================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13289
----------------------
PRIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0069030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 SAN FELIPE, SUITE 3300
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 789-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practical date.
Outstanding as of August 4, 2004
Common Stock, par value $.01 per share 135,981,491
================================================================================
PRIDE INTERNATIONAL, INC.
INDEX
PAGE NO.
--------
RESTATEMENT ................................................................................... 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2004 and December 31, 2003 (Restated)....... 3
Consolidated Statement of Operations for the three months ended June 30, 2004
and 2003 (Restated)................................................................ 4
Consolidated Statement of Operations for the six months ended June 30, 2004
and 2003 (Restated)................................................................ 5
Consolidated Statement of Cash Flows for the six months ended June 30, 2004
and 2003 (Restated)................................................................ 6
Notes to Unaudited Consolidated Financial Statements.................................. 7
Report of Independent Registered Public Accounting Firm............................... 20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 21
Item 4. Controls and Procedures............................................................ 33
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 34
SIGNATURES ................................................................................. 35
1
RESTATEMENT
We hereby amend the following items of our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004 as originally filed with the Securities and
Exchange Commission on August 9, 2004: "Financial Statements" in Item 1 of Part
I, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 2 of Part I, "Controls and Procedures" in Item 4 of Part I
and "Exhibits and Reports on Form 8-K" in Item 6 of Part II.
This Form 10-Q/A is being filed to include restated consolidated financial
statements and related disclosures as of June 30, 2004 and for the three months
and six months ended June 30, 2004 and 2003.
We restated our consolidated financial information for 2003, 2002, 2001
and 2000 in our annual report on Form 10-K for the year ended December 31, 2004
to correct certain errors related primarily to transactions initially recorded
in periods from 1999 to 2002, but affecting periods from 1999 through 2004. The
errors relate to adjustments to the 2001 acquisition of the interest we did not
own in the Pride Carlos Walter and Pride Brazil and the calculation of charges
associated with the subsequent refinancing of the debt; under- and
over-depreciation of certain rigs constructed or acquired in 1999; depreciation
related to rig transfers; the recording of the foreign exchange calculation of
the inventory valuation in Colombia in 1999; an error in a tax provision in
2002; a net gain reported in 2000 resulting from a casualty loss in 1999; and
adjustments related to the reconciliation of certain accounts payable and the
reclassification of certain finance charges. The cumulative effect of the errors
resulted in an increase in income from continuing operations for the three-month
period ended June 30, 2004 of approximately $0.5 million, a decrease in income
from continuing operations for the three-month period ended June 30, 2003 of
approximately $0.9 million, and an increase in income from continuing operations
for the six-month periods ended June 30, 2004 and 2003 of approximately $1.3
million and $21,000, respectively. Please read note 12 of the notes to our
unaudited consolidated financial statements for more information related to the
restatement.
The operating results also include the reclassification of certain costs
from general and administrative to operating costs. We have also reclassified
the results of our former Technical Services segment by classifying (a) our
fixed fee rig construction business as discontinued operations and (b) the
remaining revenues and costs for Technical Services activities to our corporate
and other segment. Please read notes 1 and 2 of the notes to our unaudited
consolidated financial statements for more information related to the
reclassifications.
For purposes of this Form 10-Q/A and in accordance with Rule 12b-15 under
the Securities Exchange Act of 1934, as amended, each item of the quarterly
report on Form 10-Q as originally filed on August 9, 2004 that was affected by
the restatement has been amended and restated in its entirety. No attempt has
been made in this Form 10-Q/A to modify or update other disclosures as presented
in the original Form 10-Q to reflect events occurring after the original filing
date, except as required to reflect the effects of the restatement. In
particular, and without limitation, we have provided certain forward-looking
information in this Form 10-Q/A. This information has not been revised from the
information provided in the originally filed quarterly report on Form 10-Q
because it was not affected by the restatement.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
------------- ------------
(RESTATED) (RESTATED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 44,422 $ 69,134
Restricted cash.................................................... 47,801 38,840
Trade receivables, net............................................. 404,718 371,510
Parts and supplies, net............................................ 67,720 72,263
Other current assets............................................... 180,442 171,084
------------- ------------
Total current assets.......................................... 745,103 722,831
------------- ------------
PROPERTY AND EQUIPMENT, net.......................................... 3,405,813 3,463,300
------------- ------------
OTHER ASSETS
Investments in and advances to affiliates.......................... 36,235 33,984
Goodwill........................................................... 68,651 69,014
Other assets....................................................... 72,095 87,966
------------- ------------
Total other assets............................................ 176,981 190,964
------------- ------------
$ 4,327,897 $ 4,377,095
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................... $ 133,823 $ 163,707
Accrued expenses................................................... 263,293 260,150
Short-term borrowings.............................................. 21,799 27,555
Current portion of long-term debt.................................. 170,752 188,737
Current portion of long-term lease obligations..................... 11,012 2,749
------------- ------------
Total current liabilities..................................... 600,679 642,898
------------- ------------
OTHER LONG-TERM LIABILITIES.......................................... 39,949 56,811
LONG-TERM DEBT, net of current portion............................... 1,824,964 1,805,099
LONG-TERM LEASE OBLIGATIONS, net of current portion.................. 380 9,979
DEFERRED INCOME TAXES................................................ 58,097 59,460
MINORITY INTEREST.................................................... 101,316 100,993
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;
136,156 and 135,769 shares issued; 135,786 and 135,400
shares outstanding.............................................. 1,363 1,358
Paid-in capital.................................................... 1,268,940 1,261,073
Treasury stock, at cost............................................ (4,409) (4,409)
Accumulated other comprehensive loss............................... (1,872) (124)
Deferred compensation.............................................. (2,543) --
Retained earnings.................................................. 441,033 443,957
------------- ------------
Total stockholders' equity.................................... 1,702,512 1,701,855
------------- ------------
$ 4,327,897 $ 4,377,095
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-----------------------
2004 2003
---------- ----------
(RESTATED) (RESTATED)
REVENUES........................................................................ $ 424,028 $ 383,438
OPERATING COSTS, excluding depreciation and amortization........................ 277,200 251,118
DEPRECIATION AND AMORTIZATION................................................... 66,449 61,855
GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization............. 20,392 12,903
(GAIN) LOSS ON SALE OF ASSETS, net.............................................. (243) 392
---------- ----------
EARNINGS FROM OPERATIONS........................................................ 60,230 57,170
OTHER INCOME (EXPENSE)
Interest expense........................................................... (29,124) (34,016)
Refinancing charges........................................................ -- 70
Interest income............................................................ 780 819
Other expense, net......................................................... 483 5,286
---------- ----------
Total other expense, net............................................... (27,861) (27,841)
---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST.................................. 32,369 29,329
INCOME TAX PROVISION............................................................ 19,648 13,848
MINORITY INTEREST............................................................... 4,478 4,074
---------- ----------
INCOME FROM CONTINUING OPERATIONS............................................... 8,243 11,407
LOSS ON DISCONTINUED OPERATIONS................................................. (5,267) (30,483)
---------- ----------
NET EARNINGS (LOSS)............................................................. $ 2,976 $ (19,076)
========== ==========
EARNINGS (LOSS) PER SHARE
Basic
Income from continuing operations................................. $ 0.06 $ 0.09
Discontinued operations........................................... (0.04) (0.23)
---------- ----------
Net earnings...................................................... $ 0.02 $ (0.14)
========== ==========
Diluted
Income from continuing operations................................. $ 0.06 $ 0.08
Discontinued operations........................................... (0.04) (0.20)
---------- ----------
Net earnings...................................................... $ 0.02 $ (0.12)
========== ==========
SHARES USED IN PER SHARE CALCULATIONS
Basic.................................................................. 135,681 134,246
Diluted................................................................ 137,435 154,834
The accompanying notes are an integral part of the consolidated financial
statements.
4
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2004 2003
---------- ----------
(RESTATED) (RESTATED)
REVENUES............................................................... $ 827,703 $ 727,738
OPERATING COSTS, excluding depreciation and amortization............... 550,890 476,810
DEPRECIATION AND AMORTIZATION.......................................... 132,395 123,445
GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization.... 32,990 22,533
(GAIN) LOSS ON SALE OF ASSETS, net..................................... (364) 454
---------- ----------
EARNINGS FROM OPERATIONS............................................... 111,792 104,496
OTHER INCOME (EXPENSE)
Interest expense.................................................. (58,933) (67,874)
Refinancing charges............................................... -- (229)
Interest income................................................... 1,087 1,073
Other expense, net................................................ (944) 2,085
---------- ----------
Total other expense, net..................................... (58,790) (64,945)
---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST......................... 53,002 39,551
INCOME TAX PROVISION .................................................. 29,776 16,219
MINORITY INTEREST...................................................... 10,323 9,243
---------- ----------
INCOME FROM CONTINUING OPERATIONS...................................... 12,903 14,089
LOSS ON DISCONTINUED OPERATIONS........................................ (15,827) (28,260)
---------- ----------
NET LOSS............................................................... $ (2,924) $ (14,171)
========== ==========
EARNINGS (LOSS) PER SHARE
Basic
Income from continuing operations............................ $ 0.10 $ 0.10
Discontinued operations...................................... (0.12) (0.21)
---------- ----------
Net earnings................................................. $ (0.02) $ (0.11)
========== ==========
Diluted
Income from continuing operations............................ $ 0.09 $ 0.10
Discontinued operations...................................... (0.11) (0.19)
---------- ----------
Net earnings................................................. $ (0.02) $ (0.09)
========== ==========
SHARES USED IN PER SHARE CALCULATIONS
Basic............................................................. 135,611 134,189
Diluted........................................................... 137,782 147,422
The accompanying notes are an integral part of the consolidated financial
statements.
5
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2004 2003
------------ -------------
(RESTATED) (RESTATED)
OPERATING ACTIVITIES
Net loss........................................................................... $ (2,924) $ (14,171)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities -
Depreciation and amortization.................................................. 132,395 123,445
Discount amortization on zero coupon convertible debentures.................... 27 1,782
Amortization of deferred loan costs............................................ 3,787 3,434
(Gain) loss on sale of assets.................................................. (364) 454
Deferred income taxes ......................................................... (406) (25,447)
Minority interest.............................................................. 10,323 9,243
Changes in assets and liabilities
Trade receivables......................................................... (33,208) (55,293)
Parts and supplies........................................................ 4,543 (16,570)
Other current assets...................................................... (9,926) (93,598)
Other assets.............................................................. 15,669 52,981
Accounts payable.......................................................... (31,718) (34,818)
Accrued expenses.......................................................... 2,179 44,507
Other liabilities......................................................... (16,120) (25,713)
------------ -------------
Net cash provided by (used in) operating activities................... 74,257 (29,764)
------------ -------------
INVESTING ACTIVITIES
Purchases of property and equipment................................................ (74,349) (93,897)
Proceeds from dispositions of property and equipment............................... 1,283 315
Investments in and advances to affiliates.......................................... (2,251) (956)
------------ -------------
Net cash used in investing activities................................. (75,317) (94,538)
------------ -------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock............................................. 1,537 16,265
Proceeds from exercise of stock options............................................ 2,751 961
Proceeds from debt borrowings...................................................... 273,047 748,926
Repayments of borrowings........................................................... (278,947) (702,816)
Repayment of joint venture partner debt............................................ (10,000) --
Debt finance costs................................................................. (3,079) (4,885)
Change in restricted cash.......................................................... (8,961) 539
------------ -------------
Net cash provided by (used in) financing activities................... (23,652) 58,990
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................... (24,712) (65,312)
CASH AND CASH EQUIVALENTS, beginning of period.......................................... 69,134 133,986
------------ -------------
CASH AND CASH EQUIVALENTS, end of period................................................ $ 44,422 $ 68,674
============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
6
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Principles of Consolidation and Reporting
The unaudited consolidated financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto of Pride International, Inc.
