UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13289
PRIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 76-0069030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 SAN FELIPE, SUITE 3300
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 789-1400
(Registrant's telephone number, including area code)
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 [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
Common Stock, no par value Outstanding as of November 13, 1998
50,383,041
PRIDE INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
-------
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1998 and
December 31, 1997............................................... 4
Consolidated Statement of Operations for the three months
ended September 30, 1998 and 1997............................... 5
Consolidated Statement of Operations for the nine months
ended September 30, 1998 and 1997............................... 6
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1998 and 1997............................... 7
Notes to Unaudited Consolidated Financial Statements.............. 8
Report of Independent Accountants................................. 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 26
Signatures........................................................... 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................................................... $ 101,653 $ 74,395
Trade receivables, net ........................................................ 201,350 194,973
Parts and supplies ............................................................ 31,880 26,899
Deferred income taxes ......................................................... 1,508 2,252
Prepaid expenses and other current assets ..................................... 44,458 35,691
----------- -----------
Total current assets .................................................... 380,849 334,210
----------- -----------
PROPERTY AND EQUIPMENT, at cost .................................................. 1,663,084 1,273,327
ACCUMULATED DEPRECIATION ......................................................... (151,996) (101,680)
----------- -----------
Net property and equipment .............................................. 1,511,088 1,171,647
----------- -----------
OTHER ASSETS
Investments in and advances to affiliates ..................................... 42,643 9,092
Goodwill and other intangibles, net ........................................... 3,472 3,623
Other assets, net ............................................................. 35,444 22,929
----------- -----------
Total other assets ...................................................... 81,559 35,644
----------- -----------
$ 1,973,496 $ 1,541,501
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .............................................................. $ 102,477 $ 94,736
Accrued expenses .............................................................. 81,655 64,994
Short-term borrowings ......................................................... 13,141 21,055
Current portion of long-term debt ............................................. 30,059 39,356
Current portion of long-term lease obligations ................................ 10,646 10,336
----------- -----------
Total current liabilities ............................................... 237,978 230,477
----------- -----------
OTHER LONG-TERM LIABILITIES ...................................................... 60,790 28,911
LONG-TERM DEBT, net of current portion ........................................... 498,390 435,100
LONG-TERM LEASE OBLIGATIONS, net of current portion .............................. 32,308 36,275
6 1/4% CONVERTIBLE SUBORDINATED DEBENTURES ....................................... 52,500 52,500
ZERO COUPON CONVERTIBLE SUBORDINATED DEBENTURES .................................. 234,552 --
DEFERRED INCOME TAXES ............................................................ 81,514 72,313
MINORITY INTEREST ................................................................ 22,948 768
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value; 100,000,000 shares authorized;
50,156,400 and 50,097,120 shares issued and 50,102,180
and 50,042,900 shares outstanding, respectively ............................ 1 1
Paid-in capital ............................................................... 523,547 522,946
Treasury stock, at cost ....................................................... (191) (191)
Retained earnings ............................................................. 229,159 162,401
----------- -----------
Total shareholders' equity .............................................. 752,516 685,157
----------- -----------
$ 1,973,496 $ 1,541,501
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
4
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
--------- ---------
REVENUES ..................................... $ 209,964 $ 182,908
OPERATING COSTS .............................. 130,959 118,040
--------- ---------
Gross margin .............................. 79,005 64,868
DEPRECIATION AND AMORTIZATION ................ 19,667 16,084
SELLING, GENERAL AND ADMINISTRATIVE .......... 20,756 18,837
--------- ---------
EARNINGS FROM OPERATIONS ..................... 38,582 29,947
--------- ---------
OTHER INCOME (EXPENSE)
Other expense, net ........................ (722) (700)
Interest income ........................... 1,785 975
Interest expense .......................... (11,413) (10,460)
--------- ---------
Total other income (expense), net ... (10,350) (10,185)
--------- ---------
EARNINGS BEFORE INCOME TAXES ................. 28,232 19,762
INCOME TAX PROVISION ......................... 7,424 5,730
--------- ---------
NET EARNINGS ................................. $ 20,808 $ 14,032
========= =========
NET EARNINGS PER SHARE
Basic ..................................... $ .42 $ .30
Diluted ................................... $ .37 $ .28
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ..................................... 50,101 46,809
Diluted ................................... 63,008 52,621
The accompanying notes are an integral part
of the consolidated financial statements.
5
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
--------- ---------
REVENUES ..................................... $ 642,836 $ 488,821
OPERATING COSTS .............................. 404,894 322,999
--------- ---------
Gross margin .............................. 237,942 165,822
DEPRECIATION AND AMORTIZATION ................ 57,566 41,581
SELLING, GENERAL AND ADMINISTRATIVE .......... 61,508 52,197
--------- ---------
EARNINGS FROM OPERATIONS ..................... 118,868 72,044
--------- ---------
OTHER INCOME (EXPENSE)
Other income (expense), net ............... (1,281) 77,965
Interest income ........................... 4,849 2,898
Interest expense .......................... (34,241) (23,809)
--------- ---------
Total other income (expense), net ... (30,673) 57,054
--------- ---------
EARNINGS BEFORE INCOME TAXES ................. 88,195 129,098
INCOME TAX PROVISION ......................... 21,437 44,519
--------- ---------
NET EARNINGS ................................. $ 66,758 $ 84,579
========= =========
NET EARNINGS PER SHARE
Basic ..................................... $ 1.33 $ 2.06
Diluted ................................... $ 1.19 $ 1.82
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ..................................... 50,082 41,143
Diluted ................................... 59,890 47,384
The accompanying notes are an integral part
of the consolidated financial statements.
6
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES
Net earnings ............................................... $ 66,758 $ 84,579
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities -
Depreciation and amortization ........................... 53,014 41,581
Discount amortization on zero coupon
convertible subordinated debentures .................. 4,552 --
Gain on sale of assets .................................. (878) (84,775)
Effect of changes in foreign currency exchange rates .... (1,685) 432
Deferred tax provision (benefit) ........................ 9,945 (8,802)
Minority interest in earnings of consolidated
subsidiaries .......................................... 67 (851)
Changes in assets and liabilities, net of
effects of acquisitions -
Trade receivables .................................... (6,377) (18,664)
Parts and supplies ................................... (4,981) (2,941)
Prepaid expenses and other current assets ............ (8,767) (2,168)
Other assets ......................................... (9,001) (7,862)
Accounts payable ..................................... (10,459) (11,779)
Accrued expenses ..................................... 16,661 10,255
--------- ---------
Net cash provided by (used in) operating activities 108,849 (995)
--------- ---------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, including
acquisition costs, less cash acquired ................... (17,000) (371,802)
Purchases of property and equipment ........................ (349,110) (116,967)
Proceeds from sales of property and equipment .............. 3,784 141,520
Investments in affiliates .................................. (39,380) (756)
--------- ---------
Net cash used in investing activities ............. (401,706) (348,005)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of common stock ..................... -- 70,235
Proceeds from exercise of stock options .................... 601 5,328
Proceeds from minority interest owners ..................... 22,113 --
Proceeds from issuance of zero coupon
convertible subordinated debentures,
net of underwriting discounts and
offering costs .......................................... 223,100 --
Proceeds from debt borrowings .............................. 181,321 426,929
Reduction of debt .......................................... (107,020) (93,161)
--------- ---------
Net cash provided by financing activities ......... 320,115 409,331
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 27,258 60,331
CASH AND CASH EQUIVALENTS, beginning of period ................ 74,395 10,770
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ...................... $ 101,653 $ 71,101
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
7
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The unaudited consolidated financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, pursuant to such rules and
regulations. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
of Pride International, Inc. (the "Company") included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. Certain
reclassifications have been made to prior year amounts to conform with the
current year presentation.
