1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13289
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PRIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<Table>
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)
</Table>
(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.
Outstanding as of August 9, 2001
Common Stock, no par value 74,077,465
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2
PRIDE INTERNATIONAL, INC.
INDEX
<Table>
<Caption>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2001 and December 31, 2000............................. 2
Consolidated Statement of Operations for the three months ended
June 30, 2001 and 2000...................................................................... 3
Consolidated Statement of Operations for the six months ended
June 30, 2001 and 2000...................................................................... 4
Consolidated Statement of Cash Flows for the six months ended
June 30, 2001 and 2000...................................................................... 5
Notes to Unaudited Consolidated Financial Statements............................................. 6
Report of Independent Accountants................................................................ 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 22
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
Signatures........................................................................................... 24
</Table>
1
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (includes restricted cash of $52,439 and $50,496) .... $ 175,756 $ 123,488
Trade receivables, net ......................................................... 260,247 234,990
Parts and supplies ............................................................. 56,217 53,938
Other current assets ........................................................... 102,496 65,732
-------------- --------------
Total current assets ....................................................... 594,716 478,148
-------------- --------------
PROPERTY AND EQUIPMENT, net ......................................................... 2,621,436 2,020,123
-------------- --------------
OTHER ASSETS
Investments in and advances to affiliates ...................................... 25,610 59,420
Goodwill, net .................................................................. 50,097 51,940
Other assets, net .............................................................. 90,085 67,297
-------------- --------------
Total other assets ......................................................... 165,792 178,657
-------------- --------------
$ 3,381,944 $ 2,676,928
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................... $ 141,223 $ 140,850
Accrued expenses ............................................................... 142,179 131,218
Short-term borrowings .......................................................... 20,590 22,135
Current portion of long-term debt .............................................. 91,286 85,286
Current portion of long-term lease obligations ................................. 2,462 4,267
-------------- --------------
Total current liabilities .................................................. 397,740 383,756
-------------- --------------
OTHER LONG-TERM LIABILITIES ......................................................... 91,480 81,364
LONG-TERM DEBT, net of current portion .............................................. 1,629,671 1,144,638
LONG-TERM LEASE OBLIGATIONS, net of current portion ................................. 16,334 17,682
DEFERRED INCOME TAXES ............................................................... 41,461 40,793
MINORITY INTEREST ................................................................... 58,465 50,599
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value; 200,000 and 100,000 shares authorized; 74,132
and 67,743 shares issued and 74,078
and 67,689 shares outstanding, respectively ................................ 1 1
Paid-in capital ................................................................ 928,141 769,515
Treasury stock, at cost ........................................................ (191) (191)
Retained earnings .............................................................. 218,842 188,771
-------------- --------------
Total shareholders' equity ................................................. 1,146,793 958,096
-------------- --------------
$ 3,381,944 $ 2,676,928
============== ==============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
2
4
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
-----------------------------
2001 2000
------------ ------------
REVENUE ............................................... $ 291,060 $ 225,064
OPERATING COSTS ....................................... 182,663 149,734
------------ ------------
Gross margin ..................................... 108,397 75,330
DEPRECIATION AND AMORTIZATION ......................... 37,625 33,086
SELLING, GENERAL AND ADMINISTRATIVE ................... 20,346 21,250
------------ ------------
EARNINGS FROM OPERATIONS .............................. 50,426 20,994
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense ................................. (24,088) (23,156)
Interest income .................................. 2,954 2,316
Other expense, net ............................... (1,729) (62)
------------ ------------
Total other income (expense), net ............ (22,863) (20,902)
------------ ------------
EARNINGS BEFORE INCOME TAXES & MINORITY INTEREST ...... 27,563 92
INCOME TAX PROVISION .................................. 5,644 556
MINORITY INTEREST ..................................... 3,810 1,567
------------ ------------
NET EARNINGS (LOSS) ................................... $ 18,109 $ (2,031)
============ ============
NET EARNINGS (LOSS) PER SHARE:
Basic ........................................ $ 0.25 $ (0.03)
Diluted ...................................... $ 0.22 $ (0.03)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ........................................ 73,453 65,099
Diluted ...................................... 88,257 65,099
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
3
5
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2001 2000
------------ ------------
REVENUE .......................................................... $ 561,414 $ 395,147
OPERATING COSTS .................................................. 356,352 264,239
------------ ------------
Gross margin ................................................ 205,062 130,908
DEPRECIATION AND AMORTIZATION .................................... 74,207 61,034
SELLING, GENERAL AND ADMINISTRATIVE .............................. 41,935 37,559
------------ ------------
EARNINGS FROM OPERATIONS ......................................... 88,920 32,315
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense ............................................ (47,311) (42,161)
Interest income ............................................. 6,736 4,463
Other expense, net .......................................... (254) (1,465)
------------ ------------
Total other income (expense), net ....................... (40,829) (39,163)
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES & MINORITY INTEREST .......... 48,091 (6,848)
INCOME TAX PROVISION (BENEFIT) ................................... 10,154 (2,551)
MINORITY INTEREST ................................................ 7,866 4,627
------------ ------------
NET EARNINGS (LOSS) .............................................. $ 30,071 $ (8,924)
============ ============
NET EARNINGS (LOSS) PER SHARE:
Basic ................................................... $ 0.42 $ (0.14)
Diluted ................................................. $ 0.38 $ (0.14)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................................... 71,759 62,800
Diluted ................................................. 84,472 62,800
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
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PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net earnings (loss) ....................................................... $ 30,071 $ (8,924)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities -
Depreciation and amortization ......................................... 74,207 61,034
Discount amortization on zero coupon debentures ....................... 8,163 5,133
Loss (gain) on sale of assets ......................................... (309) (1,569)
Deferred tax provision (benefit) ...................................... 91 (6,526)
Minority interest ..................................................... 7,866 4,627
Changes in assets and liabilities, net of effects of acquisitions -
Trade receivables ................................................ (25,257) (16,947)
Parts and supplies ............................................... (1,159) (4,982)
Other current assets ............................................. (36,187) (1,189)
Other assets ..................................................... (2,625) (6,246)
Accounts payable ................................................. (48,282) 2,625
Accrued expenses ................................................. 842 (5,289)
Other liabilities ................................................ 3,868 20,410
------------ ------------
Net cash provided by operating activities .................... 11,289 42,157
------------ ------------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, less cash acquired ........... 3,375 (33,130)
Purchases of property and equipment ....................................... (109,389) (79,470)
Proceeds from sales of property and equipment ............................. 741 2,449
Investments in and advances to affiliates ................................. (16,874) (2,000)
Proceeds from sales of short-term investments ............................. -- 72,931
Purchases of short-term investments ....................................... -- (30,054)
------------ ------------
Net cash used in investing activities ........................ (122,147) (69,274)
------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock .................................... 62,000 72,000
Proceeds from exercise of stock options ................................... 3,655 2,208
Proceeds from issuance of convertible senior debentures, net .............. 254,500 --
Proceeds from debt borrowings ............................................. 31,410 35,625
Reduction of debt ......................................................... (188,439) (76,642)
------------ ------------
Net cash provided by financing activities .................... 163,126 33,191
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 52,268 6,074
CASH AND CASH EQUIVALENTS, beginning of period ................................. 123,488 111,627
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ....................................... $ 175,756 $ 117,701
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Capital expenditures in accounts payable .................................. $ 48,655 $ 9,416
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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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 note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America 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" or "Pride") included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000. Certain reclassifications have been made
to prior year amounts to conform with the current year presentation.
