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 SEPTEMBER 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 October 31, 2004
Common Stock, par value $.01 per share 136,257,951
================================================================================
PRIDE INTERNATIONAL, INC.
INDEX
PAGE NO.
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RESTATEMENT................................................................................. 2
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheet as of September 30, 2004 and December 31, 2003
(Restated)......................................................................... 3
Consolidated Statement of Operations for the three months ended
September 30, 2004 and 2003 (Restated)............................................. 4
Consolidated Statement of Operations for the nine months ended September
30, 2004 and 2003 (Restated)....................................................... 5
Consolidated Statement of Cash Flows for the nine months ended September
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........................................................ 34
PART II. OTHER INFORMATION
Item 6. Exhibits....................................................................... 35
SIGNATURES.................................................................................. 36
1
RESTATEMENT
We hereby amend the following items of our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004 as originally filed with the Securities
and Exchange Commission on November 3, 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 September 30, 2004 and for the three
months and nine months ended September 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 loss from continuing operations for the three months
ended September 30, 2004 of approximately $53,000, a decrease in income from
continuing operations for the three months ended September 30, 2003 of
approximately $105,000, a reduction of loss from continuing operations for the
nine months ended September 30, 2004 of approximately $1.3 million, and a
decrease in income from operations for the nine months ended September 30, 2003
of approximately $85,000. Please read note 13 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 November 3, 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)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
(RESTATED) (RESTATED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................... $ 64,375 $ 69,134
Restricted cash............................................................. 29,537 38,840
Trade receivables, net...................................................... 399,434 371,510
Parts and supplies, net..................................................... 70,648 72,263
Other current assets........................................................ 152,737 171,084
------------- -------------
Total current assets................................................... 716,731 722,831
------------- -------------
PROPERTY AND EQUIPMENT, net................................................... 3,367,109 3,463,300
------------- -------------
OTHER ASSETS
Investments in and advances to affiliates................................... 40,047 33,984
Goodwill.................................................................... 68,134 69,014
Other assets................................................................ 71,277 87,966
------------- -------------
Total other assets..................................................... 179,458 190,964
------------- -------------
$ 4,263,298 $ 4,377,095
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................ $ 165,504 $ 163,707
Accrued expenses............................................................ 208,839 260,150
Short-term borrowings....................................................... 2,213 27,555
Current portion of long-term debt........................................... 84,718 188,737
Current portion of long-term lease obligations.............................. 10,412 2,749
------------- -------------
Total current liabilities.............................................. 471,686 642,898
------------- -------------
OTHER LONG-TERM LIABILITIES................................................... 36,597 56,811
LONG-TERM DEBT, net of current portion........................................ 1,900,434 1,805,099
LONG-TERM LEASE OBLIGATIONS, net of current portion........................... 366 9,979
DEFERRED INCOME TAXES......................................................... 56,413 59,460
MINORITY INTEREST............................................................. 108,775 100,993
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;
136,405 and 135,769 shares issued; 136,038 and 135,400
shares outstanding, respectively......................................... 1,364 1,358
Paid-in capital............................................................. 1,271,311 1,261,073
Treasury stock, at cost..................................................... (4,409) (4,409)
Accumulated other comprehensive loss........................................ (313) (124)
Deferred compensation....................................................... (1,756) -
Retained earnings........................................................... 422,830 443,957
------------- -------------
Total stockholders' equity............................................. 1,689,027 1,701,855
------------- -------------
$ 4,263,298 $ 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
SEPTEMBER 30,
-------------
2004 2003
---- ----
(RESTATED) (RESTATED)
REVENUES .......................................................... $ 436,439 $ 440,180
OPERATING COSTS, excluding depreciation and amortization .......... 285,020 277,665
DEPRECIATION AND AMORTIZATION ..................................... 66,611 64,007
GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization 19,909 12,410
(GAIN) LOSS ON SALE OF ASSETS, net ................................ 3,077 (397)
--------- ---------
EARNINGS FROM OPERATIONS .......................................... 61,822 86,495
OTHER INCOME (EXPENSE)
Interest expense ............................................. (31,202) (32,521)
Refinancing charges .......................................... (30,798) (6,141)
Interest income .............................................. 1,101 255
Other income, net ............................................ 720 371
--------- ---------
Total other expense, net ................................. (60,179) (38,036)
--------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST .................... 1,643 48,459
INCOME TAX PROVISION .............................................. 9,103 11,718
MINORITY INTEREST ................................................. 7,459 5,923
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS .......................... (14,919) 30,818
LOSS ON DISCONTINUED OPERATIONS ................................... (3,284) (2,211)
--------- ---------
NET EARNINGS (LOSS) ............................................... $ (18,203) $ 28,607
========= =========
EARNINGS (LOSS) PER SHARE
Basic
Income (loss) from continuing operations ............ $ (0.11) $ 0.23
Discontinued operations ............................. (0.02) (0.02)
--------- ---------
Net earnings (loss) ................................. $ (0.13) $ 0.21
========= =========
Diluted
Income (loss) from continuing operations ............ $ (0.11) $ 0.20
Discontinued operations ............................. (0.02) (0.01)
--------- ---------
Net earnings (loss) ................................. $ (0.13) $ 0.19
========= =========
SHARES USED IN PER SHARE CALCULATIONS
Basic .................................................... 135,887 135,131
Diluted .................................................. 135,887 167,137
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2004 2003
---- ----
(RESTATED) (RESTATED)
REVENUES............................................................. $1,264,142 $1,167,918
OPERATING COSTS, excluding depreciation and amortization ............ 835,910 754,475
DEPRECIATION AND AMORTIZATION ....................................... 199,006 187,452
GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization . 52,899 34,943
(GAIN) LOSS ON SALE OF ASSETS, net .................................. 2,713 57
---------- ----------
EARNINGS FROM OPERATIONS ............................................ 173,614 190,991
OTHER INCOME (EXPENSE)
Interest expense ............................................... (90,135) (100,395)
Refinancing charges ............................................ (30,798) (6,370)
Interest income ................................................ 2,188 1,328
Other income (expense), net .................................... (224) 2,456
---------- ----------
Total other expense, net .................................. (118,969) (102,981)
---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST ...................... 54,645 88,010
INCOME TAX PROVISION ................................................ 38,879 27,937
MINORITY INTEREST ................................................... 17,782 15,166
---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............................ (2,016) 44,907
LOSS ON DISCONTINUED OPERATIONS ..................................... (19,111) (30,471)
---------- ----------
NET EARNINGS (LOSS) ................................................. $ (21,127) $ 14,436
========== ==========
EARNINGS (LOSS) PER SHARE
Basic
Income (loss) from continuing operations .................. $ (0.02) $ 0.34
Discontinued operations ................................... (0.14) (0.23)
---------- ----------
Net earnings .............................................. $ (0.16) $ 0.11
========== ==========
Diluted
Income (loss) from continuing operations .................. $ (0.02) $ 0.31
Discontinued operations ................................... (0.14) (0.18)
---------- ----------
Net earnings .............................................. $ (0.16) $ 0.13
========== ==========
SHARES USED IN PER SHARE CALCULATIONS
Basic .......................................................... 135,704 134,506
Diluted ........................................................ 135,704 166,112
The accompanying notes are an integral part of the consolidated financial
statements.