The unaudited consolidated financial information included herein reflects all
adjustments, consisting only of normal recurring adjustments, which are
necessary, in the opinion of management, for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for a year.
2. DEBT AND CONVERTIBLE SUBORDINATED DEBENTURES
SHORT-TERM BORROWINGS
The Company has agreements with several banks for short-term lines of credit
denominated in U.S. dollars, French francs and Argentine pesos. The facilities
are renewable annually and bear interest at variable rates based on LIBOR for
the U.S. dollar and Argentine peso denominated facilities, and PIBOR for the
French franc denominated facilities. The interest rates on such borrowings as of
September 30, 1998 ranged from 4.2% to 7.6%.
LONG-TERM DEBT
Long-term debt as of September 30, 1998 and December 31, 1997 consisted of
the following:
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
(IN THOUSANDS)
Senior notes ............................... $325,000 $325,000
Collateralized term loans .................. 66,340 79,009
Limited-recourse
collateralized term loans .................. 32,174 35,210
Credit Facility ............................ 30,000 --
Other notes payable
Note payable to sellers .................. 2,000 11,000
Eximbank notes payable ................... 5,143 6,533
Notes payable ............................ 24,219 13,667
Loan obligations to customers ............ 3,573 4,037
Other debt ................................. 40,000 --
-------- --------
528,449 474,456
Less: Current portion of
long-term debt ........................... 30,059 39,356
-------- --------
Long-term debt, net of
current portion ..................... $498,390 $435,100
======== ========
8
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
SENIOR NOTES
In May 1997, the Company issued $325,000,000 of 9.375% Senior Notes due May
1, 2007 (the "Senior Notes"). Interest on the Senior Notes is payable
semi-annually on May 1 and November 1 of each year, commencing November 1, 1997.
The Senior Notes are not redeemable prior to May 1, 2002, after which they will
be redeemable, in whole or in part, at the option of the Company at redemption
prices starting at 104.688% and declining to 100% by May 1, 2005. In the event
the Company consummates a public equity offering on or prior to May 1, 2000, the
Company at its option may use all or a portion of the proceeds from such public
equity offering to redeem up to $108,333,000 principal amount of the Senior
Notes at a redemption price equal to 109.375% of the aggregate principal amount
thereof, together with accrued and unpaid interest to the date of redemption.
The indenture governing the Senior Notes contains provisions which limit the
ability of the Company and its subsidiaries to incur additional indebtedness,
create liens, enter into mergers and consolidations, pay cash dividends on its
capital stock, make acquisitions, sell assets or change its business.
COLLATERALIZED TERM LOANS
In April 1996, the Company completed two separate financing arrangements with
lending institutions pursuant to which it borrowed an aggregate amount of $40
million and an additional $6.5 million in November 1996. The collateralized term
loans bore interest initially at a floating rate of prime plus 0.5% and are
repayable in monthly installments of principal and interest over a period of
five to six years. In December 1996, the Company elected to convert the interest
payable to a fixed rate basis. As a result, the collateralized term loans
currently bear interest at fixed rates ranging from 7.95% to 8.50% per annum.
The loans are collateralized by certain of the Company's domestic offshore rig
fleet and ancillary equipment. The loan agreements include restrictive financial
covenants with respect to cash flow coverage and tangible net worth.
In connection with the March 1997 acquisition of Forasol-Foramer N.V.
("Forasol"), the Company assumed certain borrowing arrangements with various
banks, including a $20 million bank loan, payable in semi-annual installments
each August and February through 2002. The loan bears interest at a stated rate
of six-month LIBOR plus a margin ranging from 1.25% to 2.50%. In conjunction
with this loan, Forasol simultaneously entered into an interest rate swap
agreement with a notional amount of $20 million, which fixed the rate of
interest on this loan at 7.55% over the term of the debt agreement. A
semisubmersible rig is pledged as security for this loan. The Company also
assumed a $30 million bank loan, secured by another semisubmersible rig, payable
in semi-annual installments beginning May 1997 through 2003, which bears
interest at a rate of LIBOR plus a margin ranging from 1.00% to 2.00%.
LIMITED-RECOURSE COLLATERALIZED TERM LOANS
During 1994, the Company entered into long-term financing arrangements with
two Japanese trading companies in connection with the construction and operation
of two drilling barge rigs. The term loans bear interest at 9.60% and are
collateralized by the drilling barge rigs and related charter contracts. The
loans are being repaid from the proceeds of the related charter contracts in
equal monthly installments of principal and interest through July 2004. In
addition, a portion of contract proceeds is being held in trust to assure that
timely payment of future debt service obligations is made. As of September 30,
1998, approximately $2.4 million of such contract proceeds, which amount is
included in cash and cash equivalents on the accompanying unaudited consolidated
balance sheet, are being held in trust as security for the lenders, and are not
presently available for use by the Company.
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
CREDIT FACILITY
In March 1997, the Company entered into a senior secured revolving credit
facility with a group of banks (as amended and restated, the "Credit Facility")
under which up to $100 million (including $25 million for letters of credit) was
initially available. Availability under the Credit Facility is limited to a
borrowing base based on the fair market value of collateral. The Credit Facility
is collateralized by the accounts receivable, inventory and other assets of the
Company and its domestic subsidiaries, two-thirds of the stock of the Company's
foreign subsidiaries, the stock of the Company's domestic subsidiaries and
certain other assets. The Credit Facility terminates in December 2000.
Borrowings under the Credit Facility bear interest at a variable rate based on
either the prime rate or LIBOR.
The Credit Facility limits the ability of the Company and its subsidiaries to
incur additional indebtedness, create liens, enter into mergers and
consolidations, pay cash dividends on its capital stock, make acquisitions, sell
assets or change its business without prior consent of the lenders. Under the
Credit Facility, the Company must maintain certain financial ratios, including
(i) funded debt to pro forma EBITDA, (ii) funded debt to capitalization, (iii)
adjusted EBITDA to debt service and (iv) minimum tangible net worth. As of
September 30, 1998, advances totaling $30 million were outstanding under the
Credit Facility. In September 1998, the Credit Facility was amended to allow the
funding of the equipment loan for the Pride Africa. In connection with such
amendment, availability under the Credit Facility was reduced to $50 million. In
addition, in order to maintain the availability of the Credit Facility, the
Company will be required to obtain waivers from the lenders or further amend the
Credit Facility prior to the funding of the equipment loan for the PRIDE ANGOLA.
If the Company is unable to obtain such a waiver or amendment on terms it
considers acceptable, the Company will seek alternate financing arrangements to
replace the Credit Facility.
OTHER NOTES PAYABLE
Other notes payable consists of an acquisition note payable to sellers,
Eximbank loans for the purchase and import of goods manufactured in the United
States into other countries, notes payable in connection with financed insurance
premiums and miscellaneous loan obligations to customers.
In addition, other notes payable includes domestic bank financing of $15
million for the acquisition of two offshore drilling rigs. The borrowings bear
interest at 7.54% per annum. The loans are repayable in monthly installments
over 7 years.
OTHER DEBT
Other debt includes certain foreign short-term borrowings relating to the
acquisition of certain equipment to be installed on the PRIDE AFRICA and PRIDE
ANGOLA, two ultra-deepwater drillships under construction referred to in Note 5.
