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EXHIBIT 99.2
HERCULES OFFSHORE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Hercules Offshore Corporation
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Hercules Offshore Corporation at
December 31, 1995 and the results of its operations and its cash flows for the
years ended December 31, 1995 and 1994, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As described in Notes 4, 7, 8, 9 and 11 of the accompanying financial
statements, the Company has extensive transactions and relationships with its
owners. Because of these relationships, it is possible that the terms of these
transactions are not the same as those that would result from transactions
among wholly unrelated parties.
PRICE WATERHOUSE LLP
Houston, Texas
September 11, 1996
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HERCULES OFFSHORE CORPORATION
BALANCE SHEET
DECEMBER 31, 1995
Assets
Current assets:
Cash $ 133,209
Accounts receivable, trade 6,310,666
Accounts receivable, other 467,220
Prepaid insurance 341,992
Other current assets 262,208
-----------
Total current assets 7,515,295
Equipment, net 34,270,111
Other assets 69,188
Receivables from affiliates 1,930,323
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$43,784,917
===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,737,776
Accrued liabilities 1,533,432
Advances from stockholders 4,054,670
Note payable to affiliate 38,770
Other notes payable 261,682
Capital lease obligation 5,005,973
-----------
Total current liabilities 15,632,303
Revolving line of credit 3,057,446
Deferred income taxes 1,846,517
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Total liabilities 20,536,266
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Stockholders' equity:
Common stock, $1.00 par value, 18,034,384
shares authorized, issued and outstanding 18,034,384
Retained earnings 5,214,267
-----------
Total stockholders' equity 23,248,651
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Commitments and contingencies (Note 9)
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$43,784,917
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The accompanying notes are an integral part of this statement.
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HERCULES OFFSHORE CORPORATION
STATEMENT OF INCOME
Year ended
December 31,
--------------------------
1995 1994
----------- -----------
Offshore drilling and workover revenues $28,867,625 $25,853,169
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Costs and expenses:
Cost of operations 22,006,720 18,691,823
General and administrative 3,969,721 2,876,276
Depreciation and amortization 1,865,224 1,132,323
----------- -----------
27,841,665 22,700,422
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Income before income taxes 1,025,960 3,152,747
Income tax expense (429,857) (1,156,932)
----------- -----------
Net income $ 596,103 $ 1,995,815
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The accompanying notes are an integral part of this statement.
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HERCULES OFFSHORE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL
SHARES STOCK ($1.00 PAID-IN RETAINED
OUTSTANDING PAR VALUE) CAPITAL EARNINGS TOTAL
----------- ----------- ------------ ---------- -----------
Balance, December 31, 1993 2 2 18,034,382 2,622,349 20,656,733
Stock split 18,034,382 18,034,382 (18,034,382)
Net income 1,995,815 1,995,815
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Balance, December 31, 1994 18,034,384 18,034,384 4,618,164 22,652,548
Net income 596,103 596,103
---------- ----------- ------------ ---------- -----------
Balance, December 31, 1995 18,034,384 $18,034,384 $ $5,214,267 $23,248,651
========== =========== ============ ========== ===========
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HERCULES OFFSHORE CORPORATION
STATEMENT OF CASH FLOWS
Year ended
December 31,
----------------------------
1995 1994
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Cash flows from operating activities:
Net income $ 596,103 $ 1,995,815
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,865,224 1,132,323
Deferred income taxes 429,857 847,352
Changes in operating assets and liabilities, net:
Accounts receivable (2,010,874) 1,279,299
Prepaid insurance and other assets 79,419 (564,961)
Accounts payable 40,170 3,254,426
Accrued liabilities 677,234 (562,809)
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Net cash provided by (used in)
operating activities 1,677,133 7,381,445
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Cash flows from investing activities:
Capital expenditures (4,705,683) (10,610,289)
Proceeds from capital dispositions 36,350
Net advances to affiliates (283,234) (1,208,911)
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Net cash used in investing activities (4,952,567) (11,819,200)
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Cash flows from financing activities:
Net proceeds from revolving line of credit 507,446 2,550,000
Net advances from stockholders 4,036,220 (124,275)
Payments on capital lease (1,145,395) (245,469)
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Net cash provided by financing activities 3,398,271 2,180,256
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Net increase (decrease) in cash 122,837 (2,257,499)
Cash:
Beginning of period 10,372 2,267,871
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End of period $ 133,209 $ 10,372
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HERCULES OFFSHORE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Hercules Offshore Corporation (the Company) was formed under the laws of the
state of Texas to serve as an independent marine contractor specializing in
drilling and workover services for oil and gas wells located in the United
States Gulf of Mexico.
