-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PSCRRwTA43bA7otg8a9AqlRzfqGjmWJQVX1520dREUcsKhojukibRoZwn0oErIW2 YP0R067RKyc1Fazmu26UYw== 0000950129-05-004591.txt : 20050503 0000950129-05-004591.hdr.sgml : 20050503 20050503161344 ACCESSION NUMBER: 0000950129-05-004591 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20050503 DATE AS OF CHANGE: 20050503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIDE INTERNATIONAL INC CENTRAL INDEX KEY: 0000833081 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 760069030 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13289 FILM NUMBER: 05795234 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 3300 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7137891400 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 3300 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: PRIDE PETROLEUM SERVICES INC DATE OF NAME CHANGE: 19920703 10-Q/A 1 h24601a1e10vqza.txt PRIDE INTERNATIONAL, INC. - JUNE 30, 2004 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q/A (Amendment No. 1) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-13289 ---------------------- PRIDE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0069030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5847 SAN FELIPE, SUITE 3300 HOUSTON, TEXAS 77057 (Address of principal executive offices) (Zip Code) (713) 789-1400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practical date. Outstanding as of August 4, 2004 Common Stock, par value $.01 per share 135,981,491 ================================================================================ PRIDE INTERNATIONAL, INC. INDEX
PAGE NO. -------- RESTATEMENT ................................................................................... 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet as of June 30, 2004 and December 31, 2003 (Restated)....... 3 Consolidated Statement of Operations for the three months ended June 30, 2004 and 2003 (Restated)................................................................ 4 Consolidated Statement of Operations for the six months ended June 30, 2004 and 2003 (Restated)................................................................ 5 Consolidated Statement of Cash Flows for the six months ended June 30, 2004 and 2003 (Restated)................................................................ 6 Notes to Unaudited Consolidated Financial Statements.................................. 7 Report of Independent Registered Public Accounting Firm............................... 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Item 4. Controls and Procedures............................................................ 33 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................... 34 SIGNATURES ................................................................................. 35
1 RESTATEMENT We hereby amend the following items of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 as originally filed with the Securities and Exchange Commission on August 9, 2004: "Financial Statements" in Item 1 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, "Controls and Procedures" in Item 4 of Part I and "Exhibits and Reports on Form 8-K" in Item 6 of Part II. This Form 10-Q/A is being filed to include restated consolidated financial statements and related disclosures as of June 30, 2004 and for the three months and six months ended June 30, 2004 and 2003. We restated our consolidated financial information for 2003, 2002, 2001 and 2000 in our annual report on Form 10-K for the year ended December 31, 2004 to correct certain errors related primarily to transactions initially recorded in periods from 1999 to 2002, but affecting periods from 1999 through 2004. The errors relate to adjustments to the 2001 acquisition of the interest we did not own in the Pride Carlos Walter and Pride Brazil and the calculation of charges associated with the subsequent refinancing of the debt; under- and over-depreciation of certain rigs constructed or acquired in 1999; depreciation related to rig transfers; the recording of the foreign exchange calculation of the inventory valuation in Colombia in 1999; an error in a tax provision in 2002; a net gain reported in 2000 resulting from a casualty loss in 1999; and adjustments related to the reconciliation of certain accounts payable and the reclassification of certain finance charges. The cumulative effect of the errors resulted in an increase in income from continuing operations for the three-month period ended June 30, 2004 of approximately $0.5 million, a decrease in income from continuing operations for the three-month period ended June 30, 2003 of approximately $0.9 million, and an increase in income from continuing operations for the six-month periods ended June 30, 2004 and 2003 of approximately $1.3 million and $21,000, respectively. Please read note 12 of the notes to our unaudited consolidated financial statements for more information related to the restatement. The operating results also include the reclassification of certain costs from general and administrative to operating costs. We have also reclassified the results of our former Technical Services segment by classifying (a) our fixed fee rig construction business as discontinued operations and (b) the remaining revenues and costs for Technical Services activities to our corporate and other segment. Please read notes 1 and 2 of the notes to our unaudited consolidated financial statements for more information related to the reclassifications. For purposes of this Form 10-Q/A and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the quarterly report on Form 10-Q as originally filed on August 9, 2004 that was affected by the restatement has been amended and restated in its entirety. No attempt has been made in this Form 10-Q/A to modify or update other disclosures as presented in the original Form 10-Q to reflect events occurring after the original filing date, except as required to reflect the effects of the restatement. In particular, and without limitation, we have provided certain forward-looking information in this Form 10-Q/A. This information has not been revised from the information provided in the originally filed quarterly report on Form 10-Q because it was not affected by the restatement. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRIDE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PAR VALUES) (UNAUDITED)
JUNE 30, DECEMBER 31, 2004 2003 ------------- ------------ (RESTATED) (RESTATED) ASSETS CURRENT ASSETS Cash and cash equivalents.......................................... $ 44,422 $ 69,134 Restricted cash.................................................... 47,801 38,840 Trade receivables, net............................................. 404,718 371,510 Parts and supplies, net............................................ 67,720 72,263 Other current assets............................................... 180,442 171,084 ------------- ------------ Total current assets.......................................... 745,103 722,831 ------------- ------------ PROPERTY AND EQUIPMENT, net.......................................... 3,405,813 3,463,300 ------------- ------------ OTHER ASSETS Investments in and advances to affiliates.......................... 36,235 33,984 Goodwill........................................................... 68,651 69,014 Other assets....................................................... 72,095 87,966 ------------- ------------ Total other assets............................................ 176,981 190,964 ------------- ------------ $ 4,327,897 $ 4,377,095 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable................................................... $ 133,823 $ 163,707 Accrued expenses................................................... 263,293 260,150 Short-term borrowings.............................................. 21,799 27,555 Current portion of long-term debt.................................. 170,752 188,737 Current portion of long-term lease obligations..................... 11,012 2,749 ------------- ------------ Total current liabilities..................................... 600,679 642,898 ------------- ------------ OTHER LONG-TERM LIABILITIES.......................................... 39,949 56,811 LONG-TERM DEBT, net of current portion............................... 1,824,964 1,805,099 LONG-TERM LEASE OBLIGATIONS, net of current portion.................. 380 9,979 DEFERRED INCOME TAXES................................................ 58,097 59,460 MINORITY INTEREST.................................................... 101,316 100,993 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 50,000 shares authorized; none issued..................................................... -- -- Common stock, $.01 par value; 400,000 shares authorized; 136,156 and 135,769 shares issued; 135,786 and 135,400 shares outstanding.............................................. 1,363 1,358 Paid-in capital.................................................... 1,268,940 1,261,073 Treasury stock, at cost............................................ (4,409) (4,409) Accumulated other comprehensive loss............................... (1,872) (124) Deferred compensation.............................................. (2,543) -- Retained earnings.................................................. 441,033 443,957 ------------- ------------ Total stockholders' equity.................................... 1,702,512 1,701,855 ------------- ------------ $ 4,327,897 $ 4,377,095 ============= ============
The accompanying notes are an integral part of the consolidated financial statements. 3 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ----------------------- 2004 2003 ---------- ---------- (RESTATED) (RESTATED) REVENUES........................................................................ $ 424,028 $ 383,438 OPERATING COSTS, excluding depreciation and amortization........................ 277,200 251,118 DEPRECIATION AND AMORTIZATION................................................... 66,449 61,855 GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization............. 20,392 12,903 (GAIN) LOSS ON SALE OF ASSETS, net.............................................. (243) 392 ---------- ---------- EARNINGS FROM OPERATIONS........................................................ 60,230 57,170 OTHER INCOME (EXPENSE) Interest expense........................................................... (29,124) (34,016) Refinancing charges........................................................ -- 70 Interest income............................................................ 780 819 Other expense, net......................................................... 483 5,286 ---------- ---------- Total other expense, net............................................... (27,861) (27,841) ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST.................................. 32,369 29,329 INCOME TAX PROVISION............................................................ 19,648 13,848 MINORITY INTEREST............................................................... 4,478 4,074 ---------- ---------- INCOME FROM CONTINUING OPERATIONS............................................... 8,243 11,407 LOSS ON DISCONTINUED OPERATIONS................................................. (5,267) (30,483) ---------- ---------- NET EARNINGS (LOSS)............................................................. $ 2,976 $ (19,076) ========== ========== EARNINGS (LOSS) PER SHARE Basic Income from continuing operations................................. $ 0.06 $ 0.09 Discontinued operations........................................... (0.04) (0.23) ---------- ---------- Net earnings...................................................... $ 0.02 $ (0.14) ========== ========== Diluted Income from continuing operations................................. $ 0.06 $ 0.08 Discontinued operations........................................... (0.04) (0.20) ---------- ---------- Net earnings...................................................... $ 0.02 $ (0.12) ========== ========== SHARES USED IN PER SHARE CALCULATIONS Basic.................................................................. 135,681 134,246 Diluted................................................................ 137,435 154,834
The accompanying notes are an integral part of the consolidated financial statements. 4 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 2003 ---------- ---------- (RESTATED) (RESTATED) REVENUES............................................................... $ 827,703 $ 727,738 OPERATING COSTS, excluding depreciation and amortization............... 550,890 476,810 DEPRECIATION AND AMORTIZATION.......................................... 132,395 123,445 GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization.... 32,990 22,533 (GAIN) LOSS ON SALE OF ASSETS, net..................................... (364) 454 ---------- ---------- EARNINGS FROM OPERATIONS............................................... 111,792 104,496 OTHER INCOME (EXPENSE) Interest expense.................................................. (58,933) (67,874) Refinancing charges............................................... -- (229) Interest income................................................... 1,087 1,073 Other expense, net................................................ (944) 2,085 ---------- ---------- Total other expense, net..................................... (58,790) (64,945) ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST......................... 53,002 39,551 INCOME TAX PROVISION .................................................. 29,776 16,219 MINORITY INTEREST...................................................... 10,323 9,243 ---------- ---------- INCOME FROM CONTINUING OPERATIONS...................................... 12,903 14,089 LOSS ON DISCONTINUED OPERATIONS........................................ (15,827) (28,260) ---------- ---------- NET LOSS............................................................... $ (2,924) $ (14,171) ========== ========== EARNINGS (LOSS) PER SHARE Basic Income from continuing operations............................ $ 0.10 $ 0.10 Discontinued operations...................................... (0.12) (0.21) ---------- ---------- Net earnings................................................. $ (0.02) $ (0.11) ========== ========== Diluted Income from continuing operations............................ $ 0.09 $ 0.10 Discontinued operations...................................... (0.11) (0.19) ---------- ---------- Net earnings................................................. $ (0.02) $ (0.09) ========== ========== SHARES USED IN PER SHARE CALCULATIONS Basic............................................................. 135,611 134,189 Diluted........................................................... 137,782 147,422
