PARKER DRILLING CO /DE/ - Quarter Report: 2008 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, 2008

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

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

(281) 406-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

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

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

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, 2008, 113,230,576 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, 2008 and December 31, 2007			3
Consolidated Condensed Statements of Operations (Unaudited) Three and Six Months Ended June 30, 2008 and 2007			4
Consolidated Condensed Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2008 and 2007			5
Notes to the Unaudited Consolidated Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
Item 4. Controls and Procedures			36
Part II. Other Information			36
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Submission of Matters to a Vote of Security Holders			37
Item 5. Other Information			37
Item 6. Exhibits			37
Signatures			39
Officer Certifications
Section 302 Certification - Chairman and Chief Executive Officer
Section 302 Certification - Senior Vice President and Chief Financial Officer
Section 906 Certification - Chairman and Chief Executive Officer
Section 906 Certification - Senior Vice President and Chief Financial Officer

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)

		June 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	65,649			$	60,124
Accounts and notes receivable, net			178,937				166,706
Rig materials and supplies			27,758				24,264
Deferred costs			9,872				7,795
Deferred income taxes			9,424				9,423
Other tax assets			24,320				32,532
Other current assets			28,812				22,339
Total current assets			344,772				323,183
Property, plant and equipment less accumulated depreciation and amortization of $656,772 at June 30, 2008 and $628,079 at December 31, 2007			627,324				585,888
Goodwill			100,315				100,315
Investment in and advances to unconsolidated joint venture			—				(4,353	)
Deferred income taxes			17,802				40,121
Other noncurrent assets			33,008				31,833
Total assets		$	1,123,221			$	1,076,987
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	—			$	20,000
Accounts payable and accrued liabilities			104,874				87,352
Accrued income taxes			14,797				16,828
Total current liabilities			119,671				124,180
Long-term debt			388,397				353,721
Other long-term liabilities			19,417				56,318
Long-term deferred tax liability			8,432				8,044
Contingencies (Note 11)			—				—
Stockholders’ equity:
Common stock			18,879				18,653
Capital in excess of par value			599,736				593,866
Accumulated deficit			(31,311	)			(77,795	)
Total stockholders’ equity			587,304				534,724
Total liabilities and stockholders’ equity		$	1,123,221			$	1,076,987

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share and Weighted Average Shares Outstanding)
(Unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Revenues:
U.S. drilling		$	49,368			$	56,479			$	95,256			$	117,457
International drilling			77,919				43,063				146,659				84,977
Project management and engineering services			28,951				19,305				48,130				37,711
Construction contract			20,080				—				20,080				—
Rental tools			40,412				31,430				79,883				61,405
Total revenues			216,730				150,277				390,008				301,550
Operating expenses:
U.S. drilling			22,130				24,144				43,652				50,893
International drilling			56,612				34,836				109,233				64,565
Project management and engineering services			24,707				16,253				40,368				32,319
Construction contract			19,050				—				19,050				—
Rental tools			16,030				12,521				31,848				23,684
Depreciation and amortization			28,166				19,642				54,332				37,701
Total operating expenses			166,695				107,396				298,483				209,162
Total operating gross margin			50,035				42,881				91,525				92,388
General and administration expense			(8,481	)			(6,246	)			(15,149	)			(12,134	)
Gain on disposition of assets, net			636				269				1,215				16,673
Total operating income			42,190				36,904				77,591				96,927
Other income and (expense):
Interest expense			(5,876	)			(5,985	)			(11,566	)			(12,315	)
Changes in fair value of derivative positions			—				(28	)			—				(409	)
Interest income			370				1,712				738				3,496
Equity in loss of unconsolidated joint venture and related charges, net of tax			—				—				(1,105	)			—
Minority interest			—				—				—				(1,000	)
Other			144				70				204				77
Total other income and (expense)			(5,362	)			(4,231	)			(11,729	)			(10,151	)
Income before income taxes			36,828				32,673				65,862				86,776
Income tax (benefit) expense:
Current			9,488				6,613				(1,155	)			28,625
Deferred			4,744				9,200				20,533				11,297
Total income tax (benefit) expense			14,232				15,813				19,378				39,922
Net income		$	22,596			$	16,860			$	46,484			$	46,854
Basic earnings per share:
Net income		$	0.20			$	0.15			$	0.42			$	0.43
Diluted earnings per share:
Net income		$	0.20			$	0.15			$	0.41			$	0.43
Number of common shares used in computing earnings per share:
Basic			111,422,969				109,740,528				110,984,640				108,760,980
Diluted			112,495,655				110,842,121				112,023,524				109,968,329

