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 ------------------------------------------------------ (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 ----------------------------------------------------- (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 [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