EXHIBIT 99.1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Pride International, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the consolidated financial position of
Pride International, Inc. and Subsidiaries as of December 31, 2003 and 2002, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
acquisition of Marine Drilling Companies, Inc. on September 13, 2001 in a
transaction accounted for as a pooling of interests, as described in Note 1 to
the consolidated financial statements. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
in 2003, the Company changed its policies for consolidation of variable interest
entities and for presentation of gains and losses on debt retirement and in
2002, changed the manner in which it accounts for goodwill.
As discussed in Note 15, the Company has restated its consolidated
financial statements to reflect its operating segments on a basis consistent
with its current operating organization.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 11, 2004, except for Note 15, as to which the date is August 6, 2004
1
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(IN THOUSANDS, EXCEPT
PAR VALUES)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 69,134 $ 133,986
Restricted cash........................................... 38,840 52,700
Trade receivables, net.................................... 371,510 265,885
Parts and supplies, net................................... 73,763 64,920
Deferred income taxes..................................... 3,371 3,332
Other current assets...................................... 170,306 176,912
---------- ----------
Total current assets................................. 726,924 697,735
---------- ----------
PROPERTY AND EQUIPMENT, net................................. 3,446,331 3,473,636
---------- ----------
OTHER ASSETS
Investments in and advances to affiliates................. 33,984 29,620
Goodwill.................................................. 69,014 72,014
Other assets.............................................. 102,177 129,852
---------- ----------
Total other assets................................... 205,175 231,486
---------- ----------
$4,378,430 $4,402,857
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 163,707 $ 186,657
Accrued expenses.......................................... 260,098 238,061
Deferred income taxes..................................... 957 985
Short-term borrowings..................................... 27,555 17,724
Current portion of long-term debt......................... 188,737 99,265
Current portion of long-term lease obligations............ 2,749 2,679
---------- ----------
Total current liabilities............................ 643,803 545,371
---------- ----------
OTHER LONG-TERM LIABILITIES................................. 54,423 88,572
LONG-TERM DEBT, net of current portion...................... 1,805,099 1,873,936
LONG-TERM LEASE OBLIGATIONS, net of current portion......... 9,979 12,511
DEFERRED INCOME TAXES....................................... 59,378 100,966
MINORITY INTEREST........................................... 102,969 82,204
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 50,000 shares authorized;
none issued............................................ -- --
Common stock, $.01 par value; 400,000 shares authorized;
135,769 and 134,453 shares issued; 135,400 and 134,084
shares outstanding..................................... 1,358 1,344
Paid-in capital........................................... 1,261,073 1,237,146
Treasury stock, at cost................................... (4,409) (4,409)
Accumulated other comprehensive loss...................... (124) (3,598)
Retained earnings......................................... 444,881 468,814
---------- ----------
Total stockholders' equity........................... 1,702,779 1,699,297
---------- ----------
$4,378,430 $4,402,857
========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
2
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES:
Services............................................... $1,565,806 $1,168,196 $1,512,895
Sales.................................................. 123,914 101,578 --
---------- ---------- ----------
Total revenues................................. 1,689,720 1,269,774 1,512,895
---------- ---------- ----------
OPERATING COSTS, excluding depreciation and amortization:
Services............................................... 975,489 696,841 889,561
Sales.................................................. 222,356 97,898 --
---------- ---------- ----------
Total operating costs.......................... 1,197,845 794,739 889,561
DEPRECIATION AND AMORTIZATION............................ 249,222 230,204 202,710
GENERAL AND ADMINISTRATIVE, excluding depreciation and
amortization........................................... 121,259 94,241 100,309
POOLING AND MERGER COSTS................................. (824) -- 35,766
---------- ---------- ----------
EARNINGS FROM OPERATIONS................................. 122,218 150,590 284,549
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest expense....................................... (133,227) (140,863) (125,394)
Interest income........................................ 3,182 2,084 11,148
Other income (expense), net............................ 3,529 (1,072) (13,326)
---------- ---------- ----------
Total other expense, net....................... (126,516) (139,851) (127,572)
---------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST............................................... (4,298) 10,739 156,977
INCOME TAX PROVISION (BENEFIT)........................... (1,130) 2,977 49,948
MINORITY INTEREST........................................ 20,765 16,097 15,508
---------- ---------- ----------
NET EARNINGS (LOSS)...................................... $ (23,933) $ (8,335) $ 91,521
========== ========== ==========
NET EARNINGS (LOSS) PER SHARE
Basic.................................................. $ (0.18) $ (0.06) $ 0.70
Diluted................................................ $ (0.18) $ (0.06) $ 0.68
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic.................................................. 134,704 133,305 131,630
Diluted................................................ 134,704 133,305 142,778
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
3
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER TOTAL
---------------- PAID-IN ---------------- COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT GAIN (LOSS) EARNINGS EQUITY
------- ------ ---------- ------ ------- ------------- -------- -------------
(IN THOUSANDS)
BALANCE -- DECEMBER 31, 2000...... 126,250 $1,263 $1,056,206 -- $ -- $(1,102) $385,628 $1,441,995
Net earnings.................... -- -- -- -- -- -- 91,521 91,521
Foreign currency translation.... -- -- -- -- -- 87 -- 87
----------
Total comprehensive income.... 91,608
Issuance of common stock in
connection with Direct Stock
Purchase Plan................. 2,596 26 62,000 -- -- -- -- 62,026
Issuance of common stock in
connection with private
investments................... 3,555 35 92,971 -- -- -- -- 93,006
Other issuance of common
stock......................... 43 1 996 -- -- -- -- 997
Exercise of stock options....... 349 3 6,364 -- -- -- -- 6,367
Tax benefit on non-qualified
stock options................. -- -- 87 -- -- -- -- 87
------- ------ ---------- --- ------- ------- -------- ----------
BALANCE -- DECEMBER 31, 2001...... 132,793 1,328 1,218,624 -- -- (1,015) 477,149 1,696,086
Net loss........................ -- -- -- -- -- -- (8,335) (8,335)
Foreign currency translation.... -- -- -- -- -- (2,583) -- (2,583)
----------
Total comprehensive loss...... (10,918)
Issuance of common stock in
connection with private
investments................... 528 5 6,295 369 (4,409) -- -- 1,891
Other issuance of common
stock......................... 37 -- 476 -- -- -- -- 476
Exercise of stock options....... 1,095 11 9,069 -- -- -- -- 9,080
Tax benefit on non-qualified
stock options................. -- -- 2,682 -- -- -- -- 2,682
------- ------ ---------- --- ------- ------- -------- ----------
BALANCE -- DECEMBER 31, 2002...... 134,453 1,344 1,237,146 369 (4,409) (3,598) 468,814 1,699,297
Net loss........................ -- -- -- -- -- -- (23,933) (23,933)
Foreign currency translation.... -- -- -- -- -- 3,474 -- 3,474
----------
Total comprehensive loss...... (20,459)
Issuance of common stock in
connection with Direct Stock
Purchase Plan................. 830 8 14,992 -- -- -- -- 15,000
Other issuance of common
stock......................... 104 1 1,264 -- -- -- -- 1,265
Exercise of stock options....... 382 5 3,759 -- -- -- -- 3,764
Tax benefit of non-qualified
stock options................. -- -- 516 -- -- -- -- 516
Stock option compensation....... -- -- 3,396 -- -- -- -- 3,396
------- ------ ---------- --- ------- ------- -------- ----------
BALANCE -- DECEMBER 31, 2003...... 135,769 $1,358 $1,261,073 369 $(4,409) $ (124) $444,881 $1,702,779
======= ====== ========== === ======= ======= ======== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
4
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net earnings (loss)..................................... $ (23,933) $ (8,335) $ 91,521
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities --
Depreciation and amortization........................... 249,222 230,204 202,710
Discount amortization on zero coupon convertible
debentures......................................... 1,808 11,062 16,204
Amortization of deferred loan costs.................. 8,191 7,836 6,604
(Gain) loss on sale of assets........................ 453 (438) (1,393)
Deferred income taxes................................ (41,139) (30,856) 7,252
(Gain) loss on early extinguishment of debt.......... -- 1,228 (2,049)
Minority interest.................................... 20,765 16,097 15,508
Stock option compensation............................ 3,396 -- --
Changes in assets and liabilities, net of effects of
acquisitions --
Trade receivables............................... (112,346) 53,436 (43,370)
Parts and supplies.............................. (8,843) (5,108) (4,152)
Other current assets............................ 6,043 (48,192) (57,910)
Other assets.................................... 25,029 (18,795) (28,230)
Accounts payable................................ (7,951) (43,271) (18,061)
Accrued expenses................................ 37,394 5,735 51,223
Other liabilities............................... (41,654) (15,302) 20,706
--------- --------- ---------
Net cash provided by operating activities....... 116,435 155,301 256,563
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, including
acquisition costs, less cash acquired................ -- (2,414) (8,934)
Purchases of property and equipment..................... (232,497) (215,490) (307,714)
Proceeds from dispositions of property and equipment.... 1,277 1,256 2,737
Investments in and advances to affiliates............... (4,364) (1,205) (17,788)
--------- --------- ---------
Net cash used in investing activities........... (235,584) (217,853) (331,699)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of common stock.................. 16,265 476 63,023
Proceeds from exercise of stock options................. 3,764 9,080 6,367
Proceeds from issuance of convertible senior debentures,
net of issue costs................................... 294,800 291,515 254,500
Proceeds from debt borrowings........................... 188,016 385,000 194,039
Reduction of debt....................................... (462,408) (551,221) (456,083)
Decrease (increase) in restricted cash.................. 13,860 2,700 (4,900)
--------- --------- ---------
Net cash provided by financing activities....... 54,297 137,550 56,946
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (64,852) 74,998 (18,190)
CASH AND CASH EQUIVALENTS, beginning of year.............. 133,986 58,988 77,178
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year.................... $ 69,134 $ 133,986 $ 58,988
========= ========= =========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
5
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Reporting
The consolidated financial statements include the accounts of Pride
International, Inc. and its wholly-owned and majority-owned subsidiaries (the
"Company" or "Pride"). All significant intercompany transactions and balances
have been eliminated in consolidation. Investments in which the Company owns
less than 50% and exercises significant influence are accounted for using the
equity method of accounting, and investments in which the Company does not
exercise significant influence are accounted for using the cost method of
accounting. Certain reclassifications have been made to prior years' amounts to
conform with the current year presentation. Effective January 1, 2003, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 145,
which eliminates the requirements that gains and losses from the extinguishment
of debt be aggregated and classified as extraordinary items. Accordingly, the
consolidated statement of operations for the years ended December 31, 2002 and
2001 reflect reclassifications of the gross effect of $798,000 and $1.3 million,
respectively, from extraordinary item into other income (expense), net and
income tax provision.
