PARKER DRILLING CO /DE/ - Quarter Report: 2007 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For The Quarterly Period Ended JUNE 30, 2007

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

For the transition period from ___ to ___

PARKER DRILLING COMPANY

Delaware		73-0618660
(State or other jurisdiction of		(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 þ No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Exchange Act Rule 12b-2.

Large accelerated filer þ            Accelerated filer o            Non-accelerated filer o

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

As of July 31, 2007, 111,709,012 common shares were outstanding.

 

 

TABLE OF CONTENTS

		Page
Part I. Financial Information		3
Item 1. Financial Statements		3
Consolidated Condensed Balance Sheets (Unaudited) June 30, 2007 and December 31, 2006		3
Consolidated Condensed Statements of Operations (Unaudited) Three and Six Months Ended June 30, 2007 and 2006		4
Consolidated Condensed Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2007 and 2006		5
Notes to the Unaudited Consolidated Condensed Financial Statements		6-21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22-33
Item 3. Quantitative and Qualitative Disclosures about Market Risk		33
Item 4. Controls and Procedures		34
Part II. Other Information		34
Item 1. Legal Proceedings		34
Item 1A. Risk Factors		34
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		34
Item 3. Defaults Upon Senior Securities		34
Item 4. Submission of Matters to a Vote of Security Holders		34
Item 5. Other Information		35
Item 6. Exhibits		35
Signatures		36
Officer Certifications
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER DRILLING COMPANY AND SUBSIDIARIES

		June 30,				December 31,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	63,148			$	92,203
Marketable securities			39,200				62,920
Accounts and notes receivable, net			137,642				112,359
Rig materials and supplies			21,075				15,000
Deferred costs			9,343				6,662
Deferred income taxes			14,774				17,307
Other current assets			31,100				11,123
Total current assets			316,282				317,574
Property, plant and equipment less accumulated depreciation and amortization of $609,929 at June 30, 2007 and $570,650 at December 31, 2006			525,872				435,473
Goodwill			100,315				100,315
Other noncurrent assets			56,668				47,939
Total assets		$	999,137			$	901,301
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	89,359			$	95,226
Accrued income taxes			12,345				6,677
Total current liabilities			101,704				101,903
Long-term debt			329,044				329,368
Other long-term liabilities			73,964				10,931
Long-term deferred tax liability			23,008				—
Contingencies (Note 9)			—				—
Stockholders’ equity:
Common stock			18,615				18,220
Capital in excess of par value			587,821				568,253
Accumulated deficit			(135,019	)			(127,374	)
Total stockholders’ equity			471,417				459,099
Total liabilities and stockholders’ equity		$	999,137			$	901,301

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Drilling and rental revenues:
U.S. drilling		$	57,651			$	42,697			$	119,275			$	82,950
International drilling			61,196				72,972				120,870				152,802
Rental tools			31,430				30,319				61,405				57,570
Total drilling and rental revenues			150,277				145,988				301,550				293,322
Drilling and rental operating expenses:
U.S. drilling			24,616				19,814				51,377				37,284
International drilling			50,617				57,854				96,400				119,226
Rental tools			12,521				10,969				23,684				21,439
Depreciation and amortization			19,642				17,715				37,701				34,672
Total drilling and rental operating expenses			107,396				106,352				209,162				212,621
Drilling and rental operating income			42,881				39,636				92,388				80,701
General and administration expense			(6,246	)			(7,575	)			(12,134	)			(15,269	)
Gain on disposition of assets, net			269				2,125				16,673				2,573
Total operating income			36,904				34,186				96,927				68,005
Other income and (expense):
Interest expense			(5,985	)			(8,199	)			(12,315	)			(17,300	)
Changes in fair value of derivative positions			(28	)			382				(409	)			1,195
Interest income			1,712				2,039				3,496				3,445
Loss on extinguishment of debt			—				—				—				(2	)
Minority interest			—				44				(1,000	)			(920	)
Other			70				3				77				(14	)
Total other income and (expense)			(4,231	)			(5,731	)			(10,151	)			(13,596	)
Income before income taxes			32,673				28,455				86,776				54,409
Income tax expense:
Current			6,613				(5,563	)			28,625				—
Deferred			9,200				20,257				11,297				29,190
Total income tax expense			15,813				14,694				39,922				29,190
Net income		$	16,860			$	13,761			$	46,854			$	25,219
Basic earnings per share:
Net income		$	0.15			$	0.13			$	0.43			$	0.24
Diluted earnings per share:
Net income		$	0.15			$	0.13			$	0.43			$	0.24
Number of common shares used in computing earnings per share:
Basic			109,740,528				107,082,784				108,760,980				105,783,424
Diluted			110,842,121				108,363,036				109,968,329				107,283,318

