10-K 1 h13348e10vk.txt PRIDE INTERNATIONAL, INC. - DATED 12/31/2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 789-1400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.01 par value New York Stock Exchange Rights to Purchase Preferred Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of the registrant's common stock held by non-affiliates of the registrant at June 30, 2003, based on the closing price on the New York Stock Exchange on such date, was approximately $2.1 billion. (The executive officers and directors of the registrant and First Reserve Corporation, its affiliates and related parties are considered affiliates for the purposes of this calculation.) The number of shares of the registrant's common stock outstanding on March 8, 2004 was 135,769,487. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for the Annual Meeting of Stockholders to be held in May 2004 are incorporated by reference into Part III of this report. TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 15 Item 3. Legal Proceedings........................................... 15 Item 4. Submission of Matters to a Vote of Security Holders......... 16 Executive Officers of the Registrant........................ 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 18 Item 6. Selected Financial Data..................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 39 Forward-Looking Statements.................................. 40 Item 8. Financial Statements and Supplementary Data................. 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 76 Item 9A. Controls and Procedures..................................... 76 PART III Item 10. Directors and Executive Officers of the Registrant.......... 78 Item 11. Executive Compensation...................................... 78 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 78 Item 13. Certain Relationships and Related Transactions.............. 78 Item 14. Principal Accounting Fees and Services...................... 78 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 79
PART I ITEM 1. BUSINESS In this Annual Report on Form 10-K, we refer to Pride International, Inc. and its subsidiaries as "we," the "Company" or "Pride," unless the context clearly indicates otherwise. Pride International, Inc. is a Delaware corporation with its principal executive offices located at 5847 San Felipe, Suite 3300, Houston, Texas 77057. Pride's telephone number at such address is (713) 789-1400. OVERVIEW Pride is a leading international provider of contract drilling and related services, operating both offshore and on land. As of March 1, 2004, we operated a global fleet of 327 rigs, including two ultra-deepwater drillships, 11 semisubmersible rigs, 35 jackup rigs, 30 tender-assisted, barge and platform rigs and 249 land-based drilling and workover rigs. Our operations are conducted in more than 30 countries and marine provinces in many of the most active oil and gas basins of the world, including South America, the Gulf of Mexico, the Mediterranean, West and North Africa, the Middle East, Asia Pacific, Russia and Kazahkstan. The significant diversity of our rig fleet and areas of operation enables us to provide a broad range of services and to take advantage of market upturns while reducing our exposure to sharp downturns in any particular market sector or geographic region. During 2003, we continued our strategy begun in 2002 to redeploy our assets to stronger markets internationally and to enter into long-term contracts where available at attractive rates. In the Gulf of Mexico, we moved five jackup rigs, one platform rig and one semisubmersible rig from the United States to Mexico. These 2003 moves were in addition to the 11 jackups, one semisubmersible and one platform rig mobilized to Mexico and other international markets in 2002, principally from the U.S. Gulf of Mexico. The rigs are receiving higher day rates for longer terms, and providing substantially higher cash margins, than they would currently be realizing in the U.S. Gulf of Mexico market for the same classes of rigs. At the same time, we believe our remaining available jackup and platform rig fleets in the U.S. Gulf of Mexico leave us well-positioned to benefit from any improvement in that market in 2004. We may redeploy additional assets to more active regions in 2004 if we have the opportunity to do so on attractive terms; however, we expect fewer opportunities for redeployments than in 2002 and 2003. During the fourth quarter of 2003, we also entered into a ten-year aggregate contract extension with Total E&P Angola for the ultra-deepwater drillships Pride Africa and Pride Angola, to commence upon completion of their existing contracts in 2005. The ten-year aggregate is the total usage for both drillships, with a minimum of three years and a maximum of seven years for any one drillship. In addition, in November 2003, the Kizomba A deepwater platform drilling rig constructed by Pride for a unit of Exxon Mobil Corporation began operations offshore Angola under a five-year management contract. Our technical services segment has had major projects ongoing to design, engineer, manage construction of and commission four deepwater platform drilling rigs, one of which, the Kizomba A, has been completed and commenced operations. The rigs are being constructed under lump-sum contracts on behalf of two major oil company customers for installation on spar and tension-leg production platforms. We also are to provide drilling operations management of the rigs once they have been installed on the platforms. We have experienced significant cost overruns on these projects, and we estimate that total costs on all four projects will substantially exceed revenues. Accordingly, during 2003, we recorded substantial loss provisions relating to the construction of these deepwater platform rigs. We do not currently intend to enter into any additional construction contracts on a lump-sum basis for rigs to be owned by others. See "-- Risk Factors -- Costs overruns on our lump-sum construction contracts have resulted in losses on those contracts and may continue to do so in the future" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Environment and Outlook -- Segment Review -- Technical Services." 1 OPERATIONS We provide contract drilling services to oil and gas exploration and production companies through the use of mobile offshore and land-based drilling rigs in both U.S. offshore and international land and offshore markets. Generally, land-based rigs and offshore platform rigs operate with crews of six to 17 persons, jackup rigs, tender-assisted rigs and barge rigs operate with crews of 15 to 25 persons and semisubmersible rigs and drillships operate with crews of 60 to 75 persons. We provide the rig and drilling crew and are responsible for the payment of operating and maintenance expenses. Our land-based fleet also includes a class of rigs known as workover rigs designed to perform maintenance and repair or modification to existing wells. Maintenance and repair services are required on producing oil and gas wells to ensure efficient, continuous operation. These services consist of mechanical repairs necessary to maintain or improve production from the well, such as repairing parted sucker rods, replacing defective downhole pumps in an oil well or replacing defective tubing in a gas well. We provide the rigs, equipment and crews for these maintenance services, which are performed on both oil and gas wells, but are more often required on oil wells. Also, producing oil and gas wells occasionally require major modifications, called "workovers." Workover services include the opening of new producing zones in an existing well, recompletion of a well in which production has declined, drilling out plugs and packers and the conversion of a producing well to an injection well during enhanced recovery operations. GULF OF MEXICO We operate two semisubmersible rigs, two independent-leg jackup rigs and 23 mat-supported jackup rigs in the Gulf of Mexico. We are the second largest operator of mat-supported jackup rigs capable of drilling in water depths of 200 to 300 feet. We also operate a fleet of 21 modular platform rigs in the Gulf of Mexico. In the U.S. sector of the Gulf of Mexico, we operate 11 jackup rigs and 18 platform rigs. Six of the jackups and six of the platform rigs are currently working under contracts ranging in duration from well-to-well to one year. The remaining rigs are stacked. In the Mexican sector, two semisubmersible rigs, 14 jackup rigs and three platform rigs are working for a unit of Petroleos Mexicanos S.A. ("Pemex") under contracts with initial durations of one to four years each. We mobilized nine jackup rigs and one platform rig from the U.S. sector to the Mexican sector in 2002, and five additional jackups, one semisubmersible and one platform rig in 2003. Of our two semisubmersibles in this market, the Pride South Seas, which was mobilized in 2002 from South Africa, is contracted through June 2005, and the Pride Mexico, which began operations in October 2003, is contracted through April 2007. INTERNATIONAL OFFSHORE West Africa. Our market-leading position in Angola includes two ultra-deepwater drillships, three deepwater semisubmersibles, one jackup rig, two tender-assisted rigs and one deepwater platform rig. We have a 51% ownership interest in two ultra-deepwater drillships, the Pride Angola and the Pride Africa. The drillships are contracted to work for Total E&P Angola under contracts initially expiring in May 2005 and June 2005, respectively. During the fourth quarter of 2003, we entered into a ten-year aggregate contract extension for these rigs, to commence upon completion of their existing contracts. The ten-year aggregate is the total usage for both drillships, with a minimum of three years and a maximum of seven years for any one drillship. Two of our semisubmersible rigs, the Pride South Pacific and the Pride North America, are working offshore Angola under contracts expiring in April 2004 and August 2004, respectively. We are actively marketing these rigs in the region with the objective of securing work directly following completion of the current contracts. In addition, we operate the dynamically positioned semisubmersible rig Leiv Eiriksson in Angola under a long-term management contract. The current work program expires in April 2004, and we are presently marketing the rig in the region. The jackup rig Pride Cabinda is working offshore Angola under a long-term contract expiring in August 2005. 2 Following completion of its special periodic survey, the tender-assisted rig Alligator is expected to begin working in July 2004 under a contract that expires in January 2006. The tender-assisted rig Barracuda is operating in Angola under a contract that expires in July 2004. In addition, in November 2003, the Kizomba A deepwater platform drilling rig began operations for a unit of ExxonMobil Corporation offshore Angola under a management contract expiring in December 2008. Elsewhere in West Africa, we mobilized the jackup rig Pride North Dakota from the U.S. Gulf of Mexico to Nigeria for work commencing in October 2002 under a contract that expires in October 2004. The swamp barge rig Bintang Kalimantan is working in Nigeria under a contract expiring in March 2004, after which we expect the rig to be stacked, and the tender-assisted rig Al Baraka I is stacked following completion of its management contract in September 2003. South America. In Brazil, the Pride Carlos Walter and the Pride Brazil, which are deepwater, dynamically positioned semisubmersible rigs, are working under five-year contracts for Petrobras that expire in June and July 2006, respectively. The Pride South America, a dynamically positioned semisubmersible rig, is currently working offshore Brazil for Petrobras under a contract that expires in January 2005. The semisubmersible Pride South Atlantic began working on a series of one-well contracts for three independent operators offshore Brazil in January 2004, with possible additional option wells. The firm portion of the program is expected to be completed in July 2004. Our offshore fleet in Venezuela includes two jackup rigs and two barge rigs operating on Lake Maracaibo. We manage the two jackup rigs on behalf of Petroleos de Venezuela, S.A. ("PDVSA") under contracts that expire in March and April 2004 at the end of work in progress. Pride has the right to extend each of these contracts for an additional six months. The two barge rigs are working under ten-year contracts with PDVSA expiring in January 2005. Our semisubmersible rig Pride Venezuela has been stacked in Trinidad since completing its contract with PDVSA offshore Venezuela in July 2003. Other International. We operate two jackup rigs in India. In November 2002, we mobilized the Pride West Virginia from the Gulf of Mexico to India, and it is currently working under a contract that expires in November 2004. The Pride Pennsylvania is working offshore India under a contract that expires in 2006. The semisubmersible rig Pride North Sea operates in the Mediterranean Sea under a contract that expires in August 2004. The jackup rig Pride Ohio is operating in the Middle East under a contract that expires in April 2004. The jackup rig Pride Montana is currently in Saudi Arabia working under a contract expiring in June 2004. The Pride Hawaii, a jackup rig working offshore Malaysia, is under contract until May 2005. The Pride Rotterdam, an accommodation unit, is working in the Dutch sector of the North Sea under a contract that expires in March 2005. The tender-assisted rigs Ile de Sein, working in Indonesia, and the Piranha, working in Malaysia, operate under contracts expiring in December 2004 and June 2005, respectively. INTERNATIONAL LAND We operate 249 land-based rigs internationally, including 227 rigs in South America. In Argentina, we operate a market-leading 154 rigs. Of these rigs, 52 are drilling rigs and 102 are workover rigs. Argentine rig operations are generally conducted in remote regions of the country and require substantial infrastructure and support costs. We believe that our established infrastructure and scale of operations provide us with a competitive advantage in this market. Our land-based fleet in Venezuela consists of 36 rigs, of which nine are drilling rigs and 27 are workover rigs. In Colombia, we operate 12 drilling rigs and eight workover rigs under contracts with major integrated and independent international oil companies and with the national oil company. We operate four drilling rigs and two workover rigs for operators in Bolivia. We operate two drilling rigs in Ecuador. In Brazil, we operate one land-based drilling rig and eight land-based workover rigs. Elsewhere, our land-based operations include five rigs in Chad, one in Mexico, one in France, one in Russia, two in Kazakhstan, four in North Africa and four in the Middle East. 3 E&P SERVICES We provide a variety of services to exploration and production companies in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru and Venezuela through our E&P services division, including cementing, fracturing, coil tubing, directional drilling, underbalanced drilling, nitrogen injection and fishing services. We also manage integrated services projects in Argentina and other South American countries. During 2002 and 2003, our land-based rig and E&P services operations in Argentina and Venezuela were adversely affected by the economic and political instability in those countries. Please read "-- Risk Factors -- Worldwide political and economic developments may hurt our operations" in Item 1 of this annual report, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this annual report. TECHNICAL SERVICES We employ a technical staff dedicated to designing specialized drilling equipment to fulfill specific customer requirements and to conduct research and development in drilling solutions and technologies. The technical services group has designed and managed the construction of numerous rigs in our fleet. Our technical services segment has had major projects ongoing to design, engineer, manage construction of and commission four deepwater platform drilling rigs, one of which has been completed and commenced operations. The rigs are being constructed under lump-sum contracts on behalf of two major oil company customers for installation on spar and tension-leg production platforms. We also are to provide drilling operations management of the rigs once they have been installed on the platforms. We have experienced significant cost overruns on these projects, and we estimate that total costs on all four projects will substantially exceed revenues. Accordingly, during 2003, we recorded substantial loss provisions relating to the construction of these deepwater platform rigs. We do not currently intend to enter into any additional construction contracts on a lump-sum basis for rigs to be owned by others. See "Risk Factors -- Cost overruns on our lump-sum construction contracts have resulted in losses on those contracts and may continue to do so in the future" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Environment and Outlook -- Segment Review -- Technical Services." RIG FLEET OFFSHORE RIGS The table below presents information about our offshore rig fleet as of March 1, 2004:
BUILT/ UPGRADED OR WATER DRILLING EXPECTED DEPTH DEPTH RIG NAME RIG TYPE/DESIGN COMPLETION RATING RATING LOCATION STATUS -------- --------------- ----------- ------ -------- -------- ------ (FEET) (FEET) DRILLSHIPS -- 2 Pride Africa(1)........... Gusto 10,000 1999 10,000 30,000 Angola Working Pride Angola(1)........... Gusto 10,000 1999 10,000 30,000 Angola Working
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BUILT/ UPGRADED OR WATER DRILLING EXPECTED DEPTH DEPTH RIG NAME RIG TYPE/DESIGN COMPLETION RATING RATING LOCATION STATUS -------- --------------- ----------- ------ -------- -------- ------ (FEET) (FEET) SEMISUBMERSIBLE RIGS -- 13 Leiv Eiriksson(2)......... Bingo 9000 2001 8,200 30,000 Angola Working Pride North America....... Bingo 8000 1999 7,500 25,000 Angola Working Pride South Pacific....... Blohm & Voss 1974/1999 6,500 25,000 Angola Working Pride Portland(3)......... Amethyst 2004 5,600 25,000 Maine Shipyard Pride Rio de Janeiro(3)... Amethyst 2004 5,600 25,000 Curacao Sea Trials Pride Brazil.............. Amethyst 2001 5,000 25,000 Brazil Working Pride Carlos Walter....... Amethyst 2000 5,000 25,000 Brazil Working Pride South America....... Amethyst 1987/1996 4,000 20,000 Brazil Working Pride Mexico.............. Neptune Pentagon 1973/1995 2,625 22,000 Mexico Working Pride South Atlantic...... F&G Enhanced Pacesetter 1982 1,500 25,000 Brazil Working Pride Venezuela........... F&G Enhanced Pacesetter 1982/2001 1,500 25,000 Trinidad Available Pride South Seas.......... Aker H-3 1977/1997 1,000 20,000 Mexico Working Pride North Sea........... Aker H-3 1975/2001 1,000 25,000 Mediterranean Working JACKUP RIGS -- 35 Pride Cabinda............. Independent leg, cantilever 1983 300 25,000 Angola Working Pride Hawaii.............. Independent leg, cantilever 1975/1997 300 30,000 Malaysia Working Pride Pennsylvania........ Independent leg, cantilever 1973/1998 300 20,000 India Working Pride Tennessee........... Independent leg, cantilever 1981 300 25,000 Mexico Working Pride West Virginia(4).... Independent leg, cantilever 1982/2002 300 30,000 India Working Pride Montana............. Independent leg, cantilever 1980/2001 270 20,000 Saudi Arabia Working Pride North Dakota........ Independent leg, cantilever 1981/2002 250 30,000 Nigeria Working Pride Ohio................ Independent leg, cantilever 1975/1998 250 20,000 Middle East Working GP-20(2).................. Independent leg, cantilever 1982 200 20,000 Venezuela Working GP-19(2).................. Independent leg, cantilever 1981 150 20,000 Venezuela Working Pride Wisconsin........... Independent leg, slot 1976/2002 300 30,000 Mexico Working Pride Texas............... Mat-supported, cantilever 1999 300 20,000 Mexico Working Pride Alaska.............. Mat-supported, cantilever 1982/2002 250 25,000 Mexico Working Pride Kansas.............. Mat-supported, cantilever 1999 250 25,000 USA Working Pride Missouri............ Mat-supported, cantilever 1981 250 20,000 USA Working Pride Alabama............. Mat-supported, cantilever 1982 200 25,000 Mexico Working Pride Arkansas............ Mat-supported, cantilever 1982 200 25,000 Mexico Working Pride Colorado............ Mat-supported, cantilever 1982 200 25,000 Mexico Working Pride Florida............. Mat-supported, cantilever 1981 200 20,000 USA Working Pride Mississippi......... Mat-supported, cantilever 1981/2002 200 25,000 Mexico Working Pride Nebraska............ Mat-supported, cantilever 1981/2002 200 20,000 Mexico Working Pride Nevada.............. Mat-supported, cantilever 1981/2002 200 20,000 Mexico Working Pride New Mexico.......... Mat-supported, cantilever 1982 200 25,000 USA Working Pride South Carolina...... Mat-supported, cantilever 1980/2002 200 20,000 Mexico Working Pride Utah................ Mat-supported, cantilever 1978/2002 80 16,000 USA Available Pride Kentucky............ Mat-supported, slot 1974 262 25,000 USA Available Pride Arizona............. Mat-supported, slot 1981/1996 250 25,000 USA Available Pride California.......... Mat-supported, slot 1997/2002 250 20,000 Mexico Working Pride Georgia............. Mat-supported, slot 1981/1995 250 20,000 USA Working Pride Louisiana........... Mat-supported, slot 1981/2002 250 25,000 Mexico Working Pride Michigan............ Mat-supported, slot 1975/2002 250 25,000 USA Working Pride Oklahoma............ Mat-supported, slot 1996/2002 250 20,000 Mexico Working Pride Wyoming............. Mat-supported, slot 1976 250 25,000 USA Available Pride Illinois............ Mat-supported, slot 1970/1993 225 20,000 USA Available Pride Rotterdam........... Accommodation unit 1975/1992 205 -- North Sea Working
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BUILT/ UPGRADED OR WATER DRILLING EXPECTED DEPTH DEPTH RIG NAME RIG TYPE/DESIGN COMPLETION RATING RATING LOCATION STATUS -------- --------------- ----------- ------ -------- -------- ------ (FEET) (FEET) TENDER-ASSISTED RIGS -- 5 Al Baraka I(5)............ Self-erecting barge 1994 650 20,000 West Africa Available Piranha................... Self-erecting barge 1978/1998 600 20,000 Malaysia Working Ile de Sein............... Self-erecting barge 1981/1997 450 16,000 Indonesia Working Barracuda................. Self-erecting barge 1982 330 20,000 Angola Working Alligator................. Self-erecting barge 1982/2004 330 20,000 Angola Shipyard BARGE RIGS -- 3 Pride I................... Floating cantilever 1994 150 20,000 Venezuela Working Pride II.................. Floating cantilever 1994 150 20,000 Venezuela Working Bintang Kalimantan........ Swamp barge 1983 N/A 16,000 Nigeria Working PLATFORM RIGS -- 22 Kizomba A(2).............. Ultra-heavy electrical 2003 N/A 30,000 Angola Working Rig 1501E................. Heavy electrical 1996 N/A 25,000 USA Working Rig 1502E................. Heavy electrical 1998 N/A 25,000 USA Available Rig 1503E................. Heavy electrical 1997/2003 N/A 20,000 USA Working Rig 1002E................. Heavy electrical 1996 N/A 20,000 Mexico Working Rig 1003E................. Heavy electrical 1996 N/A 20,000 Mexico Working Rig 1005E................. Heavy electrical 1998 N/A 20,000 Mexico Working Rig 1006E................. Heavy electrical 2001 N/A 20,000 USA Working Rig 750E.................. Heavy electrical 1992 N/A 16,500 USA Available Rig 751E.................. Heavy electrical 1995 N/A 16,500 USA Available Rig 650E.................. Intermediate electrical 1994 N/A 15,000 USA Available Rig 651E.................. Intermediate electrical 1995 N/A 15,000 USA Working Rig 653E.................. Intermediate electrical 1995 N/A 15,000 USA Available Rig 951................... Heavy mechanical 1995 N/A 18,000 USA Available Rig 200................... Intermediate mechanical 1993 N/A 15,000 USA Available Rig 210................... Intermediate mechanical 1996 N/A 15,000 USA Working Rig 220................... Intermediate mechanical 1995 N/A 15,000 USA Available Rig 100................... Intermediate mechanical 1990 N/A 15,000 USA Available Rig 110................... Intermediate mechanical 1990 N/A 15,000 USA Available Rig 130................... Intermediate mechanical 1991 N/A 15,000 USA Available Rig 170................... Intermediate mechanical 1991 N/A 15,000 USA Available Rig 14.................... Light mechanical 1994 N/A 10,000 USA Working
--------------- (1) Owned by joint ventures in which we have a 51% interest. (2) Managed by us, but owned by others. (3) Owned by a joint venture in which we have a 30% interest; formerly known as the Amethyst 4 and Amethyst 5. (4) We have entered into a memorandum of agreement to sell the unit subject to various conditions, some of which may be difficult to satisfy. Accordingly, the sale may not be completed. (5) Owned by a joint venture in which we have a 12.5% interest. Drillships. The Pride Africa and Pride Angola are ultra-deepwater, self-propelled drillships that can be positioned over a drill site through the use of a computer-controlled thruster (dynamic positioning) system. Drillships are suitable for deepwater drilling in remote locations because of their mobility and large load-carrying capacity. Semisubmersible Rigs. Our semisubmersible rigs are floating platforms that, by means of a water ballasting system, can be submerged to a predetermined depth so that a substantial portion of the lower hulls, or pontoons, is below the water surface during drilling operations. The rig is "semisubmerged," remaining 6 afloat in a position, off bottom, where the lower hull is about 60 to 80 feet below the water line and the upper deck protrudes well above the surface. This type of rig maintains its position over the well through the use of either an anchoring system or a computer-controlled thruster system similar to that used by our drillships. Jackup Rigs. The jackup rigs we operate are mobile, self-elevating drilling platforms equipped with legs that can be lowered to the ocean or lake floor until a foundation is established to support the drilling platform. The rig legs may have a lower hull or mat attached to the bottom to provide a more stable foundation in soft bottom areas. Independent leg rigs are better suited for harsher or uneven seabed conditions. Jackup rigs are generally subject to a maximum water depth of approximately 300 feet, while some jackup rigs may drill in water depths as shallow as ten feet. The length of the rig's legs and the operating environment determine the water depth limit of a particular rig. A cantilever jackup rig has a feature that allows the drilling platform to be extended out from the hull, allowing it to perform drilling or workover operations over a pre-existing platform or structure. Some cantilever jackup rigs have "skid-off" capability, which allows the derrick equipment to be skidded onto an adjacent platform, thereby increasing the operational capacity of the rig. Slot-type jackup rigs are configured for drilling operations to take place through a slot in the hull. Slot-type rigs are usually used for exploratory drilling because their configuration makes them difficult to position over existing platforms or structures. Tender-Assisted Rigs. Our tender-assisted rigs are generally non-self-propelled barges moored alongside a platform and containing crew quarters, mud tanks, mud pumps and power generation systems. The only equipment transferred to the platform for drilling or workover operations is the derrick equipment set consisting of the substructure, drillfloor, derrick and drawworks. As a result, tender-assisted rigs are less hazardous and allow smaller, less costly platforms to be used for development projects. Self-erecting tenders carry their own derrick equipment and have a crane capable of erecting the derrick on the platform, thereby eliminating the cost associated with a separate derrick barge and related equipment. Barge Rigs. We operate barge rigs on Lake Maracaibo, Venezuela that have been designed to work in a floating mode with a cantilever feature and a mooring system that enables the rig to operate in waters up to 150 feet deep. In Nigeria, we operate a swamp barge rig. This rig is held on location by submerging the hull onto the sea floor before commencement of work. Platform Rigs. Our platform rigs generally consist of drilling equipment and machinery arranged in modular packages that are transported to and assembled and installed on fixed offshore platforms owned by the customer. Fixed offshore platforms are steel, tower-like structures that stand on the ocean floor, with the top portion, or platform, above the water level, providing the foundation upon which the platform rig is placed. Two of our modular platform rigs are capable of drilling to well depths of up to 25,000 feet. The Kizomba A rig, which we built and manage for the customer, can drill wells at depths of up to 30,000 feet. It is permanently installed on a deepwater floating structure known as a tension-leg platform. Our platform rigs can be used to provide drilling, workover and horizontal reentry services using top drives, enhanced pumps and solids control equipment for drilling fluids. 7 LAND RIGS The table below presents information about our land-based rig fleet as of March 1, 2004:
TOTAL DRILLING WORKOVER UTILIZATION ----- -------- -------- ----------- SOUTH AMERICA -- 227 Argentina....................................... 154 52 102 86% Venezuela....................................... 36 9 27 86% Colombia........................................ 20 12 8 65% Bolivia......................................... 6 4 2 50% Brazil(1)....................................... 9 1 8 89% Ecuador......................................... 2 2 -- 50% OTHER INTERNATIONAL -- 22 Chad............................................ 5 3 2 100% North Africa.................................... 4 3 1 0% Oman............................................ 4 4 -- 100% Russia/Kazakhstan............................... 3 3 -- 67% Other........................................... 6 4 2 50% --- -- --- Total Land-Based Rigs................... 249 97 152 82% === == === ====
--------------- (1) One drilling rig and three workover rigs are managed by us, but owned by third parties. A land-based drilling rig consists of engines, drawworks, a mast, substructure, pumps to circulate the drilling fluid, blowout preventers, drill string and related equipment. The intended well depth and the drilling site conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling job. A land-based well servicing rig consists of a mobile carrier, engine, drawworks and derrick. The primary function of a well servicing rig is to act as a hoist so that pipe, rods and down-hole equipment can be run into and out of a well. All of our well servicing rigs can be readily moved between well sites and between geographic areas of operations. Most of our land-based drilling and land-based workover rigs operate under short-term or well-to-well contracts. COMPETITION Our competition ranges from large multinational companies offering a wide range of drilling and other oilfield services to smaller, locally owned companies. We believe we are competitive in terms of pricing, performance, equipment, safety, availability of equipment to meet customer needs and availability of experienced, skilled personnel. Competition is usually on a regional basis, but offshore drilling rigs are highly mobile and may be moved, at a cost that is sometimes substantial, from one region to another in response to demand. Drilling contracts are generally awarded on a competitive bid basis. While an operator may consider the contractor's safety record, crew quality, rig location and quality of service and equipment, price is often the primary factor in determining which contractor, among those with suitable rigs, is awarded a job. Some of our competitors have greater financial resources, which may enable them to better withstand periods of low utilization, compete more effectively on the basis of price, build new rigs or acquire existing rigs. CUSTOMERS We work for large multinational oil and gas companies, government-owned oil and gas companies and independent oil and gas producers. During 2003, we had two customers, Pemex and Petrobras, that each accounted for approximately 13% of our consolidated revenues. The loss of either of these significant customers could, in the near term, have a material adverse effect on our results of operations. No other customer accounted for 10% or more of our 2003 consolidated revenues. 8 DRILLING CONTRACTS Our drilling contracts are awarded through competitive bidding or on a negotiated basis. The contract terms and rates vary depending on competitive conditions, the geographical area, the geological formation to be drilled, the equipment and services to be supplied, the on-site drilling conditions and the anticipated duration of the work to be performed. Oil and gas well drilling contracts are carried out on a dayrate, footage or turnkey basis. Under dayrate contracts, we charge the customer a fixed charge per day regardless of the number of days needed to drill the well. In addition, dayrate contracts usually provide for a reduced day rate (or lump sum amount) for mobilizing the rig to the well location and for assembling and dismantling the rig. Under dayrate contracts, we ordinarily bear no part of the costs arising from down-hole risks (such as time delays for various reasons, including a stuck or broken drill string or blowouts). Substantially all of our contracts with major customers are on a dayrate basis. Contracts may also include reimbursement of costs to modify or upgrade a rig to meet customer specifications. Other contracts provide for payment on a footage basis, whereby we are paid a fixed amount for each foot drilled regardless of the time required or the problems encountered in drilling the well. We may also enter into turnkey contracts, whereby we agree to drill a well to a specific depth for a fixed price and to bear some of the well equipment costs. Compared to dayrate contracts, footage and turnkey contracts involve a higher degree of risk to us and, accordingly, normally provide greater profit potential. Contracts for work in international offshore markets generally provide for longer terms than contracts in domestic offshore markets. When contracting abroad, we are faced with the risks of currency fluctuation and, in certain cases, exchange controls. Typically, we attempt to limit these risks by obtaining contracts providing for payment in U.S. dollars or freely convertible foreign currency. To the extent possible, we seek to limit our exposure to local currencies by matching our acceptance thereof to our expense requirements in such currencies. There can be no assurance that we will be able to continue to take such actions in the future, thereby exposing us to foreign currency fluctuations that could have a material adverse effect upon our results of operations and financial condition. Please read "-- Risk Factors -- Worldwide political and economic developments may hurt our operations" in Item 1 of this annual report, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this annual report and "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of this annual report. In addition, a customer may seek to cancel or renegotiate its contract during periods of depressed market conditions or if we experience downtime or operational problems above the contractual limit. See "-- Risk Factors -- Our customers may seek to cancel or renegotiate some of our drilling contracts during periods of depressed market conditions or if we experience operational difficulties." SEASONALITY Our land rigs in Kazakhstan are operating on artificial islands in the Caspian Sea. Because winter ice conditions hinder access and resupply, the rigs are placed in a non-operating standby mode during winter months at a reduced dayrate. Otherwise, our business activities are not significantly affected by seasonal fluctuations. Most of our other rigs are located in geographical areas that are not subject to severe weather changes that would halt operations for prolonged periods. EMPLOYEES As of March 1, 2004, we employed approximately 12,200 employees. Approximately 1,200 of our employees were located in the United States and 11,000 were located abroad. Hourly rig crews constitute the vast majority of our employees. None of our U.S. employees are represented by a collective bargaining unit. Many of our international employees are subject to industry-wide labor contracts within their respective countries. We believe that our employee relations are good. 9 SEGMENT INFORMATION Information with respect to revenues, earnings from operations and identifiable assets attributable to our industry segments and geographic areas of operations for the last three fiscal years is presented in Note 15 of our Notes to Consolidated Financial Statements included in Item 8 of this annual report. WEBSITE ACCESS TO SEC REPORTS We file annual, quarterly and special reports, proxy statements and other information with the SEC. These filings, and any amendments to these filings, are available free of charge through our internet website at www.prideinternational.com as soon as reasonably practicable after we electronically file that material with, or furnish it to, the SEC. These filing also are available at the SEC's internet website at www.sec.gov. Information contained on our website is not part of this annual report. RISK FACTORS COST OVERRUNS ON OUR LUMP-SUM CONSTRUCTION CONTRACTS HAVE RESULTED IN LOSSES ON THOSE CONTRACTS AND MAY CONTINUE TO DO SO IN THE FUTURE. Our technical services segment is performing four deepwater platform rig construction projects under lump-sum contracts with our customers. One of these rigs has been delivered to the customer and is now in operation. We recorded loss provisions totaling $98.4 million, or $64.0 million net of taxes at the U.S. statutory rate, during 2003 as a result of cost overruns on these projects. The loss provisions include costs incurred to date plus our estimate of costs we expect to incur to complete these projects. Currently unforeseen events may result in further cost overruns to complete these projects, which could be material and which would require us to record additional loss provisions in future periods. Such events could include variations in labor and equipment productivity over the remaining term of the contract, unanticipated cost increases, engineering changes, shipyard or systems problems, project management issues, shortages of equipment, materials or skilled labor, unscheduled delays in the delivery of ordered materials and equipment, work stoppages, shipyard unavailability or delays. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Environment and Outlook -- Technical Services" in Item 7 of this annual report. WE RECOGNIZE REVENUES AND RELATED COSTS UNDER OUR CONTRACTS IN THE TECHNICAL SERVICES SEGMENT ON A PERCENTAGE-OF-COMPLETION BASIS. ADJUSTMENTS IN ESTIMATES COULD RESULT IN A CHARGE AGAINST EARNINGS, WHICH COULD BE MATERIAL. We recognize revenues and related costs under contracts in our technical services segment on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates periodically as the work progresses and reflect adjustments in income (1) to recognize income proportionate to the percentage of completion in the case of projects showing an estimated profit at completion and (2) to recognize the entire amount of the loss in the case of projects showing an estimated loss at completion. To the extent these adjustments result in an increase in previously reported losses or a reduction in or an elimination of previously reported profits with respect to a project, we would recognize a charge against current earnings, which could be material. Our current estimates may be revised in future periods, and those revisions may be material. Currently, all four of our lump-sum construction projects are in a loss position. A MATERIAL OR EXTENDED DECLINE IN EXPENDITURES BY OIL AND GAS COMPANIES, DUE TO A DECLINE OR VOLATILITY IN OIL AND GAS PRICES, A DECREASE IN DEMAND FOR OIL AND GAS OR OTHER FACTORS, MAY REDUCE DEMAND FOR OUR SERVICES AND MATERIALLY REDUCE OUR PROFITABILITY. The profitability of our operations depends upon conditions in the oil and gas industry and, specifically, the level of exploration and production expenditures of oil and gas company customers. The oil and gas industry is cyclical. The demand for contract drilling and related services is directly influenced by many factors beyond our control, including: - oil and gas prices and expectations about future prices; 10 - the demand for oil and gas; - the cost of producing and delivering oil and gas; - advances in exploration, development and production technology; - government regulations; - local and international political and economic conditions; - the ability of the Organization of Petroleum Exporting Countries (OPEC) to set and maintain production levels and prices; - the level of production by non-OPEC countries; and - the policies of various governments regarding exploration and development of their oil and gas reserves. Depending on the market prices of oil and gas, companies exploring for oil and gas may cancel or curtail their drilling programs, thereby reducing demand for drilling services. Such a reduction in demand may erode daily rates and utilization of our rigs. Any significant decrease in daily rates or utilization of our rigs, particularly our high-specification semisubmersible rigs or jack-up rigs, could materially reduce our revenues and profitability. AN OVERSUPPLY OF COMPARABLE RIGS IN THE GEOGRAPHIC MARKETS IN WHICH WE COMPETE COULD DEPRESS THE UTILIZATION RATES AND DAYRATES FOR OUR RIGS AND MATERIALLY REDUCE OUR REVENUES AND PROFITABILITY. Utilization rates, which are the number of days a rig actually works divided by the number of days the rig is available for work, and dayrates, which are the contract prices customers pay for rigs per day, are affected by the total supply of comparable rigs available for service in the geographic markets in which we compete. Improvements in demand in a geographic market may cause our competitors to respond by moving competing rigs into the market, thus intensifying price competition. Significant new rig construction could also intensify price competition. In the past, there have been prolonged periods of rig oversupply with correspondingly depressed utilization rates and dayrates largely due to earlier, speculative construction of new rigs. Improvements in dayrates and expectations of longer-term, sustained improvements in utilization rates and dayrates for offshore drilling rigs may lead to construction of new rigs. These increases in the supply of rigs could depress the utilization rates and dayrates for our rigs and materially reduce our revenues and profitability. WORLDWIDE POLITICAL AND ECONOMIC DEVELOPMENTS MAY HURT OUR OPERATIONS MATERIALLY. In 2003, we derived approximately 39% of our revenues from operations in countries within South America and an additional approximately 48% of our revenues from operations in all other countries outside the United States. Our operations in these areas are subject to the following risks, among others: - foreign currency fluctuations and devaluation; - new economic policies; - restrictions on currency repatriation; - political instability, war and civil disturbances; - uncertainty or instability resulting from armed hostilities or other crises in the Middle East or other geographic areas in which we operate; and - acts of terrorism. Continued hostilities in the Middle East and the occurrence or threat of future terrorist attacks such as those against the U.S. on September 11, 2001 could cause a downturn in the economies of the U.S. and other developed countries. A lower level of economic activity could result in a decline in energy consumption, which could cause our revenues and margins to decline and limit our future growth prospects. More specifically, these risks could lead to increased volatility in prices for crude oil and natural gas and could affect the markets 11 for our drilling services. In addition, these risks could increase instability in the financial and insurance markets and make it more difficult for us to access capital and to obtain insurance coverages that we consider adequate or are otherwise required by our contracts. We attempt to limit the risks of currency fluctuation and restrictions on currency repatriation where possible by obtaining contracts providing for payment in U.S. dollars or freely convertible foreign currency. To the extent possible, we seek to limit our exposure to local currencies by matching the acceptance of local currencies to our expense requirements in those currencies. Although we have done this in the past, we may not be able to take these actions in the future, thereby exposing us to foreign currency fluctuations that could cause our results of operations and financial condition to deteriorate materially. During 2003, approximately 25% of our consolidated revenues were derived from our operations in Argentina and Venezuela. Over the past two years, these two countries experienced political and economic instability that resulted in significant changes in their general economic policies and regulations. During 2002, the Argentine peso declined in value against the U.S. dollar following the Argentine government's decisions to abandon the country's fixed dollar-to-peso exchange rate, requiring private sector, dollar-denominated loans and contracts to be paid in pesos and placing restrictions on the convertibility of the Argentine peso. The devaluation, coupled with the government's mandated conversion of all dollar-based contracts to pesos, severely pressured our margins. During 2002, we engaged in discussion with all of our Argentine customers regarding the recovery of losses sustained from the devaluation of accounts receivable and the basis on which new business would be contracted. We have restructured most of our contracts on a basis that we believe limits our exposure to further devaluations. However, further devaluations may cause our results to suffer materially. Since the second quarter of 2002, Venezuela has experienced political, economic and social instability, including prolonged labor strikes, demonstrations and an attempt to overthrow the government. Much of the instability negatively impacted PDVSA, which is our principal customer in Venezuela, and led to the dismissal of more than 18,000 employees by the government. The instability in Venezuela has had an adverse effect on our business. Exchange controls, together with employee dismissals and reorganization within PDVSA, led to a slower rate of collection of our trade receivables in early 2003. Although foreign exchange in the other countries where we operate is currently carried out on a free-market basis, local monetary authorities in these countries may, in the future, implement exchange controls or other economic measures that would limit or restrict our rights to receive payments or to otherwise conduct business in these countries. From time to time, certain of our foreign subsidiaries operate in countries that are subject to sanctions and embargoes imposed by the U.S. government and the United Nations. Although these sanctions and embargoes do not prohibit those subsidiaries from completing existing contracts or from entering into new contracts to provide drilling services in such countries, they do prohibit us and our domestic subsidiaries, as well as employees of our foreign subsidiaries who are U.S. citizens, from participating in or approving any aspect of the business activities in those countries. These constraints on our ability to have U.S. persons, including our senior management, provide managerial oversight and supervision may negatively affect the financial or operating performance of such business activities. Our international operations are also subject to other risks, including foreign monetary and tax policies, expropriation, nationalization and nullification or modification of contracts. Additionally, our ability to compete in international contract drilling markets may be limited by foreign governmental regulations that favor or require the awarding of contracts to local contractors or by regulations requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. Furthermore, our foreign subsidiaries may face governmentally imposed restrictions from time to time on their ability to transfer funds to us. For further information about our international operations, including our results of operations by geographic area, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Environment and Outlook" in Item 7 of this annual report and to Note 15 of our Notes to Consolidated Financial Statements included in Item 8 of this annual report. 12 OUR CUSTOMERS MAY SEEK TO CANCEL OR RENEGOTIATE SOME OF OUR DRILLING CONTRACTS DURING PERIODS OF DEPRESSED MARKET CONDITIONS OR IF WE EXPERIENCE OPERATIONAL DIFFICULTIES. Substantially all our contracts with major customers are dayrate contracts, where we charge a fixed charge per day regardless of the number of days needed to drill the well. During depressed market conditions, a customer may no longer need a rig that is currently under contract or may be able to obtain a comparable rig at a lower daily rate. As a result, customers may seek to renegotiate the terms of their existing drilling contracts or avoid their obligations under those contracts. In addition, our customers may have the right to terminate existing contracts if we experience operational problems. The likelihood that a customer may seek to terminate a contract for operational difficulties is increased during periods of market weakness. The cancellation of a number of our drilling contracts could materially reduce our revenues and profitability. 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. As of December 31, 2003, we had approximately $2.0 billion in long-term debt and capital lease obligations. The level of our indebtedness will have several important effects on our future operations, including: - a significant portion of our cash flow from operations will be dedicated to the payment of interest and principal on such debt and will not be available for other purposes; - covenants contained in our existing debt arrangements require us to meet certain financial tests, which may affect our flexibility in planning for, and reacting to, changes in our business and may limit our ability to dispose of assets, withstand current or future economic or industry downturns and compete with others in our industry for strategic opportunities; and - our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited. Our ability to meet our debt service obligations and to reduce our total indebtedness will be dependent upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. As of March 10, 2004, our liquidity position totaled approximately $108 million, consisting of approximately $53 million of unrestricted cash, $31 million of available undrawn capacity under our senior secured revolving credit facilities and $24 million of available undrawn unsecured credit facilities. The total undrawn portion of our senior secured revolving credit facilities at that date was approximately $107 million. Indentures governing our outstanding 9 3/8% senior notes due 2007 and 10% senior notes due 2009 limit our ability to draw under these facilities to a percentage of consolidated net tangible assets, which effectively restricts our ability at present to borrow additional amounts under these facilities. Accordingly, approximately $76 million of the $107 million of undrawn capacity under these facilities was not available as of March 10, 2004 to meet our short-term liquidity needs, leaving only $31 million available. WE ARE SUBJECT TO A NUMBER OF OPERATING HAZARDS INCLUDING THOSE SPECIFIC TO MARINE OPERATIONS. WE MAY NOT HAVE INSURANCE TO COVER ALL THESE HAZARDS. Our operations are subject to the many hazards customary in the oilfield services industry. Contract drilling and well servicing require the use of heavy equipment and exposure to hazardous conditions, which may subject us to liability claims by employees, customers and other parties. These hazards can cause personal injury or loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage and suspension of operations. Our offshore fleet is also subject to hazards inherent in marine 13 operations, either while on site or during mobilization, such as capsizing, sinking and damage from severe weather conditions. We customarily provide contract indemnity to our customers for: - claims which could be asserted by us relating to damage to or loss of our equipment, including rigs; - claims which could be asserted by us or our employees relating to personal injury or loss of life; and - legal and financial consequences of spills of industrial waste and other liquids, but only to the extent (1) the waste or other liquids were in our control at the time of the spill or (2) our level of culpability is greater than mere negligence. We maintain insurance for injuries to our employees, damage to or loss of our equipment and other insurance coverage for normal business risks, including general liability insurance. Any insurance protection may not be sufficient or effective under all circumstances or against all hazards to which we may be subject. In addition, some of our primary insurance policies have substantial per occurrence or annual deductibles and/or self-insured aggregate amounts. The occurrence of a significant event against which we are not fully insured, or of a number of lesser events against which we are insured, but subject to substantial deductibles, could materially increase our costs and impair our profitability and financial condition. Moreover, the September 11, 2001 terrorist attacks in the United States have significantly increased premiums for some types of coverage. We may not be able to maintain adequate insurance at rates or on terms that we consider reasonable or acceptable. WE ARE SUBJECT TO NUMEROUS GOVERNMENTAL REGULATIONS, INCLUDING THOSE THAT MAY IMPOSE SIGNIFICANT LIABILITY ON US FOR ENVIRONMENTAL DAMAGE. Many aspects of our operations are subject to governmental regulations that may relate directly or indirectly to the contract drilling and well servicing industries, including those requiring us to control the discharge of oil and other contaminants from our rigs or otherwise relating to protection of the environment. We are subject to the U.S. Oil Pollution Act of 1990, the U.S. Outer Continental Shelf Lands Act, and the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA. Additionally, other countries where we operate frequently have regulations covering the discharge of oil and other contaminants in connection with drilling operations. Laws and regulations protecting the environment have become more stringent in recent years and may in certain circumstances impose strict liability, rendering us liable for environmental damage without regard to negligence or fault on our part. These laws and regulations may expose us to liability for the conduct of, or conditions caused by, others or for acts that were in compliance with all applicable laws at the time the acts were performed. The application of these requirements, the modification of existing laws or regulations or the adoption of new laws or regulations curtailing exploratory or development drilling for oil and gas could materially limit future contract drilling opportunities or materially increase our costs or both. WE MAY HAVE DIFFICULTY IMPLEMENTING IN A TIMELY MANNER INTERNAL CONTROL PROCEDURES NECESSARY TO ALLOW OUR MANAGEMENT TO REPORT ON THE EFFECTIVENESS OF OUR INTERNAL CONTROLS. IN ADDITION, OUR INDEPENDENT AUDITORS MAY NOT BE ABLE TO ISSUE AN ATTESTATION REPORT ON MANAGEMENT'S ASSESSMENT. Beginning with our report for the year ending December 31, 2004, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our annual report on Form 10-K, which is to include management's assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. That report will also be required to include a statement that our independent auditors have issued an attestation report on management's assessment of our internal control over financial reporting. Our independent auditors, PricewaterhouseCoopers LLP, issued a letter to our audit committee dated August 13, 2003 noting certain matters in our technical services division that they considered to be a material weakness in internal control. In order to achieve compliance with Section 404 within the prescribed period, management has formed an internal control steering committee, engaged outside consultants and adopted a detailed project work plan to assess the adequacy of our internal control over financial reporting, remediate any control weaknesses that 14 may be identified, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. We may not, however, be able to complete the work necessary for our management to issue its management report in a timely manner, or any work that will be required for our management to be able to report that our internal control over financial reporting is effective. In addition, our independent auditors may not be able to issue an attestation report on management's assessment. ITEM 2. PROPERTIES Our property consists primarily of mobile offshore and land-based drilling rigs, well servicing rigs and ancillary equipment, most of which we own. We operate some rigs under joint venture arrangements, management agreements and lease agreements. Some of our rigs are pledged to collateralize secured credit facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Item 7 of this annual report. We also own and operate transport and heavy-duty trucks and other ancillary equipment. We own office and operating facilities in Houma, Louisiana and in Algeria, Angola, Argentina, Brazil, Colombia, France, Peru and Venezuela. Additionally, we lease office and operating facilities in Houston, Texas and in other international locations. We incorporate by reference in response to this item the information set forth in Item 1 of this annual report and the information set forth in Notes 3 and 6 of our Notes to Consolidated Financial Statements included in Item 8 of this annual report. ITEM 3. LEGAL PROCEEDINGS We are routinely involved in other litigation, claims and disputes incidental to our 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 our financial position, results of operations or cash flows. However, a substantial settlement payment or judgment in excess of our accruals could have a material adverse effect on our consolidated results of operations or cash flows. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 2003. EXECUTIVE OFFICERS OF THE REGISTRANT We have presented below information about our executive officers as of March 1, 2004. Officers are elected annually by the Board of Directors and serve until their successors are chosen or until their resignation or removal.
