UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended SEPTEMBER 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

PARKER DRILLING COMPANY

Delaware		73-0618660
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1401 Enclave Parkway, Suite 600, Houston, Texas 77077
(Address of principal executive offices) (Zip code)

(281) 406-2000
(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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 31, 2008, 113,310,906 common shares were outstanding.

 

 

TABLE OF CONTENTS

						Page
Part I.				Financial Information			3
				Item 1. Financial Statements			3
				Consolidated Condensed Balance Sheets (Unaudited) September 30, 2008 and December 31, 2007			3
				Consolidated Condensed Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2008 and 2007			4
				Consolidated Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2008 and 2007			5
				Notes to the Unaudited Consolidated Condensed Financial Statements			6
				Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
				Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
				Item 4. Controls and Procedures			36
Part II.				Other Information			36
				Item 1. Legal Proceedings			36
				Item 1A. Risk Factors			36
				Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
				Item 3. Defaults Upon Senior Securities			37
				Item 4. Submission of Matters to a Vote of Security Holders			37
				Item 5. Other Information			37
				Item 6. Exhibits			37
				Signatures			38
				Officer Certifications

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)

		September 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	75,277			$	60,124
Accounts and notes receivable, net			217,104				166,706
Rig materials and supplies			29,914				24,264
Deferred costs			8,528				7,795
Deferred income taxes			9,424				9,423
Other tax assets			18,084				32,532
Other current assets			22,787				22,339
Total current assets			381,118				323,183
Property, plant and equipment less accumulated depreciation and amortization of $682,933 at September 30, 2008 and $628,079 at December 31, 2007			653,119				585,888
Goodwill			100,315				100,315
Investment in and advances to unconsolidated joint venture			—				(4,353	)
Deferred income taxes			11,838				40,121
Other noncurrent assets			31,753				31,833
Total assets		$	1,178,143			$	1,076,987
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	3,000			$	20,000
Accounts payable and accrued liabilities			116,467				87,352
Accrued income taxes			11,295				16,828
Total current liabilities			130,762				124,180
Long-term debt			410,235				353,721
Other long-term liabilities			20,820				56,318
Long-term deferred tax liability			8,506				8,044
Contingencies (Note 11)			—				—
Stockholders’ equity:
Common stock			18,883				18,653
Capital in excess of par value			601,697				593,866
Accumulated deficit			(12,760	)			(77,795	)
Total stockholders’ equity			607,820				534,724
Total liabilities and stockholders’ equity		$	1,178,143			$	1,076,987

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Revenues:
U.S. drilling		$	44,743			$	56,918			$	139,999			$	174,375
International drilling			92,226				58,857				238,885				143,834
Project management and engineering services			24,089				20,922				72,219				58,633
Construction contract			20,421				—				40,501				—
Rental tools			45,975				35,500				125,858				96,905
Total revenues			227,454				172,197				617,462				473,747
Operating expenses:
U.S. drilling			21,850				23,208				65,502				74,101
International drilling			63,682				37,288				172,915				101,853
Project management and engineering services			21,451				16,685				61,819				49,004
Construction contract			19,323				—				38,373				—
Rental tools			18,166				14,579				50,014				38,263
Depreciation and amortization			30,663				23,043				84,995				60,744
Total operating expenses			175,135				114,803				473,618				323,965
Total operating gross margin			52,319				57,394				143,844				149,782
General and administration expense			(9,271	)			(6,246	)			(24,420	)			(18,380	)
Provision for reduction in carrying value of certain assets			—				(1,091	)			—				(1,091	)
Gain on disposition of assets, net			799				543				2,014				17,216
Total operating income			43,847				50,600				121,438				147,527
Other income and (expense):
Interest expense			(5,820	)			(7,576	)			(17,386	)			(19,891	)
Changes in fair value of derivative positions			—				(262	)			—				(671	)
Interest income			383				2,080				1,121				5,576
Loss on extinguishment of debt			—				(2,396	)			—				(2,396	)
Equity in loss of unconsolidated joint venture and related charges, net of tax			—				(1,123	)			(1,105	)			(1,123	)
Minority interest			—				—				—				(1,000	)
Other			299				510				503				587
Total other income and (expense)			(5,138	)			(8,767	)			(16,867	)			(18,918	)
Income before income taxes			38,709				41,833				104,571				128,609
Income tax expense:
Current			14,179				14,598				13,024				43,223
Deferred			5,979				4,582				26,512				15,879
Total income tax expense			20,158				19,180				39,536				59,102
Net income		$	18,551			$	22,653			$	65,035			$	69,507
Basic earnings per share:
Net income		$	0.17			$	0.21			$	0.58			$	0.64
Diluted earnings per share:
Net income		$	0.16			$	0.20			$	0.58			$	0.63
Number of common shares used in computing earnings per share
Basic			111,756,322				110,270,207				111,243,745				109,269,867
Diluted			112,647,450				111,278,430				112,324,566				110,522,914

