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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------------- ------
COMMISSION FILE NUMBER 1-7573
PARKER DRILLING COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 73-0618660
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1401 Enclave Parkway, Suite 600, Houston, Texas 77077
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(Address of principal executive offices) (zip code)
(281) 406-2000
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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 [ ]
As of October 31, 2003, 94,012,123 common shares were outstanding.
PARKER DRILLING COMPANY
INDEX
Page No.
Part I. Financial Information 2
Item 1. Financial Statements 2
Consolidated Condensed Balance Sheets (Unaudited)
September 30, 2003 and December 31, 2002 2
Consolidated Condensed Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2003 and 2002 3
Consolidated Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2003 and 2002 4
Notes to Unaudited Consolidated Condensed
Financial Statements 5 - 20
Report of Independent Accountants 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22-36
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 37
Part II. Other Information 37
Item 1. Legal Proceedings 37
Item 2. Changes in Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 39
1
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2003 2002
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 81,409 $ 51,982
Accounts and notes receivable, net 78,437 89,363
Rig materials and supplies 9,172 17,161
Other current assets 3,225 8,631
------------- -------------
Total current assets 172,243 167,137
------------- -------------
Property, plant and equipment less
accumulated depreciation and amortization of $432,536
at September 30, 2003 and $604,813 at December 31, 2002 406,648 641,278
Assets held for sale 148,064 896
Goodwill, net of accumulated amortization of $108,412 at
September 30, 2003 and December 31, 2002 115,983 115,983
Other noncurrent assets 21,826 28,031
------------- -------------
Total assets $ 864,764 $ 953,325
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 65,672 $ 6,486
Accounts payable and accrued liabilities 62,659 50,742
Accrued income taxes 10,152 4,347
------------- -------------
Total current liabilities 138,483 61,575
------------- -------------
Long-term debt 503,688 583,444
Discontinued operations 7,072 -
Other long-term liabilities 11,021 7,680
Contingencies (Note 7) - -
Stockholders' equity:
Common stock 15,669 15,465
Capital in excess of par value 435,992 434,998
Accumulated other comprehensive income - net unrealized
gain on investments available for sale 605 664
Accumulated deficit (247,766) (150,501)
------------- -------------
Total stockholders' equity 204,500 300,626
------------- -------------
Total liabilities and stockholders' equity $ 864,764 $ 953,325
============= =============
See accompanying notes to unaudited consolidated condensed financial statements.
2
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
Drilling and rental revenues:
U.S. drilling $ 13,872 $ 21,550 $ 49,593 $ 56,695
International drilling 49,090 53,845 138,893 163,208
Rental tools 14,054 11,852 40,366 37,206
------------- -------------- ------------- -------------
Total drilling and rental revenues 77,016 87,247 228,852 257,109
------------- -------------- ------------- -------------
Drilling and rental operating expenses:
U.S. drilling 11,964 13,977 37,466 39,508
International drilling 33,232 33,895 96,220 109,060
Rental tools 5,860 5,255 16,868 16,650
Depreciation and amortization 17,393 17,159 51,791 50,240
------------- -------------- ------------- -------------
Total drilling and rental operating expenses 68,449 70,286 202,345 215,458
------------- -------------- ------------- -------------
Drilling and rental operating income 8,567 16,961 26,507 41,651
------------- -------------- ------------- -------------
Construction contract revenue 1,061 17,285 7,030 81,948
Construction contract expense 61 16,515 5,030 79,924
------------- -------------- ------------- -------------
Construction contract operating income (Note 6) 1,000 770 2,000 2,024
------------- -------------- ------------- -------------
General and administrative expense (4,079) (6,097) (14,485) (18,583)
Provision for doubtful accounts - (1,140) - (1,140)
Gain on disposition of assets, net 405 1,581 963 2,781
------------- -------------- ------------- -------------
Total operating income 5,893 12,075 14,985 26,733
------------- -------------- ------------- -------------
Other income and (expense):
Interest expense (13,152) (13,312) (39,901) (38,409)
Other income (expense) - net 551 (282) 1,642 (4,063)
------------- -------------- ------------- -------------
Total other income and (expense) (12,601) (13,594) (38,259) (42,472)
------------- -------------- ------------- -------------
Loss before income taxes (6,708) (1,519) (23,274) (15,739)
Income tax expense (benefit):
Current 3,905 2,657 11,646 7,602
Deferred - (4,000) - (13,700)
------------- -------------- ------------- -------------
Income tax expense (benefit) 3,905 (1,343) 11,646 (6,098)
------------- -------------- ------------- -------------
Loss from continuing operations (10,613) (176) (34,920) (9,641)
Discontinued operations, net of taxes 3,957 (7,844) (62,345) (20,937)
Cumulative effect of change in accounting principle - - - (73,144)
------------- -------------- ------------- -------------
Net loss $ (6,656) $ (8,020) $ (97,265) $ (103,722)
============= ============== ============= =============
Loss per share - basic and diluted:
Loss from continuing operations $ (0.11) $ (0.00) $ (0.37) $ (0.10)
Discontinued operations, net of taxes $ 0.04 $ (0.09) $ (0.67) $ (0.23)
Cumulative effect of change in accounting principle $ - $ - $ - $ (0.79)
Net loss $ (0.07) $ (0.09) $ (1.04) $ (1.12)
Number of common shares used in computing
earnings per share:
Basic and diluted 93,728,825 92,510,985 93,198,996 92,365,791
See accompanying notes to unaudited consolidated condensed financial statements.
3
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------- -------------
Cash flows from operating activities:
Net loss $ (97,265) $ (103,722)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 51,791 50,240
Gain on disposition of assets (963) (2,781)
Cumulative effect of change in accounting principle - 73,144
Expenses not requiring cash 3,807 6,130
Deferred income taxes - (13,700)
Discontinued operations 68,574 22,387
Change in operating assets and liabilities 42,297 (24,682)
------------- -------------
Net cash provided by operating activities 68,241 7,016
------------- -------------
Cash flows from investing activities:
Capital expenditures (23,843) (39,238)
Proceeds from the sale of equipment 5,092 5,459
------------- -------------
Net cash used in investing activities (18,751) (33,779)
------------- -------------
Cash flows from financing activities:
Principal payments under debt obligations (20,063) (3,887)
Proceeds from interest rate swap settlement (Note 9) - 2,620
------------- -------------
Net cash used in financing activities (20,063) (1,267)
------------- -------------
Net change in cash and cash equivalents 29,427 (28,030)
Cash and cash equivalents at beginning of period 51,982 60,400
------------- -------------
Cash and cash equivalents at end of period $ 81,409 $ 32,370
============= =============
Supplemental cash flow information:
Interest paid $ 30,607 $ 29,172
Income taxes paid $ 13,799 $ 14,917
Supplemental noncash investing activity:
Net unrealized loss on investments available
for sale (net of taxes $0 in 2003 and $46 in 2002) $ (59) $ (82)
Capital lease obligation $ 1,004 $ -
See accompanying notes to unaudited consolidated condensed financial statements.
4
PARKER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. General - In the opinion of the management of Parker Drilling Company (the
"Company"), the accompanying unaudited consolidated condensed financial
statements reflect all adjustments (of a normally recurring nature) which
are necessary for a fair presentation of (1) the financial position as of
September 30, 2003 and December 31, 2002, (2) the results of operations for
the three and nine months ended September 30, 2003 and 2002, and (3) cash
flows for the nine months ended September 30, 2003 and 2002. Results for
the nine months ended September 30, 2003 are not necessarily indicative of
the results that will be realized for the year ending December 31, 2003.
The financial statements should be read in conjunction with the Company's
Form 10-K/A for the year ended December 31, 2002.
Our independent accountants have performed a review of these interim
financial statements in accordance with standards established by the
American Institute of Certified Public Accountants. Pursuant to Rule 436(c)
under the Securities Act of 1933, their report of that review should not be
considered a report within the meaning of Section 7 and 11 of that Act, and
the independent accountants liability under Section 11 does not extend to
it.
Stock-Based Compensation - The Company's stock-based employee compensation
plans are accounted for under the recognition and measurement principles of
the Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost related to stock options is reflected in net
loss, as all options granted under the plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of the
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," to stock-based employee compensation.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
(Dollars in Thousands, Except Per Share Amounts)
Net loss $ (6,656) $ (8,020) $ (97,265) $ (103,722)
Stock-based compensation expense
determined under fair value method (272) (261) (1,011) (2,048)
------------- ------------- ------------- -------------
Pro forma net loss $ (6,928) $ (8,281) $ (98,276) $ (105,770)
============= ============= ============= =============
Loss per share - basic and diluted:
Net loss as reported $ (0.07) $ (0.09) $ (1.04) $ (1.12)
Net loss pro forma $ (0.07) $ (0.09) $ (1.05) $ (1.15)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for the three and nine months ended September 30, 2003 and
2002: no dividend yield; expected volatility of 52.5%; risk-free interest
rate ranged from 2.94% to 2.96% and 4.48% to 4.88%, respectively; and
expected lives of options, 5-7 years.
5
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
2. Earnings Per Share-
For the Three Months Ended September 30, 2003
------------------------------------------------------
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
Basic and diluted EPS:
Loss from continuing operations $ (10,613,000) 93,728,825 $ (0.11)
Discontinued operations, net of taxes 3,957,000 0.04
-------------- --------------
Net loss $ (6,656,000) $ (0.07)
============== ==============
For the Nine Months Ended September 30, 2003
------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
Basic and diluted EPS:
Loss from continuing operations $ (34,920,000) 93,198,996 $ (0.37)
Discontinued operations, net of taxes (62,345,000) (0.67)
-------------- --------------
Net loss $ (97,265,000) $ (1.04)
============== ==============
For the Three Months Ended September 30, 2002
------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
Basic and diluted EPS:
Loss from continuing operations $ (176,000) 92,510,985 $ (0.00)
Discontinued operations, net of taxes (7,844,000) (0.09)
-------------- --------------
Net loss $ (8,020,000) $ (0.09)
============== ==============
For the Nine Months Ended September 30, 2002
------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
Basic and diluted EPS:
Loss from continuing operations $ (9,641,000) 92,365,791 $ (0.10)
Discontinued operations, net of taxes (20,937,000) (0.23)
Cumulative effect of change in accounting principle (73,144,000) (0.79)
-------------- --------------
Net loss $ (103,722,000) $ (1.12)
============== ==============
6
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
2. Earnings Per Share - (continued)
The Company has outstanding $109,706,000 of 5.5% convertible subordinated
notes which are convertible into 7,128,395 shares of common stock at $15.39
per share. The notes have been outstanding since their issuance in July
1997 but were not included in the computation of diluted EPS because the
assumed conversion of the notes would have had an anti-dilutive effect on
EPS. For the three and nine months ended September 30, 2003, options to
purchase 9,902,809 shares of common stock at prices ranging from $1.96 to
$12.19, were outstanding but not included in the computation of diluted EPS
because the assumed exercise of the options would have had an anti-dilutive
effect on EPS due to the net loss incurred during the period. For the three
and nine months ended September 30, 2002, options to purchase 9,888,561
shares of common stock at prices ranging from $2.24 to $12.1875, were
outstanding but not included in the computation of diluted EPS because the
assumed exercise of the options would have had an anti-dilutive effect on
EPS due to the net loss incurred during the period.
3. Business Segments - The primary services the Company provides are as
follows: U.S. drilling, international drilling and rental tools.
