ITEM 1. BUSINESS
OVERVIEW AND OPERATING STRATEGY
Energy Service Company, Inc. ("ENSCO" or the "Company") is an international contract drilling company that also provides related oilfield services. The Company's compliment of offshore drilling rigs includes 23 jackup and 10 barge rigs. The Company also provides marine transportation services and horizontal and directional drilling services. The Company's three business lines are integral to the exploration, development and production of oil and gas.
Since 1987, the Company has pursued a strategy of building its fleet of offshore drilling rigs. This strategy was exemplified by the Company's acquisition of the remainder of Penrod Holding Corporation ("Penrod") in August 1993 and the expansion of the Company's Venezuelan rig fleet during 1993 and 1994 with the delivery of four new barge drilling rigs in each year. The Company also added two harsh environment jackup rigs to its North Sea fleet in 1994. In addition, the Company has acquired and established businesses which provide products and services complementary to the drilling business. The Company has built its marine transportation fleet to 35 vessels operating in the Gulf of Mexico. The Company's technical drilling services division, which operates primarily in the Austin Chalk trend of South and Central Texas, and to a lesser extent in Canada and the North Sea, is a leading provider of horizontal drilling services to the industry.
With the Company's increasing emphasis on offshore markets, the Company has disposed of businesses that are not offshore oriented or that management does not believe will meet the Company's standards for financial performance. During 1994, the Company exited the land rig business with the sale of all twelve domestic and three of its four foreign land rigs. In 1993, substantially all of the Company's supply business was sold in keeping with the Company's decision to concentrate on expanding its contract drilling and marine transportation operations.
The Company (formerly Blocker Energy Corporation) was formed as a Texas corporation in 1975 and was reincorporated in Delaware in 1987. The Company's principal office is located at 2700 Fountain Place, 1445 Ross Avenue, Dallas, Texas, 75202-2792 and its telephone number is (214) 922- 1500.
RECENT EVENTS
On January 25, 1995, ENSCO Drilling Company, a wholly-owned subsidiary of the Company, entered into a letter of intent with the 30% minority interest partner in ENSCO Drilling (Caribbean), Inc. ("Caribbean") under which ENSCO Drilling Company will purchase half of the minority interest partner's shareholdings in Caribbean. The purchase price to be paid for the 15% interest in Caribbean is based on Caribbean's future operating activity and proceeds from any future sale of Caribbean's rigs. The agreement, which is
effective January 1, 1995, increases ENSCO Drilling Company's interest in Caribbean from 70% to 85%.
CONTRACT DRILLING OPERATIONS
The Company's contract drilling operations are conducted by its wholly owned subsidiaries, ENSCO Offshore Company, ENSCO Offshore U.K. Limited, ENSCO Netherlands Ltd. and ENSCO Drilling Company ("the Subsidiaries"). The Subsidiaries engage in the drilling of oil and gas wells in domestic and international markets under contracts with major and independent oil companies. ENSCO Offshore Company currently owns 20 jackup drilling rigs of which 18 are located in the Gulf of Mexico and two are in the North Sea. ENSCO Offshore U.K. Limited owns and operates three jackup drilling rigs in the North Sea.
In February 1994, ENSCO Offshore Company purchased two jackup rigs located in the North Sea and simultaneously entered into bareboat charter agreements with the seller for an initial twelve month period. The purchase price consisted of $50.0 million paid at closing and an additional $6.0 million which was to be credited against the bareboat charter payments during the last four months of the initial bareboat charter agreements. The bareboat charter agreements were not extended beyond the initial twelve month period and the Company made a payment of $1.8 million to the seller, in December 1994, for the remainder of the deferred purchase payment, net of bareboat charter payments due to the Company through the end of the twelve month bareboat charter period. The drilling contracts for the two rigs have been assigned to the Company as of January 1, 1995. Under such contracts, the rigs work for the joint venture of major oil and gas exploration companies for whom the rigs operated during the term of the bareboat charter agreements.
ENSCO Drilling Company conducts contract drilling operations through its ownership interest in Caribbean. Caribbean and its subsidiary own and operate ten barge drilling rigs on Lake Maracaibo, Venezuela for Lagoven, S.A. ("Lagoven"), a subsidiary of the Venezuelan national oil company. Caribbean has also managed barge drilling rigs owned by Lagoven. Four of Caribbean's ten barge drilling rigs were constructed in 1994 in order to fulfill four separate five-year drilling contracts with Lagoven. All four barge drilling rigs commenced drilling operations in the third quarter of 1994.
In the third quarter of 1994, the Company mobilized its jackup rig located in Brazil to the Gulf of Mexico. After undergoing modifications the rig began operating in the Gulf of Mexico during the fourth quarter of 1994. In the fourth quarter of 1994 the Company commenced the mobilization of its jackup rig from Dubai to the Gulf of Mexico. The rig is currently in a shipyard for modifications and will be available to commence operations in the second quarter of 1995.
The Company's contract drilling services and equipment are used in connection with the process of drilling and completing oil and gas wells. Demand for the Company's drilling services is based upon many factors over which the Company has no control, including the market price of oil and gas, the stability of such prices, the production levels and other
activities of OPEC and other oil and gas producers, the regional supply and demand for natural gas, the level of worldwide economic activity and the long-term effect of worldwide energy conservation measures. These factors, in turn, will affect the level of drilling and production activity.
The drilling services provided by the Company are conducted on a contract basis. The Company may be asked to provide drilling services on a "daywork", "footage" or "turnkey" basis. Under daywork contracts, the Company receives a fixed amount per day for drilling the well and the customer bears a major portion of the out-of-pocket costs of drilling. The customer may pay the cost of moving the equipment to the job site and assembling and dismantling the equipment. In some cases, the Company provides drilling services on a daywork contract basis with additional incentive compensation earned for completion of drilling activity ahead of budgeted targets set by the customer. Under footage contracts, the Company is paid a fixed amount for each foot drilled, regardless of the time required or the problems encountered in drilling the well. The Company pays more of the out-of-pocket costs associated with footage contracts than with daywork contracts. Under turnkey contracts, the Company agrees to drill a well to a specified depth for a fixed price. The Company generally operates on a daywork basis since footage and turnkey contracts involve a higher degree of risk to the Company and normally entail greater variations in profitability. However, where it considers risks to be manageable, the Company has operated under turnkey or footage contracts due to the potential for higher profits.
During the past several years, contracts have typically been short-term, particularly in the U.S. Accordingly, the Subsidiaries have had no material backlog of contracts for their drilling services in recent years. However, due to extension clauses included in the contracts, approximately 75% of the Company's rigs have worked for the same operator for greater than six months and over 50% of the Company's rigs have worked for the same operator for longer than one year. The backlog of business for the Subsidiaries at March 1, 1995 was approximately $45.3 million compared to a $55.0 million backlog level in February 1994. The Company's subsidiary in Venezuela, Caribbean, has a number of term contracts, most of which terminate in 1998 and 1999, with a backlog as of March 1, 1995 of approximately $212.8 million, compared to a backlog of approximately $266.0 million in February 1994.
The contract drilling business is highly competitive and, in recent years, has suffered from a substantial oversupply of drilling rigs. ENSCO competes with other drilling contractors on the basis of quality of service, price, equipment suitability and availability, reputation and technical expertise. Competition is usually on a regional basis, but drilling rigs are mobile and may be moved from one region to another in response to demand. Drilling operations are generally conducted throughout the year with some seasonal declines in winter months.
MARINE TRANSPORTATION OPERATIONS
The Company conducts its marine transportation operations through a wholly owned subsidiary, ENSCO Marine Company ("ENSCO Marine"), based in Broussard, Louisiana.
ENSCO Marine entered the marine transportation business in March 1988 with the acquisition and refurbishment of 14 supply vessels. Between September 1989 and April 1990, ENSCO Marine took delivery of four additional 184-foot supply vessels that are operated pursuant to long-term operating lease agreements. In January 1991, the Company acquired the 20 vessel Argosy Offshore Ltd. fleet. In August 1993, the Company acquired two additional marine vessels in the Penrod acquisition. In November 1994, ENSCO Marine acquired a supply vessel and contracted to modify four existing vessels, as discussed below.
During 1992, the Company mobilized six marine vessels to Singapore for work possibilities. Two of the vessels returned to the Gulf of Mexico in 1993. The Company operated the remaining four vessels in Singapore through a joint venture beginning in August 1993. The Singapore joint venture was terminated in May 1994 and three of the vessels were mobilized to the Gulf of Mexico. The remaining vessel, a utility boat, was sold effective June 30, 1994. During most of 1993 the Company operated two anchor handling vessels offshore Brazil. One vessel returned to the Gulf of Mexico in the fourth quarter of 1993 and the other vessel returned to the Gulf of Mexico in February 1994. All of the Company's marine transportation vessels are currently located in the Gulf of Mexico.
In the fourth quarter of 1994, the Company entered into an agreement with an unrelated third party to purchase a supply vessel, convert four of the Company's utility vessels into four larger, 146-foot mini-supply vessels and assign ownership of four of the Company's utility vessels to the unrelated third party. This transaction was consistent with the Company's strategy to concentrate its fleet on the larger, more capable vessels and to exit the unprofitable utility boat market. Earlier in 1994, the Company converted another utility boat to a mini-supply vessel. Including the four utility vessels currently being converted into mini-supply vessels, the Company has a marine transportation operating fleet of 35 vessels consisting of six anchor handling tug supply vessels, 21 supply vessels and eight mini-supply vessels. The Company continues to own one utility vessel which is used for training purposes only.
The Company's marine transportation services are used primarily in connection with the process of servicing offshore oil and gas operations. Demand for these services is largely dependent on the factors affecting the level of activity in the offshore oil and gas industry.
The Company's six anchor handling tug supply ("AHTS") vessels ordinarily support semi-submersible drilling rigs and large offshore construction projects or provide towing services. The 21 supply vessels and eight mini- supply vessels support general drilling and production activity by ferrying supplies from land and between offshore rigs. All of the Company's marine transportation operating vessels have liquid mud handling capabilities which management believes enhance their marketability. The Company's vessels are typically chartered on a well-to-well basis, or on term contracts which may be terminated on short notice. At March 1, 1995, ENSCO Marine had a backlog of contracts for its services of approximately $4.2 million compared to $6.4 million for such services in February 1994.
ENSCO Marine competes with numerous vessel operators on the basis of
quality of service, price, vessel suitability and availability and reputation. Some of the vessel operators with whom the Company competes have larger fleets of vessels and have longer operating histories than the Company. Marine transportation operations are conducted throughout the year, but some reductions in vessel utilization and charter rates may be experienced during winter months due to seasonal declines in offshore activities.
TECHNICAL SERVICES OPERATIONS
In the first quarter of 1988, the Company's wholly owned subsidiary, ENSCO Technology Company ("ENSCO Technology"), commenced providing horizontal drilling services to the petroleum industry. Horizontal drilling technology has attracted increased interest by the oil and gas industry due to the potential for significantly enhancing the recovery of oil and gas from certain types of producing reservoirs.
In 1990, the Company augmented its horizontal drilling capabilities with the addition of measurement while drilling ("MWD") equipment. MWD tools provide directional and locational readings (i.e., borehole inclination, azimuth and toolface direction) on a real time basis to the drillers. Some of the Company's MWD tools have been upgraded to include gamma ray sensors which provide a real time reading of lithological formation characteristics allowing the driller to know when the drill bit has entered the producing formation and whether it is remaining within the formation as the horizontal drilling equipment follows the formation's undulations.
ENSCO Technology has also developed horizontal drilling applications utilizing coiled tubing and slimhole drilling motors. Both of these applications can be employed in depleted vertical wells in existing oil and gas fields that are still productive, facilitating the recovery of additional reserves previously not economically recoverable.
The technical services industry is highly competitive. Demand is largely dependent upon drilling activity in certain geographical regions where oil and gas production can be enhanced through horizontal drilling and MWD services. The Company competes against numerous suppliers of horizontal drilling and MWD services on the basis of quality of service, price, equipment suitability and availability, technical performance and reputation. Several suppliers with whom the Company competes have substantially greater financial resources than the Company and develop and manufacture their own motors and equipment. However, by using multiple sources of technology and tools, the Company is able to focus on quality performance of its services.
The Company's technical services operations are presently conducted in the U.S., Canada and the North Sea. During 1992 the Company expanded internationally into Ecuador and Abu Dhabi in response to the downturn in U.S. horizontal drilling activity. The Company terminated operations in these two countries in 1993 due to the completion of contracts and lack of profitability. In 1994, the U.S. and Canada were targeted for horizontal drilling/MWD services and the North Sea was targeted for coiled tubing services.
ENSCO Technology does not have a significant backlog for its services due to the generally short duration of its contracts, with most jobs lasting less than 30 days.
DISCONTINUED OPERATIONS
In 1993, the Company completed a series of transactions that resulted in the sale of substantially all of the Company's supply segment. In 1990, the Company adopted plans to discontinue its oil and gas operations and seek a buyer for its oil and gas assets. As of December 31, 1994, the Company had sold substantially all assets of its discontinued operations.
SEGMENT INFORMATION
The following table provides operational information regarding the Company's contract drilling, marine transportation and technical services operations for the five years ended December 31, 1994:
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The company continues to own one land rig, which is stacked, located in the Middle East.
The Company's drilling rigs consist of engines, drawworks, masts, pumps to circulate the drilling fluid, blowout preventers, drill string and related equipment. The engines power a rotary table that turns a bit consisting of rotating cones so that the hole is drilled by grinding the rock which is then carried to the surface by the drilling fluid. The intended well depth and the drilling conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling job.
The Company's offshore jackup rigs consist of mobile drilling platforms equipped with legs that can be lowered to the ocean floor to provide support for the drilling platform. All the Company's jackup rigs are of the independent leg design. The jackup rig hull includes the drilling rig, jacking system, crew quarters, storage and loading facilities, helicopter landing pad and related equipment.
The Company's barge drilling rigs have all of the crew quarters, storage facilities, and related equipment mounted on floating barges with the drilling equipment cantilevered from the stern of the barge. The barges are towed to the drilling location and are held in place by anchors while drilling activities are conducted.
Over the life of a typical rig, several of the major components are replaced due to normal wear and tear. Components such as masts and drawworks are seldom replaced.
Substantially all of the Company's jackup rigs, which had a combined net book value of $246.6 million at December 31, 1994, are pledged as collateral in favor of a financial institution to secure payment of a secured term loan.
All of the Company's active rigs, and rigs in shipyards, are in good condition.
Depending upon the nature of the work, the proximity of the job site to the Company's repair facilities and certain other factors, rig maintenance and
repairs are performed either at the job site or at the Company's facilities. The Company owns or leases field locations and repair facilities for its drilling rigs in Las Morochas, Venezuela; Dubai, United Arab Emirates; Beverwijk, Holland; Broussard, Louisiana; and Aberdeen, Scotland.
MARINE TRANSPORTATION
In the fourth quarter of 1994, the Company entered into an agreement with an unrelated third party to purchase a supply vessel, convert four of the Company's utility vessels into four larger, 146-foot mini-supply vessels and assign ownership of four of the Company's utility vessels to the unrelated third party. Earlier in 1994, the Company sold one utility boat and converted another to a mini-supply vessel. Including the four utility vessels currently being converted into mini-supply vessels, the Company has a marine transportation operating fleet of 35 vessels consisting of six anchor handling tug supply vessels, 21 supply vessels and eight mini-supply vessels. All of the Company's marine transportation vessels are currently located in the Gulf of Mexico. The Company continues to own one utility vessel which is used for training purposes only.
Substantially all of the Company's owned marine transportation vessels, which had a combined net book value of $40.9 million at December 31, 1994, are pledged as collateral to secure payment of a secured term loan. The Company leases four of the supply vessels under long-term lease agreements. The Company's marine transportation operations are headquartered in Broussard, Louisiana.
The following table provides as of March 1, 1995 certain information regarding the Company's marine transportation vessels:
MARINE FLEET
NO. OF YEAR HORSE VESSEL TYPE VESSELS BUILT POWER LENGTH - ----------- ------- --------- ----------- ---------
KODIAKS-AHTS 2 1983 12,000 225' OTHER- AHTS 4 1976-1983 5,800-7,240 185'-230' SUPPLY 21 1977-1985 1,800-3,000 166'-185' MINI - SUPPLY 8 * 1981-1984 1,200 140'-146'
* Includes four 116 vessels which are currently in a shipyard for conversion to mini-supply vessels.
The Company continues to own one utility vessel which is used for training purposes only.
TECHNICAL SERVICES
The Company's technical services properties consist primarily of MWD systems, wireline trucks, survey equipment, motors and steering equipment necessary to perform horizontal drilling. The Company leases its motors primarily from Dreco Energy Services Ltd. ("Dreco"). The Company's MWD
systems are licensed from Technolink (Cyprus) Ltd. ("Technolink") and Geolink (UK) Ltd. ("Geolink"), which are related entities. If the Company's relationships with Dreco, Technolink or Geolink should change, the Company would need to secure alternative supplies of similar downhole motors and MWD systems.
The Company's technical services operations are headquartered in Houston, Texas with leased field offices in Rosenberg, Texas and Edmonton, Alberta, Canada.
OTHER PROPERTY
The Company leases its executive offices in Dallas, Texas. The Company owns offices and other facilities in Houma, Shreveport and Broussard, Louisiana and Aberdeen Scotland; and rents offices in Houston, Texas; Edmonton, Alberta, Canada; Las Morochas, Venezuela; Dubai, United Arab Emirates; and Beverwijk, Holland.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Prior to October 1990, Penrod was self-insured for the majority of its maritime claims exposure. During the period from October 1990 to the August 1993 acquisition date, Penrod had insurance coverage which limited its maritime claims exposure to a maximum of the $25,000 deductible for each claim, plus a fluctuating aggregate of $500,000 to $1.5 million in excess of the $25,000 claim deductible for each policy year. Penrod is also a defendant in lawsuits with certain of its insurers and the administrator of its self-insurance program, and personal injury and maritime liability lawsuits filed by present and former employees. Management of the Company has provided reserves for such claims as it considers appropriate given the facts currently known.
On February 13, 1991, Penrod filed an action against TransAmerican Natural Gas Corporation ("TransAmerican") which is presently pending in the U.S. District Court Southern District of Texas, Houston Division, seeking damages for breach of contract. On August 21, 1991, TransAmerican filed an action against Penrod in the 133rd Judicial District Court, Harris County, Texas, seeking damages for breach of contract and tort claims. Management of the Company believes that the outcome of this litigation will be favorable to the Company.
In addition to the matters discussed above, the Company is from time to time involved in litigation incidental to the conduct of its business. In the opinion of management, none of such litigation in which the Company is currently involved would, individually or in the aggregate, have a material effect on its financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth quarter of 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices, reported on the American Stock Exchange for each period indicated for the Company's common stock, $.10 par value (the "Common Stock") for each of the last two fiscal years, restated for the reverse stock split as discussed below:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- -------
1994 High . . . . $17 $18 5/8 $19 1/4 $15 1/2 $19 1/4 1994 Low . . . . $12 1/2 $13 1/2 $14 5/8 $10 3/4 $10 3/4
1993 High . . . . $10 $14 1/4 $14 $16 1/4 $16 1/4 1993 Low . . . . $ 4 $ 8 3/4 $ 9 1/4 $11 1/4 $ 4
The Company's Common Stock (Symbol: ESV) is traded on the American Stock Exchange. At December 31, 1994, there were approximately 4,800 stockholders of record of the Company's Common Stock.
Since inception, no dividends have been declared on the Company's Common Stock, and the Company does not expect to declare dividends on its Common Stock in the near future.
The Company's stockholders approved a one share for four shares reverse stock split of the Company's common stock at the Company's Annual Meeting of Stockholders held on May 24, 1994.