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

		Nine Months Ended September 30,
		2008				2007
Cash flows from operating activities:
Net income		$	65,035			$	69,507
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			84,995				60,744
Gain on disposition of assets			(2,014	)			(17,216	)
Equity loss in unconsolidated joint venture and related charges, net of tax			1,105				1,123
Provision for reduction in carrying value of certain assets			—				1,091
Deferred income tax expense			26,512				15,879
Expenses not requiring cash			8,258				11,008
Change in accounts receivable			(46,903	)			(48,524	)
Change in other assets			7,627				(28,579	)
Change in liabilities			(11,887	)			(12,979	)
Net cash provided by operating activities			132,728				52,054
Cash flows from investing activities:
Capital expenditures			(157,313	)			(191,381	)
Proceeds from the sale of assets			3,284				23,243
Proceeds from insurance settlements			951				—
Investment in unconsolidated joint venture			(5,000	)			—
Purchase of marketable securities			—				(101,075	)
Proceeds from sale of marketable securities			—				163,995
Net cash used in investing activities			(158,078	)			(105,218	)
Cash flows from financing activities:
Proceeds from issuance of debt			—				125,000
Proceeds payments under debt obligations			—				(100,000	)
Purchase of call options			—				(31,475	)
Proceeds from sale of common stock warrants			—				20,250
Proceeds from draw on term note facility			50,000				—
Paydown on revolver credit facility			(35,000	)			—
Proceeds from draw on revolver credit facility			25,000				—
Payments of debt issuance costs			(1,846	)			(3,563	)
Proceeds from stock options exercised			1,970				15,791
Excess tax benefit from stock based compensation			379				1,912
Net cash provided by financing activities			40,503				27,915
Net increase (decrease) in cash and cash equivalents			15,153				(25,249	)
Cash and cash equivalents at beginning of year			60,124				92,203
Cash and cash equivalents at end of period		$	75,277			$	66,954
Supplemental cash flow information:
Interest paid		$	16,364			$	16,370
Income taxes paid		$	32,158			$	44,270

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.		General – In the opinion of the management of Parker Drilling 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, 2008 and December 31, 2007, (2) the results of operations for the three and nine months ended September 30, 2008 and 2007, and (3) cash flows for the nine months ended September 30, 2008 and 2007. Results for the nine months ended September 30, 2008 are not necessarily indicative of the results that will be realized for the year ending December 31, 2008. The financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2007.
		Stock-Based Compensation – Total stock-based compensation expense recognized under SFAS No. 123R for the three and nine month periods ended September 30, 2008 and for the three and nine month periods ended September 30, 2007 was $2.7 million and $6.5 million and $2.2 million and $6.3 million, respectively, all of which was related to restricted stock plan expense. Stock-based compensation expense is included in our consolidated condensed income statement in both “General and administration expense” and “operating expense.” There were no unvested stock options at September 30, 2008. The Company had 290,300 outstanding and exercisable stock options as of September 30, 2008, the aggregate intrinsic value of which was $1.5 million, with a weighted average exercise price of $2.88. Unvested restricted stock awards at December 31, 2007 and September 30, 2008 were 1,502,592 shares and 1,473,849 shares, respectively. Total unrecognized compensation cost related to unamortized restricted stock awards was $5.1 million as of December 31, 2007 and $5.3 million as of September 30, 2008. There were 24,700 and 890,274 restricted shares granted to certain officers and key employees during the three and nine month periods ended September 30, 2008. The remaining unrecognized compensation cost related to unamortized restricted stock awards will be amortized over a weighted-average vesting period of approximately one year.
		The excess tax benefit realized for the tax deductions from options exercised and restricted stock vesting totaled $0.4 million for the nine months ended September 30, 2008, which has been reported as a financing cash inflow in the consolidated condensed statement of cash flows.
		Construction Contract – Historically the Company has primarily constructed drilling rigs for its own use. In some instances, however, the Company enters into contracts to design, construct, deliver and commission a rig for a major customer. In 2008, we were awarded a cost reimbursable, fixed fee contract to construct, deliver and commission a rig for extended reach drilling work in Alaska. In 2006, the Company entered into a separate contract for the front end engineering design of the rig. Total cost of the construction phase is currently expected to be approximately $212 million. The Company recognizes revenues received and costs incurred related to its construction contract on a gross basis and income for the related fees on a percentage of completion basis using the cost-to-cost method. Construction costs in excess of funds received from the customer are accumulated and reported as part of other current assets. At September 30, 2008, a net receivable (construction costs less progress payments) of $1.6 million is included in other current assets.
		Cash and Cash Equivalents – For purposes of the balance sheet and the statement of cash flows, the Company considers cash equivalents to be all highly liquid debt instruments that have a remaining maturity of three months or less at the date of purchase.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2.

