1
EXHIBIT 99.1
HERCULES OFFSHORE CORPORATION
AND PREDECESSOR COMPANY
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Hercules Offshore Corporation:
We have audited the accompanying balance sheet of Hercules Offshore Corporation
(a Texas corporation) (the Company) as of December 31, 1996, and the related
statement of income (loss), shareholder's equity and cash flows of the
Predecessor Company (as restated, see note 1) for the four months ended April
30, 1996, and the statement of income, shareholder's equity and cash flows of
the Company for the eight months ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Notes 1, 2 and 6 of the accompanying financial statements, the
Company and the Predecessor Company have extensive transactions and
relationships with their parent company, Trenergy (Malaysia) Berhad, their
previous owners and certain affiliated companies including Hercules Rig Corp.
(HRC), Hercules Marine Services Corporation (HMSC) and Hercules Capital
Corporation (HCC). Because of these relationships, the terms of these
transactions are not necessarily indicative of those that would result from
transactions among wholly unrelated parties.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hercules Offshore Corporation
as of December 31, 1996, and the results of the operations and the cash flows
of the Predecessor Company for the four months ended April 30, 1996, and the
results of the operations and the cash flows of the Company for the eight months
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As explained in Note 1 to the consolidated financial statements, the ownership
of the Predecessor Company was acquired by Trenergy (Malaysia) Berhad in a
purchase transaction effective as of April 30, 1996. The acquisition was
accounted for as a purchase and, accordingly, the purchase price was allocated
to the assets and liabilities of the Predecessor Company based on their
estimated fair values at April 30, 1996. Accordingly, the financial statements
of Hercules Offshore Corporation are not comparable to those of the Predecessor
Company.
ARTHUR ANDERSEN LLP
Houston, Texas
June 27, 1997, except with respect to items discussed in Note 1 "Restatement of
Previously issued Financial Statements" for which the date is March 3, 1998.
3
HERCULES OFFSHORE CORPORATION
AND PREDECESSOR COMPANY
BALANCE SHEETS
December 31, September 30,
1996 1997
-------------- -------------
ASSETS (Unaudited)
------
CURRENT ASSETS:
Cash $ 2,441,356 $ 497,776
Accounts receivable-
Trade 7,089,358 13,014,380
Other 1,121,320 152,530
Receivables from HMSC (Note 6) 811,761 604,186
Receivables from Trenergy (Note 6) -- 2,561,333
Prepaid insurance 939,276 1,886,939
Other current assets 261,204 268,186
Deferred taxes 476,527 503,092
------------- ------------
Total current assets 13,140,802 19,488,422
RIGS, EQUIPMENT AND PROPERTY, net 62,618,036 69,677,337
EXCESS OF COST OVER ESTIMATED FAIR VALUE OF NET ASSETS
ACQUIRED, net 17,262,846 16,259,978
OTHER ASSETS, net 750,474 876,678
RECEIVABLES FROM HRC (Note 6) 1,667,974 2,179,798
------------- ------------
$ 95,440,132 $108,482,213
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,445,026 $ 13,745,449
Current portion of long-term debt 1,500,000 1,543,200
Current portion of capital lease obligation 1,613,794 343,598
Note payable 672,874 1,631,910
Amounts due to affiliates (Note 6)-
Former shareholders 679,091 172,991
Trenergy (Note 6) 1,550,336 --
------------- ------------
Total current liabilities 14,461,121 17,437,148
REVOLVING LINE OF CREDIT 5,311,749 8,669,419
CAPITAL LEASE OBLIGATION 52,031 --
LONG-TERM DEBT 13,500,000 12,395,323
DEFERRED INCOME TAXES 7,605,340 10,133,012
------------- ------------
Total liabilities 40,930,241 48,634,902
------------- ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK 4,000,000 4,000,000
SHAREHOLDER'S EQUITY:
Common stock, $1.00 par value, 18,034,384 shares authorized, issued and
outstanding 18,034,384 18,034,384
Additional paid-in capital 29,965,616 29,965,616
Retained earnings 2,509,891 7,847,311
------------- ------------
Total shareholder's equity 50,509,891 55,847,311
------------- ------------
$ 95,440,132 $108,482,213
============= ============
The accompanying notes are an integral part of these financial statements.
4
HERCULES OFFSHORE CORPORATION
AND PREDECESSOR COMPANY
STATEMENTS OF INCOME (LOSS)
Predecessor | Hercules
Company | Offshore Corporation
-------------- | ------------------------------------------------
Four | Eight Five Nine
Months | Months Months Months
Ended | Ended Ended Ended
April 30, | December 31, September 30 September 30,
1996 | 1996 1996 1997
------------- | -------------- ------------ -------------
| (Unaudited) (Unaudited)
|
OFFSHORE DRILLING AND WORKOVER REVENUES $ 12,513,294 | $ 34,900,936 $ 21,290,071 $ 50,640,128
|
COSTS AND EXPENSES: |
Cost of operations 9,833,416 | 22,500,008 14,081,010 31,191,361
General and administrative 3,710,306 | 3,029,117 2,022,762 4,289,185
Depreciation and amortization 660,749 | 3,269,308 1,894,859 4,340,582
------------- | ------------- ------------ -------------
14,204,471 | 28,798,433 17,998,631 39,821,128
------------- | ------------- ------------ -------------
INCOME (LOSS) FROM OPERATIONS (1,691,177) | 6,102,503 3,291,440 10,819,000
|
INTEREST EXPENSE 471,087 | 1,079,942 602,088 1,534,748
------------- | ------------- ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES (2,162,264) | 5,022,561 2,689,352 9,284,252
|
INCOME TAX EXPENSE 98,845 | 2,512,670 1,381,349 3,676,832
------------- | ------------- ------------ -------------
NET INCOME (LOSS) $ (2,261,109) | $ 2,509,891 $ 1,308,003 $ 5,607,420
============= | ============= ============ =============
The accompanying notes are an integral part of these financial statements.