The accompanying notes are an integral part of the consolidated financial statements. 5 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 2004 2003 ------------ ------------- (RESTATED) (RESTATED) OPERATING ACTIVITIES Net loss........................................................................... $ (2,924) $ (14,171) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities - Depreciation and amortization.................................................. 132,395 123,445 Discount amortization on zero coupon convertible debentures.................... 27 1,782 Amortization of deferred loan costs............................................ 3,787 3,434 (Gain) loss on sale of assets.................................................. (364) 454 Deferred income taxes ......................................................... (406) (25,447) Minority interest.............................................................. 10,323 9,243 Changes in assets and liabilities Trade receivables......................................................... (33,208) (55,293) Parts and supplies........................................................ 4,543 (16,570) Other current assets...................................................... (9,926) (93,598) Other assets.............................................................. 15,669 52,981 Accounts payable.......................................................... (31,718) (34,818) Accrued expenses.......................................................... 2,179 44,507 Other liabilities......................................................... (16,120) (25,713) ------------ ------------- Net cash provided by (used in) operating activities................... 74,257 (29,764) ------------ ------------- INVESTING ACTIVITIES Purchases of property and equipment................................................ (74,349) (93,897) Proceeds from dispositions of property and equipment............................... 1,283 315 Investments in and advances to affiliates.......................................... (2,251) (956) ------------ ------------- Net cash used in investing activities................................. (75,317) (94,538) ------------ ------------- FINANCING ACTIVITIES Proceeds from issuance of common stock............................................. 1,537 16,265 Proceeds from exercise of stock options............................................ 2,751 961 Proceeds from debt borrowings...................................................... 273,047 748,926 Repayments of borrowings........................................................... (278,947) (702,816) Repayment of joint venture partner debt............................................ (10,000) -- Debt finance costs................................................................. (3,079) (4,885) Change in restricted cash.......................................................... (8,961) 539 ------------ ------------- Net cash provided by (used in) financing activities................... (23,652) 58,990 ------------- ------------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................................... (24,712) (65,312) CASH AND CASH EQUIVALENTS, beginning of period.......................................... 69,134 133,986 ------------ ------------- CASH AND CASH EQUIVALENTS, end of period................................................ $ 44,422 $ 68,674 ============ =============
The accompanying notes are an integral part of the consolidated financial statements. 6 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL Principles of Consolidation and Reporting The unaudited consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Pride International, Inc. (the "Company" or "Pride") and its wholly-owned and majority owned subsidiaries included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Unless the context indicates otherwise, references to the "Company" or "Pride" include Pride International, Inc. and its wholly owned and majority-owned subsidiaries. In the opinion of management, the unaudited consolidated financial information included herein reflects all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for a full year or any other interim period. PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, has performed a review of the unaudited consolidated financial statements included herein in accordance with the standards of the Public Company Accounting Oversight Board (United States). Pursuant to Rule 436(c) under the Securities Act of 1933, the report of PricewaterhouseCoopers LLP, included herein, should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of the Securities Act, and the liability provisions of Section 11 of the Securities Act do not apply to such report. In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (revised December 2003)." FIN No. 46R requires a company to consolidate a variable interest entity, as defined, when the company will absorb a majority of the variable interest entity's expected losses, receive a majority of the variable interest entity's expected residual returns, or both. It was determined that the unaffiliated trust with which the Company completed the sale and leaseback of the Pride South America semisubmersible drilling rig in February 1999 would qualify for consolidation as a variable interest entity in which the Company is the primary beneficiary, as defined. The Company elected in the fourth quarter of 2003 to adopt retroactively the provisions of FIN No. 46R and to restate previously issued financial statements for the applicable periods for comparability purposes. The effect on the Company's consolidated statement of operations for the three months and six months ended June 30, 2003 was as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2003 JUNE 30, 2003 ------------- ------------- (RESTATED) (RESTATED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net loss -- as reported.................................... $ (19,314) $ (14,641) Add: Lease rental expenses included in reported net earnings... 3,177 6,353 Deduct: Depreciation expense...................................... (946) (1,891) Interest expense.......................................... (1,993) (3,992) ------------- ------------- Net loss -- as adjusted..................................... $ (19,076) $ (14,171) ============= ============= NET LOSS PER SHARE: Basic -- as reported........................................ $ (0.14) $ (0.11) Basic -- as adjusted........................................ $ (0.14) $ (0.11) Diluted -- as reported...................................... $ (0.12) $ (0.09) Diluted -- as adjusted...................................... $ (0.12) $ (0.09)
7 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Comprehensive Income Comprehensive income is the change in the Company's equity from all transactions except those resulting from investments by or distributions to owners. Comprehensive income (loss) was as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS) Net earnings (loss).............................. $ 2,976 $ (19,076) $ (2,924) $ (14,171) Foreign currency translation gain (loss), net.... (866) 3,261 (1,748) 4,326 ---------- ---------- ---------- --------- Comprehensive income (loss)...................... $ 2,110 $ (15,815) $ (4,672) $ (9,845) ========== ========== ========== =========
Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could be materially different than the estimates and assumptions. Rig Construction Contracts In 2001 and 2002, the Company's technical services group entered into lump-sum contracts to design, engineer, manage construction of and commission four deepwater platform drilling rigs for certain of the Company's significant customers. Construction contract revenues and related costs are recognized under the percentage-of-completion method of accounting using measurements of progress toward completion appropriate for the work performed, such as man-hours, costs incurred or physical progress. Accordingly, in connection with the preparation of the Company's quarterly consolidated financial statements, following the end of each quarter the Company updates its evaluation of its contract price and cost estimates related to the projects and reflects adjustments in income (i) to recognize income proportionate to the percentage of completion in the case of projects showing an estimated profit at completion and (ii) to recognize the entire amount of the loss in the case of projects showing an estimated loss at completion. To the extent these adjustments result in an increase in previously reported losses or a reduction in or an elimination of previously reported profits with respect to a project, the Company would recognize a charge against current earnings, which could be material. Stock-Based Compensation The Company uses the intrinsic value based method of accounting for stock-based compensation prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. Under this method, the Company records no compensation expense for stock options granted when the exercise price for options granted is equal to the fair market value of the Company's stock on the date of the grant. If the fair value based method of accounting prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation" had been applied, the Company's pro forma net earnings (loss), net earnings (loss) per share and stock-based compensation cost would approximate the amounts indicated below. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. 8 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings (loss), as reported............................ $ 2,976 $ (19,076) $ (2,924) $ (14,171) Add: Stock-based compensation included in reported net earnings (loss), net of tax............................... -- -- -- -- Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax........ (3,450) (3,960) (6,623) (6,952) ---------- ---------- ---------- ---------- Pro forma net earnings (loss)............................... $ (474) $ (23,036) $ (9,547) $ (21,123) ========== ========== ========== ========== Net earnings (loss) per share: Basic -- as reported...................................... $ 0.02 $ (0.14) $ (0.02) $ (0.11) Basic -- pro forma........................................ $ 0.00 $ (0.17) $ (0.07) $ (0.16) Diluted -- as reported.................................... $ 0.02 $ (0.12) $ (0.02) $ (0.09) Diluted -- pro forma...................................... $ 0.00 $ (0.17) $ (0.07) $ (0.16)
In January 2004, the Company awarded a total of 125,000 restricted shares to certain key employees pursuant to the Company's long-term incentive plan. In May 2004, the Company awarded a total of 13,800 restricted shares to the Company's non-employee directors pursuant to the Company's directors' stock incentive plan. The Company recorded unearned compensation as a reduction of stockholders' equity based on the closing price of the Company's common stock on the date of grant. The unearned compensation is being recognized ratably over the applicable vesting period. Reclassifications In 2004, the Company reclassified certain costs such as engineering, procurement, safety and field offices from general and administrative to operating costs. The Company has reclassified prior periods to conform to this presentation. For the three-month and six-month periods ended June 30, 2004 and 2003, costs of approximately $15.8 million, $17.1 million, $30.7 million and $31.2 million, respectively, were reclassified from general and administrative to operating costs. Certain other reclassifications have been made to prior periods to conform to the current period presentation. 2. DISCONTINUED OPERATIONS In 2001 and 2002, the Company's technical services group entered into lump-sum contracts to design, engineer, manage construction of and commission four deepwater platform drilling rigs for installation on spars and tension-leg platforms. The Company entered into these lump-sum contracts in connection with long-term contracts to provide drilling operations management of the rigs once they have been installed on platforms. The first rig was completed and delivered in 2003, the second rig was completed and delivered in the second quarter of 2004, and the third rig was completed in the second quarter of 2004 and delivered early in the third quarter of 2004. The final rig has been loaded on a heavy-lift vessel for shipment to the customer's platform construction site for integration into the unit. Our commissioning of the rig is expected to continue until the platform is completed and delivered in the first quarter of 2005. In pricing these lump-sum contracts, the Company estimated the cost to perform the work, including the cost of labor, material and services. The revenue, cost and loss amounts the Company currently expects to realize on each of these lump-sum contracts vary from the originally estimated amounts. A variety of events could require the Company to revise its estimates and could result in further cost overruns to complete these projects, which could be material, and would require the Company to record additional loss provisions. Such events could include variations in labor and equipment productivity over the remaining construction period, unanticipated cost increases, engineering changes, shipyard or systems problems, project management issues, shortages of equipment, materials 9 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS or skilled labor, weather delays, unscheduled delays in the delivery of ordered materials and equipment, work stoppages, shipyard unavailability or other delays. For the three-month and six-month periods ended June 30, 2004, the Company recorded loss provisions of $10.5 million and $31.8 million, respectively, relating to the construction of the rigs. The 2004 loss provisions principally consisted of additional provisions for higher commissioning costs for the rigs, the costs of settling certain commercial disputes and renegotiations of commercial terms with shipyards, equipment vendors and other sub-contractors, completion issues at the shipyard constructing the final two rigs and revised estimates for other cost items. For the three-month and six-month periods ended June 30, 2004 and 2003, the Company recorded loss provisions of $46.9 million and $43.5 million, respectively, related to the rig construction projects. As of June 30, 2004, the cumulative losses recorded on the projects were $130.2 million. During the fourth quarter of 2004, the Company discontinued this business and does not currently intend to enter into additional business of this nature. Accordingly, the Company has reclassified its fixed-fee rig construction business in all prior periods as discontinued operations on the Company's consolidated statement of operations. The operating results of the discontinued fixed-fee construction business were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (IN THOUSANDS) Sales revenue............................................... $ 22,330 $ 25,177 $ 52,220 $ 76,298 Operating costs............................................. 32,840 72,075 84,033 119,776 --------- --------- --------- --------- Loss from discontinued fixed-fee construction operations.... (10,510) (46,898) (31,813) (43,478) Income tax benefit.......................................... (5,243) (16,415) (15,986) (15,218) --------- --------- --------- --------- Loss on discontinued operations............................. $ (5,267) $ (30,483) $ (15,827) $ (28,260) ========= ========= ========= =========