(the "Company" or "Pride") and its wholly-owned and majority owned subsidiaries
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004. Unless the context indicates otherwise, references to the "Company" or
"Pride" include Pride International, Inc. and its wholly owned and
majority-owned subsidiaries.
In the opinion of management, the unaudited consolidated financial
information included herein reflects all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for a full year or any other interim period.
PricewaterhouseCoopers LLP, the Company's independent registered public
accounting firm, has performed a review of the unaudited consolidated financial
statements included herein in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Pursuant to Rule 436(c)
under the Securities Act of 1933, the report of PricewaterhouseCoopers LLP,
included herein, should not be considered a part of any registration statement
prepared or certified within the meanings of Sections 7 and 11 of the Securities
Act, and the liability provisions of Section 11 of the Securities Act do not
apply to such report.
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. 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. The Company elected in the fourth quarter of 2003 to adopt
retroactively the provisions of FIN No. 46R and to restate previously issued
financial statements for the applicable periods for comparability purposes. The
effect on the Company's consolidated statement of operations for the three
months and six months ended June 30, 2003 was as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- -------------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net loss -- as reported.................................... $ (19,314) $ (14,641)
Add:
Lease rental expenses included in reported net earnings... 3,177 6,353
Deduct:
Depreciation expense...................................... (946) (1,891)
Interest expense.......................................... (1,993) (3,992)
------------- -------------
Net loss -- as adjusted..................................... $ (19,076) $ (14,171)
============= =============
NET LOSS PER SHARE:
Basic -- as reported........................................ $ (0.14) $ (0.11)
Basic -- as adjusted........................................ $ (0.14) $ (0.11)
Diluted -- as reported...................................... $ (0.12) $ (0.09)
Diluted -- as adjusted...................................... $ (0.12) $ (0.09)
7
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income
Comprehensive income is the change in the Company's equity from all
transactions except those resulting from investments by or distributions to
owners. Comprehensive income (loss) was as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
Net earnings (loss).............................. $ 2,976 $ (19,076) $ (2,924) $ (14,171)
Foreign currency translation gain (loss), net.... (866) 3,261 (1,748) 4,326
---------- ---------- ---------- ---------
Comprehensive income (loss)...................... $ 2,110 $ (15,815) $ (4,672) $ (9,845)
========== ========== ========== =========
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. The assumptions 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. Actual results could be materially different than
the estimates and assumptions.
Rig Construction Contracts
In 2001 and 2002, the Company's technical services group entered into
lump-sum contracts to design, engineer, manage construction of and commission
four deepwater platform drilling rigs for certain of the Company's significant
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, in connection with the preparation
of the Company's quarterly consolidated financial statements, following the end
of each quarter the Company updates its evaluation of its contract price and
cost estimates related to the projects 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, which could be material.
Stock-Based Compensation
The Company uses the intrinsic value based method of accounting for
stock-based compensation prescribed by Accounting Principles Board Opinion 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.
If the fair value based method of accounting prescribed by Statement of
Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based
Compensation" 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.
8
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings (loss), as reported............................ $ 2,976 $ (19,076) $ (2,924) $ (14,171)
Add: Stock-based compensation included in reported net
earnings (loss), net of tax............................... -- -- -- --
Deduct: Stock-based employee compensation expense
determined under the fair value method, net of tax........ (3,450) (3,960) (6,623) (6,952)
---------- ---------- ---------- ----------
Pro forma net earnings (loss)............................... $ (474) $ (23,036) $ (9,547) $ (21,123)
========== ========== ========== ==========
Net earnings (loss) per share:
Basic -- as reported...................................... $ 0.02 $ (0.14) $ (0.02) $ (0.11)
Basic -- pro forma........................................ $ 0.00 $ (0.17) $ (0.07) $ (0.16)
Diluted -- as reported.................................... $ 0.02 $ (0.12) $ (0.02) $ (0.09)
Diluted -- pro forma...................................... $ 0.00 $ (0.17) $ (0.07) $ (0.16)
In January 2004, the Company awarded a total of 125,000 restricted shares
to certain key employees pursuant to the Company's long-term incentive plan. In
May 2004, the Company awarded a total of 13,800 restricted shares to the
Company's non-employee directors pursuant to the Company's directors' stock
incentive plan. The Company recorded unearned compensation as a reduction of
stockholders' equity based on the closing price of the Company's common stock on
the date of grant. The unearned compensation is being recognized ratably over
the applicable vesting period.
Reclassifications
In 2004, the Company reclassified certain costs such as engineering,
procurement, safety and field offices from general and administrative to
operating costs. The Company has reclassified prior periods to conform to this
presentation. For the three-month and six-month periods ended June 30, 2004 and
2003, costs of approximately $15.8 million, $17.1 million, $30.7 million and
$31.2 million, respectively, were reclassified from general and administrative
to operating costs. Certain other reclassifications have been made to prior
periods to conform to the current period presentation.
2. DISCONTINUED OPERATIONS
In 2001 and 2002, the Company's technical services group 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 entered into these lump-sum contracts in connection with
long-term contracts to provide drilling operations management of the rigs once
they have been installed on platforms. The first rig was completed and delivered
in 2003, the second rig was completed and delivered in the second quarter of
2004, and the third rig was completed in the second quarter of 2004 and
delivered early in the third quarter of 2004. The final rig has been loaded on a
heavy-lift vessel for shipment to the customer's platform construction site for
integration into the unit. Our commissioning of the rig is expected to continue
until the platform is completed and delivered in the first quarter of 2005.
In pricing these lump-sum contracts, the Company estimated the cost to
perform the work, including the cost of labor, material and services. The
revenue, cost and loss amounts the Company currently expects to realize on each
of these lump-sum contracts vary from the originally estimated amounts. A
variety of events could require the Company to revise its estimates and could
result in further cost overruns to complete these projects, which could be
material, and would require the Company to record additional loss provisions.
Such events could include variations in labor and equipment productivity over
the remaining construction period, unanticipated cost increases, engineering
changes, shipyard or systems problems, project management issues, shortages of
equipment, materials
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
or skilled labor, weather delays, unscheduled delays in the delivery of ordered
materials and equipment, work stoppages, shipyard unavailability or other
delays.
For the three-month and six-month periods ended June 30, 2004, the Company
recorded loss provisions of $10.5 million and $31.8 million, respectively,
relating to the construction of the rigs. The 2004 loss provisions principally
consisted of additional provisions for higher commissioning costs for the rigs,
the costs of settling certain commercial disputes and renegotiations of
commercial terms with shipyards, equipment vendors and other sub-contractors,
completion issues at the shipyard constructing the final two rigs and revised
estimates for other cost items. For the three-month and six-month periods ended
June 30, 2004 and 2003, the Company recorded loss provisions of $46.9 million
and $43.5 million, respectively, related to the rig construction projects. As of
June 30, 2004, the cumulative losses recorded on the projects were $130.2
million.
During the fourth quarter of 2004, the Company discontinued this business
and does not currently intend to enter into additional business of this nature.
Accordingly, the Company has reclassified its fixed-fee rig construction
business in all prior periods as discontinued operations on the Company's
consolidated statement of operations.
The operating results of the discontinued fixed-fee construction business
were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(IN THOUSANDS)
Sales revenue............................................... $ 22,330 $ 25,177 $ 52,220 $ 76,298
Operating costs............................................. 32,840 72,075 84,033 119,776
--------- --------- --------- ---------
Loss from discontinued fixed-fee construction operations.... (10,510) (46,898) (31,813) (43,478)
Income tax benefit.......................................... (5,243) (16,415) (15,986) (15,218)
--------- --------- --------- ---------
Loss on discontinued operations............................. $ (5,267) $ (30,483) $ (15,827) $ (28,260)
========= ========= ========= =========
3. DEBT
Short-Term Borrowings
As of June 30, 2004, the Company had agreements with several banks for
unsecured short-term lines of credit totaling $53.0 million, primarily
denominated in U.S. dollars. Of these facilities, $50.7 million are renewable
annually and bear interest at variable rates based on LIBOR. As of June 30,
2004, $19.5 million was outstanding under these facilities and $31.2 million was
available.
10
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Debt
Long-term debt consisted of the following:
JUNE 30, DECEMBER 31,
2004 2003
------------- -------------
(IN THOUSANDS)
Senior secured term loan.......................................... $ 196,015 $ 197,000
Senior secured revolving credit facilities........................ 235,000 288,000
9 3/8% Senior Notes due 2007...................................... 175,000 175,000
10% Senior Notes due 2009......................................... 200,000 200,000
2 1/2% Convertible Senior Notes Due 2007.......................... 300,000 300,000
3 1/4% Convertible Senior Notes Due 2033.......................... 300,000 300,000
Zero Coupon Convertible Senior Debentures Due 2021................ -- 4
Zero Coupon Convertible Subordinated Debentures Due 2018.......... 1,124 1,098
Senior convertible notes due 2004................................. 74,279 85,853
Drillship loans................................................... 278,885 182,674
Semisubmersible loans due 2004 to 2008............................ 235,413 260,558
Limited-recourse collateralized term loans........................ -- 3,649
------------- -------------
1,995,716 1,993,836
Current portion of long-term debt................................. 170,752 188,737
------------- -------------
Long-term debt, net of current portion............................ $ 1,824,964 $ 1,805,099
============= =============
As of June 30, 2004, the Company had senior secured credit facilities
providing for aggregate availability of up to $446.0 million, consisting of a
$196.0 million term loan maturing in January 2009 and a $250.0 million revolving
credit facility maturing in January 2007. As of June 30, 2004, $106.0 million of
borrowings and an additional $29.3 million of letters of credit were outstanding
under the revolving credit facility. Borrowings under the facilities incurred
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 3.63%
for the term loan and 3.13% for the revolving credit facility as of June 30,
2004.
Additionally, at June 30, 2004, the Company had a senior secured revolving
credit facility with non-U.S. banks that provided aggregate availability of up
to $180.0 million, including $10.0 million of letters of credit. Borrowings
under the credit facility incurred interest at variable rates based on LIBOR
plus a spread ranging from 1.2% to 2.1%. As of June 30, 2004, $129.0 million of
borrowings and an additional $3.7 million of letters of credit were outstanding
under this credit facility, and the interest rate was 2.96%.
In July 2004, the senior secured credit facilities were retired with
proceeds from a $500 million senior notes offering and $800 million of new
senior secured credit facilities. See Note 11.
In June 2004, the Company commenced an offer to purchase the 9 3/8% Senior
Notes and the 10% Senior Notes at 37.5 basis points over the respective
redemption prices described below. See Note 11.
In April 2004, the Company completed a refinancing of its drillship loan
facilities through its consolidated joint venture company that owns the
drillships the Pride Africa and the Pride Angola. The new and expanded drillship
credit facility provides for a total credit commitment of $301.4 million, of
which a $278.9 million term loan was funded at closing. The remaining $22.5
million commitment of the drillship credit facility is available for borrowing
until July 2009. Funds at closing, together with $15.4 million of previously
restricted cash, were used to (i) refinance the outstanding principal balance on
the prior drillship loans of $172.6 million, (ii) repay $103.6 million of loans
due from the joint venture company to the Company, (iii) repay $10.0 million of
indebtedness of the joint venture company to the joint venture partner, and (iv)
pay loan transaction costs of $3.1 million. The funds paid to the Company were
used to reduce the Company's other outstanding debt and to improve liquidity.