NAME AGE POSITION ---- --- -------- Paul A. Bragg..................... 48 Chief Executive Officer John C.G. O'Leary................. 48 President Louis A. Raspino.................. 51 Executive Vice President and Chief Financial Officer John R. Blocker, Jr............... 52 Senior Vice President -- Operations Bobby E. Benton................... 51 Vice President -- Western Hemisphere Operations David A. Bourgeois................ 59 Vice President -- U.S. Gulf of Mexico Operations Edward G. Brantley................ 49 Vice President and Chief Accounting Officer Gary W. Casswell.................. 51 Vice President -- Eastern Hemisphere Operations Nicolas J. Evanoff................ 41 Vice President -- Corporate and Governmental Affairs Marcelo D. Guiscardo.............. 51 Vice President -- E&P Services W. Gregory Looser................. 34 Vice President, General Counsel and Secretary Jonathan R.A.S. Talbot............ 41 Vice President -- Marketing
Paul A. Bragg has been Chief Executive Officer since March 1999. From February 1997 to January 2004, he also served as President of Pride. From February 1997 to April 1999, he served as Chief Operating Officer of Pride. He joined Pride in July 1993 as its Vice President and Chief Financial Officer. From 1988 until he joined Pride, Mr. Bragg was an independent business consultant and managed private investments. He previously served as Vice President and Chief Financial Officer of Energy Service Company, Inc. (now ENSCO International, Inc.) from 1983 through 1987. John C.G. O'Leary was named President in January 2004. From March 1997 to January 2004, he served as Vice President -- International Marketing, a position he obtained in connection with our acquisition of Forasol-Foramer N.V. Mr. O'Leary had been Manager, Marketing and Business Development of Forasol since June 1993, with primary responsibility for worldwide business development. He joined Forasol in August 1985. Louis A. Raspino joined Pride in December 2003 as Executive Vice President and Chief Financial Officer. From July 2001 until December 2003, he served as Senior Vice President-Finance and Chief Financial Officer of Grant Prideco, Inc. From December 2000 until March 2001, he was employed as Executive Vice President, Chief Financial Officer and Chief Operating Officer of JRL Enterprises, Inc. From February 1999 until December 2000, he served as Vice President of Finance for Halliburton Company. From October 1997 until July 1998, he was a Senior Vice President at Burlington Resources, Inc. From 1978 until its merger with Burlington Resources, Inc. in 1997, he held a variety of increasingly responsible positions at Louisiana Land and Exploration Company, most recently as Senior Vice President, Finance and Administration and Chief Financial Officer. John R. Blocker, Jr. was named Senior Vice President -- Operations in January 2004. From March 2000 to January 2004, he served as Vice President -- Latin American Operations. He joined Pride in 1993 as President of our Argentine subsidiary, Pride International, S.R.L. He has more than 33 years of oilfield experience with several companies. Bobby E. Benton was named Vice President -- Western Hemisphere Operations in February 2004. He was previously Vice President -- Brazil/Asia Pacific/Middle East since May 2002. Mr. Benton joined Pride in September 2001 in the merger with Marine Drilling Companies, Inc., where he held various senior 16 management positions, including Senior Vice President -- Worldwide Operations and Vice President -- Worldwide Marketing since June 1999. Prior to joining Marine, he served as Vice President -- International Operations with Diamond Offshore Drilling, Inc., following Diamond's acquisition of Arethusa Offshore Company in April 1996. David A. Bourgeois was named Vice President -- U.S. Gulf of Mexico Operations in February 2004. He previously served as Vice President -- North American Operations since May 2002. He joined Pride in April 1994 with the purchase of Offshore Rigs, L.L.C., where he was Chief Operating Officer. From April 1994 to June 1996, Mr. Bourgeois was Sales and Marketing Manager of Pride Offshore, Inc., from June 1996 until May 1999 he was Vice President and General Manager of Pride Offshore, Inc. and from May 1999 to May 2002, he served as Vice President -- U.S. Operations. Edward G. Brantley joined Pride as Treasurer in January 2000. In September 2001, he was named Vice President and Chief Accounting Officer. Prior to joining Pride, Mr. Brantley was employed by Baker Hughes Incorporated for 11 years in various capacities, including Controller of its Baker Hughes INTEQ division. Gary W. Casswell was named Vice President -- Eastern Hemisphere Operations in May 1999. He joined Pride in August 1998 from Santa Fe International Corporation (now part of GlobalSantaFe Corporation). From 1974 through 1998, Mr. Casswell served Santa Fe in positions of increasing responsibility, including Operation Manager and Technical Development Manager. Nicolas J. Evanoff joined Pride in April 2002 as Vice President -- Corporate and Governmental Affairs. From February 1997 until joining Pride, he served as Associate General Counsel and as General Counsel, Asia & Middle East, of Transocean Inc. From August 1992 to February 1997, Mr. Evanoff practiced corporate and securities law with Baker Botts L.L.P. in Houston, Texas. Marcelo D. Guiscardo joined Pride in March 2000 as Vice President -- E&P Services. From September 1999 until joining Pride, he was President of GDM Business Development, a private company providing consulting services to the energy industry. From November 1993 to September 1999, Mr. Guiscardo held various senior management positions with YPF Sociedad Anonima (now part of Repsol YPF S.A.), an integrated energy company, including Vice President -- Exploration & Production. W. Gregory Looser was named Vice President, General Counsel and Secretary in December 2003. He joined Pride in May 1999 as Assistant General Counsel. Prior to that time, Mr. Looser was with the law firm of Bracewell & Patterson, L.L.P. in Houston, Texas. Jonathan R.A.S. Talbot was named Vice President -- Marketing in March 2004. Prior to that, he served as Director of Business Development for Pride and previously Forasol since September 1995. Mr. Talbot joined Forasol in 1990. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is listed on the New York Stock Exchange under the symbol "PDE." As of March 8, 2004, there were 1,507 stockholders of record. The following table presents the range of high and low sales prices of our common stock on the NYSE for the periods shown:
PRICE --------------- HIGH LOW ------ ------ 2002 First Quarter............................................... $16.25 $11.70 Second Quarter.............................................. 19.70 15.00 Third Quarter............................................... 15.66 10.80 Fourth Quarter.............................................. 16.15 12.25 2003 First Quarter............................................... $15.48 $12.75 Second Quarter.............................................. 20.09 13.15 Third Quarter............................................... 19.08 15.75 Fourth Quarter.............................................. 18.95 15.75
We have not paid any cash dividends on our common stock since becoming a publicly held corporation in September 1988. We currently have a policy of retaining all available earnings for the development and growth of our business and for debt repayment. We do not anticipate paying dividends on our common stock at any time in the foreseeable future. Our ability to pay cash dividends in the future is restricted by our existing financing arrangements. The desirability of paying such dividends could also be materially affected by U.S. and foreign tax considerations. 18 ITEM 6. SELECTED FINANCIAL DATA We have derived the following selected consolidated financial information as of December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, from our audited consolidated financial statements included in Item 8 of this annual report. You should read this information in conjunction with those consolidated financial statements and the notes thereto. We have derived the selected consolidated financial information as of December 31, 2001 and 2000 and for each of the years in the two-year period ended December 31, 2000, from our audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2001 that are not included herein. We have derived the selected consolidated financial information as of December 31, 1999 from the audited consolidated financial statements of Pride and Marine Drilling Companies, Inc., which we acquired in September 2001 in a transaction accounted for under the pooling-of-interests method of accounting, that are not included herein. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this annual report.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2003 2002(1) 2001(1) 2000(1) 1999(1) ---------- ---------- ---------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues............................... $1,689,720 $1,269,774 $1,512,895 $1,173,038 $734,791 Operating costs, excluding depreciation and amortization..................... 1,197,845 794,739 889,561 709,721 509,770 Restructuring charges -- operating(2).............. -- -- -- -- 12,817 Depreciation and amortization.......... 249,222 230,204 202,710 178,352 128,534 General and administrative, excluding depreciation and amortization........ 121,259 94,241 100,309 95,528 91,400 Pooling and merger costs(3)............ (824) -- 35,766 -- -- Restructuring charges -- general and administrative(2).................... -- -- -- -- 23,831 ---------- ---------- ---------- ---------- -------- Earnings (loss) from operations........ 122,218 150,590 284,549 189,437 (31,561) Other income (expense), net............ (126,516) (139,851) (127,572) (94,775) (47,601) ---------- ---------- ---------- ---------- -------- Earnings (loss) before income taxes and minority interest.................... (4,298) 10,739 156,977 94,662 (79,162) Income tax provision (benefit)......... (1,130) 2,977 49,948 34,928 (23,889) Minority interest...................... 20,765 16,097 15,508 10,812 3,996 ---------- ---------- ---------- ---------- -------- Net earnings (loss).................... $ (23,933) $ (8,335) $ 91,521 $ 48,922 $(59,269) ========== ========== ========== ========== ======== Net earnings (loss) per share: Basic................................ $ (0.18) $ (0.06) $ 0.70 $ 0.40 $ (0.55) ========== ========== ========== ========== ======== Diluted.............................. $ (0.18) $ (0.06) $ 0.68 $ 0.39 $ (0.55) ========== ========== ========== ========== ======== Weighted average shares outstanding: Basic................................ 134,704 133,305 131,630 123,038 107,801 Diluted.............................. 134,704 133,305 142,778 126,664 107,801
19
DECEMBER 31, -------------------------------------------------------------- 2003 2002(1) 2001(1) 2000(1) 1999(1) ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital....................... $ 83,121 $ 152,364 $ 73,596 $ 123,719 $ 160,490 Property and equipment, net........... 3,446,331 3,473,636 3,452,803 2,706,791 2,590,728 Total assets.......................... 4,378,430 4,402,857 4,291,207 3,423,059 3,144,027 Long-term debt and leases, net of current portion..................... 1,815,078 1,886,447 1,725,856 1,326,623 1,421,227 Stockholders' equity.................. 1,702,779 1,699,297 1,696,086 1,441,995 1,235,212
--------------- (1) The consolidated financial information as of and for the years ended December 31, 2002, 2001, 2000 and 1999 has been restated to reflect the retroactive adoption of Financial Accounting Standards Board Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities." (2) Restructuring charges include the cost of involuntary employee termination benefits, including severance, wage continuation, medical and other benefits, facility closures, related personnel relocation costs and other costs in connection with a reduction in our workforce in 1999. (3) Pooling and merger costs consist of costs incurred for investment advisory, legal and other professional fees, closure of duplicate office facilities and employee terminations in connection with our acquisition of Marine in September 2001. Please read Note 4 of the Notes to Consolidated Financial Statements in Item 8 of this annual report for more information about these charges. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in Item 8 of this annual report. The following information contains forward-looking statements. Please read "Forward-Looking Statements" below for a discussion of certain limitations inherent in such statements. OVERVIEW We provide contract drilling and related services to oil and gas companies worldwide, operating both offshore and on land. As of March 1, 2004, we operated a global fleet of 327 rigs, including two ultra-deepwater drillships, 11 semisubmersible rigs, 35 jackup rigs, 30 tender-assisted, barge and platform rigs and 249 land-based drilling and workover rigs. We operate in more than 30 countries and marine provinces. We have five principal operating segments: Gulf of Mexico, International Offshore, International Land, E&P Services and Technical 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 international offshore segment, as well as in Mexico, tend to be longer term. Accordingly, short-term changes in market conditions may have little or no impact on our revenues and cash flows from those operations unless the market changes occur during a period when we are attempting to renew a number of those contracts. In late 2001, we commenced the first of four major deepwater platform rig construction projects. The rigs are being constructed on behalf of two major oil company customers under lump-sum contracts. We have experienced significant cost overruns on these projects, and we estimate that total costs on all four projects will substantially exceed contract revenues. Accordingly, in 2003, we recorded provisions for losses on these projects totaling $98.4 million, or $64.0 million net of taxes at the U.S. statutory rate. The provisions reflect our current estimates of the costs to complete the projects and of additional contract revenues from the projects, following a review by our operating and senior management. There are, however, uncertainties regarding many of the estimates and, particularly, the range of possible outcomes of certain commercial 20 disputes related to the projects, which could result in settlements significantly above or below our current estimates. Our current estimates may be revised in future periods, and those revisions may be material. Weakness in the deepwater semisubmersible and drillship markets offshore West Africa and Brazil did not have a significant impact on our results for 2003, as our deepwater rigs in those markets were operating under long-term contracts entered into when market conditions were more favorable. The impact of the continued weakness in these markets on our results for 2004 is likely to be more significant, however, as the contracts for two of our deepwater assets in the West African market are due to be renewed during the year. We believe, however, that conditions in those markets will improve later in 2004 as development drilling commences on a number of major oil discoveries. We experienced improved utilization of our jackup rig fleet in 2003, principally due to our success in marketing rigs into Mexico and other international markets from the U.S. Gulf of Mexico, which has experienced weak market conditions since late 2001. The contracts in Mexico have an average remaining term of approximately two years and, together with recently obtained extensions to the contracts for our two drillships working offshore Angola for an aggregate of ten years, resulted in an increase in the contract backlog for our offshore rig fleet to approximately 74 years and $1.7 billion as of March 1, 2004, from 66 years and $1.4 billion as of March 1, 2003. In calculating our contract backlog, we include the remaining firm period of outstanding contracts, excluding any option periods, and the contract operating day rate less a 5% allowance for any downtime or reduced rate billing, excluding any mobilization fees, performance bonuses and anticipated charges for ancillary services. The above figures are the aggregate for all offshore rigs operated by us, including rigs owned by others that we manage, and excluding the deepwater platform rigs under construction. Conditions in our South American land and related E&P services markets improved during 2003, and our activity in these markets has recovered from the political and economic crises in Argentina and Venezuela in 2002 to levels exceeding those before the crises. Assuming there are no new major disruptions in these markets in 2004, we expect our 2004 results from operations in these markets to be comparable to 2003 results. We ended 2003 with approximately $28 million more debt and $79 million less total cash (cash and cash equivalents plus restricted cash) than at the end of 2002. Total debt and liquidity in 2003 were negatively impacted by the high level of capital expenditures required to prepare rigs in our U.S. fleet for work in Mexico, higher than normal operating costs during the start-up of operations for those rigs, net cash outflows on the rig construction projects discussed above and an increase in trade receivables. We expect that debt levels and liquidity in 2004 will continue to be negatively impacted by increased net cash outflows relating to the construction projects. Debt levels and liquidity in 2004 will also be negatively impacted by our 30% share of stacking and debt service costs if we are unable to secure work during 2004 for the Pride Portland and Pride Rio de Janeiro, two Amethyst-class semisubmersible rigs that are concluding construction and are expected to be available for work in the second quarter and third quarter of 2004, respectively. In addition, the day rate under which either or both of our two West African deepwater semisubmersible rigs, whose existing contracts expire in 2004, are recontracted could have a significant impact on our future debt and liquidity. However, we expect debt and liquidity in 2004 to benefit from a full year of operations for our rigs in Mexico and from a reduced level of capital expenditures, as our program to upgrade rigs from our U.S. Gulf of Mexico fleet for international markets winds down. Debt reduction and liquidity in 2004 also will be positively impacted if we succeed in our announced focused efforts to reduce operating, general and administrative costs, improve our working capital management and sell certain assets. Although we intend to aggressively pursue these strategies to reduce our debt and improve our liquidity, it is not practicable at the present time to quantify the possible impact, if any, of any of these measures. As of March 10, 2004, our liquidity position totaled approximately $108 million, consisting of approximately $53 million of unrestricted cash, $31 million of available undrawn capacity under our senior secured revolving credit facilities and $24 million of available undrawn unsecured credit facilities. The total undrawn portion of our senior secured revolving credit facilities at that date was approximately $107 million. Indentures governing our outstanding 9 3/8% senior notes due 2007 and our 10% senior notes due 2009 limit our ability to 21 draw under these facilities to a percentage of consolidated net tangible assets, which effectively restricts our ability at present to borrow additional amounts under these facilities. Accordingly, approximately $76 million of the $107 million of undrawn capacity under these facilities was not available as of March 10, 2004 to meet our short-term liquidity needs, leaving only $31 million available. Furthermore, in connection with the announced extension of the drilling contracts for our two drillships, we are in the process of finalizing an approximate $128 million expansion of the drillship loans. We currently expect that approximately $103 million of the proceeds and approximately $15 million of currently restricted cash will be used by the joint venture to repay indebtedness due from the joint venture company to Pride early in the second quarter of 2004. If the transaction is completed, the funds paid to us will be available to reduce our other outstanding debt and improve liquidity. In addition, as of December 31, 2003, $38.8 million of our cash balances, which amount is included in restricted cash, consisted of funds held in trust in connection with our drillship and semisubmersible loans and our limited-recourse collateralized term loans and is therefore not available for our use. The amount as of March 10, 2004 was approximately $27 million. In September 2001, we acquired Marine Drilling Companies, Inc. in a stock-for-stock transaction. We issued 58.7 million shares of our common stock to the former shareholders of Marine, which equaled approximately 44% of the outstanding shares of our common stock immediately following completion of the acquisition. The acquisition was accounted for as a pooling-of-interests for accounting and financial reporting purposes and, accordingly, our consolidated financial statements for each period prior to the merger reflect the combined operations of Pride and Marine. Since November 2003, we have reorganized our senior management team. John O'Leary has been appointed to the position of President, Louis Raspino joined Pride as Executive Vice President and Chief Financial Officer, John Blocker has been appointed Senior Vice President -- Operations and Gregory Looser has been appointed Vice President, General Counsel and Secretary. BUSINESS ENVIRONMENT AND OUTLOOK General Revenues. Our revenues depend principally upon the number of our available rigs, the number of days these rigs are utilized and the contract day rates received. The number of days our rigs are utilized and the contract day rates received are largely dependent upon the balance of supply and demand for drilling and related services in the different geographic regions in which we operate. The number of available rigs may increase or decrease as a result of the acquisition, relocation or disposal of rigs, the construction of new rigs and the number of rigs being upgraded or repaired or the subject of periodic surveys or routine maintenance at any time. In order to improve utilization or realize higher contract day rates, we may mobilize our rigs from one market to another. Our revenues also depend on the number and scope of construction or engineering projects being undertaken by our technical services group. Revenues for these projects are recognized on a percentage-of-completion basis. Oil and gas companies' exploration and development drilling programs drive the demand for drilling and related services. These drilling programs are affected by their expectations about oil and natural gas prices, anticipated production levels, demand for crude oil and natural gas products, government regulations and many other factors. Oil and gas prices are volatile, which has historically led to significant fluctuations in expenditures by our customers for oil and gas drilling and related services. Operating Expenses. Earnings from operations are primarily affected by changes in revenue, but are also a function of changes in operating expenses. Operating expenses are generally influenced by changes in utilization. For instance, if a rig is expected to be idle for an extended period of time, we may reduce the size of the rig's crew and take steps to "cold stack" the rig, which reduces expenses and partially offsets the impact on operating income associated with loss of revenues. We recognize as an operating expense routine overhauls that maintain rather than upgrade the rigs or E&P services equipment. These expenses vary from period to period. Costs of rig enhancements are capitalized and depreciated over the expected useful lives of the enhancements. Depreciation expense decreases earnings from operations in periods subsequent to capital upgrades. Operating expenses in relation to our engineering and construction projects are recognized in 22 proportion to revenues using the percentage-of-completion method. Additionally, operating expenses may include a provision for expected losses if we estimate that a project will be unprofitable in total. Our general and administrative expenses are principally related to our corporate headquarters and our regional offices. Environmental Regulation. We are subject to the U.S. Oil Pollution Act of 1990, the U.S. Outer Continental Shelf Lands Act, and the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA. Additionally, other countries where we operate have similar regulations covering the discharge of oil and other contaminants in connection with drilling operations. SEGMENT REVIEW The following table summarizes average daily revenue and percentage utilization by type of rig for the last three years. Average daily revenue information is based on total revenues for each rig type divided by actual days worked by all rigs of that type. Average daily revenue will differ from average contract day rate for a rig due to billing adjustments for any non-productive time, mobilization fees, performance bonuses and charges to the customer for ancillary services. Percentage utilization is calculated as the total days worked divided by the total days available for work by all rigs of that type.
2003 2002 2001 ---------------------- ---------------------- ---------------------- DAILY DAILY DAILY REVENUE UTILIZATION REVENUE UTILIZATION REVENUE UTILIZATION -------- ----------- -------- ----------- -------- ----------- GULF OF MEXICO Jackup Rigs................. $ 31,400 69% $ 26,300 45% $ 40,100 80% Platform Rigs............... $ 20,000 35% $ 20,700 42% $ 19,500 57% INTERNATIONAL OFFSHORE Drillships/Semisubmersibles... $117,600 86% $124,900 84% $118,500 93% Jackup Rigs................. $ 52,300 94% $ 48,000 89% $ 36,600 82% Tenders and Barges.......... $ 33,200 82% $ 33,700 94% $ 31,400 78% INTERNATIONAL LAND Land Drilling............... $ 14,900 68% $ 12,200 57% $ 13,400 79% Land Workover............... $ 3,900 80% $ 3,400 68% $ 5,600 77%
Gulf of Mexico Demand for drilling services in the U.S. Gulf of Mexico showed only a marginal improvement in 2003. Demand has continued to lag the recovery in natural gas prices that commenced in mid-2002 when natural gas inventory storage levels started to decline. Market conditions have, however, somewhat improved due to the reduction in the supply of rigs resulting from a number of rigs leaving the U.S. sector of the Gulf of Mexico for other markets. As a result, jackups in the U.S. Gulf of Mexico are currently being contracted at rates of approximately $4,000 per day higher than at the start of 2003. In response to the weak market conditions that have existed in the U.S. Gulf of Mexico since the fourth quarter of 2001, we have actively marketed a number of rigs in our U.S. Gulf of Mexico fleet to international markets. Since early 2002, we have obtained long-term contracts for 14 jackup rigs and two platform rigs with a unit of Petroleos Mexicanos S.A. in the Mexican sector of the Gulf of Mexico and for two jackup rigs in other international markets, one in Nigeria and one in India. Additionally, we obtained long-term contracts with Pemex in Mexico for the Pride South Seas, a semisubmersible rig that we mobilized from South Africa, and for the Pride Mexico, a newly acquired semisubmersible rig. The first nine jackup rigs, one of the platform rigs and the Pride South Seas were contracted and completed redeployment in 2002 and worked throughout 2003. Three of the jackups and the second platform rig commenced operations in July 2003, and the Pride Mexico and the remaining two jackup rigs commenced operations in the fourth quarter of 2003. 23 As of March 1, 2004, our 14 jackups working for Pemex had contracts with an average remaining term of 2.1 years and an average contract day rate of $32,900. Six of our jackups were working in the U.S. Gulf of Mexico with an average contract day rate of $26,800, of which four were on short-term contracts. There were five rigs available. Additionally, three of our platform rigs were working offshore Mexico on contracts with an average contract day rate of $20,200 and five were working in the U.S. Gulf of Mexico at an average contract day rate of $21,000. Two of our available jackup rigs could be put back into service in the U.S. Gulf of Mexico at a relatively low cost. The remaining three rigs have not worked since late 2001, and we would require longer-term contracts to justify the cost of reactivating these rigs. All of our available rigs would require additional expenditures to work in Mexico or other international markets. We expect that revenues and gross margins derived from our Gulf of Mexico operations in 2004 will exceed those for 2003 due to higher revenues from a full year of operations, and the absence of start-up costs, for those rigs working in Mexico. Results for 2004 are also expected to benefit from improved day rates and a modest increase in activity in the U.S. sector of the Gulf. International Offshore Our international offshore segment has continued to experience high levels of activity, and we have maintained essentially full utilization of six of our seven high-specification deepwater rigs in 2003. The seventh rig, the Pride South America semisubmersible rig, received its five-year periodic survey and related maintenance in the first quarter of 2003 and was out of service for approximately 70 days. In addition, the rig had approximately 45 days of downtime in the third and fourth quarters of 2003 due to repairs to its thruster systems. The Pride Carlos Walter and Pride Brazil semisubmersible rigs working offshore Brazil both experienced unscheduled downtime in the fourth quarter of 2003 relating to the replacement of certain bearings on their riser tensioner systems. The downtime resulted in approximately $3.0 million of lost revenues and approximately $1.5 million of increased operating costs. Each rig has eight sets of riser tensioners, and we plan to replace the bearings on the remaining unchanged sets during 2004, which is expected to result in an aggregate of approximately 25 days of downtime for the two rigs in 2004. Two of our deepwater semisubmersible rigs working in West Africa are expected to complete their current contracts in April 2004 and August 2004, respectively. Demand and day rates for deepwater rigs in the West African market are lower than when the rigs were last contracted. We currently expect that the rigs will be recontracted at rates significantly less than their current rates and that one or both could have some period without contract revenues. Our remaining three deepwater semisubmersibles are on long-term contracts, and our two deepwater drillships, the Pride Africa and Pride Angola, are working under contracts that were extended in December 2003 by an aggregate of ten years, commencing at the end of the contracts' current terms in June 2005 and May 2005, respectively. The Pride Africa is scheduled to undergo its five-year special periodic survey in the fourth quarter of 2004 and is expected to be out of service for approximately 45 days. The market for intermediate water-depth semisubmersible rigs remained weak during 2003. Idle time for our three rigs working in the international offshore segment was due primarily to one of the rigs undergoing its five-year periodic survey during the period and to the Pride Venezuela being stacked for the last five months of 2003 after it completed its contract with PDVSA in July. The Pride Venezuela has been demobilized to Trinidad and is being marketed internationally. Additionally, the contract for the Pride South Atlantic, offshore Brazil, expired in October 2003, and the rig commenced a new contract to drill three wells, with possibly additional optional wells, offshore Brazil, in January 2004. Both the Pride Venezuela and the Pride South Atlantic were warm stacked after their respective contracts expired. Therefore, operating costs while they were stacked were similar to when they had been working. Since the transfer of two independent-leg jackup rigs to Nigeria and India under two-year contracts in 2002, we have had eight jackup rigs working in international waters outside of the Gulf of Mexico. All of these rigs are currently working under long-term contracts, of which four are due to expire in 2004. These jackup 24 rigs experienced 94% utilization in 2003. The idle time was primarily due to two of these rigs undergoing shipyard repairs in 2003. Additionally, we manage two jackup rigs on behalf of PDVSA in Venezuela under contracts that expire in the second quarter of 2004. Four of our jackup rigs are expected to undergo their planned special periodic surveys during 2004 and will be out of service for a combined total of approximately eight months. We currently expect that the four rigs whose contracts are due to expire in 2004 will be recontracted at modestly lower day rates. We expect revenues and gross margin for our international offshore 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. International Land During 2003, our international land segment benefited from improved economic and political stability in Argentina, where approximately 62% (154 out of 249) of our worldwide land drilling and workover rigs are located. Operations in 2002 had been adversely affected by the economic and political instability in that country. The Argentine peso declined in value against the U.S. dollar following the Argentine government's decision to abandon the country's fixed one-to-one dollar-to-peso exchange rate at the end of 2001. Prior to that decision, commercial transactions were freely entered into in either pesos or dollars because the two currencies operated in parity and both could move out of the country freely. In December 2001, the Argentine government imposed restrictions that severely limited dollar withdrawals and exchanges, with the result that as of December 31, 2001, no Argentine commercial transactions could be conducted in dollars and there was no exchangeability between the peso and the dollar. In January 2002, the Argentine government announced the creation of a dual exchange rate system in which limited transactions would be settled at an official/preferential rate. When this system proved to be non-operational in practice, the government abandoned it in early February 2002 and adopted a free-market rate system for all new transactions. The government also mandated that all existing U.S. dollar commercial transactions be redenominated into pesos at the rate of one peso to one dollar. As a result of this conversion, which followed the earlier devaluation of the peso, we recorded a charge in the fourth quarter of 2001 of $10.7 million before estimated income taxes, and $6.9 million net of estimated income taxes, to reduce the carrying values of our net monetary assets in Argentina, which included our bank accounts, receivables, prepaid expenses, deposits, payables and accrued liabilities. This amount is reflected as other income (expense). During the first quarter of 2002, we engaged in discussions with all of our Argentine customers regarding recovery of losses sustained from the devaluation of accounts receivable and the basis on which new business would be contracted. We restructured most of our contracts on a basis that we believe limits our exposure to further devaluations. Activity levels have recovered steadily from mid-2002 as high oil prices positively impacted our customers' cash flows. The average rate of utilization of our available rig fleet in Argentina was 83.5% in 2003 as compared with 68% in 2002. As of March 1, 2004, 132 rigs, or 86% of our total fleet of 154 rigs, in Argentina were under contract. Venezuela also has been experiencing political, economic and social instability. A prolonged strike by PDVSA employees that ended in February 2003 led to the dismissal of more than 18,000 employees by the government. The recent turmoil in Venezuela led to a reduction in our level of operations in that country during the first quarter of 2003. Since the conclusion of the strike, our rig activity has recovered and currently exceeds the level that existed before the strike. As of March 1, 2004, we had 31 rigs, or 86%, of our total land-based rigs and all four of our offshore rigs in Venezuela under contract as compared with only seven rigs at the end of the strike. Exchange controls, together with employee dismissals and reorganization within PDVSA, initially led to a slower rate of collection of our trade receivables, but the rate of collection has improved since early 2003. In Kazakhstan, the first of two of our large land rigs, which had been earning a standby rate since being accepted by the customer in November 2002, commenced operations on an artificial island in the Caspian Sea in April 2003, and the second rig commenced operations in July 2003. The related contracts required substantial engineering, logistics and construction work to modify, enhance and deploy our rigs in accordance 25 with the customer's specifications. We received up-front fees that we recognized over the rigs' respective contract periods, of which $6.0 million was recognized in 2002 and $42.9 million in 2003. Both of the rigs were stacked at the onset of the winter period in November 2003 and are currently being reactivated. One of the rigs is expected to work throughout the 2004 drilling season. Activity for the second rig depends upon the results of testing of the well it drilled in 2003. In Africa, activity increased due to a full year of operation for five newly constructed mobile land rigs that started work in Chad between December 2001 and April 2002 under contracts with a unit of ExxonMobil with initial terms ranging from five to seven years. E&P Services Our E&P services activity is generated predominately in South America and has benefited from the improved political and economic environment in 2003. Revenues and gross margins have improved during 2003 in Argentina due to the commencement of additional integrated services contracts. Activity in this sector has also improved due to the commencement of directional, measurement-while-drilling and other services onshore Brazil and the provision of cementing services offshore Mexico, where the services are complementary to our existing drilling operations. Technical Services Our technical services group has major projects ongoing to design, engineer, manage construction of and commission four deepwater platform drilling rigs, which are being constructed on behalf of two major oil company customers for installation on spars and tension-leg platforms. We also are to provide drilling operations management of the rigs once they have been installed on the platforms. The first platform drilling rig has been mated with the customer's platform and towed to Angola, where it commenced drilling operations in November 2003. Two of the other deepwater platform rigs are expected to enter into service in the second half of 2004 and the remaining rig is expected to enter into service in early 2005. During 2003, we recorded loss provisions, included in operating costs, totaling $98.4 million, or $64.0 million net of taxes at the U.S. statutory rate, relating to the construction of these deepwater platform rigs. On all four of these projects, costs are now expected to substantially exceed revenues. We do not currently intend to enter into any additional lump-sum construction contracts for rigs to be owned by others. Much of the increased costs are related to difficulties experienced with two different shipyards. We terminated our contract with the initial shipyard prior to the completion of the first two rigs. As a result, we have incurred substantial unplanned costs in completing the construction of the first unit. We have engaged another shipyard to complete construction of the second rig, and the aggregate costs paid to the initial shipyard and committed and paid to the second shipyard have greatly exceeded budgeted expenditures for the rigs. In addition, because of the difficulties with the initial shipyard, we are now utilizing shipyards in the Asia Pacific region for the third and fourth deepwater rig projects. As a result, the lump sum contracts and anticipated freight costs for these two projects are higher than originally budgeted. A U.S. shipyard building one of the primary components for the third rig encountered significant financial difficulties, and we have paid costs in excess of amounts initially agreed to provide financial capacity for it to complete a reduced scope of work. The aggregate costs paid to that shipyard, in addition to the costs associated with the completion of the remaining tasks by newly contracted third parties, as well as transportation and other costs necessitated by the revisions to the project completion plan, have significantly exceeded the budgeted expenditures for the third deepwater rig. Furthermore, based on our experience from the start-up of the first rig and on revisions of estimates, we have included increased costs for construction, transportation, commissioning, training and warranties in our estimates of costs to complete the three remaining rigs. We have commenced arbitration proceedings against the initial shipyard claiming damages of approximately $5.8 million, and the shipyard has asserted counterclaims against us for damages of approximately $13.8 million. We also are in commercial disputes and negotiations with certain equipment vendors and major sub-contractors. We intend to vigorously pursue equitable resolutions with these other parties. 