3. DEBT Short-Term Borrowings As of June 30, 2004, the Company had agreements with several banks for unsecured short-term lines of credit totaling $53.0 million, primarily denominated in U.S. dollars. Of these facilities, $50.7 million are renewable annually and bear interest at variable rates based on LIBOR. As of June 30, 2004, $19.5 million was outstanding under these facilities and $31.2 million was available. 10 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Long-Term Debt Long-term debt consisted of the following:
JUNE 30, DECEMBER 31, 2004 2003 ------------- ------------- (IN THOUSANDS) Senior secured term loan.......................................... $ 196,015 $ 197,000 Senior secured revolving credit facilities........................ 235,000 288,000 9 3/8% Senior Notes due 2007...................................... 175,000 175,000 10% Senior Notes due 2009......................................... 200,000 200,000 2 1/2% Convertible Senior Notes Due 2007.......................... 300,000 300,000 3 1/4% Convertible Senior Notes Due 2033.......................... 300,000 300,000 Zero Coupon Convertible Senior Debentures Due 2021................ -- 4 Zero Coupon Convertible Subordinated Debentures Due 2018.......... 1,124 1,098 Senior convertible notes due 2004................................. 74,279 85,853 Drillship loans................................................... 278,885 182,674 Semisubmersible loans due 2004 to 2008............................ 235,413 260,558 Limited-recourse collateralized term loans........................ -- 3,649 ------------- ------------- 1,995,716 1,993,836 Current portion of long-term debt................................. 170,752 188,737 ------------- ------------- Long-term debt, net of current portion............................ $ 1,824,964 $ 1,805,099 ============= =============
As of June 30, 2004, the Company had senior secured credit facilities providing for aggregate availability of up to $446.0 million, consisting of a $196.0 million term loan maturing in January 2009 and a $250.0 million revolving credit facility maturing in January 2007. As of June 30, 2004, $106.0 million of borrowings and an additional $29.3 million of letters of credit were outstanding under the revolving credit facility. Borrowings under the facilities incurred interest at variable rates based on LIBOR plus a spread based on the credit rating of the facility or, if unrated, index debt. The interest rate was 3.63% for the term loan and 3.13% for the revolving credit facility as of June 30, 2004. Additionally, at June 30, 2004, the Company had a senior secured revolving credit facility with non-U.S. banks that provided aggregate availability of up to $180.0 million, including $10.0 million of letters of credit. Borrowings under the credit facility incurred interest at variable rates based on LIBOR plus a spread ranging from 1.2% to 2.1%. As of June 30, 2004, $129.0 million of borrowings and an additional $3.7 million of letters of credit were outstanding under this credit facility, and the interest rate was 2.96%. In July 2004, the senior secured credit facilities were retired with proceeds from a $500 million senior notes offering and $800 million of new senior secured credit facilities. See Note 11. In June 2004, the Company commenced an offer to purchase the 9 3/8% Senior Notes and the 10% Senior Notes at 37.5 basis points over the respective redemption prices described below. See Note 11. In April 2004, the Company completed a refinancing of its drillship loan facilities through its consolidated joint venture company that owns the drillships the Pride Africa and the Pride Angola. The new and expanded drillship credit facility provides for a total credit commitment of $301.4 million, of which a $278.9 million term loan was funded at closing. The remaining $22.5 million commitment of the drillship credit facility is available for borrowing until July 2009. Funds at closing, together with $15.4 million of previously restricted cash, were used to (i) refinance the outstanding principal balance on the prior drillship loans of $172.6 million, (ii) repay $103.6 million of loans due from the joint venture company to the Company, (iii) repay $10.0 million of indebtedness of the joint venture company to the joint venture partner, and (iv) pay loan transaction costs of $3.1 million. The funds paid to the Company were used to reduce the Company's other outstanding debt and to improve liquidity. The new drillship loan facility matures in September 2010 and amortizes semi-annually. The drillship loan is non-recourse to the Company and the joint owner. 11 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS As of June 30, 2004, $47.8 million of the Company's cash balances, which amount is included in restricted cash, consists of funds held in trust in connection with the Company's drillship and semisubmersible loans and, accordingly, is not available for use by the Company. 4. INCOME TAXES The Company's consolidated effective income tax rate for continuing operations for the three months ended June 30, 2004 was 60.7% as compared to 47.2% for the corresponding period in 2003. The higher rate for the three months ended June 30, 2004 is principally the result of an increase in expected taxable income for 2004 in high effective tax rate countries in Latin America and lower net income in foreign jurisdictions with low or zero effective tax rates. For the six months ended June 30, 2004, the consolidated effective income tax rate for continuing operations was 56.2% as compared to 41.0% for the same period in 2003. The higher rate for the six months ended June 30, 2004 is a result of the factors discussed above for the three months ended June 30, 2004. 5. EARNINGS (LOSS) PER SHARE Basic income from continuing operations per share has been computed based on the weighted average number of shares of common stock outstanding during the applicable period. Diluted income from continuing operations per share has been computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period, as if stock options, convertible debentures and other convertible debt were converted into common stock, after giving retroactive effect to the elimination of interest expense, net of income tax effect, applicable to the convertible debentures and other convertible debt. The following table presents information to calculate basic and diluted income from continuing operations per share:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 ---- ---- ---- ---- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS) Income from continuing operations....................... $ 8,243 $ 11,407 $ 12,903 $ 14,089 Interest expense on convertible notes .................. - 2,299 - 1,773 Income tax effect ...................................... - (805) - (621) ------------ ---------- ---------- ---------- Income from continuing operations - as adjusted......... $ 8,243 $ 12,901 $ 12,903 $ 15,241 ============ ========== ========== ========== Weighted average shares outstanding .................... 135,681 134,246 135,611 134,189 Convertible debentures and notes ....................... - 18,171 - 11,671 Stock options .......................................... 1,754 2,417 2,171 1,562 ------------ ---------- ---------- ---------- Adjusted weighted average shares outstanding ........... 137,435 154,834 137,782 147,422 ============ ========== ========== ==========
The calculation of diluted weighted average shares outstanding for the three months ended June 30, 2004 and 2003 excludes 36.3 million and 13.6 million common shares, respectively, and 34.3 million and 18.3 million common shares for the six months ended June 30, 2004 and 2003, respectively, issuable pursuant to convertible debt and outstanding options. These shares were excluded because their effect was anti-dilutive or the exercise price of stock options exceeded the average price of the Company's common stock for the period. 6. INVESTMENT IN JOINT VENTURE The Company has a 30.0% equity interest in a joint venture company that is currently completing construction of two dynamically-positioned, deepwater semisubmersible drilling rigs, the Pride Portland and the Pride Rio de Janeiro. The Pride Portland is currently in Curacao undergoing final commissioning, and the Pride Rio de Janeiro is currently undergoing final commissioning in Brazil. The joint venture company has financed the cost of construction of these rigs through equity contributions and fixed rate notes, with repayment of the notes guaranteed by the United States Maritime Administration ("MARAD"). The notes are non-recourse to any of the joint venture 12 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS owners, except that, in order to make available an additional $21.9 million under the MARAD-guaranteed notes to fund the project through the sea and drilling trial stage for each rig, the Company has provided: - a $25.0 million letter of credit to secure principal and interest payments due under the notes, the payment of costs of removing or contesting liens on the rigs and the payment of debt of the joint venture company to MARAD in the event MARAD's guarantee is drawn; - a guarantee of any cash in excess of the additional $21.9 million required to get the rigs through the sea and drilling trial stage and obtain their class certificates; and - a guarantee of the direct costs of the voyage of each rig from any foreign jurisdiction in which it is located to a U.S. Gulf port nominated by MARAD in the event of a default prior to the rig obtaining a charter of at least three years in form and substance satisfactory to MARAD and at a rate sufficient to pay operating costs and debt service. The Company's joint venture partner has agreed to reimburse the Company that partner's proportionate share of any draws under the letter of credit or payments under the guarantees. To secure those reimbursements, the Company had set-off rights against, and rights to keep as collateral any payments on, convertible senior notes of the Company held by the joint venture partner. In July 2004, the Company repaid the notes and kept as collateral $17.5 million of cash to cover the partner's proportionate share of draws, if any, under the letter of credit. The Company currently expects that funds in excess of the additional $21.9 million will not be required to get the rigs through the sea and drilling trial stage and obtain their class certificates. Additional funds may, however, be required. Any additional funding is expected to be made by additional capital contributions by the joint venture partners. The cost of construction not funded under the MARAD-guaranteed notes is being provided by the joint venture company from equity contributions that have been made by the joint venture partners. Through June 30, 2004, the Company's equity investment in the joint venture totaled $35.9 million, including capitalized interest of $7.9 million. The Pride Portland and Pride Rio de Janeiro are being built to operate under long-term contracts with Petrobras; however, Petrobras has given notice of cancellation of those contracts for late delivery. Based on current demand for deepwater drilling rigs, the Company believes that Petrobras or another customer will employ the Pride Portland and Pride Rio de Janeiro under new or amended contracts. There can be no assurance, however, that either the Pride Portland or the Pride Rio de Janeiro will be contracted to Petrobras or to any other customer. If no contract is obtained before the rigs are commissioned, the rigs will be stacked. In this case, the joint venture partners would need to advance further funds to the joint venture company to allow it to pay stacking costs (estimated to be approximately $1 million per rig per month) as well as principal and interest payments on the debt as they become due since the joint venture company would have no alternative source of funds to allow it to make such payments. Initial interest and debt service payments in respect of construction debt for the two rigs are expected to total approximately $23.0 million during 2004, of which the Company's 30% share would be $6.9 million. If the joint venture company failed to cover its debt service requirements, a default would occur under the fixed rate notes guaranteed by MARAD. MARAD would then be entitled to foreclose on the mortgages related to the Pride Portland and the Pride Rio de Janeiro and take possession of the two rigs. 7. ACQUISITION OF Al BARAKA I In June 2004, the Company purchased the Al Baraka I tender assisted-drilling rig, which it previously managed pursuant to a management agreement with Basafojagu (HS) Inc., a company incorporated in Liberia. Basafojagu (HS) Inc., in which the Company had a 12.5% interest, owned the Al Baraka I subject to two capital leases with lessor banks. Each of the shareholders of Basafojagu (HS) Inc., including the Company, guaranteed the capital lease obligations in proportion to their ownership interest. The two lessor banks and the majority shareholder of Basafojagu (HS) Inc. were part of a banking and industrial group. The Company purchased the Al Baraka I directly 13 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS from the lessor banks for cash consideration of $16.0 million, including related fees. In connection with the transaction, the lessor banks, Basafojagu (HS) Inc. and its shareholders released each of the shareholders from its obligations associated with the operation of the Al Baraka I and with its ownership interest in Basafojagu (HS) Inc. including the guarantees of the capital leases. 8. COMMITMENTS AND CONTINGENCIES In July 2004, the India Supreme Court agreed to hear the Indian Customs Department's claim against the Company regarding the importation of the Pride Pennsylvania and related customs issues. The Customs, Excise and Gold (Control) Appellate Tribunal ("CEGAT") had previously ruled in the Company's favor. The Indian Customs Department is claiming approximately $6.7 million of customs duties, $6.7 million in penalties and interest on those amounts. The Company intends to vigorously defend the claim before the India Supreme Court. While the ultimate outcome of the claim cannot be determined with certainty, the Company does not expect that the ultimate outcome will have a material adverse effect on the Company's financial position, results of operations, or cash flows. The Company currently has a $2.0 million deposit with the Indian Customs Department pending the ultimate resolution of this claim. The Company is routinely involved in other litigation, claims and disputes incidental to its business, which at times involve claims for significant monetary amounts, some of which would not be covered by insurance. In the opinion of management, none of the existing litigation will have a material adverse effect on the Company's financial position, results of operations or cash flows. However, a substantial settlement payment or judgment in excess of the Company's accruals could have a material adverse effect on its consolidated results of operations or cash flows. 