5
HERCULES OFFSHORE CORPORATION
AND PREDECESSOR COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
Common Stock Additional
---------------------------- Paid-In Retained
Shares Amount Capital Earnings
------------ ------------- -------------- -------------
PREDECESSOR COMPANY:
Balance, December 31, 1995 18,034,384 $ 18,034,384 $ - $ 5,214,267
Compensation to officers and an affiliate
of an officer from shareholders - - 2,400,000 -
Net loss - - - (2,261,109)
----------- ------------ ------------ ------------
Balance, April 30, 1996 18,034,384 18,034,384 2,400,000 2,953,158
HERCULES OFFSHORE CORPORATION:
Purchase of stock by Trenergy - - 27,565,616 (2,953,158)
Net income - - - 2,509,891
----------- ------------ ------------ ------------
Balance, December 31, 1996 18,034,384 18,034,384 29,965,616 2,509,891
Dividends (unaudited) - - - (270,000)
Net income (unaudited) - - - 5,607,420
----------- ------------ ------------ ------------
Balance, September 30, 1997 (unaudited) 18,034,384 $ 18,034,384 $ 29,965,616 $ 7,847,311
=========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
6
HERCULES OFFSHORE CORPORATION
AND PREDECESSOR COMPANY
STATEMENTS OF CASH FLOWS
Predecessor | Hercules
Company | Offshore Corporation
--------------- | --------------------------------------------------
Four | Eight Five Nine
Months | Months Months Months
Ended | Ended Ended Ended
April 30, | December 31, Sept. 30, Sept. 30,
1996 | 1996 1996 1997
-------------- | --------------- --------------- -------------
| (Unaudited) (Unaudited)
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss) $ (2,261,109) | $ 2,509,891 $ 1,308,003 $ 5,607,420
Adjustments to reconcile net income to net |
cash provided by operating activities- |
Compensation to officer and affiliate |
of an officer from shareholders 2,400,000 | - - -
Depreciation and amortization 660,749 | 3,269,308 1,894,859 4,340,852
Deferred income taxes 442,975 | 1,619,536 245,474 2,501,107
(Increase) decrease in- |
Accounts receivable 527,784 | (2,301,359) (1,828,943) (4,956,232)
Prepaids and other assets (80,767) | (689,440) (354,074) (1,219,358)
Increase in- |
Accounts payable and accrued |
liabilities 1,359,060 | 707,604 3,179,232 5,030,523
------------- | ------------- ------------ -------------
Net cash provided by operating |
activities 3,048,692 | 5,115,540 4,444,551 11,304,312
------------- | ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Capital expenditures (3,204,324) | (14,186,178) (11,212,272) (9,562,776)
Net payments from (advances to) HRC (239,369) | 214,583 190,762 (511,924)
Net payments from (advances to) HMSC 18,908 | (31,175) (29,330) 207,575
------------- | ------------- ------------ --------------
Net cash used in investing activities (3,424,785) | (14,002,770) (11,050,840) (9,867,125)
------------- | ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES: |
Proceeds from line of credit, net 523,266 | 1,731,037 1,730,734 3,357,670
Proceeds from issuance of notes payable 795,287 | 4,222,808 4,126,333 3,129,085
Payments on notes payable (581,084) | (9,748,327) (1,460,788) (2,170,049)
Proceeds from issuance of long-term debt - | 15,000,000 - -
Payments on long-term debt - | - - (1,125,000)
Payments on capital leases (429,935) | (1,861,456) (978,109) (1,954,704)
Net borrowings from (payments to) Trenergy - | 1,150,336 - (4,111,669)
Net borrowings from (payments to) former |
shareholders 202,076 | (3,432,538) - (506,100)
Proceeds from issuance of preferred stock - | 4,000,000 4,000,000 -
------------- | ------------- ------------ -------------
Net cash provided by (used in) |
financing activities 509,610 | 11,061,860 7,418,170 (3,380,767)
------------- | ------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH 133,517 | 2,174,630 811,881 (1,943,580)
|
CASH, beginning of period 133,209 | 266,726 266,726 2,441,356
------------- | ------------- ------------ -------------
CASH, end of period $ 266,726 | $ 2,441,356 $ 1,078,607 $ 497,776
============= | ============= ============ =============
SUPPLEMENTAL CASH FLOW INFORMATION: |
Cash paid during the period for- |
Interest $ 248,739 | $ 359,615 $ 274,360 $ 1,306,105
Taxes 435,000 | 700,000 400,000 450,000
|
SUPPLEMENTAL NONCASH INVESTING AND FINANCING |
ACTIVITIES: |
|
Assets acquired through debt financing or |
under capital lease 1,671,241 | 2,306,758 1,996,851 696,000
Dividends accrued on preferred stock - | - - 270,000
The accompanying notes are an integral part of these financial statements.