5
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2004 2003
---- ----
(RESTATED) (RESTATED)
OPERATING ACTIVITIES
Net earnings (loss) ................................................ $ (21,127) $ 14,436
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities -
Depreciation and amortization .................................. 199,006 187,452
Discount amortization on zero coupon convertible debentures .... 61 1,795
Amortization and write-offs of deferred financing costs ........ 19,022 6,579
Loss on sale of assets ......................................... 2,713 57
Deferred income taxes .......................................... (784) (25,661)
Minority interest .............................................. 17,782 15,166
Changes in assets and liabilities
Trade receivables ......................................... (27,924) (104,020)
Parts and supplies ........................................ 1,615 (12,782)
Other current assets ...................................... 11,060 (49,643)
Other assets .............................................. 25,759 52,115
Accounts payable .......................................... 6,191 2,423
Accrued expenses .......................................... (51,336) 4,317
Other liabilities ......................................... (17,500) (28,849)
----------- -----------
Net cash provided by operating activities ............. 164,538 63,385
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment ................................ (111,097) (179,303)
Proceeds from dispositions of property and equipment ............... 1,475 1,190
Investments in and advances to affiliates .......................... (6,063) (2,188)
----------- -----------
Net cash used in investing activities ................. (115,685) (180,301)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock ............................. 1,535 16,265
Proceeds from exercise of stock options ............................ 4,703 2,519
Proceeds from debt borrowings ...................................... 1,098,721 459,077
Repayments of borrowings ........................................... (1,135,926) (442,565)
Repayment of joint venture partner debt ............................ (10,000) -
Debt finance costs ................................................. (21,948) (4,885)
Change in restricted cash .......................................... 9,303 13,008
----------- -----------
Net cash provided by (used in) financing activities ... (53,612) 43,419
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................... (4,759) (73,497)
CASH AND CASH EQUIVALENTS, beginning of period .......................... 69,134 133,986
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ................................ $ 64,375 $ 60,489
=========== ===========
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.
7
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended September 30, 2003 was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------ ------------------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings--as reported .................................... $ 28,388 $ 13,747
Add:
Lease rental expenses included in reported net earnings........ 3,177 9,531
Deduct:
Depreciation expense........................................... (946) (2,838)
Interest expense............................................... (2,012) (6,004)
--------- ---------
Net earnings -- as adjusted...................................... $ 28,607 $ 14,436
========= =========
NET EARNINGS PER SHARE:
As reported:
Basic.......................................................... $ 0.21 $ 0.10
Diluted........................................................ $ 0.19 $ 0.13
As adjusted:
Basic.......................................................... $ 0.21 $ 0.11
Diluted........................................................ $ 0.19 $ 0.13
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
Net earnings (loss) ......................... $(18,203) $ 28,607 $(21,127) $ 14,436
Foreign currency translation gain
(loss), net ................................ 1,559 112 (189) 4,438
-------- -------- -------- --------
Comprehensive income (loss) ................. $(16,644) $ 28,719 $(21,316) $ 18,874
======== ======== ======== ========
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.
8
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 in its results of operations
any revisions in these estimates based on that evaluation. To the extent these
revisions result in an increase in previously reported losses 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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings (loss), as reported............................ $ (18,203) $ 28,607 $ (21,127) $ 14,436
Add: Stock-based compensation included in reported net
earnings (loss), net of tax............................... 304 - 334 -
Deduct: Stock-based employee compensation expense
determined under the fair value method, net of tax........ (3,016) (1,999) (9,639) (8,951)
----------- --------- ----------- -----------
Pro forma net earnings (loss)............................... $ (20,915) $ 26,608 $ (30,432) $ 5,485
=========== ========= =========== ===========
Net earnings (loss) per share:
Basic -- as reported...................................... $ (0.13) $ 0.21 $ (0.16) $ 0.11
Basic -- pro forma........................................ $ (0.15) $ 0.20 $ (0.22) $ 0.04
Diluted -- as reported.................................... $ (0.13) $ 0.19 $ (0.16) $ 0.14
Diluted -- pro forma...................................... $ (0.15) $ 0.18 $ (0.22) $ 0.08
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
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2004 and 2003, costs of approximately $16.4 million,
$15.2 million, $47.1 million and $46.4 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 is on location at
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.
For the nine-month period ended September 30, 2004, the Company recorded
loss provisions totaling $32.5 million relating to the construction of the rigs,
including a loss provision of $0.7 million for the three month period ended
September 30, 2004. 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 nine-month periods ended September 30, 2003, the
Company recorded loss provisions of $3.4 million and $46.9 million,
respectively, related to the rig construction projects. As of September 30,
2004, the cumulative losses recorded on the projects were $130.9 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- -----------
(IN THOUSANDS)
Sales revenue............................................... $ 6,335 $ 10,654 $ 58,555 $ 86,952
Operating costs............................................. 6,987 14,055 91,020 133,831
--------- --------- --------- -----------
Loss from discontinued fixed-fee construction operations.... (652) (3,401) (32,465) (46,879)
Income tax provision (benefit).............................. 2,632 (1,190) (13,354) (16,408)
--------- --------- --------- -----------
Loss on discontinued operations............................. $ (3,284) $ (2,211) $(19,111) $ (30,471)
========= ========= ========= ===========
3. DEBT
Short-Term Borrowings
As of September 30, 2004, the Company had agreements with several banks
for uncollateralized short-term lines of credit totaling $40.9 million,
primarily denominated in U.S. dollars. Of these facilities, $38.7 million are
renewable annually and bear interest at variable rates based on LIBOR. As of
September 30, 2004, $2.2 million was outstanding under these facilities and
$38.7 million was available.