In September 2001, Pride acquired Marine Drilling Companies, Inc.
("Marine") pursuant to a merger of Marine into a wholly owned subsidiary of
Pride. Approximately 58.7 million shares of Pride common stock were issued to
the former shareholders of Marine, which equaled approximately 44% of the
outstanding common shares of the combined company immediately following the
acquisition. The Marine merger was followed by a merger that changed Pride's
state of incorporation from Louisiana to Delaware. The acquisition of Marine was
accounted for as a pooling-of-interests for accounting and financial reporting
purposes. Under this method of accounting, the recorded historical carrying
amounts of the assets and liabilities of Pride and Marine are carried forward to
the financial statements of the combined company at recorded amounts, results of
operations of the combined company include the income and expenses of Pride and
Marine for the entire fiscal period in which the combination occurred, and the
historical results of operations of the separate companies for fiscal periods
prior to the combination are combined and reported as the historical results of
operations of the combined company. The results of operations of Pride and
Marine for periods prior to the combination that are included in the combined
company's recorded amounts are as follows (in thousands):
<Table>
<Caption>
PRIDE MARINE COMBINED
-------- -------- --------
SIX MONTHS ENDED JUNE 30, 2001
Revenues............................................. $561,414 $182,639 $744,053
Net earnings......................................... 30,071 52,562 82,633
</Table>
In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 (revised December 2003)". FIN No. 46R
requires a company to consolidate a variable interest entity, as defined, when
the company will absorb a majority of the variable interest entity's expected
losses, receive a majority of the variable interest entity's expected residual
returns, or both. FIN No. 46R also requires certain disclosures relating to
consolidated variable interest entities and unconsolidated variable interest
entities in which a company has a significant variable interest. With respect to
variable interest entities in which a company holds a variable interest that was
acquired before February 1, 2003, the consolidation provisions are required to
be applied no later than the company's first fiscal year or interim period
ending after December 15, 2003. Upon evaluation of the provisions of FIN No.
46R, it was determined that the unaffiliated trust with which the Company
completed the sale and leaseback of the Pride South America semisubmersible
drilling rig in February 1999 would qualify for consolidation as a variable
interest entity in which the Company is the primary beneficiary, as defined.
Pursuant to the recommendation of FIN No. 46R, the Company has elected to
retroactively adopt the provisions and restate previously issued financial
statements for the applicable years
6
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for comparability purposes. The effect on the Company's consolidated statement
of operations for the years ended December 31, 2002 and 2001 was as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
---------------------
2002 2001
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net earnings (loss) -- as reported.......................... $(8,947) $91,206
Add:
Lease rental expenses included in reported net earnings
(loss)................................................. 12,706 12,706
Deduct:
Depreciation expense...................................... (3,782) (3,782)
Interest expense.......................................... (8,312) (8,609)
------- -------
Net earnings (loss) -- as adjusted.......................... $(8,335) $91,521
======= =======
NET EARNINGS (LOSS) PER SHARE:
Basic -- as reported........................................ $ (0.07) $ 0.69
Basic -- as adjusted........................................ $ (0.06) $ 0.70
Diluted -- as reported...................................... $ (0.07) $ 0.68
Diluted -- as adjusted...................................... $ (0.06) $ 0.68
</Table>
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates and
adjustments on historical experience and on other information and assumptions
that are believed to be reasonable under the circumstances. Estimates and
judgments about future events and their effects cannot be perceived with
certainty; accordingly, these estimates may change as additional information is
obtained, as more experience is acquired, as the Company's operating environment
changes and as new events occur. While it is believed that such estimates are
reasonable, actual results could differ from those estimates. Estimates are used
for, but not limited to, determining the realization of customer and insurance
receivables, recoverability of long-lived assets, useful lives for depreciation
and amortization, determination of income taxes, contingent liabilities,
insurance and legal accruals and costs to complete construction projects.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments having maturities
of three months or less at the date of purchase to be cash equivalents.
Parts and Supplies
Parts and supplies consist of spare rig parts and supplies held for use in
operations and are valued at weighted average cost.
Property and Equipment
Property and equipment are carried at original cost or adjusted net
realizable value, as applicable. Major renewals and improvements are capitalized
and depreciated over the respective asset's remaining useful life.
7
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance and repair costs are charged to expense as incurred. When assets are
sold or retired, the remaining costs and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in results
of operations.
For financial reporting purposes, depreciation of property and equipment is
provided using the straight-line method based upon expected useful lives of each
class of assets. Estimated useful lives of the assets for financial reporting
purposes are as follows:
<Table>
<Caption>
YEARS
-----
Rigs and rig equipment...................................... 5-25
Transportation equipment.................................... 3-7
Buildings and improvements.................................. 10-20
Furniture and fixtures...................................... 5
</Table>
Rigs and rig equipment have salvage values not exceeding 20% of the cost of
the rig or rig equipment.
Interest is capitalized on construction-in-progress at the interest rate on
debt incurred for construction or at the weighted average cost of debt
outstanding during the period of construction.
Goodwill
Effective January 1, 2002, the Company adopted SFAS No. 142, which
eliminates the amortization of goodwill and requires that goodwill be reviewed
annually for impairment. The Company ceased amortizing goodwill on January 1,
2002, which was previously amortized using the straight-line method over ten to
fifteen years. The Company performed impairment tests of goodwill in the fourth
quarters of 2003 and 2002 and determined that the fair value exceeded the
recorded cost as of December 31, 2003 and 2002, respectively; accordingly, no
impairment was recorded.
The change in the carrying value of goodwill for the years ended December
31, 2003 and 2002 was as follows (in thousands):
<Table>
<Caption>
GULF OF INTERNATIONAL E&P
MEXICO LAND SERVICES TOTAL
------- ------------- -------- -------
Balance as of December 31, 2001.............. $1,472 $17,435 $45,749 $64,656
Goodwill acquired............................ -- -- 7,358 7,358
------ ------- ------- -------
Balance as of December 31, 2002.............. 1,472 17,435 53,107 72,014
Earn out payment............................. -- -- (3,000) (3,000)
------ ------- ------- -------
Balance as of December 31, 2003.............. $1,472 $17,435 $50,107 $69,014
====== ======= ======= =======
</Table>
In March 2003, the Company reduced by $3.0 million the carrying amount of
goodwill recorded in its April 2000 acquisition of Services Especiales San
Antonio S.A. ("San Antonio"). The seller of San Antonio was entitled to four
"earn out" payments of up to $3 million each on the first four anniversary dates
of the closing if San Antonio's revenues from services provided to the seller
and its affiliates exceeded specified levels during the 12 calendar months
ending immediately prior to the relevant anniversary date. The specified revenue
level was not achieved for the third anniversary earn-out payment.
The Company recorded goodwill of $16.7 million in the year ended December
31, 2001, in connection with certain acquisitions during those periods.
8
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net earnings and net earnings per share, adjusted to exclude
goodwill amortization expense, for the year ended December 31, 2001, were as
follows (in thousands, except per share amounts):
<Table>
Net earnings -- as reported................................. $91,521
Goodwill amortization, net of tax........................... 2,737
-------
Net earnings -- as adjusted................................. $94,258
=======
NET EARNINGS PER SHARE:
Basic -- as reported........................................ $ 0.70
Goodwill amortization, net of tax........................... 0.02
-------
Basic -- as adjusted........................................ $ 0.72
=======
NET EARNINGS PER SHARE:
Diluted -- as reported...................................... $ 0.68
Goodwill amortization, net of tax........................... 0.02
-------
Diluted -- as adjusted...................................... $ 0.70
=======
</Table>
Long Lived Asset Impairment
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". This statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 retains the fundamental provisions of SFAS No. 121
and the basic requirements of APB No. 30; however, it establishes a single
accounting model to be used for long-lived assets to be disposed of by sale and
it expands the presentation of discontinued operations to include more disposal
transactions.
The Company performed an impairment test on certain specific rigs and
groups of rigs in the fourth quarter of 2003 and determined that the
undiscounted future cash flows based on expected day rates and utilization rates
exceeded the recorded cost of the specific rigs and group of rigs as of December
31, 2003; accordingly, no impairment was recorded.
Revenue Recognition
The Company recognizes revenue as services are performed based upon
contracted day rates and the number of operating days during the period. Revenue
from turnkey contracts is recognized upon completion. Mobilization fees received
and costs incurred to mobilize a rig in connection with a customer contract from
one geographic area to another are deferred and recognized on a straight-line
basis over the term of such contract, excluding any option periods. Costs
incurred to mobilize a rig without a contract are expensed as incurred. Fees
received for capital improvements to rigs are deferred and recognized on a
straight-line basis over the period of the related drilling contract. The costs
of such capital improvements are capitalized and depreciated over the useful
lives of the assets.
Rig Construction Contracts
The Company has historically constructed drilling rigs only for its own
use. However, at the request of some of its significant customers, the Company
has entered into lump sum contracts to design, construct and mobilize
specialized drilling rigs through the Company's technical services group. The
Company also has
9
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
entered into contracts to operate the rigs on behalf of the customers.