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

		Six Months Ended June 30,
		2008				2007
Cash flows from operating activities:
Net income		$	46,484			$	46,854
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			54,332				37,701
Gain on disposition of assets			(1,215	)			(16,673	)
Equity loss in unconsolidated joint venture and related charges, net of tax			1,105				—
Deferred income tax expense			20,533				11,297
Expenses not requiring cash			3,613				6,600
Change in accounts receivable			(10,377	)			(24,219	)
Change in other assets			(4,393	)			(52,691	)
Change in liabilities			(30,705	)			28,316
Net cash provided by operating activities			79,377				37,185
Cash flows from investing activities:
Capital expenditures			(89,531	)			(129,637	)
Proceeds from the sale of assets			2,487				21,974
Proceeds from insurance settlements			951				—
Investment in unconsolidated joint venture			(5,000	)			—
Purchase of marketable securities			—				(48,675	)
Proceeds from sale of marketable securities			—				72,395
Net cash used in investing activities			(91,093	)			(83,943	)
Cash flows from financing activities:
Proceeds from draw on term note facility			35,000				—
Paydown on revolver credit facility			(35,000	)
Proceeds from draw on revolver credit facility			15,000
Proceeds from stock options exercised			1,861				15,791
Excess tax benefit from stock based compensation			380				1,912
Net cash provided by financing activities			17,241				17,703
Net increase (decrease) in cash and cash equivalents			5,525				(29,055	)
Cash and cash equivalents at beginning of year			60,124				92,203
Cash and cash equivalents at end of period		$	65,649			$	63,148
Supplemental cash flow information:
Interest paid		$	13,917			$	13,040
Income taxes paid		$	24,489			$	25,534

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, 2008 and December 31, 2007, (2) the results of operations for the three and six months ended June 30, 2008 and 2007, and (3) cash flows for the six months ended June 30, 2008 and 2007. Results for the six months ended June 30, 2008 are not necessarily indicative of the results that will be realized for the year ending December 31, 2008. The financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2007.
		Stock-Based Compensation — Total stock-based compensation expense recognized under SFAS No. 123R for the three and six month periods ended June 30, 2008 and for the three and six months periods ended June 30, 2007 was $1.9 million and $3.9 million and $2.3 million and $4.1 million, respectively, all of which was related to restricted stock plan expense. Stock-based compensation expense is included in our consolidated condensed income statement in both “General and administration expense” and “operating expense.” There were no unvested stock options at June 30, 2008. The Company had 299,300 outstanding and exercisable stock options as of June 30, 2008, the aggregate intrinsic value of which was $0.9 million, with a weighted average exercise price of $2.89. Unvested restricted stock awards at December 31, 2007 and June 30, 2008 were 1,502,592 shares and 1,508,983 shares, respectively. Total unrecognized compensation cost related to unamortized restricted stock awards was $5.1 million as of December 31, 2007 and $7.0 million as of June 30, 2008. There were 488,840 and 865,574 restricted shares granted to certain officers and key employees during the three and six month periods ended June 30, 2008. The remaining unrecognized compensation cost related to unamortized restricted stock awards will be amortized over a weighted-average vesting period of approximately one year.
		The excess tax benefit realized for the tax deductions from options exercised and restricted stock vesting totaled $0.4 million for the six months ended June 30, 2008, which has been reported as a financing cash inflow in the consolidated condensed statement of cash flows.
		Construction Contract — Historically the Company has primarily constructed drilling rigs for its own use. In some instances, however, the Company enters into contracts to design, construct, deliver and commission a rig for a major customer. In 2008, we were awarded a cost reimbursable, fixed fee contract to construct, deliver and commission a rig for extended reach drilling work in Alaska. In 2006, the Company entered into a separate contract for the front end engineering design of the rig. Total cost of the construction phase is currently expected to be approximately $195 million. The Company recognizes revenues received and costs incurred related to its construction contract on a gross basis and income for the related fees on a percentage of completion basis. Construction costs in excess of funds received from the customer are accumulated and reported as part of other current assets. At June 30, 2008, a net receivable (construction costs less progress payments) of $4.6 million is included in other current assets.
		Cash and Cash Equivalents — For purposes of the balance sheet and the statement of cash flows, the Company considers cash equivalents to be all highly liquid debt instruments that have a remaining maturity of three months or less at the date of purchase.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2.