10
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Debt
Long-term debt consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
(IN THOUSANDS)
Senior secured term loan.......................................... $ 300,000 $ 197,000
Senior secured revolving credit facilities........................ 85,000 288,000
7 3/8% Senior Notes due 2014, net of discount..................... 497,400 -
9 3/8% Senior Notes due 2007...................................... - 175,000
10% Senior Notes due 2009......................................... - 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.......... - 1,098
Senior convertible notes due 2004................................. - 85,853
Drillship loans................................................... 286,964 182,674
Semisubmersible loans due 2004 to 2008............................ 215,788 260,558
Limited-recourse collateralized term loans........................ - 3,649
------------- -------------
1,985,152 1,993,836
Current portion of long-term debt................................. 84,718 188,737
------------- -------------
Long-term debt, net of current portion............................ $ 1,900,434 $ 1,805,099
============= =============
In July 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.
Borrowings under the revolving credit facility are available for general
corporate purposes. As of September 30, 2004, $85.0 million of borrowings were
outstanding under the facility. The Company may obtain up to $100 million of
letters of credit under the facility. As of September 30, 2004, $28.9 million of
letters of credit were outstanding under the 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 the Company's
leverage, except that the LIBOR margin for the term loan is fixed at 1.75%. As
of September 30, 2004, the interest rates on the term loan and revolving credit
facility were 3.3% and 3.5%, respectively, and availability under the revolving
credit facility was approximately $386.1 million.
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
11
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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
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. The
notes are subject to redemption, in whole or in part, at the option of the
Company at any time on or after July 15, 2009 at redemption prices starting at
103.688% of the principal amount redeemed and declining to 100% by July 15,
2012. Prior to July 15, 2009, the Company may redeem some or all of the notes at
100% of the principal amount plus a make-whole premium. Prior to July 15, 2007,
the Company also may redeem up to 35% of the notes from the proceeds of certain
equity offerings at a specified redemption price.
The Company used 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, including its senior convertible notes due
2004. 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 recognized in
the third quarter of 2004 refinancing charges of approximately $30.8 million,
consisting of the tender offer premium, prepayment premiums and the write-off of
unamortized deferred financing costs related to the retired debt.
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 and $22.5 million was
funded in August 2004. Funds at closing, together with $15.4 million of
previously restricted cash held by the joint venture, 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 $22.5 million funding in August was used to repay loans due
from the joint venture company to the Company. 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.
As of September 30, 2004, $29.5 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 other than to meet
scheduled principal and interest payments under the loan agreements.
4. INCOME TAXES
12
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated effective income tax rate for continuing
operations for the three months ended September 30, 2004 was 554% as compared to
24.2% for the corresponding period in 2003. The higher rate for the three months
ended September 30, 2004 is principally due to debt refinancing charges
described in Note 3 that reduced income without a proportional reduction in
income taxes. The Company recorded the entire amount of the debt refinancing
charges and the related tax benefit in the third quarter of 2004. The rate is
also impacted by 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 nine months ended September 30, 2004, the consolidated effective
income tax rate for continuing operations was 71.1% as compared to 31.7% for the
same period in 2003. The higher rate for the nine months ended September 30,
2004 is a result of the factors discussed above for the three months ended
September 30, 2004.
5. EARNINGS (LOSS) PER SHARE
Basic income (loss) 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 (loss) 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 (loss) from continuing operations per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
Income (loss) from continuing operations.................... $ (14,919) $ 30,818 $ (2,016) $ 44,907
Interest expense on convertible debentures and notes........ - 4,998 - 11,369
Income tax effect........................................... - (1,749) - (3,979)
----------- ------------- ----------- ------------
Income (loss) from continuing operations - as adjusted...... $ (14,919) $ 34,067 $ (2,016) $ 52,297
=========== ============= =========== ============
Weighted average shares outstanding......................... 135,887 135,131 135,704 134,506
Convertible notes........................................... - 29,842 - 29,842
Stock options............................................... - 2,164 - 1,764
----------- ------------- ----------- ------------
Adjusted weighted average shares outstanding................ 135,887 167,137 135,704 166,112
=========== ============= =========== ============
The calculation of diluted weighted average shares outstanding for the
three months ended September 30, 2004 and 2003 excludes 36.8 million and 6.6
million common shares, respectively, and 38.7 million and 8.9 million common
shares for the nine months ended September 30, 2004 and 2003, respectively,
issuable pursuant to convertible debt and outstanding options. These shares were
excluded because their effect was antidilutive 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 owners, except that, in order to make
available an additional $21.9 million under the MARAD-guaranteed notes to fund
the project
13
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. The Company is holding cash collateral of $17.5
million to cover the partner's proportionate share of draws, if any, under the
letter of credit and has included the corresponding liability of $17.5 million
in accrued expenses.
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 cash advances from
the joint venture partners.
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. The joint venture company made principal and interest payments
totaling $3.6 million and $10.8 million in January and July 2004, respectively.
The payments were funded by cash advances from the joint venture partners, of
which the Company's share was 30%. Additional principal and interest payments of
approximately $12.3 million are due in the fourth quarter of 2004. Principal and
interest payments totaling approximately $45.1 million are due in 2005.
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.
As of September 30, 2004, the Company's investment in the joint venture
was approximately $39.9 million, including capitalized interest of $8.2 million.
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
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
14
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 $2.2 million deposit with the Indian Customs Department
pending the ultimate resolution of this claim.
In late August 2004, the Company was notified that certain of its
subsidiaries have been named, along with other defendants, in several complaints
that have been filed in the Circuit Courts of the State of Mississippi by
approximately 327 persons that allege that they were employed by some of the
named defendants between approximately 1965 and 1986. The complaints allege that
certain drilling contractors used asbestos-containing products in offshore
drilling operations, land based drilling operations and in drilling structures,
drilling rigs, vessels and other equipment and assert claims based on, among
other things, negligence and strict liability and claims under the Jones Act.