Construction contract revenues and related costs are recognized under the
percentage-of-completion method of accounting using measurements of progress
toward completion appropriate for the work performed, such as man-hours, costs
incurred or physical progress. Accordingly, the Company reviews contract price
and cost estimates periodically as the work progresses and reflects adjustments
in income (i) to recognize income proportionate to the percentage of completion
in the case of projects showing an estimated profit at completion and (ii) to
recognize the entire amount of the loss in the case of projects showing an
estimated loss at completion. To the extent these adjustments result in an
increase in previously reported losses or a reduction in or an elimination of
previously reported profits with respect to a project, the Company would
recognize a charge against current earnings. See Note 2.
Rig Certifications
The Company is required to obtain certifications from various regulatory
bodies in order to operate its offshore drilling rigs and must maintain such
certifications through periodic inspections and surveys. The costs associated
with obtaining and maintaining such certifications, including inspections and
surveys, drydock costs and remedial structural work to the rigs are deferred and
amortized over the corresponding certification periods.
The Company expended $20.2 million, $13.6 million and $5.5 million during
2003, 2002 and 2001, respectively, in obtaining and maintaining such
certifications. As of December 31, 2003 and 2002, the deferred and unamortized
portion of such costs on the Company's balance sheet were $31.6 million and
$19.1 million, respectively. The portion of the costs that are expected to be
amortized in the 12-month periods following each balance sheet date are included
in other current assets on the balance sheet and the costs expected to be
amortized after more than 12 months from each balance sheet date are included in
other assets. The costs are amortized on a straight-line basis over the period
of validity of the certifications obtained. These certifications are typically
for five years, but in some cases are for shorter periods. Accordingly, the
remaining useful lives for these deferred costs are up to five years.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and the tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the asset is recovered or the liability is settled.
Foreign Currency Translation
The Company accounts for translation of foreign currency in accordance with
SFAS No. 52, "Foreign Currency Translation". In those countries where the U.S.
dollar is the functional currency, certain assets and liabilities of foreign
operations are translated at historical exchange rates, revenues and expenses in
these countries are translated at the average rate of exchange for the period,
and all translation gains or losses are reflected in the period's results of
operations. In those countries where the U.S. dollar is not the functional
currency, revenues and expenses are translated at the average rate of exchange
for the period, assets and liabilities are translated at end-of-period exchange
rates and all translation gains and losses are included in accumulated other
comprehensive loss within stockholders' equity.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company places its cash and cash equivalents in U.S.
government securities and other high quality financial instruments. The Company
limits
10
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the amount of credit exposure to any one financial institution or issuer. The
Company's customer base consists primarily of major integrated and
government-owned international oil companies, as well as smaller independent oil
and gas producers. Management believes the credit quality of its customers is
generally high. The Company has in place insurance to cover certain exposure in
its foreign operations and provides allowances for potential credit losses when
necessary.
Conditions Affecting Ongoing Operations
The Company's current business and operations are substantially dependent
upon conditions in the oil and gas industry and, specifically, the exploration
and production expenditures of oil and gas companies. The demand for contract
drilling and related services is influenced by oil and gas prices, expectations
about future prices, the cost of producing and delivering oil and gas,
government regulations and local and international political and economic
conditions. There can be no assurance that current levels of exploration and
production expenditures of oil and gas companies will be maintained or that
demand for the Company's services will reflect the level of such activities.
Stock-Based Compensation
The Company uses the intrinsic value based method of accounting for
stock-based compensation prescribed by APB No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Under this method, the Company
records no compensation expense for stock options granted when the exercise
price for options granted is equal to the fair market value of the Company's
stock on the date of the grant.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation -- Transition and Disclosure -- an Amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation. The disclosure provisions of SFAS No. 148 are effective
immediately and require revised disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company has adopted the new
disclosure requirements, as reflected below.
Under SFAS No. 123, the fair value of stock-based awards is calculated
using option pricing models. The Company's calculations were made using the
Black-Sholes option pricing model with the following significant assumptions:
<Table>
<Caption>
2003 2002 2001
------- ------- -------
Dividend yield............................................ 0.00% 0.00% 0.00%
Volatility................................................ 62.57% 59.45% 56.05%
Risk free interest rate................................... 2.95% 4.73% 4.87%
Expected term............................................. 5 years 5 years 5 years
</Table>
The weighted average fair values per share of options granted during the
years ended December 31, 2003, 2002 and 2001 were $8.53, $7.94 and $9.31,
respectively.
11
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the fair value based method of accounting prescribed by SFAS No. 123 had
been applied, the Company's pro forma net earnings (loss), net earnings (loss)
per share and stock-based compensation cost would approximate the amounts
indicated below. The effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net earnings (loss) -- as reported................... $(23,933) $ (8,335) $ 91,521
Add: Stock-based compensation included in reported
net earnings (loss), net of tax.................... 2,081 -- --
Deduct: Stock-based employee compensation expense
determined under the intrinsic value method, net of
tax................................................ (10,784) (8,538) (18,197)
-------- -------- --------
Pro forma net earnings (loss)........................ $(32,636) $(16,873) $ 73,324
======== ======== ========
Net earnings (loss) per share:
Basic -- as reported............................... $ (0.18) $ (0.06) $ 0.70
Basic -- pro forma................................. $ (0.24) $ (0.13) $ 0.56
Diluted -- as reported............................. $ (0.18) $ (0.06) $ 0.68
Diluted -- pro forma............................... $ (0.24) $ (0.13) $ 0.56
</Table>
New Accounting Pronouncements
The FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" and SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
during the second quarter of 2003. SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including those embedded in
other contracts, and for hedging activities and is effective for contracts
entered into or modified after June 30, 2003. SFAS No. 150 establishes standards
for the classification and measurement of certain financial instruments with
both liability and equity characteristics. The adoption of SFAS Nos. 149 and 150
did not have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
2. CONSTRUCTION PROJECTS
At the request of two major international oil company customers, the
Company entered into lump-sum contracts to design, engineer, manage construction
of and commission four deepwater platform drilling rigs for installation on
spars and tension-leg platforms. The Company also entered into contracts to
provide drilling operations management of the rigs once they have been installed
on platforms. The first rig has been mated to the customers' platform and towed
to Angola, where it commenced operations in November 2003. The other rigs are
expected to enter into service in late 2004 and early 2005. In 2003, the Company
recorded loss provisions, included in operating costs, totaling $98.4 million
relating to the construction of these deepwater platform rigs as the costs are
expected to substantially exceed revenues on all four projects.
Much of the increased costs are related to difficulties experienced with
two different shipyards. The Company terminated its contract with the initial
shipyard prior to the completion of the first two rigs. As a result, the Company
has incurred substantial unplanned costs in completing the construction of the
first unit. The Company engaged another shipyard to complete construction of the
second rig, and the aggregate costs paid to the initial shipyard and committed
and paid to the second shipyard have greatly exceeded budgeted expenditures for
the rig. The Company is now utilizing shipyards in the Asia Pacific region for
the third and fourth deepwater rig projects. As a result, the lump-sum contracts
and anticipated freight costs for these two
12
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
projects are higher than were originally budgeted. A U.S. shipyard building one
of the primary components for the third rig project encountered significant
financial difficulties, and the Company has paid costs in excess of amounts
initially agreed to provide financial capacity for it to complete a reduced
scope of work. The aggregate costs paid to that shipyard, in addition to the
costs associated with the completion of the remaining tasks by newly contracted
third parties, as well as transportation and other costs necessitated by
revisions to the project completion plan, have significantly exceeded the
budgeted expenditures for the third deepwater platform rig. Based on the
experience from the start-up of the first rig and on revisions of estimates,
increased costs for construction, transportation, commissioning, training and
warranties have been included in the Company's estimates of costs to complete
the remaining three rigs.
The Company has commenced arbitration proceedings against the initial
shipyard claiming damages of approximately $5.8 million, and the shipyard has
asserted counterclaims against the Company for damages of approximately $13.8
million. The Company is also in commercial disputes and negotiations with
certain equipment vendors and major sub-contractors. While the Company intends
to vigorously pursue equitable resolutions with the other parties, the Company
has provided for additional cost estimates to resolve some of these disputes.
The Company's technical services segment is performing these deepwater
platform rig construction projects under lump-sum contracts with its customers.
Revenues and costs realized on these lump sum contracts vary from the originally
estimated amounts. Unforeseen events may result in further cost overruns to
complete these projects, which could be material and which would require the
Company to record additional loss provisions in future periods. Such events
could include variations in labor and equipment productivity over the remaining
term of the contract, unanticipated cost increases, engineering changes,
shipyard or systems problems, project management issues, shortages of equipment,
materials or skilled labor, unscheduled delays in the delivery of ordered
materials and equipment, work stoppages, shipyard unavailability or delays.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(IN THOUSANDS)
Rigs and rig equipment...................................... $4,455,736 $4,225,928
Transportation equipment.................................... 31,340 28,125
Buildings................................................... 37,966 35,866
Other....................................................... 46,888 44,102
Construction-in-progress.................................... 43,199 63,065
Land........................................................ 8,323 8,752
---------- ----------
4,623,452 4,405,838
Accumulated depreciation and amortization................... (1,177,121) (932,202)
---------- ----------
Net property and equipment.................................. $3,446,331 $3,473,636
========== ==========
</Table>
The Company capitalizes interest applicable to the construction of
significant additions to property and equipment. For the years ended December
31, 2003, 2002 and 2001, total interest incurred was $134.4 million, $142.8
million and $144.4 million, respectively, of which $1.2 million, $1.9 million
and $19.0 million, respectively, was capitalized.
13
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the years ended December 31, 2003, 2002 and 2001, maintenance and
repair costs included in operating costs on the accompanying consolidated
statement of operations were $97.6 million, $81.6 million and $85.2 million,
respectively.