Revenue recognition
The Company's rig service contracts are normally completed in one year or less.
Revenues are recognized as the related services are performed. Revenues consist
primarily of day rates charged for the rigs plus other contract costs for
mobilization fees and other rig-related services.
Concentration of credit and major customers
Accounts receivable are due primarily from large oil and gas exploration and
production corporations with operations in the United States Gulf of Mexico.
Service revenue derived from the three largest oil and gas customers was
$7,716,405 and $2,335,083 and $1,374,105 or 25%, 8% and 5%, respectively,
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for the year ended December 31, 1995 and $7,289,332 $1,027,318 and $894,049, or
28%, 4% and 3%, respectively, for the year ended December 31, 1994.
Equipment
Equipment is recorded at historical cost, which includes the allocated purchase
price of contributed assets and expenditures for additions and major
improvements. Depreciation is calculated using the straight-line method over
their estimated useful-asset lives, net of estimated salvage values.
Expenditures which substantially increase value or extend useful lives are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
Income taxes
The Company recognizes income tax expense based on the liability method of
accounting for income taxes. The deferred tax asset or liability is recorded
based upon temporary differences between the tax basis of assets and
liabilities and their carrying values for financial reporting purposes. The
primary temporary differences between the tax basis and financial basis of the
Company's assets and liabilities relate to the depreciation of equipment.
Deferred tax expense is the result of changes in the deferred tax assets and
liabilities during the periods presented.
Interest
Interest expense included in general and administrative expenses totaled
$904,195 and $189,442 for the years ended December 31, 1995 and 1994,
respectively. Interest incurred as a result of capital expenditures on major
construction projects is capitalized as part of the cost of the assets.
Interest capitalized during 1995 and 1994 was $36,828 and $95,884, respectively.
Fair value of financial instruments
Based on borrowing rates currently available, the carrying amounts of notes
payable at December 31, 1995 approximate fair values.
Use of estimates
The preparation of financial statements in accordance 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 period. Because of the
inherent uncertainties in their process, actual results could differ from such
estimates. Management believes that the estimates are reasonable.
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NOTE 2 - EQUIPMENT:
Equipment consists of the following as of December 31, 1995:
ESTIMATED
USEFUL
LIFE IN YEARS
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Drilling and workover rigs and equipment 15 $31,738,813
Jack-up rig under capital lease 15 5,403,706
Furniture, fixtures and other 4 157,479
Less - accumulated depreciation (3,029,887)
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$34,270,111
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Depreciation expense for the years ended December 31, 1995 and 1994 was
$1,730,831 and $989,773, respectively. Amortization associated with the jack-up
rig under capital lease is included in depreciation expense.
NOTE 3 - INDEBTEDNESS:
The Company obtained $927,143 of vendor financing to acquire certain
rig equipment in December 1994. The note payable for such equipment bears
interest at 11%, is due in January 1996 and is collateralized by the
equipment. At December 31, 1995, $241,388 of principal was outstanding under
this obligation. The amount was paid in full in April 1996.
The Company has a primary 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 one percent (9.5%
at December 31, 1995). The agreement provided for a $3,500,000 line of
credit subject to limitations based on amounts of eligible accounts receivable
outstanding. At December 31, 1995, the amount of credit available was reduced
by a $187,983 letter of credit representing a security deposit for insurance.
Further, the maximum amount available under the line of credit was $4,571, and
the amount outstanding was $3,057,446.
On June 14, 1996 and August 20, 1996, the Company entered into
agreements to amend and restate the terms of the revolving line of credit. As
a result, the available line of credit was increased to $5,500,000 and the
maturity date was extended from March 31, 1997 to November 20, 1997. Monthly
principal repayments of $1,833,333 are scheduled for September 20, 1997 and
October 20, 1997, with any remaining principal due November 20, 1997.
Further, certain covenants were modified and include the maintenance of
tangible net worth of $22,000,000 through October 31, 1996 which increases to
$25,000,000 thereafter; maintenance of an adjusted current ratio of .75
through October 31, 1996, increasing to .85 through December 31, 1996 and 1.00,
thereafter. The maximum allowance for advances to affiliates was increased from
$2,000,000 to $2,750,000. The requirement that the Company generate positive
net income for any one year or two consecutive quarters was not amended and is
still in effect.
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In June 1996, the Company exercised its option to purchase a jack-up rig
(Hercules Rig 11) through a vendor financing agreement (Note 7). The total
purchase price of $5,392,486 includes $392,486 of additional costs to repair
the rig's mud system. The note payable, which bears interest at 17%, is due on
the earlier of the closing of a sale by the Company of secured long term debt
securities or October 31, 1996.