The Company intends to refinance these short-term borrowings to long-term and
has obtained commitments from a group of banks to provide up to $310 million in
loans to finance these construction projects. Accordingly, the Company has
reclassified short-term borrowings of $40 million to long-term debt. The loans
will be secured by such equipment and will bear interest at a rate of LIBOR plus
1.25% per annum. The Company has agreed to sell such equipment to two joint
ventures formed to construct, own and operate the drillships on or before the
date of acceptance by the operator of the drillships which is anticipated to be
mid-1999. The Company expects to repay such loans from such sales proceeds.
CONVERTIBLE SUBORDINATED DEBENTURES
In January 1996, the Company completed a public sale of $80,500,000 principal
amount of 6 1/4% convertible subordinated debentures. The debentures, which are
due February 15, 2006, are convertible into common stock of the
10
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Company at a price of $12.25 per share. The debentures are redeemable at the
option of the Company, in whole or in part, at any time on or after March 1,
1999, at an initial redemption price of 103.125% of the principal amount and
declining to 100.0% of the principal amount by February 15, 2002. Interest is
payable semi-annually on February 15 and August 15 of each year commencing
August 15, 1996. During the first quarter of 1997, an aggregate of $28,000,000
principal amount of the debentures was converted into 2,285,712 shares of common
stock.
In April 1998, the Company completed a public sale of zero coupon convertible
subordinated debentures. The net proceeds to the Company in connection with the
sale, after deducting underwriting discounts and offering expenses, amounted to
approximately $223,100,000. The issue price of $391.06 for each debenture
represents a yield to maturity of 4.75% per annum (computed on a semiannual bond
equivalent basis) calculated from the issue date. The debentures, which mature
on April 24, 2018, are convertible into common stock of the Company at a
conversion rate of 13.794 shares of common stock per $1,000 principal amount at
maturity. At the maturity date, the aggregate amount payable would be
$588,145,000. The Company will become obligated to purchase the debentures, at
the option of the holders, in whole or in part, on April 24, 2003, 2008 and 2013
at a price per debenture of $494.52, $625.35 and $790.79, respectively, settled
either in cash, common stock or a combination thereof. On or subsequent to April
24, 2003, the debentures are redeemable at the option of the Company, in whole
or in part, for cash at a price equal to the issue price plus accrued original
issue discount to the date of redemption.
3. INCOME TAXES
The Company's consolidated effective income tax rate for the nine months
ended September 30, 1998 was approximately 24%, as compared to approximately 34%
for the corresponding period in 1997. The decrease in the effective tax rate for
the first nine months of 1998 resulted primarily from the effects of the
inclusion of the related operating results of Forasol for the full nine month
period, which was acquired in March 1997 and has a majority of its operations in
lower tax jurisdictions. Such decrease was partially offset by an increase in
the effective tax rate due to the inclusion of the related operating results of
13 mat-supported jackup drilling rigs acquired in May 1997. In addition, the
1997 first quarter included a pretax gain of $83.6 million on the sale of the
Company's U.S. land operations that were taxed at 36% and certain non-deductible
amounts, primarily $3.7 million of after-tax costs related to the induced
conversion of $28.0 million of the Company's 6 1/4% convertible subordinated
debentures.
4. NET EARNINGS PER SHARE
Other income (expense), earnings before income taxes and net earnings for the
nine months ended September 30, 1997 include a pretax gain on the divestiture of
the Company's U.S. land-based well servicing business of $83.6 million. The gain
was partially offset by nonrecurring charges totaling $4.2 million, net of
income taxes, relating principally to the induced conversion of $28.0 million
principal amount of the Company's 6 1/4% convertible subordinated debentures.
Excluding such nonrecurring items, net earnings for the nine months ended
September 30, 1997 were $35.3 million, or $.78 per share on a diluted basis.
Basic net earnings per share has been computed based on the weighted average
number of shares of common stock outstanding during the applicable period.
Diluted net earnings per share has been computed based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period, as if the convertible subordinated debentures were converted into
common stock on the date of sale, after giving retroactive effect to the
elimination of interest expense, net of income tax effect, applicable to the
convertible subordinated debentures.
11
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The following table presents information necessary to calculate basic and
diluted net earnings per share:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings ........................................... $ 20,808 $ 14,032 $ 66,758 $ 84,579
Interest expense on convertible
subordinated debentures .............................. 3,672 878 7,287 2,835
Income tax effect ...................................... (1,322) (316) (2,623) (1,020)
Adjusted net earnings .............................. $ 23,158 $ 14,594 $ 71,422 $ 86,394
======== ======== ======== ========
Weighted average number of common
shares outstanding ................................... 50,101 46,809 50,082 41,143
Convertible subordinated
debentures ....................................... 12,395 4,286 8,979 4,946
Stock options and warrants ......................... 512 1,526 829 1,295
-------- -------- -------- --------
Adjusted weighted average
shares outstanding ............................... 63,008 52,621 59,890 47,384
Basic net earnings per share ................... $ .42 $ .30 $ 1.33 $ 2.06
======== ======== ======== ========
Diluted net earnings per share ................. $ .37 $ .28 $ 1.19 $ 1.82
======== ======== ======== ========
As described in Note 2, the Company will become obligated to purchase its
zero coupon convertible subordinated debentures, at the option of the holders,
in whole or in part, on April 24, 2003, 2008 and 2013. The Company has the
option to purchase the debentures for cash, common stock or a combination
thereof. The Company anticipates that if redemption of the debentures using
common stock would result in dilution to common stockholders of greater than
13.794 shares per $1,000 principal amount at maturity (the stated conversion
rate), the Company would redeem the debentures for cash.
For the three months and nine months ended September 30, 1998, 2,180,801 and
1,310,000 shares, respectively, shares of common stock from the options and
warrants were antidilutive and therefore not included in the computation of net
earnings per share.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is routinely involved in litigation incidental to its business,
which often involves claims for significant monetary amounts, some of which
would not be covered by insurance. In the opinion of management, none of the
Company's existing litigation will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
DRILLSHIP JOINT VENTURES
During 1997, the Company entered into a joint venture to construct, own and
operate the PRIDE AFRICA, an ultra-deepwater drillship currently under
construction in South Korea. The drillship is contracted to work offshore Angola
for an initial term of five years. It is anticipated that the drillship will
commence operations in mid-1999. The joint venture has entered into a financing
arrangement with a group of banks providing that approximately $200 million of
the drillship's estimated construction cost of $235 million will be financed by
loans that are, upon delivery of the drillship, without recourse to the joint
venture participants. The Company estimates that its equity investment in the
project will be approximately $19 million, which represents a 51% ownership
interest.
12
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The Company also has obtained a commitment from a group of banks to provide
up to $110.0 million in loans to finance the acquisition of certain equipment to
be installed on the PRIDE AFRICA. The loans will be secured by such equipment
and will bear interest at a rate of LIBOR plus 1.25% per annum. The Company has
agreed to sell such equipment to the joint venture formed to construct, own and
operate the rig on or before the date Elf Angola accepts delivery of the rig
under the charter, which is anticipated to be mid-1999, and expects to repay
such loan from such sales proceeds. The joint venture intends to draw on its
financing arrangement described above to finance its payment to the Company.
In addition, the Company has entered into a separate joint venture similar to
the PRIDE AFRICA joint venture to construct, own and operate a second ultra-deep
water drillship to operate offshore Angola under a three-year contract with two
one-year options. The drillship, the PRIDE ANGOLA, is also being built in South
Korea at a cost of approximately $235 million. It is anticipated this drillship
will begin operation in late-1999. The joint venture has entered into
non-recourse financing similar to the PRIDE AFRICA financing for approximately
$200 million, subject to final documentation. The Company's equity investment in
the project is expected to be approximately $19 million, which will represent a
51% ownership interest.