The complaints name as defendants numerous other companies that are not
affiliated with the Company, including companies that allegedly manufactured
drilling related products containing asbestos that are the subject of the
complaints. The plaintiffs seek, among other things, an award of unspecified
compensatory and punitive damages. The Company has not yet had an opportunity to
conduct sufficient discovery to determine the number of plaintiffs, if any, that
were employed by Company subsidiaries or otherwise have any connection with the
Company's drilling operations during the relevant period. The Company intends to
defend itself vigorously and, based on the information available to the Company
at this time, the Company does not expect the outcome of these lawsuits to have
a material adverse effect on its financial position, results of operations or
cash flows; however, there can be no assurance as to the ultimate outcome of
these lawsuits.
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 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.
15
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2004 2003 (1) 2004 2003 (1)
---------- ---------- ----------- -----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
Revenues:
Eastern Hemisphere................... $ 142,898 $ 179,309 $ 426,657 $ 470,529
Western Hemisphere................... 118,106 105,579 343,940 280,632
U.S. Gulf of Mexico.................. 33,979 25,184 91,198 64,768
Latin America Land................... 99,536 95,492 283,354 257,853
E & P services....................... 40,772 32,873 108,060 90,036
Corporate and other.................. 1,148 1,743 10,933 4,100
---------- ---------- ----------- -----------
Total......................... $ 436,439 $ 440,180 $ 1,264,142 $ 1,167,918
========== ========== =========== ===========
Earnings (loss) from operations:
Eastern Hemisphere................... $ 37,446 $ 67,393 $ 116,181 $ 154,025
Western Hemisphere................... 31,215 30,560 83,803 79,807
U.S. Gulf of Mexico.................. 21 (9,820) (6,603) (34,088)
Latin America Land................... 6,297 4,999 12,066 15,611
E & P services....................... 5,507 4,033 10,033 7,838
Corporate and other.................. (18,664) (10,670) (41,866) (32,202)
---------- ---------- ----------- -----------
Total......................... $ 61,822 $ 86,495 $ 173,614 $ 190,991
========== ========== =========== ===========
(1) The consolidated financial information by reporting segment for the three
months and the nine months ended September 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 32.0% and 29.6% of
consolidated revenues for the three-month and nine-month periods ended September
30, 2004, respectively. For the three-month and nine-month periods ended
September 30, 2003, two customers collectively accounted for 28.8% and 26.0%,
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 (the "SERP") to change the benefits under the plan and to increase the
number of executive officers eligible for the plan. During the third quarter of
2004, the Company entered into participation agreements with the eligible
executive officers. The SERP is a non-qualified retirement plan that provides
for benefits, to the extent vested, 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. OTHER CHARGES
During the third quarter of 2004, the Company recognized charges related
to executive severance costs of approximately $2.8 million due primarily to the
severance of the Company's president in September 2004. These severance costs
were included in general and administrative expenses.
16
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 2004, the Company also recognized charges of
approximately $3.5 million for damage costs related to Hurricane Ivan, which
primarily related to damage to a rig. These charges were included in other
expenses.
12. SUBSEQUENT EVENT
In October 2004, the Company sold two jackup rigs, the Pride Illinois and
the Pride Kentucky, for total cash consideration of $11.0 million. The aggregate
carrying values of the two rigs as of September 30, 2004 was approximately
$919,000.
13. 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 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 September 30, 2004 and 2003, and by approximately $2.4 million for each of
the nine-month periods ended September 30, 2004 and 2003, 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 $0.1 million per quarter, understate interest expense and overstate
operating expenses by approximately $0.1 million for the three months ended
September 30, 2003, and by approximately $0.6 million for the nine months ended
September 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 months ended September 30, 2003
and the nine-month periods ended September 30, 2004 and 2003 of approximately
$(0.1) million, $0.7 million and $(0.8) 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
17
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 nine-month periods
ended September 30, 2004 and 2003 of $0.2 million, $0.2 million, $0.5 million
and $0.6 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 nine months ended September 30, 2003 by $13,000.
- - Interest rate collars and caps. During the second and third quarters of 2003,
the Company understated its losses by approximately $0.4 million and $0.7
million, respectively, on interest rate collars and caps associated with its
senior secured term loan that was retired during the third quarter of 2004.
These errors were corrected during the fourth quarter of 2003, which caused an
overstatement of losses during the quarter.
- - Accrued interest expense. During the third quarter of 2004, the Company
understated the interest expense on its 7 3/8% Senior Notes by approximately
$0.8 million. This error was corrected during the fourth quarter of 2004, which
caused an overstatement of interest expense in the same amount during the
quarter.