In August 1994, the Company issued a redemption notice for the 2,839,110 outstanding shares of its $1.50 Cumulative Convertible Exchangeable Preferred Stock ("1.50 Preferred Stock"). Holders of 2,807,147 shares of the $1.50 Preferred Stock elected to convert each of their shares into approximately 1.786 shares of the Company's common stock which resulted in the issuance of 5,012,762 shares of the Company's common stock. Holders of the remaining 31,963 shares of the $1.50 Preferred Stock elected to redeem their shares for cash.
The Company is also authorized to issue shares of convertible common stock. As of December 31, 1994 and March 1, 1995, no shares of convertible common stock were outstanding.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the five years ended December 31, 1994 has been derived from the Company's audited consolidated financial statements (in thousands, except per share amounts). This information should be read in conjunction with the audited consolidated financial statements and notes thereto included in "Item 8. Financial Statements and Supplementary Data."
The Company's 1994 increases in consolidated revenues and operating income compared to 1993 are primarily attributable to higher average domestic day rates for the Company's contract drilling and marine transportation segments, revenues and operating margins associated with the six drilling rigs that were added in 1994 and a full year of operation from four rigs constructed and placed into service in the first half of 1993. Operating income was also positively impacted by lower general and administrative costs but reduced by additional depreciation and amortization expense in 1994 as compared to 1993.
The consolidated revenues and operating income of the Company for the year ended December 31, 1993 increased substantially over the combined 1992 levels. The 1993 increases are primarily due to higher average day rates and increased utilization for the Company's contract drilling and marine transportation segments and increased activity in the Company's technical services segment. Operating revenues in 1992 included $17.1 million recorded by the Company in connection with its role as general contractor for the construction of four new barge drilling rigs for an affiliate in Venezuela.
CONTRACT DRILLING. Natural gas prices increased in 1992 and 1993 resulting in an increase in the number of rigs working, particularly in the Gulf of Mexico. The activity level increased throughout 1993 and remained fairly stable in 1994 causing the Company's contract drilling revenues and operating margins to increase in both 1993 and 1994. However, management anticipates that the decline in natural gas prices in late 1994 and early 1995 may result in decreased drilling activity in 1995, particularly in the Gulf of Mexico.
As of March 1, 1995 all but one of the Company's eighteen Gulf of Mexico rigs were operating or were committed under contract. The one uncommitted rig is undergoing major modifications. The Gulf of Mexico rigs continue to operate under relatively short-term agreements with contract durations normally not exceeding six months.
The Company's revenues and operating margins, defined as operating revenues less operating expenses, exclusive of depreciation and general and administrative expenses, for its jackup rigs operating in the U.S. increased for the year ended December 31, 1994 compared to the prior year due to marginally higher average day rates in the Gulf of Mexico and to the
relocation of four of the Company's rigs to the Gulf of Mexico during 1993 and 1994. U.S. operating days increased to 5,063 for the year ended December 31, 1994 as compared to 4,558 for the year ended December 31, 1993. For the year ended December 31, 1994, average day rates for the Company's rigs in the Gulf of Mexico increased by 7% compared to the prior year with results offset partially by a 6% utilization decrease from the prior year.
Revenues and operating margins for the Company's jackup rigs operating in the U.S. increased substantially for the year ended December 31, 1993 compared to the combined 1992 results primarily due to improved market conditions in the Gulf of Mexico. Utilization rates for the Company's U.S. jackup rigs in 1993 were near 100% compared to approximately 60% in the combined 1992 period with corresponding 1993 average day rates up 53%.
For the year ended December 31, 1994, revenues for the Company's international jackup rigs decreased by 13% and operating margin increased by 23% as compared to the prior year. The revenue decrease is primarily attributable to the mobilization of five international jackup rigs to the Gulf of Mexico; three in the second, third and fourth quarters of 1993 from the North Sea, one in the third quarter of 1994 from Brazil and one which began mobilizing in the fourth quarter of 1994 from Dubai. These rigs were included in the international jackup rig results for a portion or all of the year ended December 31, 1993. The revenue decrease was partially offset by, and the operating margin increase was primarily attributable to, two North Sea jackup rigs acquired in mid-February 1994 which operated under bareboat charter agreements during 1994.
The bareboat charter agreements on the two North Sea jackup rigs acquired in mid-February 1994 were not extended beyond the initial twelve month period. The Company made a $1.8 million payment to the seller in December 1994 for the remainder of the deferred purchase payment net of bareboat charter payments due to the Company through the end of the twelve month bareboat charter period. The drilling contracts for the two rigs have been assigned to the Company as of January 1, 1995. Under such contracts, the rigs work for the joint venture of major oil and gas exploration companies for whom the rigs operated during the term of the bareboat charter agreements.
The Company's jackup rig offshore Brazil was mobilized to the Gulf of Mexico during the third quarter of 1994 with costs of $1.3 million charged against 1994 earnings. Upon arrival in the U.S., the rig was placed in a shipyard for enhancements including extending the rig's water depth capability from 300 feet to 350 feet. Due to the mobilization and shipyard enhancements, the rig was unavailable for work from late June 1994 through early October 1994. The rig began operating in the Gulf of Mexico in mid- October 1994.
The Company began mobilizing a jackup rig from Dubai to the Gulf of Mexico in the fourth quarter of 1994 with costs of $2.2 million charged against 1994 earnings. The rig arrived in the Gulf of Mexico in January 1995 and is currently undergoing modifications and enhancements including extending the rig's water depth capability to approximately 400 feet. Due to the modifications and enhancements, the rig will be unavailable for work until
approximately June 1, 1995.
As of March 1, 1995, two of the Company's five jackup rigs located in the North Sea are currently undergoing substantial modifications and enhancements including converting one of the rigs from a slot rig to a cantilever rig. Due to the modifications and enhancements, the rigs will be unavailable for work until approximately May 1, 1995 and July 1, 1995, respectively.
Revenues decreased by 7% for the Company's international jackup rigs for the year ended December 31, 1993 while operating margins increased 7% compared to the combined 1992 period. The 1993 revenue decrease from 1992 is the result of decreased average day rates in 1993 for the Company's international jackup rigs, coupled with the mobilization in the second, third and fourth quarters of 1993 of three of the Company's rigs located in the North Sea to the Gulf of Mexico. The 1993 operating margin increase is a result of reduced operating costs.
The Company's barge drilling rigs are all located on Lake Maracaibo, Venezuela and are operated by a 70% owned subsidiary of the Company, ENSCO Drilling (Caribbean), Inc. ("Caribbean"). The Company's revenues and operating margins from its barge drilling rigs in Venezuela increased substantially for the year ended December 31, 1994 as compared to the prior year, primarily due to the addition of four barge drilling rigs in the third quarter of 1994 and a full year of operation of four barge drilling rigs that began operating in March through June of 1993. Revenues and operating margins from the Company's barge drilling rigs in Venezuela improved significantly for the year ended December 31, 1993 compared to the combined 1992 period, primarily as a result of the addition of four barge drilling rigs in 1993.
All eight of the barge drilling rigs which commenced operation in Venezuela in 1993 and 1994 are contracted under separate five-year contracts with Lagoven, S.A. ("Lagoven"), a subsidiary of the Venezuelan national oil company, to operate on Lake Maracaibo. The contracts afford Lagoven the option to buy the barge drilling rigs during or at the end of the five-year contracts. The barges were financed under eight, five-year secured term loans which totalled $143.0 million at origination. Each loan is secured by a specific barge and the related charter contract with Lagoven, but is without recourse to the Company. Under the terms of the Lagoven contracts, the barges will earn day rates which the Company believes will be sufficient to fully amortize the associated financing.
In addition to the eight barge drilling rigs constructed in 1993 and 1994, the Company owns two other barge drilling rigs that are contracted to Lagoven, and the Company supplied labor to operate other rigs owned by Lagoven during 1994, 1993 and 1992.
The Venezuelan currency experienced significant devaluation in the first half of 1994 and the Venezuelan government established policies to control the exchange rate of the Venezuelan currency and severely restricted the conversion of Venezuelan currency to U.S. dollars. To date, Caribbean has not experienced problems associated with receiving U.S. dollar payments with respect to the U.S. dollar portion of its contracts with Lagoven.
Changes in these conditions, other policy enactments, or political developments in Venezuela could have an adverse effect upon the Company. However, the Company believes such adverse effects are unlikely due to the volume of U.S. dollars paid to the parent company of Lagoven for its oil exports and the contractual protection available to Caribbean if U.S. dollar payments are not made.
The Company sold its U.S. land rig operation effective June 30, 1994 and three of the Company's four land rigs located in the Middle East in the fourth quarter of 1994. The Company continues to own one land rig, located in Dubai, which is currently inactive. Revenues and operating margins for the Company's land rigs for the year ended December 31, 1994 decreased $15.4 million and $3.2 million, respectively, compared to the prior year. The decreases are primarily a result of the sales.
Revenues and operating margins for land rig operations for the year ended December 31, 1993 decreased $2.7 million and $1.5 million, respectively, compared to the combined results for 1992. The decreases are primarily a result of reduced utilization of the Company's Middle East land rigs which historically earned higher day rates and margins than land rigs operating in the U.S.
MARINE TRANSPORTATION. Beginning in the fourth quarter of 1992, increased drilling activity in the Gulf of Mexico caused utilization and day rates for marine transportation vessels to increase. The activity level for marine transportation vessels in the Gulf of Mexico, which is tied to the level of oil and gas drilling activity, increased throughout 1993 and remained fairly stable in 1994. The Company anticipates that, based on lower domestic natural gas prices, the Gulf of Mexico market may experience some softening during 1995.
In the fourth quarter of 1994, the Company entered into an agreement with an unrelated third party to purchase a supply vessel, convert four of the Company's utility vessels into four larger, 146-foot mini-supply vessels and assign ownership of four of the Company's utility vessels to the unrelated third party. This transaction was consistent with the Company's strategy to concentrate its fleet on the larger, more capable vessels and to exit the unprofitable utility boat market. Earlier in 1994, the Company sold one utility boat and converted another to a mini-supply vessel. Including the supply vessel acquired in the fourth quarter of 1994 and the four utility vessels currently being converted into mini-supply vessels, the Company has a marine transportation operating fleet of 35 vessels, four of which are leased under long-term agreements, consisting of six anchor handling tug supply vessels, 21 supply vessels and eight mini-supply vessels. All of the Company's marine transportation vessels are currently located in the Gulf of Mexico.
During 1992, the Company mobilized six marine vessels to Singapore for work possibilities. Two of the vessels returned to the Gulf of Mexico in 1993. The Company operated the remaining four vessels in Singapore through a joint venture beginning in August 1993. The Singapore joint venture was terminated in May 1994 and three of the vessels were mobilized to the Gulf of Mexico. The remaining vessel, a utility boat, was sold effective June 30, 1994. The charter fees from the joint venture were recorded as
operating revenue by the Company and the Company's 50% interest in the results of the joint venture operations were reported in "Income (Loss) From Equity Affiliates." During most of 1993 the Company operated two anchor handling vessels offshore Brazil. One vessel returned to the Gulf of Mexico in the fourth quarter of 1993 and the other vessel returned to the Gulf of Mexico in February 1994.
As a result of increased average day rates in the Gulf of Mexico and improved work opportunities for the three vessels that returned to the Gulf of Mexico from Singapore in September 1994, the Company's marine transportation revenues and operating margin increased 7% and 20%, respectively, for the year ended December 31, 1994 compared to the prior year. The Company's marine transportation revenues increased 63% for the year ended December 31, 1993 compared to the combined 1992 period, with a corresponding improvement in operating margin to $10.5 million in 1993 from a negative operating margin of $367,000 in the combined 1992 period due to increased Gulf of Mexico activity and day rates.
TECHNICAL SERVICES. The Company's horizontal drilling activity declined for the year ended December 31, 1994 as compared to the prior year which caused revenues to decrease. Average days per job in 1994 increased marginally compared to 1993 due to the additional time required to drill dual horizontal laterals from one vertical well bore partially offset by substantially improved drilling efficiency with a new high performance drilling motor. Guidance activity and revenues increased due to slightly longer average job days compared to 1993. Operating margin for the year ended December 31, 1994 increased from the prior year due primarily to reduced operating expenses, the collection of a receivable that had been fully reserved in a prior year, reductions in previously recorded liability estimates and improved rates for premium tools partially offset by reduced rates in other areas. Drilling activity improved in 1993 from the depressed activity levels of 1992. Average job margins in 1993 improved, as compared to 1992, as a result of the increased demand for the Company's services coupled with the results of cost cutting programs implemented throughout the latter part of 1992 and continuing into 1993.
In September 1994, a wholly owned subsidiary of the Company entered into an exclusive alliance agreement with Halliburton Energy Services, a division of Halliburton Company, to jointly provide coiled tubing directional and horizontal drilling services on a worldwide basis.
In October 1994, a wholly owned subsidiary of the Company entered into an agreement with Lateral Vector Resources, Inc. ("LVR"), a Canadian company, under which LVR purchased a 30% interest in a subsidiary of the Company. The purpose of the sale was to combine forces with LVR to conduct horizontal/directional drilling services in Canada and certain areas of the U.S. The subsidiary continues to be included in the Company's consolidated financial statements.
The Company's technical services operations are presently conducted in the U.S., primarily in the Austin Chalk trend in the Southern U.S., Canada and the North Sea. The Company will continue to focus primarily on domestic and Canadian opportunities for its technical services segment in 1995, as well as expanding its coiled tubing drilling services in the North Sea.
To date in 1995, domestic market conditions for the Company's technical services segment have remained consistent with the activity level in 1994. There are currently no indications of substantial change in horizontal drilling activity during 1995, although management anticipates that the demand for specialized drilling applications will increase.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the year ended December 31, 1994 increased 24% from the prior year. The increase is primarily attributable to a full year of depreciation and amortization related to the step-up in basis of the assets acquired in the Penrod Acquisition, a full year of depreciation on four barge drilling rigs delivered to Venezuela in March through June of 1993, depreciation on four additional barge drilling rigs delivered to Venezuela in July through September of 1994 and depreciation on two North Sea jackup rigs acquired in mid-February 1994. Depreciation expense in 1994 was reduced by the sale of all but one of the Company's land rigs during 1994.
Depreciation and amortization expense for the year ended December 31, 1993 increased by $28.9 million from 1992. The substantial increase is due primarily to the inclusion of the assets acquired in the Penrod Acquisition for the entire year of 1993 and depreciation on four barge drilling rigs delivered to Venezuela in March through June of 1993.
GENERAL AND ADMINISTRATIVE. General and administrative expense for the year ended December 31, 1994 decreased $2.5 million, or 21%, from the prior year. The decrease is primarily attributable to the benefits realized in 1994 from integrating Penrod's general and administrative functions into the Company following the acquisition of Penrod in August 1993. General and administrative expense increased in 1993 by $3.3 million compared to 1992 as a result of the inclusion of Penrod's general and administrative expenses, primarily consisting of additional salaries and related benefits and outside professional fees. Combined Penrod and Company general and administrative expenses for 1992, without any pro forma adjustments for the effects of anticipated savings associated with the acquisition, were $16.2 million, or $4.5 million over 1993 levels.
OTHER INCOME (EXPENSE). The Company reported net other expense of $7.6 million, $6.6 million and $8.0 million for the years ended December 31, 1994, 1993 and 1992, respectively. Interest income for 1994 increased by $2.5 million over 1993 and $1.6 million in 1993 over 1992 due to higher average cash levels, due in part to the acquisition of Penrod and increased interest rates. Interest expense increased by $3.6 million in 1994 compared to 1993, while 1993 interest expense exceeded 1992 by $5.3 million due to higher levels of debt, increased interest rates and the inclusion of Penrod's debt acquired. See Note 6 to Consolidated Financial Statements.
Income (Loss) from Equity Affiliates for 1994 and 1993 consists of the Company's 50% share of the earnings (loss) of a Mexican joint venture formed in June 1993 to operate a jackup rig in the Gulf of Mexico and a joint venture in Singapore formed in August 1993 to operate marine vessels in Southeast Asia. In 1992 the Company reported its proportionate share of the losses of Penrod on the equity method of accounting.
The Company recorded a gain of $670,000 in 1994 related to the sale of
stock of a subsidiary. See Note 12 to Consolidated Financial Statements. The Company currently has no plans to reduce its ownership interest in any of its subsidiaries. The Company reported under "Other, net" losses of $755,000 in 1994 consisting primarily of foreign currency translation losses of $1.3 million partially offset by other miscellaneous income.
PROVISION FOR INCOME TAXES. For the years ended December 31, 1994, 1993 and 1992 the Company recorded provisions for income taxes of $3.8 million, $5.9 million and $2.1 million, respectively, resulting in effective tax rates of 8.6%, 20.0% and 8.8%, respectively. The Company's effective tax rate varies between years due primarily to the expected utilization or non-utilization of U.S. net operating loss carryforwards, foreign taxes and the recording of deferred taxes.
The Company has a deferred tax asset valuation allowance of $47.9 million recorded at December 31, 1994 which relates to the uncertainty as to the realization of certain deferred tax assets, primarily consisting of U.S. net operating loss carryforwards. Based upon anticipated future results, the Company has concluded that it is more likely than not that the deferred tax assets balance, net of valuation allowance, will be realized. See Note 11 to Consolidated Financial Statements.
MINORITY INTEREST. Minority interest of $3.0 million for the year ended December 31, 1994 consists primarily of the minority shareholder's interest in the net income of Caribbean. The Company has entered into a letter of intent with the minority shareholder of Caribbean to purchase, effective January 1, 1995, one-half of the 30% of Caribbean currently owned by the minority shareholder. See Note 18 to Consolidated Financial Statements. Minority interest of $6.9 million for the year ended December 31, 1993 consists of $4.5 million related to the preacquisition earnings of the 64% of Penrod which the Company did not own prior to the Penrod Acquisition and $2.4 million related to the minority shareholder's interest in the net income of Caribbean. See Note 1 to Consolidated Financial Statements.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. In 1993, the Company completed a series of transactions that resulted in the sale of substantially all of the Company's supply business, conducted by its wholly owned subsidiary, ENSCO Tool and Supply Company, for net cash proceeds of approximately $12.3 million. As a result of these transactions, the Company's financial statements were reclassified to present the Company's supply operations segment as discontinued operations for all years presented. Included in 1993 "Income (Loss) from Discontinued Operations" is a gain on the supply division sale of $2.1 million, which includes a provision of $1.3 million for operations during the phase out period which began July 1, 1993, and income from operations for the six months ended June 30, 1993 of $200,000. Revenues for the supply operations were $22.2 million and $62.6 million in 1993 and 1992, respectively. See Note 17 to Consolidated Financial Statements.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF MINORITY INTEREST. Effective January 1, 1993, Penrod adopted Statement of Financial Accounting Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires the accrual,
during the year the employee renders the service, of the estimated cost of providing postretirement non-pension benefit payments. The cumulative effect after taxes and minority interest on the Company resulting from Penrod's adoption of SFAS No. 106 was $2.5 million ($.07 per share after the reverse stock split). See Note 10 to Consolidated Financial Statements.
PREFERRED STOCK DIVIDEND REQUIREMENTS. Preferred stock dividends decreased to $2.1 million for the year ended December 31, 1994 as compared to $4.3 million for each of the years ended December 31, 1993 and 1992 due to the conversion/redemption of all of the Company's preferred stock in August 1994. See Note 7 to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES.
CASH FLOW AND CAPITAL EXPENDITURES.
Cash flow from operations in 1994 increased by $52.3 million, or 94%, compared to 1993. The increase in 1994 cash flow is primarily a result of improved operating results and a full year's contribution from the cash flow of the ex-Penrod operations. Cash flow from operations increased substantially in 1993 to $55.5 million from $7.2 million in 1992 primarily as a result of improved operating results, a reduction of accounts receivable relating to the construction of four barge drilling rigs and the contribution from the cash flow from Penrod's operations during the last five months of 1993.
