SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission file number 000-32855
TORCH OFFSHORE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2982117
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
401 Whitney Avenue, Suite 400
Gretna, LA 70056-2596
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (504) 367-7030
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes ___ No X
The number of shares of the Registrant's Common Stock outstanding
as of August 13, 2001 was 13,333,333.
TORCH OFFSHORE, INC.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
2001 2000
-------- --------
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 29,402 $ 886
Accounts receivable:
Trade, less allowance for doubtful accounts 10,700 9,824
Other 240 42
Costs and estimated earnings in excess of
billings on uncompleted contracts - 523
Prepaid expenses and other 3,395 1,664
Deferred income taxes 155 -
-------- --------
Total current assets 43,892 12,939
PROPERTY AND EQUIPMENT, net 48,356 40,202
INVESTMENTS, restricted 6 6
DEFERRED DRYDOCKING CHARGES 4,213 4,554
OTHER ASSETS 250 287
-------- --------
Total assets $ 96,717 $ 57,988
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 6,139 $ 7,809
Accrued expenses 2,999 3,384
Accrued payroll and related taxes 765 460
Financed insurance premiums 2,248 991
Current portion of long-term debt - 6,962
Revolving line of credit - 3,436
-------- --------
Total current liabilities 12,151 23,042
LONG-TERM DEBT, less current portion - 23,957
DEFERRED INCOME TAXES 2,746 -
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED - 4,678
STOCKHOLDERS' EQUITY 81,820 6,311
-------- --------
Total liabilities and stockholders' equity $ 96,717 $ 57,988
======== ========
The accompanying notes are an integral part of these financial statements.
TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
(In Thousands, Except Per Share Amounts)
Revenues $14,317 $11,014 $28,808 $17,675
Cost of revenues:
Cost of sales 10,214 8,531 20,597 14,393
Depreciation and amortization 1,490 1,177 2,959 2,348
General and administrative expenses 1,067 950 2,026 1,825
Other operating (income) expense 0 (3) 0 (19)
------- ------- ------- -------
Total costs of revenues 12,771 10,655 25,582 18,547
------- ------- ------- -------
Operating income (loss) 1,546 359 3,226 (872)
------- ------- ------- -------
Other income (expense):
Interest expense (640) (999) (1,551) (1,939)
Interest income 68 0 68 1
------- ------- ------- -------
Total other income (expense) (572) (999) (1,483) (1,938)
------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item 974 (640) 1,743 (2,810)
Income tax expense (2,860) 0 (2,860) 0
------- ------- ------- -------
Net income (loss) before
extraordinary item (1,886) (640) (1,117) (2,810)
Extraordinary loss on early
extinguishment of debt, net of
taxes of $268 (498) 0 (498) 0
------- ------- ------- -------
Net income (loss) (2,384) (640) (1,615) (2,810)
Preferred unit dividends and accretion (76) (76) (190) (76)
------- ------- ------- -------
Net income (loss) attributable to
common stockholders $(2,460) $ (716) $(1,805) $(2,886)
======= ======= ======= =======
Earnings per share (Basic and Diluted):
Income before extraordinary loss $ (0.21) $ (0.10) $ (0.15) $ (0.38)
Extraordinary loss (0.05) - (0.06) -
------- ------- ------- -------
$ (0.26) $ (0.10) $ (0.21) $ (0.38)
======= ======= ======= =======
Basic and diluted average
common shares outstanding 9,448 7,505 8,476 7,505
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
Six Months Ended
June 30,
-------------------
2001 2000
-------- -------
(In Thousands)
Net cash provided by (used in) operations:
Net income $ (1,615) $(2,810)
Depreciation and amortization 2,959 2,348
Deferred drydocking expenditures (831) (491)
Deferred income tax provision 2,860 -
Extraordinary charge, net of taxes 498 -
Severence and reorganizational costs,
net accrual (payment) (1,580) -
Changes in work capital:
Accounts receivable (1,074) (3,265)
Costs and earnings in excess of billing 523 (413)
Prepaid expenses, net of financed portion (474) (464)
Accounts payable (1,670) 1,119
Accrued payroll 342 (45)
Accrued expenses and other 103 734
-------- -------
Net cash provided by (used in) operations 41 (3,287)
-------- -------
Net cash used in investing activities:
Equipment purchases (9,941) (260)
-------- -------
Net cash used in investing activities (9,941) (260)
-------- -------
Net cash provided by financing activities:
Borrowings (payments) on revolver (3,437) 446
Payments on long-term debt (30,707) (2,812)
Gross proceeds from initial public offering 80,000 -
Initial public offering costs - paid (6,271) -
Debt extinguishment costs (766) -
Proceeds from issuance of preferred units - 5,300
Preferred unit issuance costs - (490)
Distributions to preferred unitholders (403) -
-------- -------
Net cash provided by financing activities 38,416 2,444
-------- -------
Net increase (decrease) in cash and cash equivalents 28,516 (1,103)
Cash and cash equivalents at beginning of period 886 1,215
-------- -------
Cash and cash equivalents at end of period $ 29,402 $ 112
======== =======
Interest paid (net of amounts capitalized) $ 2,289 $ 1,705
======== =======
Income taxes paid $ - $ -
======== =======
The accompanying notes are an integral part of these financial statements.