Information regarding the Company's operations by industry segment for the
three and nine months ended September 30, 2003 and 2002 is as follows
(dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
Drilling and rental revenues:
U.S. drilling $ 13,872 $ 21,550 $ 49,593 $ 56,695
International drilling 49,090 53,845 138,893 163,208
Rental tools 14,054 11,852 40,366 37,206
------------- -------------- ------------- -------------
Total drilling and rental revenues 77,016 87,247 228,852 257,109
------------- -------------- ------------- -------------
Drilling and rental operating income:
U.S. drilling (3,307) 2,649 (2,867) 2,670
International drilling 7,168 11,103 15,956 27,801
Rental tools 4,706 3,209 13,418 11,180
------------- -------------- ------------- -------------
Total drilling and rental operating income 8,567 16,961 26,507 41,651
Construction contract operating income 1,000 770 2,000 2,024
General and administrative expense (4,079) (6,097) (14,485) (18,583)
Provision for doubtful accounts - (1,140) - (1,140)
Gain on disposition of assets, net 405 1,581 963 2,781
------------- -------------- ------------- -------------
Total operating income 5,893 12,075 14,985 26,733
Interest expense (13,152) (13,312) (39,901) (38,409)
Other income (expense) - net 551 (282) 1,642 (4,063)
------------- -------------- ------------- -------------
Loss before income taxes $ (6,708) $ (1,519) $ (23,274) $ (15,739)
============= ============== ============= =============
7
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
4. Discontinued Operations - In June 2003, the Company's board of directors
approved a plan to sell its Latin American assets consisting of 17 land
rigs and related inventory and spare parts and its U.S. offshore assets
consisting of seven jackup rigs and four platform rigs. The Company is
actively marketing the assets through an independent broker. At June 30,
2003, the net book value of the assets to be sold exceeded the estimated
fair value and as a result an impairment charge including estimated sales
expenses was recognized in the second quarter of 2003 in the amount of
$54.0 million. One Latin America land rig and related spare parts was sold
for $1.8 million in July, 2003.
The operations in Latin America and the U.S. that utilize the assets
included in this plan of disposition meet the requirements of discontinued
operations under the provisions of SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." The consolidated financial
statements have been restated to present the Latin America operations and
the U.S. jackup and platform drilling operations as discontinued
operations. The assets of these discontinued operations are mainly
comprised of the estimated fair value of drilling rigs and related spare
parts and supplies. The liabilities of these discontinued operations
consist mainly of deferred revenue and estimated accrued costs to sell the
assets.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
(Dollars in Thousands)
Discontinued operations drilling revenues:
U.S. jackup and platform drilling $ 13,108 $ 12,621 $ 35,428 $ 29,641
Latin America drilling 5,860 8,976 18,201 35,948
------------- -------------- ------------- -------------
Total discontinued operations drilling revenues 18,968 21,597 53,629 65,589
------------- -------------- ------------- -------------
Discontinued operations operating income (loss)
U.S. jackup and platform drilling (1) 2,127 1,434 3,666 (243)
Latin America drilling (1) 1,692 2,086 3,166 9,043
Depreciation and amortization - (7,894) (14,629) (22,796)
------------- -------------- ------------- -------------
Total discontinued operations operating income (loss) (2) 3,819 (4,374) (7,797) (13,996)
Other income - net (853) 134 (558) 568
Provision for impairment of assets - (360) (53,968) (360)
Tax benefit (expense) 991 (3,244) (22) (7,149)
------------- -------------- ------------- -------------
Income (loss) from discontinued operations $ 3,957 $ (7,844) $ (62,345) $ (20,937)
============= ============== ============= =============
(1) Drilling gross margin - drilling revenues less direct drilling operating
expenses, excluding depreciation and amortization expense.
(2) Drilling operating income (loss) - drilling revenues less direct drilling
operating expenses, including depreciation and amortization expense.
5. Reclassifications - Effective in 2003 the Company changed its accounting
for reimbursable costs. In prior years, the Company netted the
reimbursement with the cost in the Statement of Operations. Beginning in
2003 the Company has recorded the reimbursements as operating revenues and
the costs in operating expense. There is no effect on total operating
income. The prior periods presented have been reclassified to conform to
the current presentation. The effect of making this change was an increase
in both total drilling and rental revenues and total drilling and rental
operating expenses of $19.5 million and $24.8 million for the nine months
ended September 30, 2003 and 2002, respectively and $7.0 million and $7.5
million for the three months ended September 30, 2003 and 2002,
respectively.
8
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
6. Construction Contract - The Company historically only constructed drilling
rigs for its own use. At the request of one of its significant customers,
the Company entered into a contract to design, construct, mobilize and sell
("construction contract") a specialized drilling rig to drill extended
reach wells to offshore targets from a land-based location on Sakhalin
Island, Russia, for an international consortium of oil and gas companies.
The Company also entered into a contract to subsequently operate the rig on
behalf of the consortium. Generally Accepted Accounting Principles ("GAAP")
requires that revenues received and costs incurred related to the
construction contract be accounted for and reported on a gross basis and
income for the related fees should be recognized on a percentage of
completion basis. Because this construction contract is not a part of our
historical or normal operations, the revenues and costs related to this
contract have been shown as a separate component in the statement of
operations. The profit from the design, construction, mobilization and
rig-up fees is calculated on a percentage of completion basis. During the
third quarter ended September 30, 2003 the design, construction,
mobilization and rig up was completed and we recognized $1.0 million in
profit. The total profit recognized to date under the design, construction,
mobilization and rig-up contract is $4.5 million, $2.0 million in 2003 and
$2.5 million during 2002.
7. Contingency - On July 6, 2001, the Ministry of State Revenues of Kazakhstan
("MSR") issued an Act of Audit to the Kazakhstan branch ("PKD Kazakhstan")
of Parker Drilling Company International Limited ("PDCIL"), a wholly owned
subsidiary of the Company, assessing additional taxes of approximately
$29.0 million for the years 1998-2000. The assessment consisted primarily
of adjustments in corporate income tax based on a determination by the
Kazakhstan tax authorities that payments by Offshore Kazakhstan
International Operating Company, ("OKIOC"), to PDCIL of $99.0 million, in
reimbursement of costs for modifications to barge rig 257, performed by
PDCIL prior to the importation of the drilling rig into Kazakhstan, are
income to PKD Kazakhstan, and therefore, taxable to PKD Kazakhstan. PKD
Kazakhstan filed an Act of Non-Agreement that such reimbursements should
not be taxable and requested that the Act of Audit be revised accordingly.
In November 2001, the MSR rejected PKD Kazakhstan's Act of Non-Agreement,
prompting PKD Kazakhstan to seek judicial review of the assessment. On
December 28, 2001, the Astana City Court issued a judgment in favor of PKD
Kazakhstan, finding that the reimbursements to PDCIL were not income to PKD
Kazakhstan and not otherwise subject to tax based on the U.S.-Kazakhstan
Tax Treaty. The MSR appealed the decision of the Astana City Court to the
Civil Panel of the Supreme Court, which confirmed the decision of the
Astana City Court that the reimbursements were not income to PKD Kazakhstan
in March 2002. Although the court agreed with the MSR's position on certain
minor issues, no additional taxes were payable as a result of this
assessment. Although the required period to file an appeal has expired the
MSR may petition the Supreme Court of Kazakhstan to reopen the case if
material new evidence is discovered. In addition, PDCIL has filed a
petition with the U.S. Treasury Department for competent authority review,
which is a tax treaty procedure to resolve disputes as to which country may
tax income covered under the treaty. The U.S. Treasury Department has
granted our petition and has initiated proceedings with the MSR, which are
ongoing.
8. Recent Accounting Pronouncements - In April 2002, the Financial Accounting
Standard Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements
No. 4, No. 44, and No. 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. We adopted this standard in the first quarter
of 2003 and it did not have a significant effect on our results of
operations or our financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for
exit or disposal activities initiated after December 31, 2002. The adoption
of this standard has not had any impact on our financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others." The
interpretation requires disclosure about the nature and terms of
obligations under certain guarantees that the Company has issued. The
interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing a guarantee. The initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements in
this interpretation are effective immediately. We were not impacted by the
issuance of FIN 45.
9
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure - An Amendment of SFAS
No. 123." The standard provides additional transition guidance for
companies that elect to voluntarily adopt the accounting provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 does not
change the provisions of SFAS No. 123 that permit entities to continue to
apply the intrinsic value method of APB No. 25, "Accounting for Stock
Issued to Employees." As we continue to follow APB No. 25, our accounting
for stock-based compensation will not change as a result of SFAS No. 148.
SFAS No. 148 does require certain new disclosures in both annual and
interim financial statements. The interim disclosure provisions have been
included as Note 1.
On January 17, 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No.
51." The primary objectives of FIN 46 are to provide guidance on how to
identify entities for which control is achieved through means other than
through voting rights (variable interest entities ("VIE")) and how to
determine when and which business enterprise should consolidate the VIE.
This new model for consolidation applies to an entity in which either (1)
the equity investors do not have a controlling financial interest or (2)
the equity investment at risk is insufficient to finance that entity's
activities without receiving additional subordinated financial support from
other parties. We will adopt this standard in December 2003, and do not
expect it to have a significant effect on our results of operations or our
financial position.
In March 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement will be effective for contracts entered into,
modified or designated as hedges after June 30, 2003. Implementation of
this statement did not have a material effect on our results of operations
or our financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This statement improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity and
requires that those instruments be classified as liabilities (or assets in
certain circumstances) in statements of financial position. This statement
will be effective for all financial statements entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. Implementation of this
statement did not have a significant effect on our financial position.
9. Derivative Financial Instruments - The Company is exposed to interest rate
risk from its fixed-rate debt. In January 2002, the Company hedged against
a portion of the risk of changes in fair value associated with its $214.2
million 9.75% senior notes by entering into three fixed-to-variable
interest rate swap agreements with a total notional amount of $150.0
million. The Company assumed no ineffectiveness as each interest rate swap
agreement met the short-cut method requirements under SFAS No. 133 for fair
value hedges of debt instruments. As a result, changes in the fair value of
the interest rate swap agreements were offset by changes in the fair value
of the debt and no net gain or loss was recognized in earnings. During the
nine months ended September 30, 2002, the interest rate swap agreements
reduced interest expense by $2.6 million.
On July 24, 2002, the Company terminated all the interest rate swap
agreements and received $3.5 million. A gain totaling $2.6 million is being
recognized as a reduction to interest expense over the remaining term
(ending November 2006) of the debt instrument, of which $0.2 million and
$0.5 million was recognized during the three and nine months ended
September 30, 2003, respectively.
10
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
10. Subsequent Events - On October 10, 2003, the Company refinanced a portion
of its existing debt by issuing $175.0 million of new 9.625% senior notes
due 2013 and replaced its senior credit facility with a $150.0 million
senior credit agreement. The senior credit agreement consists of a
four-year $100.0 million delayed draw term loan facility and a three-year
$50.0 million revolving credit facility which facilities are collateralized
with certain drilling rigs, rental tool equipment, accounts receivable and
substantially all of the stock of the subsidiaries, and contains customary
affirmative and negative covenants. The proceeds of the new 9.625% senior
notes, plus an initial draw of $50.0 million under the term loan facility,
were partially used to retire $184.3 million of the 9.75% senior notes due
2006 that had been tendered pursuant to a tender offer dated September 24,
2003. The balance of the proceeds from the new senior notes and the initial
draw down under the term loan facility will be used to retire the remaining
$29.9 million of 9.75% senior notes that were not tendered but have been
called for redemption effective November 15, 2003. The remaining $50.0
million of the delayed draw term loan facility may only be used to repay
the 5.5% convertible subordinated notes.
The revolving credit facility portion of the senior credit agreement
replaces the previous $50.0 million revolving credit facility that would
have expired in late October 2003. The revolving credit facility is
available for working capital requirements, general corporate purposes and
to support letters of credit. Availability under the revolving credit
facility is subject to a borrowing base limitation based on 85 percent of
eligible receivables plus a value for eligible rental tool equipment. As of
September 30, 2003, the borrowing base was $41.1 million, of which none had
been drawn down, and $10.4 million had been reserved for letters of credit,
resulting in available revolving credit of $30.7 million.