7
HERCULES OFFSHORE CORPORATION
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, BUSINESS AND
ORGANIZATION:
Restatement of Previously Issued Financial Statements
These financial statements of the Predecessor Company (as described below) for
the four month period ended April 30, 1996 have been restated to reflect an
additional $2,400,000 of general and administrative expenses and a decrease of
net income by $2,400,000 resulting in a net loss of $2,261,109, as restated. The
financial statements of Hercules for the eight months ended December 31, 1996
are not affected by this restatement. As further discussed in Note 6,
"Related-Party Transactions--Other Transactions with Affiliates", the additional
$2,400,000 of general and administrative expenses resulted from payments made by
former shareholders of the parent of the Predecessor Company to an officer of
Hercules and to a company (Hercules Capital Corporation) which is an affiliate
of an officer of Hercules. The accounting requirements of the Securities and
Exchange Commission require, in all but limited circumstances, company financial
statements to reflect expenses for amounts paid by shareholders for the benefit
of the company.
Business and Organization
Hercules Offshore Corporation (Hercules, HOC or the Company) is primarily
engaged in contract drilling and workover services for oil and gas companies
operating in the United States Gulf of Mexico.
The Company was incorporated in Texas in June 1993 to own and operate the
offshore assets of a predecessor company. On September 1, 1993, Adway
International Limited (Adway) acquired Hercules in an asset purchase for
$13,780,000. On December 31, 1993, the owners of Adway entered into an
agreement with Trenergy (Malaysia) Berhad (Trenergy), a Malaysia public
company, to sell their 100 percent ownership of the Company to Trenergy. Adway
was owned by two individuals to which, on January 11, 1994, Adway made a
dividend of the shares of the Company. The Predecessor Company is also
Hercules Offshore Corporation. On April 30, 1996, the Trenergy agreement was
consummated, whereby Trenergy acquired 100 percent ownership of Hercules from
the two shareholders for cash of $16 million and approximately 21.5 million
shares of Trenergy's common stock which had an estimated value of $32 million
resulting in a total estimated purchase price of approximately $48 million.
The acquisition was accounted for as a purchase, and the purchase price paid of
approximately $48 million was "pushed down" to the financial statements of the
Company and allocated to the assets and liabilities based on their estimated
fair values at April 30, 1996. The purchase price paid exceeded net book value
by approximately $28 million which was allocated to rigs, equipment and
property, deferred tax liabilities and costs in excess of estimated fair value
of net assets acquired. As a result, the accompanying financial statements are
presented on two different cost bases. Because of these differences, the
accompanying financial statements for the period prior to the acquisition are
not comparable to those of the subsequent period.
The following table compares the balance sheet of the Predecessor Company at
April 30, 1996, prior to and subsequent to the acquisition of the outstanding
stock of the Predecessor Company by Trenergy:
Prior to Subsequent to
Acquisition Adjustments Acquisition
----------- ----------- ----------------
(In Thousands)
Current assets $ 8,391,179 $ - $ 8,391,179
Rigs, equipment and property, net 38,484,927 9,785,114 48,270,041
Excess of cost over estimated fair value of net assets
acquired - 18,154,283 18,154,283
Other noncurrent assets 1,229,825 - 1,229,825
------------- ------------- -------------
Total assets $ 48,105,931 $ 27,939,397 $ 76,045,328
============= ============= =============
Current liabilities $ 15,754,547 $ - $ 15,754,547
Long-term debt 6,384,901 - 6,384,901
Deferred income taxes 2,578,941 3,326,939 5,905,880
Shareholder's equity 23,387,542 24,612,458 48,000,000
------------- ------------- -------------
Total liability and shareholder's equity $ 48,105,931 $ 27,939,397 $ 76,045,328
============= ============= =============
8
-2-
The adjustments reflected in the table above result primarily from allocating
the purchase price to rigs, equipment and property, deferred tax liabilities
and costs in excess of estimated fair value of net assets acquired.
The following unaudited pro forma statements of income present the results of
operations for the year ended December 31, 1996, as if the acquisition of the
Predecessor Company by Trenergy had occurred on January 1, 1996, and assumes
that there were no other changes in the operations of the Predecessor Company.
The unaudited pro forma results are not necessarily indicative of the financial
results that might have occurred had the transaction included in the pro forma
statements actually taken place on January 1, 1996 nor are they indicative of
future results.
Predecessor Hercules Offshore
Company, Corporation, Pro Forma Combined
January 1, 1996, May 1, 1996, Adjustments, Pro Forma,
Through Through Increase Year Ended
April 30, 1996 December 31, 1996 (Decrease) December 31, 1996
------------------ ----------------------- --------------- -----------------
(Unaudited)
Offshore drilling and
workover revenues $ 12,513,294 $ 34,900,936 $ - $ 47,414,230
Costs and expenses 14,204,471 28,798,433 698,874 41,301,778
(2,400,000)
------------ ------------- ----------- ------------
Income from operations (1,691,177) 6,102,503 1,701,126 6,112,452
Interest expense 471,087 1,079,942 - 1,551,029
------------ ------------- ----------- ------------
Net income before
income taxes (2,162,264) 5,022,561 1,701,126 4,561,423
Income tax expense
(benefit) 98,845 2,512,670 (86,073) 2,525,442
------------ ------------- ----------- ------------
Net income $ (2,261,109) $ 2,509,891 $ 1,787,199 $ 2,035,981
============ ============= =========== ============
The pro forma adjustments primarily represent additional depreciation and
amortization expense, the elimination of payments made by former Shareholders of
the Parent of the predecessor company to an officer and to a company (Hercules
Capital Corporation) which is an affiliate of an officer of Hercules and the
related income tax expense effects.
The former shareholders of Hercules have guaranteed to Trenergy that the
Company will achieve a designated level of earnings, as defined, for each of
the five years following the closing of the sale. Should this guaranteed level
not be achieved by Hercules, the former shareholders of the Company have agreed
to remit a portion of the purchase price to Trenergy. As of December 31, 1996
no amounts were payable pursuant to this Agreement.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Revenue Recognition
Revenue from drilling operations under daywork contracts is recognized when
earned; expenses on such contracts are charged to operations as incurred.