In June 1996, the Company entered into another vendor financing agreement (Note
7) to purchase a jack-up rig (Hercules Rig 14) for $2,300,000. The note payable
which bears interest at LIBOR plus 2.5% is due on the earlier of a sale by the
Company of secured long term debt securities or December 31, 1996.
The Company intends to repay the notes payable for the purchase of the two rigs
through a private placement of secured debt securities. The private placement
is intended to raise approximately $30 million through the issuance of
10%-10.75% senior secured notes due 2003. The remaining proceeds received from
the private placement will be used to refurbish two additional rigs, repay the
line of credit and certain shareholder advances, pay fees and other closing
costs and provide funds for general corporate purposes. The private placement
is intended to be completed during October 1996.
NOTE 4 - STOCKHOLDER'S EQUITY AND PAYABLES TO PARENT:
The Company had a note payable to Adway of $38,770 and $57,220 at December 31,
1995 and 1994, respectively. The note bears interest at prime (8.75% and 8% at
December 31, 1995 and 1994, respectively), is unsecured and is callable based
on Adway's discretion.
During 1995, the Company received advances of $4,054,670 from its stockholders
to provide working capital and meet other operating cash requirements.
Stockholder advances, which are noninterest-bearing, are included in current
liabilities and totaled $4,054,670 at December 31, 1995.
During 1996, the Company received advances from Trenergy of $4,000,000 to
provide for additional working capital (Note 11). The advances are payable on
demand and are noninterest-bearing.
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In January 1994, the Company amended the articles of incorporation to increase
the authorized common stock of the Company from two shares to 18,034,384 shares
and issued an additional 18,034,382 shares of common stock in connection with a
9,017,192-for-one stock split effected in the form of a dividend. As a result
of this transaction, capital stock increased by $18,034,382 with a
corresponding reduction in additional paid-in capital to reflect a $1.00 par
value per share for each share issued.
NOTES 5 - INCOME TAXES:
The provisions for income taxes consists of the following:
December 31,
-----------------------------
1995 1994
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Current federal income tax provision $ 309,580
Deferred federal income tax provision $ 429,857 847,352
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Total provision for income taxes $ 429,857 $ 1,156,932
=========== ===========
The tax effects of the principal temporary differences between financial
reporting and income tax reporting are as follows:
December 31,
-----------------------------
1995 1994
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Deferred tax assets:
Alternative minimum tax credit carryforward $ 309,579 $ 309,579
Net operating loss carryforward 1,263,277 581,291
Deferred tax liabilities:
Accelerated depreciation (3,241,095) (2,238,733)
Other (178,278) (68,797)
----------- -----------
$(1,846,517) $(1,416,660)
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At December 31, 1995, the Company had net operating loss carryforwards for tax
purposes of $3,715,523, which expire in 2009. The Company also has alternative
minimum tax credit carryforwards of $309,579, which can be carried forward
indefinitely. Changes in ownership of the Company could limit the utilization
of tax attribute carryforwards.
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NOTE 6 - EMPLOYEE RETIREMENT PLAN:
The Company has a retirement plan which permits participants to make
contributions up to 15% of their salary. The plan, which is a defined
contribution plan, covers all employees who are age 21 or older and have 120
days of service. The Company may make discretionary contributions in amounts
not to exceed the first six percent of an employee's eligible compensation
contributed to the plan. For the years ended December 31, 1995 and 1994 the
Company contributed $197,454 and $190,228, respectively, to the Plan.
NOTE 7 - LEASES:
In April 1994, the Company sold its right, title and interest in and the right
to purchase the jack-up rig for $100,000 to Hercules Rig Corporation (HRC), an
affiliate of the Company, who exercised the purchase option. The financial
statements include a $100,000 gain related to this transaction. In April 1994,
the Company entered into a two-year bareboat charter agreement with HRC for the
rig at $2,500 per day. This agreement provides a renewal option for an
additional two years at market rates. However, upon expiration of the original
term, the option was not exercised and the lease has reverted to a
month-to-month arrangement with a charter rate of $2,500 per day. Payments
under this agreement are recorded as a component of cost of operations as an
operating lease and totaled $837,500 and $866,375 for the years ended December
31, 1995 and 1994, respectively. HRC has pledged the rig as collateral for
certain debt incurred by HRC in fiscal 1995.
In April 1994, the Company entered into a lease through a bareboat charter
agreement for a third jack-up rig at a minimum of $1,875 per day, with
increasing rates based on rig utilization. The lease has a purchase option of
$5,000,000 at the end of the second year. The bareboat charter agreement
requires that the jack-up rig not be used for exploratory or developmental
drilling in the U.S. Gulf of Mexico. This jack-up rig was recorded in the
accompanying financial statements as a capital lease. Payments related to this
agreement totaled $876,250 for the year ended December 31, 1995. In June 1996,
the Company exercised its option to purchase the jack-up rig through a vendor
financing agreement (Note 3).