4. ACQUISITIONS
In March 2001, the Company increased from 26.4% to 100% its ownership in a
joint venture that constructed two dynamically-positioned, deepwater
semisubmersible drilling rigs, the Pride Carlos Walter and the Pride Brazil. The
purchase consideration for the interests the Company did not previously own
consisted of approximately $86 million aggregate principal amount of senior
convertible notes, convertible into approximately 4.0 million shares of the
Company's common stock, 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 two investment funds managed by
First Reserve Corporation pursuant to the funds' original investment in the
joint venture. 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
($178 million of which was outstanding as of December 31, 2003) and
approximately $86 million of convertible senior notes issued to the Brazilian
participant. See Note 5.
In September 2001, the Company acquired Marine in a stock-for-stock
transaction. Marine owned and operated a fleet of 17 offshore drilling rigs
consisting of two semisubmersible units and 15 jackup units. Additionally,
Marine owned one jackup rig configured as an accommodation unit. The acquisition
of Marine was accounted for as a pooling-of-interests for accounting and
financial reporting purposes. In connection with the acquisition, the estimated
remaining useful lives and residual values of certain rigs were reassessed and,
as a result, net income for 2001 increased $6.7 million (or $.05 per share on a
basic and diluted basis). The Company incurred pooling and merger costs totaling
$35.8 million associated with this acquisition, which consisted of investment
advisory, legal and other professional fees of $24.4 million and costs
associated with the closure of duplicate office facilities and employee
terminations of $11.4 million. During 2002 and 2001, the Company paid $12.0
million and $22.9 million, respectively, of such fees and acquisition costs.
During 2003, the Company reversed the remaining pooling and merger cost accrual.
5. DEBT
Short-Term Borrowings
The Company has agreements with several banks for unsecured short-term
lines of credit primarily denominated in U.S. dollars. The facilities are
renewable annually and bear interest at variable rates based on LIBOR. The
weighted average interest rate on such borrowings as of December 31, 2003 was
2.8%. As of December 31, 2003, $27.6 million was outstanding under these
facilities and $25.2 million was available.
14
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Debt
Long-term debt consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(IN THOUSANDS)
Senior secured term loan.................................... $ 197,000 $ 198,500
Senior secured revolving credit facilities.................. 288,000 110,000
9 3/8% Senior Notes due 2007................................ 175,000 325,000
10% Senior Notes due 2009................................... 200,000 200,000
Drillship loans............................................. 182,674 231,966
Semisubmersible loans....................................... 260,558 301,343
2 1/2% Convertible Senior Notes due 2007.................... 300,000 300,000
3 1/4% Convertible Senior Notes due 2033.................... 300,000 --
Zero Coupon Convertible Senior Debentures Due 2021.......... 4 98,220
Zero Coupon Convertible Subordinated Debentures Due 2018.... 1,098 111,481
Senior convertible notes payable............................ 85,853 85,853
Limited-recourse collateralized term loans.................. 3,649 10,263
Other notes payable......................................... -- 575
---------- ----------
1,993,836 1,973,201
Current portion of long-term debt........................... 188,737 99,265
---------- ----------
Long-term debt, net of current portion...................... $1,805,099 $1,873,936
========== ==========
</Table>
Senior Secured Term Loan and Senior Secured Revolving Credit Facilities
The Company entered into senior secured credit facilities with a group of
banks providing for aggregate availability of up to $450.0 million, consisting
of a $197.0 million term loan maturing in January 2009 and a $250.0 million
revolving credit facility maturing in January 2007. Borrowings under the
revolving credit facility are available for general corporate purposes. The
Company may issue up to $50.0 million of letters of credit under the facility.
As of December 31, 2003, $189.0 million of borrowings and an additional $27.8
million of letters of credit were outstanding under the revolving credit
facility.
Borrowings under the facilities currently bear interest at variable rates
based on LIBOR plus a spread based on the credit rating of the facility or, if
unrated, index debt. The interest rate was 3.66% for the term loan and 3.20% for
the revolving credit facility as of December 31, 2003. In 2003, in order to
reduce the potential impact of fluctuations in LIBOR, the Company entered into
interest rate agreements that effectively cap the interest rate on total
outstanding borrowings under the term loan at rates from 3.58% to 5.0% and
provide a lower limit on rates from 0.72% to 0.91%, plus the applicable spread,
to March 2007. The Company accounts for these interest rate agreements at market
value, with changes reflected in current earnings.
The facilities are collateralized by two deepwater semisubmersible rigs,
the Pride North America and the Pride South Pacific, and 28 jackup rigs. The
facilities contain provisions that limit the ability of the Company and its
subsidiaries, with certain exceptions, to pay dividends or make other restricted
payments and investments; incur additional debt; create liens; incur dividend or
other payment restrictions affecting subsidiaries; consolidate, merge or
transfer all or substantially all of its assets; sell assets or subsidiaries;
enter into speculative hedging arrangements outside the ordinary course of
business; enter into transactions with affiliates; make certain capital
expenditures and incur long-term operating leases. The credit facilities also
15
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
require the Company to comply with specified financial tests, including a ratio
of net debt to EBITDA, an interest coverage ratio, a ratio of net debt to total
capitalization and a minimum net worth.
As of December 31, 2003, the Company had a senior secured revolving credit
facility with non-U.S. banks that provides aggregate availability of up to
$180.0 million, including $10.0 million of letters of credit, and is
collateralized by three semisubmersible rigs, two jackup rigs and a
tender-assisted rig. Borrowings under the credit facility bear interest at
variable rates based on LIBOR plus a spread ranging from 1.2% to 2.1%. As of
December 31, 2003, $99.0 million of borrowings and an additional $10.0 million
of letters of credit were outstanding under this credit facility.
As of December 31, 2003, the Company had $104.2 million in aggregate
availability under its senior secured revolving credit facilities.
Indentures governing our outstanding 9 3/8% and 10% senior notes limit the
Company's ability to borrow under these facilities to a percentage of
consolidated net tangible assets.
9 3/8% Senior Notes due 2007
In May 1997, the Company issued $325.0 million principal amount of 9 3/8%
Senior Notes due May 1, 2007 (the "9 3/8% Senior Notes"). Interest on the 9 3/8%
Senior Notes is payable semi-annually on May 1 and November 1 of each year. The
9 3/8% Senior Notes are redeemable, in whole or in part, at the option of the
Company at redemption prices declining in annual increments from 103.125% at May
1, 2003 to 100% by May 1, 2005. The indenture governing the 9 3/8% Senior Notes
contains provisions that limit the ability of the Company and its subsidiaries,
with certain exemptions, 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.
In July 2003, the Company redeemed $150 million principal amount of the
9 3/8% Senior Notes at a redemption price of 103.125% of the principal amount,
plus accrued and unpaid interest to the redemption date. The Company paid a
total of $157.6 million in connection with the redemption, including $2.9
million of accrued and unpaid interest and a $4.7 million premium. In addition,
the Company expensed $1.5 million, before income taxes, of deferred financing
costs, which amount is included in other income (expense), net in the
consolidated statement of operations.
10% Senior Notes due 2009
In May 1999, the Company issued $200.0 million principal amount of 10%
Senior Notes due June 1, 2009 (the "10% Senior Notes"). Interest on the 10%
Senior Notes is payable semi-annually on June 1 and December 1 of each year. The
10% Senior Notes are not redeemable prior to June 1, 2004, after which they will
be redeemable, in whole or in part, at the option of the Company at redemption
prices starting at 105% of the principal amount and declining to 100% by June 1,
2007. The indenture governing the 10% Senior Notes contains provisions that
limit the ability of the Company and its subsidiaries, with certain exemptions,
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.
Drillship Loans
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 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
16
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$495 million. The loans with respect to the Pride Africa and the Pride Angola
are non-recourse to the Company and the joint owner and are collateralized by
the drillships. As of December 31, 2003, $67.6 million was outstanding under the
loans for the Pride Africa and $115.1 million was outstanding under the loans
for the Pride Angola. The loans are being repaid from the proceeds of the
related charter contracts in semi-annual installments of principal and interest
through December 2006 and July 2007 for the Pride Africa and Pride Angola,
respectively. The payment terms of the Pride Angola loan were extended from July
2005 to July 2007 when the customer extended the drilling contract to five years
in February 2002. The drillship loans bear interest at LIBOR plus 1.10% to
1.25%. As a condition of the drillship loans, the Company entered into interest
rate swap and cap agreements with the lenders that 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 January 2003 and capped the interest rate
on the Pride Angola loan at 6.52% from February 2003 to January 2007. As a
result, the drillship loans had a weighted average interest rate of 6.8% as of
December 31, 2003. Such swap and cap agreements are not considered derivatives
because (1) the swap and cap agreements were required by the lenders under the
drillship loans; (2) the Company believes that such loans would not have been
available to the Company without the related swap and cap agreements; and (3)
the drillship loans prohibit the Company from selling or transferring the swap
and cap agreements without the consent of the lenders, and the Company does not
believe that the lenders would grant such consent as long as any principal
amounts are outstanding. In accordance with the debt agreements, certain cash
balances are held in trust to assure that timely interest and principal payments
are made. As of December 31, 2003 and 2002, $26.7 million and $34.3 million,
respectively, of such cash balances, which amount is included in restricted
cash, was held in trust and is not available for use by the Company.
Semisubmersible Loans
In July 2001, the Company entered into a credit agreement with a group of
foreign banks to provide loans totaling up to $250.0 million to refinance the
construction loans for the Pride Carlos Walter and Pride Brazil. Borrowings
under the facility bear interest at rates based on LIBOR plus an applicable
margin of 1.50% to 1.85%. Principal and interest on the loans are payable
semi-annually from March 2002 through 2008. Funding under the facility and
repayment of the construction loans (which had interest rates of 11% per annum)
was completed in November 2001. As required by the lenders under the facility,
the Company entered into interest rate swap and cap agreements with the lenders
that capped the interest rate on $50.0 million of the debt at 7% and which fixed
the interest rate on the remainder of the debt at 5.58% through September 2006.