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 nine-month periods ended September 30, 2004 and 2003 of $0.1
million, $0.1 million, $(0.4) million and $43,000, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
2004 2003 2004 2003
------- ------- -------- --------
Acquisition of joint venture interest............ $ (209) $ (211) $ (627) $ (627)
Depreciation of certain rigs constructed
or acquired in 1999.......................... (73) 59 (219) 364
Rig transfers.................................... - (98) 673 (830)
Adjusted to certain accounts payable
accounts..................................... - - - 13
------- ------- -------- --------
Net adjustments to earnings from operations...... (282) (250) (173) (1,080)
Net adjustments to interest expense.............. 11 (16) 1,594 676
Net adjustment to tax provision.................. 126 68 (431) 43
Net adjustment to minority interest.............. 92 92 276 276
------- ------- -------- --------
Net adjustments to income from continuing
operations................................... $ (53) $ (106) $ 1,266 $ (85)
======= ======= ======== ========
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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............................... $436,439 $436,439 $ 440,180 $ 440,180 $1,264,142 $1,264,142 $1,167,918 $ 1,167,918
Operating costs........................ 285,020 285,020 277,797 277,665 835,910 835,910 755,071 754,475
Depreciation and amortization.......... 66,329 66,611 63,625 64,007 198,833 199,006 185,776 187,452
Earnings from operations............... 62,104 61,822 86,745 86,495 173,787 173,614 192,071 190,991
Interest expense....................... (31,213) (31,202) (32,505) (32,521) (91,729) (90,135) (101,071) (100,395)
Income from continuing operations
before income taxes and minority
interest.............................. 1,914 1,643 48,725 48,459 53,224 54,645 88,414 88,010
Income tax provision................... 9,229 9,103 11,786 11,718 38,448 38,879 27,980 27,937
Minority.interest...................... 7,551 7,459 6,015 5,923 18,058 17,782 15,442 15,166
Income (loss) from continuing
operations............................ (14,866) (14,919) 30,924 30,818 (3,282) (2,016) 44,992 44,907
Income (loss) on discontinued
operations............................ (3,284) (3,284) (2,211) (2,211) (19,111) (19,111) (30,471) (30,471)
Net earnings (loss).................... (18,150) (18,203) 28,713 28,607 (22,393) (21,127) 14,521 14,436
Earnings (loss) per share:
Basic
Income (loss) from continuing
operations.......................... $ (0.11) $ (0.11) $ 0.23 $ 0.23 $ (0.02) $ (0.02) $ 0.34 $ 0.34
Discontinued operations.............. (0.02) (0.02) (0.02) (0.02) (0.14) (0.14) (0.23) (0.23)
Net earnings (loss).................. (0.13) (0.13) 0.21 0.21 (0.16) (0.16) 0.11 0.11
Diluted
Income (loss) from continuing
operations.......................... $ (0.11) $ (0.11) $ 0.20 $ 0.20 $ (0.02) $ (0.02) $ 0.31 $ 0.31
Discontinued operations.............. (0.02) (0.02) (0.01) (0.01) (0.14) (0.14) (0.18) (0.18)
Net earnings (loss).................. (0.13) (0.13) 0.19 0.19 (0.16) (0.16) 0.13 0.13
SELECTED CONSOLIDATED BALANCE SHEET DATA:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------- -------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
(IN THOUSANDS)
Total current assets......................... $ 721,077 $ 716,731 $ 726,924 $ 722,831
Property and equipment, net.................. 3,349,408 3,367,109 3,446,331 3,463,300
Other assets, net............................ 82,822 71,277 102,177 87,966
Total assets................................. 4,261,488 4,263,298 4,378,430 4,377,095
Accrued expenses............................. 208,020 208,839 261,055 260,150
Other long-term liabilities.................. 33,726 36,597 54,423 56,811
Deferred income taxes........................ 56,383 56,413 59,378 59,460
Minority interest............................ 111,027 108,775 102,969 100,993
Retained earnings............................ 422,488 422,830 444,881 443,957
Total liabilities and stockholders' equity... 4,261,488 4,263,298 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 September 30, 2004, and the related
consolidated statement of operations for the three-month and nine-month periods
ended September 30, 2004 and 2003 and consolidated statement of cash flows for
the nine-month periods ended September 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 13, the Company restated its consolidated interim
financial statements as of September 30, 2004 and for each of the three-month
and nine-month periods ended September 30, 2004 and 2003.
PricewaterhouseCoopers LLP
Houston, Texas
November 2, 2004, except for the matters discussed
in Note 2 and Note 13, 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 September 30,
2004 and for the three and nine months ended September 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 loss from continuing operations for the three months
ended September 30, 2004 of approximately $53,000, a decrease in income from
continuing operations for the three months ended September 30, 2003 of
approximately $105,000, a reduction of loss from continuing operations for the
nine months ended September 30, 2004 of approximately $1.3 million, and a
decrease in income from operations for the nine months ended September 30, 2003
of approximately $85,000. Please read note 13 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 September 30, 2004, we
operated a global fleet of 328 rigs, including two ultra-deepwater drillships,
10 semisubmersible rigs, 35 jackup rigs, 32 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 or
21
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 were 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 nine months of 2004, we
recorded additional loss provisions on these projects totaling $32.5 million,
including a loss of $0.7 million for the three months ended September 30, 2004.
The additional losses in the first nine months 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.
These transactions improved our overall liquidity.
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 and $22.5 million was 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 $22.5 million drawn in August
2004 was used to repay additional loans due from the joint venture company to
us. The funds paid to us were used to reduce our other outstanding debt and
improve liquidity.
SEGMENT REVIEW
EASTERN HEMISPHERE
As of September 30, 2004, our Eastern Hemisphere segment comprised 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 at similar rates, commencing at the end of the contracts'
current terms in June 2005 and May 2005, respectively. The Pride Africa and
Pride Angola are scheduled to undergo their five-year special periodic survey in
the fourth quarter of 2004 and first quarter of 2005, respectively. Each of the
rigs is expected to be out of service for approximately 45 days during the
special periodic survey.
Semisubmersibles. During the nine months ended September 30, 2004, the
Eastern Hemisphere market for semisubmersibles was weak. For the deepwater
semisubmersibles operating in West Africa, we succeeded in obtaining a new
contract for the Pride South Pacific when its previous contract expired in April
2004, although at a substantially lower dayrate. That contract is expected to
expire later in the fourth quarter of 2004. The Pride North America working in
Angola, which was scheduled to complete its current contract in August 2004,
received an extension through August 2005, also at a substantially lower day
rate. The Pride North Sea came off contract in July 2004, but began a new
contract in October 2004 for a period of 330 days. During the fourth quarter of
2004, we are mobilizing the Pride Venezuela, which is currently stacked in the
Western Hemisphere, to the Eastern Hemisphere as we have recently received a
letter of intent for a 300-day contract in Libya starting in 2005. We believe
that market conditions for semisubmersibles are improving and will continue to
improve in 2005 as development drilling commences on a number of major oil
discoveries.
22
Jackups. The market for jackups is currently 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 began a new three year contract in
September 2004 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 first
quarter and an additional 12 days at the start of the second quarter of 2004. We
experienced disruptions with the local laborers on the Pride North Dakota in
Nigeria during the third quarter of 2004, which resulted in approximately 15
days on standby rate. The Pride North Dakota is expected to complete its work in
Nigeria in November 2004 and, following the completion of a special periodic
survey and scheduled upgrades and maintenance, begin a new three year contract
in Saudi Arabia in April 2005. We anticipate the sale of the Pride West Virginia
to close late in the fourth quarter of 2004 following the completion of its
current contract and the mobilization of the rig to Dubai. The remaining jackup
rigs are operating pursuant to long-term contracts for the remainder of the
year.