Revenues consist primarily of day rates charged for the rigs plus other
contract costs for mobilization fees and reimbursement for certain rig
operating expenses.
9
-3-
Major Suppliers, Customers,
Credit Risk and Liquidity
Four suppliers individually accounted for approximately 22 percent, 21 percent,
15 percent and 10 percent, respectively, of the Predecessor Company's total
purchases for the four months ended April 30, 1996, and two suppliers
individually accounted for approximately 22 percent and 19 percent,
respectively, of the Company's total purchases for the eight months ended
December 31, 1996. The Company currently buys a majority of its equipment and
supplies from these suppliers; however, management believes alternate sources
of supply are available on comparable terms.
Two customers individually accounted for approximately 26 percent and 20
percent, respectively, of the Predecessor Company's offshore drilling and
workover revenues for the four months ended April 30, 1996, and 28 percent and
11 percent, respectively, of the Company's offshore drilling and workover
revenues for the eight months ended December 31, 1996. In the opinion of
management, the loss of any individual customer would not have a material
adverse effect on the Company's financial position or results of its
operations.
A majority of the Company's trade receivables are from customers who are
primarily engaged in the petroleum industry. This concentration of customers
in one industry may impact the Company's overall exposure to credit risk,
either positively or negatively, in that customers may be similarly affected by
changes in economic conditions. The Company performs ongoing credit
evaluations of its customers and does not generally require collateral in
support of these trade receivables.
The Company's liquidity should be considered in light of the significant
fluctuations in demand experienced by drilling contractors as rapid changes in
oil and gas producers' expectations and budgets occur. These fluctuations can
rapidly impact the Company's liquidity as supply and demand factors directly
affect utilization and day rates, which are the primary determinants of cash
flow from the Company's operations.
Hercules believes that its available funds, together with cash generated from
operations, will be sufficient to fund its capital and debt service
requirements for the remainder of 1997. Future cash flows are subject to a
number of uncertainties, particularly the condition of the oil and gas industry
and the related drilling activity in the United States Gulf of Mexico.
Rigs, Equipment and Property
The estimated useful lives used in determining depreciation rates and the
recorded cost amounts of various assets associated with drilling operations as
of December 31, 1996, are as follows:
Useful Lives
(In Years)
--------------
Drilling and workover rigs and equipment 4-15 $ 64,732,586
Furniture, fixtures and other 4 203,327
Less- Accumulated depreciation (2,317,877
------------
$ 62,618,036
============
Included in property, plant and equipment at December 31, 1996, are
approximately $3,789,999 of assets held under capital leases.
Depreciation is calculated using the straight-line method over the estimated
useful asset lives, net of estimated salvage values. During the four months
ended April 30, 1996 and the eight months ended December 31, 1996, the
Predecessor Company and the Company recorded depreciation expense of $660,749
and $2,317,877, respectively. During the four months ended April 30, 1996, and
the eight months ended December 31, 1996, and for the nine months ended
September 30, 1997 (unaudited), the Predecessor Company and the Company
capitalized direct and indirect costs incurred in refurbishment of its drilling
workover rigs and
10
-4-
equipment including approximately $243,000, $947,000 and $571,000 (unaudited),
respectively, of payroll-related and other costs of the Company's management
which management believes are directly related to the refurbishment of their
rigs and equipment. Expenditures for maintenance and repairs are charged to
expense as incurred.
In July 1996, the Company purchased a nonoperative jack-up drilling rig (Rig
14) for $2.3 million and began refurbishment of the rig. The Company incurred
approximately $2.0 million during 1996 and $4.0 million during the first nine
months of 1997 in connection with the refurbishment and estimates that the cost
to complete the refurbishment will be approximately $4 million. The cost of
Rig 14 was included as construction in process and in rig equipment in the
amounts of $4,449,880 and $8,410,960 at December 31, 1996, and September 30,
1997 (unaudited), respectively. The Company is currently funding capital
expenditures related to the continuing rig refurbishment out of operating cash
flows. Management of the Company believes that financing is available if
needed for the completion of the rig refurbishment, although no assurances can
be made that the Company will be able to obtain any financing. During 1997, the
Company entered into an agreement with a shipyard to refurbish Rig 14 which
management expects to be completed in December, 1997. During 1996 and through
June 1997, the Company substantially refurbished a second jack-up drilling rig,
which had previously been damaged for which approximately $7.6 million of
costs, net of insurance proceeds of $1.3 million, was capitalized. Also during
1996, the Company and the Predecessor Company performed various enhancements to
several rigs in its fleet including the installation of two topdrives and
various enhancements to the rigs and drilling systems.
During the four months ended April 30, 1996, the eight months ended December
31, 1996, and the nine months ended September 30, 1997 an affiliate of the
Predecessor Company and the Company, Hercules Marine Services Corporation
(HMSC) (see Note 6), billed the Predecessor Company and the Company
approximately $264,000 and $1,184,000, and $1,899,000 (unaudited) respectively,
for refurbishment work performed on various rigs owned by the Company.
In September, 1997, the Company received notice from Cliff's Drilling to
purchase Rig 1 from the Company pursuant to the terms of the Company's lease
agreement with Cliff's Drilling (unaudited). In October, 1997, Cliff's
Drilling purchased Rig 1 from the Company for a purchase price of $4,250,000
and the Company recognized a gain on the sale of approximately $660,000 in
October, 1997 (unaudited). The Company loaned $2,000,000 of the proceeds from
the sale to its parent Trenergy (Notes 5 and 6). The Predecessor Company and
the Company recognized day rate revenues for Rig 1 of $844,000 and $544,000
during the four months ended April 30, 1996 and the eight months ended December
31, 1996, respectively and the Company recognized revenues for Rig 1 of
$748,000 during the nine months ended September 30, 1997 (unaudited).