AMETHYST JOINT VENTURES
During 1997, a special purpose company, in which the Company has a 30%
indirect investment, was formed to construct, own and operate six Amethyst-class
dynamically positioned semisubmersible drilling rigs. Upon their completion, the
rigs will be contracted to Petroleo Brasilerio S.A. pursuant to chartering
agreements with initial terms of five to eight years. The total estimated cost
to construct, equip and mobilize the six rigs is approximately $1.1 billion.
Delivery of the rigs is expected over a period from late 1999 through mid 2000.
The Company has made aggregate equity contributions of approximately $40 million
for the project as of September 30, 1998. The special purpose company has been
seeking financing for up to 90% of the construction costs of the rigs on terms
that would not require substantial recourse to the Company or the other project
sponsor. To date, however, the special purpose company has been unable to obtain
commitments for the financing, and there can be no assurance that financing will
be obtained on these or other acceptable terms. Should the financing not be
obtained, the Company may not recover some or all of its investment in the
special purpose company.
In November 1998, the special purpose company terminated the construction
contracts with respect to two of the Amethyst rigs after the shipyard at which
the rigs were to be constructed filed for protection from its creditors.
Payments to the builder under the terminated contracts total approximately $16
million, of which the Company paid approximately $5 million. Some or all of
these payments may not be recoverable by the special purpose company or the
Company. The special purpose company is currently evaluating alternatives for
constructing these two rigs elsewhere, including the possibility of exercising
option slots at the two shipyards where the other four Amethyst rigs are being
constructed.
6. SUBSEQUENT EVENT
In October 1998, the Company purchased, for $85 million, a dynamically
positioned, self-propelled semisubmersible drilling rig, named AMETHYST I. The
rig is currently working offshore Brazil under a charter and service contract
that expires in 2001. The purchase price of the rig consisted of $63.7 million
in cash, with the balance financed by a $21.3 million note convertible into
common stock at a conversion price of $28.50 per share for the first year and
decreasing $1.00 per share annually thereafter until maturity. The convertible
note also bears interest at 6% per annum for the first year and escalates 1% per
annum annually thereafter until maturity. Interest is payable semi-annually on
December 1 and June 1 of each year commencing December 1, 1998. The note matures
on September 1, 2001, and no principal payments are required until maturity.
13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Pride
International, Inc.:
We have reviewed the accompanying consolidated balance sheet of Pride
International, Inc. as of September 30, 1998, and the related consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1998 and 1997 and the related consolidated statement of cash flows
for the nine-month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated March 16, 1998, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
balance sheet as of December 31, 1997 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
PricewaterhouseCoopers LLP
Houston, Texas
November 12, 1998
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements of Pride International, Inc. (the
"Company") as of September 30, 1998 and for the three-month and nine-month
periods ended September 30, 1998 and 1997 included elsewhere herein, and with
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The following information contains forward-looking statements. For a discussion
of certain limitations inherent in such statements, see " - Outlook and
Forward-Looking Statements."
GENERAL
The Company's operations and future results have been and will be
significantly affected by a series of strategic transactions that have
transformed the Company from the second largest provider of land-based workover
and related well services in the United States into a diversified drilling
contractor operating both offshore and onshore in international markets and
offshore in the U.S. Gulf of Mexico. With the sale of its domestic land-based
well servicing operations in February 1997, the Company has ceased to provide
rig services onshore in the United States.
Since 1993, the Company has entered into a number of transactions that have
significantly expanded its international and domestic offshore operations,
including the following:
o During 1993, the Company made market-entry acquisitions in Argentina and
Venezuela. The Company further expanded these operations by subsequently
deploying more than 40 rigs from its former U.S. land-based fleet to
Argentina and Venezuela, and by acquiring four rigs from an Argentine
competitor. The Company also made market-entry acquisitions in the Gulf of
Mexico in 1994 and Colombia in 1995.
o In January 1995, the Company commenced operating two drilling barge rigs
on Lake Maracaibo, Venezuela. The barge rigs were constructed during 1994
pursuant to ten-year operating contracts entered into with Petroleos de
Venezuela, S.A., the Venezuelan national oil company.
o In April 1996, the Company acquired Quitral-Co S.A.I.C. ("Quitral-Co")
from Perez Companc S.A. and other shareholders. The 23 land-based drilling
and 57 land-based workover rigs in Argentina and seven land-based drilling
and 23 land-based workover rigs in Venezuela operated by Quitral-Co were
combined with the Company's existing land-based operations in those
countries. In November 1996, the Company added three land-based drilling
rigs and support assets to its operations in Argentina through the
acquisition of the assets of another contractor.
o In October 1996, the Company expanded its Colombian operations to 20 rigs
through the acquisition of Ingeser de Colombia, S.A., which operated seven
land-based drilling rigs and six land-based workover rigs in Colombia.
o In February 1997, the Company completed the divestiture of its domestic
land-based well servicing operations, which included 407 workover rigs in
Texas, California, New Mexico and Louisiana.
o In March 1997, the Company completed the acquisition of the operating
subsidiaries of Forasol-Foramer N.V. (collectively, "Forasol"), adding two
semisubmersible rigs, three jackup rigs, seven tender-assisted rigs, four
barge rigs and 29 land-based rigs operating in various locations in South
America, Africa, the Middle East and Southeast Asia.
o In April 1997, the Company purchased a tender-assisted rig, which has been
upgraded and deployed to Southeast Asia. In October 1997, the Company
purchased an independent-leg, cantilevered jackup rig capable of operating
in water depths of up to 300 feet, which is currently under contract in
Southeast Asia.
15
o In May 1997, the Company purchased 13 mat-supported jackup drilling rigs,
11 of which are currently operating in the Gulf of Mexico, one of which is
currently operating in West Africa and one of which is operating in
Malaysia.
o In July 1998, the Company acquired 60% of a Bolivian company, Compania
Boliviana de Perforacion S.A. M. ("CBP"), pursuant to a joint initiative
with the Bolivian national oil company, Yacimientos Petroliferos Fiscales
Bolivianos ("YPFB"). CBP was capitalized through the contribution of 13
land drilling and workover rigs, oilfield trucks and other related
drilling assets by YPFB and $17 million of cash by the Company.
o In October 1998, the Company purchased, for approximately $85 million, a
dynamically positioned, self-propelled semisubmersible drilling rig. The
rig is currently working offshore Brazil under a charter and service
contract that expires in 2001.
International drilling and well servicing activity is affected by
fluctuations in oil prices, but historically to a lesser extent than domestic
activity. International rig services contracts are typically for terms of one
year or more, while domestic contracts are typically for one well or multiple
wells. Accordingly, international rig services activities generally are not as
sensitive to short-term changes in oil prices as domestic operations.
The continuing weakness in worldwide oil prices, which began trending
downward in the fourth quarter of 1997, is depressing offshore drilling
activity, particularly in the U.S. Gulf of Mexico and international land
activity. This continuation of low oil prices has caused some customers to
reduce their 1998 drilling budgets, primarily in water depths where jackup
drilling rigs are used. This decreased drilling activity has in turn increased
competition among drilling contractors for the available work, and has forced
dayrates for some jackup rigs down by as much as 50% compared to levels seen
earlier in the year. If oil prices remain at current levels, the Company
anticipates further decreases in dayrates and possibly lower utilization on some
of its rigs, particularly its platform rigs and jackup rigs in the U.S. Gulf of
Mexico and its international land-based rig fleet. The Company expects this
slowdown in offshore and land drilling activity and anticipated decreases in
dayrates to continue to negatively affect the Company's results of operations
for the remainder of 1998, and the results of operations for the third quarter
of 1998 will not be indicative of the results for the reminder of 1998.