In connection with the above refinancing and tender offer, on September 24,
2003, the Company commenced a consent solicitation relating to its 9.75%
senior notes due 2006 and a consent solicitation relating to its 10.125%
senior notes due 2009. Upon completion of the consent solicitation relating
to the 9.75% senior notes, the indenture, dated as of March 11, 1998, among
the Company, the subsidiaries of the Company named therein as guarantors
and JPMorgan Chase Bank, as Trustee, as supplemented and amended, was
amended to (i) eliminate substantially all of the restrictive covenants and
(ii) eliminate the requirements that any subsidiary that provided
guarantees under the senior credit facility become a guarantor under said
Indenture. Holders of more than two-thirds (the requisite consent
threshold) of the outstanding principal amount of the 9.75% senior notes
consented to these amendments. The amendments were effective as of October
10, 2003.
Upon completion of the consent solicitation relating to the 10.125% senior
notes, the indenture, dated as of May 2, 2002, among the Company, the
subsidiaries of the Company named therein as guarantors and JPMorgan Chase
Bank, as Trustee, as supplemented and amended, was amended to change the
price at which the Company is permitted to purchase, redeem or otherwise
acquire or retire up to $75.0 million in aggregate principal amount of the
Company's 5.5% convertible subordinated notes due 2004, prior to their
stated maturity from a price of "less than par" to a price "equal to or
less than 100.786%" of the principal amount of such notes. Holders of more
than a majority (the requisite consent threshold) of the outstanding
principal amount of the 10.125% senior notes consented to this amendment.
The amendment was effective as of October 10, 2003.
Rig Incident - On November 7, 2003, the Company reported that a well
control incident occurred during completion operations on its offshore
barge rig 18B. All crewmembers onboard at the time of the incident were
safely evacuated and there are no reported injuries. The incident resulted
in a fire and substantial damage to the rig which management believes will
be covered by insurance.
11
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
11. Guarantor/Non-Guarantor Consolidating Condensed Financial Statements - Set
forth on the following pages are the consolidating condensed financial
statements of the restricted subsidiaries and the subsidiaries which are
not restricted by the senior notes. All of the Company's senior notes are
guaranteed by substantially all the direct and indirect wholly owned
subsidiaries of Parker Drilling. There are currently no restrictions on the
ability of the subsidiaries to transfer funds to Parker Drilling in the
form of cash dividends, loans or advances. Parker Drilling is a holding
company with no drilling operations. In prior years, the non-guarantors
were inconsequential, individually and in the aggregate, to the
consolidated financial statements and separate financial statements of the
guarantors were not presented because management had determined that they
would not be material to investors.
In August, 2002, Parker Drilling Company International Limited ("PDCIL")
sold two of its rigs in Kazakhstan to AralParker, a Kazakhstan closed joint
stock company, which is owned 50 percent by PDCIL and 50 percent by a
Kazakhstan company, Aralnedra, CJSC. Because PDCIL has significant
influence over the business affairs of AralParker, its financial statements
are consolidated with those of the Company.
AralParker, Casuarina Limited (a wholly owned captive insurance company)
and Parker Drilling Investment Company are all non-guarantor subsidiaries
whose aggregate financial position and results of operations are no longer
deemed to be inconsequential and, accordingly, the Company is providing
consolidating condensed financial information of the parent, (Parker
Drilling), the guarantor subsidiaries, and the non-guarantor subsidiaries
as of September 30, 2003 and December 31, 2002, and for the three and nine
months ended September 30, 2003, and 2002.
12
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, 2003
----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 68,373 $ 8,955 $ 4,081 $ - $ 81,409
Accounts and notes receivable, net 136,052 92,580 19,205 (169,400) 78,437
Rig materials and supplies - 9,172 - - 9,172
Other current assets and short-term investments - 3,102 73 50 3,225
----------- ----------- ----------- ----------- -----------
Total current assets 204,425 113,809 23,359 (169,350) 172,243
----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net 79 384,228 35,935 (13,594) 406,648
Assets held for sale - 148,064 - - 148,064
Goodwill, net - 115,983 - - 115,983
Investment in subsidiaries and intercompany advances 628,803 649,062 21,463 (1,299,328) -
Other noncurrent assets 11,005 10,280 580 (39) 21,826
----------- ----------- ----------- ----------- -----------
Total assets $ 844,312 $ 1,421,426 $ 81,337 $(1,482,311) $ 864,764
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 65,672 $ - $ - $ - $ 65,672
Accounts payable and accrued liabilities 41,342 194,240 13,162 (175,933) 72,811
----------- ----------- ----------- ----------- -----------
Total current liabilities 107,014 194,240 13,162 (175,933) 138,483
----------- ----------- ----------- ----------- -----------
Long-term debt 503,688 - - - 503,688
Deferred income tax (45,300) 45,300 - - -
Discontinued operations - 7,072 - - 7,072
Other long-term liabilities and minority interest (173) 11,194 - - 11,021
Intercompany payables 74,583 543,861 35,340 (653,784) -
Contingencies (Note 7) - - - - -
Stockholders' equity:
Common stock and capital in excess of par value 451,661 1,086,711 5,451 (1,092,162) 451,661
Accumulated other comprehensive income 605 - - - 605
Accumulated deficit (247,766) (466,952) 27,384 439,568 (247,766)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 204,500 619,759 32,835 (652,594) 204,500
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 844,312 $ 1,421,426 $ 81,337 $(1,482,311) $ 864,764
=========== =========== =========== =========== ===========
13
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 31, 2002
-----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 43,254 $ 6,218 $ 2,510 $ - $ 51,982
Accounts and notes receivable, net 81,551 100,400 19,080 (111,668) 89,363
Rig materials and supplies - 17,161 - - 17,161
Other current assets and short-term investments - 8,567 27 37 8,631
----------- ----------- ----------- ----------- -----------
Total current assets 124,805 132,346 21,617 (111,631) 167,137
----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net 151 614,088 40,633 (13,594) 641,278
Assets held for sale - 896 - - 896
Goodwill, net - 115,983 - - 115,983
Investment in subsidiaries and intercompany advances 808,784 531,959 21,521 (1,362,264) -
Other noncurrent assets 12,556 15,440 (103) 138 28,031
----------- ----------- ----------- ----------- -----------
Total assets $ 946,296 $ 1,410,712 $ 83,668 $(1,487,351) $ 953,325
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 5,532 $ 954 $ - $ - $ 6,486
Accounts payable and accrued liabilities 26,175 153,733 7,218 (132,037) 55,089
----------- ----------- ----------- ----------- -----------
Total current liabilities 31,707 154,687 7,218 (132,037) 61,575
----------- ----------- ----------- ----------- -----------
Long-term debt 583,444 - - - 583,444
Deferred income tax (45,473) 45,473 - - -
Other long-term liabilities and minority interest 1,409 6,271 - - 7,680
Intercompany payables 74,583 490,099 44,557 (609,239) -
Contingencies (Note 7) - - -
Stockholders' equity:
Common stock and capital in excess of par value 450,463 1,086,701 5,451 (1,092,152) 450,463
Accumulated other comprehensive income 664 - - - 664
Accumulated deficit (150,501) (372,519) 26,442 346,077 (150,501)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 300,626 714,182 31,893 (746,075) 300,626
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 946,296 $ 1,410,712 $ 83,668 $(1,487,351) $ 953,325
=========== =========== =========== =========== ===========
14
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended September 30, 2003
------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
-------- --------- ------------- ------------ ------------
Drilling and rental revenues:
U.S. drilling $ - $ 13,872 $ - $ - $ 13,872
International drilling - 36,546 13,142 (598) 49,090
Rental tools - 14,054 - - 14,054
-------- -------- -------- -------- --------
Total drilling and rental revenues - 64,472 13,142 (598) 77,016
-------- -------- -------- -------- --------
Drilling and rental operating expenses:
U.S. drilling - 11,964 - - 11,964
International drilling - 22,992 10,838 (598) 33,232
Rental tools - 5,860 - - 5,860
Depreciation and amortization - 15,828 1,565 - 17,393
-------- -------- -------- -------- --------
Total drilling and rental operating income - 56,644 12,403 (598) 68,449
-------- -------- -------- -------- --------
Drilling and rental operating income - 7,828 739 - 8,567
-------- -------- -------- -------- --------
Construction contract revenue - 1,061 - - 1,061
Construction contract expense - 61 - - 61
-------- -------- -------- -------- --------
Construction contract operating income - 1,000 - - 1,000
-------- -------- -------- -------- --------
General and administrative expense (38) (4,041) - - (4,079)
Gain on disposition of assets, net - 426 (21) - 405
-------- -------- -------- -------- --------
Total operating income (38) 5,213 718 - 5,893
-------- -------- -------- -------- --------
Other income and (expense):
Interest expense (14,345) (11,611) (1,015) 13,819 (13,152)
Other income (expense) - net 12,704 1,097 569 (13,819) 551
Equity in net earnings of subsidiaries (4,724) - - 4,724 -
-------- -------- -------- -------- --------
Total other income and (expense) (6,365) (10,514) (446) 4,724 (12,601)
-------- -------- -------- -------- --------
Loss before income taxes (6,403) (5,301) 272 4,724 (6,708)
Income tax expense (benefit):
Current 253 3,652 - - 3,905
Deferred - - - - -
-------- -------- -------- -------- --------
Income tax expense 253 3,652 - - 3,905
-------- -------- -------- -------- --------
Loss from continuing operations (6,656) (8,953) 272 4,724 (10,613)
Discontinued operations, net of taxes - 3,957 - - 3,957
-------- -------- -------- -------- --------
Net income (loss) $ (6,656) $ (4,996) $ 272 $ 4,724 $ (6,656)
======== ======== ======== ======== ========
15
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended September 30, 2002
------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
-------- --------- ------------- ------------ ------------
Drilling and rental revenues:
U.S. drilling $ - $ 21,274 $ - $ 276 $ 21,550
International drilling - 38,545 14,703 597 53,845
Rental tools - 11,852 - - 11,852
-------- -------- -------- -------- --------
Total drilling and rental revenues - 71,671 14,703 873 87,247
-------- -------- -------- -------- --------
Drilling and rental operating expenses:
U.S. drilling - 13,701 - 276 13,977
International drilling - 22,953 10,345 597 33,895
Rental tools - 5,255 - - 5,255
Depreciation and amortization - 15,629 1,530 - 17,159
-------- -------- -------- -------- --------
Total drilling and rental operating income - 57,538 11,875 873 70,286
-------- -------- -------- -------- --------
Drilling and rental operating income - 14,133 2,828 - 16,961
-------- -------- -------- -------- --------
Construction contract revenue - 17,285 - - 17,285
Construction contract expense - 16,515 - - 16,515
-------- -------- -------- -------- --------
Construction contract operating income - 770 - - 770
-------- -------- -------- -------- --------
General and administrative expense (90) (6,032) - 25 (6,097)
Provision for doubtful accounts - (1,140) - - (1,140)
Gain on disposition of assets, net - 6,210 - (4,629) 1,581
-------- -------- -------- -------- --------
Total operating income (90) 13,941 2,828 (4,604) 12,075
-------- -------- -------- -------- --------
Other income and (expense):
Interest expense (14,487) (10,650) (395) 12,220 (13,312)
Other income (expense) - net 5,916 3,095 (1,677) (7,616) (282)
Equity in net earnings of subsidiaries (3,318) - - 3,318 -
-------- -------- -------- -------- --------
Total other income and (expense) (11,889) (7,555) (2,072) 7,922 (13,594)
-------- -------- -------- -------- --------
Loss before income taxes (11,979) 6,386 756 3,318 (1,519)
Income tax expense (benefit):
Current 41 2,616 - - 2,657
Deferred (4,000) - - - (4,000)
-------- -------- -------- -------- --------
Income tax expense (3,959) 2,616 - - (1,343)
-------- -------- -------- -------- --------
Loss from continuing operations (8,020) 3,770 756 3,318 (176)
Discontinued operations, net of taxes - (7,844) - - (7,844)
-------- -------- -------- -------- --------
Net income (loss) $ (8,020) $ (4,074) $ 756 $ 3,318 $ (8,020)
======== ======== ======== ======== ========
16
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30, 2003
-----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
--------- --------- ------------- ------------ ------------
Drilling and rental revenues:
U.S. drilling $ - $ 49,593 $ - $ - $ 49,593
International drilling - 101,536 39,177 (1,820) 138,893
Rental tools - 40,366 - - 40,366
--------- --------- --------- --------- ---------
Total drilling and rental revenues - 191,495 39,177 (1,820) 228,852
--------- --------- --------- --------- ---------
Drilling and rental operating expenses:
U.S. drilling - 37,466 - - 37,466
International drilling - 65,773 32,279 (1,832) 96,220
Rental tools - 16,868 - - 16,868
Depreciation and amortization - 47,090 4,701 - 51,791
--------- --------- --------- --------- ---------
Total drilling and rental operating expenses - 167,197 36,980 (1,832) 202,345
--------- --------- --------- --------- ---------
Drilling and rental operating income - 24,298 2,197 12 26,507