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

		Six Months Ended June 30,
		2007				2006
Cash flows from operating activities:
Net income		$	46,854			$	25,219
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			37,701				34,672
Gain on disposition of assets			(16,673	)			(2,573	)
Deferred income tax expense			11,297				19,664
Expenses not requiring cash			6,600				5,828
Change in operating assets and liabilities			(48,594	)			(3,767	)
Net cash provided by operating activities			37,185				79,043
Cash flows from investing activities:
Capital expenditures			(129,637	)			(80,242	)
Proceeds from the sale of assets			21,974				2,123
Proceeds from insurance settlements			—				2,501
Purchase of marketable securities			(48,675	)			(136,120	)
Proceeds from sale of marketable securities			72,395				126,550
Net cash used in investing activities			(83,943	)			(85,188	)
Cash flows from financing activities:
Principal payments under debt obligations			—				—
Proceeds from common stock offering			—				99,947
Proceeds from stock options exercised			15,791				6,641
Excess tax benefit from stock based compensation			1,912				2,063
Net cash provided by financing activities			17,703				108,651
Net increase (decrease) in cash and cash equivalents			(29,055	)			102,506
Cash and cash equivalents at beginning of year			92,203				60,176
Cash and cash equivalents at end of period		$	63,148			$	162,682
Supplemental cash flow information:
Interest paid		$	13,040			$	17,577
Income taxes paid		$	25,534			$	6,753

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.		General — In the opinion of the management of Parker Drilling Company, the accompanying unaudited consolidated condensed financial statements reflect all adjustments (of a normally recurring nature) which are necessary for a fair presentation of (1) the financial position as of June 30, 2007 and December 31, 2006, (2) the results of operations for the three and six months ended June 30, 2007 and 2006, and (3) cash flows for the six months ended June 30, 2007 and 2006. Results for the six months ended June 30, 2007 are not necessarily indicative of the results that will be realized for the year ending December 31, 2007. The financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2006.
		Stock-Based Compensation — Total stock-based compensation expense recognized under SFAS No. 123R for the three and six month periods ended June 30, 2007 was $2.3 million and $4.1 million respectively, all of which was related to restricted stock plan expense. Total stock-based compensation expense recognized under SFAS No. 123R for the three and six month periods ended June 30, 2006 was $1.9 million and $3.1 million respectively, of which $1.9 million and $3.0 million, respectively, was related to restricted stock plan expense. Stock-based compensation expense is included in our consolidated condensed income statement in “General and administration expense.” There were 8,334 unvested stock options at December 31, 2006 and none as of June 30, 2007. Total unrecognized compensation cost related to stock options granted under our plans was approximately $1,200 at December 31, 2006 and zero at June 30, 2007. The Company had 1,307,800 outstanding and exercisable stock options as of June 30, 2007, the aggregate intrinsic value of which was $3.5 million, with a weighted average exercise price of $6.10. Unvested restricted stock awards at December 31, 2006 and June 30, 2007 were 1,556,485 shares and 1,430,822 shares, respectively. Total unrecognized compensation cost related to unamortized restricted stock awards was $4.8 million as of December 31, 2006 and $8.0 million as of June 30, 2007. There were 10,500 and 804,345 restricted shares granted (net of forfeitures, if any) to certain officers and key employees during the three and six month periods ended June 30, 2007, respectively. The remaining unrecognized compensation cost related to unamortized restricted stock awards will be amortized over a weighted-average vesting period of approximately one year.
		During the six months ended June 30, 2006 the valuation assumptions used in our Black-Scholes option pricing model to estimate the fair value of stock options granted were 16.9 percent for expected volatility, 0.25 years expected term, 4.23 percent risk free interest rate and there was no expected dividend yield. There were no stock options granted in 2007.
		The excess tax benefit realized for the tax deductions from options exercised and restricted stock vesting totaled $1.9 million for the six months ended June 30, 2007, which has been reported as a financing cash inflow in the consolidated condensed statement of cash flows.
2.		Common Stock Offering — In January 2006, we issued 8,900,000 shares of common stock pursuant to a Free Writing Prospectus dated January 17, 2006 and a Prospectus Supplement dated January 18, 2006. On January 23, 2006, we realized $11.23 per share or a total of $99.9 million of net proceeds before expenses, but after underwriter discount, from the offering.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

3.