Earnings Per Share (“EPS”)

		Three Months Ended September 30, 2008
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	18,551,000				111,756,322			$	0.17
Effect of dilutive securities:
Stock options and restricted stock							891,128			$	(0.01	)
Diluted EPS:
Net income		$	18,551,000				112,647,450			$	0.16

		Nine Months Ended September 30, 2008
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	65,035,000				111,243,745			$	0.58
Effect of dilutive securities:
Stock options and restricted stock							1,080,821			$	—
Diluted EPS:
Net income		$	65,035,000				112,324,566			$	0.58

		Three Months Ended September 30, 2007
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	22,653,000				110,270,207			$	0.21
Effect of dilutive securities:
Stock options and restricted stock							1,008,223			$	(0.01	)
Diluted EPS:
Net income		$	22,653,000				111,278,430			$	0.20

		Nine Months Ended September 30, 2007
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	69,507,000				109,269,867			$	0.64
Effect of dilutive securities:
Stock options and restricted stock							1,253,047			$	(0.01	)
Diluted EPS:
Net income		$	69,507,000				110,522,914			$	0.63

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2.		Earnings Per Share (“EPS”) (continued)
		All stock options outstanding during the three and nine months ended September 30, 2008, were included in the computation of diluted EPS as the options’ exercise prices were less than the average market price of the common shares. Options to purchase 325,000 shares of common stock with exercise prices ranging from $10.81 to $12.19 per share were outstanding during the three and nine months ended September 30, 2007, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares and would have been anti-dilutive.
3.		Business Segments – The five primary services we provide are as follows: U.S. drilling, International drilling, Project management and engineering services, Construction contracts and Rental tools. In the first quarter of 2008, the Company created a new segment called Project management and engineering services by combining our labor, operations and maintenance and engineering services contracts which had been previously reported in our U.S. drilling or International drilling segments. The new segment was created in anticipation of the significant expansion of these projects and services and senior management’s resultant separate performance assessment and resource allocation for this segment. The new segment operations, unlike our U.S. and International drilling and Rental tools operations, generally require little or no capital expenditures, and therefore have different performance assessment and resource needs. The Company anticipates further growth of this segment of our business and reviews and assesses its performance separately. Financial information for reportable segments for 2007 has been restated below to reflect this change. In the second quarter of 2008, the Company created a new segment called Construction contracts to reflect the Company’s Engineering, Procurement, Construction and Installation contract (“EPCI”). The Construction contract segment income (fees) is accounted for on a percentage of completion basis using the cost-to-cost method. Revenues received and costs incurred related to the contract are recorded on a gross basis.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

3.		Business Segments (continued)
		Information regarding our operations by industry segment for the three and nine months ended September 30, 2008 and 2007 is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(Dollars in Thousands)								(Dollars in Thousands)
Revenues:
U.S. drilling		$	44,743			$	56,918			$	139,999			$	174,375
International drilling			92,226				58,857				238,885				143,834
Project management and engineering services			24,089				20,922				72,219				58,633
Construction contract			20,421				—				40,501				—
Rental tools			45,975				35,500				125,858				96,905
Total revenues		$	227,454			$	172,197			$	617,462			$	473,747
Operating gross margin:
U.S. drilling		$	14,166			$	24,918			$	48,475			$	76,365
International drilling			14,241				13,869				29,029				22,391
Project management and engineering services			2,638				4,237				10,400				9,629
Construction contract			1,098				—				2,128				—
Rental tools			20,176				14,370				53,812				41,397
Total operating gross margin			52,319				57,394				143,844				149,782
General and administration expense			(9,271	)			(6,246	)			(24,420	)			(18,380	)
Provision for reduction in carrying value of certain assets			—				(1,091	)							(1,091	)
Gain on disposition of assets, net			799				543				2,014				17,216
Total operating income			43,847				50,600				121,438				147,527
Interest expense			(5,820	)			(7,576	)			(17,386	)			(19,891	)
Changes in fair value of derivative positions			—				(262	)			—				(671	)
Loss on extinguishment of debt			—				(2,396	)			—				(2,396	)
Other			682				1,467				519				4,040
Income before income taxes		$	38,709			$	41,833			$	104,571			$	128,609