Cost in Excess of Estimated
Fair Value of Assets Acquired
Cost in excess of estimated fair value of net assets acquired is amortized on a
straight-line basis over the estimated period benefited, which management of
the Company has deemed to be the average remaining life of drilling and
workover rigs and equipment at April 30, 1996, of approximately 13 years.
Management of the Company evaluates the realizability of cost in excess of
estimated fair value of assets acquired as events or circumstances indicate a
possible inability to recover its carrying amount. Accumulated amortization is
$891,437 at December 31, 1996.
Deferred Costs
Hercules has incurred costs and paid fees in connection with various financing
arrangements (see Notes 4 and 5). These costs, primarily legal fees,
underwriters' costs and loan commitment fees, have been deferred and are
included in other assets at December 31, 1996, and are being amortized into the
results of operations over the term of the related financing instruments.
Accumulated amortization of deferred costs is $62,669 at December 31, 1996.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
the tax provision is determined based upon the liability method in which
deferred tax assets and liabilities are recognized based on differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates. SFAS No. 109 provides, in part, that a deferred tax asset shall be
evaluated for realization based on a more-likely-than-not criteria.
11
-5-
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Interim Financial Information
The unaudited interim financial statements as of September 30, 1996 and 1997,
and for the five months ended September 30, 1996 and for the nine months ended
September 30, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
3. ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at December
31, 1996:
Accounts payable $ 5,202,199
Accrued management bonuses 846,000
Other accrued liabilities 2,396,827
-----------
$ 8,445,026
===========
4. REVOLVING LINE OF CREDIT
AND NOTE PAYABLE:
The Company has a revolving line-of-credit agreement with a bank under which
borrowings are secured by trade receivables and bear interest payable monthly
at rates based on the bank's prime rate plus .5 percent (8.75 percent at
December 31, 1996). The agreement provides for a $6,500,000 line of credit
subject to limitations based on amounts of eligible accounts receivable
outstanding. In 1997, the Company and the bank extended the maturity of the
line of credit to January 31, 1999; accordingly, the balances outstanding at
December 31, 1996, have been reflected as long-term debt. Additionally in
1997, the amount of credit available was increased to $8,000,000 and then
subsequently $9,000,000, and the interest rate was reduced to the bank's prime
rate (unaudited). At December 31, 1996 and September 30, 1997, the amount of
credit available was reduced by a letter of credit of $187,983 and $283,000
(unaudited), respectively, representing a security deposit for insurance.
Borrowings pursuant to the line of credit at December 31, 1996, and September
30, 1997 were $5,311,749 and $8,669,419 (unaudited), respectively.
Approximately $500,000 was available under this facility at December 31, 1996.
At September 30, 1997, there was no availability under this facility based upon
the Company's calculation of its eligible borrowing base (unaudited).
The Company has financed a portion of its insurance premiums through a note
payable. The principal amount remaining at December 31, 1996, on this note was
$672,874.
5. LONG-TERM DEBT:
During the fourth quarter of 1996, the Company undertook a private debt
placement offering whereby the Company had intended to raise $26 million. In
December 1996, the Company borrowed a total of $15 million from a financial
institution as described below. In October 1997, the Company borrowed an
additional $8 million from a financial institution of which the Company loaned
$5 million to its Parent Company, Trenergy (note 6) (unaudited). In addition,
management of the Company believes that the remaining $3 million of financing
is available if needed, although no assurances can be made that the Company
will be able to obtain this financing.
12
-6-
At December 31, 1996, the Company's long-term debt of $15 million payable to a
financial institution (the Lender) bore interest at 4-1/4 percent plus the
three-month average LIBOR rate. Interest is due and payable quarterly together
with principal payments based on a percentage (ranging from 2.5 percent to 3.75
percent during the term of the loan) of advances funded by the financial
institution. The indenture pursuant to which the $15 million was borrowed
requires the Company to maintain certain financial statement covenants,
including a minimum tangible net worth, as defined, of $20,200,000 plus 50
percent of net income subsequent to June 30, 1996, and maximum annual capital
expenditures ranging from $3.0 million to $4.5 million. The amount borrowed is
secured by all the drilling and workover rigs and equipment of the Company.
The net proceeds of the $15 million indebtedness incurred were used to repay
(a) mortgage notes payable in connection with two of the Company's drilling
rigs totaling approximately $7.9 million, (b) indebtedness of approximately
$4.5 million outstanding pursuant to the Company's revolving credit agreement,
(c) to repay shareholder advances totaling $2 million and (d) general working
capital purposes.
Scheduled principal payments on long-term debt are as follows:
1997 $ 1,500,000
1998 1,557,600
1999 1,615,200
2000 1,846,200
2001 2,077,200
Thereafter 6,403,800
-------------
$ 15,000,000
=============
In October, 1997 the Company borrowed an additional $8 million of long term
debt from the Lender which bears an interest rate of three month LIBOR plus two
percent from October 10, 1997 through April 10, 1998 and three month LIBOR plus
two and one-half percent thereafter (unaudited).
6. RELATED-PARTY TRANSACTIONS:
Hercules Rig Corp.
Hercules Rig Corp. (HRC) and the Company are affiliated through a common board
of directors and management. The accounts of HRC are not combined with those
of the Company for financial reporting purposes.