Earnings Per Share (“EPS”)

		Three Months Ended June 30, 2007
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	16,860,000				109,740,528			$	0.15
Effect of dilutive securities:
Stock options and restricted stock			—				1,101,593				—
Diluted EPS:
Net income		$	16,860,000				110,842,121			$	0.15

		Six Months Ended June 30, 2007
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	46,854,000				108,760,980			$	0.43
Effect of dilutive securities:
Stock options and restricted stock			—				1,207,350				—
Diluted EPS:
Net income		$	46,854,000				109,968,329			$	0.43

		Three Months Ended June 30, 2006
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	13,761,000				107,082,784			$	0.13
Effect of dilutive securities:
Stock options and restricted stock			—				1,280,252				—
Diluted EPS:
Net income		$	13,761,000				108,363,036			$	0.13

		Six Months Ended June 30, 2006
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	25,219,000				105,783,424			$	0.24
Effect of dilutive securities:
Stock options and restricted stock			—				1,499,894				—
Diluted EPS:
Net income		$	25,219,000				107,283,318			$	0.24

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

3.		Earnings Per Share (“EPS”) (continued)
		Options to purchase 321,000 shares of common stock with exercise prices ranging from $12.09 to $12.19 per share were outstanding during the three months ended June 30, 2007, and options to purchase 371,000 shares of common stock with exercise prices ranging from $10.81 to $12.19 per share were outstanding during the six months ended June 30, 2007, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 2,277,000 shares of common stock with exercise prices ranging from $8.88 to $12.19 per share were outstanding during the three months ended June 30, 2006, and options to purchase 517,000 shares of common stock with exercise prices ranging from $9.31 to $12.19 per share were outstanding during the six months ended June 30, 2006 but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares.
4.		Business Segments — The primary services we provide are as follows: U.S. drilling, international drilling and rental tools. Information regarding our operations by industry segment for the three and six months ended June 30, 2007 and 2006 is as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
		(Dollars in Thousands)								(Dollars in Thousands)
Drilling and rental revenues:
U.S. drilling		$	57,651			$	42,697			$	119,275			$	82,950
International drilling			61,196				72,972				120,870				152,802
Rental tools			31,430				30,319				61,405				57,570
Total drilling and rental revenues		$	150,277			$	145,988			$	301,550			$	293,322
Drilling and rental operating income:
U.S. drilling		$	25,281			$	17,341			$	52,755			$	35,067
International drilling			4,347				7,827				12,607				18,980
Rental tools			13,253				14,468				27,026				26,654
Total drilling and rental operating income			42,881				39,636				92,388				80,701
General and administration expense			(6,246	)			(7,575	)			(12,134	)			(15,269	)
Gain on disposition of assets, net			269				2,125				16,673				2,573
Total operating income			36,904				34,186				96,927				68,005
Interest expense			(5,985	)			(8,199	)			(12,315	)			(17,300	)
Changes in fair value of derivative positions			(28	)			382				(409	)			1,195
Loss on extinguishment of debt			—				—				—				(2	)
Other			1,782				2,086				2,573				2,511
Income before income taxes		$	32,673			$	28,455			$	86,776			$	54,409

5.