TORCH OFFSHORE, INC.
Notes to Consolidated Financial Statements (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The interim consolidated financial statements included herein have
been prepared by Torch Offshore, Inc. (a Delaware corporation) and
are unaudited. The consolidated financial statements of Torch
Offshore, Inc. include its wholly owned subsidiary, Torch Offshore,
LLC. Management believes that the unaudited interim financial
statements include all adjustments (such adjustments consisting
only of a normal recurring nature) necessary for fair presentation.
Certain information and note disclosures normally included in annual
audited financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed
or omitted pursuant to those rules and regulations. The results for
the six months ended June 30, 2001 are not necessarily indicative of
the results to be expected for the entire year. The interim financial
statements included herein should be read in conjunction with the
audited financial statements and notes thereto together with
management's discussion and analysis of financial condition and
results of operations included in the Company's Registration Statement
on Form S-1 (Registration No. 333-54120).
In June 2001, Torch Offshore, Inc. (the "Company") completed its
initial public offering of 5.0 million shares of its common stock
at $16.00 per share, raising gross proceeds of $80.0 million; net
proceeds were $72.6 million after underwriting commission and
discounts and expenses totaling $7.4 million. The Company used
$31.3 million to repay all outstanding indebtedness (including
prepayment fees), purchased the Midnight Rider for $9.5 million
(See Note 5) and used $2.4 million for general corporate purposes.
The balance of the proceeds, $29.4 million at June 30, 2001, is being
invested in short-term securities, pending its targeted use for the
Company's deepwater expansion program and general corporate purposes.
2. STOCKHOLDERS' EQUITY
In connection with the public offering, discussed above,
predecessor interests of the Company (including preferred unit
interests) were exchanged for common shares of the Company. For
financial reporting purposes, the transactions were considered a
recapitalization of the Company, and all historical share data
have been retroactively restated.
The Company has a long-term incentive plan under which 3 million
shares of its common stock are authorized to be granted to
employees and affiliates. The awards can be in the form of
options, stock, phantom stock, cash, performance stock or stock
appreciation rights. Concurrent with the initial public
offering, the Company granted stock options covering 250,000
shares of common stock at $16.00 per share, and 31,250 shares of
restricted stock, both vesting generally over five years. Prior
to this grant, no options to purchase the Company's common stock
were outstanding.
On August 8, 2001, the Board of Directors approved the repurchase
of up to $5.0 million of the Company's outstanding common stock.
Purchases will be made on a discretionary basis in the open
market or otherwise over a period of time as determined by
management subject to market conditions, applicable legal
requirements and other factors.
3. EXTRAORDINARY LOSS
In June 2001, the Company repaid all debt, incurring an
extraordinary loss on the early retirement of debt of $0.8
million ($0.5 million after tax).
4. INCOME TAXES
In connection with the initial public offering, the Company
became subject to corporate level taxation and recorded a $2.6
million charge based upon cumulative book and tax basis
differences at the date of change in taxpayer status. In
addition, the Company recorded a $0.3 million provision (a 35%
effective tax rate) attributable to operating earnings after the
initial public offering. From 1997 until the initial public
offering the Company had not been subject to income taxes.
5. PURCHASE OF THE MIDNIGHT RIDER
In June 2001, the Company purchased an existing pipelay/bury
barge, the BH-400 (renamed the Midnight Rider), for $9.5 million.
This barge is presently undergoing a required drydocking and is
expected to be placed into service by September 2001.
6. EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standard
("SFAS") No. 128, "Earnings per Share." Basic earnings per share
is calculated by dividing income attributable to common
stockholders by the weighted-average number of common shares
outstanding for the applicable period, without adjustment for
potential common shares outstanding in the form of options,
warrants, convertible securities or contingent stock agreements.