The new drillship loan facility matures in September 2010 and amortizes
semi-annually. The drillship loan is non-recourse to the Company and the joint
owner.
11
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2004, $47.8 million of the Company's cash balances, which
amount is included in restricted cash, consists of funds held in trust in
connection with the Company's drillship and semisubmersible loans and,
accordingly, is not available for use by the Company.
4. INCOME TAXES
The Company's consolidated effective income tax rate for continuing
operations for the three months ended June 30, 2004 was 60.7% as compared to
47.2% for the corresponding period in 2003. The higher rate for the three months
ended June 30, 2004 is principally the result of an increase in expected taxable
income for 2004 in high effective tax rate countries in Latin America and lower
net income in foreign jurisdictions with low or zero effective tax rates.
For the six months ended June 30, 2004, the consolidated effective income
tax rate for continuing operations was 56.2% as compared to 41.0% for the same
period in 2003. The higher rate for the six months ended June 30, 2004 is a
result of the factors discussed above for the three months ended June 30, 2004.
5. EARNINGS (LOSS) PER SHARE
Basic income from continuing operations per share has been computed based
on the weighted average number of shares of common stock outstanding during the
applicable period. Diluted income from continuing operations per share has been
computed based on the weighted average number of shares of common stock and
common stock equivalents outstanding during the period, as if stock options,
convertible debentures and other convertible debt were converted into common
stock, after giving retroactive effect to the elimination of interest expense,
net of income tax effect, applicable to the convertible debentures and other
convertible debt.
The following table presents information to calculate basic and diluted
income from continuing operations per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
Income from continuing operations....................... $ 8,243 $ 11,407 $ 12,903 $ 14,089
Interest expense on convertible notes .................. - 2,299 - 1,773
Income tax effect ...................................... - (805) - (621)
------------ ---------- ---------- ----------
Income from continuing operations - as adjusted......... $ 8,243 $ 12,901 $ 12,903 $ 15,241
============ ========== ========== ==========
Weighted average shares outstanding .................... 135,681 134,246 135,611 134,189
Convertible debentures and notes ....................... - 18,171 - 11,671
Stock options .......................................... 1,754 2,417 2,171 1,562
------------ ---------- ---------- ----------
Adjusted weighted average shares outstanding ........... 137,435 154,834 137,782 147,422
============ ========== ========== ==========
The calculation of diluted weighted average shares outstanding for the
three months ended June 30, 2004 and 2003 excludes 36.3 million and 13.6 million
common shares, respectively, and 34.3 million and 18.3 million common shares for
the six months ended June 30, 2004 and 2003, respectively, issuable pursuant to
convertible debt and outstanding options. These shares were excluded because
their effect was anti-dilutive or the exercise price of stock options exceeded
the average price of the Company's common stock for the period.
6. INVESTMENT IN JOINT VENTURE
The Company has 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 the Pride Rio de Janeiro.
The Pride Portland is currently in Curacao undergoing final commissioning, and
the Pride Rio de Janeiro is currently undergoing final commissioning in Brazil.
The joint venture company has financed the cost of construction of these rigs
through equity contributions and fixed rate notes, with repayment of the notes
guaranteed by the United States Maritime Administration ("MARAD"). The notes are
non-recourse to any of the joint venture
12
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
owners, except that, in order to make available an additional $21.9 million
under the MARAD-guaranteed notes to fund the project through the sea and
drilling trial stage for each rig, the Company has provided:
- a $25.0 million letter of credit to secure principal and interest
payments due under the notes, the payment of costs of removing or
contesting liens on the rigs and the payment of debt of the joint
venture company to MARAD in the event MARAD's guarantee is drawn;
- a guarantee of any cash in excess of the additional $21.9 million
required to get the rigs through the sea and drilling trial stage
and obtain their class certificates; and
- a guarantee of the direct costs of the voyage of each rig from any
foreign jurisdiction in which it is located to a U.S. Gulf port
nominated by MARAD in the event of a default prior to the rig
obtaining a charter of at least three years in form and substance
satisfactory to MARAD and at a rate sufficient to pay operating
costs and debt service.
The Company's joint venture partner has agreed to reimburse the Company
that partner's proportionate share of any draws under the letter of credit or
payments under the guarantees. To secure those reimbursements, the Company had
set-off rights against, and rights to keep as collateral any payments on,
convertible senior notes of the Company held by the joint venture partner. In
July 2004, the Company repaid the notes and kept as collateral $17.5 million of
cash to cover the partner's proportionate share of draws, if any, under the
letter of credit.
The Company currently expects that funds in excess of the additional $21.9
million will not be required to get the rigs through the sea and drilling trial
stage and obtain their class certificates. Additional funds may, however, be
required. Any additional funding is expected to be made by additional capital
contributions by the joint venture partners.
The cost of construction not funded under the MARAD-guaranteed notes is
being provided by the joint venture company from equity contributions that have
been made by the joint venture partners. Through June 30, 2004, the Company's
equity investment in the joint venture totaled $35.9 million, including
capitalized interest of $7.9 million.
The Pride Portland and Pride Rio de Janeiro are being built to operate
under long-term contracts with Petrobras; however, Petrobras has given notice of
cancellation of those contracts for late delivery. Based on current demand for
deepwater drilling rigs, the Company believes that Petrobras or another customer
will employ the Pride Portland and Pride Rio de Janeiro under new or amended
contracts. There can be no assurance, however, that either the Pride Portland or
the Pride Rio de Janeiro will be contracted to Petrobras or to any other
customer. If no contract is obtained before the rigs are commissioned, the rigs
will be stacked. In this case, the joint venture partners would need to advance
further funds to the joint venture company to allow it to pay stacking costs
(estimated to be approximately $1 million per rig per month) as well as
principal and interest payments on the debt as they become due since the joint
venture company would have no alternative source of funds to allow it to make
such payments. Initial interest and debt service payments in respect of
construction debt for the two rigs are expected to total approximately $23.0
million during 2004, of which the Company's 30% share would be $6.9 million.
If the joint venture company failed to cover its debt service
requirements, a default would occur under the fixed rate notes guaranteed by
MARAD. MARAD would then be entitled to foreclose on the mortgages related to the
Pride Portland and the Pride Rio de Janeiro and take possession of the two rigs.
7. ACQUISITION OF Al BARAKA I
In June 2004, the Company purchased the Al Baraka I tender
assisted-drilling rig, which it previously managed pursuant to a management
agreement with Basafojagu (HS) Inc., a company incorporated in Liberia.
Basafojagu (HS) Inc., in which the Company had a 12.5% interest, owned the Al
Baraka I subject to two capital leases with lessor banks. Each of the
shareholders of Basafojagu (HS) Inc., including the Company, guaranteed the
capital lease obligations in proportion to their ownership interest. The two
lessor banks and the majority shareholder of Basafojagu (HS) Inc. were part of a
banking and industrial group. The Company purchased the Al Baraka I directly
13
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
from the lessor banks for cash consideration of $16.0 million, including related
fees. In connection with the transaction, the lessor banks, Basafojagu (HS) Inc.
and its shareholders released each of the shareholders from its obligations
associated with the operation of the Al Baraka I and with its ownership interest
in Basafojagu (HS) Inc. including the guarantees of the capital leases.
8. COMMITMENTS AND CONTINGENCIES
In July 2004, the India Supreme Court agreed to hear the Indian Customs
Department's claim against the Company regarding the importation of the Pride
Pennsylvania and related customs issues. The Customs, Excise and Gold (Control)
Appellate Tribunal ("CEGAT") had previously ruled in the Company's favor. The
Indian Customs Department is claiming approximately $6.7 million of customs
duties, $6.7 million in penalties and interest on those amounts. The Company
intends to vigorously defend the claim before the India Supreme Court. While the
ultimate outcome of the claim cannot be determined with certainty, the Company
does not expect that the ultimate outcome will have a material adverse effect on
the Company's financial position, results of operations, or cash flows. The
Company currently has a $2.0 million deposit with the Indian Customs Department
pending the ultimate resolution of this claim.
The Company is routinely involved in other litigation, claims and disputes
incidental to its business, which at times involve claims for significant
monetary amounts, some of which would not be covered by insurance. In the
opinion of management, none of the existing litigation will have a material
adverse effect on the Company's financial position, results of operations or
cash flows. 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.
9. 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 five 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; and E&P Services.
Historically, the Company reported a technical services segment which
included its fixed-fee rig construction business, consulting services provided
to customers, managing special periodic surveys and shipyard work for the
Company's fleet. Due to the discontinuance of the Company's fixed-fee rig
construction business, this business was classified as discontinued operations.
The revenues and costs for engineering and management consulting services
provided to the Company's customers are now included as part of its corporate
and other activities for reporting purposes. The costs associated with managing
special periodic surveys and shipyard work for the Company's fleet are now
reported in the operating segment managing the rig. As a result, the Company no
longer reports construction operations as a separate technical services segment.
14
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth selected consolidated financial information
of the Company by reporting segment:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 (1) 2004 2003 (1)
---- -------- ---- --------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
Revenues:
Eastern Hemisphere................... $ 140,788 $149,070 $ 283,759 $ 291,220
Western Hemisphere................... 116,673 89,801 225,834 175,053
U.S. Gulf of Mexico.................. 30,199 21,342 57,219 39,584
Latin America Land................... 94,858 89,262 183,818 162,361
E & P services....................... 33,064 32,526 67,288 57,163
Corporate and other.................. 8,446 1,437 9,785 2,357
--------- -------- ---------- ----------
Total......................... $ 424,028 $383,438 $ 827,703 $ 727,738
========= ======== ========== ==========
Earnings (loss) from operations:
Eastern Hemisphere................... $ 40,522 $ 44,253 $ 78,735 $ 86,632
Western Hemisphere................... 30,568 22,585 52,588 49,247
U.S. Gulf of Mexico.................. (2,097) (9,411) (6,624) (24,268)
Latin America Land................... 4,326 7,315 5,769 10,612
E & P services....................... 1,686 2,672 4,526 3,805
Corporate and other.................. (14,775) (10,244) (23,202) (21,532)
--------- -------- ---------- ----------
Total......................... $ 60,230 $ 57,170 $ 111,792 $ 104,496
========= ======== ========== ==========
(1) The consolidated financial information by reporting segment for the three
months and the six months ended June 30, 2003 has been restated to reflect
the Company's new reporting segments and to reflect the retroactive
adoption of FIN No. 46R, "Consolidation of Variable Interest Entities."
Significant Customers
Two customers collectively accounted for approximately 24.9% and 22.9% of
consolidated revenues for the three-month and six-month periods ended June 30,
2004, respectively. For the three-month and six-month periods ended June 30,
2003, two customers collectively accounted for 24.6% and 23.9%, respectively, of
consolidated revenues.
10. EMPLOYEE BENEFITS
During the second quarter of 2004, the Company's board of directors
authorized a modification of the Company's Supplemental Executive Retirement
Plan (SERP), subject to final documentation, to change the benefits under the
plan and to increase the number of executive officers eligible for the plan. The
SERP is an unfunded deferred compensation arrangement that provides for vested
benefits to be paid to the participating executive officer upon the officer's
termination or retirement. The Company recognizes its estimated liability and
the related compensation expense over the estimated service period of each
officer.
11. SUBSEQUENT EVENTS
On July 7, 2004, the Company completed a private offering of $500 million
principal amount of 7 3/8% Senior Notes due 2014 (the "7 3/8% Senior Notes") and
entered into new senior secured credit facilities with aggregate availability of
up to $800 million, consisting of a $300 million term loan and a $500 million
revolving credit facility.