Disposition of Assets — During the first quarter of 2007 we sold workover barge Rigs 9 and 26 for proceeds of approximately $20.5 million resulting in a recognized gain of $15.1 million. These two rigs were classified as assets held for sale as of December 31, 2006. During the second quarter of 2006, we sold the remaining salvageable assets in connection with the loss of Rig 255 in Bangladesh that occurred in June 2005. The asset sales resulted in a gain of $1.4 million during the period. In addition, we realized a gain of $0.7 million in connection with the disposition of certain other equipment during the second quarter of 2006.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

6.		Accounting for Uncertainty in Income Taxes — In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This accounting statement prescribes financial statement recognition threshold and measurement criteria for tax positions taken or expected to be taken in tax returns.
		The Company adopted FIN 48 effective January 1, 2007. As a result, the Company has increased its liability by $54.5 million for unrecognized tax amounts related to various federal, state and international tax matters. Included in this amount is $35.1 million of tax positions, that, if recognized, would have impacted the Company’s effective tax rate. The recognition of this liability is required under FIN 48 because of the uncertainty regarding the ultimate outcome of certain tax positions. Although the Company’s position regarding the ultimate outcome of these matters is unchanged, the Company is now required to record a liability at a lower threshold across the Company’s worldwide operations. The Company has accounted for the entire $54.5 million as a reduction to the January 1, 2007 balance of retained earnings.
		Of the $54.5 million referred to above, $49 million is related to Kazakhstan. As of June 30, 2007, we have a total liability of $91.5 million accrued for Kazakhstan before the recognition of U.S. tax benefits, which net liability has been classified as non-current in our balance sheet. For a complete overview of this issue, see Kazakhstan Tax Claims in Note 9.
		The Company has classified foreign currency exchange rate fluctuations, interest and penalties as a component of tax expense. On January 1, 2007, we recorded approximately $41.3 million for interest and penalties related to uncertain tax positions. During the six months ended June 30, 2007, the Company recognized an additional liability of approximately $5.9 million, comprising of foreign currency exchange rate fluctuations, interest and a release of a previously recognized liability. The Company does not expect that the unrecognized tax amounts will change significantly within the next twelve months.
		The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business our returns are subject to examination by taxing authorities throughout the world.
		Income Tax Expense — Income tax expense was $15.8 million for the second quarter of 2007, as compared to income tax expense of $14.7 million for the second quarter of 2006. Income tax for 2007 includes $4.0 million of interest and foreign currency exchange rate fluctuations related to our FIN 48 calculation.
7.		Long-Term Debt

		June 30, 2007				December 31, 2006
		(Dollars in Thousands)
Senior Notes:
Interest rate floating (LIBOR + 4.75%), due 2010		$	100,000			$	100,000
Interest rate 9.625%, due 2013			229,044				229,368
Total debt			329,044				329,368
Less current portion			—				—
Total long-term debt		$	329,044			$	329,368

Our current $40.0 million credit facility is available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to this facility. 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 tools equipment. The credit facility calls for a borrowing base calculation only when the credit facility has outstanding loans, including letters of credit, totaling at least $25.0 million. As of June 30, 2007, there were $17.6 million in letters of credit outstanding and no loans.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

8.		Derivative Instruments — We use derivative instruments to manage risks associated with interest rate fluctuations in connection with our $100.0 million Senior Floating Rate Notes. These derivative instruments, which consist of variable-to-fixed interest rate swaps, do not meet the hedge criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and are therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is recognized currently in earnings.
		As of June 30, 2007, we had the following derivative instruments outstanding related to our interest rate swaps, which are included in “Other current assets” and “Other noncurrent assets” as determined by their termination dates:

Effective

Termination

Notional

Floating

Fixed

Fair

Date

Date

Amount

Rate

Rate

Value

(Dollars in Thousands)