Tender-assisted and Barge Rigs. In June 2004, we 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 Ile de Sein recently received a contract
extension through March 2005 at its current day rate. The tender-assisted rig
Alligator, working in Angola, started a two year contract in June 2004. The
contract for the tender-assisted rig Barracuda expired in August 2004. We are
currently evaluating opportunities for this rig. The swamp barge Bintang
Kalimantan is expected to work through March 2005.
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 working in
Kazakhstan completed its contract and is currently idle. The remainder of the
Eastern Hemisphere land rigs are also idle.
WESTERN HEMISPHERE
As of September 30, 2004, we had seven semisubmersible rigs, 14 jackup
rigs, three platform rigs, two lake barge rigs and two managed rigs in our
Western Hemisphere segment. Revenue and income from operations for our Western
Hemisphere segment for the first nine months 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 the
completion of the contract for the Pride Venezuela in July 2003. 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 two deepwater semisubmersible
rigs, 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 strengthening. We were able to mobilize the
Pride Mexico to Mexico in late 2003 to begin a contract expiring in April 2007.
The Pride Venezuela, which has been warm stacked in Trinidad throughout the
first ten months of 2004, recently received a letter of intent for a 300-day
contract in Libya beginning in February 2005. During the fourth quarter of 2004,
we are transferring the Pride Venezuela from the Western Hemisphere segment to
the Eastern Hemisphere. The Pride South Atlantic operating in Brazil is working
on a series of one-well contracts for four independent operators that we expect
to utilize the rig through the end of the first quarter of 2005. We anticipate
that the rig will have approximately 15 to 30 days downtime between contracts
during the fourth quarter of 2004. The independent operators have options for
additional wells, and we are actively marketing the rig for work after the first
quarter of 2005. 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.
Our two lake barges operating in Venezuela are contracted through the end of
2004. We also continue to manage two jackup rigs in Venezuela on a well-to-well
basis.
23
U.S. GULF OF MEXICO
As of September 30, 2004, our rig fleet in the U.S. Gulf of Mexico segment
comprised 11 jackup rigs and 18 platform rigs. Additionally, we manage two high
specification platform rigs built by us for our customers. During the first nine
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 left the U.S. sector of the Gulf of Mexico for other markets.
Jackups. As of September 30, 2004, we had seven jackups working in the
U.S. Gulf of Mexico with an average daily revenue of approximately $32,200 as
compared with six jackups working at an average of $24,600 per day as of
September 30, 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.
In October 2004, we sold the Pride Illinois and Pride Kentucky for total
cash consideration of $11.0 million. The Pride Illinois and the Pride Kentucky
are mechanical mat-supported slot rigs which last worked September 2001 and
December 2001, respectively. We determined that these rigs were not suitable for
upgrade as drilling rigs. The rigs are intended to be converted to mobile
production units.
Platforms. We currently expect to have six of our platform rigs working
for the balance of the year. An additional platform rig, which had worked for
most of the third quarter, sustained significant damage from Hurricane Ivan in
September 2004. We recognized a charge for damage to the rig of approximately
$3.2 million during the third quarter of 2004. We are currently evaluating the
marketing opportunities and the related cost to rebuild the rig. We commenced
operations in July 2004 and September 2004, respectively, on two deepwater
platform rigs which we constructed on behalf of a customer.
LATIN AMERICA LAND
As of September 30, 2004, the Latin America Land segment comprised 228
land drilling and workover rigs operating in Argentina, Bolivia, Brazil,
Colombia, Ecuador, Mexico and Venezuela. During the first nine 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 remains 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
As of September 30, 2004, our E&P Services segment operated 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,
Brazil and Venezuela, as well as offshore services in Brazil, Venezuela and
Mexico.
During the first nine months of 2004, business activity and revenues
continued to increase due to increased activity in Mexico, Brazil and Venezuela
as well as to a high level of integrated services work in Argentina. We
anticipate our E&P Services segment will maintain its high level of business
activity during the remainder of 2004.
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
24
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 is on location at 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 nine months of 2004, we
recorded additional loss provisions on these projects totaling $32.5 million,
including a loss of $0.7 million for the three months ended September 30, 2004.
A variety of events could require us to revise our estimates in future periods
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, among others, variations in labor and
equipment productivity over the remaining construction period, unanticipated
cost increases, engineering changes, project management issues, shortages of
equipment, materials or skilled labor, weather delays, unscheduled delays in the
delivery of ordered materials and equipment, work stoppages or other delays. We
do not currently intend to enter into additional business of this nature.
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 nine-month periods ended September 30,
2004 and 2003, we had a loss on discontinued operations of $3.3 million, $2.2
million, $19.1 million and $30.5 million, respectively. Sales revenues and
operating costs decreased for the 2004 periods compared to the 2003 periods as
the rigs' construction was nearer to completion.
25
RESULTS OF OPERATIONS
The following table sets forth selected consolidated financial information by
reporting segment for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 (1) 2004 2003 (1)
----------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
Revenues:
Eastern Hemisphere...... $ 142,898 $ 179,309 $ 426,657 $ 470,529
Western Hemisphere...... 118,106 105,579 343,940 280,632
U.S. Gulf of Mexico..... 33,979 25,184 91,198 64,768
Latin America Land...... 99,536 95,492 283,354 257,853
E & P services.......... 40,772 32,873 108,060 90,036
Corporate and other..... 1,148 1,743 10,933 4,100
----------- ---------- ---------- ----------
Total.......... $ 436,439 $ 440,180 $1,264,142 $1,167,918
=========== ========== ========== ==========
Earnings (loss) from
operations:
Eastern Hemisphere...... $ 37,446 $ 67,393 $ 116,181 $ 154,025
Western Hemisphere...... 31,215 30,560 83,803 79,807
U.S. Gulf of Mexico..... 21 (9,820) (6,603) (34,088)
Latin America Land...... 6,297 4,999 12,066 15,611
E & P services.......... 5,507 4,033 10,033 7,838
Corporate and other..... (18,664) (10,670) (41,866) (32,202)
----------- ---------- ---------- ----------
Total.......... $ 61,822 $ 86,495 $ 173,614 $ 190,991
=========== ========== ========== ==========
(1) The consolidated financial information by reporting segment for the three
months and the nine months ended September 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 SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Revenues. Revenues for the three months ended September 30, 2004 decreased
$3.7 million, or 0.1%, to $436.4 million as compared to the three months ended
September 30, 2003. The decrease was primarily due to revenue declines in the
Eastern Hemisphere segment due to the weak market for semisubmersible rigs and
resulting lower dayrates. Additionally, the 2003 period included $27.6 million
of up-front fees recognized over the terms of the contracts for our Kazakhstan
land rigs. These decreases in revenues were partially offset by increased
activity offshore Mexico in our Western Hemisphere segment, improved dayrates
and utilization of the jackup and platform fleet in the U.S. Gulf of Mexico,
improved rig activity in our Latin America Land segment and increased activity
in our E&P Services segment due to increased utilization and pricing driven by
stronger demand.