4.		Disposition of Assets – Asset dispositions in the first nine months of 2008 included the sale of Rig 206 in Indonesia, for which we recorded no gain or loss, and miscellaneous equipment that resulted in a recognized gain of $2.0 million. In the first nine months of 2007 asset dispositions consisted primarily of the sale of workover barge Rigs 9 and 26 for proceeds of approximately $20.5 million, resulting in a recognized gain of $15.1 million.
5.		Accounting for Uncertainty in Income Taxes – FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. During March 2008, the Company resolved the pending tax case with the Kazakhstan Ministry of Finance by paying the reduced interest assessment related to tax payments made in 2007 (see Note 8 - Kazakhstan Tax Case), and we accordingly reduced the previously recorded accruals based on the final resolution of this matter. In addition, for the third quarter of 2008, the Company recognized $2.4 million of expense related to certain intercompany transactions between our US companies and foreign affiliates. As of September 30, 2008, the Company had a remaining liability for unrecognized tax benefits of $14.7 million primarily related to foreign operations.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

6.		Income Tax Expense – Income tax expense was $20.2 million for the third quarter of 2008 and includes a charge of $2.4 million related to FIN 48 as compared to income tax expense of $19.2 million for the third quarter of 2007.
7.		Saudi Arabia Joint Venture – On April 9, 2008, a subsidiary of Parker executed an agreement (“Sale Agreement”) to sell its 50 percent share interest in Al-Rushaid Parker Drilling Co. Ltd. (“ARPD”) to an affiliate of the Al Rushaid subsidiary that owns the remaining 50 percent interest. The terms of the Sale Agreement provided for a $2.0 million payment to Parker’s subsidiary as consideration for the 50 percent share interest of the Parker subsidiary and partial repayment of investments and advances of the Parker subsidiary to ARPD, including a $5.0 million advance in January 2008. During the first quarter of 2008, the Parker subsidiary made the decision to terminate any future funding to ARPD, and accordingly, the Company did not record equity in losses of ARPD in the first quarter of 2008. We recognized a $1.1 million loss, net of income taxes, in the first quarter of 2008 primarily as a result of nonrecoverable costs, as per the terms of the Sale Agreement, incurred by the Parker affiliate to support ARPD operations during the current quarter. The Parker subsidiary received the $2.0 million on April 15, 2008 in full settlement of the Company’s investment in and advances to ARPD.
		The Sale Agreement obligates the resulting Saudi shareholders to indemnify the Parker subsidiary and its affiliates from claims arising out of or related to the operations of ARPD, including the drilling contracts between ARPD and Saudi Aramco, ARPD’s bank loans and vendors providing goods or services to ARPD. Each party has agreed to waive any claims that it may have against the other party arising out of the business of ARPD on or before the closing date, and subject to the formal transfer of the shares the Parker subsidiary has agreed to disclaim any remaining rights with respect to the unpaid portion of shareholder loans and payables owed by ARPD to the Parker subsidiary. The formal transfer of shares was approved by the Saudi Arabian authorities in July 2008.
		The agreement also provides that there are no restrictions on Parker or any of its affiliates with regard to competing with ARPD in the future, including in Saudi Arabia.
8.		Kazakhstan Tax Case - On October 12, 2005, the Kazakhstan Branch (“PKD Kazakhstan”) of Parker Drilling’s subsidiary, Parker Drilling Company International Limited (“PDCIL”), received an Act of Tax Audit from the Ministry of Finance of Kazakhstan (“MinFin”) assessing PKD Kazakhstan an amount of KZT (Kazakhstan Tenge) 14.9 billion (approximately $125.8 million). Approximately KZT7.5 billion or $63.3 million was assessed for import Value Added Tax (“VAT”), administrative fines and interest on equipment imported to perform the drilling contracts (the “VAT Assessment”) and approximately KZT7.4 billion or $62.5 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received by PDCIL from a client for the upgrade of Barge Rig 257 and other issues related to PKD Kazakhstan’s operations in the Republic of Kazakhstan (the “Income Tax Assessment”).
		On May 24, 2006, the Supreme Court of the Republic of Kazakhstan (“SCK”) issued a decision upholding the VAT Assessment. Consistent with its contractual obligations, on November 20, 2006, the client advanced the actual amount of the VAT Assessment and this amount has been remitted to MinFin. The administrative fines related to the VAT Assessment are being appealed by the client who is contractually responsible to reimburse PKD Kazakhstan for any administrative fines ultimately assessed. The client has also contractually agreed to reimburse PKD Kazakhstan for any incremental income taxes that PKD Kazakhstan incurs from the reimbursement of this VAT Assessment.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

