1
EXHIBIT 99.2
HERCULES RIG CORP.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Hercules Rig Corp.:
We have audited the accompanying balance sheets of Hercules Rig Corp. (a Texas
corporation) (the Company) as of December 31, 1995 and 1996, and the related
statements of income, shareholder's equity and cash flows for the period from
inception, April 6, 1994, through December 31, 1994, and for each of the two
years in the period 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 Note 4 of the accompanying financial statements, the Company
has extensive transactions and relationships with an affiliated company,
Hercules Offshore Corporation (HOC). Because of this relationship, the terms
of the transactions are not necessarily indicative of those that would result
from transactions among wholly unrelated parties. The Company has chartered
its two rigs to HOC at day rates which based on current circumstances and
assuming no other changes, are insufficient to enable the Company to meet its
obligations of $12 million maturing on January 3, 2000, and the Company's note
payable to HOC of approximately $1.7 million maturing on January 1, 1999.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hercules Rig Corp. as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the period from inception, April 6, 1994, through December 31, 1994,
and for the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 27, 1997
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HERCULES RIG CORP.
BALANCE SHEETS
December 31
------------------------------ April 30,
1995 1996 1997
-------------- ------------- ------------
ASSETS (Unaudited)
------
CURRENT ASSETS:
Cash $ 100 $ 325 $ 68
Receivables from HMSC, net of valuation allowance (Note 4) 31,140 - -
Receivable from shareholder - 349,467 349,467
------------ ------------ ------------
Total current assets 31,240 349,792 349,535
RIGS AND EQUIPMENT, net of accumulated depreciation 11,048,870 10,793,409 25,170,037
OTHER ASSETS 153,340 11,901 10,138
------------ ------------ ------------
$ 11,233,450 $ 11,155,102 $ 25,529,710
============ ============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 487,851 $ 241,968 $ 230,095
Note payable 3,817,822 - -
Current portion of capital lease obligation - - 1,668,531
------------ ------------ ------------
Total current liabilities 4,305,673 241,968 1,898,626
AMOUNTS DUE TO HOC (Note 4) 1,624,454 1,667,974 1,968,132
CAPITAL LEASE OBLIGATION, long term - - 12,701,155
------------ ------------ ------------
Total liabilities 5,930,127 1,909,942 16,567,913
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock 1,000 1,000 1,000
Additional paid-in capital 6,090,953 9,632,112 9,632,112
Accumulated (deficit) (788,630) (387,952) (671,315)
------------ ------------ ------------
Total shareholders' equity 5,303,323 9,245,160 8,961,797
------------ ------------ ------------
$ 11,233,450 $ 11,155,102 $ 25,529,710
============ ============ ============
The accompanying notes are an integral part of these financial statements.
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HERCULES RIG CORP.
STATEMENTS OF INCOME
Period From
Inception,
April 6, 1994, Year Ended Four Months Ended
Through December 31 April 30
December 31, --------------------------- -------------------------
1994 1995 1996 1996 1997
--------------- ------------ ------------ ----------- -----------
(Unaudited)
REVENUES $ 667,500 $ 912,500 $ 1,541,500 $ 511,333 $ 670,204
COSTS AND EXPENSES:
Cost of operations 434,314 680,875 788,270 260,546 492,077
General and administrative 423,966 159,792 185,283 96,559 5,213
---------- ----------- ----------- ---------- ----------
858,280 840,667 973,553 357,105 497,290
---------- ----------- ----------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (190,780) 71,833 567,947 154,228 172,914
OTHER:
Interest income - - 349,467 195,290 -
Interest expense (262,041) (407,642) (516,736) (187,998) (456,277)
---------- ----------- ----------- ---------- ----------
NET INCOME (LOSS) BEFORE
INCOME TAXES (452,821) (335,809) 400,678 161,520 (283,363)
INCOME TAX EXPENSE - - - - -
---------- ----------- ----------- ---------- ----------
NET INCOME (LOSS) $ (452,821) $ (335,809) $ 400,678 $ 161,520 $ (283,363)
========== =========== =========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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HERCULES RIG CORP.