Such swap and cap agreements are not considered derivatives because (1) the swap
and cap agreements were required by the lenders under the facility agreement;
(2) the Company believes that such credit facility would not have been available
to the Company without the related swap and cap agreements; and (3) the credit
facility prohibits the Company from selling or transferring the swap and cap
agreements without the consent of the lenders, and the Company does not believe
that the lenders would grant such consent as long as any principal amounts are
outstanding. The loans are collateralized by, among other things, a first
priority mortgage on the drilling rigs and assignment of the charters for the
rigs. The debt agreement requires certain cash balance to be held in trust to
assure that timely interest and principal payments are made. As of December 31,
2003 and 2002, $11.4 million and $16.0 million, respectively, of such cash
balances, which amount is included in restricted cash, was held in trust and is
not available for use by the Company.
In February 1999, the Company completed the sale and leaseback of the Pride
South America semisubmersible drilling rig with an unaffiliated trust pursuant
to which it received $97.0 million. The lease was classified as an operating
lease for financial statement purposes. With the adoption of FIN No. 46R in
December 2003, it was determined that the Company was the primary beneficiary,
as defined, of the unaffiliated trust, and accordingly, the Company should
consolidate said trust as a variable interest entity. The Company elected to
adopt the provisions of FIN No. 46R retroactively and restate previously issued
financial statements. Debt in the amount of $82.3 million and $86.0 million and
property and equipment, net of
17
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$74.1 million and $77.9 million were recorded as of December 31, 2003 and 2002,
respectively, in connection with the retroactive adoption of FIN No. 46R. See
Note 1.
2 1/2% Convertible Senior Notes Due 2007
In March 2002, the Company issued $300.0 million principal amount of 2 1/2%
convertible senior notes due March 1, 2007. The net proceeds to the Company,
after deducting underwriting discounts and offering costs, were $291.5 million.
The notes are convertible into approximately 18.2 million shares of common stock
of the Company (equal to a conversion rate of 60.5694 shares of common stock per
$1,000 principal amount, or $16.51 per share). Interest on the notes is payable
semiannually on March 1 and September 1 of each year. On or after March 4, 2005,
the notes are redeemable at the Company's option, in whole or in part, for cash
at redemption prices starting at 101% and declining to 100% by March 1, 2007, in
each case plus accrued and unpaid interest. The Company may redeem some or all
of the notes at any time prior to March 4, 2005 at 100% of the principal amount,
plus accrued and unpaid interest and an amount equal to 7.5% of the principal
amount, less the amount of any interest actually paid on the notes on or prior
to the redemption date, if the closing price of the Company's common stock has
exceeded 150% of the conversion price per share then in effect for at least 20
trading days within a period of 30 consecutive trading days. In connection with
the issuance of the notes, a private equity fund related to First Reserve
Corporation purchased 7.9 million shares of the Company's common stock from
third parties. First Reserve manages private equity funds that specialize in the
energy industry.
3 1/4% Convertible Senior Notes Due 2033
In April and May 2003, the Company issued $300 million aggregate principal
amount of 3.25% convertible senior notes due 2033. Substantially all of the net
proceeds (after expenses) of approximately $294.8 million were used to repay
amounts outstanding under the Company's senior secured revolving credit
facilities, which included borrowings used to fund a portion of the purchase
price of the zero coupon convertible subordinated debentures due 2018 discussed
below. The notes bear interest at a rate of 3.25% per annum. The Company also
will pay contingent interest during any six-month interest period commencing on
or after May 1, 2008 for which the trading price of the notes for each of the
five trading days immediately preceding such period equals or exceeds 120% of
the principal amount of the notes. Beginning May 5, 2008, the Company may redeem
any of the notes at a redemption price of 100% of the principal amount redeemed
plus accrued and unpaid interest. In addition, noteholders may require the
Company to repurchase the notes on May 1 of 2008, 2010, 2013, 2018, 2023 and
2028 at a repurchase price of 100% of the principal amount redeemed plus accrued
and unpaid interest. The Company may elect to pay all or a portion of the
repurchase price in common stock instead of cash, subject to certain conditions.
The notes are convertible under specified circumstances into shares of the
Company's common stock at a conversion rate of 38.9045 shares per $1,000
principal amount of notes (which is equal to a conversion price of $25.704),
subject to adjustment. Upon conversion, the Company will have the right to
deliver, in lieu of shares of its common stock, cash or a combination of cash
and common stock.
Zero Coupon Convertible Senior Debentures Due 2021
In January 2001, the Company issued zero coupon convertible senior
debentures due January 16, 2021 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, 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 using the effective interest method over the term of the debentures.
18
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 2002, the Company purchased on the open market and then extinguished
$277.9 million face amount of the debentures for $172.8 million. In January
2003, the Company repurchased substantially all of the remaining outstanding
zero coupon convertible senior debentures for $98.2 million.
Zero Coupon Convertible Subordinated Debentures Due 2018
In April 1998, the Company issued zero coupon convertible subordinated
debentures due April 24, 2018 with a face amount of $588.1 million. The net
proceeds to the Company in connection with the sale, after deducting
underwriting discounts and offering expenses, amounted to approximately $222.6
million. 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 difference between the issue price and face
amount of the debentures is recorded as a discount and amortized to interest
expense using the effective interest method over the term of the debentures. The
debentures are convertible into shares of common stock of the Company at a
conversion rate of 13.794 shares of common stock per $1,000 principal amount at
maturity.
During 2001, the Company purchased on the open market and then extinguished
$129.1 million face amount of the debentures for $56.2 million. During 2002, the
Company purchased on the open market and then extinguished $153.3 million face
amount of the debentures for $72.7 million. In April 2003, the Company
repurchased $226.5 million face amount of the outstanding debentures for $112.0
million, which was equal to their accreted value on the date of purchase. The
purchase price was funded through borrowings under the Company's senior secured
revolving credit facilities and available cash. Debentures with a face amount of
$2.1 million, and an accreted value of $1.1 million as of December 31, 2003,
remain outstanding.
Senior Convertible Notes Payable
In March 2001, in connection with the acquisition of the interests the
Company did not previously own in the Pride Carlos Walter and the Pride Brazil,
the Company issued approximately $86 million aggregate principal amount of
senior convertible notes. See Note 4. The notes, which mature in December 2004,
bear interest at 9% per annum and are convertible into approximately 4.0 million
shares of the Company's common stock. The holder of the notes has the right to
require the Company to prepay the notes at any time (1) after July 1, 2004 or
(2) before July 1, 2004 to the extent of the amount of any required capital
contributions by such holder with respect to the joint venture for the Pride
Portland and the Pride Rio de Janeiro described in Note 13. The Company has the
option to prepay the notes any time after June 1, 2004.
Limited-Recourse Collateralized Term Loans
The limited-recourse collateralized term loans are collateralized by two of
the Company's drilling/ workover barge rigs, the Pride I and the Pride II, 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. These loans are non-interest bearing and have
implied interest rates of 9.61%. 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 December 31, 2003 and 2002, $0.7 million and $2.4
million, respectively, of such contract proceeds, which amount is included in
restricted cash, was being held in trust as collateral for the lenders and is
not available for use by the Company.
19
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future Maturities
Future maturities of long-term debt as of December 31, 2003 are as follows:
<Table>
<Caption>
AMOUNT
--------------
(IN THOUSANDS)
2004........................................................ 188,737
2005........................................................ 188,611
2006........................................................ 108,955
2007........................................................ 926,254
2008........................................................ 37,449
Thereafter.................................................. 543,830
----------
Total long-term debt...................................... $1,993,836
==========
</Table>
As of December 31, 2003, the fair value of long-term debt was approximately
$2.1 billion.
6. LEASES
The Company has lease obligations pursuant to sale and leaseback agreements
or financing arrangements with unaffiliated entities for three platform rigs and
offices in France that are accounted for as capital leases. The obligations are
payable in semiannual installments through June 2006 and bear interest at a
weighted average rate of 7.8% per annum.
Future maturities of capital lease obligations as of December 31, 2003 are
as follows:
<Table>
<Caption>
AMOUNT
--------------
(IN THOUSANDS)
2004........................................................ $ 3,645
2005........................................................ 8,180
2006........................................................ 2,180
2007........................................................ 124
2008........................................................ 123
Thereafter.................................................. 61
-------
Total minimum lease obligations........................... 14,313
Less: interest portion...................................... (1,585)
-------
12,728
Less: current portion....................................... 2,749
-------
Long-term portion........................................... $ 9,979
=======
</Table>
Rental expense for operating leases for equipment, vehicles and various
facilities of the Company for the years ended December 31, 2003, 2002 and 2001
were $49.4, $28.4 million and $36.1 million, respectively.
7. 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 attempts to limit the risks of adverse currency fluctuations
and restrictions on currency repatriation by obtaining contracts providing for
payment in U.S. dollars or freely convertible foreign currency. To the extent
possible, the Company seeks to limit its exposure to local currencies by
matching its acceptance
20
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thereof to its expense requirements in such currencies. Moreover, the Company
enters into forward exchange contracts and option contracts to manage foreign
currency exchange risk principally associated with its Euro-and denominated
expenses. These forward exchange contacts and option contracts have not been
designated as hedging instruments under SFAS No. 133, as the forward or option
contracts are not systematically identified as being the hedge of specific
expenditures at inception.
Currency option contracts existing as of December 31, 2003 consist of U.S.
dollar calls/Euro puts with a notional amount of $2.6 million sold by the
Company, U.S. dollar puts/Euro calls with a notional amount of $1.1 million
purchased by the Company and South African Rand calls/U.S. dollar puts with a
notional amount of 5 million Rand, equivalent to $0.8 million at the year end
exchange rate, purchased by the Company. The counterparties to these contracts
are all major European banks.