8.		Kazakhstan Tax Case (continued)
		After multiple appeals to the SCK and two meetings of the U.S. Competent Authorities under the Mutual Agreement Procedure of the U.S.- Kazakhstan Tax Treaty, the SCK ultimately upheld the Income Tax Assessment and on December 12, 2007, PKD Kazakhstan paid the principal tax portion of the Income Tax Assessment, net of estimated taxes previously paid. After a further appeal against the interest portion of the notice of assessment, on February 25, 2008, the Atyrau Economic Court issued a ruling that interest on the income tax assessed should accrue from the October 12, 2005 assessment date as opposed to the original assessment in 2001, which resulted in a revised interest assessment by the Atyrau Tax Committee of approximately US$13 million, which was paid by PKD Kazakhstan on March 14, 2008, in final resolution of this matter. Income tax for the first nine months of 2008 includes a benefit of $13.4 million of FIN 48 interest and foreign currency exchange rate fluctuations related to this final resolution.
9.		Long-Term Debt

		September 30, 2008				December 31, 2007
		(Dollars in Thousands)
Senior Notes:
Interest rate 2.125% convertible due 2012		$	125,000			$	125,000
Interest rate 9.625%, due 2012			228,235				228,721
Revolver			10,000				20,000
Term loan			50,000				—
Total debt			413,235				373,721
Less current portion			3,000				20,000
Total long-term debt		$	410,235			$	353,721

		On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125 percent Convertible Senior Notes due July 15, 2012. Interest is payable semiannually on July 15th and January 15th. The initial conversion price is approximately $13.85 per share and is subject to adjustment for the occurrence of certain events stated within the indenture. Simultaneously, we entered into a call spread convertible note hedge consisting of a call option purchased by the Company for $31.5 million and sold warrants for $20.2 million, the net cost of which is included in our consolidated condensed balance sheet in “Capital in excess of par value”. Proceeds from the transaction were used to call our outstanding Senior Floating Rate notes, to pay the net cost of hedge and warrant transactions, and for general corporate purposes. The call strike price at $13.85 mirrors the note conversion price and the warrant strike price is $18.29, which effectively, increase the conversion price to approximately $18.29 per share.
		On September 20, 2007, we replaced our existing $40.0 million Credit Agreement with a new $60.0 million credit facility pursuant to an Amended and Restated Credit Agreement (the “2007 Credit Facility”), which expires in September 2012. The 2007 Credit Facility was secured by rental tools equipment, accounts receivable and the stock of substantially all of our domestic subsidiaries, other than domestic subsidiaries owned by a foreign subsidiary, and contained customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

9.		Long-Term Debt (continued)
		On May 15, 2008 we entered into a new Credit Agreement (“2008 Credit Facility”) with a five year senior secured $80.0 million revolving credit facility (“Revolving Credit Facility) and a senior secured term loan facility (“Term Loan Facility”) of up to $50.0 million. The obligations of the Company under the 2008 Credit Facility are guaranteed by substantially all of the Company’s domestic subsidiaries, except for domestic subsidiaries owned by foreign subsidiaries and certain immaterial subsidiaries, each of which has executed a guaranty. The 2008 Credit Facility contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage. On July 9, 2008, the Company drew down the remaining $15.0 million available on the Term Loan Facility, bringing the total amount outstanding to $50.0 million. The Term Loan will begin amortizing on September 30, 2009 at equal installments of $3.0 million per quarter. On September 12, 2008, we drew down $10.0 million on the Revolving Credit Facility. Subsequent to quarter end we drew down an additional $48.0 million resulting in total draws under the Revolving Credit Facility of $58.0 million as of October 17, 2008. The amount drawn represents 94 percent of the capacity of the Revolving Credit Facility. The Company expects to use the additional drawn amounts over the next twelve months to fund construction of two new rigs to perform an anticipated five year contract in Alaska based on the executed letter of intent.
10.		Derivative Instruments – We used derivative instruments to manage risks associated with interest rate fluctuations in connection with our $100.0 million Senior Floating Rate Notes, which were fully redeemed on September 27, 2007. These derivative instruments, which consisted of variable-to-fixed interest rate swaps, did not meet the hedge criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and were therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps was recognized in earnings.
		On July 17, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million. On September 4, 2007, our one remaining swap expired.
11.		Contingencies
		Bangladesh Claim
		In September 2005, a subsidiary of the Company was served with a lawsuit filed in the 152nd District Court of Harris County State of Texas on behalf of numerous citizens of Bangladesh claiming $250 million in damages due to various types of property damage and personal injuries (none involving loss of life) arising as a result of two blowouts that occurred in Bangladesh in January and June 2005, although only the June 2005 blowout involved the Company. The court dismissed the case on the basis that Houston, Texas, is not the appropriate location for this suit to be filed. The plaintiffs have appealed this dismissal; however, the Company believes the plaintiffs’ prospects of being successful on appeal are remote. No amounts were accrued at September 30, 2008.
		Asbestos-Related Claims
		In August 2004, the Company was notified that certain of its subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi by several hundred persons that allege that they were employed by some of the named defendants between approximately 1965 and 1986. The complaints name as defendants numerous other companies that are not affiliated with the Company, including companies that allegedly manufactured drilling- related products containing asbestos that are the subject of the complaints.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