26 Our technical services segment is performing these deepwater platform rig construction projects under lump sum contracts with our customers. In pricing these contracts, we attempted to accurately estimate our cost to perform the work, including the cost of labor, material and services. Despite these efforts, however, the revenue, cost and gross profit or loss we now expect to realize on these lump-sum contracts vary from the originally estimated amounts. We have experienced cost overruns on these contracts that have adversely impacted our financial results. Currently unforeseen events may result in further cost overruns to complete these projects, which could be material and which would require us to record additional loss provisions in future periods. Such events could include variations in labor and equipment productivity over the remaining term of the contract, unanticipated cost increases, engineering changes, shipyard or systems problems, project management issues, shortages of equipment, materials or skilled labor, unscheduled delays in the delivery of ordered materials and equipment, work stoppages, shipyard unavailability or delays. We recognize revenues and related costs from our rig construction contracts 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, we review contract price and cost estimates periodically as the work progresses and reflect adjustments in income (1) to recognize income proportionate to the percentage of completion in the case of projects showing an estimated profit at completion and (2) to recognize the entire amount of the loss in the case of projects showing an estimated loss at completion. To the extent these adjustments result in an increase in previously reported losses or a reduction in or an elimination of previously reported profits with respect to a project, we would recognize a charge against current earnings, which could be material. Although we continually strive to improve our ability to estimate our contract costs and profitability associated with our construction projects, our current estimates may be revised in future periods, and those revisions may be material. Currently, all four of our lump-sum construction projects are in a loss position. Please read "Business -- General" in Item 1 of this annual report and "-- Liquidity and Capital Resources" in this Item 7. 27 RESULTS OF OPERATIONS The following table presents selected consolidated financial information by operating segment for the periods indicated.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2003 2002(1) 2001(1) ------------------ ------------------ ------------------ (DOLLARS IN THOUSANDS) Revenues: Gulf of Mexico.......... $ 271,490 16.1% $ 165,419 13.0% $ 418,850 27.7% International offshore............. 683,058 40.4 642,319 50.6 507,139 33.5 International land...... 482,832 28.6 299,278 23.6 444,405 29.4 E&P services............ 122,052 7.2 73,000 5.7 142,501 9.4 Technical services...... 130,288 7.7 89,758 7.1 -- 0.0 ---------- ----- ---------- ----- ---------- ----- Total revenues....... $1,689,720 100.0% $1,269,774 100.0% $1,512,895 100.0% ========== ===== ========== ===== ========== ===== Operating Costs: Gulf of Mexico.......... $ 185,476 15.5% $ 141,766 17.8% $ 212,401 23.9% International offshore............. 347,398 29.0 310,071 39.0 237,758 26.7 International land...... 341,847 28.5 204,018 25.7 330,492 37.2 E&P services............ 88,318 7.4 52,176 6.6 108,910 12.2 Technical services...... 234,806 19.6 86,708 10.9 -- 0.0 ---------- ----- ---------- ----- ---------- ----- Total operating costs.............. $1,197,845 100.0% $ 794,739 100.0% $ 889,561 100.0% ========== ===== ========== ===== ========== ===== Segment Profit (Loss): Gulf of Mexico.......... $ 86,014 17.5% $ 23,653 5.0% $ 206,449 33.1% International offshore............. 335,660 68.2 332,248 69.9 269,381 43.2 International land...... 140,985 28.7 95,260 20.1 113,913 18.3 E&P services............ 33,734 6.9 20,824 4.4 33,591 5.4 Technical services...... (104,518) (21.3) 3,050 0.6 -- 0.0 ---------- ----- ---------- ----- ---------- ----- Total segment profit............. $ 491,875 100.0% $ 475,035 100.0% $ 623,334 100.0% ========== ===== ========== ===== ========== ===== Depreciation and amortization............ $ 249,222 $ 230,204 $ 202,710 General and administrative.......... 121,259 94,241 100,309 Pooling and merger costs................... (824) -- 35,766 ---------- ---------- ---------- Earnings from operations........... $ 122,218 $ 150,590 $ 284,549 ========== ========== ==========
--------------- (1) The consolidated financial information by operating segment for 2002 and 2001 has been restated to reflect the retroactive adoption of FIN No. 46R, "Consolidation of Variable Interest Entities." 2003 Compared with 2002 Revenues. Revenues for 2003 were $419.9 million, or 33.1%, higher than in 2002, due primarily to increased activity for our offshore rigs in Mexico, an increase in land drilling and E&P services activity due to the recovery in Argentina and Venezuela, increased activity in Kazakhstan, and an increase in revenues recognized related to the design, engineering and construction of deepwater platform rigs by our technical services group. Additionally, one of our international deepwater rigs, the Pride South Pacific, worked throughout 2003, but was idle from April 2002 to November 2002. These increases in revenues were partially offset by a decrease in activity in the U.S. sector of the Gulf of Mexico. 28 Operating Costs. Operating costs for 2003 were $403.1 million, or 50.7%, higher than in 2002 due to increased costs, including loss provisions of $98.4 million, incurred on contracts related to the construction of deepwater platform rigs and costs associated with rigs that operated during 2003 that were stacked or being upgraded during 2002. Additionally, certain operating costs denominated in euros increased due to the strengthening of that currency relative to the dollar. These increases in costs were partially offset by the favorable impact of the devaluation in Venezuela on expenses denominated in its local currency. Operating costs for 2002 were reduced by $1.5 million as a result of changes in estimates of costs accrued in prior periods primarily for contractually required maintenance costs that were not expected to be incurred on two rigs managed by us. Depreciation and Amortization. Depreciation expense increased by $19.0 million, or 8.3%, to $249.2 million in 2003, from $230.2 million in 2002, due to incremental depreciation on newly acquired and constructed rigs and other rig refurbishments and upgrades. General and Administrative. General and administrative expenses increased by $27.1 million, or 28.7%, to $121.3 million for 2003, from $94.2 million for 2002, due primarily to executive retirement costs of $5.3 million, increased overhead related to higher activity in Argentina, Mexico and Venezuela, the impact of the decline in the value of the dollar relative to the euro on certain expenses denominated in euros and higher professional fees, insurance and staffing costs. Other Income (Expense). Other expense for 2003 decreased by $13.3 million, or 9.5%, as compared to 2002. Interest expense decreased by $7.6 million due principally to a reduction in the weighted average interest rate of our debt as a result of recent debt refinancings, partly offset by an increase in the average amount of outstanding debt. Additionally, the effective interest rate applicable to our Pride Angola drillship loan declined after January 2003 from the swapped rate of 6.52% to a rate based on LIBOR plus a margin of 1.25%. Other income in 2003 was comprised of mostly net foreign exchange gains, primarily in Venezuela, partly offset by expenses related to the redemption of $150 million principal amount of our 93/8% senior notes due 2007, including a redemption premium of $4.7 million and the recognition of $1.5 million of unamortized deferred financing costs. Other expense in 2002 principally comprised a loss of $1.2 million related to the early extinguishment of approximately $244.2 million accreted value, net of offering costs, of our zero coupon convertible senior and subordinated debentures. Income Tax Provision. Our consolidated effective income tax rate for 2003 was 26.3% as compared to 27.7% for 2002. The lower rate for the current period was principally a result of increased income in foreign jurisdictions with low or zero effective tax rates, partly offset by a true-up of the provision relating to tax returns for prior periods. Minority Interest. Minority interest in 2003 increased $4.7 million, or 29.0%, as compared to 2002, primarily due to an increase in income from a reduction in interest expense on the Pride Angola drillship loan. 2002 Compared with 2001 Revenues. Revenues in 2002 decreased $243.1 million, or 16.1%, as compared to 2001, primarily due to reduced activity and day rates for our jackup and platform rigs in the U.S. Gulf of Mexico and a reduction in revenues in Argentina and Venezuela due to reduced activity levels for our land drilling and E&P services operations and the devaluation of their currencies. Additionally, one of our seven high-specification deepwater rigs, the Pride South Pacific, which worked throughout 2001, was idle from April 2002 to November 2002. These decreases were partially offset by a full year of operations for two of our semisubmersible rigs, the Pride Carlos Walter and Pride Brazil, which commenced working for Petrobras under five-year contracts in June and July 2001, increased jackup activity in Mexico, the commencement of land drilling operations in Chad and in Kazakhstan and the start-up of operations for our technical services division. Operating Costs. Operating costs in 2002 decreased $94.8 million, or 10.7%, as compared to 2001 due to decreased costs associated with rigs that were stacked or being upgraded during 2002 that operated during 2001 and a reduction in operating costs in Argentina and Venezuela due to reduced activity levels in those 29 countries and the devaluation of their local currencies. These reductions in costs were partially offset by a full year of operating costs for the Pride Carlos Walter and Pride Brazil placed into service in June and July 2001, costs related to the commencement of operations in Chad and Kazakhstan and to the start-up of operations of our technical services division. Depreciation and Amortization. Depreciation and amortization expense increased $27.5 million, or 13.6%, in 2002 as compared with 2001, due to incremental depreciation on newly acquired and constructed rigs and other rig refurbishments and upgrades. This increase was partially offset by the impact of a reassessment of residual values and estimated remaining useful lives of certain rigs during the third quarter of 2001 and the elimination of amortization of goodwill beginning in January 2002. General and Administrative. General and administrative expenses for 2002 decreased $6.1 million, or 6.0%, as compared with 2001, primarily due to cost savings associated with the closure of duplicate facilities and staffing reductions following our September 2001 acquisition of Marine. Additionally, the devaluation of the currencies in Argentina and Venezuela favorably impacted expenses denominated in their local currencies. Pooling and Merger Costs. Costs totaling $35.8 million were incurred in connection with the acquisition of Marine in September 2001. The costs consisted of investment advisory, legal and other professional fees totaling $24.4 million and costs associated with the closure of duplicate office facilities and employee terminations of $11.4 million. Other Income (Expense). Other expense in 2002 increased $12.3 million, or 9.6%, as compared to 2001. Interest expense increased by $15.5 million, principally due to interest on indebtedness added in the March 2001 acquisition of the remaining 73.6% ownership of the Pride Carlos Walter and Pride Brazil and interest on construction financing for the rigs that had been capitalized during their construction. During 2002, we capitalized $1.9 million of interest expense in connection with construction projects, as compared to $19.0 million of interest capitalized in 2001. Interest income declined $9.1 million due to lower cash balances available for investment and to a reduction in interest rates. Other expense in 2002 principally comprised a loss of $1.2 million related to the early extinguishment of approximately $244.2 million accreted value, net of offering costs, of our zero coupon convertible senior and subordinated debentures. Other expense in 2001 included foreign exchange losses of $13.1 million and a $5.1 million charge in connection with the settlement of a wage-related antitrust lawsuit, partially offset by a gain from the sale of surplus assets and a gain of $2.0 million related to the early extinguishment of approximately $59.5 million accreted value, net of offering costs, of our zero coupon convertible subordinated debentures due 2018. The 2001 foreign exchange losses included a pre-tax charge of $10.7 million (or $6.9 million net of estimated income taxes) to reduce the carrying value of our net monetary assets in Argentina following devaluation of the Argentine currency. Income Tax Provision. Our consolidated effective income tax rate for 2002 decreased to 27.7% from 31.8% in 2001. The higher rate in 2001 was principally a result of approximately $19.0 million of the pooling and merger costs being estimated to be non-deductible for U.S. federal income tax purposes. Minority Interest. Minority interest in 2002 increased $0.6 million, or 3.8%, as compared to 2001, primarily due to an increase in net income generated by our 51% owned drillships, the Pride Africa and Pride Angola, as a result of decreased downtime and increased performance bonuses received from our customer. LIQUIDITY AND CAPITAL RESOURCES We had net working capital of $83.1 million and $152.4 million as of December 31, 2003 and December 31, 2002, respectively. The decrease in net working capital was attributable primarily to the use of cash to upgrade rigs being contracted to Mexico and other international markets from our U.S. Gulf of Mexico fleet and other capital expenditures in excess of cash generated from operating activities, an increase in the current portion of long-term debt as a result of the reclassification of approximately $86 million of senior convertible notes that mature in December 2004 from long-term to current liabilities and net cash outlays on deepwater platform rig construction projects. 30 Rig Construction Projects In 2003, we recorded a provision for expected losses on deepwater platform rig construction projects of $98.4 million. Of this amount, approximately $80.0 million corresponds to the excess of expected cash outlays after December 31, 2003 to complete the projects over estimated future cash receipts from the projects, which will negatively impact liquidity in 2004 and the first six months of 2005. Capital Expenditures Additions to property and equipment during 2003 totaled $217.0 million, including $23.4 million for the upgrade of one large land rig to work in Kazakhstan, $12.2 million for the acquisition of a conventionally moored semisubmersible rig, now the Pride Mexico, $85.1 million for the upgrading of five jackup rigs, one platform rig and the Pride Mexico for contracts in Mexico, $10.0 million for other rig upgrades, refurbishments and reactivations, and approximately $86.3 million for sustaining capital projects. Since early 2002, we have obtained long-term contracts in Mexico for 14 jackup rigs, two platform rigs and two semisubmersible rigs. Most of these rigs came from our U.S. Gulf of Mexico rig fleet and required substantial upgrades to meet international standards and Pemex's specific requirements. The upgrades included expanding the living quarters and adding additional equipment such as extra mud pumps, top-drives and higher load capacity cranes. Although we currently expect our capital expenditures in 2004 to decrease as our program to upgrade rigs in our U.S. Gulf of Mexico fleet for international markets winds down, we may be required to upgrade a number of rigs whose contracts expire in 2004 in connection with their working under new contracts. These upgrades could require significant investments of our working capital. Rig Mobilization Fees Mobilization fees received from customers and the costs incurred to mobilize a rig from one geographic area to another, as well as up-front fees to modify a rig to meet a customer's specifications, are deferred and amortized over the term of the related drilling contracts. Additionally, we defer costs associated with obtaining special periodic survey certificates from various regulatory bodies in order to operate our offshore rigs. We amortize these costs over the period of validity of the related certificate. These up-front fees and costs impact liquidity in the period in which the fees are received or the costs incurred, whereas they will impact our statement of operations in the periods during which the deferred revenues and costs are amortized. Deferred revenues and costs that are expected to be amortized in the twelve-month period following each balance sheet date are included in other accrued liabilities and current assets, respectively, and deferred revenues and costs that are expected to be amortized after more than twelve months from each balance sheet date are included in other long-term liabilities and other assets, respectively. The amount of up-front fees received and the related costs vary from period to period depending upon the nature of new contracts entered into and market conditions then prevailing. Generally, contracts for drilling services in remote locations or contracts that require specialized equipment will provide for higher up-front fees than contracts for readily available equipment in major markets. In 2003, up-front fees received included $13.5 million related to the mobilization of rigs to Mexico. In 2002, up-front fees received included $48.9 million in respect of engineering, logistics and construction work to modify, enhance and deploy two large land rigs for Kazakhstan, in accordance with the customer's specifications, and $18.8 million related to the mobilization of rigs to Mexico. Credit Facilities In June 2002, we entered into senior secured credit facilities with a group of banks providing for aggregate availability of up to $450.0 million, consisting of a five-year $200.0 million term loan and a three-year $250.0 million revolving credit facility. In December 2003, we replaced the term loan with a new $197.0 million term loan expiring in January 2009 and extended the period of the revolving credit agreement until January 2007. Borrowings under the revolving credit facility are available for general corporate purposes. We may issue up to $50.0 million of letters of credit under the facility. As of December 31, 2003, $189.0 million of borrowings and an additional $27.8 million of letters of credit were outstanding under the revolving credit 31 facility. The facilities are collateralized by two deepwater semisubmersible rigs, the Pride North America and the Pride South Pacific, and 28 jackup rigs. Borrowings under the facilities currently bear interest at variable rates based on LIBOR plus a spread based on the credit rating of the facility or, if unrated, index debt. As of December 31, 2003, the interest rates on the term loan and revolving credit facility were 3.66% and 3.20%, respectively. The credit facilities contain provisions that limit our ability and the ability of our subsidiaries, with certain exceptions, to pay dividends or make other restricted payments and investments; incur additional debt; create liens; incur dividend or other payment restrictions affecting subsidiaries; consolidate, merge or transfer all or substantially all of our assets; sell assets or subsidiaries; enter into speculative hedging arrangements outside the ordinary course of business; enter into transactions with affiliates; make maintenance capital expenditures and incur long-term operating leases. The credit facilities also require us to comply with specified financial tests, including a ratio of net debt to EBITDA, an interest coverage ratio, a ratio of net debt to total capitalization and a minimum net worth. In 2003, in order to reduce the potential impact of fluctuations in LIBOR, we entered into interest rate agreements that effectively cap the interest rate on $194.0 million of borrowings under our senior secured term loan at rates from 3.58% to 5.0%, plus the applicable spread, and provide a lower limit on rates from 0.72% to 0.91%, plus the applicable spread, to March 2007. If interest rates fall below the lower limits, interest rates payable increase to rates from 2.0% to 3.94%, plus the applicable spread. The interest rate agreements are marked-to-market quarterly with the change in fair value recorded as a component of interest expense. At December 31, 2003, the net value of the instruments was a liability of $0.6 million. Marking these instruments to market each quarter may increase short-term earnings volatility as market perceptions of future interest rate movements change. We amended our $95.0 million senior secured revolving credit facility with non-U.S. banks in October 2003. The amended facility provides aggregate availability of up to $180.0 million, including up to $10.0 million of letters of credit, and is collateralized by three semisubmersible rigs, two jackup rigs and a tender-assisted rig. Borrowings under the amended credit facility bear interest at variable rates based on LIBOR plus a spread ranging from 1.2% to 2.1%. As of December 31, 2003, $99.0 million of borrowings and an additional $10.0 million of letters of credit were outstanding under this credit facility. As of March 10, 2004, the undrawn portion of our senior secured revolving credit facilities was approximately $107 million. Indentures governing our outstanding 9 3/8% senior notes due 2007 and our 10% senior notes due 2009 limit our ability to draw under these facilities to a percentage of consolidated net tangible assets, which, as of March 10, 2004, effectively restricted our ability to borrow approximately $76 million of undrawn capacity under these facilities. Accordingly, only $31 million of these facilities were available to meet our short-term liquidity needs. Outstanding Debt Securities In April and May 2003, we issued $300 million aggregate principal amount of 3.25% convertible senior notes due 2033. Substantially all of the net proceeds of approximately $294.8 million were used to repay amounts outstanding under our senior secured revolving credit facilities, which included borrowings used to fund a portion of the purchase price of our zero coupon convertible subordinated debentures due 2018, described below. The notes bear interest at a rate of 3.25% per annum. We also will pay contingent interest during any six-month interest period commencing on or after May 1, 2008 for which the trading price of the notes for each of the five trading days immediately preceding such period equals or exceeds 120% of the principal amount of the notes. Beginning May 5, 2008, we may redeem any of the notes at a redemption price of 100% of the principal amount redeemed plus accrued and unpaid interest. In addition, noteholders may require us to repurchase the notes on May 1 of 2008, 2010, 2013, 2018, 2023 and 2028 at a repurchase price of 100% of the principal amount redeemed plus accrued and unpaid interest. We may elect to pay all or a portion of the repurchase price in common stock instead of cash, subject to certain conditions. The notes are convertible under specified circumstances into shares of our common stock at a conversion rate of 38.9045 shares per $1,000 principal amount of notes (which is equal to a conversion price of $25.704), subject to adjustment. Upon conversion, we will have the right to deliver, in lieu of shares of common stock, cash or a combination of cash and common stock. 32 In March 2002, we issued $300.0 million principal amount of 2 1/2% convertible senior notes due 2007. Net proceeds, after deducting underwriting discounts and offering costs, were $291.5 million. The notes are convertible into approximately 18.2 million shares of our common stock (equal to a conversion rate of 60.5694 shares of common stock per $1,000 principal amount, or $16.51 per share). Interest on the notes is payable semiannually. In connection with the issuance of the notes, a private equity fund related to First Reserve Corporation purchased 7.9 million shares of our common stock from third parties. First Reserve manages private equity funds that specialize in the energy industry. In 1997 and 1999, respectively, we issued $325.0 million of 9 3/8% senior notes due 2007 and $200.0 million of 10% senior notes due 2009. The notes contain provisions that limit our ability and the ability of our subsidiaries, with certain exceptions, to pay dividends or make other restricted payments; incur additional debt or issue preferred stock; create or permit to exist liens; incur dividend or other payment restrictions affecting subsidiaries; consolidate, merge or transfer all or substantially all our assets; sell assets; enter into transactions with affiliates and engage in sale and leaseback transactions. In July 2003, we redeemed $150.0 million principal amount of our 9 3/8% senior notes due 2007 at a redemption price of 103.125% of the principal amount, plus accrued and unpaid interest to the redemption date. We paid a total of $157.6 million in connection with the redemption, including $2.9 million of accrued and unpaid interest and a $4.7 million premium. The call premium in respect of any additional redemptions reduces to 101.563% of the principal amount redeemed on or after May 1, 2004. In January 2003, we repurchased substantially all of our outstanding zero coupon convertible senior debentures due 2021 for $98.2 million, which was equal to their accreted value on the date of purchase. In April 2003, we repurchased $226.5 million face amount of our zero coupon convertible subordinated debentures due 2018 for $112.0 million, which was equal to their accreted value on the date of purchase. The purchase price was funded through borrowings under our senior secured revolving credit facilities and available cash. Convertible subordinated debentures with a face amount of $2.1 million, and an accreted value of $1.1 million as of December 31, 2003, remain outstanding. Drillship Loans We have a 51% ownership interest in and operate the ultra-deepwater drillships Pride Africa and Pride Angola, which are contracted to work for Total Exploration & Production Angola SA under contracts which were extended, in December 2003, by an aggregate of ten years, commencing at the end of the contracts' current terms in June 2005 and May 2005, respectively, each with two one-year extension options. Financing for approximately $400 million of the drillships' total construction cost of $495 million was provided by a group of banks. The loans are collateralized by the two drillships and the proceeds from the related drilling contracts and are non-recourse to us and the joint owner. As of December 31, 2003, a total of $182.7 million was outstanding under these loans. As a condition of the drillship loans, we entered into interest rate swap and cap agreements. The agreements effectively fixed the interest rate on the Pride Africa loan at 7.34% through December 2006, effectively fixed the interest rate on the Pride Angola loan at 6.52% through January 2003 and effectively capped the interest rate on the Pride Angola loan at 6.52% from February 2003 to January 2007. After January 2003, the effective interest rate applicable to our Pride Angola drillship loan declined from the swapped rate of 6.52% to a rate based on six-month LIBOR plus a margin of 1.25%. Interest expense was approximately $4.8 million lower, and minority interest was approximately $2.4 million higher, in 2003 than it would have been if we had continued to pay interest on this debt at the swapped rate. Following the extension of the contracts for our two drillships, we are in the process of finalizing an approximate $128 million expansion of the drillship loans. We expect to complete the increase of the facility early in the second quarter of 2004. We expect that approximately $103 million of the proceeds and approximately $15 million of currently restricted cash will be used by the joint venture to repay indebtedness due from the joint venture company to Pride and that the balance of the proceeds will be used by the joint venture to repay indebtedness to our joint venture partner and to increase future working capital in the joint venture. If the transaction is completed, the funds paid to us will be available to reduce our other outstanding debt, including the $86 million of senior convertible notes described below, and for other working capital purposes. 33 Semisubmersible Rig Financings In March 2001, we increased from 26.4% to 100% our ownership in a joint venture that constructed two dynamically-positioned, deepwater semisubmersible drilling rigs. The Pride Carlos Walter commenced operations in June 2001, and the Pride Brazil commenced operations in July 2001. These rigs are operating for Petrobras under charter and service rendering contracts expiring in June and July 2006, respectively, each with two one-year extension options. The purchase consideration for the interests we did not previously own consisted of approximately $86 million aggregate principal amount of senior convertible notes, which were issued to the Brazilian participant in the joint venture, and 519,468 shares of our common stock valued at approximately $14.0 million, which were issued to two investment funds managed by First Reserve Corporation pursuant to the funds' original investment in the joint venture. The acquisition added to our consolidated balance sheet approximately $443 million of assets represented by the two rigs, approximately $287 million of indebtedness incurred to finance the construction of the rigs and approximately $86 million of senior convertible notes issued to the Brazilian participant. The notes mature in December 2004, bear interest at 9% per annum and are convertible into approximately 4.0 million shares of our common stock. The holder of the notes has the right to require us to prepay the notes at any time (1) after July 1, 2004 or (2) before July 1, 2004 to the extent of the amount of any required capital contributions by such holder with respect to the joint venture for the Pride Portland and the Pride Rio de Janeiro described below under "-- Investments." We have the option to prepay the notes any time after June 1, 2004. In July 2001, we entered into a credit agreement with a group of foreign banks to provide loans totaling up to $250.0 million to refinance the construction loans for the Pride Carlos Walter and Pride Brazil. Borrowings under the facility bear interest at rates based on LIBOR plus an applicable margin of 1.50% to 1.85%. Principal and interest on the loans are payable semi-annually from March 2002 through 2008. Funding under the facility and repayment of the construction loans (which had interest rates of 11% per annum) was completed in November 2001. The loans are collateralized by, among other things, a first priority mortgage on the drilling rigs and assignment of the charters for the rigs. As required by the lenders under the facility, we entered into interest rate swap and cap agreements with the lenders that capped the interest rate on $50.0 million of the debt at 7% and which fixed the interest rate on the remainder of the debt at 5.58% from March 2002 through September 2006. As of December 31, 2003, there were borrowings of $178.2 million outstanding under this facility. In February 1999, we completed the sale and leaseback of the Pride South America semisubmersible drilling rig with an unaffiliated leasing trust pursuant to which we received $97.0 million. Since that time we have been recording activity associated with this transaction as an operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13 "Accounting for Leases". Upon evaluation of the provisions of the recently issued Financial Accounting Standards Board ("FASB") Interpretation No. 46R "Consolidation of Variable Interest Entities" ("FIN No. 46R"), issued in December 2003, it was determined that the leasing trust would qualify for consolidation as a variable interest entity and that we were the primary beneficiary, as defined. Pursuant to the recommendation of the FASB, in the fourth quarter of 2003 we adopted the consolidation provisions of FIN No. 46R retroactively by restating previously issued financial statements for comparability purposes to consolidate the leasing trust's assets and liabilities, which comprise the Pride South America rig and the associated note payable, from inception of the lease. As of December 31, 2003, the carrying amount of the note payable was approximately $82.3 million. 34 Contractual Obligations As of December 31, 2003, we had approximately $4.4 billion in total assets and $2.0 billion of long-term debt and capital lease obligations. Although we do not expect that our level of total indebtedness will have a material adverse impact on our financial position, results of operations or liquidity in future periods, it may limit our flexibility in certain areas. Please read "Risk Factors -- We may be considered highly leveraged. Our significant debt levels and debt agreement restrictions may limit our flexibility in obtaining additional financing and in pursuing other business opportunities" in Item 1 of this annual report. The following table summarizes our contractual obligations at December 31, 2003.