For calculation of diluted earnings per share, the number of
common shares outstanding are increased (if deemed dilutive) by
the weighted-average number of additional common shares that would
have been outstanding if the dilutive potential common shares had
been issued, determined using the treasury stock method where
appropriate.
Common stock equivalents (related to stock options) excluded from
the calculation of diluted loss per share were 83,333 shares and
39,000 shares in the second quarters of 2001 and 2000,
respectively, and 41,667 shares and 39,000 shares in the first
six months of 2001 and 2000, respectively, because they were anti-
dilutive. None of the predecessor convertible preferred units
were considered in the calculation of diluted earnings per share
(prior to their being converted to common stock) because of their
anti-dilutive effect.
7. NEW ACCOUNTING STANDARD
In July 2001, the Financial Accounting Standards Board issued
SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective for fiscal years beginning after June 15, 2002. This
statement will require the Company to record the fair value of
liabilities related to future asset retirement obligations in the
period the obligation is incurred. The Company expects to adopt
SFAS No. 143 on January 1, 2003. Upon adoption, the Company will
be required to recognize cumulative transition amounts for
existing asset retirement obligation liabilities. The Company
has not yet determined the transition amounts.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our
Consolidated Financial Statements and Management's Discussion and
Analysis contained in our Registration Statement on Form S-1
(Registration No. 333-54120), relating to our initial public
offering, and the unaudited interim consolidated financial
statements and related notes contained in Item 1 above.
This Quarterly Report on Form 10-Q contains forward looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934 concerning, among other things our
prospects, expected revenues, expenses and profits, developments
and business strategies for our operations all of which are
subject to certain risks, uncertainties and assumptions. Our
actual results may differ materially from those expressed or
implied. Accordingly, there is no assurance that our expectations
will be realized. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
our Registration Statement on Form S-1 (Registration No. 333-
54120) under the caption "Risk factors."
GENERAL
We provide subsea construction services in connection with the
infield development of offshore oil and natural gas reservoirs.
We are a leading service provider in our market niche of
installing and maintaining small diameter flowlines and related
infrastructure associated with the development of offshore oil
and natural gas reserves on the Continental Shelf of the Gulf of
Mexico (the "Shelf"). Over the last three years, we have
expanded our operations, capabilities and management expertise to
enable us to provide deepwater services analogous to the services
we provide on the Shelf.
Since 1997, we have increased the size of our fleet from three to
nine construction and service vessels. In 1998, we added two
diving support vessels and one supply/diving support vessel. In
the first quarter of 2000, we added one fully redundant
dynamically positioned, or DP-2, pipelay/bury barge and one DP-2
subsea construction vessel. In June 2001, we purchased a
pipelay/bury barge, the BH-400 (renamed the Midnight Rider),
which will increase our capabilities on the Shelf and is expected
to be placed into service by September 2001. We also have a
contract to construct a new generation DP-2 vessel (the Midnight
Warrior) for deepwater pipelay and subsea construction. As part
of that construction contract, we have an option from the
shipyard to construct a sister vessel. We continue to actively
seek opportunities to expand our fleet either through
construction or acquisition of vessels.
FACTORS AFFECTING RESULTS OF OPERATIONS
The demand for subsea construction services primarily depends on
the prices of oil and natural gas. These prices reflect the
general condition of the industry and influence our customers'
willingness to spend capital to develop oil and natural gas
reservoirs. In addition to the prices of oil and natural gas, we
use the following leading indicators, among others, to forecast
the demand for our services:
* the offshore mobile rig count and jack-up rig count;
* forecasts of capital expenditures by major and independent
oil and gas companies;
* the recent lease sale activity levels; and
* the expiration dates of existing Gulf of Mexico leases.
Even when demand for subsea construction services is strong,
several factors may affect our profitability, including the
following:
* competition;
* equipment and labor productivity;
* weather conditions;
* contract estimating uncertainties; and
* other risks inherent in marine construction.
Although greatly influenced by overall market conditions, our
fleet-wide utilization is generally lower during the first half
of the year because of winter weather conditions in the Gulf of
Mexico. Accordingly, we endeavor to schedule our drydock
inspections and routine and preventative maintenance during this
period. Additionally, during the first quarter, a substantial
number of our customers finalize capital budgets and solicit bids
for construction projects. For this reason, individual
quarterly/interim results are not necessarily indicative of the
expected results for any given year.
