shareholder approval, including the election of the Company’s Board of Directors. This concentration of ownership could delay or deter a change of control of the Company.

      Although the owners of all the ordinary shares after the Merger are entitled to one vote per share, the consent of SFIC Holdings is required to change the jurisdiction of incorporation of the Company or any existing subsidiary or to incorporate a new subsidiary in a jurisdiction in a manner materially adversely affecting the rights or interests of Kuwait Petroleum Corporation and its affiliates as long as Kuwait Petroleum Corporation and its affiliates own at least 10% of the outstanding ordinary shares or at least 10% of the outstanding voting shares of the Company. This restriction on the Company may limit its ability to take action it deems to be in the best interest of its other shareholders.

      As discussed above, SFIC Holdings has the right to designate for election up to three members of the Company’s Board of Directors. The Company’s articles of association state that Kuwait Petroleum Corporation and its affiliated companies have no duty to refrain from competing with the Company. The articles of association also state that Kuwait Petroleum Corporation and its affiliated companies are not under any duty to present corporate opportunities to the Company in the event of a conflict, and that corporate opportunities offered to persons who are directors or officers of the Company and of Kuwait Petroleum Corporation or its affiliates will be allocated based principally on the capacities in which the individual director or officer is offered the opportunity. As a result, any director of the Company designated by SFIC Holdings may have potential or actual conflicts that could affect the process or outcome of board deliberations.

23

Table of Contents

      The Company is incorporated under the laws of the Cayman Islands, and its corporate affairs are governed by its memorandum of association and its articles of association and by the Companies Law (2001 Second Revision) of the Cayman Islands. Principles of law relating to matters such as the validity of corporate procedures, the fiduciary duties of management, directors and controlling shareholders and the rights of shareholders differ from those that would apply if the Company were incorporated in a jurisdiction within the United States. Further, the rights of shareholders under Cayman Islands law are not as clearly established as the rights of shareholders under legislation or judicial precedent applicable in some U.S. jurisdictions. As a result, GlobalSantaFe’s shareholders may face more uncertainty in protecting their interests in the face of actions by the management or directors than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction.

Employees

      The Company had approximately 7,100 employees worldwide at December 31, 2003, excluding approximately 1,200 persons contracted through contract labor providers. The Company requires highly skilled personnel to operate its drilling rigs and, accordingly, conducts extensive personnel training and safety programs. A total of 282 of the Company’s local employees in Nigeria and 188 of the Company’s local employees in Trinidad are represented by labor unions. The Company, through its membership in the U.K. Drilling Contractors Association, has also entered into a recognition agreement with a union which covers 836 of the Company’s 1,133 employees in the North Sea.

Executive Officers of the Registrant

      The name, age as of December 31, 2003, and office or offices currently held by each of the executive officers of the Company are as follows:

      Officers serve for a one-year term or until their successors are elected and qualified to serve. Each executive officer’s principal occupation has been as an executive officer of the Company or its predecessors, Santa Fe International or Global Marine, for more than the past five years, with the exception of Messrs. Dawson and Simmons and Ms. Richard. Mr. Dawson has been the Company’s Vice President and Controller since July 2003, prior to which he served as Vice President and Treasurer for the Company. From 1999 to November 2001, he served as Vice President, Investor Relations and Corporate Communications for Global Marine. Mr. Dawson’s previous experience includes 16 years with Union Texas Petroleum Holdings, where he served as Director of Acquisitions and Portfolio Management, Director of Investor Relations and in numerous management positions in the Controller’s organization. Mr. Simmons has been President of Applied Drilling Technology Inc. since June 2003. Previously he served as Regional Vice President of GlobalSantaFe Drilling U.K. Ltd. from November 2001 to June 2003, prior to which he served as President and Managing Director of Global Marine UK Ltd. (now GlobalSantaFe Drilling U.K. Ltd.) from June 2000 to November 2001. He was GSFDC’s Vice President, Sales and Contracts from 1998 to June 2000. Ms. Richard has been

24

Table of Contents

      The Company and two of its subsidiaries are defendants in a lawsuit filed on July 28, 2003, by Transocean Inc. (“Transocean”) in the United States District Court for the Southern District of Texas, Houston Division. The lawsuit alleges that the dual drilling structure and method utilized by the Company’s two ultra-deepwater semisubmersibles under construction in Singapore infringe on United States patents granted to Transocean. The lawsuit seeks damages, royalties and attorney’s fees, together with an injunction that would prevent the use of the dual drilling capabilities of the rigs. The Company believes that the lawsuit is without merit and intends to vigorously defend it. The trial of this lawsuit has been scheduled for December 2005. The Company does not expect that the matter will have a material adverse effect on the Company’s business or financial position, results of operations or cash flows.

      A subsidiary of the Company filed suit in February 2004 against its insurance underwriters in the Superior Court of San Francisco County, California, seeking a declaration as to its rights to insurance coverage and the proper allocation among its insurers of liability for claims payments in order to assist in the future management and disposition of certain claims described below. The subsidiary is continuing to receive payment from its insurers for claim settlements and legal costs, and expects to continue to receive such payments during the pendency of this action.