PAYMENTS DUE BY PERIOD --------------------------------------------------- LESS THAN 1-3 AFTER CONTRACTUAL OBLIGATIONS(1) TOTAL 1 YEAR YEARS 4-5 YEARS 5 YEARS -------------------------- -------- --------- ------ --------- ------- (IN MILLIONS) Principal payments on long-term debt................................ $1,993.8 $188.7 $297.6 $ 963.7 $543.8 Interest payments on long-term debt... 417.3 102.4 179.0 100.3 35.6 Capital lease obligations............. 12.7 2.7 9.7 0.2 0.1 Operating lease obligations........... 39.2 12.1 13.7 6.5 6.9 Deepwater platform rig construction obligations......................... 186.9 178.9 8.0 -- -- Retirement obligations................ 3.6 1.2 1.4 0.9 0.1 -------- ------ ------ -------- ------ Total............................... $2,653.5 $486.0 $509.4 $1,071.6 $586.5 ======== ====== ====== ======== ======
--------------- (1) Does not include unconditional purchase commitments to third parties for materials, goods and services incurred in the normal course of business. Investments in Joint Ventures 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 (formerly referred to as Amethyst 4 and Amethyst 5). The Pride Rio de Janeiro is undergoing sea trials in the Caribbean Sea and the Pride Portland is expected to exit the shipyard in Maine in May 2004. The joint venture company has financed 87.5% of the cost of construction of these rigs through credit facilities, with repayment of the borrowings under those facilities guaranteed by the United States Maritime Administration ("MARAD"). Advances under the credit facilities, which totaled approximately $342 million as of March 1, 2004, are being provided without recourse to any of the joint venture owners at a weighted average fixed interest rate of 4.31%. The remaining 12.5% of the cost of construction is being provided by the joint venture company from equity contributions that have been made by the joint venture partners. In addition, the joint venture partners have agreed to provide equity contributions to finance all of the estimated $5.2 million of incremental costs associated with upgrading both rigs to a water depth capability of 1,700 meters from the original design of approximately 1,500 meters, of which our 30% share would be approximately $1.6 million. We expect that the joint venture partners will have to make additional capital contributions to fund the project through the sea trial stage for each rig or, alternatively, will have to provide acceptable guarantees to MARAD to permit the required further draws to become available under the MARAD-guaranteed credit facilities. If the funding is made by additional capital contributions, we expect that our proportionate share would be approximately $8.0 million. The capital contributions are likely to be required during the second quarter of 2004. Through December 31, 2003, our equity contributions to the joint venture totaled $33.7 million, including capitalized interest of $7.3 million and contributions of $0.8 million in connection with the water depth upgrades. If either joint venture partner failed to make its capital contribution and the other joint venture partner failed to cover the obligations, a default would occur under the fixed rate obligations guaranteed by MARAD. MARAD would 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. 35 The Pride Portland and Pride Rio de Janeiro are being built to operate under long-term contracts with Petrobras; however, Petrobras has given notice of cancellation of those contracts for late delivery. Based on current demand for deepwater drilling rigs, we believe that Petrobras or another customer will employ the Pride Portland and Pride Rio de Janeiro under new or amended contracts. There can be no assurance, however, that either the Pride Portland or the Pride Rio de Janeiro will be contracted to Petrobras or to any other customer. If no contract is obtained before the rigs complete their sea trials, 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 as well as principal and interest payments on the debt as they become due since the joint venture company would have no alternative source of funds to allow it to make such payments. Initial interest and debt service payments in respect of construction debt for the two rigs are expected to total approximately $22.0 million during 2004, of which our 30% share would be $6.6 million. We have a 12.5% interest in Basafojagu (HS) Inc., a company incorporated in Liberia that has capital lease obligations in respect of the Al Baraka 1 tender-assisted drilling rig. The majority shareholder is a subsidiary of a major Saudi Arabian banking and industrial group, and the two lessor banks are members of that same group. We entered into a long-term management agreement with Basafojagu to manage and operate the rig. We also provided guarantees for our 12.5% share, or approximately $5.0 million at December 31, 2003, of Basafojagu's lease obligations. Basafojagu is in arrears in payment of its lease obligations. In January 2004, we entered into a purchase option that expires on May 15, 2004 to acquire the tender barge and associated derrick set for aggregate consideration of $15.3 million. If we exercise our option, we will be released of all obligations under the guarantees and under the lease and management agreements. We currently expect that we will exercise our purchase option. Other Sources and Uses of Cash We have a Direct Stock Purchase Plan, which provides a means for investors to purchase shares of our common stock without paying brokerage commissions or service charges. During 2001 and 2003, we sold approximately 2.6 million and 830,000 shares, respectively, of common stock under this plan for net proceeds of $62.0 million and $15.0 million, respectively. No shares were sold under the plan in 2002. As of December 31, 2003, $38.8 million of our cash balances, which amount is included in restricted cash, consisted of funds held in trust in connection with our drillship and semisubmersible loans and our limited-recourse collateralized term loans and, accordingly, was not available for our use. The amount as of March 10, 2004 was approximately $27 million. Management believes that the cash and cash equivalents on hand, together with the cash generated from our operations and borrowings under our credit facilities, will be adequate to fund normal ongoing capital expenditures, working capital and debt service requirements for the foreseeable future. We may redeploy additional assets to more active regions in 2004 if we have the opportunity to do so on attractive terms; however, we expect fewer opportunities for redeployments than in 2002 and 2003. From time to time, we have one or more bids outstanding for contracts that could require significant capital expenditures and mobilization costs. We expect to fund project opportunities primarily through a combination of working capital, cash flow from operations and full or limited recourse debt or equity financing. In addition, we may consider from time to time opportunities to dispose of certain assets when we believe the capital could be more effectively deployed to reduce debt or for other purposes, and we continue to discuss with potential buyers the possible sale of certain assets. In addition to the matters described in this "-- Liquidity and Capital Resources" section, please read "-- Business Environment and Outlook" for additional matters that may have a material impact on our liquidity. TAX MATTERS We have a U.S. deferred tax asset of $244.7 million relating to U.S. net operating loss ("NOL") carryforwards. Due to the acquisition of Marine in September 2001, certain NOL carryforwards are subject to 36 limitation under Sections 382 and 383 of the U.S. Internal Revenue Code. We have determined that such limitations should not affect our ability to realize the benefits associated with such NOL carryforwards. The U.S. NOL carryforwards total $699.3 million and expire in 2019 through 2023. We estimate that we will generate sufficient U.S. taxable income of approximately $699.3 million prior to the expiration dates of these NOL carryforwards to fully utilize them. Historically, the difference between financial income (loss) and taxable income (loss) is primarily due to accelerated tax depreciation. Tax depreciation in excess of book depreciation for the years ended December 31, 2003, 2002, and 2001 was $66.4 million, $89.5 million, and $78.5 million, respectively. The Argentine NOL carryforwards were utilized in the current year due to a merger between the entity with the losses and our profitable Argentine entity. The profitable entity had sufficient income to utilize the entire amount of the deferred tax asset. We provide an allowance for the deferred tax assets in certain taxing jurisdictions because the benefits of the net operating losses will be realized only if we enter into additional profitable contracts in those jurisdictions. In 2003 we had an increase of 14.8% in the U.S. statutory rate for foreign taxes due to the following: (34.9)% for an adjustment to prior year deferred tax assets for foreign losses, and 49.7% for current year foreign taxes in excess of U.S. statutory rate. In 2003 we had an increase of 34.9% in the U.S. statutory rate for the change in valuation allowance due to an adjustment to prior year allowances on the deferred tax asset for foreign losses as explained above that will not be utilized in future years. We also had a decrease in the U.S. statutory rate for the following: 55.2% tax increase due to estimated U.S. tax at December 31, 2002 below the actual tax expense on the U.S. tax return as filed and a 3.1% increase to U.S. tax for other permanent items. In 2002 we had a decrease of (126.1)% in the U.S. statutory rate for foreign taxes due to the following: (112.0)% for previously omitted deferred tax assets for foreign losses, (51.7)% for current year deferred tax assets created by Mexico losses, and 37.6% for current year foreign taxes in excess of U.S. statutory rate. In 2002 we had an increase of 115.2% in the U.S. statutory rate for the change in valuation allowance due to the following: 112.0% for previously omitted allowances on the deferred tax asset for foreign losses as explained above that will not be utilized in future years, 51.7% for the current year allowance on Mexico tax losses described above that will not be utilized in future years, and (48.5)% decrease for the partial reversal of the allowance on French tax losses from rig rental income in France from Russia and Kazakhstan contracts that extend into 2003. Management's assumptions regarding these tax provisions, as described herein, were consistent with those of prior periods. CRITICAL ACCOUNTING POLICIES We consider policies concerning property and equipment and rig construction contracts to have the most significant impact on our consolidated financial statements. Property and equipment are carried at original cost or adjusted net realizable value, as applicable. Property and equipment held and used by us are reviewed for impairment whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. Indicators of possible impairment include extended periods of idle time and/or an inability to contract specific assets or groups of assets, such as a specific type of drilling rig, or assets in a specific geographical region. However, the drilling, workover and related service industries in which we operate are highly cyclical and it is not unusual to find that assets that were idle, underutilized or contracted at sub-economic rates for significant periods of time resume activity at economic rates when market conditions improve. Additionally, most of our assets are mobile, and we may mobilize rigs from one market to another to improve utilization or realize higher day rates. We estimate the future undiscounted cash flows of the affected assets to determine the recoverability of carrying amounts. In general, analyses are based on expected costs, utilization and day rates for the estimated remaining useful lives of the asset or group of assets being assessed. 37 Asset impairment evaluations are by, nature, highly subjective. They involve expectations about future cash flows generated by our assets, and reflect management's assumptions and judgments regarding future industry conditions and their effect on future utilization levels, day rates and costs. The use of different estimates and assumptions could result in materially different carrying values of our assets and could materially affect our results of operations. We account for rig construction contracts using the percentage-of-completion method. In applying this method we estimate periodically for each project the profit or loss at completion. This involves estimating future costs and revenues as well as determining the amount of costs incurred and revenues earned to date. Although estimating future revenues may require the exercise of a high degree of judgment, for example where there have been changes to the scope of work that have not been approved by the customer, the most judgmental areas often involve estimates of future costs. This judgment is most critical in construction projects that are expected to show a loss at completion since any change in estimate will immediately effect the amount of the recorded loss provision. In projects that are expected to show a profit, the judgment would only impact the results in proportion to the estimate of percentage complete. With our current construction projects, we have had to make particularly difficult judgments and estimates concerning the likely outcome, or range of outcomes, of a number of commercial disputes with shipyards, equipment vendors, major sub-contractors and others. Certain of these disputes involve claims and counterclaims and may involve either binding arbitration or legal proceedings. 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks arising from the use of financial instruments in the ordinary course of business. These risks arise primarily as a result of potential changes in the fair market value of financial instruments that would result from adverse fluctuation in interest rates and foreign currency exchange rates as discussed below. We entered into these instruments other than for trading purposes. We incorporate by reference in response to this item the information set forth in Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this annual report. Interest Rate Risk. We are exposed to interest rate risk through our convertible and fixed rate long-term debt. We have entered into agreements as required by the lenders under our drillship and semisubmersible loan agreements that effectively fixed or capped the interest rate on such debt. Additionally, during 2003, we entered into interest rate agreements that effectively capped the interest rate on $194 million of borrowings under our senior secured term loan. These latter interest rate agreements are marked-to-market quarterly with the change in fair value recorded as a component of interest expense. As of December 31, 2003, the net value of these instruments was a liability of $0.6 million. As of December 31, 2003, we held interest rate swap and cap agreements covering $557.9 million of our long-term debt. The fair market value of fixed rate debt will increase as prevailing interest rates decrease. The fair value of our long-term debt is estimated based on quoted market prices where applicable, or based on the present value of expected cash flows relating to the debt discounted at rates currently available to us for long-term borrowings with similar terms and maturities. The estimated fair value of our long-term debt as of December 31, 2003 and 2002 was approximately $2,095 million and $2,065 million, respectively, which is more than its carrying value as of December 31, 2003 and 2002 of $1,994 million and $1,973 million, respectively. A hypothetical 10% decrease in interest rates relative to market interest rates at December 31, 2003 would increase the fair market value of our long-term debt at December 31, 2003 by approximately $34 million. Foreign Currency Exchange Rate Risk. We operate in a number of international areas and are involved in transactions denominated in currencies other than U.S. dollars, which expose us to foreign exchange rate risk. We utilize forward exchange and option contracts, local currency borrowings and the payment structure of customer contracts to selectively reduce our exposure to exchange rate fluctuations in connection with monetary assets, liabilities and cash flows denominated in certain foreign currencies. We had no unrealized losses as of December 31, 2003 on forward exchange contracts and option contracts based on quoted market prices of comparable instruments. The estimated unrealized loss on our forward exchange and option contracts as of December 31, 2002 was approximately $1.0 million. We do not hold or issue forward exchange contracts, option contracts or other derivative financial instruments for speculative purposes. 39 FORWARD-LOOKING STATEMENTS This annual report 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 annual 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 - 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 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 - business strategies - expansion and growth of operations - future exposure to currency devaluations - 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 "Business -- Risk Factors" in Item 1 of this annual report 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 - 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 40 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. 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Pride International, Inc.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of Pride International, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements give retroactive effect to the acquisition of Marine Drilling Companies, Inc. on September 13, 2001 in a transaction accounted for as a pooling of interests, as described in Note 1 to the consolidated financial statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, effective in 2003, the Company changed its policies for consolidation of variable interest entities and for presentation of gains and losses on debt retirement and in 2002, changed the manner in which it accounts for goodwill. PRICEWATERHOUSECOOPERS LLP Houston, Texas March 11, 2004 42 PRIDE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET
DECEMBER 31, ----------------------- 2003 2002 ---------- ---------- (IN THOUSANDS, EXCEPT PAR VALUES) ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 69,134 $ 133,986 Restricted cash........................................... 38,840 52,700 Trade receivables, net.................................... 371,510 265,885 Parts and supplies, net................................... 73,763 64,920 Deferred income taxes..................................... 3,371 3,332 Other current assets...................................... 170,306 176,912 ---------- ---------- Total current assets................................. 726,924 697,735 ---------- ---------- PROPERTY AND EQUIPMENT, net................................. 3,446,331 3,473,636 ---------- ---------- OTHER ASSETS Investments in and advances to affiliates................. 33,984 29,620 Goodwill.................................................. 69,014 72,014 Other assets.............................................. 102,177 129,852 ---------- ---------- Total other assets................................... 205,175 231,486 ---------- ---------- $4,378,430 $4,402,857 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.......................................... $ 163,707 $ 186,657 Accrued expenses.......................................... 260,098 238,061 Deferred income taxes..................................... 957 985 Short-term borrowings..................................... 27,555 17,724 Current portion of long-term debt......................... 188,737 99,265 Current portion of long-term lease obligations............ 2,749 2,679 ---------- ---------- Total current liabilities............................ 643,803 545,371 ---------- ---------- OTHER LONG-TERM LIABILITIES................................. 54,423 88,572 LONG-TERM DEBT, net of current portion...................... 1,805,099 1,873,936 LONG-TERM LEASE OBLIGATIONS, net of current portion......... 9,979 12,511 DEFERRED INCOME TAXES....................................... 59,378 100,966 MINORITY INTEREST........................................... 102,969 82,204 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 50,000 shares authorized; none issued............................................ -- -- Common stock, $.01 par value; 400,000 shares authorized; 135,769 and 134,453 shares issued; 135,400 and 134,084 shares outstanding..................................... 1,358 1,344 Paid-in capital........................................... 1,261,073 1,237,146 Treasury stock, at cost................................... (4,409) (4,409) Accumulated other comprehensive loss...................... (124) (3,598) Retained earnings......................................... 444,881 468,814 ---------- ---------- Total stockholders' equity........................... 1,702,779 1,699,297 ---------- ---------- $4,378,430 $4,402,857 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 43 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------ 2003 2002 2001 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES: Services............................................... $1,565,806 $1,168,196 $1,512,895 Sales.................................................. 123,914 101,578 -- ---------- ---------- ---------- Total revenues................................. 1,689,720 1,269,774 1,512,895 ---------- ---------- ---------- OPERATING COSTS, excluding depreciation and amortization: Services............................................... 975,489 696,841 889,561 Sales.................................................. 222,356 97,898 -- ---------- ---------- ---------- Total operating costs.......................... 1,197,845 794,739 889,561 DEPRECIATION AND AMORTIZATION............................ 249,222 230,204 202,710 GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization........................................... 121,259 94,241 100,309 POOLING AND MERGER COSTS................................. (824) -- 35,766 ---------- ---------- ---------- EARNINGS FROM OPERATIONS................................. 122,218 150,590 284,549 ---------- ---------- ---------- OTHER INCOME (EXPENSE) Interest expense....................................... (133,227) (140,863) (125,394) Interest income........................................ 3,182 2,084 11,148 Other income (expense), net............................ 3,529 (1,072) (13,326) ---------- ---------- ---------- Total other expense, net....................... (126,516) (139,851) (127,572) ---------- ---------- ---------- EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST............................................... (4,298) 10,739 156,977 INCOME TAX PROVISION (BENEFIT)........................... (1,130) 2,977 49,948 MINORITY INTEREST........................................ 20,765 16,097 15,508 ---------- ---------- ---------- NET EARNINGS (LOSS)...................................... $ (23,933) $ (8,335) $ 91,521 ========== ========== ========== NET EARNINGS (LOSS) PER SHARE Basic.................................................. $ (0.18) $ (0.06) $ 0.70 Diluted................................................ $ (0.18) $ (0.06) $ 0.68 WEIGHTED AVERAGE SHARES OUTSTANDING Basic.................................................. 134,704 133,305 131,630 Diluted................................................ 134,704 133,305 142,778
The accompanying notes are an integral part of the consolidated financial statements. 44 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ACCUMULATED COMMON STOCK TREASURY STOCK OTHER TOTAL ---------------- PAID-IN ---------------- COMPREHENSIVE RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL SHARES AMOUNT GAIN (LOSS) EARNINGS EQUITY ------- ------ ---------- ------ ------- ------------- -------- ------------- (IN THOUSANDS) BALANCE -- DECEMBER 31, 2000...... 126,250 $1,263 $1,056,206 -- $ -- $(1,102) $385,628 $1,441,995 Net earnings.................... -- -- -- -- -- -- 91,521 91,521 Foreign currency translation.... -- -- -- -- -- 87 -- 87 ---------- Total comprehensive income.... 91,608 Issuance of common stock in connection with Direct Stock Purchase Plan................. 2,596 26 62,000 -- -- -- -- 62,026 Issuance of common stock in connection with private investments................... 3,555 35 92,971 -- -- -- -- 93,006 Other issuance of common stock......................... 43 1 996 -- -- -- -- 997 Exercise of stock options....... 349 3 6,364 -- -- -- -- 6,367 Tax benefit on non-qualified stock options................. -- -- 87 -- -- -- -- 87 ------- ------ ---------- --- ------- ------- -------- ---------- BALANCE -- DECEMBER 31, 2001...... 132,793 1,328 1,218,624 -- -- (1,015) 477,149 1,696,086 Net loss........................ -- -- -- -- -- -- (8,335) (8,335) Foreign currency translation.... -- -- -- -- -- (2,583) -- (2,583) ---------- Total comprehensive loss...... (10,918) Issuance of common stock in connection with private investments................... 528 5 6,295 369 (4,409) -- -- 1,891 Other issuance of common stock......................... 37 -- 476 -- -- -- -- 476 Exercise of stock options....... 1,095 11 9,069 -- -- -- -- 9,080 Tax benefit on non-qualified stock options................. -- -- 2,682 -- -- -- -- 2,682 ------- ------ ---------- --- ------- ------- -------- ---------- BALANCE -- DECEMBER 31, 2002...... 134,453 1,344 1,237,146 369 (4,409) (3,598) 468,814 1,699,297 Net loss........................ -- -- -- -- -- -- (23,933) (23,933) Foreign currency translation.... -- -- -- -- -- 3,474 -- 3,474 ---------- Total comprehensive loss...... (20,459) Issuance of common stock in connection with Direct Stock Purchase Plan................. 830 8 14,992 -- -- -- -- 15,000 Other issuance of common stock......................... 104 1 1,264 -- -- -- -- 1,265 Exercise of stock options....... 382 5 3,759 -- -- -- -- 3,764 Tax benefit of non-qualified stock options................. -- -- 516 -- -- -- -- 516 Stock option compensation....... -- -- 3,396 -- -- -- -- 3,396 ------- ------ ---------- --- ------- ------- -------- ---------- BALANCE -- DECEMBER 31, 2003...... 135,769 $1,358 $1,261,073 369 $(4,409) $ (124) $444,881 $1,702,779 ======= ====== ========== === ======= ======= ======== ==========
The accompanying notes are an integral part of the consolidated financial statements. 45 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 --------- --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net earnings (loss)..................................... $ (23,933) $ (8,335) $ 91,521 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities -- Depreciation and amortization........................... 249,222 230,204 202,710 Discount amortization on zero coupon convertible debentures......................................... 1,808 11,062 16,204 Amortization of deferred loan costs.................. 8,191 7,836 6,604 (Gain) loss on sale of assets........................ 453 (438) (1,393) Deferred income taxes................................ (41,139) (30,856) 7,252 (Gain) loss on early extinguishment of debt.......... -- 1,228 (2,049) Minority interest.................................... 20,765 16,097 15,508 Stock option compensation............................ 3,396 -- -- Changes in assets and liabilities, net of effects of acquisitions -- Trade receivables............................... (112,346) 53,436 (43,370) Parts and supplies.............................. (8,843) (5,108) (4,152) Other current assets............................ 6,043 (48,192) (57,910) Other assets.................................... 25,029 (18,795) (28,230) Accounts payable................................ (7,951) (43,271) (18,061) Accrued expenses................................ 37,394 5,735 51,223 Other liabilities............................... (41,654) (15,302) 20,706 --------- --------- --------- Net cash provided by operating activities....... 116,435 155,301 256,563 --------- --------- --------- INVESTING ACTIVITIES Purchase of net assets of acquired entities, including acquisition costs, less cash acquired................ -- (2,414) (8,934) Purchases of property and equipment..................... (232,497) (215,490) (307,714) Proceeds from dispositions of property and equipment.... 1,277 1,256 2,737 Investments in and advances to affiliates............... (4,364) (1,205) (17,788) --------- --------- --------- Net cash used in investing activities........... (235,584) (217,853) (331,699) --------- --------- --------- FINANCING ACTIVITIES Proceeds from issuance of common stock.................. 16,265 476 63,023 Proceeds from exercise of stock options................. 3,764 9,080 6,367 Proceeds from issuance of convertible senior debentures, net of issue costs................................... 294,800 291,515 254,500 Proceeds from debt borrowings........................... 188,016 385,000 194,039 Reduction of debt....................................... (462,408) (551,221) (456,083) Decrease (increase) in restricted cash.................. 13,860 2,700 (4,900) --------- --------- --------- Net cash provided by financing activities....... 54,297 137,550 56,946 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (64,852) 74,998 (18,190) CASH AND CASH EQUIVALENTS, beginning of year.............. 133,986 58,988 77,178 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of year.................... $ 69,134 $ 133,986 $ 58,988 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 46 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Reporting The consolidated financial statements include the accounts of Pride International, Inc. and its wholly-owned and majority-owned subsidiaries (the "Company" or "Pride"). All significant intercompany transactions and balances have been eliminated in consolidation. Investments in which the Company owns less than 50% and exercises significant influence are accounted for using the equity method of accounting, and investments in which the Company does not exercise significant influence are accounted for using the cost method of accounting. Certain reclassifications have been made to prior years' amounts to conform with the current year presentation. Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 145, which eliminates the requirements that gains and losses from the extinguishment of debt be aggregated and classified as extraordinary items. Accordingly, the consolidated statement of operations for the years ended December 31, 2002 and 2001 reflect reclassifications of the gross effect of $798,000 and $1.3 million, respectively, from extraordinary item into other income (expense), net and income tax provision. In September 2001, Pride acquired Marine Drilling Companies, Inc. ("Marine") pursuant to a merger of Marine into a wholly owned subsidiary of Pride. Approximately 58.7 million shares of Pride common stock were issued to the former shareholders of Marine, which equaled approximately 44% of the outstanding common shares of the combined company immediately following the acquisition. The Marine merger was followed by a merger that changed Pride's state of incorporation from Louisiana to Delaware. The acquisition of Marine was accounted for as a pooling-of-interests for accounting and financial reporting purposes. Under this method of accounting, the recorded historical carrying amounts of the assets and liabilities of Pride and Marine are carried forward to the financial statements of the combined company at recorded amounts, results of operations of the combined company include the income and expenses of Pride and Marine for the entire fiscal period in which the combination occurred, and the historical results of operations of the separate companies for fiscal periods prior to the combination are combined and reported as the historical results of operations of the combined company. The results of operations of Pride and Marine for periods prior to the combination that are included in the combined company's recorded amounts are as follows (in thousands):
PRIDE MARINE COMBINED -------- -------- -------- SIX MONTHS ENDED JUNE 30, 2001 Revenues............................................. $561,414 $182,639 $744,053 Net earnings......................................... 30,071 52,562 82,633
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (revised December 2003)". FIN No. 46R requires a company to consolidate a variable interest entity, as defined, when the company will absorb a majority of the variable interest entity's expected losses, receive a majority of the variable interest entity's expected residual returns, or both. FIN No. 46R also requires certain disclosures relating to consolidated variable interest entities and unconsolidated variable interest entities in which a company has a significant variable interest. With respect to variable interest entities in which a company holds a variable interest that was acquired before February 1, 2003, the consolidation provisions are required to be applied no later than the company's first fiscal year or interim period ending after December 15, 2003. Upon evaluation of the provisions of FIN No. 46R, it was determined that the unaffiliated trust with which the Company completed the sale and leaseback of the Pride South America semisubmersible drilling rig in February 1999 would qualify for consolidation as a variable interest entity in which the Company is the primary beneficiary, as defined. Pursuant to the recommendation of FIN No. 46R, the Company has elected to retroactively adopt the provisions and restate previously issued financial statements for the applicable years 47 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for comparability purposes. The effect on the Company's consolidated statement of operations for the years ended December 31, 2002 and 2001 was as follows:
YEAR ENDED DECEMBER 31, --------------------- 2002 2001 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings (loss) -- as reported.......................... $(8,947) $91,206 Add: Lease rental expenses included in reported net earnings (loss)................................................. 12,706 12,706 Deduct: Depreciation expense...................................... (3,782) (3,782) Interest expense.......................................... (8,312) (8,609) ------- ------- Net earnings (loss) -- as adjusted.......................... $(8,335) $91,521 ======= ======= NET EARNINGS (LOSS) PER SHARE: Basic -- as reported........................................ $ (0.07) $ 0.69 Basic -- as adjusted........................................ $ (0.06) $ 0.70 Diluted -- as reported...................................... $ (0.07) $ 0.68 Diluted -- as adjusted...................................... $ (0.06) $ 0.68
Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and adjustments on historical experience and on other information and assumptions that are believed to be reasonable under the circumstances. Estimates and judgments about future events and their effects cannot be perceived with certainty; accordingly, these estimates may change as additional information is obtained, as more experience is acquired, as the Company's operating environment changes and as new events occur. While it is believed that such estimates are reasonable, actual results could differ from those estimates. Estimates are used for, but not limited to, determining the realization of customer and insurance receivables, recoverability of long-lived assets, useful lives for depreciation and amortization, determination of income taxes, contingent liabilities, insurance and legal accruals and costs to complete construction projects. Cash and Cash Equivalents The Company considers all highly liquid debt instruments having maturities of three months or less at the date of purchase to be cash equivalents. Parts and Supplies Parts and supplies consist of spare rig parts and supplies held for use in operations and are valued at weighted average cost. Property and Equipment Property and equipment are carried at original cost or adjusted net realizable value, as applicable. Major renewals and improvements are capitalized and depreciated over the respective asset's remaining useful life. 48 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Maintenance and repair costs are charged to expense as incurred. When assets are sold or retired, the remaining costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in results of operations. For financial reporting purposes, depreciation of property and equipment is provided using the straight-line method based upon expected useful lives of each class of assets. Estimated useful lives of the assets for financial reporting purposes are as follows:
YEARS ----- Rigs and rig equipment...................................... 5-25 Transportation equipment.................................... 3-7 Buildings and improvements.................................. 10-20 Furniture and fixtures...................................... 5
Rigs and rig equipment have salvage values not exceeding 20% of the cost of the rig or rig equipment. Interest is capitalized on construction-in-progress at the interest rate on debt incurred for construction or at the weighted average cost of debt outstanding during the period of construction. Goodwill Effective January 1, 2002, the Company adopted SFAS No. 142, which eliminates the amortization of goodwill and requires that goodwill be reviewed annually for impairment. The Company ceased amortizing goodwill on January 1, 2002, which was previously amortized using the straight-line method over ten to fifteen years. The Company performed impairment tests of goodwill in the fourth quarters of 2003 and 2002 and determined that the fair value exceeded the recorded cost as of December 31, 2003 and 2002, respectively; accordingly, no impairment was recorded. The change in the carrying value of goodwill for the years ended December 31, 2003 and 2002 was as follows (in thousands):
GULF OF INTERNATIONAL E&P MEXICO LAND SERVICES TOTAL ------- ------------- -------- ------- Balance as of December 31, 2001.............. $1,472 $17,435 $45,749 $64,656 Goodwill acquired............................ -- -- 7,358 7,358 ------ ------- ------- ------- Balance as of December 31, 2002.............. 1,472 17,435 53,107 72,014 Earn out payment............................. -- -- (3,000) (3,000) ------ ------- ------- ------- Balance as of December 31, 2003.............. $1,472 $17,435 $50,107 $69,014 ====== ======= ======= =======
In March 2003, the Company reduced by $3.0 million the carrying amount of goodwill recorded in its April 2000 acquisition of Services Especiales San Antonio S.A. ("San Antonio"). The seller of San Antonio was entitled to four "earn out" payments of up to $3 million each on the first four anniversary dates of the closing if San Antonio's revenues from services provided to the seller and its affiliates exceeded specified levels during the 12 calendar months ending immediately prior to the relevant anniversary date. The specified revenue level was not achieved for the third anniversary earn-out payment. The Company recorded goodwill of $16.7 million in the year ended December 31, 2001, in connection with certain acquisitions during those periods. 49 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's net earnings and net earnings per share, adjusted to exclude goodwill amortization expense, for the year ended December 31, 2001, were as follows (in thousands, except per share amounts): Net earnings -- as reported................................. $91,521 Goodwill amortization, net of tax........................... 2,737 ------- Net earnings -- as adjusted................................. $94,258 ======= NET EARNINGS PER SHARE: Basic -- as reported........................................ $ 0.70 Goodwill amortization, net of tax........................... 0.02 ------- Basic -- as adjusted........................................ $ 0.72 ======= NET EARNINGS PER SHARE: Diluted -- as reported...................................... $ 0.68 Goodwill amortization, net of tax........................... 0.02 ------- Diluted -- as adjusted...................................... $ 0.70 =======
Long Lived Asset Impairment Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the fundamental provisions of SFAS No. 121 and the basic requirements of APB No. 30; however, it establishes a single accounting model to be used for long-lived assets to be disposed of by sale and it expands the presentation of discontinued operations to include more disposal transactions. The Company performed an impairment test on certain specific rigs and groups of rigs in the fourth quarter of 2003 and determined that the undiscounted future cash flows based on expected day rates and utilization rates exceeded the recorded cost of the specific rigs and group of rigs as of December 31, 2003; accordingly, no impairment was recorded. Revenue Recognition The Company recognizes revenue as services are performed based upon contracted day rates and the number of operating days during the period. Revenue from turnkey contracts is recognized upon completion. Mobilization fees received and costs incurred to mobilize a rig in connection with a customer contract from one geographic area to another are deferred and recognized on a straight-line basis over the term of such contract, excluding any option periods. Costs incurred to mobilize a rig without a contract are expensed as incurred. Fees received for capital improvements to rigs are deferred and recognized on a straight-line basis over the period of the related drilling contract. The costs of such capital improvements are capitalized and depreciated over the useful lives of the assets. Rig Construction Contracts The Company has historically constructed drilling rigs only for its own use. However, at the request of some of its significant customers, the Company has entered into lump sum contracts to design, construct and mobilize specialized drilling rigs through the Company's technical services group. The Company also has 50 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) entered into contracts to operate the rigs on behalf of the customers. Construction contract revenues and related costs are recognized under the percentage-of-completion method of accounting using measurements of progress toward completion appropriate for the work performed, such as man-hours, costs incurred or physical progress. Accordingly, the Company reviews contract price and cost estimates periodically as the work progresses and reflects adjustments in income (i) to recognize income proportionate to the percentage of completion in the case of projects showing an estimated profit at completion and (ii) to recognize the entire amount of the loss in the case of projects showing an estimated loss at completion. To the extent these adjustments result in an increase in previously reported losses or a reduction in or an elimination of previously reported profits with respect to a project, the Company would recognize a charge against current earnings. See Note 2. Rig Certifications The Company is required to obtain certifications from various regulatory bodies in order to operate its offshore drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs associated with obtaining and maintaining such certifications, including inspections and surveys, drydock costs and remedial structural work to the rigs are deferred and amortized over the corresponding certification periods. The Company expended $20.2 million, $13.6 million and $5.5 million during 2003, 2002 and 2001, respectively, in obtaining and maintaining such certifications. As of December 31, 2003 and 2002, the deferred and unamortized portion of such costs on the Company's balance sheet were $31.6 million and $19.1 million, respectively. The portion of the costs that are expected to be amortized in the 12-month periods following each balance sheet date are included in other current assets on the balance sheet and the costs expected to be amortized after more than 12 months from each balance sheet date are included in other assets. The costs are amortized on a straight-line basis over the period of validity of the certifications obtained. These certifications are typically for five years, but in some cases are for shorter periods. Accordingly, the remaining useful lives for these deferred costs are up to five years. Income Taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the asset is recovered or the liability is settled. Foreign Currency Translation The Company accounts for translation of foreign currency in accordance with SFAS No. 52, "Foreign Currency Translation". In those countries where the U.S. dollar is the functional currency, certain assets and liabilities of foreign operations are translated at historical exchange rates, revenues and expenses in these countries are translated at the average rate of exchange for the period, and all translation gains or losses are reflected in the period's results of operations. In those countries where the U.S. dollar is not the functional currency, revenues and expenses are translated at the average rate of exchange for the period, assets and liabilities are translated at end-of-period exchange rates and all translation gains and losses are included in accumulated other comprehensive loss within stockholders' equity. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents in U.S. government securities and other high quality financial instruments. The Company limits 51 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the amount of credit exposure to any one financial institution or issuer. The Company's customer base consists primarily of major integrated and government-owned international oil companies, as well as smaller independent oil and gas producers. Management believes the credit quality of its customers is generally high. The Company has in place insurance to cover certain exposure in its foreign operations and provides allowances for potential credit losses when necessary. Conditions Affecting Ongoing Operations The Company's current business and operations are substantially dependent upon conditions in the oil and gas industry and, specifically, the exploration and production expenditures of oil and gas companies. The demand for contract drilling and related services is influenced by oil and gas prices, expectations about future prices, the cost of producing and delivering oil and gas, government regulations and local and international political and economic conditions. There can be no assurance that current levels of exploration and production expenditures of oil and gas companies will be maintained or that demand for the Company's services will reflect the level of such activities. Stock-Based Compensation The Company uses the intrinsic value based method of accounting for stock-based compensation prescribed by APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Under this method, the Company records no compensation expense for stock options granted when the exercise price for options granted is equal to the fair market value of the Company's stock on the date of the grant. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation -- Transition and Disclosure -- an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. The disclosure provisions of SFAS No. 148 are effective immediately and require revised disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company has adopted the new disclosure requirements, as reflected below. Under SFAS No. 123, the fair value of stock-based awards is calculated using option pricing models. The Company's calculations were made using the Black-Sholes option pricing model with the following significant assumptions:
2003 2002 2001 ------- ------- ------- Dividend yield............................................ 0.00% 0.00% 0.00% Volatility................................................ 62.57% 59.45% 56.05% Risk free interest rate................................... 2.95% 4.73% 4.87% Expected term............................................. 5 years 5 years 5 years
The weighted average fair values per share of options granted during the years ended December 31, 2003, 2002 and 2001 were $8.53, $7.94 and $9.31, respectively. 52 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) If the fair value based method of accounting prescribed by SFAS No. 123 had been applied, the Company's pro forma net earnings (loss), net earnings (loss) per share and stock-based compensation cost would approximate the amounts indicated below. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.