--------- --------- --------- --------- ---------
Construction contract revenue - 7,030 - - 7,030
Construction contract expense - 5,030 - - 5,030
--------- --------- --------- --------- ---------
Construction contract operating income - 2,000 - - 2,000
--------- --------- --------- --------- ---------
General and administrative expense (113) (14,372) - - (14,485)
Gain on disposition of assets, net - 987 (24) - 963
--------- --------- --------- --------- ---------
Total operating income (113) 12,913 2,173 12 14,985
--------- --------- --------- --------- ---------
Other income and (expense):
Interest expense (43,480) (41,018) (3,188) 47,785 (39,901)
Other income (expense ) - net 44,718 2,939 1,782 (47,797) 1,642
Equity in net earnings of subsidiaries (97,006) - - 97,006 -
--------- --------- --------- --------- ---------
Total other income and (expense) (95,768) (38,079) (1,406) 96,994 (38,259)
--------- --------- --------- --------- ---------
Loss before income taxes (95,881) (25,166) 767 97,006 (23,274)
Income tax expense (benefit):
Current 1,384 10,262 - - 11,646
Deferred - - - - -
--------- --------- --------- --------- ---------
Income tax expense 1,384 10,262 - - 11,646
--------- --------- --------- --------- ---------
Loss from continuing operations (97,265) (35,428) 767 97,006 (34,920)
Discontinued operations, net of taxes - (62,345) - - (62,345)
--------- --------- --------- --------- ---------
Net income (loss) $ (97,265) $ (97,773) $ 767 $ 97,006 $ (97,265)
========= ========= ========= ========= =========
17
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30, 2002
-----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
--------- --------- ------------- ------------ ------------
Drilling and rental revenues:
U.S. drilling $ - $ 56,419 $ - $ 276 56,695
International drilling - 144,005 17,885 1,318 163,208
Rental tools - 37,206 - - 37,206
--------- --------- --------- --------- ---------
Total drilling and rental revenues - 237,630 17,885 1,594 257,109
--------- --------- --------- --------- ---------
Drilling and rental operating expenses:
U.S. drilling - 39,232 - 276 39,508
International drilling - 94,215 13,527 1,318 109,060
Rental tools - 16,650 - - 16,650
Depreciation and amortization - 48,710 1,530 - 50,240
--------- --------- --------- --------- ---------
Total drilling and rental operating expenses - 198,807 15,057 1,594 215,458
--------- --------- --------- --------- ---------
Drilling and rental operating income - 38,823 2,828 - 41,651
--------- --------- --------- --------- ---------
Construction contract revenue - 81,948 - - 81,948
Construction contract expense - 79,924 - - 79,924
--------- --------- --------- --------- ---------
Construction contract operating income - 2,024 - - 2,024
--------- --------- --------- --------- ---------
General and administrative expense (292) (18,379) - 88 (18,583)
Provision for doubtful accounts - (1,140) - - (1,140)
Gain on disposition of assets, net - 7,410 - (4,629) 2,781
--------- --------- --------- --------- ---------
Total operating income (292) 28,738 2,828 (4,541) 26,733
--------- --------- --------- --------- ---------
Other income and (expense):
Interest expense (41,948) (31,935) (395) 35,869 (38,409)
Other income (expense ) - net 22,814 5,205 (754) (31,328) (4,063)
Equity in net earnings of subsidiaries (97,955) - - 97,955 -
--------- --------- --------- --------- ---------
Total other income and (expense) (117,089) (26,730) (1,149) 102,496 (42,472)
--------- --------- --------- --------- ---------
Loss before income taxes (117,381) 2,008 1,679 97,955 (15,739)
Income tax expense (benefit):
Current 41 7,561 - - 7,602
Deferred (13,700) - - - (13,700)
--------- --------- --------- --------- ---------
Income tax expense (13,659) 7,561 - - (6,098)
--------- --------- --------- --------- ---------
Loss from continuing operations (103,722) (5,553) 1,679 97,955 (9,641)
Discontinued operations, net of taxes - (20,937) - - (20,937)
Cumulative effect of change in accounting principle - (73,144) - - (73,144)
--------- --------- --------- --------- ---------
Net income (loss) $(103,722) $ (99,634) $ 1,679 $ 97,955 $(103,722)
========= ========= ========= ========= =========
18
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30, 2003
--------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
-------- --------- ------------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $(97,265) $(97,773) $ 767 $ 97,006 $(97,265)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization - 47,090 4,701 - 51,791
Gain on disposition of assets - (987) 24 - (963)
Expenses not requiring cash 1,776 2,125 - (94) 3,807
Equity in net earnings of subsidiaries 97,006 - - (97,006) -
Discontinued operations - 68,574 - - 68,574
Change in operating assets and liabilities (40,229) 63,247 5,213 14,066 42,297
-------- -------- -------- -------- --------
Net cash (used in) provided by operating activities (38,712) 82,276 10,705 13,972 68,241
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures - (23,868) 25 - (23,843)
Proceeds from the sale of equipment - 5,092 - - 5,092
-------- -------- -------- -------- --------
Net cash (used in) provided by investing activities - (18,776) 25 - (18,751)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Principal payments under debt obligations (19,145) (918) - - (20,063)
Intercompany advances, net 82,976 (59,845) (9,159) (13,972) -
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities 63,831 (60,763) (9,159) (13,972) (20,063)
-------- -------- -------- -------- --------
Net change in cash and cash equivalents 25,119 2,737 1,571 - 29,427
Cash and cash equivalents at beginning of period 43,254 6,218 2,510 - 51,982
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 68,373 $ 8,955 $ 4,081 $ - $ 81,409
======== ======== ======== ======== ========
19
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30, 2002
------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
--------- --------- ------------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $(103,722) $ (99,634) $ 1,679 $ 97,955 $(103,722)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization - 48,710 1,530 - 50,240
Gain on disposition of assets - (7,410) - 4,629 (2,781)
Cumulative effect of change in accounting principle - 73,144 - - 73,144
Expenses not requiring cash 2,759 3,439 - (68) 6,130
Deferred income taxes (13,700) - - - (13,700)
Equity in net earnings of subsidiaries 97,955 - - (97,955) -
Discontinued operations - 22,387 - - 22,387
Change in operating assets and liabilities (7,623) 2,083 (12,307) (6,835) (24,682)
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating activities (24,331) 42,719 (9,098) (2,274) 7,016
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (81) 4,173 (37,530) (5,800) (39,238)
Proceeds from the sale of equipment 8 5,459 - (8) 5,459
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing activities (73) 9,632 (37,530) (5,808) (33,779)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Principal payments under debt obligations (3,887) - - - (3,887)
Proceeds from interest rate swap settlement 2,620 - - - 2,620
Intercompany advances, net (4,103) (53,470) 49,491 8,082 -
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing activities (5,370) (53,470) 49,491 8,082 (1,267)
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents (29,774) (1,119) 2,863 - (28,030)
Cash and cash equivalents at beginning of period 50,937 8,072 1,391 - 60,400
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 21,163 $ 6,953 $ 4,254 $ - $ 32,370
========= ========= ========= ========= =========
20
Report of Independent Accountants
To the Board of Directors and Shareholders
Parker Drilling Company
We have reviewed the consolidated condensed balance sheet of Parker
Drilling Company and subsidiaries as of September 30, 2003 and the related
consolidated condensed statements of operations for the three and nine month
periods ended September 30, 2003 and 2002 and the consolidated condensed
statements of cash flows for the nine month periods ended September 30, 2003 and
2002. These interim financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. 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
auditing standards generally accepted in the United States of America, 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 consolidated condensed financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report, dated January 29, 2003, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 2002, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
October 31, 2003
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this Quarterly Report on Form 10-Q, the terms "Parker Drilling,"
"we," "us" and "our" refer to Parker Drilling Company, its subsidiaries and the
consolidated joint venture, unless the context requires otherwise.
This Form 10-Q contains statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements contained in this Form 10-Q, other than statements of historical
facts, are "forward-looking statements" for purposes of these provisions,
including any statements regarding:
*prices and demand for oil and natural gas,
*levels of oil and natural gas exploration and production activities,
*demand for contract drilling and drilling related services and demand
for rental tools,
*operating results, including our efforts to reduce costs and our
projected net loss from continuing operations,
*rig utilization, dayrates and rental tool activity,
*capital expenditures and investments in the acquisition and
refurbishment of rigs and equipment,
*reducing our debt, including our liquidity and the sources and
availability of funds to reduce our debt,
*sales of assets,
*formation of alliances with operators,
*the outcome of pending and future legal proceedings, including the
outcome of our dispute with the Ministry of State Revenues of the
Republic of Kazakhstan,
*our recovery of insurance proceeds in respect of our damaged rigs in
Nigeria and the Gulf of Mexico,
*maintenance of the borrowing base under our revolving credit facility,
and
*expansion and growth of our operations.
In some cases, you can identify these statements by words that indicate
future events such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "outlook," "may," "should," "will" and "would" or similar words.
Forward-looking statements are based on certain assumptions and analyses made by
our management in light of their experience and perception of historical trends,
current conditions, expected future developments and other factors they believe
are relevant. Although our management believes that their assumptions are
reasonable based on information currently available, those assumptions are
subject to significant risks and uncertainties, many of which are outside of our
control. The following factors, as well as any other cautionary language in this
Form 10-Q, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements:
*worldwide economic and business conditions that adversely affect
market conditions and/or the cost of doing business,
*the pace of recovery in the U.S. economy and the demand for natural
gas,
*fluctuations in the market prices of oil and gas,
*imposition of unanticipated trade restrictions and political
instability,
*operating hazards and uninsured risks,
*political instability, terrorism or war,
*governmental regulations, including changes in tax laws or ability to
remit funds to the U.S., that adversely affect the cost of doing
business,
*adverse environmental events,
*adverse weather conditions,
*changes in concentration of customer and supplier relationships,
*unexpected cost increases for upgrade and refurbishment projects,
*unanticipated cancellation of contracts by operators without cause,
*breakdown of equipment and other operational problems,
*changes in competition, and
*other similar factors (some of which are discussed in documents
referred to in this Form 10-Q).
Each forward-looking statement speaks only as of the date of this Form
10-Q, and we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. You should be aware that the occurrence of the events
described above and elsewhere in this Form 10-Q could have a material adverse
effect on our business, results of operations and financial condition.
22
OUTLOOK AND OVERVIEW
The financial results for the first nine months of 2003 continued to
reflect the current depressed conditions in most drilling markets. Despite high
utilization for jackup rigs in the Gulf of Mexico, the dayrates for jackups and
barges in this market continue to remain at depressed levels. Utilization for
international land drilling operations, while ending its downward trend that
began during the second quarter of 2002, remains at depressed levels. Our rental
tool business continued to out perform 2002, primarily due to activity in the
Gulf of Mexico.
Dayrates in the Gulf of Mexico drilling market were depressed during
the first nine months of 2003 despite natural gas prices remaining at
historically high levels during the period. We believe this can be attributed to
several factors, including: operators addressing debt reduction issues, a lack
of acceptable well prospects for major oil companies and funding issues for
independent operators. Although our jackup utilization increased from 75 percent
in the first quarter of 2003 to 86 percent in the third quarter of 2003, our
jackup dayrates increased only slightly during the same period. Barge drilling
activity results were more predictable for the current operating environment
with barge utilization and dayrates declining during the third quarter of 2003
when compared with the first quarter of 2003, despite a brief increase in
activity during June 2003. We anticipate that the Gulf of Mexico barge drilling
market will improve throughout the remainder of 2003 but we anticipate
utilization and dayrates should begin to increase during the first quarter of
2004 if natural gas prices remain at current levels.