Earnings Per Share (“EPS”)

		Three Months Ended June 30, 2008
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	22,596,000				111,422,969			$	0.20
Effect of dilutive securities:
Stock options and restricted stock							1,072,686			$	—
Diluted EPS:
Net income		$	22,596,000				112,495,655			$	0.20

		Six Months Ended June 30, 2008
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	46,484,000				110,984,640			$	0.42
Effect of dilutive securities:
Stock options and restricted stock							1,038,884			$	(0.01	)
Diluted EPS:
Net income		$	46,484,000				112,023,524			$	0.41

		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				109,968,330			$	0.43

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2.		Earnings Per Share (“EPS”) (continued)
		All stock options outstanding during the three and six months ended June 30, 2008, were included in the computation of diluted EPS as the options’ exercise prices were less than the average market price of the common shares. Options to purchase 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.
3.		Business Segments — The five primary services we provide are as follows: U.S. drilling, International drilling, Project management and engineering services, Construction contracts and Rental tools. In the first quarter of 2008, the Company created a new segment called Project management and engineering services by combining our labor, operations and maintenance and engineering services contracts which had been previously reported in our U.S. drilling or International drilling segments. The new segment was created in anticipation of the significant expansion of these projects and services and senior management’s resultant separate performance assessment and resource allocation for this segment. The new segment operations, unlike our U.S. and international drilling and rental tools operations, generally require little or no capital expenditures, and therefore have different performance assessment and resource needs. The Company anticipates the growth of this segment of our business and reviews and assesses its performance separately. Financial information for reportable segments for 2007 has been restated below to reflect this change. In the second quarter of 2008, the Company created a new segment called Construction contracts to reflect the Company’s Engineering, Procurement, Construction and Installation contract (“EPCI”). The new Construction contract segment income (fees) are accounted for on a percentage of completion basis. Also, revenues received and costs incurred related to the contract are recorded on a gross basis.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(Dollars in Thousands)								(Dollars in Thousands)
Revenues:
U.S. drilling		$	49,368			$	56,479			$	95,256			$	117,457
International drilling			77,919				43,063				146,659				84,977
Project management and engineering services			28,951				19,305				48,130				37,711
Construction contract			20,080				—				20,080				—
Rental tools			40,412				31,430				79,883				61,405
Total revenues		$	216,730			$	150,277			$	390,008			$	301,550
Operating gross margin:
U.S. drilling		$	18,636			$	24,581			$	34,309			$	51,421
International drilling			9,029				1,995				14,788				8,549
Project management and engineering services			4,244				3,052				7,762				5,392
Construction contract			1,030				—				1,030				—
Rental tools			17,096				13,253				33,636				27,026
Total operating gross margin			50,035				42,881				91,525				92,388
General and administration expense			(8,481	)			(6,246	)			(15,149	)			(12,134	)
Gain on disposition of assets, net			636				269				1,215				16,673
Total operating income			42,190				36,904				77,591				96,927
Interest expense			(5,876	)			(5,985	)			(11,566	)			(12,315	)
Changes in fair value of derivative positions			—				(28	)			—				(409	)
Other			514				1,782				(163	)			2,573
Income before income taxes		$	36,828			$	32,673			$	65,862			$	86,776

4.		Disposition of Assets — Asset dispositions in the first six months of 2008 included the sale of Rig 206 in Indonesia, for which we recorded no gain or loss, and miscellaneous equipment in the first and second quarter of 2008 that resulted in a recognized gain of $0.6 in both quarters. In the first six months of 2007 asset dispositions consisted primarily of the sale of workover barge Rigs 9 and 26 for proceeds of approximately $20.5 million, resulting in a recognized gain of $15.1 million.
5.		Accounting for Uncertainty in Income Taxes — FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. During March 2008, the Company resolved the pending tax case with the Kazakhstan Ministry of Finance by paying the reduced interest assessment related to tax payments made in 2007 (see Note 8 - Kazakhstan Tax Case), and we have accordingly reduced the previously recorded accruals based on the final resolution of this matter. As of June 30, 2008, the Company had a remaining liability for unrecognized tax benefits of $13.0 million primarily related to foreign operations.
6.		Income Tax Expense — Income tax expense was $14.2 million for the second quarter of 2008 and includes the reversal of a $3.1 million reserve for 2007 foreign tax credits as compared to income tax expense of $15.8 million for the second quarter of 2007.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