In the opinion of management, the unaudited consolidated financial
information included herein reflects all adjustments, consisting only of normal
recurring adjustments, which are necessary 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 full year or any other interim period.
2. LONG-TERM DEBT
Long-term debt as of June 30, 2001 and December 31, 2000 consisted of
the following:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS)
9 3/8% Senior Notes due 2007 ............................... $ 325,000 $ 325,000
10% Senior Notes due 2009 .................................. 200,000 200,000
Drillship loans ............................................ 320,797 351,826
Semisubmersible construction loans ......................... 233,948 --
Zero Coupon Convertible Senior Debentures Due 2021 ......... 265,263 --
Zero Coupon Convertible Subordinated Debentures Due 2018 ... 232,262 226,861
Senior convertible notes payable ........................... 107,103 21,250
Limited-recourse collateralized term loans ................. 19,070 21,736
Note payable to seller ..................................... 15,890 20,222
Other notes payable ........................................ 1,624 13,029
Credit facilities .......................................... -- 50,000
------------ ------------
1,720,957 1,229,924
Current portion of long-term debt .......................... 91,286 85,286
------------ ------------
Long-term debt, net of current portion ..................... $ 1,629,671 $ 1,144,638
============ ============
</Table>
In connection with the construction of two ultra-deepwater drillships,
the Pride Africa and the Pride Angola, the Company and the two joint venture
companies that own and operate the drillships, in which the Company has a 51%
interest, entered into financing arrangements with a group of banks that
provided $400 million of the drillships' total cost of $495 million. These loans
are secured by the two drillships and the proceeds from the related drilling
contracts and are non-recourse to the joint venture owners.
As a condition of the drillship loans, the Company entered into
interest rate swap and cap agreements. The agreements fixed the interest rate on
the Pride Africa loan at 7.34% through December 2006, fixed the interest rate on
the Pride Angola loan at 6.52% through July 2003 and capped the interest rate on
the Pride Angola loan at 6.52% from August 2003 to July 2007.
In March 2001, in connection with the acquisition of the interests the
Company did not previously own in two deepwater semisubmersible drilling rigs,
the Pride Carlos Walter and the Pride Brazil, the Company issued
6
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PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
approximately $86 million aggregate principal amount of senior convertible
notes. The notes, which mature in March 2004 and bear interest at 9% per annum,
are convertible into approximately 4.0 million shares of the Company's common
stock. In addition, the Company assumed approximately $287 million of
indebtedness incurred to finance the construction of the rigs. An aggregate $53
million of the construction-related indebtedness, which was scheduled to mature
in November 2001 and bore interest at 11 3/4% per annum, was repaid in April
2001. The Pride Carlos Walter and Pride Brazil commenced operations in June 2001
and July 2001, respectively.
In July 2001, the Company entered into a credit agreement with a group
of foreign banks to provide loans totaling up to $250 million to refinance the
construction loans for the Pride Carlos Walter and Pride Brazil. Borrowings
under the new facility will bear interest at rates based on LIBOR plus an
applicable margin of 1.50% to 1.85%. Principal and interest is payable
semi-annually through 2008. Funding under the new facility and repayment of the
construction loans (which currently bear interest at 11% per annum) is expected
to be completed in the fourth quarter of 2001 following expiration of the
applicable notice period governing the construction loans. As a condition of the
facility, the Company entered into interest rate swap agreements, fixing the
respective interest rates through 2006. Such swap agreements are not considered
derivatives, as the swap agreements were required by the lenders under the
facility agreement and the interest rates on the swap agreements are clearly and
closely related to the interest rates provided for in the agreement. The new
loans are to be secured by, among other things, a first priority mortgage on the
drilling rigs and assignment of the charters for the rigs.
In January 2001, the Company completed a public sale of Zero Coupon
Convertible Senior Debentures with a face amount of $431.5 million. The net
proceeds to the Company in connection with the sale, after deducting
underwriting discounts and offering expenses totaling $8.0 million, amounted to
approximately $254.5 million. The issue price of $608.41 for each debenture
represents a yield to maturity of 2.50% per annum (computed on a semiannual bond
equivalent basis) calculated from the issue date. The difference between the
issue price and face amount of the debentures is recorded as a discount and
amortized to interest expense on a straight-line basis over the term of the
debentures. The debentures, which mature on January 16, 2021, are convertible
into a total of approximately 9.4 million shares of common stock of the Company
(equal to a conversion rate of 21.729 shares of common stock per $1,000
principal amount at maturity). The Company will become obligated to purchase the
debentures, at the option of the holders, in whole or in part, on January 16,
2003, 2005, 2007, 2009 and 2016 at a price per debenture equal to the issue
price plus accrued original issue discount to the relevant purchase date. On or
subsequent to January 16, 2004, 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. The debentures
contain provisions that limit the ability of the Company and its subsidiaries,
with certain exceptions, to pay dividends or make other restricted payments;
incur additional debt or issue preferred stock; create or permit to exist liens;
incur dividend or other payment restrictions affecting subsidiaries;
consolidate, merge or transfer all or substantially all of its assets; sell
assets; enter into transactions with affiliates and engage in sale and leaseback
transactions.
The Company currently has senior bank credit facilities with foreign
banks that provide aggregate availability of up to $164.1 million. The credit
facilities terminate between January 2002 and June 2005. Borrowings under each
of the credit facilities bear interest at variable rates based on LIBOR plus a
spread ranging from 0.50% to 1.70%. As of June 30, 2001, there were no advances
outstanding under these credit facilities.
The Company has a senior secured credit facility with a U.S. bank under
which up to $25 million of letters of credit may be issued. Outstanding letters
of credit issued under this credit facility are secured by the Company's cash
and cash equivalents maintained at such bank. The letter of credit facility
expires in March 2003. As of June 30, 2001, there were $12.6 million of letters
of credit issued under this credit facility.
As of June 30, 2001, $52.4 million of the Company's cash balances,
which amount is included in cash and cash equivalents, consists of funds held in
trust in connection with the drillship loans and the limited-recourse
collateralized term loans and, accordingly, is not available for use by the
Company.
7
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. INCOME TAXES
The Company's consolidated effective income tax rate for the three
months and six months ended June 30, 2001 was 20.5% and 21.1%, respectively, as
compared to 604.3% and 37.3% for the corresponding periods in 2000. The decrease
in the effective tax rate resulted primarily from increased income in foreign
jurisdictions with zero or low tax rates. The higher rates in 2000 were impacted
by deemed profit taxes in several countries (where the Company's tax liability
is based on revenues rather than actual income or loss), despite actual results
for those periods.
4. NET EARNINGS PER SHARE
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 stock options, convertible debentures and
other convertible debt were converted into common stock, after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the convertible debentures and other convertible debt.
The following table presents information necessary to calculate basic
and diluted net earnings per share:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings (loss) .................................... $ 18,109 $ (2,031) $ 30,071 $ (8,924)
Interest expense on convertible debentures and notes ... 1,623 -- 2,943 --
Income tax effect ...................................... (568) -- (1,030) --
-------- -------- -------- --------
Adjusted net earnings (loss) ...................... $ 19,164 $ (2,031) $ 31,984 $ (8,924)
======== ======== ======== ========
Weighted average number of common shares outstanding ... 73,453 65,099 71,759 62,800
Convertible debentures and notes ....................... 13,345 -- 11,252 --
Stock options and warrants ............................. 1,459 -- 1,461 --
-------- -------- -------- --------
Adjusted weighted average shares outstanding ...... 88,257 65,099 84,472 62,800
======== ======== ======== ========
Basic net earnings (loss) per share ............ $ 0.25 $ (0.03) $ 0.42 $ (0.14)
Diluted net earnings (loss) per share .......... $ 0.22 $ (0.03) $ 0.38 $ (0.14)
</Table>
The calculation of diluted weighted average shares outstanding for the
three months and six months ended June 30, 2001 and 2000 excludes 7.8 million
and 11.1 million common shares, respectively, issuable pursuant to outstanding
options, convertible debentures and notes, because their effect was
antidilutive.