9. SEGMENT INFORMATION In January 2004, the Company reorganized its reporting segments to achieve a more rational geographic distribution and to establish better defined lines of accountability and responsibility for the sectors of its business. The Company now has five principal reporting segments: Eastern Hemisphere, which comprises the Company's offshore and land drilling activity in Europe, Africa, the Middle East, Southeast Asia, Russia and Kazakhstan; Western Hemisphere, which comprises the Company's offshore drilling activity in Latin America, currently Brazil, Mexico and Venezuela; U.S. Gulf of Mexico, which comprises the Company's U.S. offshore platform and jackup rig fleets; Latin America Land; and E&P Services. Historically, the Company reported a technical services segment which included its fixed-fee rig construction business, consulting services provided to customers, managing special periodic surveys and shipyard work for the Company's fleet. Due to the discontinuance of the Company's fixed-fee rig construction business, this business was classified as discontinued operations. The revenues and costs for engineering and management consulting services provided to the Company's customers are now included as part of its corporate and other activities for reporting purposes. The costs associated with managing special periodic surveys and shipyard work for the Company's fleet are now reported in the operating segment managing the rig. As a result, the Company no longer reports construction operations as a separate technical services segment. 14 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth selected consolidated financial information of the Company by reporting segment:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 (1) 2004 2003 (1) ---- -------- ---- -------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS) Revenues: Eastern Hemisphere................... $ 140,788 $149,070 $ 283,759 $ 291,220 Western Hemisphere................... 116,673 89,801 225,834 175,053 U.S. Gulf of Mexico.................. 30,199 21,342 57,219 39,584 Latin America Land................... 94,858 89,262 183,818 162,361 E & P services....................... 33,064 32,526 67,288 57,163 Corporate and other.................. 8,446 1,437 9,785 2,357 --------- -------- ---------- ---------- Total......................... $ 424,028 $383,438 $ 827,703 $ 727,738 ========= ======== ========== ========== Earnings (loss) from operations: Eastern Hemisphere................... $ 40,522 $ 44,253 $ 78,735 $ 86,632 Western Hemisphere................... 30,568 22,585 52,588 49,247 U.S. Gulf of Mexico.................. (2,097) (9,411) (6,624) (24,268) Latin America Land................... 4,326 7,315 5,769 10,612 E & P services....................... 1,686 2,672 4,526 3,805 Corporate and other.................. (14,775) (10,244) (23,202) (21,532) --------- -------- ---------- ---------- Total......................... $ 60,230 $ 57,170 $ 111,792 $ 104,496 ========= ======== ========== ==========
(1) The consolidated financial information by reporting segment for the three months and the six months ended June 30, 2003 has been restated to reflect the Company's new reporting segments and to reflect the retroactive adoption of FIN No. 46R, "Consolidation of Variable Interest Entities." Significant Customers Two customers collectively accounted for approximately 24.9% and 22.9% of consolidated revenues for the three-month and six-month periods ended June 30, 2004, respectively. For the three-month and six-month periods ended June 30, 2003, two customers collectively accounted for 24.6% and 23.9%, respectively, of consolidated revenues. 10. EMPLOYEE BENEFITS During the second quarter of 2004, the Company's board of directors authorized a modification of the Company's Supplemental Executive Retirement Plan (SERP), subject to final documentation, to change the benefits under the plan and to increase the number of executive officers eligible for the plan. The SERP is an unfunded deferred compensation arrangement that provides for vested benefits to be paid to the participating executive officer upon the officer's termination or retirement. The Company recognizes its estimated liability and the related compensation expense over the estimated service period of each officer. 11. SUBSEQUENT EVENTS On July 7, 2004, the Company completed a private offering of $500 million principal amount of 7 3/8% Senior Notes due 2014 (the "7 3/8% Senior Notes") and entered into new senior secured credit facilities with aggregate availability of up to $800 million, consisting of a $300 million term loan and a $500 million revolving credit facility. The 7 3/8% Senior Notes contain provisions that limit the Company's ability to enter into transactions with affiliates; pay dividends and make other restricted payments; incur debt and issue preferred stock; incur dividend or 15 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS other payment restrictions affecting the Company's subsidiaries; sell assets; engage in sale and leaseback transactions; create liens; and consolidate, merge or transfer all or substantially all of the Company's assets. Many of these restrictions will terminate if the notes are rated investment grade by either Standard & Poor's Ratings Services or Moody's Investors Service, Inc. and, in either case, the notes have a specified minimum rating by the other rating agency. The Company is required to offer to repurchase the notes in connection with specified change in control events that result in a ratings decline. Borrowings under the revolving credit facility are available for general corporate purposes. The Company may obtain up to $100 million of letters of credit under the revolving credit facility. Amounts drawn under the senior secured credit facilities bear interest at variable rates based on either LIBOR plus a margin or prime rate plus a margin. The interest rate margins will vary based on the Company's leverage, as defined, except that the LIBOR margin for the term loan is fixed at 1.75%. The revolving credit facility will mature in July 2009 and the term loan will mature in July 2011 (with amortization on the term loan of 0.25% per quarter prior to maturity). The Company may prepay the term loan at any time without penalty. Additionally, the Company is required to prepay the term loan and, in certain cases, the revolving loans with the proceeds from (i) asset sales or casualty events (with some exceptions), (ii) certain extraordinary events such as tax refunds, indemnity payments and pension reversion proceeds if availability under the new revolving credit facility plus the Company's unrestricted cash is less than $200 million and (iii) future debt issuances not permitted by the credit facilities. The senior secured credit facilities are secured by first priority liens on certain of the Company's subsidiaries' existing and future rigs, accounts receivable, inventory and related insurance, all of the equity of the Company's subsidiary Pride Offshore, Inc., the borrower under the facilities, and Pride Offshore's domestic subsidiaries and 65% of the stock of certain of the Company's foreign subsidiaries. The senior secured credit facilities contain a number of covenants restricting, among other things, prepayment, redemption and repurchase of the Company's indebtedness; distributions, dividends and repurchases of capital stock and other equity interests; acquisitions and investments; asset sales; capital expenditures; indebtedness; liens and affiliate transactions. The senior secured credit facilities also contain customary events of default, including with respect to a change of control. The Company is using the net proceeds from the offering of the 7 3/8% Senior Notes of $491.1 million (after discounts but before other expenses) to retire $175 million aggregate principal amount of its 9 3/8% Senior Notes due 2007 and $200 million aggregate principal amount of its 10% Senior Notes due 2009, together with the applicable prepayment premium and accrued and unpaid interest, and to retire other indebtedness. Proceeds from the term loan and initial borrowings of approximately $95 million under the revolving credit facility were used to refinance amounts outstanding under other credit facilities of the Company. In connection with the retirement of the 9 3/8% Senior Notes and 10% Senior Notes, the Company commenced an offer to purchase the notes at 37.5 basis points over the respective redemption prices described below. The Company purchased a total of $110.6 million aggregate principal amount of the 9 3/8% Senior Notes and $127.6 million aggregate principal amount of the 10% Senior Notes pursuant to the tender offer. The remaining notes were redeemed on August 6, 2004 at redemption prices of 101.563% of the principal amount of the 9 3/8% Senior Notes and 105.000% of the principal amount of the 10% Senior Notes, in each case plus accrued and unpaid interest to the redemption date. In connection with the early retirement of (i) the 9 3/8% Senior Notes and the 10% Senior Notes, including the redemption of the notes outstanding following completion of the tender offer, and (ii) the senior secured term loan and the senior secured revolving credit facilities, the Company will recognize in the third quarter of 2004 pretax charges of approximately $31.0 million, consisting of the tender offer premium, prepayment premiums and the write-off of deferred financing costs related to the retired debt. 12. RESTATEMENT During 2004, the Company identified several matters that resulted in the restatement of amounts previously reported in the Company's financial statements for the years 1999 through 2003 in the Company's annual report on Form 10-K for the year ended December 31, 2004. In addition, certain disclosures in other notes to the consolidated 16 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS financial statements have been restated to reflect the restatement adjustments. The matters consist of certain errors related primarily to transactions initially recorded in periods from 1999 to 2002, but affecting periods from 1999 through 2004. The errors relate to: - - Acquisition of Joint Venture Interest. In March 2001, the Company acquired the 73.6% interest that it did not already own in the joint venture that owned the Pride Carlos Walter and the Pride Brazil. At the time of the acquisition, the Company was negotiating to refinance the joint venture's debt; the refinancing was completed in November 2001. The Company recorded the acquired joint venture debt and the joint venture assets at the book value as recorded on the joint venture's books and records, as opposed to recording the assets and liabilities at their fair market value. In addition, when the joint venture debt was refinanced, certain costs associated with the retirement of the joint venture debt were inappropriately recorded as deferred financing costs of the new debt and amortized using a seven year life. As a result, interest expense was overstated by approximately $0.8 million for each of the three-month periods ended June 30, 2004 and 2003, and by approximately $1.6 million and $1.5 million for the six-month periods ended June 30, 2004 and 2003, respectively, and depreciation was understated by approximately $0.2 million per quarter. - - Depreciation of Certain Rigs Constructed or Acquired in 1999. In 1999, the Company completed construction of its two deepwater drillships, the Pride Africa and Pride Angola. During 2004, the Company enhanced its balance sheet reconciliation process and identified certain costs in its intercompany accounts and construction-in-process accounts that related to the construction period, which should have been included in fixed assets and depreciated beginning in 1999. Also in 1999, the Company, through a 51.0% owned joint venture, acquired the Pride Cabinda in a transaction whereby the Company funded 45.0% percent of the purchase price and entered into a lease agreement for the unfunded portion of the purchase price. The Company depreciated 45.0% of the book value of the Pride Cabinda and recorded the finance charges associated with the lease agreement as operating costs rather than recording and depreciating the full cost of the rig. The result of these errors was to understate depreciation expense by approximately $0.1 million per quarter, understate interest expense and overstate operating expenses by approximately $0.2 million for the three-month period ended June 30, 2003, and by approximately $0.5 million for the six-month period ended June 30, 2003, and overstate minority interest by $0.1 million per quarter. - - Rig Transfers. During 2004, the Company completed a review of depreciation expense and detected errors in the calculation of depreciation associated with rigs that were transferred between operating segments and had spent time in the shipyard before arriving at the new location. In each case, the Company had recorded an adjustment, after the rig re-entered service, to properly state the cumulative depreciation. These errors resulted in the overstatement (understatement) of depreciation for the three-month period ended June 30, 2003 and the six-month periods ended June 30, 2004 and 2003 of approximately $(1.2) million, $0.7 million, and $(0.7) million, respectively. - - Error in 2002 Tax Provision. During the fourth quarter of 2004, the Company received a tax assessment associated with a 2002 tax return and performed a review of the Company's provision for the item at issue with the tax authority. Based on this review, the Company determined that it had miscalculated the tax provision and related penalties and interest resulting in an understatement of tax expense for the three-month and six-month periods ended June 30, 2004 and 2003 of approximately $0.2 million, $0.2 million, $0.3 million and $0.4 million, respectively. - - Adjustments to Certain Accounts Payable Accounts. During 2003, the Company completed the reconciliation of certain vendor accounts and determined that it had over-accrued certain invoices. The Company reversed this over-accrual in the fourth quarter of 2003 without considering the periods impacted by the over-accruals. The result of this error was to overstate operating expenses for the three-month and six-month periods ended June 30, 2003 by $2,000 and $13,000, respectively. - - Interest rate collars and caps. During the second quarter of 2003, the Company understated its losses by approximately $0.4 million on interest rate collars and caps associated with its senior secured term loan that was retired during the third quarter of 2004. This error was corrected during the fourth quarter of 2003, which caused an overstatement of losses during the quarter. 17 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The errors noted above, including the error in the 2002 tax provision, resulted in the overstatement (understatement) of the tax provision for the three-month and six-month periods ended June 30, 2004 and 2003 of $(0.2) million, $0.1 million, $(0.6) million and $(25,000), respectively. The determination to restate these financial statements was approved by the audit committee of the Company's board of directors upon the recommendation of the Company's senior management. The following summarizes the effect of the restatements for each period:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Acquisition of joint venture interest.......... $ (209) $ (209) $ (418) $ (416) Depreciation of certain rigs constructed or acquired in 1999.......................... (73) 147 (146) 305 Rig transfers.................................. - (1,164) 673 (732) Adjusted to certain accounts payable accounts.. - 2 - 13 ------- -------- ------- -------- Net adjustments to earnings from operations.... (282) (1,224) 109 (830) Net adjustments to interest expense............ 805 171 1,583 692 Net adjustment to tax provision................ (161) 58 (557) (25) Net adjustment to minority interest............ 92 92 184 184 ------- -------- ------- -------- Net adjustments to income from continuing operations........................ $ 454 $ (903) $ 1,319 $ 21 ======= ======== ======= ========