      The insurance coverage in question relates to lawsuits filed against the subsidiary arising out of its involvement in the design, construction and refurbishment of major industrial complexes. The operating assets of the subsidiary were sold and its operations discontinued in 1989, and the subsidiary has no remaining assets other than the insurance policies involved in the litigation. The subsidiary has been named as a defendant, along with numerous other companies, in lawsuits alleging personal injury as a result of exposure to asbestos. To date, the subsidiary has been named as a defendant in approximately 2,700 lawsuits, the first of which was filed in 1990. Of the 2,700 lawsuits, approximately 1,700 have been resolved, with approximately 1,000 currently pending. Over the course of the past fourteen years approximately $18.5 million has been expended to settle these claims with the subsidiary having expended $3.4 million of that amount due to insurance deductible obligations, all of which have now been satisfied. Insurers have funded the balance of the settlement costs and all legal costs associated therewith. The subsidiary has in excess of $1 billion in insurance limits that it believes will be available to cover future claims. The Company does not believe that these claims will have any material impact on the Company’s consolidated financial position, results of operations or cash flows.

Environmental matters

      The Company has certain potential liabilities under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state acts regulating cleanup of various hazardous waste disposal sites, including those described below. CERCLA is intended to expedite the remediation of hazardous substances without regard to fault. Potentially responsible parties (“PRPs”) for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several.

      The Company has been named as a PRP in connection with a site located in Santa Fe Springs, California known as the Waste Disposal, Inc. site. The Company and other PRPs have agreed with the U.S. Environmental Protection Agency (“EPA”) and the U.S. Department of Justice (“DOJ”) to settle their potential liabilities for this site by agreeing to perform the remaining remediation required by the EPA. The form of the agreement is a consent decree, which has now been entered by the court. The parties to the settlement have entered into a participation agreement, which makes the Company liable for an estimated 7.7% of the remediation costs. Although the remediation costs cannot be determined with certainty until the

25

Table of Contents

      The Company has also been named as a PRP in connection with a site in California known as the Casmalia Resources Site. The Company and other PRPs have entered into an agreement with the EPA and the DOJ to resolve their potential liabilities. Under the settlement, the Company is not likely to owe any substantial additional amounts for this site beyond what the Company has already paid. There are additional potential liabilities related to this site, but these cannot be quantified at this time, and the Company has no reason at this time to believe that they will be material.

      The Company has been named as one of many PRPs in connection with a site located in Carson, California formerly maintained by Cal Compact Landfill. On February 15, 2002, the Company was served with a required 90-day notification that eight California cities, on behalf of themselves and other PRPs, intend to commence an action against the Company under the Resource Conservation and Recovery Act (“RCRA”). On April 1, 2002, a complaint was filed by the cities against the Company and others alleging that they have liabilities in connection with the site. However, the complaint has not been served. The site was closed in or around 1965, and the Company does not have sufficient information to enable it to assess its potential liability, if any, for this site.

      Resolutions of other claims by the EPA, the involved state agency and/or PRPs are at various stages of investigation. These investigations involve determinations of:

	•	the actual responsibility attributed to the Company and the other PRPs at the site;
	•	appropriate investigatory and/or remedial actions; and
	•	allocation of the costs of such activities among the PRPs and other site users.

      The Company’s ultimate financial responsibility in connection with those sites may depend on many factors, including:

	•	the volume and nature of material, if any, contributed to the site for which the Company is responsible;
	•	the numbers of other PRPs and their financial viability; and
	•	the remediation methods and technology to be used.

      It is difficult to quantify with certainty the potential cost of these environmental matters, particularly in respect of remediation obligations. Nevertheless, based upon the information currently available, the Company believes that its ultimate liability arising from all environmental matters, including the liability for all other related pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, is adequately accrued and should not have a material effect on the Company’s financial position or ongoing results of operations. Estimated costs of future expenditures for environmental remediation obligations are not discounted to their present value.

Other Legal Matters

      The Company and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of business. In the opinion of management, the Company’s ultimate liability with respect to these pending lawsuits is not expected to have a material adverse effect on its consolidated financial position, results of operations or cash flows.

      There were no matters submitted to a vote of the Company’s security holders during the fourth quarter of 2003.

26

Table of Contents

PART II

      The Company’s Ordinary Shares, $.01 par value per share, are listed on the New York Stock Exchange under the symbol “GSF.” The following table sets forth the high and low closing sales prices of the Company’s Ordinary Shares as reported on the New York Stock Exchange Composite Transactions Tape for the calendar periods indicated.

      On February 27, 2004, the closing price of the Ordinary Shares, as reported by the NYSE, was $29.50 per share. As of February 27, 2004, there were 3,104 shareholders of record of Ordinary Shares. This number does not include shareholders for whom shares are held in a nominee or street name.

Dividend Policy

      On March 2, 2004, the Company’s Board of Directors declared a dividend for the first quarter of 2004 of $0.05 per share, payable on April 15, 2004, to holders of record of Ordinary Shares as of the close of business on March 31, 2004. The Company paid dividends of $0.0325 per share during each period in 2002 shown in the table above. The Company paid dividends of $0.0325 per share in the first quarter of 2003, $0.0375 per share in the second and third quarters of 2003 and $0.05 per share in the fourth quarter of 2003 and the first quarter of 2004. The dividends paid in a given quarter relate to the immediately preceding quarter. The Company’s payment of dividends in the future, if any, will be at the discretion of the Company’s Board of Directors and will depend on the Company’s results of operations, financial condition, cash requirements, future business prospects and other factors.

27

Table of Contents