The Company's consolidated statement of cash flows for the year ended December 31, 1993 includes the cash and cash equivalents acquired with the acquisition of Penrod in August 1993, plus the cash provided by operating activities of Penrod subsequent to the acquisition. The cash flows from investing and financing activities of Penrod subsequent to the acquisition, including capital expenditures for property and equipment, long-term borrowings, and repayments of long-term borrowings, are also included in the Company's consolidated statement of cash flows. The cash provided by operating activities of Penrod prior to the Penrod Acquisition and the cash flows from investing and financing activities of Penrod prior to the acquisition have not been included in the Company's consolidated statement of cash flows. See Note 3 to Consolidated Financial Statements.
The Company's capital expenditures for 1994 consisted principally of $62.2
million towards the construction of four barge drilling rigs delivered for operation in Venezuela in July through September of 1994, $55.7 million for the purchase of two jackup rigs located in the North Sea, $24.9 million for contract drilling equipment, $7.0 million for marine transportation equipment and $3.4 million for other equipment, primarily for technical services operations.
During 1994, the Company sold its U.S. land rig operations and three of the Company's four land rigs located in the Middle East for aggregate proceeds of $23.0 million consisting of cash, a promissory note which was repaid prior to December 31, 1994 and receivables.
The Company's capital expenditures for the year ended December 31, 1993 for continuing operations included $65.7 million in connection with the construction of four barge drilling rigs that commenced operations in Venezuela in 1993, $4.2 million for the barge drilling rigs under construction at the end of 1993 that were delivered to Venezuela in 1994, $9.9 million for contract drilling equipment, $2.0 million for marine transportation equipment and $1.2 million for equipment used in the Company's technical service operations.
The Company's capital expenditures for continuing operations for 1992 included $1.9 million for technical services equipment, $1.0 million for contract drilling equipment and $500,000 for other equipment, primarily for marine transportation vessels.
Management anticipates that capital expenditures in 1995 will be approximately $25.0 million for existing operations and up to an additional $50.0 million for upgrades and enhancements of rigs and vessels, dependent upon the cash generated from the Company's operations. The Company may spend additional funds to acquire rigs or vessels in 1995, depending on market conditions and opportunities.
FINANCING AND CAPITAL RESOURCES. The Company's long-term debt, total capital and debt to capital ratios are summarized below (in thousands, except percentages):
The increase in long-term debt in 1994 as compared to 1993 primarily relates to an additional $76.5 million borrowed by Caribbean, on a non- recourse basis to the Company, in connection with the construction of four barge drilling rigs which were completed and placed into service in the third quarter of 1994. This increase in long-term debt was partially
offset by scheduled repayments and the redemption of the Company's convertible subordinated debentures in March 1994. The total capital of the Company increased in 1994 as compared to 1993 due primarily to the net increase in long-term debt as discussed above and the profitability of the Company in 1994.
The long-term debt of the Company increased substantially in 1993 as compared to 1992 due primarily to $60.0 million of borrowings in December 1993, a portion of which was used to retire existing term loans of Penrod. Caribbean also borrowed $65.0 million in 1993, on a non-recourse basis to the Company, related to four barge drilling rigs delivered to Venezuela in 1993. Additionally the Company borrowed $25.0 million in October 1993, a portion of which was used to repay a secured term loan and secured notes payable. These increases in long-term debt were partially offset by scheduled repayments. The total capital of the Company also significantly increased in 1993 as compared to 1992 due primarily to the issuance of common stock of the Company in connection with the acquisition of Penrod in August 1993, the net increase in long-term debt as discussed above and due to the profitability of the Company in 1993. See Note 3 to Consolidated Financial Statements.
The Company had a $39.0 million undrawn revolving line of credit at December 31, 1994. The revolver is reduced semi-annually by $1.0 million over five years, with the final $30.0 million line expiring in December 1998. See Note 6 to Consolidated Financial Statements.
In August 1994, the Company issued a redemption notice for the 2,839,110 outstanding shares of its $1.50 Cumulative Convertible Exchangeable Preferred Stock ("$1.50 Preferred Stock"), which was also the number of shares outstanding at December 31, 1993. Holders of substantially all of the $1.50 Preferred Stock elected to convert each of their shares into approximately 1.786 shares of the Company's common stock. See Note 7 to Consolidated Financial Statements.
The Company's liquidity position is summarized in the table below (in thousands, except ratios):
The Company utilizes a conservative investment philosophy with respect to its cash and short-term investments and does not invest in any derivative financial instruments.
Based on current energy industry conditions, management believes cash flow from operations, the Company's existing credit facilities and the Company's
working capital should be sufficient to fund the Company's required debt service and capital additions for the next twelve months.
OTHER MATTERS.
In December 1994, the Company's Board of Directors authorized the repurchase of up to $50.0 million of the Company's common stock. As of December 31, 1994, the Company had repurchased 201,400 shares of its common stock. Management anticipates that future repurchases of the Company's common stock will be funded from the Company's cash flow from operations and working capital.
On February 21, 1995, the Board of Directors of the Company adopted a shareholder rights plan and declared a dividend of one preferred share purchase right (a "Right") for each share of the Company's common stock outstanding on March 6, 1995. Each Right initially entitles its holder to purchase 1/100th of a share of the Company's Series A Junior Participating Preferred Stock for $50.00, subject to adjustment. The Rights generally will not become exercisable until 10 days after a public announcement that a person or group has acquired 15% or more of the Company's common stock (thereby becoming an "Acquiring Person") or the commencement of a tender or exchange offer upon consummation of which such person or group would own 15% or more of the Company's common stock (the earlier of such dates being called the "Distribution Date"). Rights will be issued with all shares of the Company's common stock issued between March 6, 1995, and the Distribution Date. Until the Distribution Date, the Rights will be evidenced by the certificates representing the Company's common stock and will be transferrable only with the Company's common stock. If any person or group becomes an Acquiring Person, each Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter entitle its holder to purchase, at the Right's then current exercise price, shares of the Company's common stock having a market value of two times the exercise price of the Right. If, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each Right (other than Rights owned by an Acquiring Person which will have become void) will entitle its holder to purchase, at the Rights then current exercise price, that number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) which at the time of such transaction will have a market value of two times the exercise price of the Right. After any person or group has become an Acquiring Person, the Company's Board of Directors may, under certain circumstances, exchange each Right (other than Rights of the Acquiring Person) for shares of the Company's common stock having a value equal to the difference between the market value of the shares of the Company's common stock receivable upon exercise of the Right and the exercise price of the Right. The Company will generally be entitled to redeem the Rights for $.01 per Right at any time until 10 days after a public announcement that a 15% position has been acquired. The Rights expire on February 21, 2005.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Energy Service Company, Inc.
In our opinion, based upon our audits and the report of other auditors, the accompanying consolidated balance sheet and the related consolidated statements of operations and of cash flows present fairly, in all material respects, the financial position of Energy Service Company, Inc. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for the years then ended 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 did not audit the financial statements of the Company's Venezuelan operations for the year ended December 31, 1993, which statements reflect total revenues of $28,967,000 for the year then ended. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for the Company's Venezuelan operations, is based solely on the report of the other auditors. 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 and report of other auditors provide a reasonable basis for the opinion expressed above. As discussed in Note 17, in 1993 the Company decided to discontinue its supply business. The financial statements for 1992 have been restated to reflect the discontinuance of the supply business. We have audited the adjustments that were applied to restate the 1992 financial statements. In our opinion, such adjustments are appropriate and have been properly applied to the 1992 financial statements. As discussed in Note 10, in 1993 the Company changed its method of accounting for postretirement benefits other than pensions.
/s/ Price Waterhouse LLP Dallas, Texas February 21, 1995 - ---------------------------------------------------------------------------
To the Board of Directors and Stockholders of Energy Service Company, Inc.
We have audited the consolidated statements of operations and cash flows of Energy Service Company, Inc. and its subsidiaries ("the Company") for the year ended December 31, 1992 (which are not presented herein). 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 audit. The financial statements of Penrod Partners L.P.,
formerly NGP No. I., L.P. ("Penrod Partners"), which were not audited by us, were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for such entity, is based solely upon the report of such other auditors. The Company's investment in Penrod Partners is accounted for under the equity method. Included in the consolidated financial statements is a net loss of $2.9 million for the Company's equity interest in the operations of Penrod Partners for the year ended December 31, 1992. We conducted our audit 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 audit and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company's operations and its cash flows for the year ended December 31, 1992 in conformity with generally accepted accounting principles. As discussed in Note 11 to the financial statements, in 1993 the Company changed its method of accounting for taxes to conform with Statement of Financial Accounting Standards No. 109 and, retroactively, restated the 1992 financial statements for the change.
/s/ Deloitte & Touche LLP Dallas, Texas March 2, 1993 (except for Note 11 as to which the date is May 12, 1993)
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
ENERGY SERVICE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Energy Service Company, Inc. (the "Company"), a Delaware corporation, was incorporated in August 1987, and is the successor by merger to Blocker Energy Corporation. The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. The Company's investments in 50% or less owned affiliates are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated. See Note 2 "Investments in Equity Affiliates."
In August 1993, the Company completed the step acquisition (the "Penrod Acquisition") of Penrod Holding Corporation ("Penrod"). See Note 2 "Investments in Equity Affiliates" and Note 3 "Acquisition." The Company has included the income from continuing operations of Penrod in its consolidated statement of operations beginning January 1, 1993 and has presented the preacquisition earnings related to the 64% of Penrod which it did not own prior to August 1993 as Minority Interest. The results of the Company's 1992 operations reflect Penrod on the equity method of accounting.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company's consolidated statement of cash flows for the year ended December 31, 1993 includes the cash and cash equivalents acquired in the Penrod Acquisition, net of acquisition costs, plus the cash provided by operating activities of Penrod subsequent to the Penrod Acquisition. The cash flows from investing and financing activities of Penrod subsequent to the Penrod Acquisition, including additions to property and equipment, long-term borrowings, and repayments of long-term borrowings, are also included in the Company's consolidated statement of cash flows for the year ended December 31, 1993. The cash provided by operating activities of Penrod prior to the Penrod Acquisition and the cash flows from investing and financing activities of Penrod prior to the Penrod Acquisition have not been included in the Company's consolidated statement of cash flows for the year ended December 31, 1993.
For purposes of the consolidated balance sheet and statement of cash flows, the Company considers highly liquid debt instruments to be cash equivalents if they have maturities of three months or less at the date of purchase.
FOREIGN CURRENCY TRANSLATION
The financial statements of certain foreign subsidiaries are maintained in their local currency, and assets and liabilities are translated into U.S. dollars at current exchange rates. Revenues and
expenses are translated at the average exchange rate for each period. Translation adjustments are accumulated as a separate component of stockholders' equity. Such translation adjustment activity was insignificant for all years presented.
Some foreign subsidiaries operate in highly inflationary economies. The financial statements of these subsidiaries, as well as the financial statements of certain foreign subsidiaries for which the U.S. dollar is the functional currency, are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Gains and losses caused by the remeasurement process applicable to these foreign subsidiaries are reflected in the consolidated statement of operations. Transaction and translation losses were $1.3 million for the year ended December 31, 1994, $961,000, net of minority interest, for the year ended December 31, 1993 and $217,000 for the year ended December 31, 1992.
SHORT-TERM INVESTMENTS
Short-term investments are comprised of debt instruments having maturities of greater than three months and less than one year at the date of purchase and are stated at cost due to the Company's intent and ability to hold the investments to maturity. The aggregate fair value of short- term investments at December 31, 1994 approximates cost. As of December 31, 1994, short-term investments consisted of debt instruments issued by U.S. government agencies.
PROPERTY AND EQUIPMENT
Depreciation on drilling rigs and related equipment and marine vessels acquired after 1990 is computed using the straight line method over estimated useful lives ranging from 4 to 15 years. Depreciation on drilling rigs and related equipment and marine vessels acquired prior to 1991 is computed using the units-of-production method over estimated useful lives ranging from 10 to 15 years. Under the units-of-production method, depreciation is based on the utilization of the drilling rigs and vessels with a minimum provision when the rigs or vessels are idle. Depreciation is computed using the straight line method over estimated useful lives ranging from 2 to 10 years for other equipment and 7 to 30 years for buildings and improvements.
The Company capitalizes interest applicable to the construction of significant additions to property and equipment. Interest capitalized for the years ended December 31, 1994 and 1993 was $731,000 and $735,000, respectively. No interest was capitalized in 1992.
Maintenance and repair costs are charged to expense as incurred. Major renewals and improvements are capitalized. Upon retirement or replacement of assets, the related cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income.
GOODWILL
Goodwill arising from the acquisition of Penrod in 1993 and Argosy
Offshore, Ltd. in 1991 is amortized on the straight-line basis over periods of 40 years and 10 years, respectively. See Note 3 "Acquisition." During 1994, goodwill from the Penrod Acquisition was reduced primarily for adjustments to insurance and other liabilities and deferred taxes. See Note 11 "Income Taxes". Accumulated amortization was $2.0 million and $1.2 million at December 31, 1994 and 1993, respectively. Amortization expense was $802,000, $598,000 and $290,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
At each balance sheet date, the Company evaluates the realizability of goodwill based upon expectations of undiscounted cash flows and operating income. Based upon its most recent analysis, the Company believes that no impairment of goodwill exists at December 31, 1994.
INCOME TAXES
In 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," the effects of which were applied retroactively to the beginning of 1990. SFAS No. 109 requires the Company to compute deferred income taxes based upon the amount of taxes payable in future years after considering changes in tax rates and other statutory provisions that will be in effect in those years. The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. See Note 11 "Income Taxes."
MINORITY INTEREST
The Company's 1994 and 1993 consolidated financial statements include Penrod, which prior to the Company's acquisition of the remaining interest in August 1993 was a 36% owned affiliate. See Note 3 "Acquisition." ENSCO Drilling (Caribbean), Inc. ("Caribbean"), which is 70% owned by the Company, has been included in the Company's consolidated financial statements for all years presented. The Company's consolidated financial statements also include ENSCO Technology Canada, Inc. ("ETC") for all years presented. In October 1994, a wholly owned subsidiary of the Company sold a 30% interest in ETC to an unrelated third party. See Note 12 "Gain on Sale of Subsidiary Stock." The minority shareholders' interest included in the Company's consolidated balance sheet at December 31, 1994 and 1993 was $4.7 million and $1.2 million, respectively, and is included in Other Liabilities.
The minority interest amount in the consolidated statement of operations for the year ended December 31, 1993 included $4.5 million related to the preacquisition earnings of Penrod.
CONSTRUCTION REVENUE RECOGNITION
Revenues from the construction of Venezuela barge drilling rigs were recognized on the percentage of completion method based on shipyard costs incurred as a percentage of estimated total shipyard costs in the consolidated statement of operations for the year ended December 31, 1992. There was no such treatment of construction activity for the years ended
December 31, 1994 or 1993.
SALE OF SUBSIDIARY STOCK
The Company has adopted the income statement recognition method as its accounting policy with respect to gains and losses associated with the sale of subsidiary stock. A gain of $670,000 is included in the Company's consolidated statement of operations for the year ended December 31, 1994 related to the sale of stock of a subsidiary. See Note 12 "Gain on Sale of Subsidiary Stock."
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share has been computed based on the weighted average number of common shares outstanding during the applicable period after recognition of minority interest charges and preferred stock dividend requirements. Common stock equivalents have been included in periods in which their effect is dilutive. All weighted average share and per share amounts have been restated to reflect the one share for four shares reverse stock split ("reverse stock split") which was effective June 1, 1994. See Note 8 "Stockholders' Equity."
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to the 1994 presentation.
2. INVESTMENTS IN EQUITY AFFILIATES
Investment in equity affiliate at December 31, 1994 and 1993 consists primarily of a wholly owned subsidiary's 50% interest in a joint venture, which was formed in June 1993, for the purpose of owning, leasing and operating jackup rigs in the territorial waters of Mexico and other parts of the world. The wholly owned subsidiary contributed a jackup rig to the joint venture and the other partner's capital contribution consisted of payments for mobilization costs, costs of leg extensions and other rig equipment and a working capital contribution. For the years ended December 31, 1994 and 1993, the Company recorded income of $700,000 and $561,000, respectively, in Income (Loss) from Equity Affiliates from its beneficial ownership in the joint venture. The difference between the Company's investment in the joint venture and its proportionate share of the joint venture's net assets was $1.4 million, net of accumulated amortization, at December 31, 1994 and is being amortized over a ten year period. The Company received $2.2 million of distributions from the joint venture in 1994, of which $1.1 million represented a return of capital. No distributions were received from the joint venture in 1993.
A wholly owned subsidiary of the Company, through its 42% investment in a partnership, beneficially owned 25% of Penrod during 1992. See Note 3 "Acquisition." The following is a consolidated summary of the operating results of the partnership for the year ended December 31, 1992 (in thousands):
A wholly owned subsidiary of the Company also owned, through a 28% ownership interest in certain trusts in 1992, an additional 11% of Penrod. See Note 3 "Acquisition."
For the year ended December 31, 1992, the Company recorded in its results of operations in Income (Loss) from Equity Affiliates a loss of $5.2 million from its beneficial ownership in the Penrod-related affiliates.
3. ACQUISITION
In August 1993, ENSCO Engineering Company, a wholly owned subsidiary of the Company, acquired the remaining 64% of the common stock of Penrod not then beneficially owned by the Company. In exchange for the common stock of Penrod, the Company issued 102.1 million net shares (25.5 million net shares after the reverse stock split) of its common stock valued at approximately $227.9 million, which included 23.9 million shares (6.0 million shares after the reverse stock split) of a new class of convertible common stock of the Company that was converted into an equal number of shares of the Company's common stock in October 1993. The exchange was based upon four common shares of the Company's common stock (prior to the reverse stock split) for each share of Penrod common stock.
The Company accounted for the Penrod Acquisition, under the rules of purchase accounting, as a step acquisition. Under a step acquisition, the acquiring company purchases its controlling interest in the acquired company through a series of transactions at different time intervals. A partial step-up or step-down in basis of the acquired company's assets is recognized in the consolidated financial statements of the acquirer each time an additional interest is acquired. The purchase by the Company of the remaining 64% of Penrod was recorded at the price paid at the time of purchase, while the prior 36% ownership of Penrod obtained by the Company in prior transactions remained at historical cost.
The following unaudited pro forma information shows the consolidated results of operations for the years ended December 31, 1993 and 1992 based upon adjustments to the restated historical financial statements of the Company and the historical financial statements of Penrod to give effect to the acquisition by the Company of the remaining 64% of Penrod as if such
acquisition had occurred January 1, 1992 (in thousands, except per share data):
1993 1992 --------- ---------
Operating revenues . . . . . . . . . . $246,235 $182,235 Operating income (loss) . . . . . . . . $ 33,886 $(34,124) Income (loss) from continuing operations $ 19,005 $(35,529) Net income (loss) . . . . . . . . . . . $ 21,329 $(39,648) Preferred stock dividend requirements . (4,260) (4,260) Income (loss) applicable to common stock $ 17,069 $(43,908)
Income (loss) per common share . . . . $ .30 $ (.79)
The pro forma consolidated results of operations are not necessarily indicative of the actual results that would have occurred had the acquisition occurred on January 1, 1992, or of results that may occur in the future.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1993 consisted of the following (in thousands):
1994 1993 --------- ---------
Land and buildings . . . . . . . . . $ 2,638 $ 2,169 Drilling rigs and equipment . . . . . 562,722 475,590 Marine vessels . . . . . . . . . . . 66,729 66,492 Other equipment . . . . . . . . . . . 19,989 21,084 Work in progress . . . . . . . . . . 14,285 15,395 $666,363 $580,730
In February 1994, the Company purchased two jackup rigs located in the North Sea and simultaneously entered into bareboat charter agreements with the seller for an initial twelve month period. The purchase price consisted of $50.0 million paid at closing and an additional $6.0 million which was to be credited against the bareboat charter payments during the last four months of the initial bareboat charter agreements. The bareboat charter agreements were not extended beyond the initial twelve month period and the Company made a payment of $1.8 million to the seller, in December 1994, for the remainder of the deferred purchase payment, net of bareboat charter payments due to the Company through the end of the twelve month bareboat charter period. The drilling contracts for the two rigs have been assigned to the Company as of January 1, 1995. Under such contracts, the rigs work for the joint venture of major oil and gas exploration companies for whom the rigs operated during the term of the bareboat charter agreements.