7.		Saudi Arabia Joint Venture — On April 9, 2008, a subsidiary of Parker executed an agreement (“Sale Agreement”) to sell its 50 percent share interest in Al-Rushaid Parker Drilling Co. Ltd. (“ARPD”) to an affiliate of the Al Rushaid subsidiary that owns the remaining 50 percent interest. The terms of the Sale Agreement provided for a $2.0 million payment to Parker’s subsidiary as consideration for the 50 percent share interest of the Parker subsidiary and partial repayment of investments and advances of the Parker subsidiary to ARPD, including a $5.0 million advance in January 2008. During the first quarter of 2008, the Parker subsidiary made the decision to terminate any future funding to ARPD, and accordingly, the Company did not record equity in losses of ARPD in the first quarter of 2008. We recognized a $1.1 million loss, net of income taxes, in the first quarter of 2008 primarily as a result of nonrecoverable costs incurred by the Parker affiliate to support ARPD operations during the current quarter. The Parker subsidiary received the $2.0 million on April 15, 2008.
		The Sale Agreement obligates the resulting Saudi shareholders to indemnify the Parker subsidiary and its affiliates from claims arising out of or related to the operations of ARPD, including the drilling contracts between ARPD and Saudi Aramco, ARPD’s bank loans and vendors providing goods or services to ARPD. Each party has agreed to waive any claims that it may have against the other party arising out of the business of ARPD on or before the closing date, and subject to the formal transfer of the shares the Parker subsidiary has agreed to disclaim any remaining rights with respect to the unpaid portion of shareholder loans and payables owed by ARPD to the Parker subsidiary. The formal transfer of shares was recently approved by the Saudi Arabian authorities.
		The agreement also provides that there are no restrictions on Parker or any of its affiliates with regard to competing with ARPD in the future, including in Saudi Arabia.
8.		Kazakhstan Tax Case — On October 12, 2005, the Kazakhstan Branch (“PKD Kazakhstan”) of Parker Drilling’s subsidiary, Parker Drilling Company International Limited (“PDCIL”), received an Act of Tax Audit from the Ministry of Finance of Kazakhstan (“MinFin”) assessing PKD Kazakhstan an amount of KZT (Kazakhstan Tenge) 14.9 billion (approximately $125.8 million). Approximately KZT7.5 billion or $63.3 million was assessed for import Value Added Tax (“VAT”), administrative fines and interest on equipment imported to perform the drilling contracts (the “VAT Assessment”) and approximately KZT7.4 billion or $62.5 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received by PDCIL from a client for the upgrade of Barge Rig 257 and other issues related to PKD Kazakhstan’s operations in the Republic of Kazakhstan (the “Income Tax Assessment”).
		On May 24, 2006, the Supreme Court of the Republic of Kazakhstan (“SCK”) issued a decision upholding the VAT Assessment. Consistent with its contractual obligations, on November 20, 2006, the client advanced the actual amount of the VAT Assessment and this amount has been remitted to MinFin. The administrative fines related to the VAT Assessment are being appealed by the client who is contractually responsible to reimburse PKD Kazakhstan for any administrative fines ultimately assessed. The client has also contractually agreed to reimburse PKD Kazakhstan for any incremental income taxes that PKD Kazakhstan incurs from the reimbursement of this VAT Assessment.
		After multiple appeals to the SCK and two meetings of the U.S. Competent Authorities under the Mutual Agreement Procedure of the U.S.- Kazakhstan Tax Treaty, the SCK ultimately upheld the Income Tax Assessment and on December 12, 2007, PKD Kazakhstan paid the principal tax portion of the Income Tax Assessment, net of estimated taxes previously paid. After a further appeal against the interest portion of the notice of assessment, on February 25, 2008, the Atyrau Economic Court issued a ruling that interest on the income tax assessed should accrue from the October 12, 2005 assessment date as opposed to the original assessment in 2001, which resulted in a revised interest assessment by the Atyrau Tax Committee of approximately US$13 million, which was paid by PKD Kazakhstan on March 14, 2008, in final resolution of this matter. Income tax for the first six months of 2008 includes a benefit of $13.4 million of FIN 48 interest and foreign currency exchange rate fluctuations related to this final resolution.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

9.