5. SHAREHOLDERS' EQUITY
During the six months ended June 30, 2001, the Company sold
approximately 2.6 million shares of common stock under its Direct Stock Purchase
Plan for net proceeds of $62.0 million.
8
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PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. PENDING MERGERS
In May 2001, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Marine Drilling Companies, Inc. ("Marine"), a
Texas based offshore drilling company, PM Merger, Inc., a Delaware corporation
and wholly owned subsidiary of Pride ("New Pride"), and AM Merger Inc., a
Delaware corporation and wholly owned subsidiary of Pride. Two mutually
dependent mergers are provided for in the Merger Agreement. The first merger is
a merger of Marine into AM Merger, Inc., with the surviving corporation to be
renamed Pride Marine, Inc. The Marine merger will cause Marine to become a
subsidiary of Pride and Marine common stock to be converted into Pride common
stock. The second merger, which will occur immediately after the Marine merger,
is a merger of Pride into New Pride, with New Pride as the surviving
corporation. This reincorporation merger will have the effect of changing the
state of incorporation of the combined company from Louisiana to Delaware, and
converting Pride (Louisiana) common stock, including stock issued to former
Marine shareholders, into New Pride (Delaware) common stock. At the effective
time of the reincorporation merger, New Pride will be renamed Pride
International, Inc. Taken together, the mergers result in a tax-free exchange of
Marine and Pride common stock for common stock in New Pride on a one-for-one
basis.
The closing of the mergers is conditioned upon approval of the Merger
Agreement by the requisite vote of the respective shareholders of Pride and
Marine in accordance with applicable law. The Company anticipates that the
mergers will become effective in September 2001.
The mergers are intended to qualify as a pooling-of-interests for
accounting and financial reporting purposes.
7. ACQUISITIONS
In February 2001, the Company completed the acquisition of a
second-generation semisubmersible drilling rig (now the Pride North Sea) and a
third-generation semisubmersible drilling rig (now the Pride North Atlantic)
located in the North Sea for $44.7 million in cash and 3.0 million shares of the
Company's common stock valued at $78.9 million. The Company has chartered the
Pride North Atlantic to an affiliate of the seller under a bareboat charter that
expires in September 2001. The charter can be extended to complete commitments
outstanding on the initial expiration date. The Pride North Sea was refurbished
prior to commencing operations in July 2001.
In March 2001, the Company increased from 26.4% to 100% its ownership
in a joint venture that recently constructed two dynamically-positioned,
deepwater semisubmersible drilling rigs. The Pride Carlos Walter commenced
operations in June 2001 and the Pride Brazil commenced operations in July 2001.
These rigs are operating for Petroleo Brasilerio S.A. ("Petrobras") under new
five-year charter and service rendering contracts, each with two one-year
extension options. The purchase consideration for the interests the Company did
not previously own consisted of approximately $86 million aggregate principal
amount of senior convertible notes, which were issued to the Brazilian
participant in the joint venture, and 519,468 shares of the Company's common
stock valued at approximately $14 million, which were issued to investment funds
managed by First Reserve Corporation pursuant to the funds' original investment
in the joint venture. First Reserve-managed funds continue to hold an interest
in the portion of the joint venture that is constructing two additional
dynamically-positioned, deepwater semisubmersible drilling rigs known as the
Amethyst 4 and Amethyst 5 (see Note 9), which interest is exchangeable for
527,652 shares of the Company's common stock. The new charter and service
rendering contracts with Petrobras, together with the Company's acquisition of
100% ownership, resulted in the termination of previous seven-year charter and
service rendering contracts and resolved all the outstanding issues with
Petrobras relating to the Pride Carlos Walter and the Pride Brazil, including
the elimination of accrued late delivery penalties. The acquisition added to the
Company's consolidated balance sheet approximately $443 million of assets
represented by the two rigs, approximately $287 million of indebtedness incurred
to finance the construction of the rigs ($53 million of which was repaid in
April 2001) and approximately $86 million of convertible senior notes issued to
the Brazilian participant. See Note 2.
9
11
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Each of the acquisitions discussed above was recorded using the
purchase method of accounting. The operating results of each acquisition have
been included in the Company's consolidated results of operations from the date
of the acquisition.
8. COMMITMENTS AND CONTINGENCIES
The Company and a number of other offshore drilling contractors with
operations in the Gulf of Mexico are defendants in a lawsuit in the U.S.
District Court for the Southern District of Texas entitled Verdin v. R&B Falcon
Drilling USA, Inc. The plaintiff in this suit, who purports to be an "offshore
worker" previously employed by R&B Falcon Drilling USA, alleges that the
defendants have engaged in a conspiracy to depress wages and benefits paid to
the defendants' offshore employees. Plaintiff contends that this alleged conduct
violates federal and state antitrust laws. Plaintiff seeks treble damages,
attorneys' fees and costs on behalf of himself and an alleged class of offshore
workers. The Company vigorously denies these allegations. A preliminary
agreement has been negotiated on behalf of the Company that, subject to
certification of a settlement class by the court and the satisfaction of other
conditions, would resolve the matter for an amount within the policy limits of
the Company's insurance. In July 2001, the case was transferred to a different
federal judge as a docket equalization measure, and that judge has not yet
indicated when he will consider certification of the settlement class or any of
the other settlement conditions. While the Company's insurance carrier has
not yet agreed to pay the settlement amount, the Company believes that it is
insured for that amount. The Company does not believe the settlement will
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
The Company is routinely involved in other litigation incidental to its
business, which at times involves claims for significant monetary amounts, some
of which would not be covered by insurance. In the opinion of management, none
of the existing litigation will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
9. INVESTMENT IN AMETHYST JOINT VENTURE
The Company has a 26.4% equity interest in a joint venture company that
is constructing two dynamically-positioned, deepwater semisubmersible drilling
rigs, yet to be named and currently referred to as the Amethyst 4 and Amethyst
5. In April 2001, the builder of these rigs, Friede Goldman Halter, Inc.
("FGH"), filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code and requested the Bankruptcy Court to reject the
construction contracts. In July 2001, the Bankruptcy Court officially rejected
the construction contracts. To ensure completion of construction under the
shipbuilding contracts for the Amethyst 4 and Amethyst 5, FGH posted performance
bonds totaling $175 million. The surety has commenced funding the
cost of completing the rigs under its obligations, and discussions are currently
being conducted regarding plans to complete construction of the rigs using the
facilities of FGH or another U.S. shipyard or shipyards. Under the
circumstances, no prediction can be made as to when construction of the Amethyst
4 and Amethyst 5 will be completed. The joint venture company has financed 87.5%
of the cost of construction of these rigs through credit facilities, with
repayment of the borrowings under those facilities guaranteed by the United
States Maritime Administration ("MARAD"). Advances under the credit facilities
are being provided without recourse to any of the joint venture owners. The
remaining 12.5% of the cost of construction is being provided by the joint
venture company from equity contributions that have been made by the joint
venture partners. Through June 30, 2001, the Company's equity contributions to
the joint venture totaled $25.6 million, including capitalized interest of $4.0
million. In the opinion of management, the performance and payment bonds issued
by the surety on behalf of FGH, together with additional draws under the
MARAD-guaranteed credit facilities, will provide sufficient funds to complete
the Amethyst 4 and Amethyst 5 without requiring additional contributions by the
joint venture partners.