YEAR ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings (loss) -- as reported................... $(23,933) $ (8,335) $ 91,521 Add: Stock-based compensation included in reported net earnings (loss), net of tax.................... 2,081 -- -- Deduct: Stock-based employee compensation expense determined under the intrinsic value method, net of tax................................................ (10,784) (8,538) (18,197) -------- -------- -------- Pro forma net earnings (loss)........................ $(32,636) $(16,873) $ 73,324 ======== ======== ======== Net earnings (loss) per share: Basic -- as reported............................... $ (0.18) $ (0.06) $ 0.70 Basic -- pro forma................................. $ (0.24) $ (0.13) $ 0.56 Diluted -- as reported............................. $ (0.18) $ (0.06) $ 0.68 Diluted -- pro forma............................... $ (0.24) $ (0.13) $ 0.56
New Accounting Pronouncements The FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" during the second quarter of 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including those embedded in other contracts, and for hedging activities and is effective for contracts entered into or modified after June 30, 2003. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with both liability and equity characteristics. The adoption of SFAS Nos. 149 and 150 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. 2. CONSTRUCTION PROJECTS At the request of two major international oil company customers, the Company entered into lump-sum contracts to design, engineer, manage construction of and commission four deepwater platform drilling rigs for installation on spars and tension-leg platforms. The Company also entered into contracts to provide drilling operations management of the rigs once they have been installed on platforms. The first rig has been mated to the customers' platform and towed to Angola, where it commenced operations in November 2003. The other rigs are expected to enter into service in late 2004 and early 2005. In 2003, the Company recorded loss provisions, included in operating costs, totaling $98.4 million relating to the construction of these deepwater platform rigs as the costs are expected to substantially exceed revenues on all four projects. Much of the increased costs are related to difficulties experienced with two different shipyards. The Company terminated its contract with the initial shipyard prior to the completion of the first two rigs. As a result, the Company has incurred substantial unplanned costs in completing the construction of the first unit. The Company engaged another shipyard to complete construction of the second rig, and the aggregate costs paid to the initial shipyard and committed and paid to the second shipyard have greatly exceeded budgeted expenditures for the rig. The Company is now utilizing shipyards in the Asia Pacific region for the third and fourth deepwater rig projects. As a result, the lump-sum contracts and anticipated freight costs for these two 53 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) projects are higher than were originally budgeted. A U.S. shipyard building one of the primary components for the third rig project encountered significant financial difficulties, and the Company has paid costs in excess of amounts initially agreed to provide financial capacity for it to complete a reduced scope of work. The aggregate costs paid to that shipyard, in addition to the costs associated with the completion of the remaining tasks by newly contracted third parties, as well as transportation and other costs necessitated by revisions to the project completion plan, have significantly exceeded the budgeted expenditures for the third deepwater platform rig. Based on the experience from the start-up of the first rig and on revisions of estimates, increased costs for construction, transportation, commissioning, training and warranties have been included in the Company's estimates of costs to complete the remaining three rigs. The Company has commenced arbitration proceedings against the initial shipyard claiming damages of approximately $5.8 million, and the shipyard has asserted counterclaims against the Company for damages of approximately $13.8 million. The Company is also in commercial disputes and negotiations with certain equipment vendors and major sub-contractors. While the Company intends to vigorously pursue equitable resolutions with the other parties, the Company has provided for additional cost estimates to resolve some of these disputes. The Company's technical services segment is performing these deepwater platform rig construction projects under lump-sum contracts with its customers. Revenues and costs realized on these lump sum contracts vary from the originally estimated amounts. Unforeseen events may result in further cost overruns to complete these projects, which could be material and which would require the Company to record additional loss provisions in future periods. Such events could include variations in labor and equipment productivity over the remaining term of the contract, unanticipated cost increases, engineering changes, shipyard or systems problems, project management issues, shortages of equipment, materials or skilled labor, unscheduled delays in the delivery of ordered materials and equipment, work stoppages, shipyard unavailability or delays. 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
DECEMBER 31, ----------------------- 2003 2002 ---------- ---------- (IN THOUSANDS) Rigs and rig equipment...................................... $4,455,736 $4,225,928 Transportation equipment.................................... 31,340 28,125 Buildings................................................... 37,966 35,866 Other....................................................... 46,888 44,102 Construction-in-progress.................................... 43,199 63,065 Land........................................................ 8,323 8,752 ---------- ---------- 4,623,452 4,405,838 Accumulated depreciation and amortization................... (1,177,121) (932,202) ---------- ---------- Net property and equipment.................................. $3,446,331 $3,473,636 ========== ==========
The Company capitalizes interest applicable to the construction of significant additions to property and equipment. For the years ended December 31, 2003, 2002 and 2001, total interest incurred was $134.4 million, $142.8 million and $144.4 million, respectively, of which $1.2 million, $1.9 million and $19.0 million, respectively, was capitalized. 54 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the years ended December 31, 2003, 2002 and 2001, maintenance and repair costs included in operating costs on the accompanying consolidated statement of operations were $97.6 million, $81.6 million and $85.2 million, respectively. 4. ACQUISITIONS In March 2001, the Company increased from 26.4% to 100% its ownership in a joint venture that constructed two dynamically-positioned, deepwater semisubmersible drilling rigs, the Pride Carlos Walter and the Pride Brazil. The purchase consideration for the interests the Company did not previously own consisted of approximately $86 million aggregate principal amount of senior convertible notes, convertible into approximately 4.0 million shares of the Company's common stock, which were issued to the Brazilian participant in the joint venture, and 519,468 shares of the Company's common stock valued at approximately $14 million, which were issued to two investment funds managed by First Reserve Corporation pursuant to the funds' original investment in the joint venture. The acquisition added to the Company's consolidated balance sheet approximately $443 million of assets represented by the two rigs, approximately $287 million of indebtedness incurred to finance the construction of the rigs ($178 million of which was outstanding as of December 31, 2003) and approximately $86 million of convertible senior notes issued to the Brazilian participant. See Note 5. In September 2001, the Company acquired Marine in a stock-for-stock transaction. Marine owned and operated a fleet of 17 offshore drilling rigs consisting of two semisubmersible units and 15 jackup units. Additionally, Marine owned one jackup rig configured as an accommodation unit. The acquisition of Marine was accounted for as a pooling-of-interests for accounting and financial reporting purposes. In connection with the acquisition, the estimated remaining useful lives and residual values of certain rigs were reassessed and, as a result, net income for 2001 increased $6.7 million (or $.05 per share on a basic and diluted basis). The Company incurred pooling and merger costs totaling $35.8 million associated with this acquisition, which consisted of investment advisory, legal and other professional fees of $24.4 million and costs associated with the closure of duplicate office facilities and employee terminations of $11.4 million. During 2002 and 2001, the Company paid $12.0 million and $22.9 million, respectively, of such fees and acquisition costs. During 2003, the Company reversed the remaining pooling and merger cost accrual. 5. DEBT Short-Term Borrowings The Company has agreements with several banks for unsecured short-term lines of credit primarily denominated in U.S. dollars. The facilities are renewable annually and bear interest at variable rates based on LIBOR. The weighted average interest rate on such borrowings as of December 31, 2003 was 2.8%. As of December 31, 2003, $27.6 million was outstanding under these facilities and $25.2 million was available. 55 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-Term Debt Long-term debt consisted of the following:
DECEMBER 31, ----------------------- 2003 2002 ---------- ---------- (IN THOUSANDS) Senior secured term loan.................................... $ 197,000 $ 198,500 Senior secured revolving credit facilities.................. 288,000 110,000 9 3/8% Senior Notes due 2007................................ 175,000 325,000 10% Senior Notes due 2009................................... 200,000 200,000 Drillship loans............................................. 182,674 231,966 Semisubmersible loans....................................... 260,558 301,343 2 1/2% Convertible Senior Notes due 2007.................... 300,000 300,000 3 1/4% Convertible Senior Notes due 2033.................... 300,000 -- Zero Coupon Convertible Senior Debentures Due 2021.......... 4 98,220 Zero Coupon Convertible Subordinated Debentures Due 2018.... 1,098 111,481 Senior convertible notes payable............................ 85,853 85,853 Limited-recourse collateralized term loans.................. 3,649 10,263 Other notes payable......................................... -- 575 ---------- ---------- 1,993,836 1,973,201 Current portion of long-term debt........................... 188,737 99,265 ---------- ---------- Long-term debt, net of current portion...................... $1,805,099 $1,873,936 ========== ==========
Senior Secured Term Loan and Senior Secured Revolving Credit Facilities The Company entered into senior secured credit facilities with a group of banks providing for aggregate availability of up to $450.0 million, consisting of a $197.0 million term loan maturing in January 2009 and a $250.0 million revolving credit facility maturing in January 2007. Borrowings under the revolving credit facility are available for general corporate purposes. The Company may issue up to $50.0 million of letters of credit under the facility. As of December 31, 2003, $189.0 million of borrowings and an additional $27.8 million of letters of credit were outstanding under the revolving credit facility. Borrowings under the facilities currently bear interest at variable rates based on LIBOR plus a spread based on the credit rating of the facility or, if unrated, index debt. The interest rate was 3.66% for the term loan and 3.20% for the revolving credit facility as of December 31, 2003. In 2003, in order to reduce the potential impact of fluctuations in LIBOR, the Company entered into interest rate agreements that effectively cap the interest rate on total outstanding borrowings under the term loan at rates from 3.58% to 5.0% and provide a lower limit on rates from 0.72% to 0.91%, plus the applicable spread, to March 2007. The Company accounts for these interest rate agreements at market value, with changes reflected in current earnings. The facilities are collateralized by two deepwater semisubmersible rigs, the Pride North America and the Pride South Pacific, and 28 jackup rigs. The facilities contain provisions that limit the ability of the Company and its subsidiaries, with certain exceptions, to pay dividends or make other restricted payments and investments; incur additional debt; create liens; incur dividend or other payment restrictions affecting subsidiaries; consolidate, merge or transfer all or substantially all of its assets; sell assets or subsidiaries; enter into speculative hedging arrangements outside the ordinary course of business; enter into transactions with affiliates; make certain capital expenditures and incur long-term operating leases. The credit facilities also 56 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) require the Company to comply with specified financial tests, including a ratio of net debt to EBITDA, an interest coverage ratio, a ratio of net debt to total capitalization and a minimum net worth. As of December 31, 2003, the Company had a senior secured revolving credit facility with non-U.S. banks that provides aggregate availability of up to $180.0 million, including $10.0 million of letters of credit, and is collateralized by three semisubmersible rigs, two jackup rigs and a tender-assisted rig. Borrowings under the credit facility bear interest at variable rates based on LIBOR plus a spread ranging from 1.2% to 2.1%. As of December 31, 2003, $99.0 million of borrowings and an additional $10.0 million of letters of credit were outstanding under this credit facility. As of December 31, 2003, the Company had $104.2 million in aggregate availability under its senior secured revolving credit facilities. Indentures governing our outstanding 9 3/8% and 10% senior notes limit the Company's ability to borrow under these facilities to a percentage of consolidated net tangible assets. 9 3/8% Senior Notes due 2007 In May 1997, the Company issued $325.0 million principal amount of 9 3/8% Senior Notes due May 1, 2007 (the "9 3/8% Senior Notes"). Interest on the 9 3/8% Senior Notes is payable semi-annually on May 1 and November 1 of each year. The 9 3/8% Senior Notes are redeemable, in whole or in part, at the option of the Company at redemption prices declining in annual increments from 103.125% at May 1, 2003 to 100% by May 1, 2005. The indenture governing the 9 3/8% Senior Notes contains provisions that limit the ability of the Company and its subsidiaries, with certain exemptions, to pay dividends or make other restricted payments; incur additional debt or issue preferred stock; create or permit to exist liens; incur dividend or other payment restrictions affecting subsidiaries; consolidate, merge or transfer all or substantially all of its assets; sell assets; enter into transactions with affiliates and engage in sale and leaseback transactions. In July 2003, the Company redeemed $150 million principal amount of the 9 3/8% Senior Notes at a redemption price of 103.125% of the principal amount, plus accrued and unpaid interest to the redemption date. The Company paid a total of $157.6 million in connection with the redemption, including $2.9 million of accrued and unpaid interest and a $4.7 million premium. In addition, the Company expensed $1.5 million, before income taxes, of deferred financing costs, which amount is included in other income (expense), net in the consolidated statement of operations. 10% Senior Notes due 2009 In May 1999, the Company issued $200.0 million principal amount of 10% Senior Notes due June 1, 2009 (the "10% Senior Notes"). Interest on the 10% Senior Notes is payable semi-annually on June 1 and December 1 of each year. The 10% Senior Notes are not redeemable prior to June 1, 2004, after which they will be redeemable, in whole or in part, at the option of the Company at redemption prices starting at 105% of the principal amount and declining to 100% by June 1, 2007. The indenture governing the 10% Senior Notes contains provisions that limit the ability of the Company and its subsidiaries, with certain exemptions, to pay dividends or make other restricted payments; incur additional debt or issue preferred stock; create or permit to exist liens; incur dividend or other payment restrictions affecting subsidiaries; consolidate, merge or transfer all or substantially all of its assets; sell assets; enter into transactions with affiliates and engage in sale and leaseback transactions. Drillship Loans In connection with the construction of two ultra-deepwater drillships, the Pride Africa and the Pride Angola, the Company and the two joint venture companies in which the Company has a 51% interest entered 57 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) into financing arrangements with a group of banks that provided $400 million of the drillships' total cost of $495 million. The loans with respect to the Pride Africa and the Pride Angola are non-recourse to the Company and the joint owner and are collateralized by the drillships. As of December 31, 2003, $67.6 million was outstanding under the loans for the Pride Africa and $115.1 million was outstanding under the loans for the Pride Angola. The loans are being repaid from the proceeds of the related charter contracts in semi-annual installments of principal and interest through December 2006 and July 2007 for the Pride Africa and Pride Angola, respectively. The payment terms of the Pride Angola loan were extended from July 2005 to July 2007 when the customer extended the drilling contract to five years in February 2002. The drillship loans bear interest at LIBOR plus 1.10% to 1.25%. As a condition of the drillship loans, the Company entered into interest rate swap and cap agreements with the lenders that fixed the interest rate on the Pride Africa loan at 7.34% through December 2006, fixed the interest rate on the Pride Angola loan at 6.52% through January 2003 and capped the interest rate on the Pride Angola loan at 6.52% from February 2003 to January 2007. As a result, the drillship loans had a weighted average interest rate of 6.8% as of December 31, 2003. Such swap and cap agreements are not considered derivatives because (1) the swap and cap agreements were required by the lenders under the drillship loans; (2) the Company believes that such loans would not have been available to the Company without the related swap and cap agreements; and (3) the drillship loans prohibit the Company from selling or transferring the swap and cap agreements without the consent of the lenders, and the Company does not believe that the lenders would grant such consent as long as any principal amounts are outstanding. In accordance with the debt agreements, certain cash balances are held in trust to assure that timely interest and principal payments are made. As of December 31, 2003 and 2002, $26.7 million and $34.3 million, respectively, of such cash balances, which amount is included in restricted cash, was held in trust and is not available for use by the Company. Semisubmersible Loans In July 2001, the Company entered into a credit agreement with a group of foreign banks to provide loans totaling up to $250.0 million to refinance the construction loans for the Pride Carlos Walter and Pride Brazil. Borrowings under the facility bear interest at rates based on LIBOR plus an applicable margin of 1.50% to 1.85%. Principal and interest on the loans are payable semi-annually from March 2002 through 2008. Funding under the facility and repayment of the construction loans (which had interest rates of 11% per annum) was completed in November 2001. As required by the lenders under the facility, the Company entered into interest rate swap and cap agreements with the lenders that capped the interest rate on $50.0 million of the debt at 7% and which fixed the interest rate on the remainder of the debt at 5.58% through September 2006. Such swap and cap agreements are not considered derivatives because (1) the swap and cap agreements were required by the lenders under the facility agreement; (2) the Company believes that such credit facility would not have been available to the Company without the related swap and cap agreements; and (3) the credit facility prohibits the Company from selling or transferring the swap and cap agreements without the consent of the lenders, and the Company does not believe that the lenders would grant such consent as long as any principal amounts are outstanding. The loans are collateralized by, among other things, a first priority mortgage on the drilling rigs and assignment of the charters for the rigs. The debt agreement requires certain cash balance to be held in trust to assure that timely interest and principal payments are made. As of December 31, 2003 and 2002, $11.4 million and $16.0 million, respectively, of such cash balances, which amount is included in restricted cash, was held in trust and is not available for use by the Company. In February 1999, the Company completed the sale and leaseback of the Pride South America semisubmersible drilling rig with an unaffiliated trust pursuant to which it received $97.0 million. The lease was classified as an operating lease for financial statement purposes. With the adoption of FIN No. 46R in December 2003, it was determined that the Company was the primary beneficiary, as defined, of the unaffiliated trust, and accordingly, the Company should consolidate said trust as a variable interest entity. The Company elected to adopt the provisions of FIN No. 46R retroactively and restate previously issued financial 58 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) statements. Debt in the amount of $82.3 million and $86.0 million and property and equipment, net of $74.1 million and $77.9 million were recorded as of December 31, 2003 and 2002, respectively, in connection with the retroactive adoption of FIN No. 46R. See Note 1. 2 1/2% Convertible Senior Notes Due 2007 In March 2002, the Company issued $300.0 million principal amount of 2 1/2% convertible senior notes due March 1, 2007. The net proceeds to the Company, after deducting underwriting discounts and offering costs, were $291.5 million. The notes are convertible into approximately 18.2 million shares of common stock of the Company (equal to a conversion rate of 60.5694 shares of common stock per $1,000 principal amount, or $16.51 per share). Interest on the notes is payable semiannually on March 1 and September 1 of each year. On or after March 4, 2005, the notes are redeemable at the Company's option, in whole or in part, for cash at redemption prices starting at 101% and declining to 100% by March 1, 2007, in each case plus accrued and unpaid interest. The Company may redeem some or all of the notes at any time prior to March 4, 2005 at 100% of the principal amount, plus accrued and unpaid interest and an amount equal to 7.5% of the principal amount, less the amount of any interest actually paid on the notes on or prior to the redemption date, if the closing price of the Company's common stock has exceeded 150% of the conversion price per share then in effect for at least 20 trading days within a period of 30 consecutive trading days. In connection with the issuance of the notes, a private equity fund related to First Reserve Corporation purchased 7.9 million shares of the Company's common stock from third parties. First Reserve manages private equity funds that specialize in the energy industry. 3 1/4% Convertible Senior Notes Due 2033 In April and May 2003, the Company issued $300 million aggregate principal amount of 3.25% convertible senior notes due 2033. Substantially all of the net proceeds (after expenses) of approximately $294.8 million were used to repay amounts outstanding under the Company's senior secured revolving credit facilities, which included borrowings used to fund a portion of the purchase price of the zero coupon convertible subordinated debentures due 2018 discussed below. The notes bear interest at a rate of 3.25% per annum. The Company also will pay contingent interest during any six-month interest period commencing on or after May 1, 2008 for which the trading price of the notes for each of the five trading days immediately preceding such period equals or exceeds 120% of the principal amount of the notes. Beginning May 5, 2008, the Company may redeem any of the notes at a redemption price of 100% of the principal amount redeemed plus accrued and unpaid interest. In addition, noteholders may require the Company to repurchase the notes on May 1 of 2008, 2010, 2013, 2018, 2023 and 2028 at a repurchase price of 100% of the principal amount redeemed plus accrued and unpaid interest. The Company may elect to pay all or a portion of the repurchase price in common stock instead of cash, subject to certain conditions. The notes are convertible under specified circumstances into shares of the Company's common stock at a conversion rate of 38.9045 shares per $1,000 principal amount of notes (which is equal to a conversion price of $25.704), subject to adjustment. Upon conversion, the Company will have the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and common stock. Zero Coupon Convertible Senior Debentures Due 2021 In January 2001, the Company issued zero coupon convertible senior debentures due January 16, 2021 with a face amount of $431.5 million. The net proceeds to the Company in connection with the sale, after deducting underwriting discounts and offering expenses, amounted to approximately $254.5 million. The issue price of $608.41 for each debenture represents a yield to maturity of 2.50% per annum (computed on a semiannual bond equivalent basis) calculated from the issue date. The difference between the issue price and face amount of the debentures is recorded as a discount and amortized to interest expense using the effective interest method over the term of the debentures. 59 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 2002, the Company purchased on the open market and then extinguished $277.9 million face amount of the debentures for $172.8 million. In January 2003, the Company repurchased substantially all of the remaining outstanding zero coupon convertible senior debentures for $98.2 million. Zero Coupon Convertible Subordinated Debentures Due 2018 In April 1998, the Company issued zero coupon convertible subordinated debentures due April 24, 2018 with a face amount of $588.1 million. The net proceeds to the Company in connection with the sale, after deducting underwriting discounts and offering expenses, amounted to approximately $222.6 million. The issue price of $391.06 for each debenture represents a yield to maturity of 4.75% per annum (computed on a semiannual bond equivalent basis) calculated from the issue date. The difference between the issue price and face amount of the debentures is recorded as a discount and amortized to interest expense using the effective interest method over the term of the debentures. The debentures are convertible into shares of common stock of the Company at a conversion rate of 13.794 shares of common stock per $1,000 principal amount at maturity. During 2001, the Company purchased on the open market and then extinguished $129.1 million face amount of the debentures for $56.2 million. During 2002, the Company purchased on the open market and then extinguished $153.3 million face amount of the debentures for $72.7 million. In April 2003, the Company repurchased $226.5 million face amount of the outstanding debentures for $112.0 million, which was equal to their accreted value on the date of purchase. The purchase price was funded through borrowings under the Company's senior secured revolving credit facilities and available cash. Debentures with a face amount of $2.1 million, and an accreted value of $1.1 million as of December 31, 2003, remain outstanding. Senior Convertible Notes Payable In March 2001, in connection with the acquisition of the interests the Company did not previously own in the Pride Carlos Walter and the Pride Brazil, the Company issued approximately $86 million aggregate principal amount of senior convertible notes. See Note 4. The notes, which mature in December 2004, bear interest at 9% per annum and are convertible into approximately 4.0 million shares of the Company's common stock. The holder of the notes has the right to require the Company to prepay the notes at any time (1) after July 1, 2004 or (2) before July 1, 2004 to the extent of the amount of any required capital contributions by such holder with respect to the joint venture for the Pride Portland and the Pride Rio de Janeiro described in Note 13. The Company has the option to prepay the notes any time after June 1, 2004. Limited-Recourse Collateralized Term Loans The limited-recourse collateralized term loans are collateralized by two of the Company's drilling/ workover barge rigs, the Pride I and the Pride II, and related charter contracts. The loans are being repaid from the proceeds of the related charter contracts in equal monthly installments of principal and interest through July 2004. These loans are non-interest bearing and have implied interest rates of 9.61%. In addition, a portion of contract proceeds is being held in trust to assure that timely payment of future debt service obligations is made. As of December 31, 2003 and 2002, $0.7 million and $2.4 million, respectively, of such contract proceeds, which amount is included in restricted cash, was being held in trust as collateral for the lenders and is not available for use by the Company. 60 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future Maturities Future maturities of long-term debt as of December 31, 2003 are as follows:
AMOUNT -------------- (IN THOUSANDS) 2004........................................................ 188,737 2005........................................................ 188,611 2006........................................................ 108,955 2007........................................................ 926,254 2008........................................................ 37,449 Thereafter.................................................. 543,830 ---------- Total long-term debt...................................... $1,993,836 ==========
As of December 31, 2003, the fair value of long-term debt was approximately $2.1 billion. 6. LEASES The Company has lease obligations pursuant to sale and leaseback agreements or financing arrangements with unaffiliated entities for three platform rigs and offices in France that are accounted for as capital leases. The obligations are payable in semiannual installments through June 2006 and bear interest at a weighted average rate of 7.8% per annum. Future maturities of capital lease obligations as of December 31, 2003 are as follows:
AMOUNT -------------- (IN THOUSANDS) 2004........................................................ $ 3,645 2005........................................................ 8,180 2006........................................................ 2,180 2007........................................................ 124 2008........................................................ 123 Thereafter.................................................. 61 ------- Total minimum lease obligations........................... 14,313 Less: interest portion...................................... (1,585) ------- 12,728 Less: current portion....................................... 2,749 ------- Long-term portion........................................... $ 9,979 =======