September 1, 2005

September 2, 2008

$

50,000

Three-month LIBOR

8.83

%

$

699

plus 475 basis points

September 1, 2005

September 4, 2007

$

50,000

Three-month LIBOR

8.48

%

213

plus 475 basis points

$

912

		Subsequent to June 30, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million on July 17, 2007.
9.		Contingencies
		Kazakhstan Tax Claims
		On October 12, 2005, the Kazakhstan Branch (“PKD Kazakhstan”) of Parker Drilling Company International Limited (“PDCIL”) received an Act of Tax Audit from the Ministry of Finance of Kazakhstan (“MinFin”) assessing PKD Kazakhstan an amount of KZT (Kazakhstan Tenge) 14.9 billion (approximately $119.7 million). Approximately KZT 7.5 billion or $60.6 million was assessed for import Value Added Tax (“VAT”), administrative fines and interest on equipment imported to perform the drilling contracts (the “VAT Assessment”) and approximately KZT 7.4 billion or $59.1 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received from the client for the upgrade of Barge Rig 257 and other issues (the “Income Tax Assessment”).
		The VAT and Income Tax Assessment were both appealed to the Astana City Court and on April 6, 2006, the Astana City Court issued an opinion in favor of PKD Kazakhstan on the Income Tax Assessment and in favor of MinFin on the VAT Assessment, but reduced the amount of the VAT Assessment. MinFin and PKD Kazakhstan both appealed the decision of the Astana City Court to the Civil Panel of the Supreme Court of Kazakhstan (“SCK”). On May 24, 2006, the Civil Panel of the SCK issued a decision upholding the ruling of the Astana City Court on the VAT Assessment. Consistent with its contractual obligations, on November 20, 2006, the client advanced the actual amount of the VAT Assessment and this amount has been remitted to MinFin. The client has also contractually agreed to reimburse PKD Kazakhstan for any incremental income taxes that PKD Kazakhstan incurs from the reimbursement of this VAT Assessment
		Contrary to two previous rulings on this precise issue, the May 24, 2006, ruling of the Civil Panel of the SCK affirmed the Income Tax Assessment. PKD Kazakhstan immediately made application for a stay of execution of the ruling, based on the fact that the SCK has decided this issue in favor of PKD Kazakhstan on two previous occasions and because the decision is inconsistent with the US-Kazakhstan tax treaty, and also requested that the five-member supervisory panel of the SCK grant a supervisory review of the decision. On May 30, 2006, the SCK granted a stay of execution of the decision pending a determination of the five-member panel of the SCK whether or not to grant supervisory review of the decision.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

9.		Contingencies (continued)
		Kazakhstan Tax Claims (continued)
		The SCK repeatedly postponed a decision on the issue of supervisory review, which postponement was apparently granted to allow the Competent Authorities from the U.S. and the Republic of Kazakhstan (“RoK”) to address this matter. Competent Authority review is a tax treaty procedure to resolve disputes, including which country may tax income covered under the treaty. In response to the petition initiated by PKD Kazakhstan and pursuant to the Mutual Agreement Procedures of the U.S.-Kazakhstan Tax Treaty (the “Tax Treaty”), the Competent Authority of the U.S. IRS Treaty Division and MinFin held meetings but were unable to achieve mutual agreement as to which country may tax the income in issue under the Tax Treaty.
		On April 12, 2007, the SCK determined that the May 24, 2006, ruling of the SCK should be reviewed by a five member supervisory panel of the SCK indicating it had doubts as to the lawfulness and validity of the May 24, 2006 ruling, including whether or not the ruling takes into account double taxation under the Tax Treaty.
		On July 30, 2007, the SCK affirmed the May 24, 2006 ruling upholding the income tax assessment of MinFin. On August 2, 2007, PKD Kazakhstan filed an appeal to the twelve member plenum of the SCK pursuant to an RoK law that provides relief can be granted if enforcement of the ruling would result in economic harm to the RoK. On August 7, 2007, MinFin issued a notice of assessment of corporate income taxes of approximately US$40 million and interest of approximately US$30 million. A liability associated with this claim has been fully accrued as described in Note 6. PKD Kazakhstan immediately filed a Complaint Against the Notice requesting that the double taxation issue be resolved pursuant to the Competent Authority procedure, that interest be waived since Parker has paid tax on this income and that enforcement be suspended pending resolution of the double taxation issue. Parker’s counsel has advised that the Complaint has been received by MinFin and that under RoK law any enforcement action is stayed pending resolution of the Complaint. The Company anticipates that resumption of the Competent Authority proceedings in the immediate future will address the double taxation issue, although the Company has no assurance as to the ultimate resolution of the double taxation issue.
		Bangladesh Claim
		In September 2005, a subsidiary of the Company was served with a lawsuit filed in the 152nd District Court of Harris County State of Texas on behalf of numerous citizens of Bangladesh claiming $250 million in damages due to various types of property damage and personal injuries (none involving loss of life) arising as a result of two blowouts that occurred in Bangladesh in January and June 2005, although only the June 2005 blowout involved the Company. This case was dismissed against the subsidiary of the Company based on forum non conveniens, a legal defense raised by the subsidiary claiming that Houston, Texas, is not the appropriate location for this suit to be filed. The plaintiffs have appealed this dismissal; however the Company believes the plaintiffs’ prospects of being successful on appeal are remote.
		Asbestos-Related Claims
		In August 2004, the Company was notified that certain of its subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi by several hundred persons that allege that they were employed by some of the named defendants between approximately 1965 and 1986. The complaints name as defendants numerous other companies that are not affiliated with the Company, including companies that allegedly manufactured drilling related products containing asbestos that are the subject of the complaints.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