18 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following tables compare selected financial data as restated with the previously reported amounts for each period. The operating results, as reported, have been revised to include reclassifications of certain costs from general and administrative to operating costs (See Note 1), and the classification of the operations of the Company's fixed-fee construction line of business as discontinued operations (See Note 2). SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 2004 2003 -------------- -------------- -------------- ------------ AS AS AS AS AS AS AS AS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 Revenues............................. $ 424,028 $ 424,028 $ 383,438 $ 383,438 $ 827,703 $ 827,703 $ 727,738 $ 727,738 Operating costs...................... 277,200 277,200 251,340 251,118 550,890 550,890 477,274 476,810 Depreciation and amortization........ 66,167 66,449 60,409 61,855 132,504 132,395 122,151 123,445 Earnings from operations............. 60,512 60,230 58,394 57,170 111,683 111,792 105,326 104,496 Interest expense..................... (29,929) (29,124) (34,187) (34,016) (60,516) (58,933) (68,566) (67,874) Income from continuing operations.... before income taxes and minority interest............................ 31,846 32,369 30,382 29,329 51,310 53,002 39,689 39,551 Income tax provision................. 19,487 19,648 13,906 13,848 29,219 29,776 16,194 16,219 Minority interest.................... 4,570 4,478 4,166 4,074 10,507 10,323 9,427 9,243 Income from continuing operations.... 7,789 8,243 12,310 11,407 11,584 12,903 14,068 14,089 Income (loss) on discontinued operations.......................... (5,267) (5,267) (30,483) (30,483) (15,827) (15,827) (28,260) (28,260) Net earnings (loss).................. 2,522 2,976 (18,173) (19,076) (4,243) (2,924) (14,192) (14,171) Earnings (loss) per share: Basic Income from continuing operations.. $ 0.06 $ 0.06 $ 0.09 $ 0.09 $ 0.09 $ 0.10 $ 0.10 $ 0.10 Discontinued operations............ (0.04) (0.04) (0.23) (0.23) (0.12) (0.12) (0.21) (0.21) Net earnings (loss)................ 0.02 0.02 (0.14) (0.14) (0.03) (0.02) (0.11) (0.11) Diluted Income from continuing operations.. $ 0.06 $ 0.06 $ 0.09 $ 0.08 $ 0.08 $ 0.09 $ 0.10 $ 0.10 Discontinued operations............ (0.04) (0.04) (0.20) (0.20) (0.11) (0.11) (0.19) (0.19) Net earnings (loss)................ 0.02 0.02 (0.11) (0.12) (0.03) (0.02) (0.09) (0.09)
SELECTED CONSOLIDATED BALANCE SHEET DATA:
JUNE 30, 2004 DECEMBER 31, 2003 ------------- ----------------- AS REPORTED AS RESTATED AS REPORTED AS RESTATED ----------- ----------- ----------- ----------- (IN THOUSANDS) Total current assets................. $ 749,363 $ 745,103 $ 726,924 $ 722,831 Property and equipment, net.......... 3,387,830 3,405,813 3,446,331 3,463,300 Other assets, net.................... 84,556 72,095 102,177 87,966 Total assets......................... 4,326,635 4,327,897 4,378,430 4,377,095 Accrued expenses..................... 263,293 263,293 261,055 260,150 Other long-term liabilities.......... 37,239 39,949 54,423 56,811 Deferred income taxes................ 57,780 58,097 59,378 59,460 Minority interest.................... 103,476 101,316 102,969 100,993 Retained earnings.................... 440,638 441,033 444,881 443,957 Total liabilities and stockholders' equity............................. 4,326,635 4,327,897 4,378,430 4,377,095
19 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Pride International, Inc.: We have reviewed the accompanying consolidated balance sheet of Pride International, Inc. and subsidiaries as of June 30, 2004, and the related consolidated statement of operations for the three-month and six-month periods ended June 30, 2004 and 2003 and consolidated statement of cash flows for the six-month periods ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of operations, of stockholders' equity, and of cash flows for the year then ended (not presented herein) and in our report dated March 25, 2005 (which contains an explanatory paragraph stating that the Company has restated its 2003 and 2002 consolidated financial statements), we expressed an unqualified opinion on those consolidated financial statements in a report that also included an explanatory paragraph referring to a change in accounting principle for variable interest entities. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. As discussed in Note 12, the Company restated its consolidated interim financial statements as of June 30, 2004 and for each of the three-month and six-month periods ended June 30, 2004 and 2003. PricewaterhouseCoopers LLP Houston, Texas August 6, 2004, except for the matters discussed in Note 2 and Note 12, as to which the date is March 25, 2005 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with the accompanying unaudited consolidated financial statements as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 included elsewhere herein, and with our Annual Report on Form 10-K for the year ended December 31, 2003. The following information contains forward-looking statements. Please read "Forward-Looking Statements" below for a discussion of certain limitations inherent in such statements. Please also read "Risk Factors" in Item 1 of our annual report for a discussion of certain risks facing our company. RESTATEMENT We restated our consolidated financial information for 2003, 2002, 2001 and 2000 in our annual report on Form 10-K for the year ended December 31, 2004 to correct certain errors related primarily to transactions initially recorded in periods from 1999 to 2002, but affecting periods from 1999 through 2004. The errors relate to adjustments to the 2001 acquisition of the interest we did not own in the Pride Carlos Walter and Pride Brazil and the calculation of charges associated with the subsequent refinancing of the debt; under- and over-depreciation of certain rigs constructed or acquired in 1999; depreciation related to rig transfers; the recording of the foreign exchange calculation of the inventory valuation in Colombia in 1999; an error in a tax provision in 2002; a net gain reported in 2000 resulting from a casualty loss in 1999; and adjustments related to the reconciliation of certain accounts payable and the reclassification of certain finance charges. The cumulative effect of the errors resulted in an increase in income from continuing operations for the three-month period ended June 30, 2004 of approximately $0.5 million, a decrease in income from continuing operations for the three-month period ended June 30, 2003 of approximately $0.9 million, and an increase in income from continuing operations for the six-month periods ended June 30, 2004 and 2003 of approximately $1.3 million and $21,000, respectively. Please read note 12 of the notes to our unaudited consolidated financial statements for more information related to the restatement. RECLASSIFICATION AND DISCONTINUED OPERATIONS The operating results also include the reclassification of certain costs from general and administrative to operating costs. We have also reclassified the results of our former Technical Services segment by classifying (a) our fixed fee rig construction business as discontinued operations and (b) the remaining revenues and costs for Technical Services activities to our corporate and other segment. Please read notes 1 and 2 of the notes to our unaudited consolidated financial statements for more information related to the reclassifications. OVERVIEW We provide contract drilling and related services to oil and gas companies worldwide, operating both offshore and on land. As of June 30, 2004, we operated a global fleet of 328 rigs, including two ultra-deepwater drillships, 11 semisubmersible rigs, 35 jackup rigs, 31 tender-assisted, barge and platform rigs and 249 land-based drilling and workover rigs. We operate in more than 30 countries and marine provinces. In January 2004, we reorganized our reporting segments to achieve a more rational geographic distribution and to establish better defined lines of accountability and responsibility for the sectors of our business. We now have five principal segments: Eastern Hemisphere, which comprises our offshore and land drilling activity in Europe, Africa, the Middle East, Southeast Asia, Russia and Kazakhstan; Western Hemisphere, which comprises our offshore drilling activity in Latin America, currently Brazil, Mexico and Venezuela; U.S. Gulf of Mexico, which comprises our U.S. offshore platform and jackup rig fleets; Latin America Land; and E&P Services. The markets for our drilling, workover and related E&P services are highly cyclical. Variations in market conditions during the cycle impact us in different ways depending primarily on the length of drilling contracts in different regions. Contracts in the U.S. Gulf of Mexico, for example, tend to be short-term, so a deterioration or improvement in market conditions tends to impact our operations quickly. Contracts in our Eastern and Western Hemisphere segments tend to be longer term. Accordingly, short-term changes in market conditions may have little 21 or no impact on our revenues and cash flows from those operations unless the market changes occur during a period when we are attempting to renew a number of those contracts. In late 2001, we commenced the first of four major deepwater platform rig construction projects. The rigs are being constructed on behalf of two major oil company customers under lump-sum contracts. As previously reported, we have experienced significant cost overruns on these projects, and we estimate that total costs on each of the four projects will substantially exceed contract revenues. Accordingly, in 2003 we recorded provisions for losses on these projects totaling $98.4 million. During the first and second quarter of 2004, we recorded additional loss provisions on these projects totaling $21.3 million and $10.5 million, respectively. The additional losses in the second quarter of 2004 resulted from a revision of previous estimates due principally to completion issues at the shipyard constructing the final two rigs and renegotiations of commercial terms with certain shipyards, equipment vendors and other subcontractors. In July 2004, we completed a private offering of $500 million principal amount of 7 3/8% Senior Notes due 2014 and entered into new senior secured credit facilities with aggregate availability of up to $800 million, consisting of a $300 million term loan and a $500 million revolving credit facility. The net proceeds from these transactions were used to retire existing indebtedness. In April 2004, we completed a refinancing of our drillship loan facilities through our consolidated joint venture company that owns our ultra deepwater drillships the Pride Africa and the Pride Angola. The new drillship credit facility provides for a total credit commitment of $301.4 million, of which a $278.9 million term loan was funded at closing. The remaining $22.5 million commitment of the drillship credit facility is expected to be drawn in August 2004. Funds at closing, together with $15.4 million of previously restricted cash, were used to (i) refinance the outstanding principal balance on the prior drillship loans of $172.6 million, (ii) repay $103.6 million of loans due from the joint venture company to us, (iii) repay $10.0 million of indebtedness of the joint venture company to the joint venture partner, and (iv) pay loan transaction costs of $3.1 million. The funds paid to us were used to reduce our other outstanding debt and improve liquidity. SEGMENT REVIEW EASTERN HEMISPHERE Our Eastern Hemisphere segment currently comprises two ultra-deepwater drillships, three semisubmersible rigs, eight jackup rigs, six tender assisted and barge rigs, 21 land rigs and two rigs managed for other parties. We expect revenues and earnings from operations for our Eastern Hemisphere segment to be lower in 2004 than in 2003 primarily due to the weaker market conditions in the West African deepwater semisubmersible market and to the Pride Africa undergoing its special periodic survey. Drillships. Our two ultra-deepwater drillships, the Pride Africa and Pride Angola, are working under contracts that were extended in December 2003 by an aggregate of ten years, commencing at the end of the contracts' current terms in June 2005 and May 2005, respectively. The Pride Africa is scheduled to undergo its five-year special periodic survey in the fourth quarter of 2004 and is expected to be out of service for approximately 45 days. Semisubmersibles. The Eastern Hemisphere market for semisubmersibles remains relatively weak. For the deepwater semisubmersibles operating in West Africa, we succeeded in obtaining a new six-month contract for the Pride South Pacific when its previous contract expired in April 2004, although at a substantially lower dayrate. The Pride North America working in Angola, which was scheduled to complete its current contract in August 2004, has recently received an extension through August 2005. The Pride North Sea was fully utilized during the first six months of 2004. A new contract for the rig has been obtained for a period of 300 days commencing in October 2004. We believe that market conditions for semisubmersibles will improve in 2005 as development drilling commences on a number of major oil discoveries. Jackups. The market for jackups is presently improving. The Pride Montana operating in Saudi Arabia began a new three year contract in June 2004. The Pride Ohio operating in the Middle East will begin a new three year contract in September following the completion of a special periodic survey and scheduled maintenance. The Pride Pennsylvania underwent its special periodic survey and was not receiving its contract day rate for 80 days during the 22 first quarter and an additional 12 days at the start of the second quarter of 2004. We have experienced disruptions with the local laborers on the Pride North Dakota in Nigeria, which have idled the rig since late July 2004. We anticipate that the Pride North Dakota will return to operations during the third quarter of 2004. The remaining jackup rigs are operating pursuant to long term contracts for the remainder of the year. Tender-assisted and Barge Rigs. We recently acquired the ownership interest in the tender-assisted rig Al Baraka I that we did not already own. The Al Baraka I will be in the shipyard for the remainder of the year to complete a special periodic survey and upgrades and is scheduled to begin a new contract in January 2005 in the Ivory Coast. The tender-assisted rig Alligator working in Angola started a two year contract in June 2004. The tender-assisted rigs Barracuda, operating in Angola, and