11.		Contingencies (continued)
		Asbestos-Related Claims (continued)
		The complaints allege that the Company’s subsidiaries and other drilling contractors used asbestos-containing products in offshore drilling operations, land-based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability and claims under the Jones Act and that the plaintiffs are entitled to monetary damages. Based on the report of the special master, these complaints have been severed and venue of the claims transferred to the county in which the plaintiff resides or the county in which the cause of action allegedly accrued. Subsequent to the filing of amended complaints, Parker Drilling has joined with other co-defendants in filing motions to compel discovery to determine what plaintiffs have an employment relationship with which defendant, including whether or not any plaintiffs have an employment relationship with subsidiaries of Parker Drilling. Out of 668 amended single-plaintiff complaints filed to date, sixteen (16) plaintiffs have identified Parker Drilling or one of its affiliates as a defendant. Discovery is proceeding in groups of 60 and none of the plaintiff complaints naming Parker are included in the first 60 (Group I). The initial discovery of Group I resulted in certain dismissals with prejudice, two dismissals without prejudice and two withdraws from Group I, leaving only 40 plaintiffs remaining in Group I. Selection of Discovery Group II was completed on April 21, 2008. Out of the 60 plaintiffs selected, Parker Drilling was named in one suit.
		The subsidiaries named in these asbestos-related lawsuits intend to defend themselves vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome to have a material adverse effect on its financial condition, results of operations or cash flows; however, the Company is unable to predict the ultimate outcome of these lawsuits. No amounts were accrued at September 30, 2008.
		Gulfco Site
		Several years ago the Company received an information request under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) designating Parker Drilling Offshore Corporation, a subsidiary of Parker Drilling as a potentially responsible party with respect to the Gulfco Marine Maintenance, Inc. Superfund Site in Freeport, Texas (EPA No. TX 055144539). The subsidiary responded to this request in 2003 with documents. In January, 2008 the subsidiary received an administrative order to participate in an investigation of the site and a study of the remediation needs and alternatives. The EPA alleges that the subsidiary is successor to a party who owned the Gulfco site during the time when chemical releases took place there. Two other parties have been performing that work since mid-2005 under an earlier version of the same order. The subsidiary believes that it has a sufficient cause to decline participation under the order and has notified the EPA of that decision. Non-compliance with an EPA order absent sufficient cause for doing so can result in substantial penalties under CERCLA. The subsidiary is continuing to evaluate its relationship to the site and has conferred with the EPA and the other parties in an effort to resolve the matter. The Company has not yet estimated the amount or impact on our operations, financial position or cash flows of any costs related to the site. The EPA and the other two parties have spent over $2.7 million studying and conducting initial remediation of the site, and it is anticipated that an additional $1.3 million will be required to complete the remediation. Other costs (not yet quantified) such as interest and administrative overhead could be added to any claim against the Company. The Company does not believe it has any obligation with respect to the remediation of the property, and accordingly no accrual was made as of September 30, 2008.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

11.		Contingencies (continued)
		Customs Agent Investigation
		As previously disclosed, the Company received requests from the United States Department of Justice (“DOJ”) in July 2007 and the United States Securities and Exchange Commission (SEC”) in January 2008 relating to the Company’s utilization of the services of a customs agent. In response to those requests, the Company is conducting an internal investigation. The DOJ and the SEC are conducting parallel investigations into possible violations of U.S. law by the Company, including the Foreign Corrupt Practices Act (the “FCPA”). In particular, the DOJ and the SEC are investigating the Company’s use of customs agents in certain countries in which the Company currently operates or formerly operated, including Kazakhstan and Nigeria. The Company is fully cooperating with the DOJ and SEC investigations. At this point, we are unable to predict the duration, scope or result of the DOJ or the SEC investigation or whether either agency will commence any legal action. If we are not in compliance with the FCPA and other laws governing the conduct of business with foreign government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
		Economic Sanctions Compliance
		Our international operations are subject to economic sanctions laws and regulations restricting certain activities involving countries, entities and persons on which the U.S. has imposed economic sanctions. Pursuant to a recent internal review, we have preliminarily identified certain shipments of equipment and supplies that were routed through Iran. In addition, we have engaged in drilling wells in the Korpedje Field in Turkmenistan, from where natural gas may be exported by pipeline to Iran. We are currently reviewing these shipments and drilling activities to determine whether the timing, nature and extent of such shipments or drilling activities may have given rise to violations of these laws and regulations. Although we are unable to predict the scope or result of this internal review or its ultimate outcome, we have initiated a voluntary disclosure of these potential compliance issues to the appropriate U.S. government agency. If we are not in compliance with export restrictions and U.S. economic sanctions, we may be subject to civil or criminal penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
12.		Recent Accounting Pronouncements – In May 2008, the FASB issued FSP Accounting Principles Board (APB) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP clarifies that convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We will adopt the provisions of FSP AAPB 14-1 on January 1, 2009 and will be required to retroactively apply its provisions, which means we will restate our consolidated financial statements for prior periods. We have not yet determined the impact of this FSP on our consolidated financial statements.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