Our rental tool business in the Gulf of Mexico experienced increased
activity during the first nine months of 2003 when compared to the first nine
months of 2002. Contributing to the increase in gross margin of $1.0 million
during this period has been the opening of Quail Tools' new Evanston, Wyoming
operation that continues to establish a solid customer base. Our outlook for the
rental tools business for the remainder of 2003 is positive, and we anticipate
that the year over year growth for the remainder of 2003 will equal or exceed
that of the first three quarters of 2003.
The Commonwealth of Independent States (former Soviet Union, referred
to herein as "CIS") is our leading market of international land operations. In
addition to our established operations in Kazakhstan and Russia, one of our
subsidiaries, in cooperation with Calik Enerji, A.S., has recently signed a
three-year, two rig contract to provide drilling services to Turkmenneft State
Concern in Turkmenistan. Our remaining international land operations showed
little signs of improvement during the third quarter of 2003 due primarily to
our Asia Pacific operation. However, we expect this area to improve during the
fourth quarter of 2003 as a result of two new contracts in New Zealand and a new
contract in Bangladesh. The new contracts in New Zealand and Bangladesh are
anticipated to last from nine to twelve months. As bidding activity increases in
the Asia Pacific market, we are hopeful that this market will continue to grow.
We are also continuing our pursuit of opportunities to increase our presence in
Russia through, among other means, alliances with operators who are making
long-term investments.
International barge drilling was negatively impacted during the first
nine months of 2003 by continued community unrest in Nigeria that has resulted
in the shutdown of one barge rig since March 2003. We negotiated an amendment to
our contract with the operator of this project to activate one of our other
barge rigs that was previously idle until such time as we are able to access,
evaluate and repair the damage to the rig due to the community unrest. The term
of the contract for our barge rig operation in the Caspian Sea expired in
October 2003, however, the contract will remain in effect until operations are
completed on the current well being drilled which should result in continued
revenue for this operation through November 2003. Although we anticipate that
this rig will resume operating in the future, we do not expect any increase in
our international barge drilling operations in the near term.
23
OUTLOOK AND OVERVIEW (continued)
In June 2003, our board of directors approved a plan to sell our
non-core assets to generate funds to enable us to reduce our debt. As of June
30, 2003, our fleet of rigs held for sale consisted of seven shallow water
jackup rigs and four offshore platform rigs located in the Gulf of Mexico and 17
land rigs located in Latin America. We identified these assets for sale based on
the relatively low utilization rates of the land rigs and platform rigs and the
wide fluctuations in the dayrates for the jackup rigs. The operations that
constitute this plan of disposition meet the requirements of discontinued
operations under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Accordingly, our consolidated financial statements for the nine months
ended September 30, 2002 and the year ended December 31, 2002 have been
reclassified to present our Latin America operations and our U.S. jackup and
platform drilling operations as discontinued operations. The assets held for
sale have been written down to their estimated fair value, resulting in a
non-cash impairment charge of $54.0 million recognized in the second quarter of
2003. Included in the discontinued operations line on the statement of
operations for the nine months ended September 30, 2003 is the non-cash
impairment charge anticipated on the eventual sale of the assets, the results of
operations of the discontinued operations and any applicable taxes relating to
the results of operations. We will continue to report separately the results of
operations of these discontinued operations until the closing of the actual
sales.
Our goal is to reduce our debt by approximately $200 million. We intend
to accomplish this goal from cash currently on hand, cash generated from
operations and cash generated by asset sales. An initial step in our debt
reduction plan was accomplished by the purchase of approximately $14.8 million
of our 5.5% convertible subordinated notes due 2004 on the open market in May
2003, which reduced the outstanding aggregate principal amount to approximately
$109.7 million as of June 30, 2003. The 5.5% convertible subordinated notes
mature on August 1, 2004.
During October, 2003, we completed a refinancing of a portion of our
debt. The total refinancing package was for $325.0 million comprised of $175.0
million of 9.625% senior notes due 2013 and the replacement of our senior credit
agreement with a $100.0 million delayed draw term loan facility and a $50.0
million revolving credit facility. Immediately prior to the financing we
tendered for the 9.75% senior notes due 2006 and obtained the consent from the
holders of the 9.75% senior notes to eliminate substantially all of the
restrictive covenants contained in the indenture governing these senior notes
and obtained a consent from the holders of our 10.125% senior notes due 2009 to
acquire up to $75.0 million of the 5.5% convertible subordinated notes due 2004
at a price equal to or less than 100.786% of the principal amount of such notes.
Utilizing the proceeds from the new 9.625% senior notes and $50.0 million of the
new delayed draw term loan we purchased $184.3 million of the 9.75% senior notes
that were tendered pursuant to the tender offer and called the remaining
outstanding portion for redemption effective November 15, 2003. The remaining
$50.0 million of delayed draw term loan facility may only be utilized to repay
the 5.5% convertible subordinated notes. We believe these transactions have
provided adequate financial flexibility to pursue asset sales in a very
determined, but conservative fashion. The transactions have neither reduced our
resolve to successfully complete asset sales, nor modified our goal to reduce
debt by $200 million.
We continue to be vigilant in our efforts to conserve cash by reducing
our general and administrative expenses and limiting our capital expenditures.
We anticipate that general and administrative expenses will be reduced from
$24.7 million in 2002 to less than $20.0 million in 2003 and our capital
expenditures will not exceed $50.0 million in 2003. We reduced our general and
administrative expenses in the first nine months of 2003 by reducing our
corporate workforce in 2002 and by limiting administrative costs. We will
continue to monitor expenses and make reductions as appropriate for the level of
our operations. Our capital expenditure program calls for limiting expenditures
to scheduled ongoing maintenance projects, our preventive maintenance program
and capital projects that we believe have the potential to yield an attractive
rate of return.
24
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 Compared with Three Months Ended September
30, 2002
We have recorded a net loss of $6.7 million for the three months ended
September 30, 2003 including net income of $3.9 million attributed to
discontinued operations as compared to a net loss of $8.0 million for the three
months ended September 30, 2002 which includes a loss of $7.8 million attributed
to discontinued operations. The net loss from continuing operations for the
current quarter was $10.6 million compared to a net loss of $0.2 million for the
three months ended September 30, 2002.
In June 2003, the board of directors approved a plan to sell the U.S.
jackup and platform drilling operations and the Latin America operations. In
compliance with Generally Accepted Accounting Principles ("GAAP") we have
recognized the U.S. jackup and platform drilling and the Latin America
operations as discontinued operations. Reclassifications have been made to
reflect operations from continuing operations and discontinued operations for
2003 and 2002. The analysis below reflects these reclassifications, beginning
with an analysis of the continuing operations followed by a discussion of
discontinued operations.
Analysis of Continuing Operations
Three Months Ended September 30,
-------------------------------------
2003 2002
---------------- -----------------
(Dollars in Thousands)
Drilling and rental revenues:
U.S. drilling $13,872 18% $21,550 25%
International drilling 49,090 64% 53,845 61%
Rental tools 14,054 18% 11,852 14%
------- --- ------- ---
Total drilling and rental revenues $77,016 100% $87,247 100%
======= === ======= ===
Our drilling and rental revenues decreased $10.2 million to $77.0
million in the current quarter as compared to the third quarter of 2002. U.S.
drilling revenues consisting of 22 barge rigs decreased $7.7 million in the
current quarter as compared to the third quarter of 2002 due to an eight percent
decline in dayrates and a 13 percent decline in utilization. After experiencing
improved utilization during the first and second quarters of 2003 the third
quarter marked a sharp decline in activity. On average during the quarter we
operated five of nine deep drilling barges, approximately 56 percent
utilization, a sharp contrast to approximately 85 percent utilization during the
first two quarters of 2003. Drilling activity for the deep barge rigs has
increased in October and we are currently working eight of nine deep barge rigs,
89 percent utilization. Utilization for the workover and intermediate barge rigs
remained comparable quarter to quarter with slight decrease in the dayrates.
International drilling revenues decreased $4.7 million to $49.1 million
in the current quarter as compared to the third quarter of 2002. International
land drilling revenues increased $0.1 million while international offshore
drilling revenues decreased $4.8 million. Land drilling revenues in the CIS
region increased $3.2 million primarily attributed to commencement of drilling
operations on Sakhalin Island. Drilling activity began in June 2003 contributing
approximately $6.0 million of revenue. This increase was partially offset by
decreased revenues in Kazakhstan. During the third quarter 2002 we had two rigs
operating in the Karachaganak field in Kazakhstan. One of these rigs was
released during the latter half of 2002 resulting in decreased revenues of $1.2
million. In addition, our operations in Tengiz with Tengizchevroil ("TCO")
accounted for $2.0 million reduction in revenues due to TCO's release of one
rig, owned by TCO, on which we had previously provided labor services. Revenues
in our Asia Pacific region decreased by $3.3 million due primarily to reduced
utilization in Indonesia and Papua New Guinea. During the third quarter of 2003
there were approximately three fewer rigs operating, as compared to the third
quarter of 2002. Currently, there is one rig operating in Indonesia and one rig
operating in Papua New Guinea. Utilization in New Zealand increased slightly
resulting in a $0.2 million increase in revenues during the current quarter. In
Indonesia, revenues decreased $0.8 million as we had operated three rigs in 2002
compared to one rig during the third quarter of 2003. In Papua New Guinea,
revenues decreased $2.7 million due to a one rig decrease in utilization and
reduced labor contract days.
25
RESULTS OF OPERATIONS (continued)
The decrease of $4.8 million in international offshore drilling
revenues was due primarily to reduced dayrates in Nigeria, even though three of
the four Nigerian barge rigs were under contract during all of the third quarter
of 2002 and most of the third quarter of 2003. In March of 2003, two of the
three barge rigs suspended drilling and were evacuated due to civil unrest.
During the suspension, the contracts provide for the application of a force
majeure rate which is approximately 90 percent of the full operating dayrate.
One of the barge rigs returned to full operations at the end of April 2003. The
second barge rig remains evacuated and we have been unable to access or retrieve
the rig due to continued unrest in the area. In April, barge rig 74 was placed
on a standby rate approximating 45 percent of the full dayrate. As of the end of
October 2003, barge rigs 75 and 73 are operating on full dayrates and barge rig
74 remains on standby rate. Barge rig 72 has been stacked since the completion
of its contract during the third quarter of 2002.
Rental tool revenues increased $2.2 million as Quail Tools reported
revenues in the current quarter of $14.1 million. Revenues increased $0.3
million and $0.8 million from the Victoria, Texas and Evanston, Wyoming
operations, respectively. The Odessa, Texas operations revenues increased $0.2
million and revenues from the New Iberia, Louisiana operations increased $0.9
million in the current period as compared to the third quarter 2002. The
increased revenues were driven by higher rental tool utilization which averaged
31 percent during the current quarter as compared to 23 percent experienced
during the third quarter of 2002. Operations in the Evanston, Wyoming region
commenced the second quarter of 2002; thus, its increased revenues are the
result of continued marketing efforts that have expanded our customer base in
the region.
Three Months Ended September 30,
--------------------------------------
2003 2002
----------------- -----------------
(Dollars in Thousands)
Drilling and rental operating income:
U.S. drilling (1) $ 1,908 14% $ 7,573 35%
International drilling (1) 15,858 32% 19,950 37%
Rental tools (1) 8,194 58% 6,597 56%
Depreciation and amortization (17,393) (17,159)
-------- --------
Total drilling and rental operating income (2) 8,567 16,961
Construction contract operating income 1,000 770
General and administrative expense (4,079) (6,097)
Provision for doubtful accounts - (1,140)
Gain on disposition of assets, net 405 1,581
-------- --------
Total operating income $ 5,893 $ 12,075
======== ========
(1) Drilling and rental gross margin - drilling and rental revenues less direct
drilling and rental operating expenses, excluding depreciation and
amortization expense; drilling and rental gross margin percentages -
drilling and rental gross margin as a percent of drilling and rental
revenues.