9.		Contingencies (continued)
		Asbestos-Related Claims (continued)
		The complaints allege that the Company’s subsidiaries and other drilling contractors used asbestos-containing products in offshore drilling operations, land-based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability and claims under the Jones Act and that the Plaintiffs are entitled to monetary damages. Based on the report of the special master, these complaints have been severed and venue of the claims transferred to the county in which the plaintiff resides or the county in which the cause of action allegedly accrued. Subsequent to the filing of amended complaints, Parker has joined with other co-defendants in filing motions to compel discovery to determine what plaintiffs have an employment relationship with which defendant, including whether or not any plaintiffs have an employment relationship with subsidiaries of the Company. Out of 528 amended single-plaintiff complaints filed to date, eleven plaintiffs have identified Parker Drilling or one of its affiliates as a defendant.
		The subsidiaries named in these asbestos-related lawsuits intend to defend themselves vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome to have a material adverse effect on its financial condition, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these lawsuits.
		Gulfco Site
		In 2003 the Company received an information request under CERCLA designating a subsidiary of the Company as a potentially responsible party with respect to the Gulfco Marine Maintenance, Inc. Superfund Site in Freeport, Texas (EPA No. TX 055144539). We responded to this request in 2003 and have been in contact with EPA regarding the response. In July 2005, EPA issued a Unilateral Administrative Order for remedial investigation to five potentially responsible parties. The EPA order did not name us. According to EPA, three of the potentially responsible parties who received the order are currently performing a remedial investigation of the site to define the nature and extent of the contamination there. Based on the currently available information, we do not believe we have responsibility for the Gulfco Marine Site. Among other reasons, our subsidiary, Parker Drilling Offshore Company neither owned nor operated the site during the relevant time period, and is not otherwise connected to the site. If a claim were to be brought against us in the future by the United States or the parties performing the work, we would defend that action vigorously. The amount of any such future claim cannot be estimated with accuracy until after the remedial investigation is completed, but it is not expected to be material to our business or financial condition.
		Freight Forwarding and Customs Agent Request
		The U.S. Department of Justice has recently requested us to provide information regarding our utilization of the services of a freight forwarding and customs agent during the past five years to verify if the services provided by this freight forwarding and customs agent were in compliance with the Foreign Corrupt Practices Act. It is our understanding that a similar request was sent to several other service contractors. We are fully cooperating with the request for information.
10.		Recent Accounting Pronouncements — In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities-Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 allows certain financial assets and liabilities to be recognized, at the Company’s election, at fair market value, with any gains or losses for the period recorded in the statement of income. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective for fiscal years beginning after November 15, 2007. The Company has not determined the impact on its Consolidated Financial Statements, if any, of the adoption of SFAS No. 159.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

11.

Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements — Set forth on the following pages are the unaudited consolidating condensed financial statements of (i) Parker Drilling, (ii) our restricted subsidiaries that are guarantors of the Senior Notes and (iii) our restricted and unrestricted subsidiaries that are not guarantors of the Senior Notes. All of our Senior Notes are guaranteed by substantially all of the restricted subsidiaries of Parker Drilling. There are currently no restrictions on the ability of the restricted subsidiaries to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries.