Operating Costs. Operating costs for the three months ended September 30,
2004 increased $7.4 million, or 2.6%, to $285.0 million as compared to the three
months ended September 30, 2003. The increase was due to increased activity
offshore Mexico in our Western Hemisphere segment, 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 were offset, in part, by a
decrease in the Eastern Hemisphere segment due to lower utilization resulting
from the weak market for semisubmersible rigs.
Depreciation and Amortization. Depreciation expense for the three months
ended September 30, 2004 increased $2.6 million, or 4.1%, to $66.6 million as
compared to the three months ended September 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.
26
General and Administrative. General and administrative expenses for the
three months ended September 30, 2004 increased $7.5 million, or 60.4%, as
compared to the three months ended September 30, 2003. The increase was due
primarily to charges related to executive severance costs of $2.8 million due
primarily to the severance of our President in September 2004, increased audit
and other professional fees due to Sarbanes-Oxley Act compliance and other
projects, and an increase in staffing due to an increase in business activity.
Other Income (Expense). Other expense for the three months ended September
30, 2004 and 2003 was $60.2 million and $38.0 million, respectively. Other
expense for the three months ended September 30, 2004 included $30.8 million of
refinancing charges associated with the retirement of debt obligations as
compared to $6.1 million of such charges for the three months ended September
30, 2003. Interest expense decreased by $1.3 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 nine months of 2004. Other income, net in the three months ended September
30, 2004 and 2003 included miscellaneous income items offset, in part, by net
foreign exchange losses.
Income Tax Provision. Our consolidated effective income tax rate for the
three months ended September 30, 2004 was 554.0% as compared to 24.2% for the
corresponding period in 2003. The higher rate for the three months ended
September 30, 2004 is principally because the debt refinancing charges reduced
income without a proportional reduction in income taxes. We recorded the entire
amount of the debt refinancing charges and the related tax benefit in the third
quarter of 2004. The rate is also impacted by 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 September
30, 2004 increased $1.5 million, or 25.9%, as compared to the three months ended
September 30, 2003, primarily due to the commencement of operations of the
Kizomba A deepwater platform rig in November 2003, which is managed by a joint
venture in Angola, and strong operating performance on the Pride Angola and the
Pride Africa, which are owned and operated by a joint venture in Angola.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
Revenues. Revenues for the nine months ended September 30, 2004 increased
$96.2 million, or 8.2%, to $1,264.1 million as compared to the nine months ended
September 30, 2003. The increase was primarily due to increased activity
offshore Mexico in our Western Hemisphere segment, 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 due to increased utilization and pricing driven by stronger
demand. 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. Additionally, the 2003 period included $42.5 million
of up-front fees recognized over the terms of the contracts for our Kazakhstan
land rigs.
Operating Costs. Operating costs for the nine months ended September 30,
2004 increased $81.4 million, or 10.8%, to $835.9 million as compared to the
nine months ended September 30, 2003. The increase was due primarily to
increased activity offshore Mexico in our Western Hemisphere segment, 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 nine months
ended September 30, 2004 increased $11.6 million, or 6.2%, to $199.0 million as
compared to the nine months ended September 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 in 2004.
General and Administrative. General and administrative expenses for the
nine months ended September 30, 2004 increased $18.0 million, or 51.4%, as
compared to the nine months ended September 30, 2003. The increase was due
primarily to increased audit and other professional fees due to Sarbanes-Oxley
Act compliance and other projects,
27
charges related to executive severance costs of $2.8 million due primarily to
the severance of our President in September 2004, and an increase in staffing
due to an increase in business activity.
Other Income (Expense). Other expense for the nine months ended September
30, 2004 increased by $16.0 million as compared to the nine months ended
September 30, 2003. Other expense for the nine months ended September 30, 2004
included $30.8 million of refinancing charges associated with the retirement of
debt obligations as compared to $6.4 million of such charges for the nine months
ended September 30, 2003. Interest expense decreased by $10.3 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 nine months of 2004. Other expense, net in the nine
months ended September 30, 2004 included $3.1 million of net foreign exchange
losses, which were partially offset by miscellaneous income items. Other income,
net in the corresponding period in 2003 included miscellaneous income items
offset, in part, by net foreign exchange losses.
Income Tax Provision. Our consolidated effective income tax rate for the
nine months ended September 30, 2004, was 71.1% as compared to 31.7% for the
same period in 2003. The higher rate for the nine months ended September 30,
2004 is a result of the factors discussed above for the three months ended
September 30, 2004.
We estimate that the 2004 effective income tax rate for the entire year
will be approximately 60 to 65 percent. The effective tax rate for the full year
is lower than for the first nine months of 2004 due primarily to the debt
retirement charge in connection with the July refinancing transactions of
approximately $30.8 million, before taxes, as described in note 3 of the notes
to the consolidated financial statements included in Item 1 of this quarterly
report. Since the debt retirement occurred in the third quarter of 2004, we
recorded the entire amount of the charge and the related tax benefit in that
quarter. This charge resulted in an unusually high effective tax rate in the
third quarter and the first nine months of 2004 because it reduced income
without a proportional reduction in income taxes. We are currently analyzing the
effect of "The American Jobs Creation Act of 2004" enacted in October 2004 and
any impact it may have on our effective income tax rate for 2004 and beyond.
Minority Interest. Minority interest in the nine months ended September
30, 2004 increased $2.6 million, or 17.2%, as compared to the nine months ended
September 30, 2003, primarily due to the commencement of operations of the
Kizomba A deepwater platform rig in November 2003 and strong operating
performance on the Pride Angola and the Pride Africa.