The Company leases its office buildings and certain equipment under long-term
operating leases.
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Rental expense for the year ended December 31, 1995 and 1994 was approximately
$2,602,728 and $1,811,631 respectively. Future minimum lease payments on the
Company's long-term operating leases are as follows for the years ending
December 31:
1996 $444,273
1997 10,306
1998 6,572
1999 233
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$461,384
========
NOTE 8 - RELATED PARTY TRANSACTIONS:
In accordance with a Management Services Agreement, the Company provides
essentially all accounting and administrative services to Hercules Marine
Services Corporation (HMS), an unconsolidated entity owned by Adway. The
Company's total general and administrative expenses are charged to HMS at a
rate of one-tenth for the year ended December 31, 1995 and for the period from
May 1, 1994 to December 31, 1994 and are recorded as a reduction of the
Company's expense. An aggregate of $343,670 and $384,800 was charged to HMS for
general and administrative services for the years ended December 31, 1995 and
1994, respectively. The Company also provides cash advances to HMS to finance
working capital requirements and other cash needs. In 1995, HOC and HMS entered
into a demand promissory note under which HOC may advance up to $800,000 to HMS
payable on demand. At December 31, 1995 and 1994, receivables from HMS totaled
$799,502 and $519,893, respectively, and related interest receivable totaled
$108,659 and $49,489, respectively. Summarized financial information for HMS as
of December 31, is as follows:
(Unaudited)
1995 1994
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Current assets $ 113,452 $ 69,085
Noncurrent assets 853,806 758,441
Current liabilities 1,697,783 1,236,376
Equity (730,525) (408,858)
Revenues 1,329,547 1,007,022
Net loss (342,679) (697,112)
During 1994, the Company provided HRC cash advances totaling $1,100,000
primarily consisting of a $1,000,000 escrow deposit required for the purchase
of a jack-up rig (Note 7).
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The Company has a management service agreement with Hercules Capital
Corporation (HCC), a company owned by an officer of the Company. HCC provides
investment banking services for the Company. Payment for these services totaled
$88,945 and $85,730 for the years ended December 31, 1995 and 1994,
respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
In the normal course of business, employees of the Company and of the Company's
customers have incurred injuries. These incidents could result in workers'
compensation and other claims against the Company. Management plans to
aggressively defend its position in any claims and believes its insurance
coverage is adequate to cover any possible materials losses.
The Company has employment agreements with certain officers of the Company
which provide guaranteed payments if the officers are terminated without cause.
At December 31, 1995, guaranteed future payments under these agreements and the
management services agreement with HCC (Note 8) total $273,330.
NOTE 10 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Year ended
December 31,
----------------------------
1995 1994
---------- ----------
Cash paid for interest, net of amounts capitalized $ 923,000 $ 245,000
Cash paid for taxes, net of refunds (51,000) 995,000
Supplemental disclosures of noncash investing
and financing activities:
Assets acquired through debt financing (Note 3) 27,813 1,227,000
Asset acquired under capital lease (Note 7) 5,403,706
NOTE 11 - SUBSEQUENT EVENTS:
In June 1996, the Company entered into an eighteen month lease agreement for a
top drive system at a rate of $90,000 per month. The lease has an option to
purchase the top drive system at the completion of the lease term at a price
below fair market value.
On April 30, 1996, the stockholders sold their 100% ownership of the Company to
Trenergy (Note 1). The stockholders received cash and stock to Trenergy. The
resultant change in the stockholders' basis has not been given effect to in the
accounts of the Company. The sellers have guaranteed to Trenergy that the
Company's profit before tax will be approximately $6 million for each of the
five years after
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the closing of the transaction. The guarantee is supported by a bank guarantee
provided by the sellers. Further, Trenergy advanced to the Company
approximately $4,000,000 for certain rig improvements. The advances are to be
repaid upon consummation of the sale by the Company of secured long-term debt
securities (discussed in Note 3).
In February 1996, the Company entered into a thirteen month lease agreement for
a top drive system at a rate of $119,135 per month. The lease has a purchase
option of $100.00 at the completion of the thirteen month lease term.
In February 1996, the Company entered into an operating lease agreement through
a bareboat charter agreement with Cliff's Drilling for a jack-up rig (Rig 12)
at a rate of $3,250 per day.
In February 1996, the Company awarded bonuses of $170,000 to certain officers.