The non-guarantor subsidiaries are AralParker (a Kazakhstan closed joint stock company, owned 80 percent by Parker Drilling (Kazakstan), LLC and 20 percent by Aralnedra, CJSC), Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Drilling of South America, Inc., Mallard Drilling of Venezuela, Inc., Parker Drilling Investment Company, Parker Drilling (Nigeria) Limited, Parker Drilling Company (Bolivia) S.A., Parker Drilling Company Kuwait Limited, Parker Drilling Company Limited (Bahamas), Parker Drilling Company of New Zealand Limited, Parker Drilling Company of Sakhalin, Parker Drilling de Mexico, S. de R.L. de C.V., Parker Drilling International of New Zealand Limited, Parker Drilling Tengiz, Ltd., PD Servicios Integrales, S. de R.L. de C.V., PKD Sales Corporation, Parker SMNG Drilling Limited Liability Company (owned 50 percent by Parker Drilling Company International, LLC), Parker Drilling Asia Pacific, LLC, Parker Drilling Kazakhstan B.V., Parker Drilling Netherlands B.V., Parker Drilling International B.V., Parker Drilling Offshore B.V., Parker Drilling Overseas B.V., Parker Drilling Russia B.V., Parker Drilling Dutch B.V., Parker Drilling AME Limited, Parker Drillsource, LLC, Parker 3source, LLC, Parker Enex, LLC, Parker Hungary Rig Holdings Limited Liability Company, Parker 5272, LLC, Parker Drilling Spain Rig Services S.L., Parker Cyprus Leasing Limited, Parker Cyprus Ventures Limited, PD International Holdings C.V., PD Dutch Holdings C.V., PD Offshore Holdings C.V., PD Selective Holdings, C.V., PD Labor Services, Ltd., and PD Labor Sourcing, Ltd. We are providing unaudited consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of June 30, 2007 and December 31, 2006 and for the three and six months ended June 30, 2007 and 2006. The condensed consolidating financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET

		June 30, 2007
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	33,149			$	12,858			$	17,141			$	—			$	63,148
Marketable securities			37,200				2,000				—				—				39,200
Accounts and notes receivable, net			75,241				169,118				42,291				(149,008	)			137,642
Rig materials and supplies			—				11,806				9,269				—				21,075
Deferred costs			—				5,140				4,203				—				9,343
Other current assets			35,358				9,426				1,036				54				45,874
Total current assets			180,948				210,348				73,940				(148,954	)			316,282
Property, plant and equipment, net			134				438,670				86,946				122				525,872
Assets held for sale			—				—				—				—				—
Goodwill			—				100,315				—				—				100,315
Investment in subsidiaries and intercompany advances			708,900				891,582				21,828				(1,622,310	)			—
Other noncurrent assets			15,946				26,053				14,669				—				56,668
Total assets		$	905,928			$	1,666,968			$	197,383			$	(1,771,142	)		$	999,137
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities			46,324				195,734				45,266				(197,965	)		$	89,359
Accrued income taxes			1,636				9,125				1,584				—				12,345
Total current liabilities			47,960				204,859				46,850				(197,965	)			101,704
Long-term debt			329,044				—				—				—				329,044
Other long-term liabilities			(34,702	)			103,797				4,869				—				73,964
Long-term deferred tax liability			17,626				(620	)			6,002				—				23,008
Intercompany payables			74,583				580,356				32,359				(687,298	)			—
Stockholders’ equity:
Common stock			18,615				39,899				21,153				(61,052	)			18,615
Capital in excess of par value			587,821				1,041,930				86,553				(1,128,483	)			587,821
Retained earnings (accumulated deficit)			(135,019	)			(303,253	)			(403	)			303,656				(135,019	)
Total stockholders’ equity			471,417				778,576				107,303				(885,879	)			471,417
Total liabilities and stockholders’ equity		$	905,928			$	1,666,968			$	197,383			$	(1,771,142	)		$	999,137