10
12
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Amethyst 4 and Amethyst 5 are being built to operate under
long-term charter and service rendering contracts with Petrobras; however,
Petrobras has given notice of its intention to cancel those contracts for late
delivery. Based on current demand for deepwater drilling rigs, the Company
believes that Petrobras or another customer will employ the Amethyst 4 and
Amethyst 5 under new or amended contracts. There can be no assurance, however,
that either the Amethyst 4 or Amethyst 5 will be chartered to Petrobras or to
any other customer.
10. FINANCIAL INSTRUMENTS
The Company's operations are subject to foreign exchange risks
including the risks of adverse foreign currency fluctuations and devaluations
and of restrictions on currency repatriation.
The Company limits the risks of adverse currency fluctuations and
restrictions on currency repatriation by obtaining contracts providing for
payment in U.S. dollars or freely convertible currency. To the extent possible,
the Company limits its exposure to potentially devaluating currencies by
matching its acceptance of local currencies to its expense requirements in those
currencies. Moreover, the Company enters into forward exchange contracts and
option contracts to manage foreign currency exchange risks associated with its
French franc and Euro denominated expenses.
The forward exchange contracts and option contracts have not been
designated as hedging instruments under the Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The net realized
and unrealized losses on all forward and option contracts, included in other
expense, net during the three months and six months ended June 30, 2001, were
approximately $0.6 million and $2.4 million, respectively.
In connection with the construction of two ultra-deepwater drillships,
the Pride Africa and the Pride Angola, and as a condition of the drillship
loans, the Company entered into interest rate swap and cap agreements, fixing
the interest rates on the Pride Africa and Pride Angola loans (See Note 2). The
interest rate swap and cap agreements related to the loans are not considered
derivatives as the agreements were required by the lenders under the related
debt agreements and the interest rates on the interest rate swap and cap
agreements are clearly and closely related to the interest rates on the loan
agreements.
11
13
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. SEGMENT INFORMATION
The following table sets forth selected consolidated financial
information of the Company by operating segment for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ------------------------------------------
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenue:
United States offshore ..... $ 60.9 20.9% $ 29.7 13.2% $ 115.2 20.5% $ 51.7 13.1%
International offshore ..... 86.9 29.9 84.5 37.5 171.0 30.4 158.9 40.2
International land ......... 104.6 35.9 83.0 36.9 205.2 36.6 156.7 39.7
E&P services ............... 38.7 13.3 27.8 12.4 70.0 12.5 27.8 7.0
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue ............ 291.1 100.0 225.0 100.0 561.4 100.0 395.1 100.0
-------- -------- -------- -------- -------- -------- -------- --------
Operating Costs:
United States offshore ..... 32.5 17.8 20.8 13.9 63.5 17.8 38.4 14.5
International offshore ..... 49.8 27.3 46.8 31.3 99.8 28.0 86.9 32.9
International land ......... 71.3 39.0 62.0 41.4 141.2 39.6 118.8 45.0
E&P services ............... 29.1 15.9 20.1 13.4 51.8 14.6 20.1 7.6
-------- -------- -------- -------- -------- -------- -------- --------
Total operating costs .... 182.7 100.0 149.7 100.0 356.3 100.0 264.2 100.0
-------- -------- -------- -------- -------- -------- -------- --------
Gross Margin:
United States offshore ..... 28.4 26.2 8.9 11.8 51.7 25.2 13.3 10.2
International offshore ..... 37.1 34.2 37.7 50.1 71.2 34.7 72.0 55.0
International land ......... 33.3 30.7 21.0 27.9 64.0 31.2 37.9 28.9
E&P services ............... 9.6 8.9 7.7 10.2 18.2 8.9 7.7 5.9
-------- -------- -------- -------- -------- -------- -------- --------
Total gross margin ....... $ 108.4 100.0% $ 75.3 100.0% $ 205.1 100.0% $ 130.9 100.0%
======== ======== ======== ======== ======== ======== ======== ========
</Table>
Significant Customers
Two customers accounted for approximately $108.6 million, or 37.3%, of
consolidated revenue for the three months ended June 30, 2001. Of this amount,
$50.2 million and $58.4 million were attributable to the Company's international
offshore and international land operations, respectively. Two customers
accounted for approximately $181.2 million, or 32.3%, of consolidated revenue
for the six months ended June 30, 2001. Of this amount, $86.7 million and $94.5
million were attributable to the Company's international offshore and
international land operations, respectively.
12. SUBSEQUENT EVENT
In July 2001, the Company acquired all the outstanding capital stock
of Almeria S.A. ("Almeria") for aggregate consideration of $48 million. Almeria
operates 12 land drilling rigs in Argentina and two land drilling rigs in
Venezuela.
13. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141, which is applicable to all business combinations
initiated after June 30, 2001, prohibits the use of pooling-of-interests method
of accounting for business combinations and provides a new definition of
intangible assets.
12
14
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SFAS No. 142 eliminates the amortization of goodwill and requires that
goodwill be reviewed annually for impairment. SFAS No. 142 also requires that
the useful lives of previously recognized intangible assets be reassessed and
the remaining amortization periods be adjusted accordingly. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001 and affects all
goodwill and other intangible assets recognized on the Company's balance sheet
at that date, regardless of when the assets were initially recognized. The
Company recognized goodwill amortization expense of $0.9 million and $1.8
million for the three-month and six-month periods ended June 30, 2001. Such
amortization will not be recorded after the adoption of SFAS No. 142. The
Company is currently evaluating the effect of SFAS No. 142 relating to the
annual impairment review of goodwill.
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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 June 30, 2001, and the related consolidated statements
of operations for each of the three month and six month periods ended June 30,
2001 and 2000, and the related consolidated statement of cash flows for the six
month periods ended June 30, 2001 and 2000. 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 auditing standards generally accepted in the United States of
America, 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 consolidated interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2000, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein), and in our report dated March 26, 2001, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2000 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
August 8, 2001
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction
with our unaudited consolidated financial statements as of June 30, 2001 and for
the three month and six month periods ended June 30, 2001 and 2000 included
elsewhere herein, and with our Annual Report on Form 10-K for the year ended
December 31, 2000. The following information contains forward-looking
statements. Please read "Forward-Looking Statements" for a discussion of
limitations inherent in such statements.
GENERAL
Pride is a leading international provider of contract drilling and
related services, operating both offshore and on land. Currently, we operate a
global fleet of 319 rigs, including two ultra-deepwater drillships, nine
semisubmersible rigs, 19 jackup rigs, five tender-assisted rigs, three barge
rigs, 21 offshore platform rigs and 260 land-based drilling and workover rigs.
We operate in more than 20 countries and marine provinces. The significant
diversity of our rig fleet and areas of operations enables us to provide a broad
range of services and to take advantage of market upturns while reducing our
exposure to sharp downturns in any particular market sector or geographic
region.
Since mid-1999, we have increased the size of our fleet capable of
drilling in deeper waters. We have a 51% ownership interest in and operate two
ultra-deepwater drillships, the Pride Africa and the Pride Angola, that were
placed in service in October 1999 and May 2000, respectively. In February 2001,
we purchased two semisubmersible drilling rigs located in the North Sea, now the
Pride North Atlantic and the Pride North Sea. The Pride North Atlantic is under
charter to an affiliate of the seller through September 2001 and the Pride North
Sea was refurbished prior to commencing operations in July 2001.