Management believes, however, that a rebound in the price of oil would result in
increased demand for the Company's services and corresponding increases in
dayrates and utilization. See "--Outlook and Forward-Looking Statements."
16
RESULTS OF OPERATIONS
The following table sets forth selected consolidated financial information of
the Company by operating segment for the periods indicated:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997
------------------- -------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues
International land ...... $103,303 49.2% $ 99,382 54.3%
International offshore .. 67,167 32.0 41,864 22.9
United States offshore .. 39,494 18.8 41,662 22.8
-------- ----- -------- -----
Total revenues ....... 209,964 100.0 182,908 100.0
-------- ----- -------- -----
Operating Costs
International land ...... 72,132 55.1 70,731 59.9
International offshore .. 38,110 29.1 26,038 22.1
United States offshore .. 20,717 15.8 21,271 18.0
-------- ----- -------- -----
Total operating costs 130,959 100.0 118,040 100.0
-------- ----- -------- -----
Gross Margin
International land ...... 31,171 39.4 28,651 44.2
International offshore .. 29,057 36.8 15,826 24.4
United States offshore .. 18,777 23.8 20,391 31.4
-------- ----- -------- -----
Total gross margin ... $ 79,005 100.0% $ 64,868 100.0%
======== ===== ======== =====
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997
------------------- -------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues
International land ...... $313,909 48.8% $282,579 57.8%
International offshore .. 196,502 30.6 102,732 21.0
United States offshore .. 132,425 20.6 87,025 17.8
United States land ...... -- -- 16,485 3.4
-------- ----- -------- -----
Total revenues ....... 642,836 100.0 488,821 100.0
-------- ----- -------- -----
Operating Costs
International land ...... 226,043 55.8 203,143 62.9
International offshore .. 107,219 26.5 59,734 18.4
United States offshore .. 71,632 17.7 47,346 14.7
United States land ...... -- -- 12,776 4.0
-------- ----- -------- -----
Total operating costs 404,894 100.0 322,999 100.0
-------- ----- -------- -----
Gross Margin
International land ...... 87,866 36.9 79,436 47.9
International offshore .. 89,283 37.5 42,998 26.0
United States offshore .. 60,793 25.6 39,679 23.9
United States land ...... -- -- 3,709 2.2
-------- ----- -------- -----
Total gross margin ... $237,942 100.0% $165,822 100.0%
======== ===== ======== =====
17
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUES. Revenues for the three months ended September 30, 1998 increased
$27.1 million, or 14.8%, as compared to the corresponding period in 1997.
Revenues from international offshore operations increased $25.3 million, due
primarily to the deployment of three additional offshore rigs and two additional
tender-assisted rigs. Revenues from domestic offshore operations decreased $2.2
million, due primarily to generally weak market conditions and downtime due to
lower dayrates on some rigs and severe weather conditions in the Gulf of Mexico.
Revenues from international land-based operations increased $3.9 million due to
the deployment of two additional land rigs to Argentina and the acquisition of
several land rigs in Bolivia, partially offset by lower utilization in Argentina
and Venezuela.
OPERATING COSTS. Operating costs for the three months ended September 30,
1998 increased $12.9 million, or 10.9%, as compared to the corresponding period
in 1997. Of this increase, $12.1 million was a result of the Company's
international offshore operations, due to the deployment of additional rigs, as
discussed above. Operating costs from international land operations increased
$1.4 million, due primarily to the addition of rigs in Argentina and Bolivia.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the three
months ended September 30, 1998 increased $3.6 million, or 22.3%, as compared to
the corresponding period in 1997, primarily due to the expansion of the
Company's international land-based operations and refurbishment of certain of
its international offshore rigs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three months ended September 30, 1998 increased $1.9 million,
or 10.2%, as compared to the corresponding period in 1997, primarily due to the
expansion of the Company's domestic and international offshore operations. As a
percentage of revenues, selling, general and administrative expenses were 9.9%
for the third quarter of 1998, as compared to 10.3% for the third quarter of
1997.
OTHER INCOME (EXPENSE). Interest income increased to $1.8 million for the
three months ended September 30, 1998, from $.9 million for the corresponding
period in 1997, due to increased cash made available from increased operations
and the public sale of zero coupon convertible subordinated debentures in April
1998. Interest expense for the three months ended September 30, 1998 increased
by $1.0 million over the corresponding period in 1997, primarily as a result of
$2.7 million in discount amortization on the Company's zero coupon convertible
subordinated debentures. During the three months ended September 30, 1998, the
Company capitalized $4.7 million of interest expense in connection with
construction projects, as compared to $2.5 million for the three months ended
September 30, 1997.
INCOME TAX PROVISION. The Company's consolidated effective income tax rate
for the three months ended September 30, 1998 was approximately 26.3%, as
compared to approximately 29.0% for the corresponding period in 1997, due to the
mobilization to and operation of rigs in lower tax jurisdictions.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997.
REVENUES. Revenues for the nine months ended September 30, 1998 increased
$154.0 million, or 31.5%, as compared to the corresponding period in 1997.
Revenues from international land operations increased $31.3 million, due to the
inclusion of Forasol's revenues and revenues from its 13 mat-suppported jackup
rigs for the full nine months of 1998 and the acquisition of CBP in Bolivia in
July 1998. Revenues from international offshore operations increased $93.8
million, due also to the inclusion of Forasol's revenues for the full nine
months of 1998, and due to the deployment of five additional offshore rigs
partially offset by declining utilization of land based rigs. In addition,
revenues from domestic offshore operations increased $45.4 million, due to the
inclusion of revenues from the 13 mat-supported jackup rigs acquired in May
1997, for the full nine months of 1998. These increases were partially offset by
a decrease in revenues of $16.5 million, due to the sale of the Company's U.S.
land-based well servicing operations in February 1997, and generally weak market
conditions in the Gulf of Mexico.
18
OPERATING COSTS. Operating costs for the nine months ended September 30, 1998
increased $81.9 million, or 25.4%, as compared to the corresponding period in
1997. Of this increase, $70.4 million was a result of expansion of the Company's
international operations, as discussed above. In addition, operating costs from
domestic offshore operations increased $24.3 million, due primarily to the
acquisition of 13 mat-supported jackup rigs. Operating costs decreased by $12.8
million, due to the sale of the Company's U.S. land-based well servicing
operations, as discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the nine
months ended September 30, 1998 increased $16.0 million, or 38.4%, as compared
to the corresponding period in 1997, primarily as a result of the acquisitions
of Forasol, 13 mat-supported jackup rigs and the completion and deployment of
several newly-constructed or refurbished jackup rigs. This increase was
partially offset by the sale of the Company's U.S. domestic land-based well
servicing operations in February 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the nine months ended September 30, 1998 increased $9.3 million, or
17.8%, as compared to the corresponding period in 1997, primarily due to the
inclusion of such expenses for the Forasol acquisition and the acquisition of 13
mat-supported jackup rigs. As a percentage of revenues, selling, general and
administrative expenses were 9.6% for the first nine months of 1998, as compared
to 10.7% for the first nine months of 1997.
OTHER INCOME (EXPENSE). Other income (expense) for the nine months ended
September 30, 1997 included a gain of $83.6 million from the sale of the
Company's U.S. land-based well servicing operations in February 1997. The gain
was partially offset by a charge of $3.7 million related to the induced
conversion of $28.0 million principal amount of the Company's 6 1/4% convertible
subordinated debentures.