Ile de Sein, operating in Indonesia, have contracts expiring in August and December 2004, respectively, and the swamp barge Bintang Kalimantan's contract in Nigeria expires in October 2004. We are currently evaluating opportunities for each of these rigs, and expect that they will experience some idle time prior to being re-contracted. Land Rigs. We anticipate nearly full utilization of the five land rigs working in Chad, four rigs in Oman, one rig operating in France, and the rig operating in Pakistan. We expect one of our two large land rigs in Kazakhstan to work throughout the 2004 drilling season. In July 2004, the other rig completed its contract and is currently idle. The remainder of the land rigs are also idle. WESTERN HEMISPHERE We currently have seven semisubmersible rigs, 14 jackup rigs, three platform rigs, two lake barge rigs and three managed rigs in our Western Hemisphere segment. Revenue and income from operations for our Western Hemisphere segment for the first half of 2004 were higher than the corresponding period in 2003 primarily due to the mobilization of a semisubmersible rig, five jackup rigs, and a platform rig to Mexico from the U.S. Gulf of Mexico fleet during the second half of 2003, partially offset by somewhat higher downtime of our high-specification semisubmersible rigs working offshore Brazil, and the completion of the contract for the Pride Venezuela. Revenues and gross margins from our Western Hemisphere operations for all of 2004 are expected to exceed those for 2003 due to the impact of a full year of activity in Mexico for rigs transferred from our U.S. Gulf of Mexico rig fleet during 2003 and higher operating efficiency for our semisubmersible rigs in Brazil. In addition, the timing and terms under which the Pride Venezuela and the two deepwater semisubmersible rigs nearing completion, the Pride Rio de Janeiro and the Pride Portland, are contracted could have a significant impact on our results. Semisubmersibles. The current Western Hemisphere market for intermediate water-depth semisubmersible rigs is very weak. However, we were able to mobilize the Pride Mexico to Mexico in late 2003 to begin a contract expiring in April 2007. The Pride Venezuela has been warm stacked in Trinidad throughout the first six months of 2004. The Pride South Atlantic operating in Brazil is working on a series of one-well contracts for four independent operators which we expect to fully utilize the rig through September 2004. The independent operators have options for additional wells. We are actively marketing the Pride Venezuela for work later this year and marketing the Pride South Atlantic for work after September 2004. The remainder of the Western Hemisphere semisubmersible fleet is operating under long-term contracts that are expected to keep the rigs working for the remainder of the year. Jackups, Platforms and Lake Barges. The Western Hemisphere fleet of 14 jackup and three platform rigs are working in Mexico under long-term contracts. We also continue to manage two jackup rigs and one barge in Venezuela on a well-to-well basis, and two lake barges operating in Venezuela are contracted through the end of 2004. U.S. GULF OF MEXICO Our rig fleet in the U.S. Gulf of Mexico segment currently comprises 11 jackup rigs and 19 platform rigs. During the first six months of 2004, demand for drilling services in the U.S. Gulf of Mexico continued to improve, resulting in higher revenue and income from operations. Market conditions have improved due to the reduction in the supply of rigs as a number of rigs leaving the U.S. sector of the Gulf of Mexico for other markets. Jackups. We currently have seven jackups working in the U.S. Gulf of Mexico with an average daily revenue of approximately $30,000 as compared with six jackups working at an average of $24,000 per day as of June 30, 23 2003. While the U.S. Gulf of Mexico continues to be primarily a spot market, we were able, due to improved market conditions, to contract the Pride New Mexico and the Pride Arizona under one year contracts commencing May 2004 and June 2004, respectively. Platforms. We currently expect to have seven of our platform rigs working for the balance of the year. We recently commenced operations of a deepwater platform rig which we constructed on behalf of a customer. We expect to commence operations of a second deepwater platform rig on behalf of the customer in the fourth quarter of 2004. LATIN AMERICA LAND The Latin America Land segment currently comprises 228 land drilling and workover rigs operating in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico and Venezuela. During the first six months of 2004, we experienced increased land drilling activity in Argentina and Venezuela, where our active rig fleets increased by seven rigs to 137 rigs and five rigs to 28 rigs, respectively. We experienced a combined reduction of four active rigs in Colombia and Bolivia, of which two have now been moved from Bolivia to Argentina. The outlook for our Latin America Land segment looks positive for the remainder of 2004. We expect high levels of activity in Argentina, Venezuela and Colombia to continue, which we expect will offset a reduction of activity in Ecuador and Bolivia. E&P SERVICES Our E&P Services segment currently operates in eight countries in Latin America and provides cementing, stimulation, carbon dioxide, coiled tubing and production services in addition to directional and under-balanced drilling. We are also providing integrated services in Argentina, Ecuador and Venezuela, as well as offshore services in Brazil, Venezuela and Mexico. During the first six months of 2004, business activity and revenues continued to increase due to increased activity in Mexico and Brazil as well as to a high level of integrated services work in Argentina. We anticipate business activity in our E&P Services segment will continue to improve during the remainder of 2004 as the business continues to expand. TECHNICAL SERVICES The operations of the Technical Services segment are concentrated on completing the final of four rigs pursuant to lump-sum contracts to design, engineer, manage construction of and commission specialized drilling rigs for two of our significant customers. The first rig was completed and delivered in 2003, the second rig was completed and delivered in the second quarter of 2004, and the third rig was completed in the second quarter of 2004 and delivered early in the third quarter of 2004. The final rig has been loaded on a heavy-lift vessel for shipment to the customer's platform construction site for integration into the unit. Our commissioning of the rig is expected to continue until the platform is completed and delivered in the first quarter of 2005. We have experienced significant cost overruns on these projects, and we estimate that total costs on each of the four projects will substantially exceed contract revenues. Accordingly, in 2003 we recorded provisions for losses on these projects totaling $98.4 million. During the first and second quarter of 2004, we recorded additional loss provisions on these projects totaling $21.3 million and $10.5 million, respectively. The additional losses in the second quarter of 2004 resulted from a revision of previous estimates and were due principally to recent scheduling issues at the shipyard constructing the final rig and commercial negotiations with certain equipment vendors and major subcontractors. A variety of events could require us to revise our estimates and could result in further cost overruns to complete these projects, which could be material and which would require us to record additional loss provisions. Such events could include variations in labor and equipment productivity over the remaining construction period, unanticipated cost increases, engineering changes, shipyard or systems problems, project management issues, shortages of equipment, materials or skilled labor, weather delays, unscheduled delays in the delivery of ordered materials and equipment, work stoppages, shipyard unavailability or other delays. We do not currently intend to enter into additional business of this nature. 24 Historically, we reported a technical services segment which included our fixed-fee rig construction business, consulting services provided to customers, managing special periodic surveys and shipyard work for our fleet. Due to the discontinuance of our fixed-fee rig construction business, this business was classified as discontinued operations. The revenues and costs for engineering and management consulting services provided to our customers are now included as part of our corporate and other activities for reporting purposes. The costs associated with managing special periodic surveys and shipyard work for our fleet are now reported in the operating segment managing the rig. As a result, we no longer report construction operations as a separate technical services segment. For the three-month periods and six-month periods ended June 30, 2004 and 2003, we had a loss on discontinued operations of $5.3 million, $30.5 million, $15.8 million and $28.3 million, respectively. Sales revenue and operating costs decreased for the 2004 periods compared to the 2003 periods as the rigs' construction was nearer to completion. RESULTS OF OPERATIONS The following table sets forth selected consolidated financial information by reporting segment for the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 (1) 2004 2003 (1) ----------- ---------- ---------- ---------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS) Revenues: Eastern Hemisphere............ $ 140,788 $ 149,070 $ 283,759 $ 291,220 Western Hemisphere............ 116,673 89,801 225,834 175,053 U.S. Gulf of Mexico........... 30,199 21,342 57,219 39,584 Latin America Land............ 94,858 89,262 183,818 162,361 E & P services................ 33,064 32,526 67,288 57,163 Corporate and other........... 8,446 1,437 9,785 2,357 ---------- ---------- ---------- --------- Total.................. $ 424,028 $ 383,438 $ 827,703 $ 727,738 ========== ========== ========== ========= Earnings (loss) from operations: Eastern Hemisphere............ $ 40,522 44,253 $ 78,735 $ 86,632 Western Hemisphere............ 30,568 22,585 52,588 49,247 U.S. Gulf of Mexico........... (2,097) (9,411) (6,624) (24,268) Latin America Land............ 4,326 7,315 5,769 10,612 E & P services................ 1,686 2,672 4,526 3,805 Corporate and other........... (14,775) (10,244) (23,202) (21,532) ---------- ---------- ---------- --------- Total.................. $ 60,230 $ 57,170 $ 111,792 $ 104,496 ========== ========== ========== =========
(1) The consolidated financial information by reporting segment for the three months and the six months ended June 30, 2003 has been restated to reflect our new reporting segments and to reflect the retroactive adoption of FIN No. 46R, "Consolidation of Variable Interest Entities." THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 Revenues. Revenues for the three months ended June 30, 2004 increased $40.6 million, or 10.6%, to $424.0 million as compared to the three months ended June 30, 2003. The increase was primarily due to our Western Hemisphere segment's increased activity offshore Mexico, improved dayrates and utilization of the jackup and platform fleet in the U.S. Gulf of Mexico, and improved rig activity in our Latin America Land segment. These increases in revenues were partially offset by revenue declines in the Eastern Hemisphere segment due to the weak market for semisubmersible rigs and resulting lower dayrates. 25 Operating Costs. Operating costs for the three months ended June 30, 2004 increased $26.1 million, or 10.4%, to $277.2 million as compared to the three months ended June 30, 2003. The increase was due to our Western Hemisphere segment's increased activity offshore Mexico, improved utilization of the jackup and platform fleet in the U.S. Gulf of Mexico, and improved rig activity in our Latin America Land segment. These increases in costs were partially offset by cost declines in Eastern Hemisphere due to lower utilization results from the weak market for semisubmersible rigs. Depreciation and Amortization. Depreciation expense for the three months ended June 30, 2004 increased $4.6 million, or 7.4%, to $66.4 million as compared to the three months ended June 30, 2003, due principally to incremental depreciation on upgrades for rigs relocated to Mexico and to other rig refurbishments and upgrades in late 2003 and in 2004. General and Administrative. General and administrative expenses for the three months ended June 30, 2004 increased $7.5 million, or 58.0%, as compared to the three months ended June 30, 2003. The increase was due primarily to increased audit and other professional fees due to Sarbanes-Oxley Act compliance and other projects, and increases in staffing due to an increase in business activity. Other Income (Expense). Other expense for the three months ended June 30, 2004 and 2003 was $27.9 million. Interest expense decreased by $4.9 million from the 2003 period to the 2004 period due principally to a reduction in the weighted average interest rate of our debt as a result of debt refinancings in the last half of 2003 and the first half of 2004. Other income, net in the quarter ended June 30, 2004 consisted mostly of net foreign exchange gains. Other income, net in the corresponding period in 2003 principally consisted of net foreign exchange gains on our euro and Venezuelan bolivar denominated net monetary assets. Income Tax Provision. Our consolidated effective income tax rate for the three months ended June 30, 2004 was 60.7% as compared to 47.2% for the corresponding period in 2003. The higher rate for the three months ended June 30, 2004 is principally the result of an increase in expected taxable income for 2004 in high effective tax rate countries in Latin America and lower net income in foreign jurisdictions with low or zero effective tax rates. Minority Interest. Minority interest in the three months ended June 30, 2004 increased $0.4 million, or 9.9%, as compared to the three months ended June 30, 2003, primarily due to the commencement of operations of the Kizomba A deepwater platform rig. That rig is being operated by our Angolan joint venture in West Africa in which we have a 51% interest. SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 Revenues. Revenues for the six months ended June 30, 2004 increased $100.0 million, or 13.7%, to $827.7 million as compared to the six months ended June 30, 2003. The increase was primarily due to our Western Hemisphere segment's increased activity offshore Mexico, improved dayrates and utilization of the jackup and platform rig fleets in the U.S. Gulf of Mexico, improved rig activity in our Latin America Land segment, and the growth of the E&P Services segment. These increases in revenues were partially offset by revenue declines in the Eastern Hemisphere due to the weak market for semisubmersible rigs and resulting lower dayrates. Operating Costs. Operating costs for the six months ended June 30, 2004 increased $74.1 million, or 15.5%, to $550.9 million as compared to the six months ended June 30, 2003. The increase was due primarily to our Western Hemisphere segment's increased activity offshore Mexico, improved utilization of the jackup and platform fleet in the U.S. Gulf of Mexico, improved rig activity in our Latin America Land segment, and the growth of the E&P Services segment. These increases in costs were partially offset by cost declines in the Eastern Hemisphere due to the lower utilization resulting from weak market for semisubmersible rigs. Depreciation and Amortization. Depreciation expense for the six months ended June 30, 2004 increased $9.0 million, or 7.3%, to $132.4 million as compared to the six months ended June 30, 2003. The increase was due primarily to incremental depreciation on upgrades for rigs relocated to Mexico and to other rig refurbishments and upgrades in late 2003 and 2004. 