Rental expense for operating leases for equipment, vehicles and various facilities of the Company for the years ended December 31, 2003, 2002 and 2001 were $49.4, $28.4 million and $36.1 million, respectively. 7. FINANCIAL INSTRUMENTS The Company's operations are subject to foreign exchange risks, including the risks of adverse foreign currency fluctuations and devaluations and of restrictions on currency repatriation. The Company attempts to limit the risks of adverse currency fluctuations and restrictions on currency repatriation by obtaining contracts providing for payment in U.S. dollars or freely convertible foreign currency. To the extent possible, the Company seeks to limit its exposure to local currencies by matching its acceptance 61 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) thereof to its expense requirements in such currencies. Moreover, the Company enters into forward exchange contracts and option contracts to manage foreign currency exchange risk principally associated with its Euro-and denominated expenses. These forward exchange contacts and option contracts have not been designated as hedging instruments under SFAS No. 133, as the forward or option contracts are not systematically identified as being the hedge of specific expenditures at inception. Currency option contracts existing as of December 31, 2003 consist of U.S. dollar calls/Euro puts with a notional amount of $2.6 million sold by the Company, U.S. dollar puts/Euro calls with a notional amount of $1.1 million purchased by the Company and South African Rand calls/U.S. dollar puts with a notional amount of 5 million Rand, equivalent to $0.8 million at the year end exchange rate, purchased by the Company. The counterparties to these contracts are all major European banks. The Company had no unrealized losses as of December 31, 2003 on forward exchange contracts and option contracts based on quoted market prices of comparable instruments. The unrealized loss as of December 31, 2002 was approximately $1.0 million. The net realized and unrealized gains (losses) on all forward and option contracts, included in other income (expense), net for the years ended December 31, 2003, 2002 and 2001, were approximately $1.2 million, $4.8 million and $(0.1) million, respectively. The Company is subject to the risk of variability in interest payments on its floating rate debt. In 2003, in order to reduce the potential impact of fluctuations in LIBOR, the Company entered into interest rate agreements that effectively cap the interest rate on $194.0 million of borrowings under its senior secured term loan at rates from 3.58% to 5.0%, plus the applicable spread, and provide a lower limit on rates from 0.72% to 0.91%, plus the applicable spread, to March 2007. If interest rates fall below the lower limits, interest rates payable increase to rates from 2.0% to 3.94%, plus the applicable spread. The interest rate agreements are marked-to-market quarterly with the change in fair value recorded as a component of interest expense. As of December 31, 2003, the net value of the instruments was a liability of $0.6 million. 8. INCOME TAXES The components of the income tax provision (benefit) were as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 -------- -------- ------- (IN THOUSANDS) U.S.: Federal: Current............................................. $ -- $ -- $15,694 Deferred............................................ (78,127) (38,675) 9,664 -------- -------- ------- Total -- Federal................................. (78,127) (38,675) 25,358 -------- -------- ------- Foreign: Current............................................. 42,487 33,833 27,002 Deferred............................................ 34,510 7,819 (2,412) -------- -------- ------- Total -- Foreign................................. 76,997 41,652 24,590 -------- -------- ------- Income tax provision (benefit)................. $ (1,130) $ 2,977 $49,948 ======== ======== =======
62 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The difference between the effective federal income tax amounts and rate reflected in the income tax provision (benefit) and the amount and rate which would be determined by applying the U.S. statutory federal tax rate to earnings (loss) before income taxes and minority interest is summarized as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2003 2002 2001 --------------- ----------------- --------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ------- ----- -------- ------ -------- ---- (IN THOUSANDS) U.S. statutory rate............. $(1,504) 35.0% $ 3,759 35.0% $ 54,942 35.0% Foreign: Tax on foreign earnings....... (635) 14.8 (13,541) (126.1) (7,207) (4.6) Change in valuation allowance.................. (1,498) 34.8 12,372 115.2 (2,821) (1.8) ------- ----- -------- ------ -------- ---- Net effect of foreign income taxes......................... (2,133) 49.6 (1,169) (10.9) (10,028) (6.4) Change in estimate.............. 2,372 (55.2) 291 2.7 5,034 3.2 Other........................... 135 (3.1) 96 0.9 -- -- ------- ----- -------- ------ -------- ---- Effective income tax rate....... $(1,130) 26.3% $ 2,977 27.7% $ 49,948 31.8% ======= ===== ======== ====== ======== ====
In 2003, the Company had an increase of 14.8% in the U.S. statutory rate for foreign taxes due to the following: (34.8)% for an adjustment to prior year deferred tax assets for foreign losses, and 49.6% for current year foreign taxes in excess of U.S. statutory rate. In 2003, the Company had an increase of 34.8% in the U.S. statutory rate for the change in valuation allowance due to an adjustment to prior year allowances on the deferred tax asset for foreign losses as explained above that will not be utilized in future years. The change in estimate for 2003 relates primarily to the difference between the Company's estimate of U.S. income tax on approximately $153 million of 2002 foreign earnings and the actual amount on the 2002 U.S. tax return as filed. In 2002, the Company had a decrease of (126.1)% in the U.S. statutory rate for foreign taxes due to the following: (112.0)% for previously omitted deferred tax assets for foreign losses, (51.7)% for current year deferred tax assets created by Mexico losses, and 37.6% for current year foreign taxes in excess of U.S. statutory rate. In 2002, the Company had an increase of 115.2% in the U.S. statutory rate for the change in valuation allowance due to the following: 112.0% for previously omitted allowances on the deferred tax asset for foreign losses as explained above that will not be utilized in future years, 51.7% for the current year allowance on Mexico tax losses described above that will not be utilized in future years, and (48.5)% decrease for the partial reversal of the allowance on French tax losses from rig rental income in France from Russia and Kazakhstan contracts that extend into 2003. The domestic and foreign components of earnings (losses) before income taxes and minority interest were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 --------- --------- -------- (IN THOUSANDS) Domestic........................................... $(257,512) $(142,044) $ 22,297 Foreign............................................ 253,214 152,783 134,680 --------- --------- -------- Earnings (losses) before income taxes and minority interest......................................... $ (4,298) $ 10,739 $156,977 ========= ========= ========
63 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets were as follows:
DECEMBER 31, --------------------- 2003 2002 --------- --------- (IN THOUSANDS) Deferred tax liabilities: Depreciation.............................................. $ 320,284 $ 312,215 Other..................................................... 21,286 16,962 --------- --------- Total deferred tax liabilities......................... 341,570 329,177 --------- --------- Deferred tax assets: Net operating loss carryforwards.......................... (272,698) (217,114) Alternative Minimum Tax credits........................... (27,958) (27,958) Other..................................................... (10,285) (9,271) --------- --------- Total deferred tax assets.............................. (310,941) (254,343) Valuation allowance for deferred tax assets............... 22,287 23,785 --------- --------- Net deferred tax assets................................ (288,654) (230,558) --------- --------- Net deferred tax liability............................. $ 52,916 $ 98,619 ========= =========
Applicable U.S. deferred income taxes and related foreign dividend withholding taxes have not been provided on approximately $507.8 million of undistributed earnings and profits of the Company's foreign subsidiaries. The Company considers such earnings to be permanently reinvested outside the United States. It is not practicable to estimate the amount of deferred income taxes associated with these unremitted earnings. As of December 31, 2003, the Company had deferred tax assets of $272.7 million relating to $783.2 million of net operating loss ("NOL") carryforwards and had $28.0 million of non-expiring Alternative Minimum Tax ("AMT") credits. The NOL carryforwards and AMT credits can be used to reduce the Company's federal and foreign income taxes payable in future years. The Company's ability to realize the entire benefit of its deferred tax assets requires that the Company achieve certain future earnings levels prior to the expiration of its NOL carryforwards. U.S. NOL carryforwards total $699.2 million and expire in 2019 through 2023. Foreign NOL carryforwards include $41.6 million that do not expire and $42.3 million that expire in 2003 through 2013. The Company has recognized a partial allowance due to the uncertainty of realizing certain foreign NOL carryforwards. The Company could be required to record an additional valuation allowance against certain or all of its remaining deferred tax assets if market conditions deteriorate or future earnings are below current estimates. In connection with the acquisition of Marine, the Company determined that certain NOL carryforwards and AMT credits are subject to limitation under Sections 382 and 383 of the U.S. Internal Revenue Code as a result of the greater than 50% cumulative change in the Company's ownership. However, the Company has determined that such limitations should not affect its ability to realize the benefits of the deferred tax assets associated with such NOL carryforwards and AMT credits. 9. NET EARNINGS (LOSS) PER SHARE Basic net earnings (loss) per share has been computed based on the weighted average number of shares of common stock outstanding during the applicable period. Diluted net earnings (loss) per share has been computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the applicable period, as if stock options, convertible debentures and other convertible debt 64 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) were converted into common stock, after giving retroactive effect to the elimination of interest expense, net of income tax effect. The following table presents information necessary to calculate basic and diluted net earnings (loss) per share:
YEAR ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings (loss).................................. $(23,933) $ (8,335) $ 91,521 Interest expense on convertible debentures and notes.............................................. -- -- 9,171 Income tax effect.................................... -- -- (3,210) -------- -------- -------- Net earnings (loss) -- as adjusted................. $(23,933) $ (8,335) $ 97,482 ======== ======== ======== Weighted average shares outstanding.................. 134,704 133,305 131,630 Convertible debentures and notes..................... -- -- 9,437 Stock options........................................ -- -- 1,711 -------- -------- -------- Weighted average shares outstanding -- as adjusted........................................ 134,704 133,305 142,778 ======== ======== ======== Net earnings (loss) per share: Basic.............................................. $ (0.18) $ (0.06) $ 0.70 ======== ======== ======== Diluted............................................ $ (0.18) $ (0.06) $ 0.68 ======== ======== ========
The calculation of diluted weighted average shares outstanding excludes 35.9 million, 34.3 million and 13.2 million common shares issuable pursuant to convertible debt and outstanding options for the years ended December 31, 2003, 2002 and 2001, respectively, because their effect was antidilutive or the exercise price of stock options exceeded the average price of the Company's common stock for the applicable period. 10. EMPLOYEE BENEFITS The Company has a 401(k) defined contribution plan for its employees, which allows eligible employees to defer up to 15% of their eligible annual compensation, with certain limitations. The Company may at its discretion match up to 100% of the first 6% of compensation. The Company's contributions to the plan for the years ended December 31, 2003, 2002 and 2001 were $2.5 million, $1.6 million and $3.5 million, respectively. The Company has a deferred compensation plan, which provides its officers and key employees with the opportunity to participate in an unfunded, non-qualified plan. Eligible employees may defer up to 100% of compensation, including bonuses and net proceeds from the exercise of stock options. 11. STOCKHOLDERS' EQUITY Preferred Stock The Company is authorized to issue 50 million shares of preferred stock, par value $0.01 per share. The Company's board of directors has the authority to issue shares of preferred stock in one or more series and to fix the number of shares, designations and other terms of each series. The board of directors has designated 4.0 million shares of preferred stock to constitute the Series A Junior Participating Preferred Stock in connection with the Company's stockholders' rights plan. As of December 31, 2003, no shares of preferred stock are outstanding. 65 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Common Stock The Company has established the Pride International, Inc. Direct Stock Purchase Plan, which provides a convenient way for investors to purchase shares of its common stock without paying brokerage commissions or service charges. For the years ended December 31, 2003 and 2001, the Company sold 0.8 million shares for $15.0 million and 2.6 million shares for $62.0 million, respectively. There were no shares sold under the plan in 2002. In January 2000, Marine completed a public offering of 1.0 million shares of its common stock, for net proceeds of $18.5 million. The proceeds were used to fund the acquisition, upgrade and mobilization of the Pride South Carolina, formerly the Marine 202, a jackup drilling rig. In February 2001, the Company issued 3.0 million shares of common stock valued at $78.9 million in connection with the acquisition of the Pride North Sea and the Pride Venezuela. In March 2001, the Company issued 519,468 shares of common stock valued at approximately $14.0 million to investment funds managed by First Reserve Corporation in connection with the Company's acquisition of the funds' equity ownership interest in the Pride Carlos Walter and Pride Brazil. See Note 4. In October 2002, the Company issued 527,652 shares of common stock to two funds managed by First Reserve in exchange for an additional 11.9% investment in the Amethyst joint venture. Subsequently, in November 2002 the other joint venture partner exercised its option to acquire up to 70% of the interest acquired by the Company, in exchange for 369,356 shares of the Company's common stock. The shares of Company common stock acquired in the exchange are currently held as treasury shares. Stockholders' Rights Plan The Company has a preferred share purchase rights plan. Under the plan, each share of common stock includes one right to purchase preferred stock. The rights will separate from the common stock and become exercisable (1) ten days after public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% of the Company's outstanding common stock or (2) ten business days following the start of a tender offer or exchange offer that would result in a person's acquiring beneficial ownership of 15% of the Company's outstanding common stock. A 15% beneficial owner is referred to as an "acquiring person" under the plan. Certain investment funds managed by First Reserve Corporation, their affiliates and certain related parties currently have the right to acquire beneficial ownership of up to 19% of the Company's common stock without becoming an acquiring person under the plan. The Company's board of directors can elect to delay the separation of the rights from the common stock beyond the ten-day periods referred to above. The plan also confers on the board the discretion to increase or decrease the level of ownership that causes a person to become an acquiring person. Until the rights are separately distributed, the rights will be evidenced by the common stock certificates and will be transferred with and only with the common stock certificates. After the rights are separately distributed, each right will entitle the holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock for a purchase price of $50. The rights will expire at the close of business on September 30, 2011, unless the Company redeems or exchanges them earlier as described below. If a person becomes an acquiring person, the rights will become rights to purchase shares of the Company's common stock for one-half the current market price, as defined in the rights agreement, of the common stock. This occurrence is referred to as a "flip-in event" under the plan. After any flip-in event, all rights that are beneficially owned by an acquiring person, or by certain related parties, will be null and void. The Company's board of directors has the power to decide that a particular tender or exchange offer for all 66 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) outstanding shares of the Company's common stock is fair to and otherwise in the best interests of its stockholders. If the board makes this determination, the purchase of shares under the offer will not be a flip-in event. If, after there is an acquiring person, the Company is acquired in a merger or other business combination transaction or 50% or more of the Company's assets, earning power or cash flow are sold or transferred, each holder of a right will have the right to purchase shares of the common stock of the acquiring company at a price of one-half the current market price of that stock. This occurrence is referred to as a "flip-over event" under the plan. An acquiring person will not be entitled to exercise its rights, which will have become void. Until ten days after the announcement that a person has become an acquiring person, the Company's board of directors may decide to redeem the rights at a price of $0.01 per right, payable in cash, shares of common stock or other consideration. The rights will not be exercisable after a flip-in event until the rights are no longer redeemable. At any time after a flip-in event and prior to either a person's becoming the beneficial owner of 50% or more of the shares of common stock or a flip-over event, the Company's board of directors may decide to exchange the rights for shares of common stock on a one-for-one basis. Rights owned by an acquiring person, which will have become void, will not be exchanged. Stock Option Plans The Company has a long-term incentive plan which provides for the granting or awarding of stock options, restricted stock, stock appreciation rights and stock indemnification rights to officers and other key employees. The number of shares authorized and reserved for issuance under the long-term incentive plan is limited to 10% of total issued and outstanding shares, subject to adjustment in the event of certain changes in the Company's corporate structure or capital stock. Stock options may be exercised in whole or in part within 60 days of termination of employment or one year after retirement, total disability or death of an employee. Options granted under the long-term incentive plan prior to 1998 were vested 25% immediately, 50% after one year, 75% after two years and 100% after three years. Options granted in 1998 were vested 20% after one year, 40% after two years, 60% after three years, 80% after four years and 100% after five years. Options granted in 1999 through 2003 were vested 40% after six months, 60% after 18 months, 80% after two years and 100% after 30 months. In 1993, the shareholders of the Company approved and ratified the 1993 Directors' Stock Option Plan. The purpose of the plan is to afford the Company's directors who are not full-time employees of the Company or any subsidiary of the Company an opportunity to acquire a greater proprietary interest in the Company. A maximum of 400,000 shares of the Company's common stock has been reserved for issuance upon the exercise of options granted pursuant to the plan. The exercise price of options is the fair market value per share on the date the option is granted. Directors' stock options vest over two years at the rate of 50% per year and expire ten years from date of grant. Pursuant to the merger agreement with Marine, all options to acquire Marine common stock under various Marine stock option plans were deemed to be options to acquire the same number of shares of the Company's common stock and all Marine options became fully vested and exercisable pursuant to the "change of control" provisions of the Marine stock option plans. 67 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Employee and director stock option transactions for the last three years are summarized as follows:
EMPLOYEE STOCK OPTIONS DIRECTOR STOCK OPTIONS -------------------------- ----------------------- PRICE SHARES PRICE SHARES ------------- ---------- ------------- ------- Outstanding as of December 31, 2000....... 7,998,362 308,165 Granted................................. $14.65-$29.63 2,159,500 $14.65-$28.10 66,500 Exercised............................... $ 2.50-$22.75 (322,689) $ 4.00-$8.38 (26,000) Forfeited............................... $ 8.00-$29.63 (39,488) -- -- ---------- ------- Outstanding as of December 31, 2001....... 9,795,685 348,665 Granted................................. $14.35-$19.14 1,225,000 $ 14.35 52,500 Exercised............................... $ 6.25-$16.50 (1,095,005) -- -- Forfeited............................... $ 8.00-$29.63 (1,208,650) -- -- ---------- ------- Outstanding as of December 31,2002........ 8,717,030 401,165 Granted................................. $15.40-$16.10 2,700,000 $ 15.40 52,500 Exercised............................... $ 6.19-$19.56 (364,395) $ 8.38-$15.50 (18,000) Forfeited............................... $ 8.00-$29.63 (500) $ 8.38-$29.25 (33,000) ---------- ------- Outstanding as of December 31, 2003....... 11,052,135 402,665 ========== ======= Exercisable as of December 31,2003........ 8,485,435 323,915 ========== =======
The following table summarizes information on stock options outstanding and exercisable at December 31, 2003 pursuant to the employee stock option plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- -------------- -------------- ----------- -------------- $ 0.00-$14.81................. 5,823,760 5.7 $11.85 5,031,060 $11.44 $14.81-$29.63................. 5,228,375 6.9 $18.59 3,454,375 $20.11 ---------- --------- $ 0.00-$29.63................. 11,052,135 6.3 $15.04 8,485,435 $14.97 ========== =========
The following table summarizes information on stock options outstanding and exercisable at December 31, 2003 pursuant to the directors' stock option plan:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- -------------- -------------- ----------- -------------- $ 0.00-$14.81.................. 124,500 5.1 $12.78 98,250 $12.36 $14.81-$29.63.................. 278,165 3.5 $19.31 225,665 $20.22 ------- ------- $ 0.00-$29.63.................. 402,665 4.0 $17.29 323,915 $17.83 ======= =======
During 2003, the Company recognized $3.4 million of stock option compensation in connection with the modification of the terms of certain key employees' stock option grants. 12. COMMITMENTS AND CONTINGENCIES The Company is routinely involved in other litigation, claims and disputes incidental to its business, which at times involves claims for significant monetary amounts, some of which would not be covered by 68 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) insurance. In the opinion of management, none of the existing litigation will have a material adverse effect on the Company's financial position, results of operations or cash flows. However, a substantial settlement payment or judgment in excess of the Company's accruals could have a material adverse effect on its consolidated results of operations or cash flows. 13. INVESTMENTS IN JOINT VENTURES As of December 31, 2003, the Company had a 30.0% equity interest in a joint venture company that is currently completing construction of two dynamically-positioned, deepwater semisubmersible drilling rigs, the Pride Portland and Pride Rio de Janeiro. The Pride Rio de Janeiro is undergoing sea trials in the Caribbean Sea and the Pride Portland is expected to leave the shipyard in Maine in May 2004. The joint venture company has financed 87.5% of the cost of construction of these rigs through credit facilities, with repayment of the borrowings under those facilities guaranteed by the United States Maritime Administration ("MARAD"). Advances under the credit facilities are being provided without recourse to any of the joint venture owners. The remaining 12.5% of the cost of construction is being provided by the joint venture company from equity contributions that have been made by the joint venture partners. In addition, the joint venture partners have agreed to provide equity contributions to finance all of the estimated $5.2 million of incremental costs associated with upgrading both rigs to a water depth capability of 1,700 meters from the original design of approximately 1,500 meters, of which the Company's 30% share would be approximately $1.6 million. The Company expects that the joint venture partners will have to make additional capital contributions to fund the project through the sea trial stage for each rig or, alternatively, will have to provide acceptable guarantees to MARAD to permit the required further draws to become available under the MARAD-guaranteed credit facilities. If the funding is made by additional capital contributions, the Company expects that its proportionate share would be approximately $8.0 million. The capital contributions are likely to be required during the second quarter of 2004. Through December 31, 2003, the Company's equity contributions to the joint venture totaled $33.7 million, including capitalized interest of $7.3 million and contributions of $0.8 million in connection with the water depth upgrades. Initial interest and debt service payments in respect of construction debt for the two rigs are expected to total approximately $22.0 million during 2004, of which the Company's 30% share would be $6.6 million. The Company has a 12.5% interest in Basafojagu (HS) Inc. ("Basafojagu"), a company incorporated in Liberia that has capital lease obligations in respect of the Al Baraka 1 tender-assisted drilling rig. The majority shareholder is a subsidiary of a major Saudi Arabian banking and industrial group, and the two lessor banks are also members of that same group. The Company entered into a long-term management agreement with Basafojagu to manage and operate the rig. The Company also provided guarantees for its 12.5% share, or approximately $5.0 million as of December 31, 2003, of Basafojagu's lease obligations. Basafojagu is in arrears in payment of its lease obligations. In January 2004, the Company entered into a purchase option that expires on May 15, 2004 to acquire the tender barge and associated derrick set for aggregate consideration of $15.3 million. If the Company exercises its option, it will be released of all obligations under the guarantees and under the lease and management agreements. The Company considers it likely that the purchase option will be exercised and, therefore, has not provided for any amounts contingently payable under its guarantee. The Company has a 30.0% ownership in United Gulf Energy Resource Co. SAOC-Sultanate of Oman, which owns 99.9% of National Drilling and Services Co. LLC ("NDSC"), an Omani company. NDSC owns and operates four land drilling rigs. The Company accounts for this investment under the equity method, which as of December 31, 2003 was $300,000. 69 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUPPLEMENTAL FINANCIAL INFORMATION Other Current Assets Other current assets consisted of the following:
DECEMBER 31, ------------------- 2003 2002 -------- -------- (IN THOUSANDS) Deferred mobilization and inspection costs.................. $ 46,406 $ 59,753 Insurance receivables....................................... 5,975 33,982 Prepaid expenses............................................ 34,059 27,549 Other receivables........................................... 8,129 13,266 Construction project costs.................................. 48,262 28,351 Deferred financing costs.................................... 11,949 11,121 Other....................................................... 15,526 2,890 -------- -------- Total other current assets................................ $170,306 $176,912 ======== ========
Other Assets Other assets consisted of the following:
DECEMBER 31, ------------------- 2003 2002 -------- -------- (IN THOUSANDS) Deferred mobilization and inspection costs.................. $ 40,576 $ 55,882 Deferred financing costs.................................... 34,055 38,860 Deferred compensation plan.................................. 12,996 11,670 Deferred income taxes....................................... 4,048 -- Other....................................................... 10,502 23,440 -------- -------- Total other assets........................................ $102,177 $129,852 ======== ========
70 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accrued Expenses Accrued expenses consisted of the following:
DECEMBER 31, ------------------- 2003 2002 -------- -------- (IN THOUSANDS) Deferred mobilization revenues.............................. $ 48,894 $ 90,302 Construction project costs.................................. 64,496 -- Payroll and benefits........................................ 44,809 42,830 Interest.................................................... 17,370 26,398 Current income taxes........................................ 24,263 22,334 Taxes, other than income.................................... 21,256 21,705 Insurance................................................... 9,746 7,147 Earn-out payment, current portion........................... 3,000 3,000 Foreign currency contracts.................................. -- 1,116 Pooling and merger costs.................................... -- 886 Other....................................................... 26,264 22,343 -------- -------- Total accrued expenses.................................... $260,098 $238,061 ======== ========
Other Long-Term Liabilities Other long-term liabilities consisted of the following:
DECEMBER 31, ----------------- 2003 2002 ------- ------- (IN THOUSANDS) Deferred mobilization revenue............................... $26,190 $47,457 Deferred compensation....................................... 12,996 14,621 Deferred revenue, other..................................... 1,176 14,712 Earn-out payment, net of current portion.................... -- 3,000 Other....................................................... 14,061 8,782 ------- ------- Total other long-term liabilities......................... $54,423 $88,572 ======= =======
71 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other Income (Expense), Net Other income (expense), net consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------- 2003 2002 2001 ------- ------- -------- (IN THOUSANDS) Argentina writedown.................................... $ -- $ -- $(10,679) Foreign exchange gain (loss)........................... 9,592 (1) (2,375) Gain (loss) on extinguishment of debt.................. (6,142) (1,228) 2,049 Insurance gains........................................ -- -- 1,299 Litigation settlement.................................. -- -- (5,100) Other, net............................................. 79 157 1,480 ------- ------- -------- Total other income (expense), net.................... $ 3,529 $(1,072) $(13,326) ======= ======= ========