Interest income increased by $2.0 million for the nine months ended September
30, 1998, from $2.9 million for the corresponding period in 1997, due to
increased cash made available from increased operations and the public sale of
zero coupon convertible subordinated debentures in April 1998. Interest expense
for the nine months ended September 30, 1998 increased by $10.4 million over the
corresponding period in 1997, as a result of increased borrowings and discount
amortization on the Company's zero coupon convertible subordinated debentures.
During the nine months ended September 30, 1998, the Company capitalized $10.5
million of interest expense in connection with construction projects, compared
to $5.7 million in 1997.
INCOME TAX PROVISION. The Company's consolidated effective income tax rate
for the nine months ended September 30, 1998 was approximately 24%, as compared
to approximately 34.5% for the corresponding period in 1997. The decrease in the
effective tax rate for the first nine months of 1998 resulted primarily from the
effects of the inclusion of the related operating results of Forasol, which has
a majority of its operations in lower tax jurisdictions, for the full nine month
period as well as expansion of the Company's other international operations. In
addition, the 1997 first quarter included a pretax gain of $83.6 million on the
sale of the Company's U.S. land-based well servicing operations that were taxed
at 36% and certain non-deductible amounts, primarily $3.7 million of after-tax
costs related to the induced conversion of $28.0 million of the Company's 6 1/4%
convertible subordinated debentures.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $142.9 million and $103.7 million as
of September 30, 1998 and December 31, 1997, respectively. The Company's current
ratio was 1.6 as of September 30, 1998 and 1.5 as of December 31, 1997. The
increase in the current ratio was attributable primarily to the increase in cash
and cash equivalents from the sale of zero coupon convertible subordinated
debentures in April 1998 offset by an increase in accounts payable and accrued
expenses as a result of increased capital expenditures and investments in joint
ventures.
19
The Company's cash flow from operations and capital expenditures were as
follows:
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------ ------
(IN MILLIONS)
Cash flow provided by (used in) operations ... $108.8 $ (1.0)
====== ======
Capital Expenditures
Sustaining ................................. $ 81.9 $ 42.8
New Construction ........................... 205.1 39.8
Acquisitions ............................... 17.0 371.8
Enhancements ............................... 75.8 67.4
Other ...................................... 4.5 0.2
------ ------
Total ........................................ $384.3 $522.0
====== ======
Net cash provided by operations increased by $109.8 million for the nine
months ended September 30, 1998 over the corresponding period in 1997. The
increase is primarily due to increased earnings from operations due to the
inclusion of Forasol's revenue for the full nine months in 1998, and the net of
changes in the components of working capital.
Net cash used in investing activities increased by $53.7 million for the nine
months ended September 30, 1998 over the corresponding period in 1997. The
increase is primarily related to the proceeds from the sale of the Company's
U.S. land-based operations received in 1997.
Net cash provided by financing activities decreased $89.2 million for the
nine months ended September 30, 1998, over the same period in 1997. The decrease
is primarily due to decreased debt borrowings and issuance of common stock.
Management anticipates that capital expenditures for the full year 1998 will
be approximately $550 million, represented by $94 million to sustain operations,
$76 million for enhancements, $273 million for new construction projects, $102
million for the purchase of drilling related assets and $5 million for the
upgrade of the Company's computers and software systems. The Company may spend
additional funds to acquire rigs or vessels in 1998, depending on market
conditions and opportunities. Currently, the Company has two mat-supported
jackup rigs under construction, is a party to the joint ventures having two
drillships and 6 semisubmesible drilling rigs under construction, and has
recently completed construction of four land rigs that were deployed to South
America.
In March 1997, the Company entered into a senior secured revolving credit
facility with a group of banks (as amended and restated, the "Credit Facility")
under which up to $100 million (including $25 million for letters of credit) was
initially available. Availability under the Credit Facility is limited to a
borrowing base based on the fair market value of collateral. The Credit Facility
is collateralized by the accounts receivable, inventory and other assets of the
Company and its domestic subsidiaries, two-thirds of the stock of the Company's
foreign subsidiaries, the stock of the Company's domestic subsidiaries and
certain other assets. The Credit Facility terminates in December 2000.
Borrowings under the Credit Facility bear interest at a variable rate based on
either the prime rate or LIBOR.
The Credit Facility limits the ability of the Company and its subsidiaries to
incur additional indebtedness, create liens, enter into mergers and
consolidations, pay cash dividends on its capital stock, make acquisitions, sell
assets or change its business without prior consent of the lenders. Under the
Credit Facility, the Company must maintain certain financial ratios, including
(i) funded debt to pro forma EBITDA, (ii) funded debt to capitalization, (iii)
adjusted EBITDA to debt service and (iv) minimum tangible net worth. As of
September 30, 1998, advances totaling $30 million were outstanding under the
Credit Facility at 8% interest. In September 1998, the Credit Facility was
amended to allow the funding of the equipment loan for the Pride Africa. In
connection with such amendment, availability under the Credit Facility was
reduced to $50 million. In addition, in order to maintain the availability of
the Credit Facility, the Company will
20
be required to obtain waivers from the lenders or further amend the Credit
Facility prior to the funding of the equipment loan for the PRIDE ANGOLA. If the
Company is unable to obtain such a waiver or amendment on terms it considers
acceptable, the Company will seek alternate financing arrangements to replace
the Credit Facility.
During 1997, the Company entered into a joint venture to construct, own and
operate the PRIDE AFRICA, an ultra-deepwater drillship currently under
construction in South Korea. The drillship is contracted to work offshore Angola
for an initial term of five years. It is anticipated that the drillship will
commence operations in mid-1999. The joint venture has entered into a financing
arrangement with a group of banks providing that approximately $200 million of
the drillship's estimated construction cost of $235 million will be financed by
loans that, upon delivery of the drillship, are without recourse to the joint
venture participants. The Company estimates that its equity investment in the
project will be approximately $19 million, which represents a 51% ownership
interest.
The Company also has obtained a commitment from a group of banks to provide
up to $110.0 million in loans to finance the acquisition of certain equipment to
be installed on the PRIDE AFRICA. As of September 30, 1998 there were no
outstanding loans under this commitment. As of November 12, 1998, $35 million
was outstanding under this commitment. The loans will be secured by such
equipment and will bear interest at a rate of LIBOR plus 1.25% per annum. The
Company has agreed to sell such equipment to the joint venture formed to
construct, own and operate the rig on or before the date Elf Angola accepts
delivery of the rig under the charter, which is anticipated to be mid-1999, and
expects to repay the loan from the sales proceeds. The joint venture intends to
draw on its financing arrangement described above to finance its payment to the
Company.
In addition, the Company has entered into a separate joint venture similar to
the PRIDE AFRICA joint venture to construct, own and operate a second ultra-deep
water drillship to operate offshore Angola under a three-year contract with two
one-year options. The drillship, the PRIDE ANGOLA, is also being built in South
Korea at a cost of approximately $235 million. It is anticipated this drillship
will begin operation in late-1999. The joint venture has entered into a
non-recourse financing similar to the PRIDE AFRICA financing for approximately
$200 million, subject to find documentation. The Company's equity investment in
the project is expected to be approximately $19 million, which will represent a
51% ownership interest.
The Company intends to finance the acquisition of certain equipment for the
PRIDE ANGOLA through a commitment from a group of banks for approximately $110
million. The Company expects to finalize this commitment during the fourth
quarter of 1998. As of November 12, 1998, the Company had purchased
approximately $5 million of this equipment using its working capital. Additional
commitments for the fourth quarter of 1998 are expected to be approximately $10
million.