In March 2001, we increased our ownership from 26.4% to 100% in two
newly built, dynamically-positioned, deepwater semisubmersible drilling rigs,
the Pride Carlos Walter and the Pride Brazil. The Pride Carlos Walter and Pride
Brazil commenced operations in Brazil in June and July 2001, respectively,
working under five-year charter and service rendering contracts.
In May 2001, we entered into a definitive agreement to merge with
Marine Drilling Companies, Inc. in a stock-for-stock transaction that will
create one of the world's largest offshore drilling contractors. Marine's
primary business is providing offshore drilling services to independent and
major oil and gas companies. Marine owns and operates a fleet of 17 offshore
drilling rigs consisting of five independent-leg jackup units, four of which
have a cantilever feature, ten mat-supported jackup units, five of which have a
cantilever feature, and two semisubmersible units. Additionally, Marine owns one
independent-leg jackup rig configured as an accommodation unit. Currently, 15 of
Marine's rigs are located in the U.S. Gulf of Mexico, and the three remaining
rigs are in Southeast Asia, the North Sea and India. The combination with Marine
presents a unique opportunity for deleveraging our consolidated balance sheet
and, at the same time, is expected to significantly enhance the competitive
positions of both us and Marine in the Gulf of Mexico jackup rig market and
elsewhere. The merger with Marine would be followed by a merger that would
change our state of incorporation from Louisiana to Delaware. A special meeting
of shareholders has been scheduled for September 12, 2001 to consider and vote
upon the approval of the mergers.
BUSINESS ENVIRONMENT
The business environment for our drilling and E&P services is driven by
the capital spending programs of our customers. Our customers' capital spending
is affected by their expectations about oil and natural gas prices, anticipated
production levels, demand for crude oil and natural gas products, government
regulations and many other factors. Due to the volatility of commodity prices,
it is difficult to predict with any certainty whether conditions for a
particular sector of our business will improve or deteriorate.
Prices for oil and natural gas increased during 2000 and early 2001 and
had a favorable impact on utilization, dayrates and demand for our services. Our
financial results have benefited from the strength of the global drilling
market. Recently, increasing inventories of natural gas and slowing demand in
the North America market have reduced U.S. natural gas prices, resulting in a
decrease in activity levels and dayrates for jackup rigs in the Gulf of Mexico.
15
17
Internationally, higher oil prices and increased capital spending by large
multinational and national oil companies have strengthened demand and dayrates
for offshore drilling rigs.
RESULTS OF OPERATIONS
We have presented in the following table selected consolidated
financial information by operating segment for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ------------------------------------------
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenue:
United States offshore .......... $ 60.9 20.9% $ 29.7 13.2% $ 115.2 20.5% $ 51.7 13.1%
International offshore .......... 86.9 29.9 84.5 37.5 171.0 30.4 158.9 40.2
International land .............. 104.6 35.9 83.0 36.9 205.2 36.6 156.7 39.7
E&P services .................... 38.7 13.3 27.8 12.4 70.0 12.5 27.8 7.0
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue ................. 291.1 100.0 225.0 100.0 561.4 100.0 395.1 100.0
-------- -------- -------- -------- -------- -------- -------- --------
Operating Costs:
United States offshore .......... 32.5 17.8 20.8 13.9 63.5 17.8 38.4 14.5
International offshore .......... 49.8 27.3 46.8 31.3 99.8 28.0 86.9 32.9
International land .............. 71.3 39.0 62.0 41.4 141.2 39.6 118.8 45.0
E&P services .................... 29.1 15.9 20.1 13.4 51.8 14.6 20.1 7.6
-------- -------- -------- -------- -------- -------- -------- --------
Total operating costs ......... 182.7 100.0 149.7 100.0 356.3 100.0 264.2 100.0
-------- -------- -------- -------- -------- -------- -------- --------
Gross Margin:
United States offshore .......... 28.4 26.2 8.9 11.8 51.7 25.2 13.3 10.2
International offshore .......... 37.1 34.2 37.7 50.1 71.2 34.7 72.0 55.0
International land .............. 33.3 30.7 21.0 27.9 64.0 31.2 37.9 28.9
E&P services .................... 9.6 8.9 7.7 10.2 18.2 8.9 7.7 5.9
-------- -------- -------- -------- -------- -------- -------- --------
Total gross margin ............ $ 108.4 100.0% $ 75.3 100.0% $ 205.1 100.0% $ 130.9 100.0%
======== ======== ======== ======== ======== ======== ======== ========
</Table>
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30,
2000.
Revenue. Revenue for the three months ended June 30, 2001 increased
$66.1 million, or 29.4%, as compared to the corresponding period in 2000.
Revenue from United States offshore operations increased $31.2 million due to
increased utilization and higher dayrates for our Gulf of Mexico jackup and
platform rigs. Revenue from international land operations increased $21.6
million, primarily due to higher utilization of our land-based fleet in South
America. Revenue from E&P services increased $10.9 million, due primarily to the
commencement of operations of recently added equipment.
Operating Costs. Operating costs for the three months ended June 30,
2001 increased $33.0 million, or 22.0%, as compared to the corresponding period
in 2000. Of this increase, United States offshore operating costs increased
$11.7 million, due to increased utilization of our Gulf of Mexico jackup and
platform rigs. International land operating costs increased $9.3 million due to
higher utilization and E&P services operating costs increased $9.0 million due
to the commencement of operations of recently added equipment.
Depreciation and Amortization. Depreciation and amortization for the
three months ended June 30, 2001 increased $4.5 million, or 13.7%, as compared
to the corresponding period in 2000. Of this amount, $1.3 million related to our
new drillship Pride Angola, $1.3 million related to the addition of the Pride
North Atlantic, $0.6 million related to the expansion of our Gulf of Mexico
jackup rig fleet and $1.3 million was attributable to other additions to our
international offshore fleet.
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18
Selling, General and Administrative. Selling, general and
administrative expenses for the three months ended June 30, 2001 decreased $0.9
million, or 4.3%, as compared to the corresponding period in 2000 primarily due
to decreased personnel expenses.
Other Income (Expense). Other expense for the three months ended June
30, 2001 increased $2.0 million, or 9.4%, as compared to the corresponding
period in 2000. Interest expense increased $0.9 million due to interest on the
Zero Coupon Convertible Senior Debentures that we issued in January 2001.
Interest income increased $0.6 million due to an increase in average cash
balances available for investment. Other expense for the three months ended June
30, 2001 increased $1.7 million, due primarily to net unrealized foreign
exchange losses.
Income Tax Provision. Our consolidated effective income tax rate for
the three months ended June 30, 2001 was 20.5% as compared to 604.4% for the
corresponding period in 2000. The decrease in effective tax rate resulted
primarily from increased income in foreign jurisdictions with zero or low tax
rates. The higher rate in 2000 was impacted by deemed profit taxes in several
countries (where our tax liability is based on revenues rather than actual
income or loss), despite actual results for that period.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000.