(2) Drilling and rental operating income - drilling and rental revenues less
direct drilling and rental operating expenses, including depreciation and
amortization expense.
Drilling and rental operating income decreased $8.4 million in the
current quarter to $8.6 million from $17.0 million in the third quarter of 2002.
In the U.S. drilling market, gross margin for the barge rigs decreased $5.7
million. Utilization for the barge rigs in the third quarter of 2003 was 40
percent, a 13 percent drop from the third quarter of 2002. In addition, the
average dayrate for all barge rigs decreased approximately eight percent.
26
RESULTS OF OPERATIONS (continued)
International drilling gross margin decreased $4.1 million to $15.9
million in the current quarter as compared to $20.0 million in the third quarter
of 2002. International land drilling gross margin decreased $2.7 million to
$10.3 million during the current quarter due primarily to declining utilization
in Asia Pacific. The Asia Pacific region gross margin decreased $2.7 million in
the third quarter of 2003. Indonesia had three rigs operating in 2002 compared
to one in 2003. Utilization in Papua New Guinea declined from 67 percent in
2002, to 33 percent in 2003. The CIS region gross margin for land operations of
$8.1 million in the third quarter 2003 did not change from 2002. The gross
margin generated from the new Sakhalin Island operations were offset by reduced
rig count in the Karachaganak field and reduced activity with TCO.
The international offshore gross margin was $5.5 million in the current
quarter reflecting only a $1.4 million decrease from the third quarter of 2002.
Gross margin related to the four Nigerian barge rigs decreased $2.3 million
which was offset by a $0.9 million increase in gross margin for barge rig 257 in
the Caspian Sea. Gross margins in Nigeria decreased primarily due to the
community unrest in Nigeria which has resulted in significant damage to barge
rig 74. The increase in gross margin for barge rig 257 in the Caspian Sea is the
result of a one-time assessment during 2002 for property taxes that were related
to previous years.
Rental tool gross margin increased $1.6 million to $8.2 million during
the current quarter as compared to the third quarter of 2002. Gross margin
percentage increased to 58 percent during the current quarter as compared to 56
percent for the third quarter of 2002, due to a slight increase in revenues and
a three percent decrease in operating expenses. More specifically, salaries and
benefits have experienced a six percent decline during the current quarter, as
compared to the third quarter of 2002.
During the first quarter of 2002, we announced a new contract to
design, construct, mobilize and sell a rig to drill extended reach wells to
offshore targets from a land-based location on Sakhalin Island, Russia for an
international consortium. We also entered into a contract to subsequently
operate the rig on behalf of the international consortium. The revenue and
expense for the project are recognized as construction contract revenue and
expense. The profit from the design, construction, mobilization and rig-up fees
is calculated on a percentage of completion basis. During the third quarter
ended September 30, 2003 the design, construction, mobilization and rig-up was
completed and we recognized $1.0 million in profit. The total profit recognized
to date from the design, construction, mobilization and rig-up contract is $4.5
million, $2.0 million of which was recognized in 2003 and $2.5 million was
recognized during 2002.
General and Administrative expense decreased $2.0 million to $4.1
million in the current quarter as compared to the third quarter of 2002. The
decrease is attributed to the following: salaries and wages decreased $1.0
million as a result of the reduction in force in June 2002, $0.3 million
reduction in property and franchise taxes, $0.3 million reduction in legal and
professional fees and the remaining decrease is a result of the ongoing cost
reduction program implemented in 2002.
Interest expense decreased $0.2 million in the third quarter of 2003 as
compared to the third quarter of 2002. This decrease was the result of the
purchase of $14.8 million of our convertible subordinated notes on the open
market in May 2003, reduced interest amortization of the Boeing note and the
amortization of the swap gain recognized upon liquidation of the swap
agreements.
Income tax expense consists of foreign tax expense of $3.9 million for
the third quarter of 2003. For the third quarter of 2002, income tax expense
consisted of foreign tax expense of $2.7 million and a deferred tax benefit of
$4.0 million. Foreign taxes increased $1.2 million due primarily to a tax
benefit realized in 2002 from a Kazakhstan tax ruling related to prior years.
For the third quarter of 2003 we incurred a net loss, however, no additional
deferred tax benefit was recognized since the sum of our deferred tax assets,
principally the net operating loss carryforwards, exceeds the deferred tax
liabilities, principally the excess of tax depreciation over book depreciation.
This additional deferred tax asset was fully reserved through a valuation
allowance in the current quarter.
27
RESULTS OF OPERATIONS (continued)
Analysis of Discontinued Operations
Three Months Ended September 30,
--------------------------------
2003 2002
------------- -------------
(Dollars in Thousands)
Discontinued operations drilling revenues:
U.S. jackup and platform drilling $ 13,108 $ 12,621
Latin America drilling 5,860 8,976
---------- ----------
Total discontinued operations drilling revenues 18,968 21,597
---------- ----------
Discontinued operations operating income (loss)
U.S. jackup and platform drilling (1) 2,127 1,434
Latin America drilling (1) 1,692 2,086
Depreciation and amortization - (7,894)
---------- ----------
Total discontinued operations operating income (loss) (2) 3,819 (4,374)
Other income (expense) - net (853) 134
Provision for impairment of assets - (360)
Tax benefit (expense) 991 (3,244)
---------- ----------
Loss from discontinued operations $ 3,957 $ (7,844)
========== ==========
(1) Drilling gross margin - drilling revenues less direct drilling operating
expenses, excluding depreciation and amortization expense.
(2) Drilling operating income (loss) - drilling revenues less direct drilling
operating expenses, including depreciation and amortization expense.
Revenues in Latin America decreased $3.1 million primarily due to
declining utilization in Colombia and Ecuador. During the third quarter of 2002
the Latin America region averaged 4 rigs operating as compared to an average of
2.5 rigs working during the third quarter of 2003. The decrease in revenues is
primarily attributed to Ecuador which had generated $2.5 million revenues during
the third quarter of 2002. During the third quarter of 2002, Ecuador had one rig
operating, the contract was completed in late 2002 and the rig has been moved to
Bangladesh. In Colombia we operated an average of 1.5 rigs during the current
quarter as compared to two rigs working during the third quarter of 2002. One
rig continued to work in Peru on a contract expected to continue into 2006.
In Latin America gross margin declined $0.4 million primarily
attributable to the completion of the contract in Ecuador late in 2002.
U. S. jackup and platform drilling revenues increased $0.5 million in
the current quarter as compared to the third quarter 2002. Jackup rig revenues
decreased $0.6 million as a result of decreased utilization during the current
quarter as compared to the third quarter of 2002. Jackup rig utilization was
down from 97 percent during the third quarter of 2002 to 86 percent during the
current quarter. A malfunction caused one side of the rig to become partially
submerged in the water, resulting in the loss of certain drilling equipment
overboard and damage to certain portions of the rig. We believe that
substantially all of the loss of will be covered by insurance. Platform rig
revenues increased $1.1 million as one platform rig operated during the third
quarter of 2003.
U.S. jackup and platform drilling gross margin increased $0.7 million
in the current quarter as compared to the third quarter 2002. The gross margin
was positively impacted during the current quarter by the platform rig that
worked during the third quarter of 2003.
28
RESULTS OF OPERATIONS (continued)
Nine Months Ended September 30, 2003 Compared with Nine Months Ended September
30, 2002
We recorded a net loss from continuing operations of $34.9 million for
the nine months ended September 30, 2003 compared to a net loss from continuing
operations of $9.6 million before the cumulative effect of a change in
accounting principle for the nine months ended September 30, 2002. Losses from
discontinued operations were $62.3 million and $20.9 million for the nine months
ended September 30, 2003 and 2002, respectively. During the nine months ended
September 30, 2002 we adopted SFAS No. 142 which resulted in a $73.1 million
impairment of goodwill which was recognized as a change in accounting principle.
Analysis of Continuing Operations
Nine Months Ended September 30,
---------------------------------------
2003 2002
---------------- ----------------
(Dollars in Thousands)
Drilling and rental revenues:
U.S. drilling $ 49,593 22% $ 56,695 22%
International drilling 138,893 61% 163,208 63%
Rental tools 40,366 17% 37,206 15%
-------- --- -------- ---
Total drilling and rental revenues $228,852 100% $257,109 100%
======== === ======== ===
Our drilling and rental revenues decreased $28.3 million to $228.9
million in the current nine-month period as compared to the nine months ended
September 30, 2002. U.S. drilling revenues decreased $7.1 million due to an 11
percent decline in average dayrates for the 22 barge rigs during the current
nine month period as compared to the nine months ended September 30, 2002.
Utilization between the two periods remained constant at a rate of approximately
50 percent.
International drilling revenues decreased $24.3 million to $138.9
million in the current nine-month period as compared to the nine months ended
September 30, 2002. International land drilling revenues decreased $12.3 million
while international offshore drilling revenues decreased $12.0 million. Land
drilling revenues in the CIS operations decreased $1.6 million due to reduced
utilization in Kazakhstan. In the Karachaganak field we worked three rigs during
2002 while only one worked during the nine months ended September 30, 2003. In
addition, during December of 2002, TCO's release of one rig, owned by TCO, for
which we provided labor services, resulted in reduced revenues. Decreased
revenues in Kazakhstan were partially offset by increased revenues in Russia.
During the second quarter of 2003 rig 262 began drilling operations on the
Sakhalin Island resulting in increased revenues. Revenues in our Asia Pacific
region decreased $11.6 million in 2003 as compared to 2002. Reduced utilization
was the primary factor in all three countries in which we operate. Indonesia
worked on average three rigs in 2002 and one rig during 2003. Both New Zealand
and Papua New Guinea had one less rig working in 2003 as compared to 2002. Labor
contracts in Kuwait increased in 2003 resulting in additional revenues of $0.9
million in 2003 as compared to the nine months ended September 30, 3002.
The decrease of $12.0 million in international offshore drilling
revenues was due primarily to reduced dayrates in Nigeria. As noted earlier,
significant civil unrest resulted in the suspension of drilling operations on
two of the three rigs working during 2003. Both of the barge rigs were evacuated
and were placed on force majeure rates at approximately 90 percent of the full
dayrate. One of the barge rigs returned to full operations while the second
barge rig remains evacuated. In April 2003, barge rig 74 was placed on a standby
rate approximating 45 percent of the full dayrate. As of the end of October
2003, barge rigs 75 and 73 are operating on full dayrates and barge rig 74
remains on a standby rate. Barge rig 72 has been stacked since the completion of
its contract during the third quarter of 2002.
Rental tool revenues increased $3.1 million as Quail Tools reported
revenues in the current year of $40.4 million. Revenues increased $1.2 million
from the New Iberia, Louisiana operations, increased $0.9 million from the
Victoria, Texas operations, decreased $0.5 million from the Odessa, Texas
operations and generated $1.5 million from its new operations in Evanston,
Wyoming. Both, New Iberia, Louisiana and the Victoria, Texas operations
experienced an increase in customer demand in the respective regions due to
increased Gulf of Mexico drilling activity. The Odessa, Texas operation was down
11 percent in 2003 as compared to 2002 due to a decrease in customer activity in
the region and a highly competitive pricing environment.
29
RESULTS OF OPERATIONS (continued)
Nine Months Ended September 30,
-------------------------------
2003 2002
-------------- --------------
(Dollars in Thousands)
Drilling and rental operating income:
U.S. drilling (1) $ 12,127 24% $ 17,187 30%
International drilling (1) 42,673 31% 54,148 33%
Rental tools (1) 23,498 58% 20,556 55%
Depreciation and amortization (51,791) (50,240)
-------- --------
Total drilling and rental operating income (2) 26,507 41,651
Construction contract operating income 2,000 2,024
General and administrative expense (14,485) (18,583)
Provision for doubtful accounts - (1,140)
Gain on disposition of assets, net 963 2,781
-------- --------
Total operating income $ 14,985 $ 26,733
======== ========
(1) Drilling and rental gross margin - drilling and rental revenues less direct
drilling and rental operating expenses, excluding depreciation and
amortization expense; drilling and rental gross margin percentages -
drilling and rental gross margin as a percent of drilling and rental
revenues.