During 1997, a special purpose company, in which the Company has a 30%
indirect investment, was formed to construct, own and operate six Amethyst-class
dynamically positioned semisubmersible drilling rigs. Upon their completion, the
rigs will be contracted to Petroleo Brasilerio S.A. pursuant to chartering
agreements with initial terms of five to eight years. The total estimated cost
to construct, equip and mobilize the six rigs is approximately $1.1 billion.
Delivery of the rigs is expected over a period from late 1999 through mid 2000.
The Company has made aggregate equity contributions of approximately $40 million
for the project as of September 30, 1998. The special purpose company has been
seeking financing for up to 90% of the construction costs of the rigs on terms
that would not require substantial recourse to the Company or the other project
sponsor. To date, however, the special purpose company has been unable to obtain
commitments for the financing, and there can be no assurance that financing will
be obtained on these or other acceptable terms. Should the financing not be
obtained, the Company may not recover some or all of its investment in the
special purpose company.
In November 1998, the special purpose company terminated the construction
contracts with respect to two of the Amethyst rigs after the shipyard at which
the rigs were to be constructed filed for protection from its creditors.
Payments to the builder under the terminated contracts total approximately $16
million, of which the Company paid approximately $5 million. Some or all of
these payments may not be recoverable by the special purpose company or the
Company. The special purpose company is currently evaluating alternatives for
constructing these two rigs elsewhere, including the possibility of exercising
option slots at the two shipyard where the other four Amethyst rigs are being
constructed.
21
In October 1998, the Company purchased, for $85 million, a dynamically
positioned, self-propelled semisubmersible drilling rig, named AMETHYST I. The
rig is currently working offshore Brazil under a charter and service contract
that expires in 2001. The purchase price of the rig consists of $63.7 million
in cash, with the balance financed by a $21.3 million note convertible into
common stock at a conversion price of $28.50 per share for the first year and
decreasing $1.00 per share annually thereafter until maturity. The convertible
note also bears interest at 6% per annum for the first year and escalates 1% per
annum annually thereafter until maturity. Interest is payable semi-annually on
December 1 and June 1 of each year commencing December 1, 1998. The note matures
on September 1, 2001, and no principal payments are required until maturity.
In April 1998, the Company completed a public sale of zero coupon convertible
subordinated debentures. The net proceeds to the Company in connection with the
sale, after deducting underwriting discounts and offering expenses, amounted to
approximately $223.1 million. Of such net proceeds approximately $63.2 million
was used to fund the cash portion of the purchase price of a semisubmersible
rig, approximately $40.0 million was used to fund the Company's investments in
the Amethyst joint ventures and approximately $38.0 million was used to fund the
Company's equity investments in the PRIDE AFRICA and the PRIDE ANGOLA.
Approximately $45.0 million was used to repay the balance outstanding under the
Company's Credit Facility. The Company used the excess proceeds from the
offering for general corporate purposes. The debentures, which mature on April
24, 2018, are convertible into common stock of the Company at a conversion rate
of 13.794 shares of common stock per $1,000 principal amount at maturity. At
maturity, the amortized aggregate amount payable under the debentures including
accrued original issue discount would be approximately $588.1 million.
The sale of the zero coupon convertible subordinated debentures was pursuant
to a "shelf" registration statement under the Securities Act of 1933 pursuant to
which the Company may issue up to $500 million initial offering price of
securities consisting of any combination of debt securities, common stock and
preferred stock of the Company. Management believes that the cash generated from
the Company's operations, together with borrowings under the Credit Facility,
will be adequate to fund the rig acquisition and equity investments discussed
above and the Company's normal ongoing capital expenditures, working capital and
debt service requirements.
The Company is active in reviewing possible expansion and acquisition
opportunities relating to all of its business segments. While the Company has no
definitive agreements to acquire additional equipment other than those discussed
above, suitable opportunities may arise in the future. The timing, size or
success of any acquisition effort and the associated potential capital
commitments are unpredictable. From time to time, the Company has one or more
bids outstanding for contracts that could require significant capital
expenditures and mobilization costs. The Company expects to fund acquisitions
and project opportunities primarily through a combination of working capital,
cash flow from operations and full or limited recourse debt or equity financing.
OUTLOOK AND FORWARD-LOOKING STATEMENTS
With oil prices remaining at depressed levels, management anticipates that
the Company will experience further decreases in day rates and utilization in
the near-term. As day rates and utilization continue to decrease, the Company's
future financial results are expected to be lower than 1998 results. Due to the
short-term nature of many of the Company's contracts, primarily in the Gulf of
Mexico and South America land operations, and the unpredictable nature of oil
and natural gas prices, which affect the demand for drilling activity, the
extent of such adverse change cannot be accurately predicted. However, the
Company currently anticipates that its financial results for the next several
quarters will be significantly lower than the results for each of the three
quarters of 1998. The duration of this market downturn depends on many factors
that also cannot be accurately predicted. Management anticipates that the
offshore drilling markets will be unsettled for at least the balance of 1998 and
the first quarter of 1999, but remains positive on the long-term outlook for the
industry and for the Company.
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The declines experienced in the offshore drilling markets have had the
greatest impact on the demand for the Company's platform rigs in the Gulf of
Mexico. The Company currently has one jackup rig and 15 platform rigs idle in
the Gulf of Mexico where the Company's contracts have traditionally been and
continue to be short-term contracts. Due to the short-term nature of these
contracts, the Company expects that its Gulf of Mexico rigs will experience
increased downtime.
The construction of the Company's two drillships (PRIDE AFRICA AND PRIDE
ANGOLA) and two jackup rigs (PRIDE KANSAS AND PRIDE TEXAS) is proceeding as
scheduled. The drillships, which are being constructed to work under long-term
contracts, are expected to be delivered in mid and late 1999, respectively, and
the two jackup rigs are scheduled for delivery in the fourth quarter of 1998.
Following delivery, the PRIDE KANSAS is contracted to work in the Gulf of
Mexico. The PRIDE TEXAS is currently being marketed. The Company continues to
evaluate its opportunities with regard to new construction projects.
This Quarterly Report on Form 10-Q includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Quarterly Report on Form 10-Q that address
activities, events or developments that the Company expects, projects, believes
or anticipates will or may occur in the future, including such matters as future
capital expenditures and investments in the construction, acquisition and
refurbishment of rigs (including the amount and nature thereof and the timing of
completion thereof), expansion and other development trends of the contract
drilling industry, business strategies, expansion and growth of operations and
other such matters are forward-looking statements. These statements are based on
certain assumptions and analyses made by management of the Company in light of
its experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. Such statements are subject to a number of assumptions, risks
and uncertainties, general economic and business conditions, prices of oil and
gas, foreign exchange controls and currency fluctuations, the business
opportunities (or lack thereof) that may be presented to and pursued by the
Company, changes in laws or regulations, the ability to obtain shipyard
contracts and other factors, many of which are beyond the control of the
Company. Any such statements are not guarantees of future performance, and
actual results or developments may differ materially from those projected in the
forward-looking statements.
ACCOUNTING MATTERS
The Company will adopt Statement of Financial Accounting Standards ("FAS")
No. 131 "Disclosures about Segments of an Enterprise and Related Information",
FAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits", and FAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" for the year ended December 31, 1998. The Company does not
anticipate that the adoption of these disclosure standards will have a material
impact on its consolidated financial statements. FAS No. 130 "Reporting
Comprehensive Income" was adopted during the quarter ended March 31, 1998 and
had no impact on the Company's financial position, results of operations or cash
flows.
YEAR 2000 ISSUE
BACKGROUND. The "Year 2000" problem refers to the inability for certain
computer systems and other equipment with embedded chips or processors
(collectively "Business Systems") to correctly interpret the century from a date
in which the year is represented by only two digits. Business Systems, which are
not Year 2000 compliant, would not be able to correctly process certain data, or
in extreme situations, could cause the entire system to be disabled.