The 7 3/8% Senior Notes contain provisions that limit the Company's
ability to enter into transactions with affiliates; pay dividends and make other
restricted payments; incur debt and issue preferred stock; incur dividend or
15
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
other payment restrictions affecting the Company's subsidiaries; sell assets;
engage in sale and leaseback transactions; create liens; and consolidate, merge
or transfer all or substantially all of the Company's assets. Many of these
restrictions will terminate if the notes are rated investment grade by either
Standard & Poor's Ratings Services or Moody's Investors Service, Inc. and, in
either case, the notes have a specified minimum rating by the other rating
agency. The Company is required to offer to repurchase the notes in connection
with specified change in control events that result in a ratings decline.
Borrowings under the revolving credit facility are available for general
corporate purposes. The Company may obtain up to $100 million of letters of
credit under the revolving credit facility. Amounts drawn under the senior
secured credit facilities bear interest at variable rates based on either LIBOR
plus a margin or prime rate plus a margin. The interest rate margins will vary
based on the Company's leverage, as defined, except that the LIBOR margin for
the term loan is fixed at 1.75%.
The revolving credit facility will mature in July 2009 and the term loan
will mature in July 2011 (with amortization on the term loan of 0.25% per
quarter prior to maturity). The Company may prepay the term loan at any time
without penalty. Additionally, the Company is required to prepay the term loan
and, in certain cases, the revolving loans with the proceeds from (i) asset
sales or casualty events (with some exceptions), (ii) certain extraordinary
events such as tax refunds, indemnity payments and pension reversion proceeds if
availability under the new revolving credit facility plus the Company's
unrestricted cash is less than $200 million and (iii) future debt issuances not
permitted by the credit facilities.
The senior secured credit facilities are secured by first priority liens
on certain of the Company's subsidiaries' existing and future rigs, accounts
receivable, inventory and related insurance, all of the equity of the Company's
subsidiary Pride Offshore, Inc., the borrower under the facilities, and Pride
Offshore's domestic subsidiaries and 65% of the stock of certain of the
Company's foreign subsidiaries. The senior secured credit facilities contain a
number of covenants restricting, among other things, prepayment, redemption and
repurchase of the Company's indebtedness; distributions, dividends and
repurchases of capital stock and other equity interests; acquisitions and
investments; asset sales; capital expenditures; indebtedness; liens and
affiliate transactions. The senior secured credit facilities also contain
customary events of default, including with respect to a change of control.
The Company is using the net proceeds from the offering of the 7 3/8%
Senior Notes of $491.1 million (after discounts but before other expenses) to
retire $175 million aggregate principal amount of its 9 3/8% Senior Notes due
2007 and $200 million aggregate principal amount of its 10% Senior Notes due
2009, together with the applicable prepayment premium and accrued and unpaid
interest, and to retire other indebtedness. Proceeds from the term loan and
initial borrowings of approximately $95 million under the revolving credit
facility were used to refinance amounts outstanding under other credit
facilities of the Company. In connection with the retirement of the 9 3/8%
Senior Notes and 10% Senior Notes, the Company commenced an offer to purchase
the notes at 37.5 basis points over the respective redemption prices described
below. The Company purchased a total of $110.6 million aggregate principal
amount of the 9 3/8% Senior Notes and $127.6 million aggregate principal amount
of the 10% Senior Notes pursuant to the tender offer. The remaining notes were
redeemed on August 6, 2004 at redemption prices of 101.563% of the principal
amount of the 9 3/8% Senior Notes and 105.000% of the principal amount of the
10% Senior Notes, in each case plus accrued and unpaid interest to the
redemption date.
In connection with the early retirement of (i) the 9 3/8% Senior Notes and
the 10% Senior Notes, including the redemption of the notes outstanding
following completion of the tender offer, and (ii) the senior secured term loan
and the senior secured revolving credit facilities, the Company will recognize
in the third quarter of 2004 pretax charges of approximately $31.0 million,
consisting of the tender offer premium, prepayment premiums and the write-off of
deferred financing costs related to the retired debt.
12. RESTATEMENT
During 2004, the Company identified several matters that resulted in the
restatement of amounts previously reported in the Company's financial statements
for the years 1999 through 2003 in the Company's annual report on Form 10-K for
the year ended December 31, 2004. In addition, certain disclosures in other
notes to the consolidated
16
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
financial statements have been restated to reflect the restatement adjustments.
The matters consist of certain errors related primarily to transactions
initially recorded in periods from 1999 to 2002, but affecting periods from 1999
through 2004. The errors relate to:
- - Acquisition of Joint Venture Interest. In March 2001, the Company acquired
the 73.6% interest that it did not already own in the joint venture that owned
the Pride Carlos Walter and the Pride Brazil. At the time of the acquisition,
the Company was negotiating to refinance the joint venture's debt; the
refinancing was completed in November 2001. The Company recorded the acquired
joint venture debt and the joint venture assets at the book value as recorded on
the joint venture's books and records, as opposed to recording the assets and
liabilities at their fair market value. In addition, when the joint venture debt
was refinanced, certain costs associated with the retirement of the joint
venture debt were inappropriately recorded as deferred financing costs of the
new debt and amortized using a seven year life. As a result, interest expense
was overstated by approximately $0.8 million for each of the three-month periods
ended June 30, 2004 and 2003, and by approximately $1.6 million and $1.5 million
for the six-month periods ended June 30, 2004 and 2003, respectively, and
depreciation was understated by approximately $0.2 million per quarter.
- - Depreciation of Certain Rigs Constructed or Acquired in 1999. In 1999, the
Company completed construction of its two deepwater drillships, the Pride Africa
and Pride Angola. During 2004, the Company enhanced its balance sheet
reconciliation process and identified certain costs in its intercompany accounts
and construction-in-process accounts that related to the construction period,
which should have been included in fixed assets and depreciated beginning in
1999. Also in 1999, the Company, through a 51.0% owned joint venture, acquired
the Pride Cabinda in a transaction whereby the Company funded 45.0% percent of
the purchase price and entered into a lease agreement for the unfunded portion
of the purchase price. The Company depreciated 45.0% of the book value of the
Pride Cabinda and recorded the finance charges associated with the lease
agreement as operating costs rather than recording and depreciating the full
cost of the rig. The result of these errors was to understate depreciation
expense by approximately $0.1 million per quarter, understate interest expense
and overstate operating expenses by approximately $0.2 million for the
three-month period ended June 30, 2003, and by approximately $0.5 million for
the six-month period ended June 30, 2003, and overstate minority interest by
$0.1 million per quarter.
- - Rig Transfers. During 2004, the Company completed a review of depreciation
expense and detected errors in the calculation of depreciation associated with
rigs that were transferred between operating segments and had spent time in the
shipyard before arriving at the new location. In each case, the Company had
recorded an adjustment, after the rig re-entered service, to properly state the
cumulative depreciation. These errors resulted in the overstatement
(understatement) of depreciation for the three-month period ended June 30, 2003
and the six-month periods ended June 30, 2004 and 2003 of approximately $(1.2)
million, $0.7 million, and $(0.7) million, respectively.
- - Error in 2002 Tax Provision. During the fourth quarter of 2004, the
Company received a tax assessment associated with a 2002 tax return and
performed a review of the Company's provision for the item at issue with the tax
authority. Based on this review, the Company determined that it had
miscalculated the tax provision and related penalties and interest resulting in
an understatement of tax expense for the three-month and six-month periods ended
June 30, 2004 and 2003 of approximately $0.2 million, $0.2 million, $0.3 million
and $0.4 million, respectively.
- - Adjustments to Certain Accounts Payable Accounts. During 2003, the Company
completed the reconciliation of certain vendor accounts and determined that it
had over-accrued certain invoices. The Company reversed this over-accrual in the
fourth quarter of 2003 without considering the periods impacted by the
over-accruals. The result of this error was to overstate operating expenses for
the three-month and six-month periods ended June 30, 2003 by $2,000 and $13,000,
respectively.
- - Interest rate collars and caps. During the second quarter of 2003, the
Company understated its losses by approximately $0.4 million on interest rate
collars and caps associated with its senior secured term loan that was retired
during the third quarter of 2004. This error was corrected during the fourth
quarter of 2003, which caused an overstatement of losses during the quarter.
17
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The errors noted above, including the error in the 2002 tax provision,
resulted in the overstatement (understatement) of the tax provision for the
three-month and six-month periods ended June 30, 2004 and 2003 of $(0.2)
million, $0.1 million, $(0.6) million and $(25,000), respectively.
The determination to restate these financial statements was approved by
the audit committee of the Company's board of directors upon the recommendation
of the Company's senior management.
The following summarizes the effect of the restatements for each period:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Acquisition of joint venture interest.......... $ (209) $ (209) $ (418) $ (416)
Depreciation of certain rigs constructed
or acquired in 1999.......................... (73) 147 (146) 305
Rig transfers.................................. - (1,164) 673 (732)
Adjusted to certain accounts payable accounts.. - 2 - 13
------- -------- ------- --------
Net adjustments to earnings from operations.... (282) (1,224) 109 (830)
Net adjustments to interest expense............ 805 171 1,583 692
Net adjustment to tax provision................ (161) 58 (557) (25)
Net adjustment to minority interest............ 92 92 184 184
------- -------- ------- --------
Net adjustments to income from
continuing operations........................ $ 454 $ (903) $ 1,319 $ 21
======= ======== ======= ========
18
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables compare selected financial data as restated with the
previously reported amounts for each period. The operating results, as reported,
have been revised to include reclassifications of certain costs from general and
administrative to operating costs (See Note 1), and the classification of the
operations of the Company's fixed-fee construction line of business as
discontinued operations (See Note 2).
SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
-------------- -------------- -------------- ------------
AS AS AS AS AS AS AS AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004
Revenues............................. $ 424,028 $ 424,028 $ 383,438 $ 383,438 $ 827,703 $ 827,703 $ 727,738 $ 727,738
Operating costs...................... 277,200 277,200 251,340 251,118 550,890 550,890 477,274 476,810
Depreciation and amortization........ 66,167 66,449 60,409 61,855 132,504 132,395 122,151 123,445
Earnings from operations............. 60,512 60,230 58,394 57,170 111,683 111,792 105,326 104,496
Interest expense..................... (29,929) (29,124) (34,187) (34,016) (60,516) (58,933) (68,566) (67,874)
Income from continuing operations....