(2) Drilling and rental operating income - drilling and rental revenues less
direct drilling and rental operating expenses, including depreciation and
amortization expense.
Drilling and rental operating income of $26.5 million in the current
nine-month period reflected a decrease of $15.1 million from the nine months
ended September 30, 2002. Decreased gross margin in the U.S. drilling operations
and international operations were partially offset by increased gross margin in
the rental tools operations. The U.S. drilling operation gross margin decreased
$5.1 million during the current period. The gross margin percentage decreased
from 30 percent to 24 percent primarily attributed to the decrease in barge rig
revenues in the current period.
International drilling gross margin decreased $11.4 million in the
current nine-month period as compared to the nine months ended September 30,
2002. International land drilling gross margin decreased $9.7 million to $26.0
million during the current nine-month period due primarily to the reduced
revenues in our land drilling operations in Kazakhstan, Papua New Guinea and New
Zealand, as previously discussed. The gross margin percentage for the
international land drilling decreased from 39 percent to 33 percent in the
current nine-month period. The international offshore drilling gross margin
decreased $1.7 million to $16.7 million in the current nine-month period. The
decrease is primarily attributed to reduced revenues resulting from the
community unrest issues in Nigeria as discussed. Gross margins in Nigeria
decreased approximately $3.5 million during the current nine-month period. This
decrease was partially offset by an increase in gross margin related to barge
rig 257 in the Caspian Sea. The increased gross margin was directly related to a
one-time payment in 2002 for property taxes, as previously mentioned.
Rental tool gross margin increased $2.9 million to $23.5 million during
the current nine-month period as compared to 2002. Gross margin percentage
increased to 58 percent during the current period as compared to 55 percent for
the nine months ended September 30, 2002, due to an eight percent increase in
revenues and only a one percent increase in operating expenses during the
period. The slight increase in operating expenses was driven primarily by
increased health care costs.
Depreciation and amortization expense increased $1.6 million to $51.8
million during the current period. Depreciation expense increased due to capital
additions during 2002.
30
RESULTS OF OPERATIONS (continued)
Interest expense increased $1.5 million for the nine months ended
September 30, 2003 as compared to 2002. During the first quarter of 2002, we
entered into three $50.0 million swap agreements that resulted in $2.6 million
in interest savings during the nine months ended September 30, 2002. The swap
agreements were terminated during the third quarter of 2002. Effective July 1,
2002 interest expense increased due to the exchange of $235.6 million in
principal amount of new 10.125% senior notes due 2009 for a like amount of its
9.75% senior notes due 2006. Partially offsetting this increase was a reduction
in interest from the purchase of $14.8 million of convertible subordinated notes
on the open market in May 2003, reduced interest amortization of the Boeing note
and the amortization of the swap gain recognized upon liquidation of the swap
agreements.
During the first quarter of 2002, we announced a new contract to build
and operate a rig to drill extended reach wells to offshore targets from a
land-based location on Sakhalin Island, Russia for an international consortium.
The revenue and expense for the project are recognized as construction contract
revenue and expense, with the profit calculated on a percentage of completion
basis, $2.0 million was recognized during both the nine months ended September
30, 2003 and 2002, respectively.
General and Administrative expense decreased $4.1 million to $14.5
million in the current nine-month period as compared to the nine months ended
September 30, 2002. This decrease is primarily attributed to the following:
salaries and wages decreased $1.4 million as a result of the reduction in force
in June 2002; professional and legal fees decreased $0.9 million; $0.7 million
decrease in property and franchise tax expense; and unscheduled maintenances of
$0.2 million on the former corporate headquarters in Tulsa during 2002. The
remaining decrease is a result of the ongoing cost reduction program implemented
last year.
Other expense decreased $5.7 million in the current nine-month period
as compared to the nine months ended September 30, 2002. The nine months ended
September 30, 2002 included $3.6 million related to the Exchange Offer and $0.6
million costs incurred for an attempted acquisition.
Income tax expense consists of foreign tax expense of $11.6 million for
the current nine-month period. For the nine months ended September 30, 2002
income tax expense included foreign tax expense of $7.6 million and deferred tax
benefit of $13.7 million. Foreign taxes increased $4.0 million in the current
nine-month period due primarily to a tax benefit realized in 2002 from a
Kazakhstan tax ruling related to prior years. For the current nine-month period
we incurred a net loss, however, no additional deferred tax benefit was
recognized since the sum of our deferred tax assets, principally the net
operating loss carryforwards, exceeds the deferred tax liabilities, principally
the excess of tax depreciation over book depreciation. This additional deferred
tax asset was fully reserved through a valuation allowance in the current
quarter.
31
RESULTS OF OPERATIONS (continued)
Analysis of Discontinued Operations
Nine Months Ended September 30,
-------------------------------
2003 2002
----------- -----------
(Dollars in Thousands)
Discontinued operations drilling revenues:
U.S. jackup and platform drilling $ 35,428 $ 29,641
Latin America drilling 18,201 35,948
-------- --------
Total discontinued operations drilling revenues $ 53,629 $ 65,589
======== ========
Discontinued operations operating income (loss)
U.S. jackup and platform drilling (1) $ 3,666 $ (243)
Latin America drilling (1) 3,166 9,043
Depreciation and amortization (14,629) (22,796)
-------- --------
Total discontinued operations operating income loss (2) (7,797) (13,996)
Other income (expense) - net (558) 568
Provision for impairment of assets (53,968) (360)
Tax expense (22) (7,149)
-------- --------
Loss from discontinued operations $(62,345) $(20,937)
======== ========
(1) Drilling gross margin - drilling revenues less direct drilling operating
expenses, excluding depreciation and amortization expense.
(2) Drilling operating income (loss) - drilling revenues less direct drilling
operating expenses, including depreciation and amortization expense.
Revenues in Latin America decreased $17.7 million to $18.2 million in
the current nine-month. The region operated an average of 3.0 rigs in the
current nine-month period as compared to 7.0 rigs in the nine months ended
September 30, 2002. The decline in utilization in Colombia and Ecuador, as
mentioned previously, was partially offset by operations in Peru. Peru had one
rig operating at full dayrate for the current nine-month period as compared to a
reduced move rate for a portion of the nine months ended September 30, 2002.
Gross margin in the Latin America region decreased $5.9 million to $3.2
million in the current period as compared to the nine months ended September 30,
2002. The loss of four contracts in Colombia in mid 2002 and completion of one
contract in Ecuador contributed to the decline in gross margin. Of the four
contracts cancelled in Colombia, only one rig returned to work in early 2003.
Revenues for the U.S. jackup and platform drilling operations increased
$5.8 million to $35.4 million in the current nine-month period as compared to
the nine months ended September 30, 2002. The jackup rigs contributed to the
increase with higher utilization and improved dayrates. Utilization for the
jackup rigs increased from 76 percent to 81 percent and average dayrates
improved 9 percent in the current nine-month period as compared to the nine
months ended September 30, 2002. The platform rigs utilization and dayrates
increased slightly during the current nine-month period as compared to the nine
months ended September 30, 2002.
The U.S. jackup and platform drilling gross margin was $3.7 million in
the current period, an increase of $3.9 million from the nine months ended
September 30, 2002. The gross margin was positively impacted in the current
period by higher dayrates and utilization for the jackup rigs and platform rigs
as previously discussed.
32
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, we had cash and cash equivalents of $81.4
million, an increase of $29.4 million from December 31, 2002. The primary
sources of cash for the nine-month period as reflected on the Consolidated
Condensed Statement of Cash Flows were $68.2 million provided by operating
activities and $5.1 million from the disposition of equipment.
The primary uses of cash for the nine-month period ended September 30,
2003 were $23.8 million for capital expenditures and $20.1 million for repayment
of debt. We used $14.5 million cash to purchase $14.8 million face value of its
outstanding convertible subordinated notes on the open market in May 2003. Major
capital expenditures during the current nine-month period included purchases of
drill pipe and tubulars by Quail Tools.
As of September 30, 2002, we had cash and cash equivalents of $32.4
million, a decrease of $28.0 million from December 31, 2001. The net cash
provided by operating activities as reflected on the Consolidated Condensed
Statement of Cash Flows was $7.0 million. This included an increase in other
current assets of $23.8 million of which $27.2 million related to construction
of rig 262 for the Sakhalin Island project. Cash flows from investing activities
included $39.2 million for capital expenditures and proceeds from the sale of
assets of $5.5 million. Cash flows from financing activities included $3.9
million repayment of debt. On July 24, 2002, we terminated $150.0 million of
interest rate swap agreements associated with its 9.75% senior notes and
received $3.5 million. A gain totaling $2.6 million will be amortized over the
remaining term of the 9.75% senior notes as a reduction to interest expense.
We anticipate the working capital needs and funds required for capital
spending will be met from existing cash, asset sales and cash provided by
operations. It is our intention to limit capital spending, net of reimbursements
from customers, to less than $50.0 million in 2003. Should new opportunities
requiring additional capital arise, we may seek project financing or equity
participation from outside alliance partners or customers. We have no assurances
that such financing or equity participation would be available on terms
acceptable to us.
We had total long-term debt of $569.4 million, including the current
portion of $65.7 million at September 30, 2003. As of September 30, 2003, the
long-term debt included:
- $109.7 million aggregate principal amount of 5.5% convertible
subordinated notes, which are due August 1, 2004 (The undrawn
portion of the term loan can only be used to repay the 5.5%
convertible subordinated notes, therefore $50.0 million of
these notes have been reclassified as long-term.)
- $214.2 million aggregate principal amount of 9.75% senior
notes, which are due November 15, 2006; and
- $236.5 million aggregate principal amount of 10.125% senior
notes, which are due on November 15, 2009.
Subsequent to September 30, 2003, we refinanced a portion of our
existing debt by issuing $175.0 million of new 9.625% senior notes due 2013 and
replaced our senior credit facility with a $150.0 million senior credit
agreement. The senior credit agreement consists of a four-year $100.0 million
delayed draw term loan facility and a three-year $50.0 million revolving credit
facility that are secured by certain drilling rigs, rented tool equipment,
accounts receivable and substantially all of the stock of the subsidiaries, and
contains customary affirmative and negative covenants. The proceeds of the new
9.625% senior notes, plus an initial draw of $50.0 million under the term loan
facility, were partially used to retire $184.3 million of the 9.75% senior notes
due 2006 that had been tendered pursuant to a tender offer dated September 24,
2003. The balance of the proceeds from the new senior notes and the initial draw
down under the term loan facility will be used to retire the remaining $29.9
million of 9.75% senior notes that were not tendered but have been called for
redemption effective November 15, 2003.
The revolving credit facility portion of the senior credit agreement
replaces the previous $50.0 million revolving credit facility that would have
expired in late October 2003. The revolving credit facility is available for
working capital requirements, general corporate purposes and to support letters
of credit. Availability under the revolving credit facility is subject to a
borrowing base limitation based on 85 percent of eligible receivables plus a
value for eligible rental tool equipment. As of September 30, 2003 the borrowing
base was $41.1 million, of which none had been drawn down, and $10.4 million had
been reserved for letters of credit, resulting in available revolving credit of
$30.7 million.
33
LIQUIDITY AND CAPITAL RESOURCES (continued)
As of September 30, 2003, after giving effect to the new 9.625% senior
notes, the new credit agreement and the call of the remaining 9.75% senior
notes, on a proforma basis we would have had approximately $131.7 million of
liquidity. This liquidity would have been comprised of $81.4 million of cash on
hand, $30.7 million of undrawn availability under the new revolving credit
facility and $50.0 million of availability under the delayed draw term loan
facility (which may only be used to repay the 5.5% convertible subordinated
notes), less $30.4 million to call the remaining 9.75% senior notes. In the
previous quarter we advised that due to cross default provisions in our debt
agreements, if we were unable to pay the 5.5% convertible subordinated notes
when due all of our debt would be declared in default and would become
immediately due and payable. We believe that any such concern has been
substantially alleviated. Based on our current liquidity, along with cash which
is anticipated to be generated from operations, will provide sufficient
liquidity to repay the $109.7 million of convertible subordinated notes due in
August 2004.