The Company's additions to property and equipment for the year ended December 31, 1994 also included $62.2 million in connection with the construction of four barge drilling rigs delivered to Venezuela in July through September of 1994. The rigs immediately commenced operations under five-year drilling contracts with Lagoven, S.A. ("Lagoven"), an affiliate of the Venezuelan national oil company. The contracts afford Lagoven the option to buy the barge drilling rigs during or at the end of the five-year contracts.
In June 1994, the Company completed the sale of its United States land rig operations consisting of twelve land rigs and related equipment, as well as an office building and yard, to an unrelated third party. The total sales price was approximately $15.5 million, consisting of cash, a promissory note and receivables. In November and December of 1994, the Company sold three of its land rigs and related equipment, located in the Middle East, to unrelated third parties for $7.5 million. No significant gains or losses resulted from the 1994 land rig sales.
The Company's additions to property and equipment for the year ended December 31, 1993 include $65.7 million in connection with the construction of four barge drilling rigs delivered to Venezuela in March through June of 1993. The rigs immediately commenced operations under five-year drilling contracts with Lagoven. The contracts afford Lagoven the option to buy the
barge drilling rigs during or at the end of the five-year contracts.
In November 1993, the Company transferred three inactive land rigs to work in progress in connection with the construction of four barge drilling rigs which began operating in July through September of 1994 in Venezuela. The rigs had a net book value of $6.8 million at the date of transfer to work in progress.
In June 1992, the Company sold four inactive land rigs located in Texas to a third party in connection with the construction of four barge drilling rigs. The land rigs were sold at the Company's net book value and therefore no gain or loss was recognized. The rigs had a net book value at the time of sale of $7.6 million.
5. LEASES
The Company operates four marine transportation vessels pursuant to ten-year operating lease agreements. The leases are renewable at the option of the Company for up to three successive one-year periods and provide the Company with an option to buy each of the vessels at the end of the initial lease term at fair market value. In addition, the Company is obligated under leases for certain of its offices and equipment.
Rental expense relating to operating leases was $3.7 million, $4.1 million and $3.1 million for the years ended December 31, 1994, 1993 and 1992, respectively. Future minimum rental payments under the Company's noncancellable operating lease obligations having initial or remaining lease terms in excess of one year are as follows: $4.2 million in 1995; $3.4 million in 1996; $3.2 million in 1997; $2.7 million in 1998; $1.9 million in 1999 and $860,000 thereafter.
6. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993 consists of the following (in thousands):
1994 1993 --------- ---------
Secured term loans (non-recourse to the Company) . . . . . . . . . . . . . $127,799 $ 59,722 Secured term loans . . . . . . . . . . 75,417 85,000 Interim construction financing . . . . -- 3,320 Convertible subordinated debentures . -- 5,059 Other notes payable . . . . . . . . . -- 80 Total long-term debt . . . . . . . . . 203,216 153,181
Less current maturities . . . . . . . (40,750) (27,198) $162,466 $125,983
A subsidiary of the Company entered into two financing arrangements with a subsidiary of a Japanese corporation in connection with the
construction of eight barge drilling rigs. The first financing arrangement, totalling $65.0 million, funded the cost of four barge drilling rigs delivered to Venezuela in 1993. The second financing arrangement, totalling $78.0 million, funded the cost of four more barge drilling rigs delivered to Venezuela in 1994. Each financing arrangement consists of four secured term loans, one for each barge drilling rig. The eight secured term loans bear interest at an average fixed rate of 8.17% and are each repayable in 60 equal monthly installments of principal and interest ending in mid-1998 through the first part of 2000. The term loans are each secured by a specific barge drilling rig, which rigs together had a combined net book value of $131.8 million at December 31, 1994, and the charter contract on each rig. The secured term loans are expected to be repaid from the cash flow generated by the eight barge drilling rigs and are without recourse to the Company.
In March 1994, the Company redeemed its convertible subordinated debentures consisting of $5.1 million principal amount of 8.25% convertible subordinated debentures which were originally due July 1, 1995.
In December 1993, a subsidiary of the Company entered into a $100.0 million loan arrangement with a group of international banks. The facility consisted of a $60.0 million secured term loan and a $40.0 million revolving line of credit. The secured term loan is repayable in equal semi-annual installments of principal over five years. The revolver is reduced semi-annually by $1.0 million over five years, with the final $30.0 million line expiring at the end of the five-year term. The facility carries a floating interest rate tied to London InterBank Offered Rates. As of December 31, 1994, the interest rate on the facility was 7.4% per annum. The remaining $39.0 million of the revolver is undrawn at December 31, 1994. The facility is collateralized by most of the Company's jackup rigs, which had a combined net book value of $246.6 million at December 31, 1994. The loan arrangement requires that the Company maintain specified minimum balances of cash and working capital, maintain certain operating cash flows and not exceed a certain debt to total asset ratio, and it includes certain limitations on dividends and requires that the appraised value of the rigs securing the facility exceed the loan balances relating to those rigs by a specified factor.
In October 1993, a subsidiary of the Company entered into a $25.0 million loan agreement with a financial institution. The seven year secured term loan bears interest at a fixed rate of 7.91% per annum, repayable in 28 equal quarterly installments ending October 15, 2000. The term loan is collateralized by substantially all of the Company's marine transportation vessels which had a combined net book value of $40.9 million at December 31, 1994. The loan agreement requires that the Company maintain a specified minimum tangible net worth and that the Company not exceed a certain ratio of liabilities to tangible net worth.
The Company maintains legally restricted cash balances with a bank as collateral for letters of credit issued by the bank related to borrowings and insurance arrangements. These restricted cash balances aggregated $5.6 million at December 31, 1994 and are included in prepaid expenses and other.
Maturities of long-term debt are as follows: $40.8 million in 1995; $43.5 million in 1996; $45.8 million in 1997; $40.6 million in 1998; $29.1 million in 1999, and $3.4 million thereafter.
7. PREFERRED STOCK
In August 1994, the Company issued a redemption notice for the 2,839,110 outstanding shares of its $1.50 Cumulative Convertible Exchangeable Preferred Stock ("$1.50 Preferred Stock"), which was also the number of shares outstanding at December 31, 1993. Holders of 2,807,147 shares of the $1.50 Preferred Stock elected to convert each of their shares into approximately 1.786 shares of the Company's common stock. Such conversion resulted in the issuance of 5,012,762 shares of the Company's common stock. Holders of the remaining 31,963 shares of the $1.50 Preferred Stock elected to redeem their shares which resulted in a cash outlay of $799,000.
Dividends on the $1.50 Preferred Stock were cumulative and payable quarterly when declared at a rate of $1.50 per annum per share.
8. STOCKHOLDERS' EQUITY
The Company's stockholders approved a one share for four shares reverse stock split of the Company's common stock at the Company's Annual Meeting of Stockholders held on May 24, 1994. All references in the financial statements to weighted average common shares outstanding, income (loss) per common share amounts and the 1994 share amounts in the table above have been restated to reflect the reverse stock split. The aggregate par value of the Company's common stock was reduced and additional paid-in capital was increased to reflect the decreased aggregate par value of the Company's common stock outstanding subsequent to the reverse stock split.
In December 1994, the Company's Board of Directors authorized the repurchase of up to $50.0 million of the Company's common stock. As of December 31, 1994, the Company had repurchased 201,400 shares of its common stock. Management anticipates that future repurchases of the Company's common stock will be funded from the Company's cash flow from operations and working capital.
At the Company's Annual Meeting of Stockholders held on August 10, 1993, the Company's stockholders approved an increase in the number of authorized shares of common stock ($.10 par value) of the Company from 250.0 million (62.5 million after the reverse stock split) to 500.0 million (125.0 million after the reverse stock split).
In March 1988, in connection with borrowings under a secured loan facility, the Company issued warrants to purchase 2.5 million shares (prior to the reverse stock split) at prices between $3.75 and $4.50 per share (prior to the reverse stock split). The warrants were extinguished in October 1993 at the time the secured loans were repaid.
9. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OPTIONS
The Company has an employee stock option plan as part of the ENSCO Incentive Plan (the "Incentive Plan"). The maximum number of shares with respect to which awards may be made pursuant to the Incentive Plan is 6.3 million. Of the 6.3 million shares, a minimum of 625,000 are reserved for issuance of incentive stock grants and a minimum of 625,000 are reserved for issuance as profit sharing grants.
The exercise price of stock options under the Incentive Plan is the fair market value of the stock at the time the option is granted. Accordingly, no compensation expense is recognized by the Company with respect to such grants. Non-qualified options are generally exercisable one year after grant. Incentive stock options generally become exercisable in 25% increments over a four-year period. To the extent not exercised, options expire generally on the fifth anniversary of the date of grant.
A summary of stock option transactions, restated for the reverse stock split, under the Incentive Plan is as follows (in thousands, except per share amounts):
Outstanding December 31, 1991 . . . . . . . 1,007 Granted ($4.76 to $11.00 per share) . 389 Forfeited . . . . . . . . . . . . . . (350) ----- Outstanding December 31, 1992 . . . . . . . 1,046 Granted ($12.00 per share) . . . . . . 310 Exercised ($4.76 to $11.00 per share) (89) Forfeited . . . . . . . . . . . . . . (192) -----
Outstanding December 31, 1993 . . . . . . . 1,075 Granted ($15.69 per share) . . . . . . 213 Exercised ($4.76 to $16.00 per share) (244) Forfeited . . . . . . . . . . . . . . (39) ----- Outstanding December 31, 1994 . . . . . . . 1,005 =====
At December 31, 1994, 468,000 options were exercisable at prices ranging from $4.76 to $16.00 per share. Under the Incentive Plan, 2.7 million shares were available for grant as options or incentive grants at December 31, 1994.
INCENTIVE STOCK GRANTS
Key employees, who are in a position to contribute materially to the Company's growth and development and to its long-term success, are eligible for incentive stock grants under the Incentive Plan through February 8, 1998.
Shares of common stock subject to incentive grants shall vest on such a basis as determined by a committee of the Board of Directors. Through 1994, incentive stock grants for 1.1 million shares of common stock were granted, of which 520,000 were vested at December 31, 1994. During 1994 and 1993, incentive stock grants for 60,000 shares and 50,000 shares (12,500 shares after the reverse stock split), respectively, were granted. No incentive stock grants were made in 1992. During 1993, 40,000 shares (10,000 shares after the reverse stock split) were forfeited. The remaining outstanding incentive stock grants vest as follows: 102,500 in 1995, 92,500 in each of the years 1996 through 1998, 90,000 in each of the years 1999 and 2000, and 6,000 in each of the years 2001 through 2004. The Company charged $1.0 million to operations in each of the years 1994 and 1993, and $1.2 million in 1992, related to incentive stock grants. The unvested portion of the incentive stock grants is classified in the Stockholders' Equity section of the consolidated balance sheet as Restricted Stock.
PROFIT SHARING PLAN
The Company has a profit sharing plan (the "ENSCO Savings Plan") which covers eligible employees with more than one year of service, as defined. Profit sharing contributions require Board approval and may be in cash or grants of the Company's common stock. The Company recorded profit sharing contribution provisions for the years ended December 31, 1994 and 1993 of $1.1 million and $500,000, respectively. No profit sharing contribution was made for 1992.
The ENSCO Savings Plan includes a 401(k) savings plan feature which allows eligible employees with more than three months of service to make tax deferred contributions to the plan. Beginning July 1, 1993, the Company made matching contributions equivalent to 25% of all employee contributions, subject to a maximum employee contribution of 6% of their compensation, which amounted to $307,000 and $64,000 in 1994 and 1993, respectively. The Company made no matching contributions during 1992. The
Company has reserved 500,000 shares of common stock for issuance as matching contributions under the ENSCO Savings Plan.
EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the Company's employee stock purchase plan (the "Stock Purchase Plan"), eligible employees could acquire shares of common stock through payroll deductions of not more than 10% of their base annual compensation. The price at which shares were purchased was 85% of the lower of fair market value for such shares on the first or last day of each plan year. In February 1993, the Board of Directors of the Company voted to terminate the Stock Purchase Plan, effective June 30, 1993. Employees participating in the Stock Purchase Plan at the date of termination had the option of purchasing common stock of the Company or receiving a cash refund of funds contributed in 1993. For the 1993 and 1992 plan years, 18,340 shares (4,585 shares after the reverse stock split) and 115,352 shares (28,838 shares after the reverse stock split), respectively, were sold at $.96 per share ($3.84 per share after the reverse stock split).
Common stock acquired pursuant to the Stock Purchase Plan may not be sold or otherwise transferred by the participant within two years after the purchase date, unless such common stock is first tendered to the Company. The Company has the right to repurchase the common stock at the lesser of the original purchase price paid for such common stock by the participant or the fair market value on the tender date.
EMPLOYEE RETIREMENT PLAN
Eligible former Penrod employees participate in a noncontributory defined benefit employee retirement plan. However, the plan was frozen effective December 31, 1990. Accordingly, no additional participants may join the plan and no additional benefits have been accrued for participants subsequent to December 31, 1990. The Company's policy is to fund the plan based on the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and tax considerations. Management intends to terminate the plan when it is in the best financial interest of the Company by purchasing annuities or otherwise providing for participants under the plan. The plan termination liability is estimated at $11.1 million, and the value of plan assets is estimated at $6.0 million, resulting in an unfunded termination liability of $5.1 million which is included in Other Liabilities at December 31, 1994. Net periodic pension expense for all years presented was insignificant. The Company does not expect to incur any future charges or additional liabilities in connection with the plan prior to its termination.
10. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1993, Penrod adopted Statement of Financial Accounting Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires the accrual, during the year the employee renders the service, of the estimated cost of providing postretirement non-pension benefit payments. SFAS No. 106 allows recognition of the cumulative effect of the liability in the
year of adoption or the amortization of the obligation over a period of up to twenty years. Penrod elected to recognize this change in accounting on the immediate recognition basis. The cumulative effect, after taxes and minority interest, on the Company resulting from Penrod's adoption of SFAS No. 106 was $2.5 million ($.07 per share after the reverse stock split). Effective January 1, 1994, the Company's medical plan was amended such that eligible Penrod retirees and eligible future retirees of the Company could participate in the Company's medical plan. Retirees participating in the Company's medical plan make contributions to the plan at a level that is intended to fund the cost of all retiree medical claims. The Company's current and contemplated employee benefit plans do not require the recognition of a liability for postretirement benefits under SFAS No. 106.
11. INCOME TAXES
In February 1992, the FASB issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires the use of the liability method for computing deferred income taxes. In accordance with the provisions of SFAS No. 109, the Company elected to retroactively apply the requirements of SFAS No. 109 to January 1, 1990, and to restate the financial statements of the Company issued subsequent to that date. The adoption of SFAS No. 109 resulted in an increase of $246,000 ($.01 per share after the reverse stock split) to income from continuing operations for the year ended December 31, 1992.
The Company had income of $31.6 million and $9.4 million, and a loss of $23.4 million from its operations before income taxes in the United States and income of $12.3 million, $20.2 million and $191,000 from its operations before income taxes in foreign countries for the years ended December 31, 1994, 1993 and 1992, respectively.
The provisions for income taxes for the years ended December 31, 1994, 1993 and 1992 are summarized as follows (in thousands):
The valuation allowance decreased by $13.7 million in 1994, of which $1.6 million was recorded as an adjustment to goodwill, due to the expected utilization of net operating losses that were previously projected to expire unutilized. Included in the valuation allowance at December 31, 1994 is approximately $13.3 million related to net operating loss carryforwards of Penrod, which originated prior to the Penrod Acquisition, that are projected to expire unutilized. Any future adjustments to the valuation allowance related to the projected utilization or nonutilization of the net operating loss carryforwards of Penrod that originated prior to the Penrod Acquisition will be allocated to goodwill. The valuation allowance in 1993 and 1992 increased $15.9 million and $10.3 million, respectively, due to net operating losses incurred for which no future benefit was projected to be realized.
The consolidated effective income tax rate for the years ended December 31, 1994, 1993 and 1992 differs from the United States statutory income tax rate as follows:
At December 31, 1994, the Company had regular and alternative minimum tax net operating losses and investment tax credit carryforwards of approximately $297.6 million, $176.3 million and $3.6 million, respectively. Included in the foregoing amounts are approximately $22.1 million of net operating loss carryforwards and $3.6 million of investment tax credit carryforwards which originated prior to the Company's quasi- reorganization in 1983. Through December 31, 1994, in accordance with the provisions of SFAS No. 109, the Company had recognized the benefit of all of the pre quasi-reorganization net operating loss carryforwards for financial reporting purposes, by utilizing reversing taxable temporary differences available during the carryforward period of such net operating losses, and through tax planning strategies that will generate sufficient taxable income to offset the remaining pre quasi-reorganization net operating loss carryforwards. The costs of the tax planning strategies have been included in the income tax provision. The utilization of these net operating loss carryforwards did not reduce the Company's provision for income taxes but resulted in the addition of $15.3 million to additional paid-in capital. This accounting treatment does not affect the Company's ability to use such net operating loss carryforwards to offset taxes otherwise payable. If not utilized, the regular and alternative minimum tax net operating loss carryforwards expire from 1998 through 2007, and the investment tax credit carryforwards expire from 1995 through 2000. As a result of the Penrod Acquisition, the utilization of a portion of the Company's net operating loss carryforwards are subject to limitations imposed by the Internal Revenue Code of 1986.
It is the policy of the Company to consider that income generated in foreign subsidiaries is permanently invested. A significant portion of the Company's undistributed foreign earnings at December 31, 1994 were generated by controlled foreign corporations and were taxed, for U.S. tax purposes, in the year that such earnings arose. Upon distribution of foreign earnings in the form of dividends or otherwise, the Company may be
subject to additional U.S. income taxes. However, deferred taxes related to the future remittance of these funds are not expected to be significant to the financial statements of the Company since additional available net operating loss carryforwards would be utilized to reduce the additional U.S. income taxes payable.
12. GAIN ON SALE OF SUBSIDIARY STOCK
In October 1994, a wholly owned subsidiary of the Company sold 400,000 shares of ETC to Lateral Vector Resources, Inc. ("LVR"), a Canadian company, for $1.2 million and a gain of $670,000 was recognized. The purpose of the sale was to combine forces with LVR to conduct horizontal/ directional drilling services in Canada and certain areas of the United States. The sale reduced the Company's ownership interest in ETC to 70%. A provision for income taxes related to the gain on sale has been made. However, the income tax provision has been offset by a reduction in the deferred tax asset valuation allowance due to the utilization of additional net operating loss carryforwards that had previously been projected to expire unutilized.
13. COMMITMENTS AND CONTINGENCIES
Prior to October 1990, Penrod was self-insured for the majority of its maritime claims exposure. During the period from October 1990 to the August 1993 acquisition date, Penrod had insurance coverage which limited its maritime claims exposure to a maximum of the $25,000 deductible for each claim, plus a fluctuating aggregate of $500,000 to $1.5 million which is in excess of the $25,000 claim deductible for each policy year. Penrod is also a defendant in lawsuits with certain of its insurers and the administrator of its self-insurance program, and personal injury and maritime liability lawsuits filed by present and former employees. Management of the Company has provided reserves for such claims as it considers appropriate given the facts currently known.
On February 13, 1991, Penrod filed an action against TransAmerican Natural Gas Corporation ("TransAmerican") which is presently pending in the U.S. District Court Southern District of Texas, Houston Division, seeking damages for breach of contract. On August 21, 1991, TransAmerican filed an action against Penrod in the 133rd Judicial District Court, Harris County, Texas, seeking damages for breach of contract and tort claims. Management of the Company believes that the outcome of this litigation will be favorable to the Company.