before income taxes and minority
interest............................ 31,846 32,369 30,382 29,329 51,310 53,002 39,689 39,551
Income tax provision................. 19,487 19,648 13,906 13,848 29,219 29,776 16,194 16,219
Minority interest.................... 4,570 4,478 4,166 4,074 10,507 10,323 9,427 9,243
Income from continuing operations.... 7,789 8,243 12,310 11,407 11,584 12,903 14,068 14,089
Income (loss) on discontinued
operations.......................... (5,267) (5,267) (30,483) (30,483) (15,827) (15,827) (28,260) (28,260)
Net earnings (loss).................. 2,522 2,976 (18,173) (19,076) (4,243) (2,924) (14,192) (14,171)
Earnings (loss) per share:
Basic
Income from continuing operations.. $ 0.06 $ 0.06 $ 0.09 $ 0.09 $ 0.09 $ 0.10 $ 0.10 $ 0.10
Discontinued operations............ (0.04) (0.04) (0.23) (0.23) (0.12) (0.12) (0.21) (0.21)
Net earnings (loss)................ 0.02 0.02 (0.14) (0.14) (0.03) (0.02) (0.11) (0.11)
Diluted
Income from continuing operations.. $ 0.06 $ 0.06 $ 0.09 $ 0.08 $ 0.08 $ 0.09 $ 0.10 $ 0.10
Discontinued operations............ (0.04) (0.04) (0.20) (0.20) (0.11) (0.11) (0.19) (0.19)
Net earnings (loss)................ 0.02 0.02 (0.11) (0.12) (0.03) (0.02) (0.09) (0.09)
SELECTED CONSOLIDATED BALANCE SHEET DATA:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
(IN THOUSANDS)
Total current assets................. $ 749,363 $ 745,103 $ 726,924 $ 722,831
Property and equipment, net.......... 3,387,830 3,405,813 3,446,331 3,463,300
Other assets, net.................... 84,556 72,095 102,177 87,966
Total assets......................... 4,326,635 4,327,897 4,378,430 4,377,095
Accrued expenses..................... 263,293 263,293 261,055 260,150
Other long-term liabilities.......... 37,239 39,949 54,423 56,811
Deferred income taxes................ 57,780 58,097 59,378 59,460
Minority interest.................... 103,476 101,316 102,969 100,993
Retained earnings.................... 440,638 441,033 444,881 443,957
Total liabilities and stockholders'
equity............................. 4,326,635 4,327,897 4,378,430 4,377,095
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Pride International,
Inc.:
We have reviewed the accompanying consolidated balance sheet of Pride
International, Inc. and subsidiaries as of June 30, 2004, and the related
consolidated statement of operations for the three-month and six-month periods
ended June 30, 2004 and 2003 and consolidated statement of cash flows for the
six-month periods ended June 30, 2004 and 2003. These interim financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2003, and the related consolidated statements of
operations, of stockholders' equity, and of cash flows for the year then ended
(not presented herein) and in our report dated March 25, 2005 (which contains an
explanatory paragraph stating that the Company has restated its 2003 and 2002
consolidated financial statements), we expressed an unqualified opinion on those
consolidated financial statements in a report that also included an explanatory
paragraph referring to a change in accounting principle for variable interest
entities. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2003 is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
As discussed in Note 12, the Company restated its consolidated interim
financial statements as of June 30, 2004 and for each of the three-month and
six-month periods ended June 30, 2004 and 2003.
PricewaterhouseCoopers LLP
Houston, Texas
August 6, 2004, except for the matters discussed
in Note 2 and Note 12, as to which the date is March 25, 2005
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the accompanying unaudited consolidated financial statements as of June 30, 2004
and for the three and six months ended June 30, 2004 and 2003 included elsewhere
herein, and with our Annual Report on Form 10-K for the year ended December 31,
2003. The following information contains forward-looking statements. Please read
"Forward-Looking Statements" below for a discussion of certain limitations
inherent in such statements. Please also read "Risk Factors" in Item 1 of our
annual report for a discussion of certain risks facing our company.
RESTATEMENT
We restated our consolidated financial information for 2003, 2002, 2001
and 2000 in our annual report on Form 10-K for the year ended December 31, 2004
to correct certain errors related primarily to transactions initially recorded
in periods from 1999 to 2002, but affecting periods from 1999 through 2004. The
errors relate to adjustments to the 2001 acquisition of the interest we did not
own in the Pride Carlos Walter and Pride Brazil and the calculation of charges
associated with the subsequent refinancing of the debt; under- and
over-depreciation of certain rigs constructed or acquired in 1999; depreciation
related to rig transfers; the recording of the foreign exchange calculation of
the inventory valuation in Colombia in 1999; an error in a tax provision in
2002; a net gain reported in 2000 resulting from a casualty loss in 1999; and
adjustments related to the reconciliation of certain accounts payable and the
reclassification of certain finance charges. The cumulative effect of the errors
resulted in an increase in income from continuing operations for the three-month
period ended June 30, 2004 of approximately $0.5 million, a decrease in income
from continuing operations for the three-month period ended June 30, 2003 of
approximately $0.9 million, and an increase in income from continuing operations
for the six-month periods ended June 30, 2004 and 2003 of approximately $1.3
million and $21,000, respectively. Please read note 12 of the notes to our
unaudited consolidated financial statements for more information related to the
restatement.
RECLASSIFICATION AND DISCONTINUED OPERATIONS
The operating results also include the reclassification of certain costs
from general and administrative to operating costs. We have also reclassified
the results of our former Technical Services segment by classifying (a) our
fixed fee rig construction business as discontinued operations and (b) the
remaining revenues and costs for Technical Services activities to our corporate
and other segment. Please read notes 1 and 2 of the notes to our unaudited
consolidated financial statements for more information related to the
reclassifications.
OVERVIEW
We provide contract drilling and related services to oil and gas companies
worldwide, operating both offshore and on land. As of June 30, 2004, we operated
a global fleet of 328 rigs, including two ultra-deepwater drillships, 11
semisubmersible rigs, 35 jackup rigs, 31 tender-assisted, barge and platform
rigs and 249 land-based drilling and workover rigs. We operate in more than 30
countries and marine provinces.
In January 2004, we reorganized our reporting segments to achieve a more
rational geographic distribution and to establish better defined lines of
accountability and responsibility for the sectors of our business. We now have
five principal segments: Eastern Hemisphere, which comprises our offshore and
land drilling activity in Europe, Africa, the Middle East, Southeast Asia,
Russia and Kazakhstan; Western Hemisphere, which comprises our offshore drilling
activity in Latin America, currently Brazil, Mexico and Venezuela; U.S. Gulf of
Mexico, which comprises our U.S. offshore platform and jackup rig fleets; Latin
America Land; and E&P Services.
The markets for our drilling, workover and related E&P services are highly
cyclical. Variations in market conditions during the cycle impact us in
different ways depending primarily on the length of drilling contracts in
different regions. Contracts in the U.S. Gulf of Mexico, for example, tend to be
short-term, so a deterioration or improvement in market conditions tends to
impact our operations quickly. Contracts in our Eastern and Western Hemisphere
segments tend to be longer term. Accordingly, short-term changes in market
conditions may have little
21
or no impact on our revenues and cash flows from those operations unless the
market changes occur during a period when we are attempting to renew a number of
those contracts.
In late 2001, we commenced the first of four major deepwater platform rig
construction projects. The rigs are being constructed on behalf of two major oil
company customers under lump-sum contracts. As previously reported, we have
experienced significant cost overruns on these projects, and we estimate that
total costs on each of the four projects will substantially exceed contract
revenues. Accordingly, in 2003 we recorded provisions for losses on these
projects totaling $98.4 million. During the first and second quarter of 2004, we
recorded additional loss provisions on these projects totaling $21.3 million and
$10.5 million, respectively. The additional losses in the second quarter of 2004
resulted from a revision of previous estimates due principally to completion
issues at the shipyard constructing the final two rigs and renegotiations of
commercial terms with certain shipyards, equipment vendors and other
subcontractors.
In July 2004, we completed a private offering of $500 million principal
amount of 7 3/8% Senior Notes due 2014 and entered into new senior secured
credit facilities with aggregate availability of up to $800 million, consisting
of a $300 million term loan and a $500 million revolving credit facility. The
net proceeds from these transactions were used to retire existing indebtedness.
In April 2004, we completed a refinancing of our drillship loan facilities
through our consolidated joint venture company that owns our ultra deepwater
drillships the Pride Africa and the Pride Angola. The new drillship credit
facility provides for a total credit commitment of $301.4 million, of which a
$278.9 million term loan was funded at closing. The remaining $22.5 million
commitment of the drillship credit facility is expected to be drawn in August
2004. Funds at closing, together with $15.4 million of previously restricted
cash, were used to (i) refinance the outstanding principal balance on the prior
drillship loans of $172.6 million, (ii) repay $103.6 million of loans due from
the joint venture company to us, (iii) repay $10.0 million of indebtedness of
the joint venture company to the joint venture partner, and (iv) pay loan
transaction costs of $3.1 million. The funds paid to us were used to reduce our
other outstanding debt and improve liquidity.
SEGMENT REVIEW
EASTERN HEMISPHERE
Our Eastern Hemisphere segment currently comprises two ultra-deepwater
drillships, three semisubmersible rigs, eight jackup rigs, six tender assisted
and barge rigs, 21 land rigs and two rigs managed for other parties. We expect
revenues and earnings from operations for our Eastern Hemisphere segment to be
lower in 2004 than in 2003 primarily due to the weaker market conditions in the
West African deepwater semisubmersible market and to the Pride Africa undergoing
its special periodic survey.
Drillships. Our two ultra-deepwater drillships, the Pride Africa and Pride
Angola, are working under contracts that were extended in December 2003 by an
aggregate of ten years, commencing at the end of the contracts' current terms in
June 2005 and May 2005, respectively. The Pride Africa is scheduled to undergo
its five-year special periodic survey in the fourth quarter of 2004 and is
expected to be out of service for approximately 45 days.
Semisubmersibles. The Eastern Hemisphere market for semisubmersibles
remains relatively weak. For the deepwater semisubmersibles operating in West
Africa, we succeeded in obtaining a new six-month contract for the Pride South
Pacific when its previous contract expired in April 2004, although at a
substantially lower dayrate. The Pride North America working in Angola, which
was scheduled to complete its current contract in August 2004, has recently
received an extension through August 2005. The Pride North Sea was fully
utilized during the first six months of 2004. A new contract for the rig has
been obtained for a period of 300 days commencing in October 2004. We believe
that market conditions for semisubmersibles will improve in 2005 as development
drilling commences on a number of major oil discoveries.
Jackups. The market for jackups is presently improving. The Pride Montana
operating in Saudi Arabia began a new three year contract in June 2004. The
Pride Ohio operating in the Middle East will begin a new three year contract in
September following the completion of a special periodic survey and scheduled
maintenance. The Pride Pennsylvania underwent its special periodic survey and
was not receiving its contract day rate for 80 days during the
22
first quarter and an additional 12 days at the start of the second quarter of
2004. We have experienced disruptions with the local laborers on the Pride North
Dakota in Nigeria, which have idled the rig since late July 2004. We anticipate
that the Pride North Dakota will return to operations during the third quarter
of 2004. The remaining jackup rigs are operating pursuant to long term contracts
for the remainder of the year.
Tender-assisted and Barge Rigs. We recently acquired the ownership
interest in the tender-assisted rig Al Baraka I that we did not already own. The
Al Baraka I will be in the shipyard for the remainder of the year to complete a
special periodic survey and upgrades and is scheduled to begin a new contract in
January 2005 in the Ivory Coast. The tender-assisted rig Alligator working in
Angola started a two year contract in June 2004. The tender-assisted rigs
Barracuda, operating in Angola, and Ile de Sein, operating in Indonesia, have
contracts expiring in August and December 2004, respectively, and the swamp
barge Bintang Kalimantan's contract in Nigeria expires in October 2004. We are
currently evaluating opportunities for each of these rigs, and expect that they
will experience some idle time prior to being re-contracted.
Land Rigs. We anticipate nearly full utilization of the five land rigs
working in Chad, four rigs in Oman, one rig operating in France, and the rig
operating in Pakistan. We expect one of our two large land rigs in Kazakhstan to
work throughout the 2004 drilling season. In July 2004, the other rig completed
its contract and is currently idle. The remainder of the land rigs are also
idle.