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $245.0 million and $79.9 million as of
September 30, 2004 and December 31, 2003, respectively. Our working capital
included a total of $97.4 million and $219.0 million of short-term borrowings
and current portion of long-term debt and long-term lease obligations as of
September 30, 2004 and December 31, 2003, respectively. The increase in net
working capital was attributable primarily to reduction in 2004 of short-term
borrowings and current maturities of long-term debt.
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. As
of September 30, 2004, $85.0 million of borrowings and an additional $28.9
million of letters of credit were outstanding under the facility. We may obtain
up to $100.0 million of letters of credit under the 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 September 30, 2004, the interest rates on the term loan and revolving
credit facility were 3.3% and 3.5%, respectively, and availability under the
revolving credit facility was approximately $386.1 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
28
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 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 and $22.5 million
commitment was drawn in August 2004. Funds at closing, together with $15.4
million of previously restricted cash held by the joint venture, 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 $22.5 million drawn in August 2004 was used to repay
additional loans due from the joint venture company to us. 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 used 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, including our
9% senior convertible notes due 2004.
In connection with the retirement of our 9 3/8% senior notes and 10%
senior 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 9 3/8% senior notes and $127.6
million aggregate principal amount of 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.
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 nine months of
2004, we recorded additional loss provisions totaling $32.5 million related to
expected losses on the deepwater platform rig construction projects. We expect
approximately $28.0 million of cash receipts from the projects after September
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
29
Additions to property and equipment during the nine months ended September
30, 2004 totaled $110.1 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 $60.0 million.
Contractual Obligations
As of September 30, 2004, we had approximately $4.3 billion in total
assets and $1.9 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 September 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.
We are holding cash collateral of $17.5 million 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 cash advances from the joint
venture partners.
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
30
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. The joint venture company made principal and
interest payments totaling $3.6 million and $10.8 million in January and July
2004, respectively. The payments were funded by cash advances from the joint
venture partners, of which our share was 30%. Additional principal and interest
payments of approximately $12.3 million are due in the fourth quarter of 2004.
Principal and interest payments totaling approximately $45.1 million are due in
2005.
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.
As of September 30, 2004, our investment in the joint venture was
approximately $39.9 million, including capitalized interest of $8.2 million.
Other Sources and Uses of Cash
As of September 30, 2004, $29.5 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 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 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 and evaluating bids. There can be no assurance
that the bids received will ultimately 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.
31
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
32
- 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.
33
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 September 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 September 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 September 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 September 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 September 30, 2004 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
34
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS*
+4.1 Credit Agreement dated July 7, 2004 by and among Pride Offshore, Inc.,
the guarantors named therein, the lenders party thereto, Calyon New York
Branch and Natexis Banques Populaires, as issuing banks, Calyon and
Natexis, as swingline lenders, Citicorp North America, Inc., as
administrative agent, and Citibank, N.A., as collateral agent.
4.2 Indenture dated as of July 1, 2004 by and between Pride and JPMorgan
Chase Bank, as Trustee (incorporated by reference to Exhibit 4.1 to
Pride's Registration Statement on Form S-4, File. No. 333-118104 (the
"Registration Statement")).
4.3 First Supplemental Indenture dated as of July 7, 2004 by and between
Pride and JPMorgan Chase Bank, as Trustee (incorporated by reference to
Exhibit 4.2 to the Registration Statement).
+10.1 Supplemental Executive Retirement Plan, as amended and restated ("SERP").
+10.2 SERP Participation Agreement effective August 12, 2004 between Pride and
John R. Blocker, Jr.
+10.3 SERP Participation Agreement effective August 12, 2004 between Pride and
Paul A. Bragg.
+10.4 SERP Participation Agreement effective August 12, 2004 between Pride and
John C. G. O'Leary.
+10.5 SERP Participation Agreement effective August 12, 2004 between Pride and
Louis A. Raspino.
+10.6 First Amendment to Employment/Non-Competition/Confidentiality Agreement
effective August 12, 2004 between Pride and John R. Blocker, Jr.
+10.7 First Amendment to Employment/Non-Competition/Confidentiality Agreement
effective August 12, 2004 between Pride and Gary Casswell.
+10.8 Separation Agreement effective October 8, 2004 between Pride and John
C.G. O'Leary (incorporated by reference to Exhibit 10.1 to Pride's
Current Report on Form 8-K filed on October 14, 2004, 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.
35
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
36
INDEX TO EXHIBITS
+4.1 Credit Agreement dated July 7, 2004 by and among Pride Offshore, Inc., the
guarantors named therein, the lenders party thereto, Calyon New York
Branch and Natexis Banques Populaires, as issuing banks, Calyon and
Natexis, as swingline lenders, Citicorp North America, Inc., as
administrative agent, and Citibank, N.A., as collateral agent.
4.2 Indenture dated as of July 1, 2004 by and between Pride and JPMorgan Chase
Bank, as Trustee (incorporated by reference to Exhibit 4.1 to Pride's
Registration Statement on Form S-4, File. No. 333-118104 (the
"Registration Statement")).
4.3 First Supplemental Indenture dated as of July 7, 2004 by and between Pride
and JPMorgan Chase Bank, as Trustee (incorporated by reference to Exhibit
4.2 to the Registration Statement).
+10.1 Supplemental Executive Retirement Plan, as amended and restated ("SERP").
+10.2 SERP Participation Agreement effective August 12, 2004 between Pride and
John R. Blocker, Jr.
+10.3 SERP Participation Agreement effective August 12, 2004 between Pride and
Paul A. Bragg.
+10.4 SERP Participation Agreement effective August 12, 2004 between Pride and
John C. G. O'Leary.
+10.5 SERP Participation Agreement effective August 12, 2004 between Pride and
Louis A. Raspino.
+10.6 First Amendment to Employment/Non-Competition/Confidentiality Agreement
effective August 12, 2004 between Pride and John R. Blocker, Jr.
+10.7 First Amendment to Employment/Non-Competition/Confidentiality Agreement
effective August 12, 2004 between Pride and Gary Casswell.
+10.8 Separation Agreement effective October 8, 2004 between Pride and John C.G.
O'Leary (incorporated by reference to Exhibit 10.1 to Pride's Current
Report on Form 8-K filed on October 14, 2004, 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.
37