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET

		December 31, 2006
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	60,029			$	14,367			$	17,807			$	—			$	92,203
Marketable securities			60,920				2,000				—				—				62,920
Accounts and notes receivable, net			53,844				143,905				33,625				(119,015	)			112,359
Rig materials and supplies			—				7,173				7,827				—				15,000
Deferred costs			—				6,321				341				—				6,662
Other current assets			18,105				8,969				1,319				37				28,430
Total current assets			192,898				182,735				60,919				(118,978	)			317,574
Property, plant and equipment, net			134				354,356				80,861				122				435,473
Assets held for sale			—				4,828				—				—				4,828
Goodwill			—				100,315				—				—				100,315
Investment in subsidiaries and intercompany advances			694,050				846,800				(8,053	)			(1,532,797	)			—
Other noncurrent assets			18,043				19,774				5,294				—				43,111
Total assets		$	905,125			$	1,508,808			$	139,021			$	(1,651,653	)		$	901,301
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	44,667			$	175,092			$	44,611			$	(169,144	)		$	95,226
Accrued income taxes			(10,514	)			17,039				152				—				6,677
Total current liabilities			34,153				192,131				44,763				(169,144	)			101,903
Long-term debt			329,368				—				—				—				329,368
Other long-term liabilities			1,596				9,030				265				40				10,931
Intercompany payables			80,909				544,250				37,219				(662,378	)			—
Stockholders’ equity:
Common stock			18,220				39,899				21,251				(61,150	)			18,220
Capital in excess of par value			568,253				1,013,736				34,526				(1,048,262	)			568,253
Retained earnings (accumulated deficit)			(127,374	)			(290,238	)			997				289,241				(127,374	)
Total stockholders’ equity			459,099				763,397				56,774				(820,171	)			459,099
Total liabilities and stockholders’ equity		$	905,125			$	1,508,808			$	139,021			$	(1,651,653	)		$	901,301

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

		Three months ended June 30, 2007
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Drilling and rental revenues		$	—			$	136,568			$	22,036			$	(8,327	)		$	150,277
Drilling and rental operating expenses			1				75,897				20,188				(8,332	)			87,754
Depreciation and amortization			—				18,484				1,158				—				19,642
Drilling and rental operating income			(1	)			42,187				690				5				42,881
General and administration expense (1)			(42	)			(6,177	)			(27	)			—				(6,246	)
Gain (loss) on disposition of assets, net			—				253				16				—				269
Total operating income (loss)			(43	)			36,263				679				5				36,904
Other income and (expense):
Interest expense			(7,175	)			(11,795	)			(165	)			13,150				(5,985	)
Changes in fair value of derivative positions			(28	)			—				—				—				(28	)
Interest income			11,989				2,059				814				(13,150	)			1,712
Loss on extinguishment of debt			—				—				—				—				—
Minority interest			—				—				—				—				—
Other			5				70				—				(5	)			70
Equity in net earnings of subsidiaries			18,722				—				—				(18,722	)			—
Total other income and (expense)			23,513				(9,666	)			649				(18,727	)			(4,231	)
Income (loss) before income taxes			23,470				26,597				1,328				(18,722	)			32,673
Income tax expense :
Current			3,821				1,409				1,383				—				6,613
Deferred			2,789				6,125				286				—				9,200
Income tax expense			6,610				7,534				1,669				—				15,813
Net income (loss)		$	16,860			$	19,063			$	(341	)		$	(18,722	)		$	16,860

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

		Three Months Ended June 30, 2006
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Drilling and rental revenues		$	—			$	130,444			$	28,621			$	(13,077	)		$	145,988
Drilling and rental operating expenses			—				69,377				32,337				(13,077	)			88,637
Depreciation and amortization			—				16,725				990				—				17,715
Drilling and rental operating income (loss)			—				44,342				(4,706	)			—				39,636
General and administration expense (1)			(27	)			(7,547	)			(1	)			—				(7,575	)
Gain (loss) on disposition of assets, net			(6	)			2,115				16				—				2,125
Total operating income (loss)			(33	)			38,910				(4,691	)			—				34,186
Other income and (expense):
Interest expense			(9,378	)			(11,803	)			(445	)			13,427				(8,199	)
Changes in fair value of derivative positions			382				—				—				—				382
Interest income			12,594				2,012				860				(13,427	)			2,039
Loss on extinguishment of debt			—				—				—				—				—
Minority interest			—				—				44				—				44
Other			11				(89	)			81				—				3
Equity in net earnings of subsidiaries			21,161				—				—				(21,161	)			—
Total other income and (expense)			24,770				(9,880	)			540				(21,161	)			(5,731	)
Income (loss) before income taxes			24,737				29,030				(4,151	)			(21,161	)			28,455
Income tax expense (benefit)
Current			279				3,590				94				—				3,963
Deferred			10,697				(172	)			206				—				10,731
Income tax expense			10,976				3,418				300				—				14,694
Net income (loss)		$	13,761			$	25,612			$	(4,451	)		$	(21,161	)		$	13,761