Revenue. Revenue for the six months ended June 30, 2001 increased
$166.3 million, or 42.1%, as compared to the corresponding period in 2000. Of
this increase, United States offshore revenue increased $63.5 million, due to
increased utilization and higher dayrates for our Gulf of Mexico jackup and
platform rigs. Revenue from international offshore operations increased $12.1
million due primarily to full-period operations in 2001 for our new drillship
Pride Angola, which commenced operations in May 2000. Revenue from international
land operations increased $48.5 million, primarily due to higher utilization of
our land-based fleet in South America. Revenue from E&P services increased by
$42.2 million due primarily to six months of operations in 2001 as compared with
three months in 2000 as well as commencement of operations of recently added
equipment.
Operating Costs. Operating costs for the six months ended June 30, 2001
increased $92.1 million, or 34.9%, as compared to the corresponding period in
2000. Of this increase, United States offshore operating costs increased $25.1
million, due to increased utilization of our Gulf of Mexico jackup and platform
rigs. Operating costs for our international offshore operations increased $12.9
million, primarily due to full-period operations for the Pride Angola.
International land operating costs increased $22.4 million, primarily due to
higher utilization of our land-based fleet in South America. Operating costs for
our E&P services increased $31.7 million due primarily to six months of
operations in 2001 as compared with three months in 2000, as well as
commencement of operations of recently added equipment.
Depreciation and Amortization. Depreciation and amortization for the
six months ended June 30, 2001 increased $13.2 million, or 21.6%, as compared to
the corresponding period in 2000. Of this amount, $3.7 million related to the
Pride Angola, $1.3 million related to the addition of the Pride North Atlantic,
$3.2 million related to additional E&P services assets and $5.0 million was
attributable to other additions to our international offshore fleet.
Selling, General and Administrative. Selling, general and
administrative expenses for the six months ended June 30, 2001 increased $4.4
million, or 11.7%, as compared to the corresponding period in 2000. This
increase was primarily attributable to the addition of our E&P services
operations in April 2000.
Other Income (Expense). Other expense for the six months ended June 30,
2001 increased $1.7 million, or 4.3%, as compared to the corresponding period in
2000. Interest expense increased $5.2 million due to interest on the Zero Coupon
Convertible Senior Debentures that we issued in January 2001 and interest on the
Pride Angola loan. Interest income increased $2.3 million due to an increase in
average cash balances available for investment. Other expense for the six months
ended June 30, 2001 decreased $1.2 million, due primarily to insurance
recoveries, partially offset by net unrealized foreign exchange gains.
Income Tax Provision. Our consolidated effective income tax rate for
the six months ended June 30, 2001 was 21.1% as compared to approximately 37.3%
for the corresponding period in 2000. The decrease in effective tax rate
resulted primarily from increased income in foreign jurisdictions with zero or
low tax rates. The higher rate in 2000 was impacted by deemed profit taxes in
several countries, despite actual results for that period.
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LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $197.0 million and $94.4 million as of
June 30, 2001 and December 31, 2000, respectively. Our current ratio, the ratio
of current assets to current liabilities, was 1.5 as of June 30, 2001 and 1.2 as
of December 31, 2000. The increases were attributable primarily to the net cash
proceeds from our January 2001 public issuance of Zero Coupon Convertible Senior
Debentures Due 2021, partially offset by additions to other current assets.
During the six months ended June 30, 2001, our capital additions
consisted of $442.9 million for the acquisition of the ownership interests we
did not already own in the Pride Carlos Walter and the Pride Brazil, $123.6
million for the purchase of the Pride North Atlantic and the Pride North Sea,
$65.9 million for certain other reactivation, refurbishment and upgrade
expenditures and approximately $41.9 million for other enhancement and
sustaining capital projects. We expect to spend approximately $20 to $40 million
during the remainder of 2001 for enhancements and sustaining capital projects.
In February 2001, we completed the acquisition of a second-generation
semisubmersible drilling rig (now the Pride North Sea) and a third-generation
semisubmersible drilling rig (now the Pride North Atlantic) located in the North
Sea for $44.7 million in cash and 3.0 million shares of our common stock valued
at $78.9 million.
In March 2001, we increased from 26.4% to 100% our ownership in a joint
venture that recently constructed two dynamically-positioned, deepwater
semisubmersible drilling rigs. The Pride Carlos Walter commenced operations in
June 2001, and the Pride Brazil commenced operations in July 2001. These rigs
are operating for Petroleo Brasilerio S.A. ("Petrobras") under new five-year
charter and service rendering contracts, each with two one-year extension
options. The purchase consideration for the interests we did not previously own
consisted of approximately $86 million aggregate principal amount of senior
convertible notes, which were issued to the Brazilian participant in the joint
venture, and 519,468 shares of our common stock valued at approximately $14.0
million, which were issued to investment funds managed by First Reserve
Corporation pursuant to the funds' original investment in the joint venture. The
new charter and service rendering contracts with Petrobras, together with our
acquisition of 100% ownership, resulted in the termination of previous
seven-year charter and service rendering contracts and resolved all the
outstanding issues with Petrobras relating to the Pride Carlos Walter and the
Pride Brazil, including the elimination of accrued late delivery penalties. The
acquisition added to our consolidated balance sheet approximately $443 million
of assets represented by the two rigs, approximately $287 million of
indebtedness incurred to finance the construction of the rigs and approximately
$86 million of senior convertible notes issued to the Brazilian participant. The
notes mature in March 2004, bear interest at 9% per annum and are convertible
into approximately 4.0 million shares of our common stock. An aggregate $53
million of the construction-related indebtedness, which was scheduled to mature
in November 2001 and bore interest at 11 3/4% per annum, was repaid in April
2001. In July 2001, we entered into a new financing agreement with a group of
foreign banks to provide loans totaling up to $250 million to refinance the
construction loans for the Pride Carlos Walter and Pride Brazil. Borrowings
under the new facility will bear interest at rates based on LIBOR plus an
applicable margin of 1.50% to 1.85%. Principal and interest is payable
semi-annually through 2008. Funding under the new facility and repayment of the
construction loans is expected to be completed in the fourth quarter of 2001. As
a condition of the facility, we entered into interest rate swap agreements,
fixing the respective interest rates through 2006. The new loans are to be
secured by, among other things, a first priority mortgage on the drilling rigs
and assignment of the charters for the rigs.
In July 2001, we acquired all the outstanding capital stock of Almeria
S.A. for aggregate consideration of $48 million. Almeria operates 12 land
drilling rigs in Argentina and two land drilling rigs in Venezuela.
In January 2001, we completed a public sale of $431.5 million face
amount of Zero Coupon Convertible Senior Debentures. The net proceeds to us in
connection with the sale, after deducting underwriting discounts and offering
expenses, amounted to approximately $254.5 million. The issue price of $608.41
for each debenture represents a yield to maturity of 2.50% per annum (computed
on a semiannual bond equivalent basis) calculated from the issue date. The
debentures, which mature on January 16, 2021, are convertible into a total of
approximately 9.4 million shares of our common stock (equal to a conversion rate
of 21.729 shares of common stock per $1,000 principal amount at maturity). We
will become obligated to purchase the debentures, at the option of the holders,
in whole or in part, on January 16, 2003, 2005, 2007, 2009 and 2016 at a price
per debenture equal to the issue price plus accrued original issue discount
18
20
to the relevant purchase date. On or subsequent to January 16, 2004, the
debentures are redeemable at our option, 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. The debentures contain provisions that limit our ability and the
ability of our subsidiaries, with certain exceptions, to pay dividends or make
other restricted payments; incur additional debt or issue preferred stock;
create or permit to exist liens; incur dividend or other payment restrictions
affecting subsidiaries; consolidate, merge or transfer all or substantially all
of our assets; sell assets; enter into transactions with affiliates and engage
in sale and leaseback transactions.