26 General and Administrative. General and administrative expenses for the six months ended June 30, 2004 increased $10.5 million, or 46.4%, to $33.0 million as compared to the six months ended June 30, 2003. The increase was due primarily to increased audit and other professional fees due to Sarbanes-Oxley Act compliance and other projects, and increases in staffing due to an increase in business activity. Other Income (Expense). Other expense for the six months ended June 30, 2004 decreased by $6.2 million, or 9.5%, as compared to the six months ended June 30, 2003. Interest expense decreased by $8.9 million from the 2003 period to the 2004 period due principally to a reduction in the weighted average interest rate of our debt as a result of debt refinancings in the last half of 2003 and the first half of 2004. Other expense, net in the six months ended June 30, 2004 consisted mostly of net foreign exchange losses, primarily in Venezuela. Other income, net in the corresponding period in 2003 principally consisted of net foreign exchange gains. Income Tax Provision. Our consolidated effective income tax rate for the six months ended June 30, 2004, was 56.2% as compared to 41.0% for the same period in 2003. The higher rate for the six months ended June 30, 2004 is a result of the factors discussed above for the three months ended June 30, 2004. We estimate that the 2004 effective income tax rate for the entire year will be approximately 85 to 90 percent. The effective tax rate for the full year is higher than for the first half of 2004 due primarily to a debt retirement charge in connection with our July refinancing transactions of approximately $31.0 million, before taxes, as described in note 11 of the notes to consolidated financial statements included in Item 1 of this quarterly report. Since the debt retirement occurred in the third quarter of 2004, we will record the entire amount of the charge and the related tax benefit in that quarter, which is expected to result in an unusually high effective tax rate in the third quarter. Minority Interest. Minority interest in the six months ended March 31, 2004 increased $1.1 million, or 11.7%, as compared to the six months ended June 30, 2003, primarily due to the commencement of operations of the Kizomba A deepwater platform rig. That rig is being operated by our Angolan joint venture in West Africa in which we have a 51% interest. LIQUIDITY AND CAPITAL RESOURCES We had net working capital of $144.4 million and $79.9 million as of June 30, 2004 and December 31, 2003, respectively. The increase in net working capital was attributable primarily to increased accounts receivable and decreased accounts payable and accrued interest expense, offset in part by the use of cash to repay debt and to net cash outlays on rig construction projects during the six months ended June 30, 2004 of approximately $70.0 million. Sources of Cash We currently have senior secured credit facilities with a group of banks and institutional lenders providing for aggregate availability of up to $800.0 million, consisting of a $300.0 million term loan maturing in July 2011 and a $500.0 million revolving credit facility maturing in July 2009. Borrowings under the revolving credit facility are available for general corporate purposes. We may obtain up to $100.0 million of letters of credit under the facility. As of July 31, 2004, $130.0 million of borrowings and an additional $29.3 million of letters of credit were outstanding under the revolving credit facility. Amounts drawn under the facilities bear interest at variable rates based on LIBOR plus a margin or prime rate plus a margin. The interest rate margin will vary based on our leverage, except that the LIBOR margin for the term loan is fixed at 1.75%. As of July 31, 2004, the interest rates on the term loan and revolving credit facility were 3.34% and 3.50%, respectively, and availability under the revolving credit facility was approximately $340.7 million. We may prepay the term loan at any time without penalty. In addition, we are required to prepay the term loan and, in certain cases, the revolving loans with the proceeds from (1) asset sales or casualty events (with some exceptions), (2) certain extraordinary events such as tax refunds, indemnity payments and pension reversion proceeds if availability under the new revolving credit facility plus our unrestricted cash is less than $200 million and (3) future debt issuances not permitted by the credit facilities. The senior secured credit facilities are secured by first priority liens on certain of our subsidiaries' existing and future rigs, accounts receivable, inventory and related insurance, all of the equity of our subsidiary Pride Offshore, Inc., the borrower under the facilities, and Pride 27 Offshore's domestic subsidiaries and 65% of the stock of certain of our foreign subsidiaries. The senior secured credit facilities contain a number of covenants restricting, among other things, prepayment, redemption and repurchase of our indebtedness; distributions, dividends and repurchases of capital stock and other equity interests; acquisitions and investments; asset sales; capital expenditures; indebtedness; liens and affiliate transactions. The senior secured credit facilities also contain customary events of default, including with respect to a change of control. In April 2004, we completed a refinancing of our drillship loan facilities through our consolidated joint venture company that owns our ultra deepwater drillships the Pride Africa and the Pride Angola. The new and expanded drillship credit facility provides for a total credit commitment of $301.4 million, of which a $278.9 million term loan was funded at closing. The remaining $22.5 million commitment of the drillship credit facility is expected to be drawn in August 2004. Funds at closing, together with $15.4 million of previously restricted cash, were used to (i) refinance the outstanding principal balance on the prior drillship loans of $172.6 million, (ii) repay $103.6 million of loans due from the joint venture company to us, (iii) repay $10.0 million of indebtedness of the joint venture company to our joint venture partner, and (iv) pay loan transaction costs of $3.1 million. The funds paid to us were used to reduce our other outstanding debt and to improve liquidity. The new drillship loan facility matures in September 2010 and amortizes semi-annually. The drillship loan is non-recourse to us and the joint owner. In July 2004, we completed a private offering of $500 million aggregate principal amount of our 7 3/8% Senior Notes due 2014. Net proceeds to us (after discounts but before other expenses) were $491.1 million. We are using the net proceeds from the offering to retire $175 million aggregate principal amount of our 9 3/8% Senior Notes due 2007 and $200 million aggregate principal amount of our 10% Senior Notes due 2009, together with the applicable prepayment premium and accrued and unpaid interest, and to retire other indebtedness. In connection with the retirement of our 2007 notes and 2009 notes, we commenced an offer to purchase the notes at 37.5 basis points over the respective redemption prices described below. We purchased a total of $110.6 million aggregate principal amount of the 2007 notes and $127.6 million aggregate principal amount of 2009 notes pursuant to the tender offer. The remaining notes were redeemed on August 6, 2004 at redemption prices of 101.563% of the principal amount of the 2007 notes and 105.000% of the principal amount of the 2009 notes, in each case plus accrued and unpaid interest to the redemption date. The new notes contain provisions that limit our ability and the ability of our subsidiaries to enter into transactions with affiliates; pay dividends and make other restricted payments; incur debt and issue preferred stock; incur dividend or other payment restrictions affecting our subsidiaries; sell assets; engage in sale and leaseback transactions; create liens; and consolidate, merge or transfer all or substantially all of our assets. Many of these restrictions will terminate if the notes are rated investment grade by either Standard & Poor's Ratings Services or Moody's Investors Service, Inc and, in either case, the notes have a specified minimum rating by the other rating agency. We are required to offer to repurchase the notes in connection with specified change in control events that result in a ratings decline. Rig Construction Projects In 2003, we recorded a provision for expected losses on deepwater platform rig construction projects of $98.4 million. During the first six months of 2004, we recorded additional loss provisions totaling $31.8 million related to expected losses on the deepwater platform rig construction projects. We expect approximately $21.0 million of cash receipts from the projects after June 30, 2004 in excess of the cash outlays after that date to complete the projects, which would positively impact liquidity for the remainder of 2004 and the first nine months of 2005. Capital Expenditures Additions to property and equipment during the six months ended June 30, 2004 totaled $74.3 million and primarily related to sustaining capital projects and to the $16.0 million purchase of the Al Baraka I tender-assisted drilling rig. Capital expenditures for the remainder of 2004 are expected to be approximately $72.5 million. Contractual Obligations 28 As of June 30, 2004, we had approximately $4.3 billion in total assets and $2.0 billion of long-term debt and capital lease obligations. Although we do not expect that our level of total indebtedness will have a material adverse impact on our financial position, results of operations or liquidity in future periods, it may limit our flexibility in certain areas. Please read "Risk Factors -- We may be considered highly leveraged. Our significant debt levels and debt agreement restrictions may limit our liquidity and flexibility in obtaining additional financing and in pursuing other business opportunities" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2003. For additional information about our contractual obligations as of December 31, 2003, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Contractual Obligations" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2003. As of June 30, 2004, there were no material changes to such disclosure regarding our contractual obligations made in the annual report. Investment in Joint Venture We own a 30.0% equity interest in a joint venture company that is currently completing construction of two dynamically-positioned, deepwater semisubmersible drilling rigs, the Pride Portland and the Pride Rio de Janeiro. The Pride Portland is currently in Curacao undergoing final commissioning, and the Pride Rio de Janeiro is currently undergoing final commissioning in Brazil. The joint venture company has financed the cost of construction of these rigs through equity contributions and fixed rate notes, with repayment of the notes guaranteed by the United States Maritime Administration ("MARAD"). The notes are non-recourse to any of the joint venture owners, except that, in order to make available an additional $21.9 million under the MARAD-guaranteed notes to fund the project through the sea and drilling trial stage for each rig, we have provided: - a $25.0 million letter of credit to secure principal and interest payments due under the notes, the payment of costs of removing or contesting liens on the rigs and the payment of debt of the joint venture company to MARAD in the event MARAD's guarantee is drawn; - a guarantee of any cash in excess of the additional $21.9 million required to get the rigs through the sea and drilling trial stage and obtain their class certificates; and - a guarantee of the direct costs of the voyage of each rig from any foreign jurisdiction in which it is located to a U.S. Gulf port nominated by MARAD in the event of a default prior to the rig obtaining a charter of at least three years in form and substance satisfactory to MARAD and at a rate sufficient to pay operating costs and debt service. Our joint venture partner has agreed to reimburse us its proportionate share of any draws under the letter of credit or payments under the guarantees. To secure those reimbursements, we had set-off rights against, and rights to keep as collateral any payments on, our convertible senior notes held by the joint venture partner. In July 2004, we repaid the notes and kept as collateral $17.5 million of cash to cover the partner's proportionate share of draws, if any, under the letter of credit. We currently expect that funds in excess of the additional $21.9 million will not be required to get the rigs through the sea and drilling trial stage and obtain their class certificates. Additional funds may, however, be required. Any additional funding is expected to be made by additional capital contributions by the joint venture partners. The cost of construction not funded under the MARAD-guaranteed notes is being provided by the joint venture company from equity contributions that have been made by the joint venture partners. Through June 30, 2004, our equity investment in the joint venture totaled $35.9 million, including capitalized interest of $7.9 million. The Pride Portland and Pride Rio de Janeiro are being built to operate under long-term contracts with Petrobras; however, Petrobras has given notice of cancellation of those contracts for late delivery. Based on current demand for deepwater drilling rigs, we believe that Petrobras or another customer will employ the Pride Portland and Pride Rio de Janeiro under new or amended contracts. There can be no assurance, however, that either the Pride Portland or the Pride Rio de Janeiro will be contracted to Petrobras or to any other customer. If no contract is 29 obtained before the rigs are commissioned, the rigs will be stacked. In this case, the joint venture partners would need to advance further funds to the joint venture company to allow it to pay stacking costs (estimated to be approximately $1 million per rig per month) as well as principal and interest payments on the debt as they become due since the joint venture company would have no alternative source of funds to allow it to make such payments. Initial interest and debt service payments in respect of construction debt for the two rigs are expected to total approximately $23.0 million during 2004, of which our 30% share would be $6.9 million. If the joint venture company failed to cover its debt service requirements, a default would occur under the fixed rate notes guaranteed by MARAD. MARAD would then be entitled to foreclose on the mortgages related to the Pride Portland and the Pride Rio de Janeiro and take possession of the two rigs. Other Sources and Uses of Cash As of June 30, 2004, $47.8 million of our cash balances, which amount is included in restricted cash, consisted of funds held in trust in connection with our drillship and semisubmersible loans and, accordingly, was not available for our use. We believe that the cash and cash equivalents on hand, together with the cash generated from our operations and borrowings under our credit facilities, will be adequate to fund normal ongoing capital expenditures, working capital and debt service requirements for the foreseeable future. We may redeploy additional assets to more active regions in 2004 if we have the opportunity to do so on attractive terms; however, we expect fewer opportunities for redeployments than in 2002 and 2003. From time to time, we have one or more bids outstanding for contracts that could require significant capital expenditures and mobilization costs. We expect to fund project opportunities primarily through a combination of working capital, cash flow from operations and borrowings under our revolving credit facilities. In addition, we may consider from time to time opportunities to dispose of certain assets or groups of assets when we believe the capital could be more effectively deployed to reduce debt or for other purposes. We have engaged a financial advisor to assist us in the possible sale of selected asset packages. We have provided interested parties information about those asset packages and are in the process of soliciting bids. There can be no assurance that we will receive any bids for any of the asset packages or that any bids we do receive will be acceptable to us. We expect to use any proceeds we receive from these asset sales to repay debt. In addition to the matters described in this "-- Liquidity and Capital Resources" section, please read "-- Segment Review" for additional matters that may have a material impact on our liquidity. 