Prior to 1994, Hercules leased Rig 25 from a third party and had paid a deposit
of $1 million toward the purchase of the rig. During 1994, Hercules sold an
option to purchase Rig 25 to HRC for $100,000 and HRC purchased the rig from
the third party for $9.5 million (the total purchase price was $10.5 million,
including the $1 million deposit paid by Hercules). Hercules has recorded the
$1.1 million as a receivable from HRC. The Company entered into a two-year
bareboat charter agreement with HRC, providing for a day rate of $2,500.
Effective January 1, 1996, the bareboat charter was amended to provide for a
day rate of $4,250 through December 22, 1996. Amounts due to the Company
pursuant to the incremental day rate totaling $626,500 pursuant to this
amendment have been recorded as a reduction of the Company's receivable from
HRC at December 31, 1996. Once the term of this amendment expired, the lease
was extended on a month-to-month basis at a day rate of $2,500 which will
continue until terminated with one month's notice by either party. The
indenture pursuant to which the $15 million of borrowings has been made from
the Lender prohibits HRC from increasing the day rates to HOC (see Note 5).
The Company has accounted for the lease as an operating lease. During 1996 and
prior years, the Company periodically incurred and paid certain capital
improvements related to Rig 25 and has recorded approximately $1.2 million of
these costs as accounts receivable from HRC, which results in an unsecured net
receivable balance from HRC of $1,667,974 on the December 31, 1996, balance
sheet.
13
-7-
During 1995, HRC incurred indebtedness of $4 million (secured by Rig 25) and
loaned the $3.7 million net proceeds to the former shareholders of the Company
who in turn loaned the $3.7 million to the Company pursuant to an interest-free
loan. All interest expense and amortization of loan costs were initially
recorded by HRC. Subsequent to December 31, 1996, and effective for the year
ended December 31, 1996, HRC charged its shareholder who in turn charged the
former shareholders of HOC who in turn charged the Company $349,467 of interest
expense which HOC has recorded and reflected as a payable to the former
shareholders of HOC and HRC has recorded as interest income and a receivable
from the former shareholders of HOC as of December 31, 1996. On December 3,
1996, the Company repaid approximately $3,541,000 of its loan balance of
approximately $3,754,000 directly to Tufton Oceanic Finance Corp. on behalf of
HRC which constituted full repayment of HRC's outstanding loan balance. The
Company's loan repayment was deemed to have been paid to the Company's former
shareholders and as contributed capital to HRC from its shareholder. The amount
of the Company's loan balance in excess of the amount paid to its former
shareholders of approximately $213,000 has been included in the $679,091 payable
to former shareholders in the Company's December 31, 1996, balance sheet of
which $200,000 was paid by the Company to Trenergy who in turn paid the former
shareholders during 1997 (unaudited).
Following is a summary of HRC's financial statements for the year ended
December 31, 1996 (in thousands):
Current assets $ 350
Drilling rigs and equipment, net 10,793
Other 12
--------
$ 11,155
========
Current liabilities $ 242
Amounts due to HOC 1,668
Equity 9,245
--------
$ 11,155
========
Revenues $ 1,542
Net income $ 401
Effective January 1, 1997, HRC entered into an agreement with an affiliate of
PLM Equipment Leasing Corporation of California (PLM) to bareboat-charter
another jack-up rig (Rig 22) at a day rate of $5,500 for three years with an
obligation to purchase the rig for $12,000,000 at the end of the lease term.
Also effective January 1, 1997, the Company entered into a three-year agreement
to bareboat-charter this jack-up rig from HRC at a day rate of $3,164 and has
no obligation to purchase the rig from HRC. HRC has accounted for its lease as
a capital lease in 1997. The Company has accounted for its lease with HRC as
an operating lease in 1997. In December 1996, the Company received an advance
of $1 million from Trenergy which the Company paid to PLM as a deposit on Rig
22. In January 1997, after entering into the lease with HRC, PLM returned the
$1 million deposit to the Company who repaid the $1 million advance from
Trenergy. At December 31, 1996, the Company had a $1 million deposit included
in other accounts receivable and $1 million included in the total of
$1,550,336 due to Trenergy.
Subsequent to December 31, 1996 and through September 30, 1997, the Company
advanced an additional $512,000 to HRC for the payment of vendor invoices
primarily related to capital expenditures on Rig 22 and 25 resulting in a net
receivable balance of $2,179,798 net of collections made from HRC by HOC
as of September 30, 1997 (unaudited).
Hercules Marine Services Corporation
- ------------------------------------
Hercules Marine Services Corporation (HMSC) is owned by Adway (see Note 1).
HMSC and Hercules share a common board of directors and management. The
accounts of HMSC are not combined with those of the Company for financial
reporting purposes. During 1996, HMSC performed rig refurbishment work, the
most substantial portion of which was for rigs owned by the Company for which
HMSC billed the Company approximately $1.4 million during 1996.
Pursuant to a management services agreement, the Company provides all
accounting and administrative
14
-8-
services to HMSC and allocates a portion of its general and administrative
costs to HMSC. The amounts allocated to HMSC by the Predecessor Company and
the Company totaled $133,719 for the four months ended April 30, 1996, and
$397,572 for the eight months ended December 31, 1996, respectively. At
December 31, 1996, Hercules has a receivable balance of $811,761 from HMSC
which includes $636,751 of principal and $175,000 of accrued interest on the
outstanding balance which the Company recorded as interest income during 1996.