WESTERN HEMISPHERE
We currently have seven semisubmersible rigs, 14 jackup rigs, three
platform rigs, two lake barge rigs and three managed rigs in our Western
Hemisphere segment. Revenue and income from operations for our Western
Hemisphere segment for the first half of 2004 were higher than the corresponding
period in 2003 primarily due to the mobilization of a semisubmersible rig, five
jackup rigs, and a platform rig to Mexico from the U.S. Gulf of Mexico fleet
during the second half of 2003, partially offset by somewhat higher downtime of
our high-specification semisubmersible rigs working offshore Brazil, and the
completion of the contract for the Pride Venezuela. Revenues and gross margins
from our Western Hemisphere operations for all of 2004 are expected to exceed
those for 2003 due to the impact of a full year of activity in Mexico for rigs
transferred from our U.S. Gulf of Mexico rig fleet during 2003 and higher
operating efficiency for our semisubmersible rigs in Brazil. In addition, the
timing and terms under which the Pride Venezuela and the two deepwater
semisubmersible rigs nearing completion, the Pride Rio de Janeiro and the Pride
Portland, are contracted could have a significant impact on our results.
Semisubmersibles. The current Western Hemisphere market for intermediate
water-depth semisubmersible rigs is very weak. However, we were able to mobilize
the Pride Mexico to Mexico in late 2003 to begin a contract expiring in April
2007. The Pride Venezuela has been warm stacked in Trinidad throughout the first
six months of 2004. The Pride South Atlantic operating in Brazil is working on a
series of one-well contracts for four independent operators which we expect to
fully utilize the rig through September 2004. The independent operators have
options for additional wells. We are actively marketing the Pride Venezuela for
work later this year and marketing the Pride South Atlantic for work after
September 2004. The remainder of the Western Hemisphere semisubmersible fleet is
operating under long-term contracts that are expected to keep the rigs working
for the remainder of the year.
Jackups, Platforms and Lake Barges. The Western Hemisphere fleet of 14
jackup and three platform rigs are working in Mexico under long-term contracts.
We also continue to manage two jackup rigs and one barge in Venezuela on a
well-to-well basis, and two lake barges operating in Venezuela are contracted
through the end of 2004.
U.S. GULF OF MEXICO
Our rig fleet in the U.S. Gulf of Mexico segment currently comprises 11
jackup rigs and 19 platform rigs. During the first six months of 2004, demand
for drilling services in the U.S. Gulf of Mexico continued to improve, resulting
in higher revenue and income from operations. Market conditions have improved
due to the reduction in the supply of rigs as a number of rigs leaving the U.S.
sector of the Gulf of Mexico for other markets.
Jackups. We currently have seven jackups working in the U.S. Gulf of
Mexico with an average daily revenue of approximately $30,000 as compared with
six jackups working at an average of $24,000 per day as of June 30,
23
2003. While the U.S. Gulf of Mexico continues to be primarily a spot market, we
were able, due to improved market conditions, to contract the Pride New Mexico
and the Pride Arizona under one year contracts commencing May 2004 and June
2004, respectively.
Platforms. We currently expect to have seven of our platform rigs working
for the balance of the year. We recently commenced operations of a deepwater
platform rig which we constructed on behalf of a customer. We expect to commence
operations of a second deepwater platform rig on behalf of the customer in the
fourth quarter of 2004.
LATIN AMERICA LAND
The Latin America Land segment currently comprises 228 land drilling and
workover rigs operating in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico
and Venezuela. During the first six months of 2004, we experienced increased
land drilling activity in Argentina and Venezuela, where our active rig fleets
increased by seven rigs to 137 rigs and five rigs to 28 rigs, respectively. We
experienced a combined reduction of four active rigs in Colombia and Bolivia, of
which two have now been moved from Bolivia to Argentina.
The outlook for our Latin America Land segment looks positive for the
remainder of 2004. We expect high levels of activity in Argentina, Venezuela and
Colombia to continue, which we expect will offset a reduction of activity in
Ecuador and Bolivia.
E&P SERVICES
Our E&P Services segment currently operates in eight countries in Latin
America and provides cementing, stimulation, carbon dioxide, coiled tubing and
production services in addition to directional and under-balanced drilling. We
are also providing integrated services in Argentina, Ecuador and Venezuela, as
well as offshore services in Brazil, Venezuela and Mexico.
During the first six months of 2004, business activity and revenues
continued to increase due to increased activity in Mexico and Brazil as well as
to a high level of integrated services work in Argentina. We anticipate business
activity in our E&P Services segment will continue to improve during the
remainder of 2004 as the business continues to expand.
TECHNICAL SERVICES
The operations of the Technical Services segment are concentrated on
completing the final of four rigs pursuant to lump-sum contracts to design,
engineer, manage construction of and commission specialized drilling rigs for
two of our significant customers. The first rig was completed and delivered in
2003, the second rig was completed and delivered in the second quarter of 2004,
and the third rig was completed in the second quarter of 2004 and delivered
early in the third quarter of 2004. The final rig has been loaded on a
heavy-lift vessel for shipment to the customer's platform construction site for
integration into the unit. Our commissioning of the rig is expected to continue
until the platform is completed and delivered in the first quarter of 2005.
We have experienced significant cost overruns on these projects, and we
estimate that total costs on each of the four projects will substantially exceed
contract revenues. Accordingly, in 2003 we recorded provisions for losses on
these projects totaling $98.4 million. During the first and second quarter of
2004, we recorded additional loss provisions on these projects totaling $21.3
million and $10.5 million, respectively. The additional losses in the second
quarter of 2004 resulted from a revision of previous estimates and were due
principally to recent scheduling issues at the shipyard constructing the final
rig and commercial negotiations with certain equipment vendors and major
subcontractors. A variety of events could require us to revise our estimates and
could result in further cost overruns to complete these projects, which could be
material and which would require us to record additional loss provisions. Such
events could include variations in labor and equipment productivity over the
remaining construction period, unanticipated cost increases, engineering
changes, shipyard or systems problems, project management issues, shortages of
equipment, materials or skilled labor, weather delays, unscheduled delays in the
delivery of ordered materials and equipment, work stoppages, shipyard
unavailability or other delays. We do not currently intend to enter into
additional business of this nature.
24
Historically, we reported a technical services segment which included our
fixed-fee rig construction business, consulting services provided to customers,
managing special periodic surveys and shipyard work for our fleet. Due to the
discontinuance of our fixed-fee rig construction business, this business was
classified as discontinued operations. The revenues and costs for engineering
and management consulting services provided to our customers are now included as
part of our corporate and other activities for reporting purposes. The costs
associated with managing special periodic surveys and shipyard work for our
fleet are now reported in the operating segment managing the rig. As a result,
we no longer report construction operations as a separate technical services
segment.
For the three-month periods and six-month periods ended June 30, 2004 and
2003, we had a loss on discontinued operations of $5.3 million, $30.5 million,
$15.8 million and $28.3 million, respectively. Sales revenue and operating costs
decreased for the 2004 periods compared to the 2003 periods as the rigs'
construction was nearer to completion.
RESULTS OF OPERATIONS
The following table sets forth selected consolidated financial information
by reporting segment for the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 (1) 2004 2003 (1)
----------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
Revenues:
Eastern Hemisphere............ $ 140,788 $ 149,070 $ 283,759 $ 291,220
Western Hemisphere............ 116,673 89,801 225,834 175,053
U.S. Gulf of Mexico........... 30,199 21,342 57,219 39,584
Latin America Land............ 94,858 89,262 183,818 162,361
E & P services................ 33,064 32,526 67,288 57,163
Corporate and other........... 8,446 1,437 9,785 2,357
---------- ---------- ---------- ---------
Total.................. $ 424,028 $ 383,438 $ 827,703 $ 727,738
========== ========== ========== =========
Earnings (loss) from operations:
Eastern Hemisphere............ $ 40,522 44,253 $ 78,735 $ 86,632
Western Hemisphere............ 30,568 22,585 52,588 49,247
U.S. Gulf of Mexico........... (2,097) (9,411) (6,624) (24,268)
Latin America Land............ 4,326 7,315 5,769 10,612
E & P services................ 1,686 2,672 4,526 3,805
Corporate and other........... (14,775) (10,244) (23,202) (21,532)
---------- ---------- ---------- ---------
Total.................. $ 60,230 $ 57,170 $ 111,792 $ 104,496
========== ========== ========== =========
(1) The consolidated financial information by reporting segment for the three
months and the six months ended June 30, 2003 has been restated to reflect our
new reporting segments and to reflect the retroactive adoption of FIN No. 46R,
"Consolidation of Variable Interest Entities."
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Revenues. Revenues for the three months ended June 30, 2004 increased
$40.6 million, or 10.6%, to $424.0 million as compared to the three months ended
June 30, 2003. The increase was primarily due to our Western Hemisphere
segment's increased activity offshore Mexico, improved dayrates and utilization
of the jackup and platform fleet in the U.S. Gulf of Mexico, and improved rig
activity in our Latin America Land segment. These increases in revenues were
partially offset by revenue declines in the Eastern Hemisphere segment due to
the weak market for semisubmersible rigs and resulting lower dayrates.
25
Operating Costs. Operating costs for the three months ended June 30, 2004
increased $26.1 million, or 10.4%, to $277.2 million as compared to the three
months ended June 30, 2003. The increase was due to our Western Hemisphere
segment's increased activity offshore Mexico, improved utilization of the jackup
and platform fleet in the U.S. Gulf of Mexico, and improved rig activity in our
Latin America Land segment. These increases in costs were partially offset by
cost declines in Eastern Hemisphere due to lower utilization results from the
weak market for semisubmersible rigs.
Depreciation and Amortization. Depreciation expense for the three months
ended June 30, 2004 increased $4.6 million, or 7.4%, to $66.4 million as
compared to the three months ended June 30, 2003, due principally to incremental
depreciation on upgrades for rigs relocated to Mexico and to other rig
refurbishments and upgrades in late 2003 and in 2004.
General and Administrative. General and administrative expenses for the
three months ended June 30, 2004 increased $7.5 million, or 58.0%, as compared
to the three months ended June 30, 2003. The increase was due primarily to
increased audit and other professional fees due to Sarbanes-Oxley Act compliance
and other projects, and increases in staffing due to an increase in business
activity.
Other Income (Expense). Other expense for the three months ended June 30,
2004 and 2003 was $27.9 million. Interest expense decreased by $4.9 million from
the 2003 period to the 2004 period due principally to a reduction in the
weighted average interest rate of our debt as a result of debt refinancings in
the last half of 2003 and the first half of 2004. Other income, net in the
quarter ended June 30, 2004 consisted mostly of net foreign exchange gains.
Other income, net in the corresponding period in 2003 principally consisted of
net foreign exchange gains on our euro and Venezuelan bolivar denominated net
monetary assets.
Income Tax Provision. Our consolidated effective income tax rate for the
three months ended June 30, 2004 was 60.7% as compared to 47.2% for the
corresponding period in 2003. The higher rate for the three months ended June
30, 2004 is principally the result of an increase in expected taxable income for
2004 in high effective tax rate countries in Latin America and lower net income
in foreign jurisdictions with low or zero effective tax rates.
Minority Interest. Minority interest in the three months ended June 30,
2004 increased $0.4 million, or 9.9%, as compared to the three months ended June
30, 2003, primarily due to the commencement of operations of the Kizomba A
deepwater platform rig. That rig is being operated by our Angolan joint venture
in West Africa in which we have a 51% interest.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Revenues. Revenues for the six months ended June 30, 2004 increased $100.0
million, or 13.7%, to $827.7 million as compared to the six months ended June
30, 2003. The increase was primarily due to our Western Hemisphere segment's
increased activity offshore Mexico, improved dayrates and utilization of the
jackup and platform rig fleets in the U.S. Gulf of Mexico, improved rig activity
in our Latin America Land segment, and the growth of the E&P Services segment.