The Company had no unrealized losses as of December 31, 2003 on forward
exchange contracts and option contracts based on quoted market prices of
comparable instruments. The unrealized loss as of December 31, 2002 was
approximately $1.0 million. The net realized and unrealized gains (losses) on
all forward and option contracts, included in other income (expense), net for
the years ended December 31, 2003, 2002 and 2001, were approximately $1.2
million, $4.8 million and $(0.1) million, respectively.
The Company is subject to the risk of variability in interest payments on
its floating rate debt. In 2003, in order to reduce the potential impact of
fluctuations in LIBOR, the Company entered into interest rate agreements that
effectively cap the interest rate on $194.0 million of borrowings under its
senior secured term loan at rates from 3.58% to 5.0%, plus the applicable
spread, and provide a lower limit on rates from 0.72% to 0.91%, plus the
applicable spread, to March 2007. If interest rates fall below the lower limits,
interest rates payable increase to rates from 2.0% to 3.94%, plus the applicable
spread. The interest rate agreements are marked-to-market quarterly with the
change in fair value recorded as a component of interest expense. As of December
31, 2003, the net value of the instruments was a liability of $0.6 million.
8. INCOME TAXES
The components of the income tax provision (benefit) were as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
-------- -------- -------
(IN THOUSANDS)
U.S.:
Federal:
Current............................................. $ -- $ -- $15,694
Deferred............................................ (78,127) (38,675) 9,664
-------- -------- -------
Total -- Federal................................. (78,127) (38,675) 25,358
-------- -------- -------
Foreign:
Current............................................. 42,487 33,833 27,002
Deferred............................................ 34,510 7,819 (2,412)
-------- -------- -------
Total -- Foreign................................. 76,997 41,652 24,590
-------- -------- -------
Income tax provision (benefit)................. $ (1,130) $ 2,977 $49,948
======== ======== =======
</Table>
21
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the effective federal income tax amounts and rate
reflected in the income tax provision (benefit) and the amount and rate which
would be determined by applying the U.S. statutory federal tax rate to earnings
(loss) before income taxes and minority interest is summarized as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001
--------------- ----------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ----- -------- ------ -------- ----
(IN THOUSANDS)
U.S. statutory rate............. $(1,504) 35.0% $ 3,759 35.0% $ 54,942 35.0%
Foreign:
Tax on foreign earnings....... (635) 14.8 (13,541) (126.1) (7,207) (4.6)
Change in valuation
allowance.................. (1,498) 34.8 12,372 115.2 (2,821) (1.8)
------- ----- -------- ------ -------- ----
Net effect of foreign income
taxes......................... (2,133) 49.6 (1,169) (10.9) (10,028) (6.4)
Change in estimate.............. 2,372 (55.2) 291 2.7 5,034 3.2
Other........................... 135 (3.1) 96 0.9 -- --
------- ----- -------- ------ -------- ----
Effective income tax rate....... $(1,130) 26.3% $ 2,977 27.7% $ 49,948 31.8%
======= ===== ======== ====== ======== ====
</Table>
In 2003, the Company had an increase of 14.8% in the U.S. statutory rate
for foreign taxes due to the following: (34.8)% for an adjustment to prior year
deferred tax assets for foreign losses, and 49.6% for current year foreign taxes
in excess of U.S. statutory rate. In 2003, the Company had an increase of 34.8%
in the U.S. statutory rate for the change in valuation allowance due to an
adjustment to prior year allowances on the deferred tax asset for foreign losses
as explained above that will not be utilized in future years. The change in
estimate for 2003 relates primarily to the difference between the Company's
estimate of U.S. income tax on approximately $153 million of 2002 foreign
earnings and the actual amount on the 2002 U.S. tax return as filed.
In 2002, the Company had a decrease of (126.1)% in the U.S. statutory rate
for foreign taxes due to the following: (112.0)% for previously omitted deferred
tax assets for foreign losses, (51.7)% for current year deferred tax assets
created by Mexico losses, and 37.6% for current year foreign taxes in excess of
U.S. statutory rate. In 2002, the Company had an increase of 115.2% in the U.S.
statutory rate for the change in valuation allowance due to the following:
112.0% for previously omitted allowances on the deferred tax asset for foreign
losses as explained above that will not be utilized in future years, 51.7% for
the current year allowance on Mexico tax losses described above that will not be
utilized in future years, and (48.5)% decrease for the partial reversal of the
allowance on French tax losses from rig rental income in France from Russia and
Kazakhstan contracts that extend into 2003.
The domestic and foreign components of earnings (losses) before income
taxes and minority interest were as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
--------- --------- --------
(IN THOUSANDS)
Domestic........................................... $(257,512) $(142,044) $ 22,297
Foreign............................................ 253,214 152,783 134,680
--------- --------- --------
Earnings (losses) before income taxes and minority
interest......................................... $ (4,298) $ 10,739 $156,977
========= ========= ========
</Table>
22
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets were as
follows:
<Table>
<Caption>
DECEMBER 31,
---------------------
2003 2002
--------- ---------
(IN THOUSANDS)
Deferred tax liabilities:
Depreciation.............................................. $ 320,284 $ 312,215
Other..................................................... 21,286 16,962
--------- ---------
Total deferred tax liabilities......................... 341,570 329,177
--------- ---------
Deferred tax assets:
Net operating loss carryforwards.......................... (272,698) (217,114)
Alternative Minimum Tax credits........................... (27,958) (27,958)
Other..................................................... (10,285) (9,271)
--------- ---------
Total deferred tax assets.............................. (310,941) (254,343)
Valuation allowance for deferred tax assets............... 22,287 23,785
--------- ---------
Net deferred tax assets................................ (288,654) (230,558)
--------- ---------
Net deferred tax liability............................. $ 52,916 $ 98,619
========= =========
</Table>
Applicable U.S. deferred income taxes and related foreign dividend
withholding taxes have not been provided on approximately $507.8 million of
undistributed earnings and profits of the Company's foreign subsidiaries. The
Company considers such earnings to be permanently reinvested outside the United
States. It is not practicable to estimate the amount of deferred income taxes
associated with these unremitted earnings.
As of December 31, 2003, the Company had deferred tax assets of $272.7
million relating to $783.2 million of net operating loss ("NOL") carryforwards
and had $28.0 million of non-expiring Alternative Minimum Tax ("AMT") credits.
The NOL carryforwards and AMT credits can be used to reduce the Company's
federal and foreign income taxes payable in future years. The Company's ability
to realize the entire benefit of its deferred tax assets requires that the
Company achieve certain future earnings levels prior to the expiration of its
NOL carryforwards. U.S. NOL carryforwards total $699.2 million and expire in
2019 through 2023. Foreign NOL carryforwards include $41.6 million that do not
expire and $42.3 million that expire in 2003 through 2013. The Company has
recognized a partial allowance due to the uncertainty of realizing certain
foreign NOL carryforwards. The Company could be required to record an additional
valuation allowance against certain or all of its remaining deferred tax assets
if market conditions deteriorate or future earnings are below current estimates.
In connection with the acquisition of Marine, the Company determined that
certain NOL carryforwards and AMT credits are subject to limitation under
Sections 382 and 383 of the U.S. Internal Revenue Code as a result of the
greater than 50% cumulative change in the Company's ownership. However, the
Company has determined that such limitations should not affect its ability to
realize the benefits of the deferred tax assets associated with such NOL
carryforwards and AMT credits.
9. NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share has been computed based on the weighted
average number of shares of common stock outstanding during the applicable
period. Diluted net earnings (loss) per share has been computed based on the
weighted average number of shares of common stock and common stock equivalents
outstanding during the applicable period, as if stock options, convertible
debentures and other convertible debt
23
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were converted into common stock, after giving retroactive effect to the
elimination of interest expense, net of income tax effect.
The following table presents information necessary to calculate basic and
diluted net earnings (loss) per share:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net earnings (loss).................................. $(23,933) $ (8,335) $ 91,521
Interest expense on convertible debentures and
notes.............................................. -- -- 9,171
Income tax effect.................................... -- -- (3,210)
-------- -------- --------
Net earnings (loss) -- as adjusted................. $(23,933) $ (8,335) $ 97,482
======== ======== ========
Weighted average shares outstanding.................. 134,704 133,305 131,630
Convertible debentures and notes..................... -- -- 9,437
Stock options........................................ -- -- 1,711
-------- -------- --------
Weighted average shares outstanding -- as
adjusted........................................ 134,704 133,305 142,778
======== ======== ========
Net earnings (loss) per share:
Basic.............................................. $ (0.18) $ (0.06) $ 0.70
======== ======== ========
Diluted............................................ $ (0.18) $ (0.06) $ 0.68
======== ======== ========
</Table>
The calculation of diluted weighted average shares outstanding excludes
35.9 million, 34.3 million and 13.2 million common shares issuable pursuant to
convertible debt and outstanding options for the years ended December 31, 2003,
2002 and 2001, respectively, because their effect was antidilutive or the
exercise price of stock options exceeded the average price of the Company's
common stock for the applicable period.
10. EMPLOYEE BENEFITS
The Company has a 401(k) defined contribution plan for its employees, which
allows eligible employees to defer up to 15% of their eligible annual
compensation, with certain limitations. The Company may at its discretion match
up to 100% of the first 6% of compensation. The Company's contributions to the
plan for the years ended December 31, 2003, 2002 and 2001 were $2.5 million,
$1.6 million and $3.5 million, respectively.
The Company has a deferred compensation plan, which provides its officers
and key employees with the opportunity to participate in an unfunded,
non-qualified plan. Eligible employees may defer up to 100% of compensation,
including bonuses and net proceeds from the exercise of stock options.
11. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 50 million shares of preferred stock,
par value $0.01 per share. The Company's board of directors has the authority to
issue shares of preferred stock in one or more series and to fix the number of
shares, designations and other terms of each series. The board of directors has
designated 4.0 million shares of preferred stock to constitute the Series A
Junior Participating Preferred Stock in connection with the Company's
stockholders' rights plan. As of December 31, 2003, no shares of preferred stock
are outstanding.