At December 31, 1994, there were no other contingencies, claims, or lawsuits against the Company which, in the opinion of management, would have a material effect on its financial condition or results of operations.
14. SEGMENT INFORMATION
The following shows industry segment and geographic region information for the years ended December 31, 1994, 1993 and 1992 (in thousands):
Revenues in corporate and other in 1992 consists of revenues recognized in the Company's role as general contractor for the construction of four barge drilling rigs. Corporate and other assets consist primarily of cash, investments, notes receivable and furniture and fixtures.
Identifiable assets excluded net assets of discontinued operations of $399,000 and $12.0 million at December 31, 1993 and 1992, respectively.
During 1994, revenues from two customers were in excess of 10% of the Company's total revenues. Revenues from one customer were $48.2 million, or 18%, of total revenues, all of which were from the contract drilling segment. Revenues from another customer were $35.3 million, or 13%, of total revenues. Of such amount, $33.7 million was from the contract drilling segment, $1.4 million was from the marine transportation segment and the remainder was from the technical services segment.
During 1993, revenues from one customer were $29.0 million, or 12% of total revenues, all of which was from the contract drilling segment.
During 1992, revenues from two customers were in excess of 10% of the Company's total revenues. Revenues from one customer were $17.1 million, or 17%, of total revenues, all of which was from the corporate and other segment. Revenues from another customer were $12.5 million, or 13%, of total revenues. Of such amount, $8.9 million was from the marine transportation segment, $2.6 million was from the contract drilling segment and the remainder was from the technical services segment.
15. TRANSACTIONS WITH RELATED PARTIES
During 1994 and 1993, four of the Company's marine transportation vessels had bareboat charter agreements with a joint venture in which the Company had a 50% interest. Charter revenues from the joint venture of $365,000 and $648,000 are included in Operating Revenues in the Company's consolidated statement of operations for the years ended December 31, 1994 and 1993, respectively. The Company terminated the joint venture and the related charter agreements in May 1994.
During 1993, the Company recorded $500,000 of Other Income related to fees received from a partnership, owned 42% by a wholly owned subsidiary of the Company, for management services provided by the Company.
The Company has paid or accrued legal fees to a firm of which a director of the Company was a partner in 1993 and 1992. The Company paid or accrued fees for legal services from this firm of $369,000 and $432,000 during 1993 and 1992, respectively. The Company has a $675,000 note receivable from a director of the Company in connection with the sale of 675,000 shares (168,750 shares after the reverse stock split) of restricted common stock in 1988. The note is due July 1997 and is noninterest bearing as long as the payor remains a director of the Company. At December 31, 1994 and 1993, the note was recorded as a reduction of additional paid-in capital.
During 1992, the Company paid Rainwater, Inc., which is owned by one of the Company's larger stockholders, a fee of $150,000 for providing financial advisory and consulting services to the Company. The Company made no payments to Rainwater, Inc. during 1994 or 1993.
16. SUPPLEMENTAL FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET INFORMATION. Accounts receivable, net at December 31, 1994 and 1993 consists of the following (in thousands):
1994 1993 ------- -------
Trade . . . . . . . . . . . . . . . . . $37,944 $51,473 Other . . . . . . . . . . . . . . . . . 3,400 1,336 ------- ------- 41,344 52,809 Allowance for doubtful accounts . . . . (1,207) (1,577) ------- ------- $40,137 $51,232
Prepaid expenses and other at December 31, 1994 and 1993 consists of the following (in thousands):
1994 1993 ------- -------
Prepaid expenses . . . . . . . . . . . $ 5,358 $ 3,825 Inventory . . . . . . . . . . . . . . . 3,236 3,350 Other . . . . . . . . . . . . . . . . . 9,561 6,524 ------- ------- $18,155 $13,699
Accrued liabilities at December 31, 1994 and 1993 consists of the following (in thousands): 1994 1993 ------- -------
Operating expenses . . . . . . . . . . $ 9,396 $10,881 Payroll . . . . . . . . . . . . . . . . 6,424 5,009 Insurance . . . . . . . . . . . . . . . 6,789 7,698 Taxes . . . . . . . . . . . . . . . . . 6,250 3,475 Other . . . . . . . . . . . . . . . . . 5,859 5,661 ------- ------- $34,718 $32,724
CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION. Maintenance and repairs and taxes, other than payroll and income taxes for the years ended December 31, 1994, 1993 and 1992 are as follows (in thousands):
1994 1993 1992 ------- ------- ------
Maintenance and repairs . . . . . . . $18,790 $22,516 $7,395 Taxes, other than payroll and income taxes . . . . . . . . . . 751 897 913
CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION. The consolidated statement of cash flows excludes noncash activities related to the conversion of the $1.50 Preferred Stock into common stock of the Company as described in Note 7 "Preferred Stock", adjustments to goodwill as described in Note 1 "Summary of Significant Accounting Policies" and noncash consideration received related to the sale of the United States land rig operation as described in Note 4 "Property and Equipment".
Cash paid for interest and income taxes for the years ended December 31, 1994, 1993 and 1992 is as follows (in thousands):
1994 1993 1992 ------- ------- -------
Interest . . . . . . . . . . . . . . $ 9,940 $ 5,682 $ 3,809 Income taxes . . . . . . . . . . . . 3,104 232 419
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgement is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts and estimated fair values at December 31, 1994 and 1993 are as follows (in thousands):
The estimated fair values were determined as follows:
Short-term investments --- The estimated fair value of short-term investments is based on current interest rates for investments with similar characteristics.
Long-term debt --- Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues.
Other liabilities --- The fair value of other liabilities was determined by discounting the expected future cash outflows relating to the other liabilities using long-term borrowing rates available to the Company.
Preferred stock --- The fair value of the preferred stock at December 31, 1993 was based on a quoted market price at that time. The preferred stock was converted/redeemed in 1994.
17. DISCONTINUED OPERATIONS
In 1993, the Company completed a series of transactions that resulted in the sale of substantially all of the Company's supply business conducted by its wholly owned subsidiary ENSCO Tool and Supply Company.
The Company sold substantially all of the assets of the international supply, tubular services and engineered products business lines of its supply operations segment to an unrelated party under an agreement consummated July 1, 1993. The purchase price consisted of $1.0 million in cash and approximately $3.9 million in notes issued by the purchaser. The notes were repaid in full in December 1993. In a separate transaction consummated June 30, 1993, the Company sold to another unrelated party all of the shares of capital stock of Petroil Services Corporation, ENSCO Tool and Supply (Peru) S.A. and the Egyptian American Technical Services Company owned by the Company. The Company received $5.0 million in cash from the purchaser. Additionally, substantially all of the Company's remaining supply operations segment real estate was sold in 1993 to unrelated purchasers for approximately $2.4 million in cash, net of sales costs.
As a result of these transactions, the Company's financial statements have been reclassified to present the net assets and operating results of the Company's supply operations segment as discontinued operations. Prior years have been reclassified for comparative purposes. Included in the 1993 Income (Loss) from Discontinued Operations is a gain on the sales discussed above of $2.1 million (which includes a provision of $1.3 million for operations during the phase out period which began July 1, 1993) and income from operations for the six months ended June 30, 1993 of $200,000. Revenues from the supply operations segment were $22.2 million and $62.6 million in 1993 and 1992, respectively. Substantially all of the remaining assets and liabilities of the supply business were sold, liquidated or settled in 1994.
18. SUBSEQUENT EVENTS
On January 25, 1995, a wholly owned subsidiary of the Company entered into a letter of intent with the 30% minority interest partner in Caribbean under which the wholly owned subsidiary of the Company will purchase half of the minority interest partner's shareholdings in Caribbean. The purchase price to be paid for the 15% interest in Caribbean is based on Caribbean's future operating activity and proceeds from any future sale of Caribbean's rigs. The agreement, which is effective January 1, 1995, increases the wholly owned subsidiary's interest in Caribbean from 70% to 85%.
On February 21, 1995, the Board of Directors of the Company adopted a shareholder rights plan and declared a dividend of one preferred share purchase right (a "Right") for each share of the Company's common stock outstanding on March 6, 1995. Each Right initially entitles its holder to purchase 1/100th of a share of the Company's Series A Junior Participating Preferred Stock for $50.00, subject to adjustment. The Rights generally will not become exercisable until 10 days after a public announcement that a person or group has acquired 15% or more of the Company's common stock
(thereby becoming an "Acquiring Person") or the commencement of a tender or exchange offer upon consummation of which such person or group would own 15% or more of the Company's common stock (the earlier of such dates being called the "Distribution Date"). Rights will be issued with all shares of the Company's common stock issued between March 6, 1995, and the Distribution Date. Until the Distribution Date, the Rights will be evidenced by the certificates representing the Company's common stock and will be transferrable only with the Company's common stock. If any person or group becomes an Acquiring Person, each Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter entitle its holder to purchase, at the Right's then current exercise price, shares of the Company's common stock having a market value of two times the exercise price of the Right. If, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each Right (other than Rights owned by an Acquiring Person which will have become void) will entitle its holder to purchase, at the Rights then current exercise price, that number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) which at the time of such transaction will have a market value of two times the exercise price of the Right. After any person or group has become an Acquiring Person, the Company's Board of Directors may, under certain circumstances, exchange each Right (other than Rights of the Acquiring Person) for shares of the Company's common stock having a value equal to the difference between the market value of the shares of the Company's common stock receivable upon exercise of the Right and the exercise price of the Right. The Company will generally be entitled to redeem the Rights for $.01 per Right at any time until 10 days after a public announcement that a 15% position has been acquired. The Rights expire on February 21, 2005.
19. UNAUDITED QUARTERLY FINANCIAL DATA
A summary of unaudited quarterly consolidated financial information for 1994 and 1993 is as follows (in thousands, except per share amounts):
(9) TRANSACTIONS WITH RELATED PARTIES
On November 1, 1990, Holding and ENSCO entered into an agreement that required ENSCO to provide certain consulting services to Holding and its subsidiaries. On June 28, 1991, the agreement was extended without fee until October 11, 1991, when it was renewed on a month-to- month basis under the same terms. In November 1992, pursuant to the Settlement Agreement discussed in Note 7, the consulting agreement was terminated. At this time, Holding paid $300,000 each to the Partnership and the Smith Trusts as reimbursements of legal fees related to the litigation. Also in connection with the Settlement Agreement discussed previously, ENSCO forgave $305,000 of the 1991 charges to Holding under the consulting agreement.
During 1992, the Partnership's general and administrative expenses include $307,000 of charges from ENSCO.
(3) Exhibits
The following instruments are included as exhibits to this Report. Exhibits incorporated by reference are so indicated by parenthetical information.
Exhibit No. Document
* 3.1 - Certificate of Incorporation of Energy Service Company, Inc., as amended.
3.2 - Bylaws of Energy Service Company, Inc., as amended (incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
3.3 - Certificate of Designation of $1.50 Cumulative Convertible Exchangeable Preferred Stock (incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1988, File No. 1-8097).
4.1 - Indenture, dated as of July 1, 1980, among Blocker Energy International N.V., Blocker Energy Corporation, as Guarantor, and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
4.2 - Purchase Agreement dated March 28, 1988 among Energy Service Company, Inc., ENSCO Marine Company, Prudential-Bache Energy Growth Fund, L.P. G-2 and Prudential-Bache Energy Growth Fund, L.P. G-3 relating to $26,000,000 aggregate principal amount of Senior Secured Notes of ENSCO Marine Company and warrants to purchase 2,500,000 shares of the Company's Common Stock (incorporated by reference to Exhibit 4.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
4.3 - Contract of Sale dated October 14, 1987 between Manufacturers Hanover Trust Company and ENSCO Operating Company relating to purchase of ENSCO I and ENSCO II (incorporated by reference to Exhibit 4.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
4.4 - Certificate of Designation of $1.50 Cumulative Convertible Preferred Stock (set forth as Exhibit 3.3).
4.5 - Form of 6% Convertible Subordinated Debenture due April 15, 2003 (incorporated by reference to Exhibit 4.10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988, File No. 1-8097).
4.6 - Form of Indenture relating to Registrant's 6% Convertible Subordinated Debentures (incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10- Q for the quarter ended March 31, 1988, File No. 1-8097).
4.7 - Form of Rights Agreement dated as of February 21, 1995 between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit A the Form of Certificate of Designations of Series A Junior Participating Preferred Stock of Energy Service Company, Inc., as Exhibit B the Form of Right Certificate, and as Exhibit C the Summary of Rights to Purchase Shares of Preferred Stock of Energy Service Company, Inc. (incorporated by reference to Exhibit 4 to Registrant's Current Report on form 8-K dated February 21, 1995, File No. 1-8097).
10.1 - ENSCO Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.2 - Employee Stock Purchase Plan of Energy Service Company, Inc. (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-8097).
10.3 - Restricted Stock Agreement effective as of June 10, 1987 between Morton H. Meyerson and Blocker Energy Corporation (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.4 - Restricted Stock Agreement effective as of May 31, 1988 between Morton H. Meyerson and Energy Service Company, Inc. (incorporated by reference to Exhibit 19.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1988, File No. 1-8097).
10.5 - Termination of Pledge Agreement and Amendment of Restricted Stock Agreement, dated March 1, 1991, by and between Morton H. Meyerson and Energy Service Company, Inc. (incorporated by reference to Exhibit 10.108 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
10.6 - First Amendment, dated March 1, 1991, to the Promissory Note dated July 19, 1988 in the original principal amount of $675,000 between Morton H. Meyerson and Energy Service Company, Inc. (incorporated by reference to Exhibit 10.109 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
10.7 - Bareboat Charter Party dated as of September 6, 1989 between Chrysler Capital Corporation and Energy Service Company,
Inc. relating to one offshore supply vessel, the ENSCO Cruiser. (incorporated by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-8097).
10.8 - Bareboat Charter Party dated October 6, 1989 between Chrysler Capital Corporation and Energy Service Company, Inc. relating to one offshore supply vessel, the ENSCO Transport. (incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-8097).
10.9 - Bareboat Charter Party dated February 26, 1990 between Chrysler Capital Corporation and Energy Service Company, Inc. relating to one offshore supply vessel, the ENSCO Galleon. (incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-8097).
10.10 - Bareboat Charter Party dated April 12, 1990 between Chrysler Capital Corporation and Energy Service Company , Inc. relating to one offshore supply vessel, the ENSCO Schooner (incorporated by reference to Exhibit 28.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990, File No. 1-8097).
10.11 - Lease Agreement between Energy Service Company, Inc. as tenant and Freeman Ross, Ltd. as landlord for the Company's corporate office space at First Interstate Bank Tower at Fountain Place, 1445 Ross Avenue, Dallas, Texas (incorporated by reference to Exhibit 28.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-8097).
10.12 - Lease Agreement between Energy Service Company, Inc. as tenant and Peter Kurts Properties, U.S., Inc. as landlord for the Company's division office space at 1776 Yorktown, Houston, Texas (incorporated by reference to Exhibit 28.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-8097).
10.13 - Supplemental Compensation Agreement, dated March 1, 1991, between Morton H. Meyerson and Energy Service Company, Inc. (incorporated by reference to Exhibit 10.110 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
10.14 - First Restated Credit Agreement between the ENSCO Companies and NationsBank of Texas, N.A. dated February 3, 1992 (incorporated by reference to Exhibit 10.125 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-8097).
10.15 - First Amendment, dated November 12, 1992, to the Credit
Agreement between the ENSCO Companies and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.54 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.16 - Second Amendment, dated November 13, 1992, to the Credit Agreement between the ENSCO Companies and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.55 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.17 - Loan Agreement, dated March 2, 1993, among ENSCO Drilling Company, as Borrower, Energy Service Company, Inc., as Guarantor, and Christiania Bank OG Kreditkasse (incorporated by reference to Exhibit 10.56 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.18 - First Amendment, dated March 9, 1992, to the Lease Agreement between Energy Service Company, Inc. and Peter Kurts Properties U.S., Inc. (incorporated by reference to Exhibit 10.57 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.19 - Agreement among the partners of NGP No. I, L.P. dated November 11, 1992 (incorporated by reference to Exhibit 10.59 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.20 - Construction and Purchase Agreement dated as of February 3, 1992 between Nissho Iwai Hong Kong Corporation Limited as Purchaser and ENSCO Drilling Company as Contractor (incorporated by reference to Exhibit 10.21 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.21 - Sale and Financing Agreement dated as of February 3, 1992 between ENSCO Drilling Venezuela, Inc. as Purchaser and Nissho Iwai Hong Kong Corporation Limited as Seller (incorporated by reference to Exhibit 10.22 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.22 - Shelf Registration Agreement by and among Energy Service Company, Inc., SOLVation Inc., Energy Management Corporation, SEGA Associates, L.P., Smith Factors Inc., The Summit Trust Company, as Trustee, Natural Gas Partners, L.P., The Goldman Sachs Group, L.P., Permian Equities Inc., and others dated as of May 6, 1993 (incorporated by reference to Exhibit 28.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-8097).
10.23 - Stock Exchange Agreement by and among Energy Service Company, Inc., ENSCO Engineering Company, SOLVation Inc., Natural Gas Partners, L.P., Goldman Sachs Group, L.P., Permian Equities Inc., NGP No. I, L.P., and the Summit Trust Company, as Trustee dated as of May 6, 1993 (incorporated by reference to Exhibit 28.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-8097).
10.24 - Asset Purchase Agreement dated June 30, 1993, between Energy Ventures, Inc. and ENSCO Tool & Supply Company (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 1, 1993, File No. 1-8097).
10.25 - Purchase Agreement dated June 30, 1993, between CAMCO International Inc. and ENSCO Tool & Supply Company (incorporated by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K dated July 1, 1993, File No. 1- 8097).
10.26 - Loan Agreement dated October 14, 1993, by and among ENSCO Marine Company and The CIT Group/Equipment Financing, Inc. (incorporated by reference to Exhibit 10.27 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.27 - Construction and Purchase Agreement dated November 12, 1993, by and between ENSCO Drilling Company and Nissho Iwai Hong Kong Corporation Limited (incorporated by reference to Exhibit 10.28 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.28 - Sale and Financing Agreement dated November 12, 1993, by and between Nissho Iwai Hong Kong Corporation Limited and ENSCO Drilling Venezuela, Inc. (incorporated by reference to Exhibit 10.29 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.29 - Credit Facility Agreement dated December 15, 1993, by and among ENSCO Offshore Company and ENSCO Offshore U.K. Limited, as borrowers, and Christiania Bank OG Kreditkasse, London Branch, den Norske Bank A.S., New York Branch, Banque Indosuez, and Meespierson N.V., as the Banks (incorporated by reference to Exhibit 10.30 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
*10.30 - Partial Satisfaction of Mortgage, dated November 29, 1994, between Wilmington Trust Company, as trustee for the benefit of The CIT Group/Equipment Financing, Inc., and ENSCO Marine Company.
*10.31 - Modification and Amendment of First Preferred Fleet Ship Mortgage, dated January 23, 1995, by ENSCO Marine Company
and Wilmington Trust Company, as trustee for the benefit of The CIT Group/Equipment Financing, Inc.
*10.32 - Amendment No. 1, dated November 1, 1994, to Credit Facility Agreement dated December 15, 1993 among ENSCO Offshore Company and ENSCO Offshore U.K. Limited, as borrowers, and Christiana Bank OG Kreditkasse, London Branch, den Norske Bank A.S., New York Branch, Banque Indosuez and Meespierson N.V., as the banks.
* 21 - Subsidiaries of the Registrant
* 23.1 - Consent of Price Waterhouse LLP
* 23.2 - Consent of Deloitte & Touche LLP
* 27 - Financial Data Schedule ___________________
* Filed Herewith
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all executive compensation plans and arrangements required to be filed as an exhibit to this Form 10-K:
1. ENSCO Incentive Plan, as amended (filed as Exhibit 10.1 hereto and incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
2. Employee Stock Purchase Plan of Energy Service Company, Inc. (filed as Exhibit 10.2 hereto and incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-8097).