13.		Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements – Set forth on the following pages are the consolidating condensed financial statements of (i) Parker Drilling, (ii) its restricted subsidiaries that are guarantors of the Senior Notes, and Convertible Senior Notes (“the Notes”) and (iii) the restricted and unrestricted subsidiaries that are not guarantors of the Notes. The Notes are guaranteed by substantially all of the domestic restricted subsidiaries of Parker Drilling. There are currently no restrictions on the ability of the restricted subsidiaries to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries. Separate financial statements for each guarantor company are not provided as the company complies with the exception to Rule 3-10(a)(1) of Regulation S-X, set forth in sub-paragraph (f) of such rule. All guarantor subsidiaries are directly or indirectly owned 100% by the parent company, all guarantees are full and unconditional and all guarantees are joint and several.
		AralParker (a Kazakhstan joint stock company, owned 100 percent by Parker Drilling (Kazakstan), LLC, Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Argentine Holdings, Ltd., Mallard Drilling of South America, Inc., Mallard Drilling of Venezuela, Inc., Parker Drilling Investment Company, Parker Drilling (Nigeria) Limited, Parker Drilling Company (Bolivia) S.A., Parker Drilling Company Kuwait Limited, Parker Drilling Company Limited (Bahamas), Parker Drilling Company of New Zealand Limited, Parker Drilling Company of Sakhalin, Parker Drilling de Mexico S. de R.L. de C.V., Parker Drilling International of New Zealand Limited, Parker Drilling Tengiz, Ltd., PD Servicios Integrales, S. de R.L. de C.V., PKD Sales Corporation, Parker SMNG Drilling Limited Liability Company (owned 50 percent by Parker Drilling Company International, LLC), Parker Drilling Kazakhstan B.V., Parker Drilling AME Limited, Parker Drilling Asia Pacific, LLC, PD International Holdings C.V.,PD Dutch Holdings C.V., PD Selective Holdings C.V., PD Offshore Holdings C.V., Parker Drilling Netherlands B.V., Parker Drilling Dutch B.V., Parker Hungary Rig Holdings Limited Liability Company, Parker Drilling Spain Rig Services, S L, Parker 3Source, LLC, Parker 5272, LLC, Parker Central Europe Rig Holdings Limited Liability Company, Parker Cyprus Leasing Limited, Parker Cyprus Ventures Limited, Parker Drilling International B.V., Parker Drilling Offshore B.V., Parker Drilling Offshore International, Inc., Parker Drilling Overseas B.V., Parker Drilling Russia B.V., Parker Drillsource, LLC, PD Labor Services, Ltd., PD Labor Sourcing, Ltd., and Parker Enex, LLC are all non-guarantor subsidiaries. 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, 2008 and December 31, 2007 and for the three and nine months ended September 30, 2008 and 2007. The consolidating condensed financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)

		September 30, 2008
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	26,654			$	7,947			$	40,676			$	—			$	75,277
Accounts and notes receivable, net			59,270				215,897				146,897				(204,960	)			217,104
Rig materials and supplies			—				11,936				17,978				—				29,914
Deferred costs			—				2,114				6,414				—				8,528
Deferred income taxes			9,424				—				—				—				9,424
Other tax assets			58,816				(38,951	)			(1,781	)			—				18,084
Other current assets			548				18,700				3,539				—				22,787
Total current assets			154,712				217,643				213,723				(204,960	)			381,118
Property, plant and equipment, net			79				482,303				170,615				122				653,119
Goodwill			—				100,315				—				—				100,315
Investment in subsidiaries and intercompany advances			960,202				963,543				(84,940	)			(1,838,805	)			—
Investment in and advances to unconsolidated joint venture			—				4,620				(4,620	)			—				—
Other noncurrent assets			19,647				15,031				8,913				—				43,591
Total assets		$	1,134,640			$	1,783,455			$	303,691			$	(2,043,643	)		$	1,178,143
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	3,000			$	—			$	—			$	—			$	3,000
Accounts payable and accrued liabilities			50,381				288,119				101,470				(323,503	)			116,467
Accrued income taxes			263				4,610				6,422				—				11,295
Total current liabilities			53,644				292,729				107,892				(323,503	)			130,762
Long-term debt			410,235				—				—				—				410,235
Other long-term liabilities			358				12,594				7,868				—				20,820
Long-term deferred tax liability			—				1,237				7,269				—				8,506
Intercompany payables			62,583				576,746				36,830				(676,159	)			—
Contingencies (Note 11)			—				—				—				—				—
Stockholders’ equity:
Common stock			18,883				39,899				21,153				(61,052	)			18,883
Capital in excess of par value			601,697				1,045,727				122,268				(1,167,995	)			601,697
Retained earnings (accumulated deficit)			(12,760	)			(185,477	)			411				185,066				(12,760	)
Total stockholders’ equity			607,820				900,149				143,832				(1,043,981	)			607,820
Total liabilities and stockholders’ equity		$	1,134,640			$	1,783,455			$	303,691			$	(2,043,643	)		$	1,178,143