We currently have senior bank credit facilities with foreign banks that
provide aggregate availability of up to $164.1 million. The credit facilities
terminate between January 2002 and June 2005. Borrowings under each of the
credit facilities bear interest at variable rates based on LIBOR plus a spread
ranging from 0.50% to 1.70%. As of June 30, 2001, there were no advances
outstanding under these credit facilities.
We have a senior secured credit facility with a U.S. bank under which
up to $25 million of letters of credit may be issued. Outstanding letters of
credit issued under this credit facility are secured by our cash and cash
equivalents maintained at such bank. The letter of credit facility expires in
March 2003. As of June 30, 2001, there were $12.6 million of letters of credit
issued under this credit facility.
During the six months ended June 30, 2001, we sold approximately 2.6
million shares of common stock under our Direct Stock Purchase Plan for net
proceeds of $62.0 million.
We have a 26.4% equity interest in a joint venture company that is
constructing two dynamically-positioned, deepwater semisubmersible drilling
rigs, yet to be named and currently referred to as the Amethyst 4 and Amethyst
5. In April 2001, the builder of these rigs, Friede Goldman Halter, Inc.
("FGH"), filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code and requested the Bankruptcy Court to reject the
construction contracts. In July 2001, the Bankruptcy Court officially rejected
the construction contracts. To ensure completion of construction under the
shipbuilding contracts for the Amethyst 4 and Amethyst 5, FGH posted performance
bonds totaling $175 million. The surety has commenced funding the cost of
completing the rigs under its obligations, and discussions are currently being
conducted regarding plans to complete construction of the rigs using the
facilities of FGH or another U.S. shipyard or shipyards. Under the
circumstances, no prediction can be made as to when construction of the Amethyst
4 and Amethyst 5 will be completed. The joint venture company has financed 87.5%
of the cost of construction of those rigs through credit facilities, with
repayment of the borrowings under those facilities guaranteed by the United
States Maritime Administration ("MARAD"). Advances under the credit facilities
are being provided without recourse to any of the joint venture owners. The
remaining 12.5% of the cost of construction is being provided by the joint
venture company from equity contributions that have been made by the joint
venture partners. Through June 30, 2001, our equity contributions to the joint
venture totaled $25.6 million, including capitalized interest of $4.0 million.
In the opinion of management, the performance and payment bonds issued by the
surety on behalf of FGH, together with additional draws under the
MARAD-guaranteed credit facilities, will provide sufficient funds to complete
the Amethyst 4 and Amethyst 5 without requiring additional contributions by the
joint venture partners.
The Amethyst 4 and Amethyst 5 are being built to operate under
long-term charter and service rendering contracts with Petrobras; however,
Petrobras has given notice of its intention to cancel those contracts for late
delivery. Based on current demand for deepwater drilling rigs, we believe that
Petrobras or another customer will employ the Amethyst 4 and Amethyst 5 under
new or amended contracts. There can be no assurance, however, that either the
Amethyst 4 or Amethyst 5 will be chartered to Petrobras or to any other
customer.
As of June 30, 2001, we had approximately $1.7 billion of debt and
capital lease obligations. We do not expect that our level of total indebtedness
will have a material adverse impact on our financial position, results of
operations or liquidity in future periods.
Management believes that the cash and cash equivalents on hand,
together with the cash generated from our operations and borrowings under our
credit facilities, will be adequate to fund normal ongoing capital expenditures,
working capital and debt service requirements for the foreseeable future. As of
June 30, 2001, $52.4 million of our cash balances, which amount is included in
cash and cash equivalents, consists of funds held in trust in connection with
our drillship loans and the limited-recourse collateralized term loans and,
accordingly, is not available for our use.
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In May 2001, we entered into a definitive agreement to merge with
Marine in a stock-for-stock transaction that will create one of the world's
largest offshore drilling contractors. The combination with Marine presents a
unique opportunity for deleveraging our consolidated balance sheet and, at the
same time, is expected to significantly enhance the competitive positions of
both us and Marine in the Gulf of Mexico jackup rig market and elsewhere. Since
the merger is a stock-for-stock transaction and Marine is essentially debt free,
the combined Company should have a lower debt to equity ratio. The lower debt to
equity ratio is expected to result in improved credit ratings and thereby reduce
borrowing costs. Following the merger, we expect to be able to reduce long term
indebtedness and further deleverage the balance sheet from our combined cash
flows.
From time to time, we may review other possible expansion and
acquisition opportunities. The timing, size or success of any acquisition effort
and the associated potential capital commitments are unpredictable. From time to
time, we have one or more bids outstanding for contracts that could require
significant capital expenditures and mobilization costs. We expect 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.
ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141, which is
applicable to all business combinations initiated after June 30, 2001, prohibits
the use of pooling-of-interests method of accounting for business combinations
and provides a new definition of intangible assets.
SFAS No. 142 eliminates the amortization of goodwill and requires that
goodwill be reviewed annually for impairment. SFAS No. 142 also requires that
the useful lives of previously recognized intangible assets be reassessed and
the remaining amortization periods be adjusted accordingly. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001 and affects all
goodwill and other intangible assets recognized on our balance sheet at that
date, regardless of when the assets were initially recognized. We recognized
goodwill amortization expense of $0.9 million and $1.8 million for the
three-month and six-month periods ended June 30, 2001. We will not record such
amortization after the adoption of SFAS No. 142. We are currently evaluating the
effect of SFAS No. 142 relating to the annual impairment review of goodwill.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements, other than
statements of historical facts, included in this Quarterly Report on Form 10-Q
that address activities, events or developments that we expect, project, believe
or anticipate will or may occur in the future are forward-looking statements.
These include such matters as:
o benefits, effects or results of the Marine merger
o 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)
o repayment of debt
o expansion and other development trends in the contract
drilling industry
o business strategies
o expansion and growth of operations
o utilization rates and contract rates for rigs
o completion and employment of Amethyst 4 and Amethyst 5 rigs
and
o future operating results and financial condition
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We have based these statements on our assumptions and analyses in light
of our experience and perception of historical trends, current conditions,
expected future developments and other factors we believe are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including:
o general economic and business conditions
o prices of oil and gas and industry expectations about future
prices
o foreign exchange controls and currency fluctuations
o political stability in the countries in which we operate
o the business opportunities (or lack thereof) that may be
presented to and pursued by us
o changes in laws or regulations and
o the ability to integrate the operations of Pride and Marine
after the Marine merger
Most of these factors are beyond our control. We caution you that
forward looking-statements are not guarantees of future performance and that
actual results or developments may differ materially from those projected in
these statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7A of our
Annual Report on Form 10-K for the year ended December 31, 2000. There have been
no material changes to the disclosure regarding our exposure to certain market
risks made in the annual report. For additional information regarding our
long-term debt, please see Note 2 of the Notes to Unaudited Consolidated
Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held in Houston, Texas on May
18, 2001 for the purpose of voting on the proposals described below. Proxies for
the meeting were solicited pursuant to Section 14(a) of the Securities Exchange
Act of 1934 and there was no solicitation in opposition to management's
solicitation.
Shareholders approved the annual election of a portion of directors to
the classified Board of Directors by the following vote:
<Table>
Affirmative votes.................................... 48,238,233
Negative votes....................................... 8,286,682
Abstentions.......................................... 24,049
Shares not voted..................................... 16,431,249
</Table>
Shareholders approved the increase in authorized shares of common stock
from 100,000,000 to 200,000,000 by the following vote:
<Table>
Affirmative votes.................................... 62,815,023
Negative votes....................................... 3,186,767
Abstentions.......................................... 34,563
Shares not voted..................................... 6,943,860
</Table>
Shareholders approved the election of two Class I directors, each to
serve for a term of three years, by the following votes:
<Table>
<Caption>
Paul A. Bragg Jorge E. Estrada M.