OVERALL GOALS AND OBJECTIVES. The Company's goal is to have all of its
significant Business Systems functioning properly with respect to the Year 2000
problem and to develop contingency plans in the event of disruptions caused by
the Year 2000 problem before December 31, 1999. In order to meet these goals,
the Company has taken a strategic business decision to implement a common set of
purchased Business Systems which cover it's global operations and are Year 2000
compliant. The Company has also established a global task force of key employees
and professional consultants to work with the key staff at each location to
ensure the goal is met. It is expected that the majority of the Company's
existing significant Business Systems will either be upgraded or replaced during
this process. The task force will also develop the contingency plans as
required. These overall goals and objectives are referred to as the "Year 2000
Project Plan."
YEAR 2000 PROJECT PLAN. The phases of the Year 2000 Project Plan include: (1)
identifying, inventory and assigning priorities to existing significant Business
Systems, (i.e. Business Systems critical to continuing operations are given the
highest priority) (2) determining and implementing the new year 2000 compliant
Business Systems that will be used throughout the Company, (3) assessing all
remaining Year 2000 risks, (4) resolving and correcting remaining Year 2000
problems with upgrades, or replacements, (5) testing the Year 2000 upgrades, or
replacements, (5) conducting Year 2000 surveys of significant customers,
suppliers, and business partners (collectively "Key Business Partners"), and (6)
developing and testing Year 2000 contingency plans. Currently, each phase is in
various stages of completion; however, the Company estimates that it is
approximately 50% complete with the Year 2000 Project Plan.
BUSINESS SYSTEMS: OPERATIONAL. Part of the Year 2000 Project Plan includes
performing an inventory of each drilling rig's critical Business Systems. This
inventory is in the process of being fully developed and evaluated, and a
compilation of written documentation regarding compliance is underway. The
Company believes that some of its rigs are Year 2000 compliant, but a full
assessment is currently being performed. At this time, the Company is not able
to reasonably assess a likely worst case Year 2000 scenario related to its
drilling rigs, but expects to do so in the near future.
KEY BUSINESS PARTNERS. The Company has initiated communication with its Key
Business Partners to seek Year 2000 readiness assurances and determine the
extent to which their failure to correct their own Year 2000 problems could
affect the Company. The Company's Key Business Partners include suppliers whose
critical function is to provide drilling rig capital equipment essential to the
operation of a rig. As part of normal business operations, the Company generally
does not maintain an inventory of drilling rig capital equipment replacement
parts. In the event replacement parts are required for a rig and the Company is
unsuccessful in purchasing the equipment from its suppliers, the rig could
experience idle time resulting in loss of revenue.
Key Business Partners also include customers who provide the Company's source
of revenue and cash flow. Any disruption in this revenue stream could impact the
Company's cash flow, results of operations and financial position. Other Key
Business Partners include strategic suppliers whose critical function is to
provide Business Systems which are Year 2000 compliant and consultants who can
advise and assist the company in the implementation of the systems. Any Year
2000 problems with these Business Systems could impact the Company adversely in
terms of lost time or even loss of revenues.
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The Company cannot guarantee that Year 2000 problems, if any, in other Key
Business Partners' systems on which it relies will be timely resolved, nor can
it inspect the companies' Year 2000 efforts or independently verify their
representations to the Company. In addition, the Company cannot foretell the
effect on its business operations from the failure of systems owned by others,
from the delivery of inaccurate information from other companies, or from the
inability of their systems to interface with the Company's systems. Accordingly,
the Company cannot guarantee that other companies' failure to resolve their Year
2000 problems would not have a material adverse effect on the Company; however,
the Company is in the process of assessing these risks.
COSTS. As of November 11, 1998, the Company has incurred approximately $ 7
million in costs related to the Year 2000 issue, primarily for new hardware, new
software licenses and outside consultants. The Company estimates its future
costs to be $ 2.5 million by December 31, 1998 and an additional $5 million in
1999. Costs related to the Year 2000 issue are funded from the Company's
operating cash flows.
RISKS. The Company's expectations regarding the Year 2000 are subject to
uncertainties which could affect the Company's results of operations or
financial condition. Success depends on many factors, some of which are outside
the Company's control. Despite reasonable efforts, the Company cannot assure
that it will not experience any disruptions or otherwise be adversely affected
by Year 2000 problems. While the Company presently does not expect any
catastrophic failures of any of its Business Systems, it cannot provide any
assurances that it is not in a position to give nor should anyone rely on
statements to the contrary.
CONTINGENCY PLANS. The Company is developing contingency plans for Business
Systems and certain processes that are high and moderately critical to the
business operations. The contingency plans will encompass alternative courses of
action, with limited reliance on computer software and hardware, in the event
that Business Systems or processes are not Year 2000 compliant.
THIS DISCLOSURE IS MADE FOR THE SOLE PURPOSE OF FACILITATING RESPONSES,
COMMUNICATING OR DISCLOSING INFORMATION AIMED AT CORRECTING, HELPING TO CORRECT
AND/OR AVOIDING YEAR 2000 FAILURES. THESE STATEMENTS ARE MADE WITH THE INTENTION
TO COMPLY FULLY WITH THE YEAR 2000 READINESS AND INFORMATION DISCLOSURE ACT AS
SIGNED INTO LAW OCTOBER 19, 1998. ALL STATEMENTS MADE HEREIN SHALL BE CONSTRUED
WITHIN THE CONFINES OF THAT ACT.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO.
3.1 -- Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 0-16961).
3.2 -- Amendment to Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 0-16961).
3.3 -- Amendment to Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, File No.
0-16961).
3.4 -- Amendment to Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-8 dated September 8, 1997,
Registration No. 333-35089).
3.5 -- Amendment to Amended and Restated Articles of Incorporation.
3.6 -- Bylaws of the Company, as amended.
4.1 -- Rights Agreement dated as of September 9, 1998 between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated September 10, 1998 (File No. 1-13289)).
4.2 -- First Amendment to Credit Agreement, dated as of April 24, 1998, by
and among the Company, certain of its subsidiaries, First National
Bank of Commerce, as arranger and syndication agent, Wells Fargo Bank
(Texas), National Association, as administrative and documenation
agent, and the lenders named therein.
4.3 -- Second Amendment to Credit Agreement, dated as of September 17, 1998,
by and among the Company, certain of its subsidiaries, First National
Bank of Commerce, as arranger and syndication agent, Wells Fargo Bank
(Texas), National Association, as administrative and documenation
agent, and the lenders named therein.
15 -- Awareness Letter of PricewaterhouseCoopers LLP.
27 -- Financial data schedule.
(b) Reports on Form 8-K
In a Current Report on Form 8-K dated September 10, 1998, the Company (i)
reported pursuant to Item 5 of Form 8-K the declaration by the Board of
Directors of a dividend of one right to purchase preferred stock ("Right") for
each outstanding share of the Company's Common Stock to shareholders of record
at the close of business on September 30, 1998; (ii) set forth pursuant to Item
5 of Form 8-K a summary description of the Rights and (iii) filed pursuant to
Item 7 of Form 8-K (a) the Rights Agreement dated as of September 9, 1998
between the Company and American Stock Transfer & Trust Company, as Rights
Agent, and (b) a press release issued by the Company dated September 10, 1998
with respect thereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRIDE INTERNATIONAL, INC.
By: EARL W. MCNIEL
(EARL W. MCNIEL)
Vice President and Chief
Financial Officer
By: M. TERRY MAY
(M. TERRY MAY)
Chief Accounting Officer
Date: November 16, 1998
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