These increases in revenues were partially offset by revenue declines in the
Eastern Hemisphere due to the weak market for semisubmersible rigs and resulting
lower dayrates.
Operating Costs. Operating costs for the six months ended June 30, 2004
increased $74.1 million, or 15.5%, to $550.9 million as compared to the six
months ended June 30, 2003. The increase was due primarily to our Western
Hemisphere segment's increased activity offshore Mexico, improved utilization of
the jackup and platform fleet in the U.S. Gulf of Mexico, improved rig activity
in our Latin America Land segment, and the growth of the E&P Services segment.
These increases in costs were partially offset by cost declines in the Eastern
Hemisphere due to the lower utilization resulting from weak market for
semisubmersible rigs.
Depreciation and Amortization. Depreciation expense for the six months
ended June 30, 2004 increased $9.0 million, or 7.3%, to $132.4 million as
compared to the six months ended June 30, 2003. The increase was due primarily
to incremental depreciation on upgrades for rigs relocated to Mexico and to
other rig refurbishments and upgrades in late 2003 and 2004.
26
General and Administrative. General and administrative expenses for the
six months ended June 30, 2004 increased $10.5 million, or 46.4%, to $33.0
million as compared to the six months ended June 30, 2003. The increase was due
primarily to increased audit and other professional fees due to Sarbanes-Oxley
Act compliance and other projects, and increases in staffing due to an increase
in business activity.
Other Income (Expense). Other expense for the six months ended June 30,
2004 decreased by $6.2 million, or 9.5%, as compared to the six months ended
June 30, 2003. Interest expense decreased by $8.9 million from the 2003 period
to the 2004 period due principally to a reduction in the weighted average
interest rate of our debt as a result of debt refinancings in the last half of
2003 and the first half of 2004. Other expense, net in the six months ended June
30, 2004 consisted mostly of net foreign exchange losses, primarily in
Venezuela. Other income, net in the corresponding period in 2003 principally
consisted of net foreign exchange gains.
Income Tax Provision. Our consolidated effective income tax rate for the
six months ended June 30, 2004, was 56.2% as compared to 41.0% for the same
period in 2003. The higher rate for the six months ended June 30, 2004 is a
result of the factors discussed above for the three months ended June 30, 2004.
We estimate that the 2004 effective income tax rate for the entire year
will be approximately 85 to 90 percent. The effective tax rate for the full year
is higher than for the first half of 2004 due primarily to a debt retirement
charge in connection with our July refinancing transactions of approximately
$31.0 million, before taxes, as described in note 11 of the notes to
consolidated financial statements included in Item 1 of this quarterly report.
Since the debt retirement occurred in the third quarter of 2004, we will record
the entire amount of the charge and the related tax benefit in that quarter,
which is expected to result in an unusually high effective tax rate in the third
quarter.
Minority Interest. Minority interest in the six months ended March 31,
2004 increased $1.1 million, or 11.7%, as compared to the six months ended June
30, 2003, primarily due to the commencement of operations of the Kizomba A
deepwater platform rig. That rig is being operated by our Angolan joint venture
in West Africa in which we have a 51% interest.
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $144.4 million and $79.9 million as of June
30, 2004 and December 31, 2003, respectively. The increase in net working
capital was attributable primarily to increased accounts receivable and
decreased accounts payable and accrued interest expense, offset in part by the
use of cash to repay debt and to net cash outlays on rig construction projects
during the six months ended June 30, 2004 of approximately $70.0 million.
Sources of Cash
We currently have senior secured credit facilities with a group of banks
and institutional lenders providing for aggregate availability of up to $800.0
million, consisting of a $300.0 million term loan maturing in July 2011 and a
$500.0 million revolving credit facility maturing in July 2009. Borrowings under
the revolving credit facility are available for general corporate purposes. We
may obtain up to $100.0 million of letters of credit under the facility. As of
July 31, 2004, $130.0 million of borrowings and an additional $29.3 million of
letters of credit were outstanding under the revolving credit facility. Amounts
drawn under the facilities bear interest at variable rates based on LIBOR plus a
margin or prime rate plus a margin. The interest rate margin will vary based on
our leverage, except that the LIBOR margin for the term loan is fixed at 1.75%.
As of July 31, 2004, the interest rates on the term loan and revolving credit
facility were 3.34% and 3.50%, respectively, and availability under the
revolving credit facility was approximately $340.7 million.
We may prepay the term loan at any time without penalty. In addition, we
are required to prepay the term loan and, in certain cases, the revolving loans
with the proceeds from (1) asset sales or casualty events (with some
exceptions), (2) certain extraordinary events such as tax refunds, indemnity
payments and pension reversion proceeds if availability under the new revolving
credit facility plus our unrestricted cash is less than $200 million and (3)
future debt issuances not permitted by the credit facilities. The senior secured
credit facilities are secured by first priority liens on certain of our
subsidiaries' existing and future rigs, accounts receivable, inventory and
related insurance, all of the equity of our subsidiary Pride Offshore, Inc., the
borrower under the facilities, and Pride
27
Offshore's domestic subsidiaries and 65% of the stock of certain of our foreign
subsidiaries. The senior secured credit facilities contain a number of covenants
restricting, among other things, prepayment, redemption and repurchase of our
indebtedness; distributions, dividends and repurchases of capital stock and
other equity interests; acquisitions and investments; asset sales; capital
expenditures; indebtedness; liens and affiliate transactions. The senior secured
credit facilities also contain customary events of default, including with
respect to a change of control.
In April 2004, we completed a refinancing of our drillship loan facilities
through our consolidated joint venture company that owns our ultra deepwater
drillships the Pride Africa and the Pride Angola. The new and expanded drillship
credit facility provides for a total credit commitment of $301.4 million, of
which a $278.9 million term loan was funded at closing. The remaining $22.5
million commitment of the drillship credit facility is expected to be drawn in
August 2004. Funds at closing, together with $15.4 million of previously
restricted cash, were used to (i) refinance the outstanding principal balance on
the prior drillship loans of $172.6 million, (ii) repay $103.6 million of loans
due from the joint venture company to us, (iii) repay $10.0 million of
indebtedness of the joint venture company to our joint venture partner, and (iv)
pay loan transaction costs of $3.1 million. The funds paid to us were used to
reduce our other outstanding debt and to improve liquidity. The new drillship
loan facility matures in September 2010 and amortizes semi-annually. The
drillship loan is non-recourse to us and the joint owner.
In July 2004, we completed a private offering of $500 million aggregate
principal amount of our 7 3/8% Senior Notes due 2014. Net proceeds to us (after
discounts but before other expenses) were $491.1 million. We are using the net
proceeds from the offering to retire $175 million aggregate principal amount of
our 9 3/8% Senior Notes due 2007 and $200 million aggregate principal amount of
our 10% Senior Notes due 2009, together with the applicable prepayment premium
and accrued and unpaid interest, and to retire other indebtedness.
In connection with the retirement of our 2007 notes and 2009 notes, we
commenced an offer to purchase the notes at 37.5 basis points over the
respective redemption prices described below. We purchased a total of $110.6
million aggregate principal amount of the 2007 notes and $127.6 million
aggregate principal amount of 2009 notes pursuant to the tender offer. The
remaining notes were redeemed on August 6, 2004 at redemption prices of 101.563%
of the principal amount of the 2007 notes and 105.000% of the principal amount
of the 2009 notes, in each case plus accrued and unpaid interest to the
redemption date.
The new notes contain provisions that limit our ability and the ability of
our subsidiaries to enter into transactions with affiliates; pay dividends and
make other restricted payments; incur debt and issue preferred stock; incur
dividend or other payment restrictions affecting our subsidiaries; sell assets;
engage in sale and leaseback transactions; create liens; and consolidate, merge
or transfer all or substantially all of our assets. Many of these restrictions
will terminate if the notes are rated investment grade by either Standard &
Poor's Ratings Services or Moody's Investors Service, Inc and, in either case,
the notes have a specified minimum rating by the other rating agency. We are
required to offer to repurchase the notes in connection with specified change in
control events that result in a ratings decline.
Rig Construction Projects
In 2003, we recorded a provision for expected losses on deepwater platform
rig construction projects of $98.4 million. During the first six months of 2004,
we recorded additional loss provisions totaling $31.8 million related to
expected losses on the deepwater platform rig construction projects. We expect
approximately $21.0 million of cash receipts from the projects after June 30,
2004 in excess of the cash outlays after that date to complete the projects,
which would positively impact liquidity for the remainder of 2004 and the first
nine months of 2005.
Capital Expenditures
Additions to property and equipment during the six months ended June 30,
2004 totaled $74.3 million and primarily related to sustaining capital projects
and to the $16.0 million purchase of the Al Baraka I tender-assisted drilling
rig. Capital expenditures for the remainder of 2004 are expected to be
approximately $72.5 million.
Contractual Obligations
28
As of June 30, 2004, we had approximately $4.3 billion in total assets and
$2.0 billion of long-term debt and capital lease obligations. Although we do not
expect that our level of total indebtedness will have a material adverse impact
on our financial position, results of operations or liquidity in future periods,
it may limit our flexibility in certain areas. Please read "Risk Factors -- We
may be considered highly leveraged. Our significant debt levels and debt
agreement restrictions may limit our liquidity and flexibility in obtaining
additional financing and in pursuing other business opportunities" in Item 1 of
our Annual Report on Form 10-K for the year ended December 31, 2003.
For additional information about our contractual obligations as of
December 31, 2003, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Contractual Obligations" in Item 7 of our Annual Report on Form 10-K for the
year ended December 31, 2003. As of June 30, 2004, there were no material
changes to such disclosure regarding our contractual obligations made in the
annual report.
Investment in Joint Venture
We own 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 the Pride Rio de Janeiro.
The Pride Portland is currently in Curacao undergoing final commissioning, and
the Pride Rio de Janeiro is currently undergoing final commissioning in Brazil.
The joint venture company has financed the cost of construction of these rigs
through equity contributions and fixed rate notes, with repayment of the notes
guaranteed by the United States Maritime Administration ("MARAD"). The notes are
non-recourse to any of the joint venture owners, except that, in order to make
available an additional $21.9 million under the MARAD-guaranteed notes to fund
the project through the sea and drilling trial stage for each rig, we have
provided:
- a $25.0 million letter of credit to secure principal and interest
payments due under the notes, the payment of costs of removing or
contesting liens on the rigs and the payment of debt of the joint
venture company to MARAD in the event MARAD's guarantee is drawn;
- a guarantee of any cash in excess of the additional $21.9 million
required to get the rigs through the sea and drilling trial stage
and obtain their class certificates; and
- a guarantee of the direct costs of the voyage of each rig from any
foreign jurisdiction in which it is located to a U.S. Gulf port
nominated by MARAD in the event of a default prior to the rig
obtaining a charter of at least three years in form and substance
satisfactory to MARAD and at a rate sufficient to pay operating
costs and debt service.
Our joint venture partner has agreed to reimburse us its proportionate
share of any draws under the letter of credit or payments under the guarantees.
To secure those reimbursements, we had set-off rights against, and rights to
keep as collateral any payments on, our convertible senior notes held by the
joint venture partner. In July 2004, we repaid the notes and kept as collateral
$17.5 million of cash to cover the partner's proportionate share of draws, if
any, under the letter of credit.
We currently expect that funds in excess of the additional $21.9 million
will not be required to get the rigs through the sea and drilling trial stage
and obtain their class certificates. Additional funds may, however, be required.
Any additional funding is expected to be made by additional capital
contributions by the joint venture partners.