30 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included in this quarterly report that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These include such matters as: - market conditions, expansion and other development trends in the contract drilling industry - our ability to enter into new contracts for our rigs and future utilization rates and contract rates for rigs - future capital expenditures and investments in the construction, acquisition and refurbishment of rigs (including the amount and nature thereof and the timing of completion thereof) - estimates of profit or loss and cash flows from performance of lump-sum rig construction contracts - future asset sales - completion and employment of rigs under construction - repayment of debt - utilization of net operating loss carryforwards and future effective income tax rates - business strategies - expansion and growth of operations - future exposure to currency devaluations or exchange rate fluctuations - expected outcomes of legal and administrative proceedings and their expected effects on our financial position, results of operations and cash flows - future operating results and financial condition and - the effectiveness of our disclosure controls and procedures and internal control over financial reporting We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, including those described under "Risk Factors" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2003 and the following: - general economic business conditions - prices of oil and gas and industry expectations about future prices - cost overruns in our lump-sum construction and other turnkey contracts - adjustments in estimates affecting our revenue recognition under percentage-of-completion accounting - foreign exchange controls and currency fluctuations - political stability in the countries in which we operate 31 - the business opportunities (or lack thereof) that may be presented to and pursued by us - changes in laws or regulations - the validity of the assumptions used in the design of our disclosure controls and procedures and - our ability to implement in a timely manner internal control procedures necessary to allow our management to report on the effectiveness of our internal control over financial reporting Most of these factors are beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in these statements. 32 ITEM 4. CONTROLS AND PROCEDURES In connection with the original filing of our quarterly report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of June 30, 2004. In the course of this evaluation, management considered certain internal control areas in which we made changes to improve and enhance controls. Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that, as of June 30, 2004, our disclosure controls and procedures were effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC's rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act. Subsequent to that evaluation, management assessed the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of December 31, 2004 as more fully described in Item 9A of our annual report on Form 10-K for the year ended December 31, 2004. Based on that assessment, management identified a material weakness in our internal controls. We did not maintain effective controls over the communication among operating, functional and accounting departments of financial and other business information that is important to the period-end financial reporting process, including the specifics of non-routine and non-systematic transactions. Contributing factors included the large number of manual processes utilized during the period-end financial reporting process and an insufficient number of accounting and finance personnel to, in a timely manner, (1) implement extensive structural and procedural system and process initiatives during 2004, (2) perform the necessary manual processes and (3) analyze non-routine and non-systematic transactions. As a result of the material weakness, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that (1) our disclosure controls and procedures were not effective, as of December 31, 2004, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC's rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) we did not maintain effective internal control over financial reporting as of December 31, 2004 based on criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission. In light of our decision to restate our financial statements and the identification of a material weakness, we carried out a further evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of June 30, 2004. Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer have concluded that, as a result of the material weakness, our disclosure controls and procedures were not effective, as of June 30, 2004, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC's rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act. As disclosed in our annual report on Form 10-K for the year ended December 31, 2003 and our quarterly report on Form 10-Q for the quarter ended March 31, 2004, we made significant changes in our internal control over financial reporting in 2003 and through the date of those reports. There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 33 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits* +10.1 Employment/Non-Competition/Confidentiality Agreement dated June 10, 2004 between Pride and Lonnie D. Bane +10.2 Employment/Non-Competition/Confidentiality Agreement dated June 2, 2004 between Pride and Steven D. Oldham +10.3 Employment/Non-Competition/Confidentiality Agreement dated June 2, 2004 between Pride and Douglas G. Smith +10.4 Employment/Non-Competition/Confidentiality Agreement dated July 1, 2004 between Pride and Mario Kricorian +10.5 Pride International, Inc. 2004 Directors' Stock Incentive Plan (incorporated by reference to Appendix C to Pride's Proxy Statement on Schedule 14A for the 2004 Annual Meeting of Stockholders, File No. 1-13289) 12 Computation of Ratio of Earnings to Fixed Charges (Restated) 15 Accountant's Awareness Letter 31.1 Certification of Chief Executive Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of the Chief Executive Officer and the Chief Financial Officer of Pride pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ---------- * Pride and its subsidiaries are parties to several debt instruments that have not been filed with the SEC under which the total amount of securities authorized does not exceed 10% of the total assets of Pride and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii) (A) of Item 601(b) of Regulation S-K, Pride agrees to furnish a copy of such instruments to the SEC upon request. + Previously filed. (b) Reports on Form 8-K In a Current Report on Form 8-K submitted to the SEC on April 13, 2004, we filed pursuant to Item 5 and Item 7 of Form 8-K information regarding certain organizational changes. In a Current Report on Form 8-K submitted to the SEC on June 15, 2004, we filed pursuant to Item 5 and Item 7 of Form 8-K information regarding a private offering of $400 million aggregate principal amount of senior unsecured notes pursuant to Rule 135c under the Securities Act of 1933. In a Current Report on Form 8-K submitted to the SEC on June 23, 2004, we filed pursuant to Item 5 and Item 7 of Form 8-K information regarding a private offering of $500 million aggregate principal amount of 7 3/8% Senior Notes due 2014 pursuant to Rule 135c under the Securities Act of 1933. In a Current Report on Form 8-K submitted to the SEC on June 29, 2004, we filed pursuant to Item 5 and Item 7 of Form 8-K the purchase agreement, information about us contained in the offering memorandum and other information regarding a private offering of $500 million aggregate principal amount of 7 3/8% Senior Notes due 2014. 34 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PRIDE INTERNATIONAL, INC. By: /s/ Douglas G. Smith ---------------------------- DOUGLAS G. SMITH VICE PRESIDENT, CONTROLLER AND CHIEF ACCOUNTING OFFICER Date: May 3, 2005 35 INDEX TO EXHIBITS +10.1 Employment/Non-Competition/Confidentiality Agreement dated June 10, 2004 between Pride and Lonnie D. Bane +10.2 Employment/Non-Competition/Confidentiality Agreement dated June 2, 2004 between Pride and Steven D. Oldham +10.3 Employment/Non-Competition/Confidentiality Agreement dated June 2, 2004 between Pride and Douglas G. Smith +10.4 Employment/Non-Competition/Confidentiality Agreement dated July 1, 2004 between Pride and Mario Kricorian +10.5 Pride International, Inc. 2004 Directors' Stock Incentive Plan (incorporated by reference to Appendix C to Pride's Proxy Statement on Schedule 14A for the 2004 Annual Meeting of Stockholders, File No. 1-13289). 12 Computation of Ratio of Earnings to Fixed Charges (Restated) 15 Accountant's Awareness Letter 31.1 Certification of Chief Executive Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of the Chief Executive Officer and the Chief Financial Officer of Pride pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - --------------- + Previously filed. 36 EX-12 2 h24601a1exv12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES . . . EXHIBIT 12 RATIO OF EARNINGS TO FIXED CHARGES COMPUTATION (in thousands except ratio of earnings to fixed charges)
SIX MONTHS ENDED JUNE 30, 2004 ---------------- (Restated) EARNINGS: Income from continuing operations before income taxes and minority interest.................................................... $ 53,002 Portion of rents representative of interest expense...................... 2,952 Interest on indebtedness, including amortization of deferred loan costs.. 58,933 Amortization of capitalized interest..................................... 1,864 Minority interest in pre-tax income of subsidiaries that have not incurred fixed charges............................................... (997) --------- Earnings, as adjusted.......................................... $ 115,754 --------- FIXED CHARGES: Portion of rents representative of the interest factor................... $ 2,952 Interest on indebtedness, including amortization of deferred loan costs.................................. 58,933 Capitalized interest..................................................... 600 --------- Total fixed charges............................................. $ 62,485 ========= RATIO OF EARNINGS TO FIXED CHARGES.............................. 1.9x =========
EX-15 3 h24601a1exv15.txt ACCOUNTANT'S AWARENESS LETTER EXHIBIT 15 ACCOUNTANT'S AWARENESS LETTER May 2, 2005 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated August 6, 2004 (except for the matters discussed in Note 2 and Note 12 to the consolidated interim financial statements, as to which the date is March 25, 2005) on our review of interim financial information of Pride International, Inc. (the "Company") for the three-month and six-month periods ended June 30, 2004 and June 30, 2003 and included in the Company's quarterly report on Form 10-Q/A for the quarter ended June 30, 2004 is incorporated by reference in its Post-Effective Amendment No. 1 on Form S-8 to the Registration Statements on Form S-4 (Nos. 333-66644 and 333-666444-01), its Registration Statements on Form S-3 (Nos. 333-89604, 333-107996, 333-107051 and 333-118106), its Registration Statement on Form S-4 (No. 333-118104) and its Registration Statement on Form S-8 (No. 333-115588). Very truly yours, /s/ PricewaterhouseCoopers LLP Houston, Texas EX-31.1 4 h24601a1exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATIONS I, Paul A. Bragg, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Pride International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 3, 2005 By: /s/ Paul A. Bragg ------------------------------------- Paul A. Bragg President and Chief Executive Officer EX-31.2 5 h24601a1exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 Exhibit 31.2 CERTIFICATIONS I, Louis A. Raspino, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Pride International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 3, 2005 By: /s/ Louis A. Raspino ---------------------------- Louis A. Raspino Executive Vice President and Chief Financial Officer EX-32 6 h24601a1exv32.txt CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 EXHIBIT 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the "Act") and Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), each of the undersigned, Paul A. Bragg, President and Chief Executive Officer of Pride International, Inc., a Delaware corporation (the "Company"), and Louis A. Raspino, Executive Vice President and Chief Financial Officer of the Company, hereby certify that, to his knowledge: (1) the amendment to the Company's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 3, 2005 /s/ Paul A. Bragg ------------------------------------- Paul A. Bragg President and Chief Executive Officer /s/ Louis A. Raspino ------------------------------------- Louis A. Raspino Executive Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Act and Rule 13a-14(b) promulgated under the Exchange Act and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----