24
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock
The Company has established the Pride International, Inc. Direct Stock
Purchase Plan, which provides a convenient way for investors to purchase shares
of its common stock without paying brokerage commissions or service charges. For
the years ended December 31, 2003 and 2001, the Company sold 0.8 million shares
for $15.0 million and 2.6 million shares for $62.0 million, respectively. There
were no shares sold under the plan in 2002.
In January 2000, Marine completed a public offering of 1.0 million shares
of its common stock, for net proceeds of $18.5 million. The proceeds were used
to fund the acquisition, upgrade and mobilization of the Pride South Carolina,
formerly the Marine 202, a jackup drilling rig.
In February 2001, the Company issued 3.0 million shares of common stock
valued at $78.9 million in connection with the acquisition of the Pride North
Sea and the Pride Venezuela.
In March 2001, the Company issued 519,468 shares of common stock valued at
approximately $14.0 million to investment funds managed by First Reserve
Corporation in connection with the Company's acquisition of the funds' equity
ownership interest in the Pride Carlos Walter and Pride Brazil. See Note 4.
In October 2002, the Company issued 527,652 shares of common stock to two
funds managed by First Reserve in exchange for an additional 11.9% investment in
the Amethyst joint venture. Subsequently, in November 2002 the other joint
venture partner exercised its option to acquire up to 70% of the interest
acquired by the Company, in exchange for 369,356 shares of the Company's common
stock. The shares of Company common stock acquired in the exchange are currently
held as treasury shares.
Stockholders' Rights Plan
The Company has a preferred share purchase rights plan. Under the plan,
each share of common stock includes one right to purchase preferred stock. The
rights will separate from the common stock and become exercisable (1) ten days
after public announcement that a person or group of affiliated or associated
persons has acquired, or obtained the right to acquire, beneficial ownership of
15% of the Company's outstanding common stock or (2) ten business days following
the start of a tender offer or exchange offer that would result in a person's
acquiring beneficial ownership of 15% of the Company's outstanding common stock.
A 15% beneficial owner is referred to as an "acquiring person" under the plan.
Certain investment funds managed by First Reserve Corporation, their affiliates
and certain related parties currently have the right to acquire beneficial
ownership of up to 19% of the Company's common stock without becoming an
acquiring person under the plan.
The Company's board of directors can elect to delay the separation of the
rights from the common stock beyond the ten-day periods referred to above. The
plan also confers on the board the discretion to increase or decrease the level
of ownership that causes a person to become an acquiring person. Until the
rights are separately distributed, the rights will be evidenced by the common
stock certificates and will be transferred with and only with the common stock
certificates.
After the rights are separately distributed, each right will entitle the
holder to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock for a purchase price of $50. The rights
will expire at the close of business on September 30, 2011, unless the Company
redeems or exchanges them earlier as described below.
If a person becomes an acquiring person, the rights will become rights to
purchase shares of the Company's common stock for one-half the current market
price, as defined in the rights agreement, of the common stock. This occurrence
is referred to as a "flip-in event" under the plan. After any flip-in event, all
rights that are beneficially owned by an acquiring person, or by certain related
parties, will be null and void. The Company's board of directors has the power
to decide that a particular tender or exchange offer for all
25
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding shares of the Company's common stock is fair to and otherwise in the
best interests of its stockholders. If the board makes this determination, the
purchase of shares under the offer will not be a flip-in event.
If, after there is an acquiring person, the Company is acquired in a merger
or other business combination transaction or 50% or more of the Company's
assets, earning power or cash flow are sold or transferred, each holder of a
right will have the right to purchase shares of the common stock of the
acquiring company at a price of one-half the current market price of that stock.
This occurrence is referred to as a "flip-over event" under the plan. An
acquiring person will not be entitled to exercise its rights, which will have
become void.
Until ten days after the announcement that a person has become an acquiring
person, the Company's board of directors may decide to redeem the rights at a
price of $0.01 per right, payable in cash, shares of common stock or other
consideration. The rights will not be exercisable after a flip-in event until
the rights are no longer redeemable.
At any time after a flip-in event and prior to either a person's becoming
the beneficial owner of 50% or more of the shares of common stock or a flip-over
event, the Company's board of directors may decide to exchange the rights for
shares of common stock on a one-for-one basis. Rights owned by an acquiring
person, which will have become void, will not be exchanged.
Stock Option Plans
The Company has a long-term incentive plan which provides for the granting
or awarding of stock options, restricted stock, stock appreciation rights and
stock indemnification rights to officers and other key employees. The number of
shares authorized and reserved for issuance under the long-term incentive plan
is limited to 10% of total issued and outstanding shares, subject to adjustment
in the event of certain changes in the Company's corporate structure or capital
stock. Stock options may be exercised in whole or in part within 60 days of
termination of employment or one year after retirement, total disability or
death of an employee.
Options granted under the long-term incentive plan prior to 1998 were
vested 25% immediately, 50% after one year, 75% after two years and 100% after
three years. Options granted in 1998 were vested 20% after one year, 40% after
two years, 60% after three years, 80% after four years and 100% after five
years. Options granted in 1999 through 2003 were vested 40% after six months,
60% after 18 months, 80% after two years and 100% after 30 months.
In 1993, the shareholders of the Company approved and ratified the 1993
Directors' Stock Option Plan. The purpose of the plan is to afford the Company's
directors who are not full-time employees of the Company or any subsidiary of
the Company an opportunity to acquire a greater proprietary interest in the
Company. A maximum of 400,000 shares of the Company's common stock has been
reserved for issuance upon the exercise of options granted pursuant to the plan.
The exercise price of options is the fair market value per share on the date the
option is granted. Directors' stock options vest over two years at the rate of
50% per year and expire ten years from date of grant.
Pursuant to the merger agreement with Marine, all options to acquire Marine
common stock under various Marine stock option plans were deemed to be options
to acquire the same number of shares of the Company's common stock and all
Marine options became fully vested and exercisable pursuant to the "change of
control" provisions of the Marine stock option plans.
26
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee and director stock option transactions for the last three years
are summarized as follows:
<Table>
<Caption>
EMPLOYEE STOCK OPTIONS DIRECTOR STOCK OPTIONS
-------------------------- -----------------------
PRICE SHARES PRICE SHARES
------------- ---------- ------------- -------
Outstanding as of December 31, 2000....... 7,998,362 308,165
Granted................................. $14.65-$29.63 2,159,500 $14.65-$28.10 66,500
Exercised............................... $ 2.50-$22.75 (322,689) $ 4.00-$8.38 (26,000)
Forfeited............................... $ 8.00-$29.63 (39,488) -- --
---------- -------
Outstanding as of December 31, 2001....... 9,795,685 348,665
Granted................................. $14.35-$19.14 1,225,000 $ 14.35 52,500
Exercised............................... $ 6.25-$16.50 (1,095,005) -- --
Forfeited............................... $ 8.00-$29.63 (1,208,650) -- --
---------- -------
Outstanding as of December 31,2002........ 8,717,030 401,165
Granted................................. $15.40-$16.10 2,700,000 $ 15.40 52,500
Exercised............................... $ 6.19-$19.56 (364,395) $ 8.38-$15.50 (18,000)
Forfeited............................... $ 8.00-$29.63 (500) $ 8.38-$29.25 (33,000)
---------- -------
Outstanding as of December 31, 2003....... 11,052,135 402,665
========== =======
Exercisable as of December 31,2003........ 8,485,435 323,915
========== =======
</Table>
The following table summarizes information on stock options outstanding and
exercisable at December 31, 2003 pursuant to the employee stock option plans:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- -------------- ----------- --------------
$ 0.00-$14.81................. 5,823,760 5.7 $11.85 5,031,060 $11.44
$14.81-$29.63................. 5,228,375 6.9 $18.59 3,454,375 $20.11
---------- ---------
$ 0.00-$29.63................. 11,052,135 6.3 $15.04 8,485,435 $14.97
========== =========
</Table>
The following table summarizes information on stock options outstanding and
exercisable at December 31, 2003 pursuant to the directors' stock option plan:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- -------------- ----------- --------------
$ 0.00-$14.81.................. 124,500 5.1 $12.78 98,250 $12.36
$14.81-$29.63.................. 278,165 3.5 $19.31 225,665 $20.22
------- -------
$ 0.00-$29.63.................. 402,665 4.0 $17.29 323,915 $17.83
======= =======
</Table>
During 2003, the Company recognized $3.4 million of stock option
compensation in connection with the modification of the terms of certain key
employees' stock option grants.
12. COMMITMENTS AND CONTINGENCIES
The Company is routinely involved in other litigation, claims and disputes
incidental to its business, which at times involves claims for significant
monetary amounts, some of which would not be covered by
27
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. However, a substantial settlement payment or judgment
in excess of the Company's accruals could have a material adverse effect on its
consolidated results of operations or cash flows.
13. INVESTMENTS IN JOINT VENTURES
As of December 31, 2003, the Company had a 30.0% equity interest in a joint
venture company that is currently completing construction of two
dynamically-positioned, deepwater semisubmersible drilling rigs, the Pride
Portland and Pride Rio de Janeiro. The Pride Rio de Janeiro is undergoing sea
trials in the Caribbean Sea and the Pride Portland is expected to leave the
shipyard in Maine in May 2004. 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. In addition, the joint venture partners have agreed to provide
equity contributions to finance all of the estimated $5.2 million of incremental
costs associated with upgrading both rigs to a water depth capability of 1,700
meters from the original design of approximately 1,500 meters, of which the
Company's 30% share would be approximately $1.6 million. The Company expects
that the joint venture partners will have to make additional capital
contributions to fund the project through the sea trial stage for each rig or,
alternatively, will have to provide acceptable guarantees to MARAD to permit the
required further draws to become available under the MARAD-guaranteed credit
facilities. If the funding is made by additional capital contributions, the
Company expects that its proportionate share would be approximately $8.0
million. The capital contributions are likely to be required during the second
quarter of 2004. Through December 31, 2003, the Company's equity contributions
to the joint venture totaled $33.7 million, including capitalized interest of
$7.3 million and contributions of $0.8 million in connection with the water
depth upgrades. Initial interest and debt service payments in respect of
construction debt for the two rigs are expected to total approximately $22.0
million during 2004, of which the Company's 30% share would be $6.6 million.