Following is a summary of HMSC's unaudited financial statements for the year
ended December 31, 1996 (in thousands):
Current assets $ 134
Fixed assets, net 510
--------
$ 644
========
Current liabilities including net payables to the
Company of approximately $812 $ 1,670
Stockholder deficit (1,026)
--------
$ 644
========
Revenues $ 2,183
Net loss $ (295)
Subsequent to December 31, 1996 and through September 30, 1997, HMSC billed the
Company approximately $1,899,000 for additional rig refurbishment related
primarily to Rig 14 (unaudited). In addition, pursuant to the management
services agreement, the Company allocated general and administrative expenses
to HMSC of approximately $1,234,232 and made other working capital loans (net of
repayments) of $457,157 resulting in a net receivable balance of $604,186 which
includes $401,738 of principal and $202,448 of accrued interest at September 30,
1997 (unaudited).
Hercules Capital Corporation
- ----------------------------
Hercules Capital Corporation (HCC) is owned by an officer of the Company, who
also serves as an officer of HRC and HMSC. Hercules makes quarterly payments
to HCC of approximately $30,000 as set forth in a management services agreement
between Hercules and HCC. At December 31, 1996, Hercules has a $60,000
payable, representing amounts payable to HCC for the last two quarters of 1996.
In addition, Hercules has recorded a $100,000 payable representing a payment
due HCC for services rendered by an officer of the Company during 1994.
Subsequent to December 31, 1996, approximately $63,000 of these payables
were paid plus approximately $60,000 for the quarterly payments related to the
first two quarters of 1997 resulting in a payable to HCC of approximately
$97,000 at April 30, 1997 (unaudited). As discussed in the following paragraph,
in May 1996, two former shareholders of the Parent (Adway) of the Predecessor
Company paid HCC $1.5 million, resulting from the sale of Hercules by Adway to
Trenergy in 1996.
Other Transactions With Affiliates
- ----------------------------------
Effective September 1993, an officer of Hercules and a company, HCC, which is an
affiliate of another officer of Hercules, entered into consulting agreements
("the Agreements") with the two shareholders of the parent (Adway) of the
Predecessor Company. The Agreements provided that in exchange for advisory
services, HCC and the other officer will receive payments upon sale of the
Predecessor Company, as defined, pursuant to a formula. In May 1996, HCC and the
officer were paid a total $2.4 million as a result of the sale of the Company to
Trenergy. This $2.4 million has been reflected in general and administrative
expenses in the statement of income (loss) and as an increase to additional paid
in capital of the Predecessor Company for the four month period ended April 30,
1996.
During 1995, the Company's former shareholders advanced approximately $700,000
to the Company for working capital purposes. The amount advanced is
noninterest-bearing and had no designated repayment date. During 1996, Trenergy
paid approximately $400,000 to the former shareholders to discharge $400,000 of
the Company's obligation to the former shareholders. Accordingly, the Company's
December 31, 1996, balance sheet reflects $400,000 in amounts due to affiliates
(Trenergy). Also, included in amounts due to affiliates at December 31, 1996
(Trenergy) is approximately $150,000 in management fees for the year ended
December 31, 1996, charged to the Company and paid by the Company in 1997
(unaudited). During the nine months ended September 30, 1997, Trenergy billed
the Company and the Company recorded as expense and amount payable to affiliates
arrangement fees of $150,000 for the period January 1 through July 1, 1997
(unaudited). Included in the $679,091 balance payable to former shareholders at
December 31, 1996,
15
-9-
is the remaining $300,000 noninterest-bearing advance received in 1995 together
with the $213,511 balance outstanding on the $3.7 million loan made to the
Company in 1995, and the $349,467 of interest expense from the former
shareholders (see Hercules Rig Corp.) which HOC has recorded, net of $183,887 of
various expenses paid on behalf of the former shareholders of HOC as an offset
to the payable at December 31, 1996. Subsequent to December 31, 1996, (a)
Trenergy paid $300,000 to the former shareholders to discharge the remaining
$300,000 of shareholder advances received by the Company during 1995
(unaudited), (b) the Company repaid $700,000 to Trenergy in April 1997
(unaudited) and (c) the Company loaned $2.5 million at an interest rate of 6.5
percent to Trenergy pursuant to an agreement maturing June 30, 1998 (unaudited).
In October 1997, the $2.5 million loan was amended by the Company to increase
the amount available for borrowing to $7.0 million (unaudited). Also, in October
1997, the Company agreed to lend an additional $8.0 million at an interest rate
ranging from the three month LIBOR plus 2.5 percent to the three month LIBOR
plus 3 percent to Trenergy pursuant to another loan agreement maturing June 30,
1998 (unaudited). Of the total $15 million dollars available for borrowing by
Trenergy pursuant to these loan agreements, Hercules has loaned a total of $11.5
million to Trenergy pursuant to their loan agreements and $3.5 million remains
available to Trenergy as of October 29, 1997 (unaudited).
7. REDEEMABLE PREFERRED STOCK:
During 1996, the Company received $4 million in advances from Trenergy to be
used for working capital purposes and rig improvements. On December 21, 1996,
these advances were exchanged for 4 million shares of the Company's newly
issued A Series preferred stock. The A series of preferred stock was created
out of the authorized but unissued shares of the capital stock of the Company.
The series was designated Series A Nonvoting Cumulative Preferred Stock,
consisting of 4 million shares of no par value. The Series A preferred stock
shareholders are entitled to receive dividends out of any funds legally
available for that purpose at the annual dividend rate of $.09 on each
outstanding share of such stock. No dividends may be declared and paid until
on or after January 1, 2005, but such dividends shall accrue and become
cumulative from the date of original issuance, whether or not earned or
declared. As of September 30, 1997, $270,000 of dividends to Trenergy has been
accrued (unaudited). At the option of the board of directors of the Company,
the shares of Series A preferred stock may be redeemed in whole or in part on
or after January 1, 2005, by the Company, at a redemption price of $1.00 per
share plus all unpaid and accumulated dividends to such date.