STATEMENTS OF SHAREHOLDER'S EQUITY
Common Stock Additional
------------------- Paid-In Accumulated
Shares Amount Capital Deficit
------ -------- ------------ -----------
BALANCE AT INCEPTION, April 6, 1994 - $ - $ - $ -
ISSUANCE OF COMMON STOCK 1,000 1,000 5,249,000 -
NET LOSS - - - (452,821)
------ -------- ----------- ---------
BALANCE, December 31, 1994 1,000 1,000 5,249,000 (452,821)
CAPITAL CONTRIBUTION - - 841,953 -
NET LOSS - - - (335,809)
------ -------- ----------- ---------
BALANCE, December 31, 1995 1,000 1,000 6,090,953 (788,630)
CAPITAL CONTRIBUTION - - 3,541,159 -
NET INCOME - - - 400,678
------ -------- ----------- ---------
BALANCE, December 31, 1996 1,000 1,000 9,632,112 (387,952)
NET LOSS (unaudited) - - - (283,363)
------ -------- ----------- ---------
BALANCE, April 30, 1997 (unaudited) 1,000 $ 1,000 $ 9,632,112 $(671,315)
====== ======== =========== =========
The accompanying notes are an integral part of these financial statements.
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HERCULES RIG CORP.
STATEMENTS OF CASH FLOWS
Period From
Inception,
April 6, 1994, Year Ended Four Months Ended
Through December 31 April 30
December 31, --------------------------- --------------------------
1994 1995 1996 1996 1997
--------------- ------------- ------------ ------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (452,821) $ (335,809) $ 400,678 $ 161,520 $ (283,363)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities-
Depreciation and amortization 437,527 821,487 964,039 354,540 493,939
(Increase) decrease in-
Accounts receivable (77,500) 77,500 - - -
Other assets (25,599) (271,565) (34,330) (2,441) -
Amounts due from shareholders - - (349,467) (195,290) -
Increase (decrease) in-
Accounts payable and accrued liabilities 315,365 172,486 (245,883) (237,076) (11,972)
------------ ----------- ---------- ---------- -----------
Net cash provided by operating
activities 196,972 464,099 735,037 81,253 198,604
------------ ----------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,517,915) (1,144,015) (514,075) (216,751) (311,798)
Net borrowings from HOC - 122,324 24,786 226,367 300,158
Net payments from (advances to) HMSC (40,456) 9,316 31,140 31,140 -
------------ ----------- ---------- ---------- -----------
Net cash (used in) provided by
investing activities (9,558,371) (1,012,375) (458,149) 40,756 (11,640)
------------ ----------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,250,000 - - - -
Accretion of lease - - - - 337,403
Payments on long-term debt - (182,178) (276,663) (122,040) -
Proceeds from long-term debt - 4,000,000 - - -
Payments on capital leases - - - - (524,624)
Net proceeds from (payments to) former shareholders 4,150,000 (3,308,047) - - -
------------ ----------- ---------- ---------- -----------
Net cash provided by (used in)
financing activities 9,400,000 509,775 (276,663) (122,040) (187,221)
------------ ----------- ---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH 38,601 (38,501) 225 (31) (257)
CASH, beginning of period - 38,601 100 100 325
------------ ----------- ---------- ---------- -----------
CASH, end of period $ 38,601 $ 100 $ 325 $ 69 $ 68
============ =========== ========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ - $ 646,945 $ 531,857 $ 183,019 $ 456,279
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES:
Assets acquired through debt financing or
under capital lease - - - - 14,556,909
Assets acquired through purchases by HOC 1,100,000 402,130 18,734 15,531 -
Capital contributed by forgiveness of debt - 841,953 3,541,159 - -
The accompanying notes are an integral part of these financial statements.
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HERCULES RIG CORP.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Hercules Rig Corp. (HRC or the Company) is engaged in the business of
acquiring, through purchase or lease, offshore drilling and workover rigs and
bareboat chartering the rigs to an affiliate, Hercules Offshore Corporation
(HOC), who in turn utilizes the rigs 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 April 1994 to acquire a jack-up rig
(Rig 25) from Chiles Offshore Corporation (Chiles). Rig 25 had previously been
chartered by HOC with an option to purchase the rig from Chiles. In April
1994, HRC was incorporated, purchased the right to acquire Rig 25 from HOC,
purchased Rig 25 from Chiles and entered into a bareboat charter agreement with
HOC (see Note 4). The outstanding stock of HRC is owned by Rashid & Lee,
Nominees, a private limited company in Malaysia. Effective January 1, 1997,
HRC entered into an agreement with an affiliate of PLM Equipment Leasing
Corporation of California (PLM), whereby HRC is leasing, with an obligation to
purchase, Rig 22 (see Note 4). Also effective January 1, 1997, HRC entered
into an agreement to bareboat-charter Rig 22 to HOC for a period of three
years.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Revenue Recognition
Revenue under the bareboat charter agreements with HOC is recognized as the day
rates are earned. In accordance with the agreements with HOC, HRC charges
daily bareboat charter fees to HOC, regardless of whether the rigs are operated
by HOC.