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)

		December 31, 2007
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	31,326			$	8,314			$	20,484			$	—			$	60,124
Accounts and notes receivable, net			79,688				187,663				80,139				(180,784	)			166,706
Rig materials and supplies			—				10,667				13,597				—				24,264
Deferred costs			—				1,553				6,242				—				7,795
Deferred income taxes			9,423				—				—				—				9,423
Other tax assets			59,673				(23,395	)			(3,746	)			—				32,532
Other current assets			174				10,578				11,587				—				22,339
Total current assets			180,284				195,380				128,303				(180,784	)			323,183
Property, plant and equipment, net			79				423,652				162,035				122				585,888
Goodwill			—				100,315				—				—				100,315
Investment in subsidiaries and intercompany advances			813,248				963,269				(58,320	)			(1,718,197	)			—
Investment in and advances to unconsolidated joint venture			—				267				(4,620	)			—				(4,353	)
Other noncurrent assets			40,113				20,805				11,036				—				71,954
Total assets		$	1,033,724			$	1,703,688			$	238,434			$	(1,898,859	)		$	1,076,987
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current debt		$	20,000			$	—			$	—			$	—			$	20,000
Accounts payable and accrued liabilities			48,820				221,363				64,577				(247,408	)			87,352
Accrued income taxes			1,765				10,790				4,273				—				16,828
Total current liabilities			70,585				232,153				68,850				(247,408	)			124,180
Long-term debt			353,721				—				—				—				353,721
Other long-term liabilities			110				48,174				8,034				—				56,318
Long-term deferred tax liability			1				1,237				6,806				—				8,044
Intercompany payables			74,583				576,746				38,074				(689,403	)			—
Contingencies (Note 11)			—				—				—				—				—
Stockholders’ equity:
Common stock			18,653				39,900				21,152				(61,052	)			18,653
Capital in excess of par value			593,866				1,045,732				115,765				(1,161,497	)			593,866
Retained earnings (accumulated deficit)			(77,795	)			(240,254	)			(20,247	)			260,501				(77,795	)
Total stockholders’ equity			534,724				845,378				116,670				(962,048	)			534,724
Total liabilities and stockholders’ equity		$	1,033,724			$	1,703,688			$	238,434			$	(1,898,859	)		$	1,076,987

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

		Three months ended September 30, 2008
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Total revenues		$	—			$	171,597			$	81,945			$	(26,088	)		$	227,454
Operating expenses			5				104,648				65,907				(26,088	)			144,472
Depreciation and amortization			—				21,745				8,918				—				30,663
Total operating gross margin			(5	)			45,204				7,120				—				52,319
General and administration expense (1)			(42	)			(9,221	)			(8	)			—				(9,271	)
Gain on disposition of assets, net			—				461				338				—				799
Total operating income (loss)			(47	)			36,444				7,450				—				43,847
Other income and (expense):
Interest expense			(6,981	)			(11,814	)			(62	)			13,037				(5,820	)
Interest income			10,655				1,890				875				(13,037	)			383
Equity in loss of unconsolidated joint venture, net of taxes			—				—				—				—				—
Other			2				296				1				—				299
Equity in net earnings of subsidiaries			28,048				—				—				(28,048	)			—
Total other income and (expense)			31,724				(9,628	)			814				(28,048	)			(5,138	)
Income (loss) before income taxes			31,677				26,816				8,264				(28,048	)			38,709
Income tax (benefit) expense:
Current			12,013				2,372				(206	)			—				14,179
Deferred			1,113				4,897				(31	)			—				5,979
Total income tax (benefit) expense			13,126				7,269				(237	)			—				20,158
Net income (loss)		$	18,551			$	19,547			$	8,501			$	(28,048	)		$	18,551