Long-Term Debt

		June 30, 2008				December 31, 2007
		(Dollars in Thousands)
Senior Notes:
Interest rate 2.125% convertible due 2012		$	125,000			$	125,000
Interest rate 9.625%, due 2013			228,397				228,721
Revolver			—				20,000
Term loan			35,000				—
Total debt			388,397				373,721
Less current portion			—				20,000
Total long-term debt		$	388,397			$	353,721

		On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125 percent Convertible Senior Notes due July 15, 2012. Interest is payable semiannually on July 15th and January 15th. The initial conversion price is approximately $13.85 per share and is subject to adjustment for the occurrence of certain events stated within the indenture. Proceeds from the transaction were used to call our outstanding Senior Floating Rate notes, to pay the net cost of hedge and warrant transactions, and for general corporate purposes. Effectively, the hedge and warrant transactions increase the conversion price to approximately $18.29 per share.
		On September 20, 2007, we replaced our existing $40.0 million Credit Agreement with a new $60.0 million credit facility pursuant to an Amended and Restated Credit Agreement (the “2007 Credit Facility”), which expires in September 2012. The 2007 Credit Facility was secured by rental tools equipment, accounts receivable and the stock of substantially all of our domestic subsidiaries, other than domestic subsidiaries owned by a foreign subsidiary, and contained customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.
		On May 15, 2008 we entered into a new Credit Agreement (“2008 Credit Facility”) with a five year senior secured $80.0 million revolving credit facility (“Revolving Credit Facility) and a senior secured term loan facility (“Term Loan Facility”) of up to $50.0 million. The obligations of the Company under the 2008 Credit Facility are guaranteed by substantially all of the Company’s domestic subsidiaries, except for domestic subsidiaries owned by foreign subsidiaries and certain immaterial subsidiaries, each of which has executed a guaranty. The 2008 Credit Facility contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage. On July 9, 2008, the Company drew down the remaining $15.0 million available on the Term Loan Facility, bringing the total amount outstanding to $50.0 million. The Term Loan will begin amortizing on September 30, 2009 at equal installments of $3.0 million per quarter.
10.		Derivative Instruments — We used derivative instruments to manage risks associated with interest rate fluctuations in connection with our $100.0 million Senior Floating Rate Notes, which were fully redeemed on September 27, 2007. These derivative instruments, which consisted of variable-to-fixed interest rate swaps, did not meet the hedge criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and were therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps was recognized in earnings.
		On July 17, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million. On September 4, 2007, our one remaining swap expired.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

11.		Contingencies
		Bangladesh Claim
		In September 2005, a subsidiary of the Company was served with a lawsuit filed in the 152nd District Court of Harris County State of Texas on behalf of numerous citizens of Bangladesh claiming $250 million in damages due to various types of property damage and personal injuries (none involving loss of life) arising as a result of two blowouts that occurred in Bangladesh in January and June 2005, although only the June 2005 blowout involved the Company. The court dismissed the case on the basis that Houston, Texas, is not the appropriate location for this suit to be filed. The plaintiffs have appealed this dismissal; however, the Company believes the plaintiffs’ prospects of being successful on appeal are remote. No amounts were accrued at June 30, 2008.
		Asbestos-Related Claims
		In August 2004, the Company was notified that certain of its subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi by several hundred persons that allege that they were employed by some of the named defendants between approximately 1965 and 1986. The complaints name as defendants numerous other companies that are not affiliated with the Company, including companies that allegedly manufactured drilling- related products containing asbestos that are the subject of the complaints.
		The complaints allege that the Company’s subsidiaries and other drilling contractors used asbestos-containing products in offshore drilling operations, land-based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability and claims under the Jones Act and that the plaintiffs are entitled to monetary damages. Based on the report of the special master, these complaints have been severed and venue of the claims transferred to the county in which the plaintiff resides or the county in which the cause of action allegedly accrued. Subsequent to the filing of amended complaints, Parker Drilling has joined with other co-defendants in filing motions to compel discovery to determine what plaintiffs have an employment relationship with which defendant, including whether or not any plaintiffs have an employment relationship with subsidiaries of Parker Drilling. Out of 668 amended single-plaintiff complaints filed to date, sixteen (16) plaintiffs have identified Parker Drilling or one of its affiliates as a defendant. Discovery is proceeding in groups of 60 and none of the plaintiff complaints naming Parker are included in the first 60 (Group I). The initial discovery of Group I resulted in certain dismissals with prejudice, two dismissals without prejudice and two withdraws from Group I, leaving only 40 plaintiffs remaining in Group I. Selection of Discovery Group II was completed on April 21, 2008. Out of the 60 plaintiffs selected Parker Drilling was named in one suit.
		The subsidiaries named in these asbestos-related lawsuits intend to defend themselves vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome to have a material adverse effect on its financial condition, results of operations or cash flows; however, the Company is unable to predict the ultimate outcome of these lawsuits. No amounts were accrued at June 30, 2008.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