Major Suppliers, Customers,
Credit Risk and Liquidity
Under the terms of the bareboat charter agreements between HOC and HRC, all rig
operating costs are paid by HOC and any capital expenditures for rig
refurbishment or maintenance expenses are borne by HRC.
HOC, HRC's only customer, is primarily involved in the contract drilling and
workover industry and has as its customers companies primarily engaged in the
petroleum, exploration and production industries. 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's liquidity should be considered in light of the significant
fluctuations in demand experienced by drilling contracts 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. Based on current circumstances and
assuming no other changes, the day rates charged to HOC for Rig 22 and Rig 25
are insufficient to enable the Company to meet its obligations of the $12
million maturing on January 3, 2000 for Rig 22 (see Note 6) and the Company's
note payable to HOC of approximately $1.7 million maturing on January 1, 1999
(see Note 4).
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Rigs, Equipment and Property
Depreciation is calculated using the straight-line method over the estimated
rig asset life, net of estimated salvage value. At December 31, 1995 and 1996,
Rig 25 was recorded at a cost of $12,164,057 and $12,696,865, respectively, net
of accumulated depreciation of $1,115,187 and $1,903,456, respectively.
Expenditures for settlements of rigs and equipment are capitalized as incurred.
Expenditures for maintenance and repairs are charged to expense as incurred.
Deferred Costs
In 1995, HRC incurred costs and paid fees in connection with various financing
arrangements (see Note 3). These costs, primarily legal fees, underwriters'
costs and loan commitment fees, were deferred and included in other assets at
December 31, 1995, at a cost of $271,565 net of accumulated amortization of
$135,415 and were being amortized into the results of operations through the
date of loan repayment in December 1996. Also included in other assets are
organizational costs incurred during the formation of the Company. These costs
are being amortized on a straight-line basis over five years. At December 31,
1995 and 1996, organizational costs were recorded at a cost of $25,599, net of
accumulated amortization of $8,409 and $13,698, respectively. The Company
recorded amortization expense of approximately $3,000, $141,000, and $176,000
during the period from inception through December 31, 1994 and for the years
ended December 31, 1995 and 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.
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.
Interim Financial Information
The interim financial statements as of April 30, 1997, and for the four months
ended April 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. SHAREHOLDER ADVANCES
AND LONG-TERM DEBT:
In 1994, in connection with the original capitalization of the Company, the
shareholder advanced $9.4 million to the Company to fund the acquisition of Rig
25 from Chiles (see Note 4 for additional discussion of the purchase of Rig
25). Of this advance, $5,250,000 was recorded as equity of the Company. The
remaining $4,150,000 was established as a payable to the shareholder pursuant
to terms and conditions as set forth in a promissory note to the shareholder.
HRC accrued interest on the note at prime resulting in accrued interest of
$446,623 through July 1995.
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In July 1995, the Company borrowed $4,000,000 from Tufton Oceanic Finance Corp.
(Tufton), secured by Rig 25, of which the $3.7 million net proceeds were used
to repay the accrued interest and debt to the Company's shareholder. As part
of the agreement with the lender, HRC's remaining debt to its shareholder of
$841,953 was contributed to HOC as additional paid-in capital at that time.
The $4,000,000 note payable to Tufton was payable in monthly installments of
principal and interest equal to the revenues earned by HRC on the bareboat
charter of Rig 25. These payments were applied first to accrued interest with
the remaining portion applied to principal. The balance of the note was due on
July 14, 1996, which was subsequently extended through December 3, 1996.
Interest on the note ranged from 12 percent to 15 percent. The remaining
balance of approximately $3,541,000 was repaid on December 3, 1996, from funds
received as a capital contribution from the shareholder of HRC (see Note 4).
4. RELATED-PARTY TRANSACTIONS:
Hercules Offshore Corporation
HOC and the Company are affiliated through a common board of directors and
management. The accounts of HOC are not combined with those of the Company for
financial reporting purposes.
Prior to 1994, HOC leased Rig 25 from a third party and had paid a deposit of
$1 million toward the purchase of the rig. During 1994, HOC sold the 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 HOC). HRC has recorded the $1.1 million as a
payable to HOC, which is included in the $1,667,974 payable to HOC as of
December 31, 1996. The Company entered into a two-year bareboat charter
agreement with HOC, 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 payable to HOC 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. During 1996 and prior
years, HOC periodically incurred and paid certain capital improvements related
to Rig 25. HRC has recorded an account payable to HOC for approximately $1.2
million of these costs which has been reflected as an increase to the net
account payable balance to HOC resulting in a net payable balance to HOC of
$1,667,974 on the December 31, 1996, balance sheet. The net payable to HOC
matures on January 1, 1999.