3. Restricted Stock Agreement effective as of June 10, 1987 between Morton H. Meyerson and Energy Service Company, Inc. (filed herewith as Exhibit 10.3 and incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
4. Restricted Stock Agreement effective as of May 31, 1988 between Morton H. Meyerson and Energy Service Company, Inc. (filed as Exhibit 10.4 hereto and incorporated by reference to Exhibit 19.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1988, File No. 1-8097).
5. Termination of Pledge Agreement and Amendment of Restricted Stock Agreement, dated March 1, 1991, by and between Morton H. Meyerson and Energy Service Company, Inc. (filed as Exhibit 10.5 hereto and incorporated by reference to Exhibit 10.108 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
6. First Amendment, dated March 1, 1991, to the Promissory Note dated July 19, 1988 in the original principal amount of $675,000 between Morton H. Meyerson and Energy Service Company, Inc. (filed as Exhibit 10.6 hereto and incorporated by reference to Exhibit 10.109 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
7. Supplemental Compensation Agreement, dated March 1, 1991, between Morton H. Meyerson and Energy Service Company, Inc. (filed as Exhibit 10.13 hereto and incorporated by reference to Exhibit 10.110 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
The Company will furnish to the Securities and Exchange Commission upon request, all constituent instruments defining the rights of holders of long-term debt of the Company not filed herewith as permitted by paragraph 4(iii)(A) of Item 601 of Regulation S-K.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1994.
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) and Form S-3 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-40282 filed May 2, 1991, 33- 41294 filed June 19, 1991, 33-35862 filed July 13, 1990, 33-32447 filed December 5, 1989 and 33-14714 filed June 1, 1987 and Form S-3 Nos. 33- 64642, 33-49590 filed July 13, 1992 (as amended by Amendment No. 1 filed July 31, 1992), 33-46500 filed March 18, 1992 (as amended by Amendment No. 1 filed May 7, 1992), 33-43756 filed November 12, 1991 (as amended by Amendment No. 1 filed December 19, 1991) and 33-42965 filed September 25, 1991 (as amended by Amendment No. 1 and 2 filed October 29, 1991 and November 18, 1991, respectively):
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 16, 1995.
ENERGY SERVICE COMPANY, INC. (Registrant)
By /s/ CARL F. THORNE ------------------------------------ Carl F. Thorne Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURES TITLE DATE
/S/ CARL F. THORNE Chairman, President, Carl F. Thorne Chief Executive Officer and Director
/S/ RICHARD A. WILSON Senior Vice President, Richard A. Wilson Chief Operating Officer and Director
/S/ C. CHRISTOPHER GAUT Vice President, Chief C. Christopher Gaut Financial Officer and Treasurer
/S/ H. E. MALONE Vice President, Chief H. E. Malone Accounting Officer and Controller
/S/ CRAIG I. FIELDS Director Craig I. Fields March 16, 1995 /S/ ORVILLE D. GAITHER, SR. Director Orville D. Gaither, Sr.
/S/ GERALD W. HADDOCK Director Gerald W. Haddock
/S/ DILLARD S. HAMMETT Director Dillard S. Hammett
/S/ THOMAS L. KELLY, II Director Thomas L. Kelly, II
/S/ MORTON H. MEYERSON Director Morton H. Meyerson
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Energy Service Company, Inc.
In our opinion, based upon our audits and the report of other auditors, the accompanying consolidated balance sheet and the related consolidated statements of operations and of cash flows present fairly, in all material respects, the financial position of Energy Service Company, Inc. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for the years then ended 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 did not audit the financial statements of the Company's Venezuelan operations for the year ended December 31, 1993, which statements reflect total revenues of $28,967,000 for the year then ended. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for the Company's Venezuelan operations, is based solely on the report of the other auditors. 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 and report of other auditors provide a reasonable basis for the opinion expressed above. As discussed in Note 17, in 1993 the Company decided to discontinue its supply business. The financial statements for 1992 have been restated to reflect the discontinuance of the supply business. We have audited the adjustments that were applied to restate the 1992 financial statements. In our opinion, such adjustments are appropriate and have been properly applied to the 1992 financial statements. As discussed in Note 10, in 1993 the Company changed its method of accounting for postretirement benefits other than pensions.
/s/ Price Waterhouse LLP Dallas, Texas February 21, 1995 - ---------------------------------------------------------------------------
To the Board of Directors and Stockholders of Energy Service Company, Inc.
We have audited the consolidated statements of operations and cash flows of Energy Service Company, Inc. and its subsidiaries ("the Company") for the year ended December 31, 1992 (which are not presented herein). 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 audit. The financial statements of Penrod Partners L.P.,
formerly NGP No. I., L.P. ("Penrod Partners"), which were not audited by us, were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for such entity, is based solely upon the report of such other auditors. The Company's investment in Penrod Partners is accounted for under the equity method. Included in the consolidated financial statements is a net loss of $2.9 million for the Company's equity interest in the operations of Penrod Partners for the year ended December 31, 1992. We conducted our audit 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 audit and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company's operations and its cash flows for the year ended December 31, 1992 in conformity with generally accepted accounting principles. As discussed in Note 11 to the financial statements, in 1993 the Company changed its method of accounting for taxes to conform with Statement of Financial Accounting Standards No. 109 and, retroactively, restated the 1992 financial statements for the change.
/s/ Deloitte & Touche LLP Dallas, Texas March 2, 1993 (except for Note 11 as to which the date is May 12, 1993)
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
ENERGY SERVICE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Energy Service Company, Inc. (the "Company"), a Delaware corporation, was incorporated in August 1987, and is the successor by merger to Blocker Energy Corporation. The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. The Company's investments in 50% or less owned affiliates are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated. See Note 2 "Investments in Equity Affiliates."
In August 1993, the Company completed the step acquisition (the "Penrod Acquisition") of Penrod Holding Corporation ("Penrod"). See Note 2 "Investments in Equity Affiliates" and Note 3 "Acquisition." The Company has included the income from continuing operations of Penrod in its consolidated statement of operations beginning January 1, 1993 and has presented the preacquisition earnings related to the 64% of Penrod which it did not own prior to August 1993 as Minority Interest. The results of the Company's 1992 operations reflect Penrod on the equity method of accounting.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company's consolidated statement of cash flows for the year ended December 31, 1993 includes the cash and cash equivalents acquired in the Penrod Acquisition, net of acquisition costs, plus the cash provided by operating activities of Penrod subsequent to the Penrod Acquisition. The cash flows from investing and financing activities of Penrod subsequent to the Penrod Acquisition, including additions to property and equipment, long-term borrowings, and repayments of long-term borrowings, are also included in the Company's consolidated statement of cash flows for the year ended December 31, 1993. The cash provided by operating activities of Penrod prior to the Penrod Acquisition and the cash flows from investing and financing activities of Penrod prior to the Penrod Acquisition have not been included in the Company's consolidated statement of cash flows for the year ended December 31, 1993.
For purposes of the consolidated balance sheet and statement of cash flows, the Company considers highly liquid debt instruments to be cash equivalents if they have maturities of three months or less at the date of purchase.
FOREIGN CURRENCY TRANSLATION
The financial statements of certain foreign subsidiaries are maintained in their local currency, and assets and liabilities are translated into U.S. dollars at current exchange rates. Revenues and
expenses are translated at the average exchange rate for each period. Translation adjustments are accumulated as a separate component of stockholders' equity. Such translation adjustment activity was insignificant for all years presented.
Some foreign subsidiaries operate in highly inflationary economies. The financial statements of these subsidiaries, as well as the financial statements of certain foreign subsidiaries for which the U.S. dollar is the functional currency, are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Gains and losses caused by the remeasurement process applicable to these foreign subsidiaries are reflected in the consolidated statement of operations. Transaction and translation losses were $1.3 million for the year ended December 31, 1994, $961,000, net of minority interest, for the year ended December 31, 1993 and $217,000 for the year ended December 31, 1992.
SHORT-TERM INVESTMENTS
Short-term investments are comprised of debt instruments having maturities of greater than three months and less than one year at the date of purchase and are stated at cost due to the Company's intent and ability to hold the investments to maturity. The aggregate fair value of short- term investments at December 31, 1994 approximates cost. As of December 31, 1994, short-term investments consisted of debt instruments issued by U.S. government agencies.
PROPERTY AND EQUIPMENT
Depreciation on drilling rigs and related equipment and marine vessels acquired after 1990 is computed using the straight line method over estimated useful lives ranging from 4 to 15 years. Depreciation on drilling rigs and related equipment and marine vessels acquired prior to 1991 is computed using the units-of-production method over estimated useful lives ranging from 10 to 15 years. Under the units-of-production method, depreciation is based on the utilization of the drilling rigs and vessels with a minimum provision when the rigs or vessels are idle. Depreciation is computed using the straight line method over estimated useful lives ranging from 2 to 10 years for other equipment and 7 to 30 years for buildings and improvements.
The Company capitalizes interest applicable to the construction of significant additions to property and equipment. Interest capitalized for the years ended December 31, 1994 and 1993 was $731,000 and $735,000, respectively. No interest was capitalized in 1992.
Maintenance and repair costs are charged to expense as incurred. Major renewals and improvements are capitalized. Upon retirement or replacement of assets, the related cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income.
GOODWILL
Goodwill arising from the acquisition of Penrod in 1993 and Argosy
Offshore, Ltd. in 1991 is amortized on the straight-line basis over periods of 40 years and 10 years, respectively. See Note 3 "Acquisition." During 1994, goodwill from the Penrod Acquisition was reduced primarily for adjustments to insurance and other liabilities and deferred taxes. See Note 11 "Income Taxes". Accumulated amortization was $2.0 million and $1.2 million at December 31, 1994 and 1993, respectively. Amortization expense was $802,000, $598,000 and $290,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
At each balance sheet date, the Company evaluates the realizability of goodwill based upon expectations of undiscounted cash flows and operating income. Based upon its most recent analysis, the Company believes that no impairment of goodwill exists at December 31, 1994.
INCOME TAXES
In 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," the effects of which were applied retroactively to the beginning of 1990. SFAS No. 109 requires the Company to compute deferred income taxes based upon the amount of taxes payable in future years after considering changes in tax rates and other statutory provisions that will be in effect in those years. The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. See Note 11 "Income Taxes."
MINORITY INTEREST
The Company's 1994 and 1993 consolidated financial statements include Penrod, which prior to the Company's acquisition of the remaining interest in August 1993 was a 36% owned affiliate. See Note 3 "Acquisition." ENSCO Drilling (Caribbean), Inc. ("Caribbean"), which is 70% owned by the Company, has been included in the Company's consolidated financial statements for all years presented. The Company's consolidated financial statements also include ENSCO Technology Canada, Inc. ("ETC") for all years presented. In October 1994, a wholly owned subsidiary of the Company sold a 30% interest in ETC to an unrelated third party. See Note 12 "Gain on Sale of Subsidiary Stock." The minority shareholders' interest included in the Company's consolidated balance sheet at December 31, 1994 and 1993 was $4.7 million and $1.2 million, respectively, and is included in Other Liabilities.
The minority interest amount in the consolidated statement of operations for the year ended December 31, 1993 included $4.5 million related to the preacquisition earnings of Penrod.
CONSTRUCTION REVENUE RECOGNITION
Revenues from the construction of Venezuela barge drilling rigs were recognized on the percentage of completion method based on shipyard costs incurred as a percentage of estimated total shipyard costs in the consolidated statement of operations for the year ended December 31, 1992. There was no such treatment of construction activity for the years ended
December 31, 1994 or 1993.
SALE OF SUBSIDIARY STOCK
The Company has adopted the income statement recognition method as its accounting policy with respect to gains and losses associated with the sale of subsidiary stock. A gain of $670,000 is included in the Company's consolidated statement of operations for the year ended December 31, 1994 related to the sale of stock of a subsidiary. See Note 12 "Gain on Sale of Subsidiary Stock."
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share has been computed based on the weighted average number of common shares outstanding during the applicable period after recognition of minority interest charges and preferred stock dividend requirements. Common stock equivalents have been included in periods in which their effect is dilutive. All weighted average share and per share amounts have been restated to reflect the one share for four shares reverse stock split ("reverse stock split") which was effective June 1, 1994. See Note 8 "Stockholders' Equity."
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to the 1994 presentation.
2. INVESTMENTS IN EQUITY AFFILIATES
Investment in equity affiliate at December 31, 1994 and 1993 consists primarily of a wholly owned subsidiary's 50% interest in a joint venture, which was formed in June 1993, for the purpose of owning, leasing and operating jackup rigs in the territorial waters of Mexico and other parts of the world. The wholly owned subsidiary contributed a jackup rig to the joint venture and the other partner's capital contribution consisted of payments for mobilization costs, costs of leg extensions and other rig equipment and a working capital contribution. For the years ended December 31, 1994 and 1993, the Company recorded income of $700,000 and $561,000, respectively, in Income (Loss) from Equity Affiliates from its beneficial ownership in the joint venture. The difference between the Company's investment in the joint venture and its proportionate share of the joint venture's net assets was $1.4 million, net of accumulated amortization, at December 31, 1994 and is being amortized over a ten year period. The Company received $2.2 million of distributions from the joint venture in 1994, of which $1.1 million represented a return of capital. No distributions were received from the joint venture in 1993.
A wholly owned subsidiary of the Company, through its 42% investment in a partnership, beneficially owned 25% of Penrod during 1992. See Note 3 "Acquisition." The following is a consolidated summary of the operating results of the partnership for the year ended December 31, 1992 (in thousands):
A wholly owned subsidiary of the Company also owned, through a 28% ownership interest in certain trusts in 1992, an additional 11% of Penrod. See Note 3 "Acquisition."
For the year ended December 31, 1992, the Company recorded in its results of operations in Income (Loss) from Equity Affiliates a loss of $5.2 million from its beneficial ownership in the Penrod-related affiliates.
3. ACQUISITION
In August 1993, ENSCO Engineering Company, a wholly owned subsidiary of the Company, acquired the remaining 64% of the common stock of Penrod not then beneficially owned by the Company. In exchange for the common stock of Penrod, the Company issued 102.1 million net shares (25.5 million net shares after the reverse stock split) of its common stock valued at approximately $227.9 million, which included 23.9 million shares (6.0 million shares after the reverse stock split) of a new class of convertible common stock of the Company that was converted into an equal number of shares of the Company's common stock in October 1993. The exchange was based upon four common shares of the Company's common stock (prior to the reverse stock split) for each share of Penrod common stock.
The Company accounted for the Penrod Acquisition, under the rules of purchase accounting, as a step acquisition. Under a step acquisition, the acquiring company purchases its controlling interest in the acquired company through a series of transactions at different time intervals. A partial step-up or step-down in basis of the acquired company's assets is recognized in the consolidated financial statements of the acquirer each time an additional interest is acquired. The purchase by the Company of the remaining 64% of Penrod was recorded at the price paid at the time of purchase, while the prior 36% ownership of Penrod obtained by the Company in prior transactions remained at historical cost.
The following unaudited pro forma information shows the consolidated results of operations for the years ended December 31, 1993 and 1992 based upon adjustments to the restated historical financial statements of the Company and the historical financial statements of Penrod to give effect to the acquisition by the Company of the remaining 64% of Penrod as if such
acquisition had occurred January 1, 1992 (in thousands, except per share data):
1993 1992 --------- ---------
Operating revenues . . . . . . . . . . $246,235 $182,235 Operating income (loss) . . . . . . . . $ 33,886 $(34,124) Income (loss) from continuing operations $ 19,005 $(35,529) Net income (loss) . . . . . . . . . . . $ 21,329 $(39,648) Preferred stock dividend requirements . (4,260) (4,260) Income (loss) applicable to common stock $ 17,069 $(43,908)
Income (loss) per common share . . . . $ .30 $ (.79)
The pro forma consolidated results of operations are not necessarily indicative of the actual results that would have occurred had the acquisition occurred on January 1, 1992, or of results that may occur in the future.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1993 consisted of the following (in thousands):
1994 1993 --------- ---------
Land and buildings . . . . . . . . . $ 2,638 $ 2,169 Drilling rigs and equipment . . . . . 562,722 475,590 Marine vessels . . . . . . . . . . . 66,729 66,492 Other equipment . . . . . . . . . . . 19,989 21,084 Work in progress . . . . . . . . . . 14,285 15,395 $666,363 $580,730
In February 1994, the Company purchased two jackup rigs located in the North Sea and simultaneously entered into bareboat charter agreements with the seller for an initial twelve month period. The purchase price consisted of $50.0 million paid at closing and an additional $6.0 million which was to be credited against the bareboat charter payments during the last four months of the initial bareboat charter agreements. The bareboat charter agreements were not extended beyond the initial twelve month period and the Company made a payment of $1.8 million to the seller, in December 1994, for the remainder of the deferred purchase payment, net of bareboat charter payments due to the Company through the end of the twelve month bareboat charter period. The drilling contracts for the two rigs have been assigned to the Company as of January 1, 1995. Under such contracts, the rigs work for the joint venture of major oil and gas exploration companies for whom the rigs operated during the term of the bareboat charter agreements.
The Company's additions to property and equipment for the year ended December 31, 1994 also included $62.2 million in connection with the construction of four barge drilling rigs delivered to Venezuela in July through September of 1994. The rigs immediately commenced operations under five-year drilling contracts with Lagoven, S.A. ("Lagoven"), an affiliate of the Venezuelan national oil company. The contracts afford Lagoven the option to buy the barge drilling rigs during or at the end of the five-year contracts.
In June 1994, the Company completed the sale of its United States land rig operations consisting of twelve land rigs and related equipment, as well as an office building and yard, to an unrelated third party. The total sales price was approximately $15.5 million, consisting of cash, a promissory note and receivables. In November and December of 1994, the Company sold three of its land rigs and related equipment, located in the Middle East, to unrelated third parties for $7.5 million. No significant gains or losses resulted from the 1994 land rig sales.
The Company's additions to property and equipment for the year ended December 31, 1993 include $65.7 million in connection with the construction of four barge drilling rigs delivered to Venezuela in March through June of 1993. The rigs immediately commenced operations under five-year drilling contracts with Lagoven. The contracts afford Lagoven the option to buy the
barge drilling rigs during or at the end of the five-year contracts.
In November 1993, the Company transferred three inactive land rigs to work in progress in connection with the construction of four barge drilling rigs which began operating in July through September of 1994 in Venezuela. The rigs had a net book value of $6.8 million at the date of transfer to work in progress.
In June 1992, the Company sold four inactive land rigs located in Texas to a third party in connection with the construction of four barge drilling rigs. The land rigs were sold at the Company's net book value and therefore no gain or loss was recognized. The rigs had a net book value at the time of sale of $7.6 million.
5. LEASES
The Company operates four marine transportation vessels pursuant to ten-year operating lease agreements. The leases are renewable at the option of the Company for up to three successive one-year periods and provide the Company with an option to buy each of the vessels at the end of the initial lease term at fair market value. In addition, the Company is obligated under leases for certain of its offices and equipment.
Rental expense relating to operating leases was $3.7 million, $4.1 million and $3.1 million for the years ended December 31, 1994, 1993 and 1992, respectively. Future minimum rental payments under the Company's noncancellable operating lease obligations having initial or remaining lease terms in excess of one year are as follows: $4.2 million in 1995; $3.4 million in 1996; $3.2 million in 1997; $2.7 million in 1998; $1.9 million in 1999 and $860,000 thereafter.
6. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993 consists of the following (in thousands):
1994 1993 --------- ---------
Secured term loans (non-recourse to the Company) . . . . . . . . . . . . . $127,799 $ 59,722 Secured term loans . . . . . . . . . . 75,417 85,000 Interim construction financing . . . . -- 3,320 Convertible subordinated debentures . -- 5,059 Other notes payable . . . . . . . . . -- 80 Total long-term debt . . . . . . . . . 203,216 153,181
Less current maturities . . . . . . . (40,750) (27,198) $162,466 $125,983
A subsidiary of the Company entered into two financing arrangements with a subsidiary of a Japanese corporation in connection with the
construction of eight barge drilling rigs. The first financing arrangement, totalling $65.0 million, funded the cost of four barge drilling rigs delivered to Venezuela in 1993. The second financing arrangement, totalling $78.0 million, funded the cost of four more barge drilling rigs delivered to Venezuela in 1994. Each financing arrangement consists of four secured term loans, one for each barge drilling rig. The eight secured term loans bear interest at an average fixed rate of 8.17% and are each repayable in 60 equal monthly installments of principal and interest ending in mid-1998 through the first part of 2000. The term loans are each secured by a specific barge drilling rig, which rigs together had a combined net book value of $131.8 million at December 31, 1994, and the charter contract on each rig. The secured term loans are expected to be repaid from the cash flow generated by the eight barge drilling rigs and are without recourse to the Company.
In March 1994, the Company redeemed its convertible subordinated debentures consisting of $5.1 million principal amount of 8.25% convertible subordinated debentures which were originally due July 1, 1995.
In December 1993, a subsidiary of the Company entered into a $100.0 million loan arrangement with a group of international banks. The facility consisted of a $60.0 million secured term loan and a $40.0 million revolving line of credit. The secured term loan is repayable in equal semi-annual installments of principal over five years. The revolver is reduced semi-annually by $1.0 million over five years, with the final $30.0 million line expiring at the end of the five-year term. The facility carries a floating interest rate tied to London InterBank Offered Rates. As of December 31, 1994, the interest rate on the facility was 7.4% per annum. The remaining $39.0 million of the revolver is undrawn at December 31, 1994. The facility is collateralized by most of the Company's jackup rigs, which had a combined net book value of $246.6 million at December 31, 1994. The loan arrangement requires that the Company maintain specified minimum balances of cash and working capital, maintain certain operating cash flows and not exceed a certain debt to total asset ratio, and it includes certain limitations on dividends and requires that the appraised value of the rigs securing the facility exceed the loan balances relating to those rigs by a specified factor.
In October 1993, a subsidiary of the Company entered into a $25.0 million loan agreement with a financial institution. The seven year secured term loan bears interest at a fixed rate of 7.91% per annum, repayable in 28 equal quarterly installments ending October 15, 2000. The term loan is collateralized by substantially all of the Company's marine transportation vessels which had a combined net book value of $40.9 million at December 31, 1994. The loan agreement requires that the Company maintain a specified minimum tangible net worth and that the Company not exceed a certain ratio of liabilities to tangible net worth.
The Company maintains legally restricted cash balances with a bank as collateral for letters of credit issued by the bank related to borrowings and insurance arrangements. These restricted cash balances aggregated $5.6 million at December 31, 1994 and are included in prepaid expenses and other.
Maturities of long-term debt are as follows: $40.8 million in 1995; $43.5 million in 1996; $45.8 million in 1997; $40.6 million in 1998; $29.1 million in 1999, and $3.4 million thereafter.
7. PREFERRED STOCK
In August 1994, the Company issued a redemption notice for the 2,839,110 outstanding shares of its $1.50 Cumulative Convertible Exchangeable Preferred Stock ("$1.50 Preferred Stock"), which was also the number of shares outstanding at December 31, 1993. Holders of 2,807,147 shares of the $1.50 Preferred Stock elected to convert each of their shares into approximately 1.786 shares of the Company's common stock. Such conversion resulted in the issuance of 5,012,762 shares of the Company's common stock. Holders of the remaining 31,963 shares of the $1.50 Preferred Stock elected to redeem their shares which resulted in a cash outlay of $799,000.
Dividends on the $1.50 Preferred Stock were cumulative and payable quarterly when declared at a rate of $1.50 per annum per share.
8. STOCKHOLDERS' EQUITY
The Company's stockholders approved a one share for four shares reverse stock split of the Company's common stock at the Company's Annual Meeting of Stockholders held on May 24, 1994. All references in the financial statements to weighted average common shares outstanding, income (loss) per common share amounts and the 1994 share amounts in the table above have been restated to reflect the reverse stock split. The aggregate par value of the Company's common stock was reduced and additional paid-in capital was increased to reflect the decreased aggregate par value of the Company's common stock outstanding subsequent to the reverse stock split.
In December 1994, the Company's Board of Directors authorized the repurchase of up to $50.0 million of the Company's common stock. As of December 31, 1994, the Company had repurchased 201,400 shares of its common stock. Management anticipates that future repurchases of the Company's common stock will be funded from the Company's cash flow from operations and working capital.
At the Company's Annual Meeting of Stockholders held on August 10, 1993, the Company's stockholders approved an increase in the number of authorized shares of common stock ($.10 par value) of the Company from 250.0 million (62.5 million after the reverse stock split) to 500.0 million (125.0 million after the reverse stock split).
In March 1988, in connection with borrowings under a secured loan facility, the Company issued warrants to purchase 2.5 million shares (prior to the reverse stock split) at prices between $3.75 and $4.50 per share (prior to the reverse stock split). The warrants were extinguished in October 1993 at the time the secured loans were repaid.
9. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OPTIONS
The Company has an employee stock option plan as part of the ENSCO Incentive Plan (the "Incentive Plan"). The maximum number of shares with respect to which awards may be made pursuant to the Incentive Plan is 6.3 million. Of the 6.3 million shares, a minimum of 625,000 are reserved for issuance of incentive stock grants and a minimum of 625,000 are reserved for issuance as profit sharing grants.
The exercise price of stock options under the Incentive Plan is the fair market value of the stock at the time the option is granted. Accordingly, no compensation expense is recognized by the Company with respect to such grants. Non-qualified options are generally exercisable one year after grant. Incentive stock options generally become exercisable in 25% increments over a four-year period. To the extent not exercised, options expire generally on the fifth anniversary of the date of grant.
A summary of stock option transactions, restated for the reverse stock split, under the Incentive Plan is as follows (in thousands, except per share amounts):
Outstanding December 31, 1991 . . . . . . . 1,007 Granted ($4.76 to $11.00 per share) . 389 Forfeited . . . . . . . . . . . . . . (350) ----- Outstanding December 31, 1992 . . . . . . . 1,046 Granted ($12.00 per share) . . . . . . 310 Exercised ($4.76 to $11.00 per share) (89) Forfeited . . . . . . . . . . . . . . (192) -----
Outstanding December 31, 1993 . . . . . . . 1,075 Granted ($15.69 per share) . . . . . . 213 Exercised ($4.76 to $16.00 per share) (244) Forfeited . . . . . . . . . . . . . . (39) ----- Outstanding December 31, 1994 . . . . . . . 1,005 =====
At December 31, 1994, 468,000 options were exercisable at prices ranging from $4.76 to $16.00 per share. Under the Incentive Plan, 2.7 million shares were available for grant as options or incentive grants at December 31, 1994.
INCENTIVE STOCK GRANTS
Key employees, who are in a position to contribute materially to the Company's growth and development and to its long-term success, are eligible for incentive stock grants under the Incentive Plan through February 8, 1998.
Shares of common stock subject to incentive grants shall vest on such a basis as determined by a committee of the Board of Directors. Through 1994, incentive stock grants for 1.1 million shares of common stock were granted, of which 520,000 were vested at December 31, 1994. During 1994 and 1993, incentive stock grants for 60,000 shares and 50,000 shares (12,500 shares after the reverse stock split), respectively, were granted. No incentive stock grants were made in 1992. During 1993, 40,000 shares (10,000 shares after the reverse stock split) were forfeited. The remaining outstanding incentive stock grants vest as follows: 102,500 in 1995, 92,500 in each of the years 1996 through 1998, 90,000 in each of the years 1999 and 2000, and 6,000 in each of the years 2001 through 2004. The Company charged $1.0 million to operations in each of the years 1994 and 1993, and $1.2 million in 1992, related to incentive stock grants. The unvested portion of the incentive stock grants is classified in the Stockholders' Equity section of the consolidated balance sheet as Restricted Stock.
PROFIT SHARING PLAN
The Company has a profit sharing plan (the "ENSCO Savings Plan") which covers eligible employees with more than one year of service, as defined. Profit sharing contributions require Board approval and may be in cash or grants of the Company's common stock. The Company recorded profit sharing contribution provisions for the years ended December 31, 1994 and 1993 of $1.1 million and $500,000, respectively. No profit sharing contribution was made for 1992.
The ENSCO Savings Plan includes a 401(k) savings plan feature which allows eligible employees with more than three months of service to make tax deferred contributions to the plan. Beginning July 1, 1993, the Company made matching contributions equivalent to 25% of all employee contributions, subject to a maximum employee contribution of 6% of their compensation, which amounted to $307,000 and $64,000 in 1994 and 1993, respectively. The Company made no matching contributions during 1992. The
Company has reserved 500,000 shares of common stock for issuance as matching contributions under the ENSCO Savings Plan.
EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the Company's employee stock purchase plan (the "Stock Purchase Plan"), eligible employees could acquire shares of common stock through payroll deductions of not more than 10% of their base annual compensation. The price at which shares were purchased was 85% of the lower of fair market value for such shares on the first or last day of each plan year. In February 1993, the Board of Directors of the Company voted to terminate the Stock Purchase Plan, effective June 30, 1993. Employees participating in the Stock Purchase Plan at the date of termination had the option of purchasing common stock of the Company or receiving a cash refund of funds contributed in 1993. For the 1993 and 1992 plan years, 18,340 shares (4,585 shares after the reverse stock split) and 115,352 shares (28,838 shares after the reverse stock split), respectively, were sold at $.96 per share ($3.84 per share after the reverse stock split).
Common stock acquired pursuant to the Stock Purchase Plan may not be sold or otherwise transferred by the participant within two years after the purchase date, unless such common stock is first tendered to the Company. The Company has the right to repurchase the common stock at the lesser of the original purchase price paid for such common stock by the participant or the fair market value on the tender date.
EMPLOYEE RETIREMENT PLAN
Eligible former Penrod employees participate in a noncontributory defined benefit employee retirement plan. However, the plan was frozen effective December 31, 1990. Accordingly, no additional participants may join the plan and no additional benefits have been accrued for participants subsequent to December 31, 1990. The Company's policy is to fund the plan based on the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and tax considerations. Management intends to terminate the plan when it is in the best financial interest of the Company by purchasing annuities or otherwise providing for participants under the plan. The plan termination liability is estimated at $11.1 million, and the value of plan assets is estimated at $6.0 million, resulting in an unfunded termination liability of $5.1 million which is included in Other Liabilities at December 31, 1994. Net periodic pension expense for all years presented was insignificant. The Company does not expect to incur any future charges or additional liabilities in connection with the plan prior to its termination.
10. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1993, Penrod adopted Statement of Financial Accounting Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires the accrual, during the year the employee renders the service, of the estimated cost of providing postretirement non-pension benefit payments. SFAS No. 106 allows recognition of the cumulative effect of the liability in the
year of adoption or the amortization of the obligation over a period of up to twenty years. Penrod elected to recognize this change in accounting on the immediate recognition basis. The cumulative effect, after taxes and minority interest, on the Company resulting from Penrod's adoption of SFAS No. 106 was $2.5 million ($.07 per share after the reverse stock split). Effective January 1, 1994, the Company's medical plan was amended such that eligible Penrod retirees and eligible future retirees of the Company could participate in the Company's medical plan. Retirees participating in the Company's medical plan make contributions to the plan at a level that is intended to fund the cost of all retiree medical claims. The Company's current and contemplated employee benefit plans do not require the recognition of a liability for postretirement benefits under SFAS No. 106.
11. INCOME TAXES
In February 1992, the FASB issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires the use of the liability method for computing deferred income taxes. In accordance with the provisions of SFAS No. 109, the Company elected to retroactively apply the requirements of SFAS No. 109 to January 1, 1990, and to restate the financial statements of the Company issued subsequent to that date. The adoption of SFAS No. 109 resulted in an increase of $246,000 ($.01 per share after the reverse stock split) to income from continuing operations for the year ended December 31, 1992.
The Company had income of $31.6 million and $9.4 million, and a loss of $23.4 million from its operations before income taxes in the United States and income of $12.3 million, $20.2 million and $191,000 from its operations before income taxes in foreign countries for the years ended December 31, 1994, 1993 and 1992, respectively.
The provisions for income taxes for the years ended December 31, 1994, 1993 and 1992 are summarized as follows (in thousands):
The valuation allowance decreased by $13.7 million in 1994, of which $1.6 million was recorded as an adjustment to goodwill, due to the expected utilization of net operating losses that were previously projected to expire unutilized. Included in the valuation allowance at December 31, 1994 is approximately $13.3 million related to net operating loss carryforwards of Penrod, which originated prior to the Penrod Acquisition, that are projected to expire unutilized. Any future adjustments to the valuation allowance related to the projected utilization or nonutilization of the net operating loss carryforwards of Penrod that originated prior to the Penrod Acquisition will be allocated to goodwill. The valuation allowance in 1993 and 1992 increased $15.9 million and $10.3 million, respectively, due to net operating losses incurred for which no future benefit was projected to be realized.
The consolidated effective income tax rate for the years ended December 31, 1994, 1993 and 1992 differs from the United States statutory income tax rate as follows:
At December 31, 1994, the Company had regular and alternative minimum tax net operating losses and investment tax credit carryforwards of approximately $297.6 million, $176.3 million and $3.6 million, respectively. Included in the foregoing amounts are approximately $22.1 million of net operating loss carryforwards and $3.6 million of investment tax credit carryforwards which originated prior to the Company's quasi- reorganization in 1983. Through December 31, 1994, in accordance with the provisions of SFAS No. 109, the Company had recognized the benefit of all of the pre quasi-reorganization net operating loss carryforwards for financial reporting purposes, by utilizing reversing taxable temporary differences available during the carryforward period of such net operating losses, and through tax planning strategies that will generate sufficient taxable income to offset the remaining pre quasi-reorganization net operating loss carryforwards. The costs of the tax planning strategies have been included in the income tax provision. The utilization of these net operating loss carryforwards did not reduce the Company's provision for income taxes but resulted in the addition of $15.3 million to additional paid-in capital. This accounting treatment does not affect the Company's ability to use such net operating loss carryforwards to offset taxes otherwise payable. If not utilized, the regular and alternative minimum tax net operating loss carryforwards expire from 1998 through 2007, and the investment tax credit carryforwards expire from 1995 through 2000. As a result of the Penrod Acquisition, the utilization of a portion of the Company's net operating loss carryforwards are subject to limitations imposed by the Internal Revenue Code of 1986.
It is the policy of the Company to consider that income generated in foreign subsidiaries is permanently invested. A significant portion of the Company's undistributed foreign earnings at December 31, 1994 were generated by controlled foreign corporations and were taxed, for U.S. tax purposes, in the year that such earnings arose. Upon distribution of foreign earnings in the form of dividends or otherwise, the Company may be
subject to additional U.S. income taxes. However, deferred taxes related to the future remittance of these funds are not expected to be significant to the financial statements of the Company since additional available net operating loss carryforwards would be utilized to reduce the additional U.S. income taxes payable.
12. GAIN ON SALE OF SUBSIDIARY STOCK
In October 1994, a wholly owned subsidiary of the Company sold 400,000 shares of ETC to Lateral Vector Resources, Inc. ("LVR"), a Canadian company, for $1.2 million and a gain of $670,000 was recognized. The purpose of the sale was to combine forces with LVR to conduct horizontal/ directional drilling services in Canada and certain areas of the United States. The sale reduced the Company's ownership interest in ETC to 70%. A provision for income taxes related to the gain on sale has been made. However, the income tax provision has been offset by a reduction in the deferred tax asset valuation allowance due to the utilization of additional net operating loss carryforwards that had previously been projected to expire unutilized.
13. COMMITMENTS AND CONTINGENCIES
Prior to October 1990, Penrod was self-insured for the majority of its maritime claims exposure. During the period from October 1990 to the August 1993 acquisition date, Penrod had insurance coverage which limited its maritime claims exposure to a maximum of the $25,000 deductible for each claim, plus a fluctuating aggregate of $500,000 to $1.5 million which is in excess of the $25,000 claim deductible for each policy year. Penrod is also a defendant in lawsuits with certain of its insurers and the administrator of its self-insurance program, and personal injury and maritime liability lawsuits filed by present and former employees. Management of the Company has provided reserves for such claims as it considers appropriate given the facts currently known.
On February 13, 1991, Penrod filed an action against TransAmerican Natural Gas Corporation ("TransAmerican") which is presently pending in the U.S. District Court Southern District of Texas, Houston Division, seeking damages for breach of contract. On August 21, 1991, TransAmerican filed an action against Penrod in the 133rd Judicial District Court, Harris County, Texas, seeking damages for breach of contract and tort claims. Management of the Company believes that the outcome of this litigation will be favorable to the Company.
At December 31, 1994, there were no other contingencies, claims, or lawsuits against the Company which, in the opinion of management, would have a material effect on its financial condition or results of operations.
14. SEGMENT INFORMATION
The following shows industry segment and geographic region information for the years ended December 31, 1994, 1993 and 1992 (in thousands):
Revenues in corporate and other in 1992 consists of revenues recognized in the Company's role as general contractor for the construction of four barge drilling rigs. Corporate and other assets consist primarily of cash, investments, notes receivable and furniture and fixtures.
Identifiable assets excluded net assets of discontinued operations of $399,000 and $12.0 million at December 31, 1993 and 1992, respectively.
During 1994, revenues from two customers were in excess of 10% of the Company's total revenues. Revenues from one customer were $48.2 million, or 18%, of total revenues, all of which were from the contract drilling segment. Revenues from another customer were $35.3 million, or 13%, of total revenues. Of such amount, $33.7 million was from the contract drilling segment, $1.4 million was from the marine transportation segment and the remainder was from the technical services segment.
During 1993, revenues from one customer were $29.0 million, or 12% of total revenues, all of which was from the contract drilling segment.
During 1992, revenues from two customers were in excess of 10% of the Company's total revenues. Revenues from one customer were $17.1 million, or 17%, of total revenues, all of which was from the corporate and other segment. Revenues from another customer were $12.5 million, or 13%, of total revenues. Of such amount, $8.9 million was from the marine transportation segment, $2.6 million was from the contract drilling segment and the remainder was from the technical services segment.
15. TRANSACTIONS WITH RELATED PARTIES
During 1994 and 1993, four of the Company's marine transportation vessels had bareboat charter agreements with a joint venture in which the Company had a 50% interest. Charter revenues from the joint venture of $365,000 and $648,000 are included in Operating Revenues in the Company's consolidated statement of operations for the years ended December 31, 1994 and 1993, respectively. The Company terminated the joint venture and the related charter agreements in May 1994.
During 1993, the Company recorded $500,000 of Other Income related to fees received from a partnership, owned 42% by a wholly owned subsidiary of the Company, for management services provided by the Company.
The Company has paid or accrued legal fees to a firm of which a director of the Company was a partner in 1993 and 1992. The Company paid or accrued fees for legal services from this firm of $369,000 and $432,000 during 1993 and 1992, respectively. The Company has a $675,000 note receivable from a director of the Company in connection with the sale of 675,000 shares (168,750 shares after the reverse stock split) of restricted common stock in 1988. The note is due July 1997 and is noninterest bearing as long as the payor remains a director of the Company. At December 31, 1994 and 1993, the note was recorded as a reduction of additional paid-in capital.
During 1992, the Company paid Rainwater, Inc., which is owned by one of the Company's larger stockholders, a fee of $150,000 for providing financial advisory and consulting services to the Company. The Company made no payments to Rainwater, Inc. during 1994 or 1993.