11.		Contingencies (continued)
		Gulfco Site
		Several years ago the Company received an information request under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) designating Parker Drilling Offshore Corporation, a subsidiary of Parker Drilling as a potentially responsible party with respect to the Gulfco Marine Maintenance, Inc. Superfund Site in Freeport, Texas (EPA No. TX 055144539). The subsidiary responded to this request in 2003 with documents. In January, 2008 the subsidiary received an administrative order to participate in an investigation of the site and a study of the remediation needs and alternatives. The EPA alleges that the subsidiary is successor to a party who owned the Gulfco site during the time when chemical releases took place there. Two other parties have been performing that work since mid-2005 under an earlier version of the same order. The subsidiary believes that it has a sufficient cause to decline participation under the order and has notified the EPA of that decision. Non-compliance with an EPA order absent sufficient cause for doing so can result in substantial penalties under CERCLA. The subsidiary is continuing to evaluate its relationship to the site and intends to confer with the EPA in an effort to resolve the matter. The Company has not yet estimated the amount or impact on our operations, financial position or cash flows of any costs related to the site. The EPA and the other two parties have spent over $2.5 million studying and conducting initial remediation of the site, and it is anticipated that an additional $1.3 million will be required to complete the remediation. The Company does not believe it has any obligation with respect to the remediation of the property, and accordingly no accrual was made as of June 30, 2008.
		Customs Agent Investigation
		As previously disclosed, the Company received requests from the United States Department of Justice (“DOJ”) in July 2007 and the United States Securities and Exchange Commission (SEC”) in January 2008 relating to the Company’s utilization of the services of a customs agent. In response to those requests, the Company is conducting an internal investigation. The DOJ and the SEC are conducting parallel investigations into possible violations of U.S. law by the Company, including the Foreign Corrupt Practices Act (the “FCPA”). In particular, the DOJ and the SEC are investigating the Company’s use of customs agents in certain countries in which the Company currently operates or formerly operated, including Kazakhstan and Nigeria. The Company is fully cooperating with the DOJ and SEC investigations. At this point, we are unable to predict the duration, scope or result of the DOJ or the SEC investigation or whether either agency will commence any legal action. If we are not in compliance with the FCPA and other laws governing the conduct of business with foreign government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
		Economic Sanctions and Export Restrictions Compliance
		Our international operations are subject to economic sanctions laws and regulations restricting certain activities involving countries, entities and persons on which the U.S. has imposed economic sanctions. Pursuant to a recent internal review, we have preliminarily identified certain shipments of equipment and supplies that were routed through Iran. In addition, we have engaged in drilling wells in the Korpedje Field in Turkmenistan, from where natural gas may be exported by pipeline to Iran. We are currently reviewing these shipments and drilling activities to determine whether the timing, nature and extent of such shipments or drilling activities may have given rise to violations of these laws and regulations. Although we are unable to predict the scope or result of this internal review or its ultimate outcome, we have initiated a voluntary disclosure of these potential compliance issues to the appropriate U.S. government agency. If we are not in compliance with export restrictions and U.S. economic sanctions, we may be subject to civil or criminal penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.

12.