8. INCOME TAXES:
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory corporate tax rate of 34 percent to income before
income tax as follows:
Four Months Eight Months
Ended Ended
April 30, December 31,
1996 1996
-------------- --------------
Tax provision at the statutory rate 34% 34%
Increase resulting from-
Nondeductible amortization - 8
Other nondeductible expenses 6 2
U.S. withholdings 2 2
Other - 4
-- --
42% 50%
== ==
16
-10-
The tax effect of significant temporary differences representing deferred tax
assets and liabilities at December 31, 1996, is as follows:
Deferred tax liabilities-
Deferred tax liability related to drilling and workover rigs
and equipment $10,837,366
Other 508,437
-----------
11,345,803
Deferred tax assets-
Tax net operating loss carryforwards 2,345,451
Alternative minimum tax credit carryforward 1,395,012
Other 476,527
-----------
4,216,990
-----------
Deferred tax liability, net $ 7,128,813
============
Under the Internal Revenue Code, a change in ownership of the Company can cause
a limitation in the ability of the Company to use existing net operating losses
(NOLs) and credit carryforwards in any one year. In the opinion of management,
any limitation caused by the change in ownership which occurred in 1996 will
not materially limit the availability of NOLs.
9. COMMITMENTS AND CONTINGENCIES:
Hercules is currently involved in various lawsuits and other contingencies
arising out of operations in the normal course of business. In the opinion of
management, uninsured losses, if any, in excess of those accrued will not have
a material adverse effect on Hercules' financial position or results of
operations.
Lease Commitments
Certain noncancelable leases are classified as capital leases, and the leased
assets are included in equipment, net, under drilling and workover rigs in net
rigs, equipment and property balance in the Company's December 31, 1996,
balance sheet. Other leases are classified as operating leases and are not
capitalized.
At December 31, 1996, the future minimum lease payments under operating and
capital leases are as follows:
Operating Capital
Leases Leases
----------- -------------
1997 $ 198,406 $ 1,713,496
1998 187,786 62,295
1999 183,161 6,943
2000 45,265 2,564
---------- ------------
Total $ 614,618 1,785,298
==========
Less- Amounts representing interest (119,473)
------------
Net present value 1,665,825
Less- Current portion of capital lease obligation (1,613,794)
------------
Long-term capital lease obligation $ 52,031
============
17
-11-
The total amount of rent expense recognized for the four months ended April 30,
1996, and for the eight months ended December 31, 1996, was $45,201 and
$152,545, respectively. Additionally, for the four months ended April 30,
1996, and the eight months ended December 31, 1996, the Predecessor Company and
the Company recognized bareboat charter hire expense of approximately $702,000
and $1,504,000, respectively, of which approximately $528,000 and $1,014,000,
respectively, related to Rig 25 for each period.
Effective January 1, 1997, the Company entered into a lease for Rig 22 from HRC
(see Note 6). The Company's lease commitment for this rig is $1,154,856 for
each of the three years following January 1, 1997.
During 1997, the Company entered into an agreement with a shipyard, to
refurbish Rig 14 which management expects will be completed in December, 1997.
At September 30, 1997, the Company has incurred expenses of $6,000,000 and
estimates the cost to complete the refurbishment at $4 million.
Self-Insurance
Hercules is self-insured for the deductible portion of its insurance coverage.
In the opinion of management, adequate accruals have been made based on known
and estimated exposures up to the deductible portion of Hercules' insurance
coverages. Management believes that future claims and liabilities in excess of
the amounts accrued are fully insured. Some of the Company's insurance
provides for premium adjustments based on the claims experience of the Company
and other participants of the insurance plan. Future events, claims or
assessments may increase the Company's cost for this coverage. In the opinion
of management, adequate accruals have been made based on known and estimated
exposures.
Employment Agreements
Hercules has employment agreements with certain of its officers. The
employment agreements with Hercules' officers provide for annual salaries and
discretionary bonuses to be determined by the board of directors. In addition,
they provide for guaranteed payments if the officers are terminated without
cause.
During 1996, six employees participated in a management bonus plan sponsored by
the Company. The plan provides for bonuses to be paid based on a percentage,
determined at the discretion of the board of directors at the beginning of the
year, of the Company's income before income taxes, as defined. In 1996, the
Company recognized bonus expense of $835,500. For the nine months September 30,
1997, the Company recognized $300,000 in expense under a bonus plan structured
in a similar manner based on a lower percentage of income before income taxes,
as defined (unaudited).
401(k) Plan
Hercules has a defined contribution 401(k) savings plan for its employees
meeting certain eligibility requirements. The plan provides that an employee
may contribute up to 15 percent of his salary and Hercules may elect to match
such contributions at its discretion up to the first 6 percent of an employee's
eligible compensation contributed to the plan. For the four months ended April
30, 1996, and the eight months ended December 31, 1996, the Predecessor Company
and the Company incurred $125,226 and $340,920, respectively in such
contributions.
10. SUBSEQUENT EVENT (UNAUDITED):
On May 9, 1997, Trenergy entered into a definitive stock purchase agreement to
sell all of the outstanding stock of HOC for $145 million to Parker Drilling
Company. The agreement is conditional upon Parker Drilling Company's
acquisition of HRC for $50 million and is terminable if the transaction fails
to close by December 31, 1997.