16. SUPPLEMENTAL FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET INFORMATION. Accounts receivable, net at December 31, 1994 and 1993 consists of the following (in thousands):
1994 1993 ------- -------
Trade . . . . . . . . . . . . . . . . . $37,944 $51,473 Other . . . . . . . . . . . . . . . . . 3,400 1,336 ------- ------- 41,344 52,809 Allowance for doubtful accounts . . . . (1,207) (1,577) ------- ------- $40,137 $51,232
Prepaid expenses and other at December 31, 1994 and 1993 consists of the following (in thousands):
1994 1993 ------- -------
Prepaid expenses . . . . . . . . . . . $ 5,358 $ 3,825 Inventory . . . . . . . . . . . . . . . 3,236 3,350 Other . . . . . . . . . . . . . . . . . 9,561 6,524 ------- ------- $18,155 $13,699
Accrued liabilities at December 31, 1994 and 1993 consists of the following (in thousands): 1994 1993 ------- -------
Operating expenses . . . . . . . . . . $ 9,396 $10,881 Payroll . . . . . . . . . . . . . . . . 6,424 5,009 Insurance . . . . . . . . . . . . . . . 6,789 7,698 Taxes . . . . . . . . . . . . . . . . . 6,250 3,475 Other . . . . . . . . . . . . . . . . . 5,859 5,661 ------- ------- $34,718 $32,724
CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION. Maintenance and repairs and taxes, other than payroll and income taxes for the years ended December 31, 1994, 1993 and 1992 are as follows (in thousands):
1994 1993 1992 ------- ------- ------
Maintenance and repairs . . . . . . . $18,790 $22,516 $7,395 Taxes, other than payroll and income taxes . . . . . . . . . . 751 897 913
CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION. The consolidated statement of cash flows excludes noncash activities related to the conversion of the $1.50 Preferred Stock into common stock of the Company as described in Note 7 "Preferred Stock", adjustments to goodwill as described in Note 1 "Summary of Significant Accounting Policies" and noncash consideration received related to the sale of the United States land rig operation as described in Note 4 "Property and Equipment".
Cash paid for interest and income taxes for the years ended December 31, 1994, 1993 and 1992 is as follows (in thousands):
1994 1993 1992 ------- ------- -------
Interest . . . . . . . . . . . . . . $ 9,940 $ 5,682 $ 3,809 Income taxes . . . . . . . . . . . . 3,104 232 419
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgement is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts and estimated fair values at December 31, 1994 and 1993 are as follows (in thousands):
The estimated fair values were determined as follows:
Short-term investments --- The estimated fair value of short-term investments is based on current interest rates for investments with similar characteristics.
Long-term debt --- Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues.
Other liabilities --- The fair value of other liabilities was determined by discounting the expected future cash outflows relating to the other liabilities using long-term borrowing rates available to the Company.
Preferred stock --- The fair value of the preferred stock at December 31, 1993 was based on a quoted market price at that time. The preferred stock was converted/redeemed in 1994.
17. DISCONTINUED OPERATIONS
In 1993, the Company completed a series of transactions that resulted in the sale of substantially all of the Company's supply business conducted by its wholly owned subsidiary ENSCO Tool and Supply Company.
The Company sold substantially all of the assets of the international supply, tubular services and engineered products business lines of its supply operations segment to an unrelated party under an agreement consummated July 1, 1993. The purchase price consisted of $1.0 million in cash and approximately $3.9 million in notes issued by the purchaser. The notes were repaid in full in December 1993. In a separate transaction consummated June 30, 1993, the Company sold to another unrelated party all of the shares of capital stock of Petroil Services Corporation, ENSCO Tool and Supply (Peru) S.A. and the Egyptian American Technical Services Company owned by the Company. The Company received $5.0 million in cash from the purchaser. Additionally, substantially all of the Company's remaining supply operations segment real estate was sold in 1993 to unrelated purchasers for approximately $2.4 million in cash, net of sales costs.
As a result of these transactions, the Company's financial statements have been reclassified to present the net assets and operating results of the Company's supply operations segment as discontinued operations. Prior years have been reclassified for comparative purposes. Included in the 1993 Income (Loss) from Discontinued Operations is a gain on the sales discussed above of $2.1 million (which includes a provision of $1.3 million for operations during the phase out period which began July 1, 1993) and income from operations for the six months ended June 30, 1993 of $200,000. Revenues from the supply operations segment were $22.2 million and $62.6 million in 1993 and 1992, respectively. Substantially all of the remaining assets and liabilities of the supply business were sold, liquidated or settled in 1994.
18. SUBSEQUENT EVENTS
On January 25, 1995, a wholly owned subsidiary of the Company entered into a letter of intent with the 30% minority interest partner in Caribbean under which the wholly owned subsidiary of the Company will purchase half of the minority interest partner's shareholdings in Caribbean. The purchase price to be paid for the 15% interest in Caribbean is based on Caribbean's future operating activity and proceeds from any future sale of Caribbean's rigs. The agreement, which is effective January 1, 1995, increases the wholly owned subsidiary's interest in Caribbean from 70% to 85%.
On February 21, 1995, the Board of Directors of the Company adopted a shareholder rights plan and declared a dividend of one preferred share purchase right (a "Right") for each share of the Company's common stock outstanding on March 6, 1995. Each Right initially entitles its holder to purchase 1/100th of a share of the Company's Series A Junior Participating Preferred Stock for $50.00, subject to adjustment. The Rights generally will not become exercisable until 10 days after a public announcement that a person or group has acquired 15% or more of the Company's common stock
(thereby becoming an "Acquiring Person") or the commencement of a tender or exchange offer upon consummation of which such person or group would own 15% or more of the Company's common stock (the earlier of such dates being called the "Distribution Date"). Rights will be issued with all shares of the Company's common stock issued between March 6, 1995, and the Distribution Date. Until the Distribution Date, the Rights will be evidenced by the certificates representing the Company's common stock and will be transferrable only with the Company's common stock. If any person or group becomes an Acquiring Person, each Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter entitle its holder to purchase, at the Right's then current exercise price, shares of the Company's common stock having a market value of two times the exercise price of the Right. If, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each Right (other than Rights owned by an Acquiring Person which will have become void) will entitle its holder to purchase, at the Rights then current exercise price, that number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) which at the time of such transaction will have a market value of two times the exercise price of the Right. After any person or group has become an Acquiring Person, the Company's Board of Directors may, under certain circumstances, exchange each Right (other than Rights of the Acquiring Person) for shares of the Company's common stock having a value equal to the difference between the market value of the shares of the Company's common stock receivable upon exercise of the Right and the exercise price of the Right. The Company will generally be entitled to redeem the Rights for $.01 per Right at any time until 10 days after a public announcement that a 15% position has been acquired. The Rights expire on February 21, 2005.
19. UNAUDITED QUARTERLY FINANCIAL DATA
A summary of unaudited quarterly consolidated financial information for 1994 and 1993 is as follows (in thousands, except per share amounts):
(9) TRANSACTIONS WITH RELATED PARTIES
On November 1, 1990, Holding and ENSCO entered into an agreement that required ENSCO to provide certain consulting services to Holding and its subsidiaries. On June 28, 1991, the agreement was extended without fee until October 11, 1991, when it was renewed on a month-to- month basis under the same terms. In November 1992, pursuant to the Settlement Agreement discussed in Note 7, the consulting agreement was terminated. At this time, Holding paid $300,000 each to the Partnership and the Smith Trusts as reimbursements of legal fees related to the litigation. Also in connection with the Settlement Agreement discussed previously, ENSCO forgave $305,000 of the 1991 charges to Holding under the consulting agreement.
During 1992, the Partnership's general and administrative expenses include $307,000 of charges from ENSCO.
(3) Exhibits
The following instruments are included as exhibits to this Report. Exhibits incorporated by reference are so indicated by parenthetical information.
Exhibit No. Document
* 3.1 - Certificate of Incorporation of Energy Service Company, Inc., as amended.
3.2 - Bylaws of Energy Service Company, Inc., as amended (incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
3.3 - Certificate of Designation of $1.50 Cumulative Convertible Exchangeable Preferred Stock (incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1988, File No. 1-8097).
4.1 - Indenture, dated as of July 1, 1980, among Blocker Energy International N.V., Blocker Energy Corporation, as Guarantor, and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
4.2 - Purchase Agreement dated March 28, 1988 among Energy Service Company, Inc., ENSCO Marine Company, Prudential-Bache Energy Growth Fund, L.P. G-2 and Prudential-Bache Energy Growth Fund, L.P. G-3 relating to $26,000,000 aggregate principal amount of Senior Secured Notes of ENSCO Marine Company and warrants to purchase 2,500,000 shares of the Company's Common Stock (incorporated by reference to Exhibit 4.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
4.3 - Contract of Sale dated October 14, 1987 between Manufacturers Hanover Trust Company and ENSCO Operating Company relating to purchase of ENSCO I and ENSCO II (incorporated by reference to Exhibit 4.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
4.4 - Certificate of Designation of $1.50 Cumulative Convertible Preferred Stock (set forth as Exhibit 3.3).
4.5 - Form of 6% Convertible Subordinated Debenture due April 15, 2003 (incorporated by reference to Exhibit 4.10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988, File No. 1-8097).
4.6 - Form of Indenture relating to Registrant's 6% Convertible Subordinated Debentures (incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10- Q for the quarter ended March 31, 1988, File No. 1-8097).
4.7 - Form of Rights Agreement dated as of February 21, 1995 between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit A the Form of Certificate of Designations of Series A Junior Participating Preferred Stock of Energy Service Company, Inc., as Exhibit B the Form of Right Certificate, and as Exhibit C the Summary of Rights to Purchase Shares of Preferred Stock of Energy Service Company, Inc. (incorporated by reference to Exhibit 4 to Registrant's Current Report on form 8-K dated February 21, 1995, File No. 1-8097).
10.1 - ENSCO Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.2 - Employee Stock Purchase Plan of Energy Service Company, Inc. (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-8097).
10.3 - Restricted Stock Agreement effective as of June 10, 1987 between Morton H. Meyerson and Blocker Energy Corporation (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.4 - Restricted Stock Agreement effective as of May 31, 1988 between Morton H. Meyerson and Energy Service Company, Inc. (incorporated by reference to Exhibit 19.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1988, File No. 1-8097).
10.5 - Termination of Pledge Agreement and Amendment of Restricted Stock Agreement, dated March 1, 1991, by and between Morton H. Meyerson and Energy Service Company, Inc. (incorporated by reference to Exhibit 10.108 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
10.6 - First Amendment, dated March 1, 1991, to the Promissory Note dated July 19, 1988 in the original principal amount of $675,000 between Morton H. Meyerson and Energy Service Company, Inc. (incorporated by reference to Exhibit 10.109 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
10.7 - Bareboat Charter Party dated as of September 6, 1989 between Chrysler Capital Corporation and Energy Service Company,
Inc. relating to one offshore supply vessel, the ENSCO Cruiser. (incorporated by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-8097).
10.8 - Bareboat Charter Party dated October 6, 1989 between Chrysler Capital Corporation and Energy Service Company, Inc. relating to one offshore supply vessel, the ENSCO Transport. (incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-8097).
10.9 - Bareboat Charter Party dated February 26, 1990 between Chrysler Capital Corporation and Energy Service Company, Inc. relating to one offshore supply vessel, the ENSCO Galleon. (incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-8097).
10.10 - Bareboat Charter Party dated April 12, 1990 between Chrysler Capital Corporation and Energy Service Company , Inc. relating to one offshore supply vessel, the ENSCO Schooner (incorporated by reference to Exhibit 28.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990, File No. 1-8097).
10.11 - Lease Agreement between Energy Service Company, Inc. as tenant and Freeman Ross, Ltd. as landlord for the Company's corporate office space at First Interstate Bank Tower at Fountain Place, 1445 Ross Avenue, Dallas, Texas (incorporated by reference to Exhibit 28.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-8097).
10.12 - Lease Agreement between Energy Service Company, Inc. as tenant and Peter Kurts Properties, U.S., Inc. as landlord for the Company's division office space at 1776 Yorktown, Houston, Texas (incorporated by reference to Exhibit 28.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-8097).
10.13 - Supplemental Compensation Agreement, dated March 1, 1991, between Morton H. Meyerson and Energy Service Company, Inc. (incorporated by reference to Exhibit 10.110 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
10.14 - First Restated Credit Agreement between the ENSCO Companies and NationsBank of Texas, N.A. dated February 3, 1992 (incorporated by reference to Exhibit 10.125 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-8097).
10.15 - First Amendment, dated November 12, 1992, to the Credit
Agreement between the ENSCO Companies and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.54 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.16 - Second Amendment, dated November 13, 1992, to the Credit Agreement between the ENSCO Companies and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.55 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.17 - Loan Agreement, dated March 2, 1993, among ENSCO Drilling Company, as Borrower, Energy Service Company, Inc., as Guarantor, and Christiania Bank OG Kreditkasse (incorporated by reference to Exhibit 10.56 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.18 - First Amendment, dated March 9, 1992, to the Lease Agreement between Energy Service Company, Inc. and Peter Kurts Properties U.S., Inc. (incorporated by reference to Exhibit 10.57 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.19 - Agreement among the partners of NGP No. I, L.P. dated November 11, 1992 (incorporated by reference to Exhibit 10.59 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
10.20 - Construction and Purchase Agreement dated as of February 3, 1992 between Nissho Iwai Hong Kong Corporation Limited as Purchaser and ENSCO Drilling Company as Contractor (incorporated by reference to Exhibit 10.21 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.21 - Sale and Financing Agreement dated as of February 3, 1992 between ENSCO Drilling Venezuela, Inc. as Purchaser and Nissho Iwai Hong Kong Corporation Limited as Seller (incorporated by reference to Exhibit 10.22 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.22 - Shelf Registration Agreement by and among Energy Service Company, Inc., SOLVation Inc., Energy Management Corporation, SEGA Associates, L.P., Smith Factors Inc., The Summit Trust Company, as Trustee, Natural Gas Partners, L.P., The Goldman Sachs Group, L.P., Permian Equities Inc., and others dated as of May 6, 1993 (incorporated by reference to Exhibit 28.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-8097).
10.23 - Stock Exchange Agreement by and among Energy Service Company, Inc., ENSCO Engineering Company, SOLVation Inc., Natural Gas Partners, L.P., Goldman Sachs Group, L.P., Permian Equities Inc., NGP No. I, L.P., and the Summit Trust Company, as Trustee dated as of May 6, 1993 (incorporated by reference to Exhibit 28.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-8097).
10.24 - Asset Purchase Agreement dated June 30, 1993, between Energy Ventures, Inc. and ENSCO Tool & Supply Company (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 1, 1993, File No. 1-8097).
10.25 - Purchase Agreement dated June 30, 1993, between CAMCO International Inc. and ENSCO Tool & Supply Company (incorporated by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K dated July 1, 1993, File No. 1- 8097).
10.26 - Loan Agreement dated October 14, 1993, by and among ENSCO Marine Company and The CIT Group/Equipment Financing, Inc. (incorporated by reference to Exhibit 10.27 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.27 - Construction and Purchase Agreement dated November 12, 1993, by and between ENSCO Drilling Company and Nissho Iwai Hong Kong Corporation Limited (incorporated by reference to Exhibit 10.28 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.28 - Sale and Financing Agreement dated November 12, 1993, by and between Nissho Iwai Hong Kong Corporation Limited and ENSCO Drilling Venezuela, Inc. (incorporated by reference to Exhibit 10.29 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
10.29 - Credit Facility Agreement dated December 15, 1993, by and among ENSCO Offshore Company and ENSCO Offshore U.K. Limited, as borrowers, and Christiania Bank OG Kreditkasse, London Branch, den Norske Bank A.S., New York Branch, Banque Indosuez, and Meespierson N.V., as the Banks (incorporated by reference to Exhibit 10.30 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
*10.30 - Partial Satisfaction of Mortgage, dated November 29, 1994, between Wilmington Trust Company, as trustee for the benefit of The CIT Group/Equipment Financing, Inc., and ENSCO Marine Company.
*10.31 - Modification and Amendment of First Preferred Fleet Ship Mortgage, dated January 23, 1995, by ENSCO Marine Company
and Wilmington Trust Company, as trustee for the benefit of The CIT Group/Equipment Financing, Inc.
*10.32 - Amendment No. 1, dated November 1, 1994, to Credit Facility Agreement dated December 15, 1993 among ENSCO Offshore Company and ENSCO Offshore U.K. Limited, as borrowers, and Christiana Bank OG Kreditkasse, London Branch, den Norske Bank A.S., New York Branch, Banque Indosuez and Meespierson N.V., as the banks.
* 21 - Subsidiaries of the Registrant
* 23.1 - Consent of Price Waterhouse LLP
* 23.2 - Consent of Deloitte & Touche LLP
* 27 - Financial Data Schedule ___________________
* Filed Herewith
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all executive compensation plans and arrangements required to be filed as an exhibit to this Form 10-K:
1. ENSCO Incentive Plan, as amended (filed as Exhibit 10.1 hereto and incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097).
2. Employee Stock Purchase Plan of Energy Service Company, Inc. (filed as Exhibit 10.2 hereto and incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-8097).
3. Restricted Stock Agreement effective as of June 10, 1987 between Morton H. Meyerson and Energy Service Company, Inc. (filed herewith as Exhibit 10.3 and incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-8097).
4. Restricted Stock Agreement effective as of May 31, 1988 between Morton H. Meyerson and Energy Service Company, Inc. (filed as Exhibit 10.4 hereto and incorporated by reference to Exhibit 19.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1988, File No. 1-8097).
5. Termination of Pledge Agreement and Amendment of Restricted Stock Agreement, dated March 1, 1991, by and between Morton H. Meyerson and Energy Service Company, Inc. (filed as Exhibit 10.5 hereto and incorporated by reference to Exhibit 10.108 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
6. First Amendment, dated March 1, 1991, to the Promissory Note dated July 19, 1988 in the original principal amount of $675,000 between Morton H. Meyerson and Energy Service Company, Inc. (filed as Exhibit 10.6 hereto and incorporated by reference to Exhibit 10.109 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
7. Supplemental Compensation Agreement, dated March 1, 1991, between Morton H. Meyerson and Energy Service Company, Inc. (filed as Exhibit 10.13 hereto and incorporated by reference to Exhibit 10.110 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8097).
The Company will furnish to the Securities and Exchange Commission upon request, all constituent instruments defining the rights of holders of long-term debt of the Company not filed herewith as permitted by paragraph 4(iii)(A) of Item 601 of Regulation S-K.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1994.
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) and Form S-3 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-40282 filed May 2, 1991, 33- 41294 filed June 19, 1991, 33-35862 filed July 13, 1990, 33-32447 filed December 5, 1989 and 33-14714 filed June 1, 1987 and Form S-3 Nos. 33- 64642, 33-49590 filed July 13, 1992 (as amended by Amendment No. 1 filed July 31, 1992), 33-46500 filed March 18, 1992 (as amended by Amendment No. 1 filed May 7, 1992), 33-43756 filed November 12, 1991 (as amended by Amendment No. 1 filed December 19, 1991) and 33-42965 filed September 25, 1991 (as amended by Amendment No. 1 and 2 filed October 29, 1991 and November 18, 1991, respectively):
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 16, 1995.
ENERGY SERVICE COMPANY, INC. (Registrant)
By /s/ CARL F. THORNE ------------------------------------ Carl F. Thorne Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURES TITLE DATE
/S/ CARL F. THORNE Chairman, President, Carl F. Thorne Chief Executive Officer and Director
/S/ RICHARD A. WILSON Senior Vice President, Richard A. Wilson Chief Operating Officer and Director
/S/ C. CHRISTOPHER GAUT Vice President, Chief C. Christopher Gaut Financial Officer and Treasurer
/S/ H. E. MALONE Vice President, Chief H. E. Malone Accounting Officer and Controller
/S/ CRAIG I. FIELDS Director Craig I. Fields March 16, 1995 /S/ ORVILLE D. GAITHER, SR. Director Orville D. Gaither, Sr.
/S/ GERALD W. HADDOCK Director Gerald W. Haddock
/S/ DILLARD S. HAMMETT Director Dillard S. Hammett
/S/ THOMAS L. KELLY, II Director Thomas L. Kelly, II
/S/ MORTON H. MEYERSON Director Morton H. Meyerson