The cost of construction not funded under the MARAD-guaranteed notes is
being provided by the joint venture company from equity contributions that have
been made by the joint venture partners. Through June 30, 2004, our equity
investment in the joint venture totaled $35.9 million, including capitalized
interest of $7.9 million.
The Pride Portland and Pride Rio de Janeiro are being built to operate
under long-term contracts with Petrobras; however, Petrobras has given notice of
cancellation of those contracts for late delivery. Based on current demand for
deepwater drilling rigs, we believe that Petrobras or another customer will
employ the Pride Portland and Pride Rio de Janeiro under new or amended
contracts. There can be no assurance, however, that either the Pride Portland or
the Pride Rio de Janeiro will be contracted to Petrobras or to any other
customer. If no contract is
29
obtained before the rigs are commissioned, the rigs will be stacked. In this
case, the joint venture partners would need to advance further funds to the
joint venture company to allow it to pay stacking costs (estimated to be
approximately $1 million per rig per month) as well as principal and interest
payments on the debt as they become due since the joint venture company would
have no alternative source of funds to allow it to make such payments. Initial
interest and debt service payments in respect of construction debt for the two
rigs are expected to total approximately $23.0 million during 2004, of which our
30% share would be $6.9 million.
If the joint venture company failed to cover its debt service
requirements, a default would occur under the fixed rate notes guaranteed by
MARAD. MARAD would then be entitled to foreclose on the mortgages related to the
Pride Portland and the Pride Rio de Janeiro and take possession of the two rigs.
Other Sources and Uses of Cash
As of June 30, 2004, $47.8 million of our cash balances, which amount is
included in restricted cash, consisted of funds held in trust in connection with
our drillship and semisubmersible loans and, accordingly, was not available for
our use. We believe that the cash and cash equivalents on hand, together with
the cash generated from our operations and borrowings under our credit
facilities, will be adequate to fund normal ongoing capital expenditures,
working capital and debt service requirements for the foreseeable future.
We may redeploy additional assets to more active regions in 2004 if we
have the opportunity to do so on attractive terms; however, we expect fewer
opportunities for redeployments than in 2002 and 2003. From time to time, we
have one or more bids outstanding for contracts that could require significant
capital expenditures and mobilization costs. We expect to fund project
opportunities primarily through a combination of working capital, cash flow from
operations and borrowings under our revolving credit facilities.
In addition, we may consider from time to time opportunities to dispose of
certain assets or groups of assets when we believe the capital could be more
effectively deployed to reduce debt or for other purposes. We have engaged a
financial advisor to assist us in the possible sale of selected asset packages.
We have provided interested parties information about those asset packages and
are in the process of soliciting bids. There can be no assurance that we will
receive any bids for any of the asset packages or that any bids we do receive
will be acceptable to us. We expect to use any proceeds we receive from these
asset sales to repay debt.
In addition to the matters described in this "-- Liquidity and Capital
Resources" section, please read "-- Segment Review" for additional matters that
may have a material impact on our liquidity.
30
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements, other than statements of
historical fact, included in this quarterly report that address activities,
events or developments that we expect, project, believe or anticipate will or
may occur in the future are forward-looking statements. These include such
matters as:
- market conditions, expansion and other development trends in the
contract drilling industry
- our ability to enter into new contracts for our rigs and future
utilization rates and contract rates for rigs
- future capital expenditures and investments in the construction,
acquisition and refurbishment of rigs (including the amount and
nature thereof and the timing of completion thereof)
- estimates of profit or loss and cash flows from performance of
lump-sum rig construction contracts
- future asset sales
- completion and employment of rigs under construction
- repayment of debt
- utilization of net operating loss carryforwards and future effective
income tax rates
- business strategies
- expansion and growth of operations
- future exposure to currency devaluations or exchange rate
fluctuations
- expected outcomes of legal and administrative proceedings and their
expected effects on our financial position, results of operations
and cash flows
- future operating results and financial condition and
- the effectiveness of our disclosure controls and procedures and
internal control over financial reporting
We have based these statements on our assumptions and analyses in light of
our experience and perception of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including those described under "Risk Factors" in Item 1 of
our Annual Report on Form 10-K for the year ended December 31, 2003 and the
following:
- general economic business conditions
- prices of oil and gas and industry expectations about future prices
- cost overruns in our lump-sum construction and other turnkey
contracts
- adjustments in estimates affecting our revenue recognition under
percentage-of-completion accounting
- foreign exchange controls and currency fluctuations
- political stability in the countries in which we operate
31
- the business opportunities (or lack thereof) that may be presented
to and pursued by us
- changes in laws or regulations
- the validity of the assumptions used in the design of our disclosure
controls and procedures and
- our ability to implement in a timely manner internal control
procedures necessary to allow our management to report on the
effectiveness of our internal control over financial reporting
Most of these factors are beyond our control. We caution you that
forward-looking statements are not guarantees of future performance and that
actual results or developments may differ materially from those projected in
these statements.
32
ITEM 4. CONTROLS AND PROCEDURES
In connection with the original filing of our quarterly report on Form
10-Q, we carried out an evaluation, under the supervision and with the
participation of our management, including our President and Chief Executive
Officer and our Executive Vice President and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15
under the Securities Exchange Act of 1934 as of June 30, 2004. In the course of
this evaluation, management considered certain internal control areas in which
we made changes to improve and enhance controls. Based upon that evaluation, our
President and Chief Executive Officer and our Executive Vice President and Chief
Financial Officer concluded that, as of June 30, 2004, our disclosure controls
and procedures were effective, in all material respects, with respect to the
recording, processing, summarizing and reporting, within the time periods
specified in the SEC's rules and forms, of information required to be disclosed
by us in the reports that we file or submit under the Exchange Act.
Subsequent to that evaluation, management assessed the effectiveness of
our disclosure controls and procedures and internal control over financial
reporting as of December 31, 2004 as more fully described in Item 9A of our
annual report on Form 10-K for the year ended December 31, 2004. Based on that
assessment, management identified a material weakness in our internal controls.
We did not maintain effective controls over the communication among operating,
functional and accounting departments of financial and other business
information that is important to the period-end financial reporting process,
including the specifics of non-routine and non-systematic transactions.
Contributing factors included the large number of manual processes utilized
during the period-end financial reporting process and an insufficient number of
accounting and finance personnel to, in a timely manner, (1) implement extensive
structural and procedural system and process initiatives during 2004, (2)
perform the necessary manual processes and (3) analyze non-routine and
non-systematic transactions. As a result of the material weakness, our President
and Chief Executive Officer and our Executive Vice President and Chief Financial
Officer concluded that (1) our disclosure controls and procedures were not
effective, as of December 31, 2004, with respect to the recording, processing,
summarizing and reporting, within the time periods specified in the SEC's rules
and forms, of information required to be disclosed by us in the reports that we
file or submit under the Exchange Act and (2) we did not maintain effective
internal control over financial reporting as of December 31, 2004 based on
criteria set forth in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organization of the Treadway Commission.
In light of our decision to restate our financial statements and the
identification of a material weakness, we carried out a further evaluation,
under the supervision and with the participation of our management, including
our President and Chief Executive Officer and our Executive Vice President and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as
of June 30, 2004. Based upon that evaluation, our President and Chief Executive
Officer and our Executive Vice President and Chief Financial Officer have
concluded that, as a result of the material weakness, our disclosure controls
and procedures were not effective, as of June 30, 2004, with respect to the
recording, processing, summarizing and reporting, within the time periods
specified in the SEC's rules and forms, of information required to be disclosed
by us in the reports that we file or submit under the Exchange Act.
As disclosed in our annual report on Form 10-K for the year ended December
31, 2003 and our quarterly report on Form 10-Q for the quarter ended March 31,
2004, we made significant changes in our internal control over financial
reporting in 2003 and through the date of those reports. There were no changes
in our internal control over financial reporting that occurred during the
quarter ended June 30, 2004 that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
33
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits*
+10.1 Employment/Non-Competition/Confidentiality Agreement dated June 10, 2004
between Pride and Lonnie D. Bane
+10.2 Employment/Non-Competition/Confidentiality Agreement dated June 2, 2004
between Pride and Steven D. Oldham
+10.3 Employment/Non-Competition/Confidentiality Agreement dated June 2, 2004
between Pride and Douglas G. Smith
+10.4 Employment/Non-Competition/Confidentiality Agreement dated July 1, 2004
between Pride and Mario Kricorian
+10.5 Pride International, Inc. 2004 Directors' Stock Incentive Plan
(incorporated by reference to Appendix C to Pride's Proxy Statement on
Schedule 14A for the 2004 Annual Meeting of Stockholders, File No.
1-13289)
12 Computation of Ratio of Earnings to Fixed Charges (Restated)
15 Accountant's Awareness Letter
31.1 Certification of Chief Executive Officer of Pride pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of Pride pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and the Chief Financial
Officer of Pride pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
* Pride and its subsidiaries are parties to several debt instruments that
have not been filed with the SEC under which the total amount of
securities authorized does not exceed 10% of the total assets of Pride and
its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii) (A)
of Item 601(b) of Regulation S-K, Pride agrees to furnish a copy of such
instruments to the SEC upon request.
+ Previously filed.
(b) Reports on Form 8-K
In a Current Report on Form 8-K submitted to the SEC on April 13, 2004, we
filed pursuant to Item 5 and Item 7 of Form 8-K information regarding certain
organizational changes.
In a Current Report on Form 8-K submitted to the SEC on June 15, 2004, we
filed pursuant to Item 5 and Item 7 of Form 8-K information regarding a private
offering of $400 million aggregate principal amount of senior unsecured notes
pursuant to Rule 135c under the Securities Act of 1933.
In a Current Report on Form 8-K submitted to the SEC on June 23, 2004, we
filed pursuant to Item 5 and Item 7 of Form 8-K information regarding a private
offering of $500 million aggregate principal amount of 7 3/8% Senior Notes due
2014 pursuant to Rule 135c under the Securities Act of 1933.
In a Current Report on Form 8-K submitted to the SEC on June 29, 2004, we
filed pursuant to Item 5 and Item 7 of Form 8-K the purchase agreement,
information about us contained in the offering memorandum and other information
regarding a private offering of $500 million aggregate principal amount of 7
3/8% Senior Notes due 2014.
34
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PRIDE INTERNATIONAL, INC.
By: /s/ Douglas G. Smith
----------------------------
DOUGLAS G. SMITH
VICE PRESIDENT, CONTROLLER
AND CHIEF ACCOUNTING OFFICER
Date: May 3, 2005
35
INDEX TO EXHIBITS
+10.1 Employment/Non-Competition/Confidentiality Agreement dated June 10, 2004
between Pride and Lonnie D. Bane
+10.2 Employment/Non-Competition/Confidentiality Agreement dated June 2, 2004
between Pride and Steven D. Oldham
+10.3 Employment/Non-Competition/Confidentiality Agreement dated June 2, 2004
between Pride and Douglas G. Smith
+10.4 Employment/Non-Competition/Confidentiality Agreement dated July 1, 2004
between Pride and Mario Kricorian
+10.5 Pride International, Inc. 2004 Directors' Stock Incentive Plan
(incorporated by reference to Appendix C to Pride's Proxy Statement on
Schedule 14A for the 2004 Annual Meeting of Stockholders, File No.
1-13289).
12 Computation of Ratio of Earnings to Fixed Charges (Restated)
15 Accountant's Awareness Letter
31.1 Certification of Chief Executive Officer of Pride pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of Pride pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and the Chief Financial
Officer of Pride pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------
+ Previously filed.
36