Cash Flow Information Supplemental cash flows and non-cash transactions were as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 2003 2002 2001 ------- -------- ------- (IN THOUSANDS) Cash paid during the year for: Interest............................................. $89,354 $111,576 $97,970 Income taxes -- U.S., net............................ -- -- 13,165 Income taxes -- foreign, net......................... 33,233 22,728 25,704 Change in capital expenditures in accounts payable... (7,078) 35,863 55,346
72 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. FINANCIAL DATA OF DOMESTIC AND INTERNATIONAL OPERATIONS The following table sets forth certain consolidated information with respect to the Company by operating segment:
INTERNATIONAL GULF OF --------------------- E&P TECHNICAL MEXICO OFFSHORE LAND SERVICES SERVICES OTHER TOTAL ---------- ---------- -------- -------- --------- -------- ---------- (IN THOUSANDS) 2003 Revenues................ $ 271,490 $ 683,058 $482,832 $122,052 $ 130,288 $ -- $1,689,720 Earnings (loss) from operations............ 9,272 215,283 33,388 10,351 (104,856) (41,220) 122,218 Total assets............ 1,028,071 2,157,692 821,390 182,138 68,359 120,780 4,378,430 Capital expenditures, including acquisitions.......... 73,305 84,951 22,761 9,154 -- 26,801 216,972 Depreciation and amortization.......... 62,720 100,808 70,213 11,138 92 4,251 249,222 2002 Revenues................ $ 165,419 $ 642,319 $299,278 $ 73,000 $ 89,758 $ -- $1,269,774 Earnings (loss) from operations............ (36,664) 247,466 (42,338) (1,614) 3,217 (19,477) 150,590 Total assets............ 726,832 2,578,901 721,843 159,695 37,887 177,699 4,402,857 Capital expenditures, including acquisitions.......... 95,879 17,363 135,485 10,709 508 (4,118) 255,826 Depreciation and amortization.......... 46,041 98,385 71,557 10,345 10 3,866 230,204 2001 Revenues................ $ 418,850 $ 507,139 $444,405 $142,501 -- $ -- $1,512,895 Earnings (loss) from operations............ 112,490 186,279 15,723 7,547 -- (37,490) 284,549 Total assets............ 929,550 2,296,297 767,769 147,967 -- 149,624 4,291,207 Capital expenditures, including acquisitions.......... 45,596 708,433 151,451 22,895 -- 3,898 932,273 Depreciation and amortization.......... 57,860 79,847 47,745 13,566 -- 3,692 202,710
73 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth certain information with respect to the Company by geographic area:
NORTH SOUTH OTHER AMERICA AMERICA INTERNATIONAL TOTAL --------- ---------- ------------- ---------- (IN THOUSANDS) 2003 Revenues............................. $ 398,680 $ 662,172 $ 628,868 $1,689,720 Earnings (loss) from operations...... (137,725) 65,239 194,704 122,218 Long-term assets..................... 521,006 718,059 2,412,441 3,651,506 Capital expenditures, including acquisitions....................... 100,106 30,826 86,040 216,972 Depreciation and amortization........ 66,654 88,213 94,355 249,222 2002 Revenues............................. $ 252,127 $ 515,045 $ 502,602 $1,269,774 Earnings (loss) from operations...... (43,016) 69,333 124,273 150,590 Long-term assets..................... 508,411 702,166 2,494,545 3,705,122 Capital expenditures, including acquisitions....................... 46,923 38,554 170,349 255,826 Depreciation and amortization........ 49,917 91,702 88,585 230,204 2001 Revenues............................. $ 418,850 $ 716,572 $ 377,473 $1,512,895 Earnings from operations............. 75,000 86,360 123,189 284,549 Long-term assets..................... 953,619 1,235,863 1,465,712 3,655,194 Capital expenditures, including acquisitions....................... 49,494 612,741 270,038 932,273 Depreciation and amortization........ 61,552 86,339 54,819 202,710
Revenue is classified in geographic areas based on the physical location of the rigs. Transactions between reportable segments are accounted for consistent with revenue and expense of external customers and are eliminated in consolidation. Significant Customers Two customers each accounted for approximately 13% of consolidated revenues for the year ended December 31, 2003, which amounts are included in South America and Other International geographic segments, respectively. Two customers accounted for approximately 16% and 12%, respectively, of consolidated revenues for the year ended December 31, 2002, which amounts are included in South America and Other International geographic segments, respectively. One customer accounted for approximately 11% of consolidated revenues for the year ended December 31, 2001, which amount is included in the South America geographic segment. 74 PRIDE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Summarized quarterly financial data for the years ended December 31, 2003 and 2002 were as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 Revenues................................... $395,421 $408,615 $450,834 $434,850 Earnings (losses) from operations(1)....... 50,414 11,888 82,947 (23,031) Net earnings (loss)........................ 3,980 (18,173) 28,712 (38,452) Net earnings (loss) per share: Basic.................................... $ 0.03 $ (0.14) $ 0.21 $ (0.28) Diluted.................................. $ 0.03 $ (0.14) $ 0.19 $ (0.28) Weighted average common shares and equivalents outstanding: Basic.................................... 134,131 134,246 135,131 135,291 Diluted.................................. 134,840 134,246 155,466 135,291 2002 Revenues................................... $298,557 $309,484 $312,750 $348,983 Earnings from operations(1)................ 35,283 37,489 35,458 42,360 Net earnings (loss)........................ 263 (4,155) (5,586) 1,143 Net earnings (loss) per share: Basic.................................... $ -- $ (0.03) $ (0.04) $ 0.01 Diluted.................................. $ -- $ (0.03) $ (0.04) $ 0.01 Weighted average common shares and equivalents outstanding: Basic.................................... 132,863 133,094 133,212 134,041 Diluted.................................. 133,816 133,094 133,212 134,838
--------------- (1) Results previously reported for interim periods have been restated to reflect the retroactive adoption of FIN No. 46R, "Consolidation of Variable Interest Entities". See Note 1. 75 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with our independent auditors regarding accounting and financial disclosure matters. ITEM 9A. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our 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 the end of the period covered by this annual report. In the course of this evaluation, management considered certain internal control areas, including those enumerated below, in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, our Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are 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. Beginning with the year ending December 31, 2004, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our annual report on Form 10-K. The internal control report must contain (1) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for our company, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management's assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over financial reporting is effective, and (4) a statement that our independent auditors have issued an attestation report on management's assessment of our internal control over financial reporting. In order to achieve compliance with Section 404 within the prescribed period, management has formed an internal control steering committee, engaged outside consultants and adopted a detailed project work plan to assess the adequacy of our internal control over financial reporting, remediate any control weaknesses that may be identified, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. As a result of this initiative, we may make changes in our internal control over financial reporting from time to time during the period prior to December 31, 2004. During the most recently completed fiscal quarter and through the date of this annual report, we have made the following significant changes in our internal control over financial reporting: - senior management realignment, including separation of the Chief Executive Officer and President positions and appointment of a new President, Chief Financial Officer, Senior Vice President -- Operations and General Counsel; - appointment of a new internal audit director; - implementation of improved policies and procedures in our technical services division; - broadening of the scope and number of internal certifications sent to our Chief Executive Officer and our Chief Financial Officer; - revision and adoption of a strengthened audit committee charter; - adoption of a corporate governance and nominating committee charter, compensation committee charter, Code of Business Conduct and Ethical Practices, corporate governance guidelines and executive committee charter; and - adoption of an audit committee policy on handling of accounting and audit related complaints, including a related ethics hotline program. 76 There were no other changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As disclosed in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2003, in connection with the completion of their review of our financial statements for the three-month and six-month periods ended June 30, 2003 included in that report and, in particular, their analysis of our loss provision related to our rig construction contracts, our independent auditors, PricewaterhouseCoopers LLP, issued a letter to our audit committee dated August 13, 2003 noting certain matters in our technical services division that it considered to be a material weakness in internal control. The matters listed in the letter were the misapplication of generally accepted accounting principles and the lack of procedures and policies to properly process change orders with customers on a timely basis. We have made changes in policies and procedures to improve and enhance internal controls with regard to the processing of change orders and in the technical services division generally and believe these improvements and enhancements have appropriately addressed the matters referred to in the letter. These changes include the following: - Established procedures for the centralized review and monitoring of change orders; - Enhanced procedures for the periodic review and assessment for income recognition of each change order in accordance with generally accepted accounting principles; - Strengthened the accounting function within the technical services segment and enhanced formal reporting procedures to the corporate accounting group; and - Initiated monthly meetings among project managers and corporate accounting personnel to review change order analysis, estimates to complete and supporting documentation for each project in connection with the monthly close of accounts. 77 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2003. Information with respect to our executive officers is set forth under the caption "Executive Officers of the Registrant" in Part I of this annual report. CODE OF BUSINESS CONDUCT AND ETHICAL PRACTICES We have adopted a Code of Business Conduct and Ethical Practices, which applies to, among others, our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. We have posted a copy of the code under "Corporate Governance" in the "Investor Relations" section of our internet website at www.prideinternational.com. Copies of the code may be obtained free of charge on our website or by requesting a copy in writing from our Corporate Secretary at 5847 San Felipe, Suite 3300, Houston, Texas 77057. Any waivers of the code must be approved by our board of directors or a designated board committee. Any amendments to, or waivers from, the code that apply to our executive officers and directors will be posted under "Corporate Governance" in the "Investor Relations" section of our internet website at www.prideinternational.com. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days of the end of our fiscal year on December 31, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days of the end of our fiscal year on December 31, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days of the end of our fiscal year on December 31, 2003. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days of the end of our fiscal year on December 31, 2003. 78 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are included as part of this report: (1) Financial Statements:
PAGE ---- Report of Independent Auditors.............................. 42 Consolidated Balance Sheet -- December 31, 2003 and 2002.... 43 Consolidated Statement of Operations -- Years ended December 31, 2003, 2002 and 2001.......................... 44 Consolidated Statement of Stockholders' Equity -- Years ended December 31, 2003, 2002 and 2001.......................... 45 Consolidated Statement of Cash Flows -- Years ended December 31, 2003, 2002 and 2001.......................... 46 Notes to Consolidated Financial Statements.................. 47
(2) Consolidated Financial Statement Schedules: All financial statement schedules have been omitted because they are not applicable or not required, or the information required thereby is included in the consolidated financial statements or the notes thereto included in this annual report. (3) Exhibits:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Agreement and Plan of Merger, dated as of May 23, 2001, among Pride International, Inc., a Louisiana corporation ("Old Pride"), PM Merger, Inc., a Delaware corporation renamed Pride International, Inc. ("Pride"), Marine Drilling Companies, Inc. ("Marine") and AM Merger, Inc. (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus included in the Registration Statement of Old Pride and Pride on Form S-4, Registration Nos. 333-66644 and 333-66644-01 (the "Registration Statement")). 2.2 -- Letter Agreement, dated as of August 3, 2001, among Old Pride, Pride, Marine and AM Merger, Inc. (incorporated by reference to Exhibit 2.2 to Pride's Current Report on Form 8-K filed with the SEC on September 28, 2001, File No. 1-13289 (the "Form 8-K")). 3.1 -- Certificate of Incorporation of Pride (incorporated by reference to Annex D to the Joint Proxy Statement/Prospectus included in the Registration Statement). *3.2 -- Bylaws of Pride. 4.1 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.13 to the Registration Statement). 4.2 -- Rights Agreement, dated as of September 13, 2001, between Pride and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.2 to the Form 8-K). 4.3 -- Certificate of Designations of Series A Junior Participating Preferred Stock of Pride (incorporated by reference to Exhibit 4.3 to the Form 8-K). 4.4 -- Indenture, dated as of May 1, 1997, between Pride and JP Morgan Chase Bank (formerly The Chase Manhattan Bank), as trustee (the "Senior Trustee") (incorporated by reference to Exhibit 4.1 to Pride's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, File No. 0-16963).
79
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.5 -- Fourth Supplemental Indenture, dated as of September 10, 2001, between Pride and the Senior Trustee (incorporated by reference to Exhibit 4.4 to the Form 8-K) 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. 10.1 -- Second Amended and Restated Shareholders Agreement, dated as of March 4, 2002, among Pride, First Reserve Fund VII, Limited Partnership, First Reserve Fund VIII, L.P. and First Reserve Fund IX, L.P. (incorporated by reference to Exhibit 10.11 to Pride's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-13289). +10.2 -- Form of Indemnity Agreement between Pride and certain executive officers and directors (incorporated by reference to Exhibit 10(g) to Pride's Registration Statement on Form S-1, Registration No. 33-33233). +10.3 -- Pride International, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 4A to Pride's Registration Statement on Form S-8, Registration No. 33-26854). +10.4 -- First Amendment to Pride International, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 4.7 to Pride's Registration Statement on Form S-8, Registration No. 333-35089). +10.5 -- Second Amendment to Pride International, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 4.8 to Pride's Registration Statement on Form S-8, Registration No. 333-35089). +10.6 -- Third Amendment to Pride International, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.5 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.7 -- Summary of Pride International, Inc. Group Life Insurance and Accidental Death and Dismemberment Insurance Plan (incorporated by reference to Exhibit 10(j) to Pride's Registration Statement on Form S-1, Registration No. 33-33233). +10.8 -- Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10(j) to Pride's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 0-16963). +10.9 -- First Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 4.7 to Pride's Registration Statement on Form S-8, Registration No. 333-35093). +10.10 -- Second Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.10 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.11 -- Third Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.11 of Pride's Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-13289). +10.12 -- Fourth Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.12 to Pride's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13289). +10.13 -- Fifth Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.13 to Pride's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13289). +10.14 -- Pride International, Inc. 401(k) Restoration Plan (incorporated by reference to Exhibit 10(k) to Pride's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-16963). +10.15 -- Pride International, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.15 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289).
80
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.16 -- First Amendment to Pride International, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.16 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.17 -- Second Amendment to Pride International, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.17 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.18 -- Pride International, Inc. 1998 Long-Term Incentive Plan (incorporated by reference to Appendix A to Pride's Proxy Statement on Schedule 14A for the 1998 Annual Meeting of Shareholders of Pride, File No. 1-13289). +10.19 -- Pride International, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.4 to Pride's Registration Statement on Form S-8, Registration No. 333-06825). +10.20 -- Employment/Non-Competition/Confidentiality Agreement dated January 1, 2002 between Pride and Jorge E. Estrada (incorporated by reference to Exhibit 10.20 of Pride's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13289. +10.21 -- Employment/Non-Competition/Confidentiality Agreement dated February 5, 1999 between Pride and Paul A. Bragg (incorporated by reference to Exhibit 10.19 of Pride's Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-13289). +10.22 -- Employment/Non-Competition/Confidentiality Agreement dated February 5, 1999 between Pride and John O'Leary (incorporated by reference to Exhibit 10.31 to Pride's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-13289). +10.23 -- Employment/Non-Competition/Confidentiality Agreement dated October 15, 1998 between Pride and John R. Blocker, Jr. (incorporated by reference to Exhibit 10.24 to Pride's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-13289). +10.24 -- Employment/Non-Competition/Confidentiality Agreement dated August 15, 1998 between Pride and Gary W. Casswell (incorporated by reference to Exhibit 10.23 to Pride's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-13289). +10.25 -- Employment Agreement dated June 21, 1994 between Pride Offshore, Inc. and David A. Bourgeois (incorporated by reference to Exhibit 10.25 to Pride's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-13289). +10.26 -- Employment/Non-Competition/Confidentiality Agreement dated March 1, 2000 between Pride and Marcelo D. Guiscardo (incorporated by reference to Exhibit 10.26 to Pride's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-13289). +10.27 -- Employment/Non-Competition/Confidentiality Agreement dated February 5, 1999 between Pride and Earl W. McNiel (incorporated by reference to Exhibit 10.24 of Pride's Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-13289). +10.28 -- Employment/Non-Competition/Confidentiality Agreement dated October 31, 2002 between Pride and Nicolas J. Evanoff (incorporated by reference to Exhibit 10.30 of Pride's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13289). *+10.29 -- Employment/Non-Competition/Confidentiality Agreement dated November 22, 2003 between Pride and Louis A. Raspino. +10.30 -- First Amended and Restated Employment Agreement dated September 1, 1999 between Marine and Bobby E. Benton (incorporated by reference to Exhibit 10.5 of Marine's Quarterly Report on Form 10-Q for quarter ended September 30, 1999, File No. 1-14389). *+10.31 -- Retirement Agreement effective January 9, 2004 between Pride and James W. Allen. *+10.32 -- Retirement Agreement effective December 3, 2003 between Pride and Robert W. Randall. *12 -- Computation of ratio of earnings to fixed charges. *21 -- Subsidiaries of Pride. *23 -- Consent of PricewaterhouseCoopers LLP. *31.1 -- Certification of Chief Executive Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
81
EXHIBIT NUMBER DESCRIPTION ------- ----------- *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.
--------------- * Filed herewith. + Compensatory plan, contract or arrangement. (b) Reports on Form 8-K In a current report on Form 8-K dated December 3, 2003, we reported pursuant to Item 5 of Form 8-K that we had announced certain organizational changes. We also filed as an exhibit pursuant to Item 7 of Form 8-K the news release dated December 3, 2003 issued with respect to the organizational changes. 82 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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, IN THE CITY OF HOUSTON, STATE OF TEXAS, ON MARCH 15, 2004. PRIDE INTERNATIONAL, INC. By: /s/ PAUL A. BRAGG ------------------------------------ Paul A. Bragg Chief Executive Officer and Director PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 15, 2004.
SIGNATURES TITLE ---------- ----- /s/ PAUL A. BRAGG Chief Executive Officer, and Director -------------------------------------- (Principal Executive Officer) Paul A. Bragg /s/ LOUIS A. RASPINO Executive Vice President and Chief -------------------------------------- Financial Officer (Principal Financial Officer) Louis A. Raspino /s/ EDWARD G. BRANTLEY Vice President and Chief Accounting Officer -------------------------------------- (Principal Accounting Officer) Edward G. Brantley /s/ WILLIAM E. MACAULAY Chairman of the Board -------------------------------------- William E. Macaulay /s/ ROBERT L. BARBANELL Director -------------------------------------- Robert L. Barbanell /s/ DAVID A.B. BROWN Director -------------------------------------- David A.B. Brown /s/ J.C. BURTON Director -------------------------------------- J.C. Burton /s/ JORGE E. ESTRADA M. Director -------------------------------------- Jorge E. Estrada M. /s/ RALPH D. MCBRIDE Director -------------------------------------- Ralph D. McBride /s/ DAVID B. ROBSON Director -------------------------------------- David B. Robson
83 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Agreement and Plan of Merger, dated as of May 23, 2001, among Pride International, Inc., a Louisiana corporation ("Old Pride"), PM Merger, Inc., a Delaware corporation renamed Pride International, Inc. ("Pride"), Marine Drilling Companies, Inc. ("Marine") and AM Merger, Inc. (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus included in the Registration Statement of Old Pride and Pride on Form S-4, Registration Nos. 333-66644 and 333-66644-01 (the "Registration Statement")). 2.2 -- Letter Agreement, dated as of August 3, 2001, among Old Pride, Pride, Marine and AM Merger, Inc. (incorporated by reference to Exhibit 2.2 to Pride's Current Report on Form 8-K filed with the SEC on September 28, 2001, File No. 1-13289 (the "Form 8-K")). 3.1 -- Certificate of Incorporation of Pride (incorporated by reference to Annex D to the Joint Proxy Statement/Prospectus included in the Registration Statement). *3.2 -- Bylaws of Pride. 4.1 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.13 to the Registration Statement). 4.2 -- Rights Agreement, dated as of September 13, 2001, between Pride and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.2 to the Form 8-K). 4.3 -- Certificate of Designations of Series A Junior Participating Preferred Stock of Pride (incorporated by reference to Exhibit 4.3 to the Form 8-K). 4.4 -- Indenture, dated as of May 1, 1997, between Pride and JP Morgan Chase Bank (formerly The Chase Manhattan Bank), as trustee (the "Senior Trustee") (incorporated by reference to Exhibit 4.1 to Pride's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, File No. 0-16963). 4.5 -- Fourth Supplemental Indenture, dated as of September 10, 2001, between Pride and the Senior Trustee (incorporated by reference to Exhibit 4.4 to the Form 8-K) 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. 10.1 -- Second Amended and Restated Shareholders Agreement, dated as of March 4, 2002, among Pride, First Reserve Fund VII, Limited Partnership, First Reserve Fund VIII, L.P. and First Reserve Fund IX, L.P. (incorporated by reference to Exhibit 10.11 to Pride's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-13289). +10.2 -- Form of Indemnity Agreement between Pride and certain executive officers and directors (incorporated by reference to Exhibit 10(g) to Pride's Registration Statement on Form S-1, Registration No. 33-33233). +10.3 -- Pride International, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 4A to Pride's Registration Statement on Form S-8, Registration No. 33-26854). +10.4 -- First Amendment to Pride International, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 4.7 to Pride's Registration Statement on Form S-8, Registration No. 333-35089). +10.5 -- Second Amendment to Pride International, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 4.8 to Pride's Registration Statement on Form S-8, Registration No. 333-35089). +10.6 -- Third Amendment to Pride International, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.5 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.7 -- Summary of Pride International, Inc. Group Life Insurance and Accidental Death and Dismemberment Insurance Plan (incorporated by reference to Exhibit 10(j) to Pride's Registration Statement on Form S-1, Registration No. 33-33233).
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.8 -- Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10(j) to Pride's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 0-16963). +10.9 -- First Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 4.7 to Pride's Registration Statement on Form S-8, Registration No. 333-35093). +10.10 -- Second Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.10 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.11 -- Third Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.11 of Pride's Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-13289). +10.12 -- Fourth Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.12 to Pride's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13289). +10.13 -- Fifth Amendment to Pride International, Inc. 1993 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.13 to Pride's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13289). +10.14 -- Pride International, Inc. 401(k) Restoration Plan (incorporated by reference to Exhibit 10(k) to Pride's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-16963). +10.15 -- Pride International, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.15 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.16 -- First Amendment to Pride International, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.16 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.17 -- Second Amendment to Pride International, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.17 to Pride's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-13289). +10.18 -- Pride International, Inc. 1998 Long-Term Incentive Plan (incorporated by reference to Appendix A to Pride's Proxy Statement on Schedule 14A for the 1998 Annual Meeting of Shareholders of Pride, File No. 1-13289). +10.19 -- Pride International, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.4 to Pride's Registration Statement on Form S-8, Registration No. 333-06825). +10.20 -- Employment/Non-Competition/Confidentiality Agreement dated January 1, 2002 between Pride and Jorge E. Estrada (incorporated by reference to Exhibit 10.20 of Pride's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13289. +10.21 -- Employment/Non-Competition/Confidentiality Agreement dated February 5, 1999 between Pride and Paul A. Bragg (incorporated by reference to Exhibit 10.19 of Pride's Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-13289). +10.22 -- Employment/Non-Competition/Confidentiality Agreement dated February 5, 1999 between Pride and John O'Leary (incorporated by reference to Exhibit 10.31 to Pride's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-13289). +10.23 -- Employment/Non-Competition/Confidentiality Agreement dated October 15, 1998 between Pride and John R. Blocker, Jr. (incorporated by reference to Exhibit 10.24 to Pride's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-13289). +10.24 -- Employment/Non-Competition/Confidentiality Agreement dated August 15, 1998 between Pride and Gary W. Casswell (incorporated by reference to Exhibit 10.23 to Pride's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-13289). +10.25 -- Employment Agreement dated June 21, 1994 between Pride Offshore, Inc. and David A. Bourgeois (incorporated by reference to Exhibit 10.25 to Pride's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-13289).
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.26 -- Employment/Non-Competition/Confidentiality Agreement dated March 1, 2000 between Pride and Marcelo D. Guiscardo (incorporated by reference to Exhibit 10.26 to Pride's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-13289). +10.27 -- Employment/Non-Competition/Confidentiality Agreement dated February 5, 1999 between Pride and Earl W. McNiel (incorporated by reference to Exhibit 10.24 of Pride's Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-13289). +10.28 -- Employment/Non-Competition/Confidentiality Agreement dated October 31, 2002 between Pride and Nicolas J. Evanoff (incorporated by reference to Exhibit 10.30 of Pride's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13289). *+10.29 -- Employment/Non-Competition/Confidentiality Agreement dated November 22, 2003 between Pride and Louis A. Raspino. +10.30 -- First Amended and Restated Employment Agreement dated September 1, 1999 between Marine and Bobby E. Benton (incorporated by reference to Exhibit 10.5 of Marine's Quarterly Report on Form 10-Q for quarter ended September 30, 1999, File No. 1-14389). *+10.31 -- Retirement Agreement effective January 9, 2004 between Pride and James W. Allen. *+10.32 -- Retirement Agreement effective December 3, 2003 between Pride and Robert W. Randall. *12 -- Computation of ratio of earnings to fixed charges. *21 -- Subsidiaries of Pride. *23 -- Consent of PricewaterhouseCoopers LLP. *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.
--------------- * Filed herewith. + Compensatory plan, contract or arrangement.