The Company has a 12.5% interest in Basafojagu (HS) Inc. ("Basafojagu"), a
company incorporated in Liberia that has capital lease obligations in respect of
the Al Baraka 1 tender-assisted drilling rig. The majority shareholder is a
subsidiary of a major Saudi Arabian banking and industrial group, and the two
lessor banks are also members of that same group. The Company entered into a
long-term management agreement with Basafojagu to manage and operate the rig.
The Company also provided guarantees for its 12.5% share, or approximately $5.0
million as of December 31, 2003, of Basafojagu's lease obligations. Basafojagu
is in arrears in payment of its lease obligations. In January 2004, the Company
entered into a purchase option that expires on May 15, 2004 to acquire the
tender barge and associated derrick set for aggregate consideration of $15.3
million. If the Company exercises its option, it will be released of all
obligations under the guarantees and under the lease and management agreements.
The Company considers it likely that the purchase option will be exercised and,
therefore, has not provided for any amounts contingently payable under its
guarantee.
The Company has a 30.0% ownership in United Gulf Energy Resource Co.
SAOC-Sultanate of Oman, which owns 99.9% of National Drilling and Services Co.
LLC ("NDSC"), an Omani company. NDSC owns and operates four land drilling rigs.
The Company accounts for this investment under the equity method, which as of
December 31, 2003 was $300,000.
28
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL FINANCIAL INFORMATION
Other Current Assets
Other current assets consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Deferred mobilization and inspection costs.................. $ 46,406 $ 59,753
Insurance receivables....................................... 5,975 33,982
Prepaid expenses............................................ 34,059 27,549
Other receivables........................................... 8,129 13,266
Construction project costs.................................. 48,262 28,351
Deferred financing costs.................................... 11,949 11,121
Other....................................................... 15,526 2,890
-------- --------
Total other current assets................................ $170,306 $176,912
======== ========
</Table>
Other Assets
Other assets consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Deferred mobilization and inspection costs.................. $ 40,576 $ 55,882
Deferred financing costs.................................... 34,055 38,860
Deferred compensation plan.................................. 12,996 11,670
Deferred income taxes....................................... 4,048 --
Other....................................................... 10,502 23,440
-------- --------
Total other assets........................................ $102,177 $129,852
======== ========
</Table>
29
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued Expenses
Accrued expenses consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Deferred mobilization revenues.............................. $ 48,894 $ 90,302
Construction project costs.................................. 64,496 --
Payroll and benefits........................................ 44,809 42,830
Interest.................................................... 17,370 26,398
Current income taxes........................................ 24,263 22,334
Taxes, other than income.................................... 21,256 21,705
Insurance................................................... 9,746 7,147
Earn-out payment, current portion........................... 3,000 3,000
Foreign currency contracts.................................. -- 1,116
Pooling and merger costs.................................... -- 886
Other....................................................... 26,264 22,343
-------- --------
Total accrued expenses.................................... $260,098 $238,061
======== ========
</Table>
Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-----------------
2003 2002
------- -------
(IN THOUSANDS)
Deferred mobilization revenue............................... $26,190 $47,457
Deferred compensation....................................... 12,996 14,621
Deferred revenue, other..................................... 1,176 14,712
Earn-out payment, net of current portion.................... -- 3,000
Other....................................................... 14,061 8,782
------- -------
Total other long-term liabilities......................... $54,423 $88,572
======= =======
</Table>
30
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Income (Expense), Net
Other income (expense), net consisted of the following:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------
2003 2002 2001
------- ------- --------
(IN THOUSANDS)
Argentina writedown.................................... $ -- $ -- $(10,679)
Foreign exchange gain (loss)........................... 9,592 (1) (2,375)
Gain (loss) on extinguishment of debt.................. (6,142) (1,228) 2,049
Insurance gains........................................ -- -- 1,299
Litigation settlement.................................. -- -- (5,100)
Other, net............................................. 79 157 1,480
------- ------- --------
Total other income (expense), net.................... $ 3,529 $(1,072) $(13,326)
======= ======= ========
</Table>
Cash Flow Information
Supplemental cash flows and non-cash transactions were as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------
2003 2002 2001
------- -------- -------
(IN THOUSANDS)
Cash paid during the year for:
Interest............................................. $89,354 $111,576 $97,970
Income taxes -- U.S., net............................ -- -- 13,165
Income taxes -- foreign, net......................... 33,233 22,728 25,704
Change in capital expenditures in accounts payable... (7,078) 35,863 55,346
</Table>
31
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENT INFORMATION
In January 2004, the Company reorganized its reporting segments to achieve
a more rational geographic distribution and to establish better defined lines of
accountability and responsibility for the sectors of its business. The Company
now has six principal reporting segments: Eastern Hemisphere, which comprises
the Company's offshore and land drilling activity in Europe, Africa, the Middle
East, Southeast Asia, Russia and Kazakhstan; Western Hemisphere, which comprises
the Company's offshore drilling activity in Latin America, currently Brazil,
Mexico and Venezuela; U.S. Gulf of Mexico, which comprises the Company's U.S.
offshore platform and jackup rig fleets; Latin America Land; E&P Services; and
Technical Services.
The following table sets forth certain consolidated information with
respect to the Company by reporting segment:
<Table>
<Caption>
U.S. GULF LATIN
WESTERN OF MEXICO AMERICA E&P TECHNICAL CORPORATE
EASTERN HEMISPHERE OFFSHORE LAND SERVICES SERVICES AND OTHER TOTAL
HEMISPHERE ---------- --------- -------- -------- --------- --------- ----------
(IN THOUSANDS)
2003
Revenues............. $ 625,462 $ 378,974 $ 89,478 $344,842 $122,052 $ 128,912 $ -- $1,689,720
Earnings (loss) from
operations......... 194,923 100,250 (38,649) 14,538 8,847 (105,382) (52,309) 122,218
Total assets......... 1,907,444 1,162,593 398,235 562,422 185,120 69,127 93,489 4,378,430
Capital expenditures,
including
acquisitions....... 71,175 89,139 27,203 19,363 9,154 -- 938 216,972
Depreciation and
amortization....... 87,036 58,008 37,480 51,203 11,148 92 4,255 249,222
2002
Revenues............. $ 500,692 $ 278,664 $104,874 $222,294 $ 73,000 $ 90,250 $ -- $1,269,774
Earnings (loss) from
operations......... 148,950 88,365 (47,214) (1,409) (912) 2,386 (39,576) 150,590
Total assets......... 1,955,527 1,123,731 450,994 552,452 159,861 13,352 146,940 4,402,857
Capital expenditures,
including
acquisitions....... 115,286 89,281 11,579 27,845 10,709 508 618 255,826
Depreciation and
amortization....... 79,567 48,877 36,612 53,592 11,545 10 1 230,204
2001
Revenues............. $ 348,580 $ 174,438 $428,907 $418,469 $142,501 $ -- $ -- $1,512,895
Earnings (loss) from
operations......... 124,824 43,286 135,278 20,865 7,304 -- (47,008) 284,549
Total assets......... 1,595,257 854,932 956,046 631,903 148,464 -- 104,605 4,291,207
Capital expenditures,
including
acquisitions....... 220,079 494,387 45,562 145,452 22,895 -- 3,898 932,273
Depreciation and
amortization....... 42,943 28,016 57,519 59,631 14,580 -- 21 202,710
</Table>
Significant Customers
For the year ended December 31, 2003, one customer accounted for
approximately 13% of consolidated revenues and is included in the Western
Hemisphere segment and an additional customer accounted for approximately 13% of
consolidated revenue and is included in the Eastern Hemisphere, Latin America
Land,
32
PRIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and E&P Services segments. For the year ended December 31, 2002, one customer
accounted for approximately 16% of consolidated revenues and is included in the
Eastern Hemisphere, Latin America Land, and E&P Services segments, and an
additional customer accounted for approximately 12% of consolidated revenue and
is included in the Eastern Hemisphere segment. One customer accounted for
approximately 11% of consolidated revenues for the year ended December 31, 2001,
which amount is included in the E&P Services and Latin America Land segments.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 2003
and 2002 were as follows:
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003
Revenues................................... $395,421 $408,615 $450,834 $434,850
Earnings (losses) from operations(1)....... 50,414 11,888 82,947 (23,031)
Net earnings (loss)........................ 3,980 (18,173) 28,712 (38,452)
Net earnings (loss) per share:
Basic.................................... $ 0.03 $ (0.14) $ 0.21 $ (0.28)
Diluted.................................. $ 0.03 $ (0.14) $ 0.19 $ (0.28)
Weighted average common shares and
equivalents outstanding:
Basic.................................... 134,131 134,246 135,131 135,291
Diluted.................................. 134,840 134,246 155,466 135,291
2002
Revenues................................... $298,557 $309,484 $312,750 $348,983
Earnings from operations(1)................ 35,283 37,489 35,458 42,360
Net earnings (loss)........................ 263 (4,155) (5,586) 1,143
Net earnings (loss) per share:
Basic.................................... $ -- $ (0.03) $ (0.04) $ 0.01
Diluted.................................. $ -- $ (0.03) $ (0.04) $ 0.01
Weighted average common shares and
equivalents outstanding:
Basic.................................... 132,863 133,094 133,212 134,041
Diluted.................................. 133,816 133,094 133,212 134,838
</Table>
- ---------------
(1) Results previously reported for interim periods have been restated to
reflect the retroactive adoption of FIN No. 46R, "Consolidation of Variable
Interest Entities". See Note 1.
33