During 1995, HRC borrowed $4 million (secured by Rig 25) and used the $3.7
million net proceeds to repay its shareholder for advances paid to HRC in 1994,
who in turn loaned the proceeds to the former shareholders of HOC who in turn
loaned $3.7 million to HOC pursuant to an interest-free loan. All interest
expense and amortization of loan costs were 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 HOC $349,467 of interest expense. HRC has recorded interest
income and a receivable from the former shareholders of HOC as of December 31,
1996. On December 3, 1996, HOC repaid $3,541,159 of its loan balance of
approximately $3,754,000 directly to Tufton on behalf of HRC as full repayment
of HRC's outstanding loan balance. This loan repayment was deemed to have been
paid to HOC's former shareholders and as contributed capital to HRC from its
shareholder.
Effective January 1, 1997, HRC entered into an agreement with an affiliate of
PLM Equipment Leasing Corporation of California (PLM) to bareboat-charter a
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 operating
lease agreement to bareboat-charter this jack-up rig to HOC at a day rate of
$3,164. The Company has accounted for its lease as a capital lease in 1997.
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Hercules Marine Services Corporation
Hercules Marine Services Corporation (HMSC), a Malaysian-owned company, and HRC
are affiliated through a common board of directors and management. The
accounts of HMSC are not combined with those of the Company for financial
reporting purposes.
Throughout 1994, the Company loaned various amounts to HMSC on an unsecured
basis for working capital purposes. At December 31, 1996, the outstanding
balance was $420,401 and was noninterest-bearing and payable on demand at the
option of the Company. The Company has fully reserved the unpaid balance.
5. INCOME TAXES:
The tax effect of significant temporary differences representing deferred tax
assets and liabilities is as follows:
1995 1996
------------ ------------
Deferred tax liabilities-
Deferred tax liability related to drilling and
workover rigs and equipment $ 1,614,500 $ 2,216,649
----------- -----------
Deferred tax assets-
Tax net operating loss carryforwards 1,768,358 2,590,554
Other 142,800 142,800
Valuation allowance (296,658) (516,705)
----------- -----------
1,614,500 2,216,649
----------- -----------
Deferred tax liability, net $ - $ -
=========== ===========
As of December 31, 1996, the Company has U.S. federal tax net operating loss
(NOL) carryforwards of $7,619,277 which are available to offset future taxable
income. If not utilized, these NOL carryforwards will expire as follows:
$1,578,566 in 2009, $3,622,487 in 2010 and $2,418,224 in 2011. A valuation
allowance of $516,705 has been recorded to offset the related deferred tax
assets due to the uncertainty of realizing loss carryforwards. 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 NOL carryforwards in
any one year.
6. COMMITMENTS AND CONTINGENCIES:
Management believes that the Hercules Company is currently not involved in any
asserted litigation and is unaware of any threatened litigation. Management
believes that the Company maintains an adequate level of liability insurance
coverages. In the opinion of management, uninsured losses, if any, in excess
of those accrued will not have a material adverse effect on the Company's
financial position or results of operations.
Lease Commitments
Effective January 1, 1997, the Company entered into a lease for Rig 22. The
Company's lease commitment for this rig is $2,007,500 for each of the
three years following January 1, 1997, and, in addition, HRC has an obligation
to purchase the rig at any time on or prior to January 3, 2000. The rig may be
purchased by the Company at its option in the first year of the lease for a
purchase price of $11 million. If the option is exercised by the Company in
the second year, the purchase price will be $11.5 million. If not previously
purchased, HRC must purchase the rig in the third year of the lease agreement
for $12 million. HRC must give the lessor 90 days' notice of its intention to
purchase the rig. During the 90-day period, HRC will continue to owe a daily
bareboat charter fee payment of $5,500. None of the bareboat charter fee
payments by HRC reduce the lump-sum purchase price options or obligation of the
rig. The lease obligation is secured by both Rig 22 and Rig 25.
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Rig 22 is currently leased to HOC for $3,164 per day under a bareboat charter
agreement between HOC and HRC, expiring January 2, 2000. HOC has no option to
purchase the rig from HRC. Based on current circumstances and assuming no
other changes, the day rates charged to HOC for Rig 22 and Rig 25 are
insufficient to enable the Company to meet its obligations of the $12 million
maturing on January 3, 2000 for Rig 22.
SUBSEQUENT EVENT
(UNAUDITED):
On May 9, 1997, the shareholder of HRC entered into a definitive stock purchase
agreement to sell all of the outstanding stock of HRC for $50 million to Parker
Drilling Company. The agreement is conditional upon Parker Drilling Company's
acquisition of HOC for $145 million and is terminable if the transaction fails
to close by December 31, 1997.