The following tables summarize our future contractual cash obligations
and other commercial commitments after giving effect to the financing
transactions on October 10, 2003.
After 5
1 Year 2 - 3 Years 4 - 5 Years Years Total
-------- ----------- ----------- -------- --------
(Dollars in Thousands)
Contractual cash obligations:
Long-term debt - principal (1) $115,673 $ 525 $ 50,000 $410,612 $576,810
Long-term debt - interest (1) 56,253 85,909 85,909 111,056 339,127
Operating leases (2) 2,772 3,958 3,136 854 10,720
-------- -------- -------- -------- --------
Total contractual cash obligations $174,698 $ 90,392 $139,045 $522,522 $926,657
======== ======== ======== ======== ========
Commercial commitments:
Revolving credit facility (3) $ - $ - $ - $ - $ -
Standby letters of credit (3) 10,410 - - - 10,410
-------- -------- -------- -------- --------
Total commercial commitments $ 10,410 $ - $ - $ - $ 10,410
======== ======== ======== ======== ========
(1) Long-term debt includes the principal and interest cash obligations of the
9.625%, senior notes, the 10.125% senior notes, the 5.5% convertible
subordinated notes, the secured 10.1278% promissory note and the capital
leases. Premiums related to the senior notes and interest rate swap mark to
market gain (see Note 9 of the Notes to Unaudited Consolidated Condensed
Financial Statements) are not included in the contractual cash obligations
schedule. On October 11, 2003 $184.3 million of the 9.75% senior notes were
retired, the remaining $29.9 million were not tendered but have been called
effective November 15, 2003. Therefore, the 9.75% senior notes are not
included in the contractual obligations schedule.
(2) Operating leases consist of lease agreements in excess of one year for
office space, equipment, vehicles and personal property.
(3) We have a $50.0 million revolving credit facility with an available
borrowing base of $41.1 million. As of September 30, 2003, none has been
drawn down, but $10.4 million of availability has been used to support
letters of credit that have been issued. The revolving credit facility
expires in October 2006.
We do not have any unconsolidated special-purpose entities,
off-balance-sheet financing arrangements or guarantees of third-party financial
obligations. We have no energy or commodity contracts.
34
OTHER MATTERS
Critical Accounting Policies
We consider certain accounting policies related to impairment of
property, plant and equipment, impairment of goodwill, the valuation of deferred
tax assets and revenue recognition to be critical accounting policies due to the
estimation processes involved in each.
Impairment of property, plant and equipment - Management periodically
evaluates our property, plant and equipment to determine that their net carrying
value is not in excess of their net realizable value. These evaluations are
performed when we have realized sustained significant declines in utilization
and dayrates and recovery is not contemplated in the near future. Management
considers a number of factors such as estimated future cash flows, appraisals
and current market value analysis in determining net realizable value. Assets
are written down to their fair value if it is below its net carrying value.
In June 2003, the board of directors approved a plan to sell the Latin
America assets consisting of 17 land rigs and related inventory and spare parts
and the U.S. Gulf of Mexico assets consisting of seven jackup rigs and four
platform rigs. We are actively marketing the assets through an independent
broker and expect to complete the sale by the end of December, 2003. At June 30,
2003, the net book value of the assets to be sold exceeded the fair value and as
a result an impairment charge including estimated sales expenses was recognized
in the amount of $54.0 million, (see Note 4 of the Notes to Unaudited
Consolidated Condensed Financial Statements for additional information).
Impairment of goodwill - Management periodically assesses whether the
excess of cost over net assets acquired is impaired based on the estimated fair
value of the operation to which it relates, which value is generally determined
based on estimated future cash flows of that operation. If the estimated fair
value is in excess of the carrying value of the operation, no further analysis
is performed. If the fair value of each operation, to which goodwill has been
assigned, is less than the carrying value, we will deduct the fair value of the
tangible and intangible assets and compare the residual amount to the carrying
value of the goodwill to determine if impairment should be recorded.
In 2002, SFAS No. 142, "Goodwill and Other Intangible Assets," became
effective and as a result, we discontinued the amortization of $189.1 million of
goodwill. In lieu of amortization, we performed an initial impairment review of
goodwill and as a result impaired goodwill by $73.1 million. We will perform an
annual impairment review, in December, hereafter. The impairment was recognized
as a cumulative effect of a change in accounting principle. We performed our
annual impairment review during the fourth quarter of 2002 with no additional
impairment required.
Accounting for income taxes - As part of the process of preparing the
consolidated financial statements, we are required to estimate the income taxes
in each of the jurisdictions in which we operate. This process involves
estimating the actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as depreciation,
amortization and certain accrued liabilities for tax and accounting purposes.
These differences and the net operating loss carryforwards result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that the deferred tax assets will be
recovered from future taxable income, and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
established a valuation allowance or increase or decrease this allowance in a
period, we must include an expense or reduction of expense within the tax
provision in the statement of operations.
Revenue recognition - We recognizes revenues and expenses on dayrate
contracts as the drilling progresses (percentage of completion method) because
we do not bear the risk of completion of the well. For meterage contracts, we
recognize the revenues and expenses upon completion of the well (completed
contract method). Revenues from rental activities are recognized ratably over
the rental term which is generally less than six months.
35
OTHER MATTERS (continued)
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, No. 44, and No. 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002. We adopted this standard in the first quarter of 2003 and it
did not have a significant effect on our results of operations or our financial
position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. The adoption of this
standard has not had any impact on our financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." The interpretation requires
disclosure about the nature and terms of obligations under certain guarantees
that we have issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing a guarantee. The initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements in this interpretation are effective immediately. We were not
impacted by the issuance of FIN 45.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure - An Amendment of SFAS No.
123." The standard provides additional transition guidance for companies that
elect to voluntarily adopt the accounting provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 does not change the
provisions of SFAS No. 123 that permit entities to continue to apply the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees." As we continue to follow APB No. 25, our accounting for stock-based
compensation will not change as a result of SFAS No. 148. SFAS No. 148 does
require certain new disclosures in both annual and interim financial statements.
The interim disclosure provisions have been included as Note 1.
On January 17, 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51."
The primary objectives of FIN 46 are to provide guidance on how to identify
entities for which control is achieved through means other than through voting
rights (variable interest entities ("VIE")) and how to determine when and which
business enterprise should consolidate the VIE. This new model for consolidation
applies to an entity in which either (1) the equity investors do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. We will adopt this standard
in December 2003, and do not expect it to have a significant effect on our
results of operations or our financial position.
In March 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement will be effective for contracts entered into, modified or
designated as hedges after June 30, 2003. Implementation of this statement did
not have a material effect on our results of operations or our financial
position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity and requires that those
instruments be classified as liabilities (or assets in certain circumstances) in
statements of financial position. This statement will be effective for all
financial statements entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. Implementation of this statement did not have a significant effect on
our financial position.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk from our fixed-rate debt. In
January 2002, we hedged against a portion of the risk of changes in fair value
associated with its $214.2 million 9.75% senior notes by entering into three
fixed-to-variable interest rate swap agreements with a total notional amount of
$150.0 million. We assumed no ineffectiveness as each interest rate swap
agreement met the short-cut method requirements under SFAS No. 133 for fair
value hedges of debt instruments. As a result, changes in the fair value of the
interest rate swap agreements were offset by changes in the fair value of the
debt and no net gain or loss was recognized in earnings. During the nine months
ended September 30, 2002 the interest rate swap agreements reduced interest
expense $2.6 million.
On July 24, 2002, we terminated all the interest rate swap agreements
and received $3.5 million. A gain totaling $2.6 million is being recognized as a
reduction to interest expense over the remaining term (ending November 2006) of
the debt instrument, of which $0.2 million and $0.5 million was recognized
during the three and nine months ended September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures - The Company's management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of the end of the period
covered by this quarterly report. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act.
Internal Control Over Financial Reporting - There have not been any
changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed as a part of this report:
Exhibit Number Description ---------
-----------------------------------------------------------------
4.1 Third Supplemental Indenture dated as of October 7, 2003, between
Parker Drilling Company and Subsidiary Guarantors and JPMorgan
Chase Bank as Trustee, respecting 10.125% Senior Notes Due 2009
4.2 Fourth Supplemental Indenture dated as of October 10, 2003,
between Parker Drilling Company and Subsidiary Guarantors and
JPMorgan Chase Bank as Trustee, respecting 10.125% Senior Notes
Due 2009
4.3 Sixth Supplemental Indenture dated as of October 7, 2003, between
Parker Drilling Company and Subsidiary Guarantors and JPMorgan
Chase Bank as Trustee, respecting 9.75% Senior Notes Due 2006
4.4 Seventh Supplemental Indenture dated as of October 10, 2003,
between Parker Drilling Company and Subsidiary Guarantors and
JPMorgan Chase Bank as Trustee, respecting 9.75% Senior Notes
Due 2006
10.1 Credit Agreement, dated as of October 10, 2003 among Parker
Drilling Company as borrower and the several lenders named
therein
10.2 Non-Employee Director Deferred Compensation Plan dated December
1, 2002
12.1 Ratio of Earnings to Fixed Charges
15 Letter re Unaudited Interim Financial Information
31.1 Section 302 Certification - Chief Executive Officer
31.2 Section 302 Certification - Chief Financial Officer
32.1 Section 906 Certification - Chief Executive Officer
32.2 Section 906 Certification - Chief Financial Officer
(b) Reports on Form 8-K:
We filed a Form 8-K on September 26, 2003, announcing our
tender offer and consent solicitation for 9.75% senior notes
due 2006 and consent solicitation for 10.125% senior notes due
2009.
We filed a Form 8-K on October 7, 2003, announcing our sale of
9.625% senior notes due 2013.
We filed a Form 8-K on October 31, 2003, announcing our
operating results for the quarter ended September 30, 2003.
38
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.
Parker Drilling Company
Registrant
Date: November 13, 2003
By: /s/ James W. Whalen
-------------------------------
James W. Whalen
Senior Vice President and
Chief Financial Officer
By: /s/ W. Kirk Brassfield
-------------------------------
W. Kirk Brassfield
Vice President and Controller
39
INDEX TO EXHIBITS
Exhibit
Number Description
- ---------- -----------------------------------------------------------------
4.1 Third Supplemental Indenture dated as of October 7, 2003, between
Parker Drilling Company and Subsidiary Guarantors and JPMorgan
Chase Bank as Trustee, respecting 10.125% Senior Notes Due 2009
4.2 Fourth Supplemental Indenture dated as of October 10, 2003,
between Parker Drilling Company and Subsidiary Guarantors and
JPMorgan Chase Bank as Trustee, respecting 10.125% Senior Notes
Due 2009
4.3 Sixth Supplemental Indenture dated as of October 7, 2003, between
Parker Drilling Company and Subsidiary Guarantors and JPMorgan
Chase Bank as Trustee, respecting 9.75% Senior Notes Due 2006
4.4 Seventh Supplemental Indenture dated as of October 10, 2003,
between Parker Drilling Company and Subsidiary Guarantors and
JPMorgan Chase Bank as Trustee, respecting 9.75% Senior Notes
Due 2006
10.1 Credit Agreement, dated as of October 10, 2003 among Parker
Drilling Company as borrower and the several lenders named
therein
10.2 Non-Employee Director Deferred Compensation Plan dated December
1, 2002
12.1 Ratio of Earnings to Fixed Charges
15 Letter re Unaudited Interim Financial Information
31.1 Section 302 Certification - Chief Executive Officer
31.2 Section 302 Certification - Chief Financial Officer
32.1 Section 906 Certification - Chief Executive Officer
32.2 Section 906 Certification - Chief Financial Officer