Recent Accounting Pronouncements — In May 2008, the FASB issued FSP Accounting Principles Board (APB) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP clarifies that convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We will adopt the provisions of FSP AAPB 14-1 on January 1, 2009 and will be required to retroactively apply its provisions, which means we will restate our consolidated financial statements for prior periods. We have not yet determined the impact of this FSP on our consolidated financial statements.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

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

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

		June 30, 2008
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	20,602			$	6,999			$	38,048			$	—			$	65,649
Accounts and notes receivable, net			70,835				189,223				125,632				(206,753	)			178,937
Rig materials and supplies			—				11,902				15,856				—				27,758
Deferred costs			—				2,443				7,429				—				9,872
Deferred income taxes			9,424				—				—				—				9,424
Other tax assets			67,688				(39,530	)			(3,838	)			—				24,320
Other current assets			330				26,028				2,454				—				28,812
Total current assets			168,879				197,065				185,581				(206,753	)			344,772
Property, plant and equipment, net			79				458,106				169,017				122				627,324
Goodwill			—				100,315				—				—				100,315
Investment in subsidiaries and intercompany advances			908,238				963,817				(71,355	)			(1,800,700	)			—
Investment in and advances to unconsolidated joint venture			—				4,620				(4,620	)			—				—
Other noncurrent assets			23,562				20,131				7,117				—				50,810
Total assets		$	1,100,758			$	1,744,054			$	285,740			$	(2,007,331	)		$	1,123,221
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	—			$	—			$	—			$	—			$	—
Accounts payable and accrued liabilities			50,830				267,979				89,307				(303,242	)			104,874
Accrued income taxes			(356	)			5,260				9,893				—				14,797
Total current liabilities			50,474				273,239				99,200				(303,242	)			119,671
Long-term debt			388,397				—				—				—				388,397
Other long-term liabilities			—				12,228				7,189				—				19,417
Long-term deferred tax liability			—				1,237				7,195				—				8,432
Intercompany payables			74,583				576,746				36,830				(688,159	)			—
Contingencies (Note 11)			—				—				—				—				—
Stockholders’ equity:
Common stock			18,879				39,900				21,152				(61,052	)			18,879
Capital in excess of par value			599,736				1,045,728				122,264				(1,167,992	)			599,736
Retained earnings (accumulated deficit)			(31,311	)			(205,024	)			(8,090	)			213,114				(31,311	)
Total stockholders’ equity			587,304				880,604				135,326				(1,015,930	)			587,304
Total liabilities and stockholders’ equity		$	1,100,758			$	1,744,054			$	285,740			$	(2,007,331	)		$	1,123,221

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

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

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

		Three months ended June 30, 2008
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Total revenues		$	—			$	163,721			$	78,298			$	(25,289	)		$	216,730
Operating expenses			(4	)			102,686				61,136				(25,289	)			138,529
Depreciation and amortization			—				21,025				7,141				—				28,166
Total operating gross margin			4				40,010				10,021				—				50,035
General and administration expense (1)			(41	)			(8,412	)			(28	)			—				(8,481	)
Gain (loss) on disposition of assets, net			—				350				286				—				636
Total operating income (loss)			(37	)			31,948				10,279				—				42,190
Other income and (expense):
Interest expense			(7,063	)			(11,792	)			(66	)			13,045				(5,876	)
Interest income			10,572				1,885				958				(13,045	)			370
Other			2				(4	)			146				—				144
Equity in net earnings of subsidiaries			15,164				—				—				(15,164	)			—
Total other income and (expense)			18,675				(9,911	)			1,038				(15,164	)			(5,362	)
Income (loss) before income taxes			18,638				22,037				11,317				(15,164	)			36,828
Income tax (benefit) expense:
Current			(4,697	)			10,182				4,003				—				9,488
Deferred			739				3,826				179				—				4,744
Income tax (benefit) expense			(3,958	)			14,008				4,182				—				14,232
Net income (loss)		$	22,596			$	8,029			$	7,135			$	(15,164	)		$	22,596

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

		Three months ended June 30, 2007
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Total revenues		$	—			$	136,568			$	22,036			$	(8,327	)		$	150,277
Operating expenses			1				75,897				20,188				(8,332	)			87,754
Depreciation and amortization			—				18,484				1,158				—				19,642
Total operating gross margin			(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
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