Affirmative votes............. 63,073,520 61,580,536
Negative votes................ 2,962,833 4,455,817
Shares not voted.............. 6,943,860 6,943,860
</Table>
Shareholders ratified the appointment of PricewaterhouseCoopers LLP as
our independent public accountants for 2001 by the following vote:
<Table>
Affirmative votes.................................... 65,860,137
Negative votes....................................... 157,940
Abstentions.......................................... 18,726
Shares not voted..................................... 6,943,410
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
2.1 -- Agreement and Plan of Merger, dated as of May 23, 2001, by and
among Pride International, Inc. ("Pride"), PM Merger, Inc.
("New Pride"), Marine Drilling Companies, Inc. ("Marine") and
AM Merger, Inc. (incorporated by reference to Exhibit 2.1 to
the Registration Statement of Pride and New Pride on Form S-4,
Registration Nos. 333-66644 and 333-66644-01).
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2.2 -- Form of Letter Agreement by and among Pride, New Pride,
Marine and AM Merger, Inc. (incorporated by reference to
Exhibit 2.2 to the Registration Statement of Pride and New
Pride on Form S-4, Registration Nos. 333-66644 and
333-66644-01).
3.1 -- Restated Articles of Incorporation of Pride (incorporated by
reference to Exhibit 3.1 to Pride's Annual Report on Form 10-K
for the year ended December 31, 1996, File Nos. 0-16961 and
1-13289).
3.2 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 3.2 to Pride's Annual
Report on Form 10-K for the year ended December 31, 1996, File
Nos. 0-16961 and 1-13289).
3.3 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 3.3 to Pride's Annual
Report on Form 10-K for the year ended December 31, 1996, File
Nos. 0-16961 and 1-13289).
3.4 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 4.4 to Pride's
Registration Statement on Form S-8 dated September 8, 1997,
Registration No. 333-35089).
3.5 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 3.5 to Pride's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1998, File No. 1-13289).
3.6 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 4.6 to the Registration
Statement of Pride and New Pride on Form S-4, Registration
Nos. 333-66644 and 333-66644-01).
3.7 -- Bylaws of Pride, as amended (incorporated by reference to
Exhibit 4.7 to the Registration Statement of Pride and New
Pride on Form S-4, Registration Nos. 333-66644 and
333-66644-01).
4.1 -- Rights Agreement, dated as of September 9, 1998 (the "Rights
Agreement"), between Pride and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1 to Pride's Current Report on Form 8-K dated September 10,
1998, File No. 1-13289).
4.2 -- Amendment No. 1 to the Rights Agreement, dated as of May 23,
2001, between Pride and the Rights Agent (incorporated by
reference to Exhibit 4.1 to Pride's Current Report on Form 8-K
dated May 25, 2001, File No. 1-13289).
10.1 -- Stock Option Agreement, dated as of May 23, 2001, between
Pride, as grantor, and Marine, as grantee (incorporated by
reference to Exhibit 10.1 to the Registration Statement of
Pride and New Pride on Form S-4, Registration Nos. 333-66644
and 333-66644-01).
10.2 -- Stock Option Agreement, dated as of May 23, 2001, between
Marine, as grantor, and Pride, as grantee (incorporated by
reference to Exhibit 10.2 to the Registration Statement of
Pride and New Pride on Form S-4, Registration Nos. 333-66644
and 333-66644-01).
15.1 -- Awareness Letter of PricewaterhouseCoopers LLP
- --------------
(b) Reports on Form 8-K
In a Current Report on Form 8-K dated May 23, 2001, we reported
pursuant to Item 5 of Form 8-K that we entered into (1) an Agreement and Plan of
Merger, dated as of May 23, 2001, with PM Merger, Inc., Marine Drilling
Companies, Inc. and AM Merger, Inc., (2) reciprocal Stock Option Agreements,
dated as of May 23, 2001, with Marine and (3) Amendment No. 1, dated as of May
23, 2001, to the Rights Agreement, dated as of September 9, 1998, with American
Stock Transfer & Trust Company, as Rights Agent. We also filed pursuant to Item
7 of Form 8-K the merger agreement, the stock option agreements, the amendment
to rights agreement and a related press release.
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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
Date: August 14, 2001
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INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 -- Agreement and Plan of Merger, dated as of May 23, 2001, by and
among Pride International, Inc. ("Pride"), PM Merger, Inc.
("New Pride"), Marine Drilling Companies, Inc. ("Marine") and
AM Merger, Inc. (incorporated by reference to Exhibit 2.1 to
the Registration Statement of Pride and New Pride on Form S-4,
Registration Nos. 333-66644 and 333-66644-01).
2.2 -- Form of Letter Agreement by and among Pride, New Pride,
Marine and AM Merger, Inc. (incorporated by reference to
Exhibit 2.2 to the Registration Statement of Pride and New
Pride on Form S-4, Registration Nos. 333-66644 and
333-66644-01).
3.1 -- Restated Articles of Incorporation of Pride (incorporated by
reference to Exhibit 3.1 to Pride's Annual Report on Form 10-K
for the year ended December 31, 1996, File Nos. 0-16961 and
1-13289).
3.2 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 3.2 to Pride's Annual
Report on Form 10-K for the year ended December 31, 1996, File
Nos. 0-16961 and 1-13289).
3.3 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 3.3 to Pride's Annual
Report on Form 10-K for the year ended December 31, 1996, File
Nos. 0-16961 and 1-13289).
3.4 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 4.4 to Pride's
Registration Statement on Form S-8 dated September 8, 1997,
Registration No. 333-35089).
3.5 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 3.5 to Pride's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1998, File No. 1-13289).
3.6 -- Amendment to Restated Articles of Incorporation of Pride
(incorporated by reference to Exhibit 4.6 to the Registration
Statement of Pride and New Pride on Form S-4, Registration
Nos. 333-66644 and 333-66644-01).
3.7 -- Bylaws of Pride, as amended (incorporated by reference to
Exhibit 4.7 to the Registration Statement of Pride and New
Pride on Form S-4, Registration Nos. 333-66644 and
333-66644-01).
4.1 -- Rights Agreement, dated as of September 9, 1998 (the "Rights
Agreement"), between Pride and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1 to Pride's Current Report on Form 8-K dated September 10,
1998, File No. 1-13289).
4.2 -- Amendment No. 1 to the Rights Agreement, dated as of May 23,
2001, between Pride and the Rights Agent (incorporated by
reference to Exhibit 4.1 to Pride's Current Report on Form 8-K
dated May 25, 2001, File No. 1-13289).
10.1 -- Stock Option Agreement, dated as of May 23, 2001, between
Pride, as grantor, and Marine, as grantee (incorporated by
reference to Exhibit 10.1 to the Registration Statement of
Pride and New Pride on Form S-4, Registration Nos. 333-66644
and 333-66644-01).
10.2 -- Stock Option Agreement, dated as of May 23, 2001, between
Marine, as grantor, and Pride, as grantee (incorporated by
reference to Exhibit 10.2 to the Registration Statement of
Pride and New Pride on Form S-4, Registration Nos. 333-66644
and 333-66644-01).
15.1 -- Awareness Letter of PricewaterhouseCoopers LLP
</Table>