In the life of an offshore field, capital is allocated to the
development of a well following successful drilling activities.
The time that elapses between a successfully drilled well and the
development phase, in which we participate, varies depending on
the water depth of the field. On the Shelf, demand for our
services generally follows successful drilling activities by
three to 12 months. We have noticed that demand for pipeline
installation for deepwater projects exceeding 1,000 feet of water
depth generally follows initial exploration drilling activities
by at least three years. These deepwater installations typically
require much more engineering design effort than is the case with
Shelf installations.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2001 Compared to the Quarter Ended June
30, 2000
Revenues. Revenues were $14.3 million for the three months ended
June 30, 2001 compared to $11.0 million for the three months
ended June 30, 2000, an increase of 30%. Our second-quarter 2001
fleet-wide working days rose 2%, with an average vessel
utilization of 70%, up from 68% achieved for the year-ago
quarter. The general increase in offshore construction activity
since mid-2000 has allowed second-quarter 2001 average pricing
levels for our services to rise more than 30% over average levels
for the second quarter of 2000.
Late in the second quarter of 2001, domestic natural gas and
crude oil prices began to decline. This created caution
throughout the industry, with a resultant dampening of market
growth, and we started to note delays in the completion of
shallow water drilling projects. However, there are more jack-up
drilling rigs operating than was the case during the last market
peak, in June of 1997, when 128 jack-up drilling rigs were in
operation. We believe that these working rigs are simply taking
longer to complete individual wells. Further, we believe a
higher proportion of the wells being completed are development
wells at remote locations, wells which typically require new
pipeline infrastructure to transport product. Recently, crude
oil and natural gas prices have improved marginally as a result
of OPEC curtailments and early indications of increasing domestic
natural gas consumption. Taken together, we believe that these
positive developments suggest improved business activity for us
in the latter half of 2001 and into 2002. Despite this
anticipated improvement in construction activity, we, and others,
expect the offshore construction market through the end of the
year to remain extremely price competitive. From an activity
standpoint, we expect a relatively short period of moderate
growth followed by a resumption of stronger growth beginning late
in the third quarter of this year.
Gross Profit. Gross profit, which is revenues less cost of
sales, was $4.1 million (28.7% of revenues) for the three months
ended June 30, 2001 compared to $2.5 million (22.5% of revenues)
for the three months ended June 30, 2000, an increase of 65%.
This increase primarily resulted from improved pricing levels for
our services.
Depreciation and Amortization. Depreciation and amortization
expense was $1.5 million for the three months ended June 30, 2001
compared to $1.2 million for the three months ended June 30,
2000, an increase of 27%. This increase primarily reflects the
amortization of two drydockings incurred during 2000.
General and Administrative Expenses. General and administrative
expenses totaled $1.1 million (7.5% of revenues) for the three
months ended June 30, 2001 compared to $1.0 million (8.6% of
revenues) for the three months ended June 30, 2000, an increase
of 12%. This increase was primarily caused by greater sales and
related promotional costs and the introduction of two additional
vessels during the year 2000. We anticipate that total general
and administrative expenses will continue to be impacted by costs
related to our fleet expansion, our efforts to strengthen our
deepwater activity levels and the additional costs associated
with being a public entity.
Interest Expense, Net. Net interest expense was $0.6 million for
the three months ended June 30, 2001 compared to $1.0 million for
the three months ended June 30, 2000, a decrease of 43%. This
decline reflects the repayment of debt in mid-June of 2001
following our initial public offering.
Income Taxes. In connection with the initial public offering,
we became subject to corporate level taxation and recorded a $2.6
million charge based upon cumulative book and tax basis
differences at the date of change in taxpayer status. In
addition, we recorded a $0.3 million provision (a 35% effective
tax rate) attributable to operating earnings after the initial
public offering. From 1997 until the initial public offering we
had not been subject to income taxes.
Extraordinary Loss. In June 2001, we repaid our debt and
recognized a $0.5 million after-tax charge resulting from related
prepayment penalties.
Net Income (Loss) Attributable to Common Stockholders. Net loss
to common stockholders for the three months ended June 30, 2001
was $2.5 million, compared with a net loss of $0.7 million for
the three months ended June 30, 2000.
Six Months Ended June 30, 2001 Compared to the Six Months Ended
June 30, 2000
Revenues. Revenues were $28.8 million for the six months ended
June 30, 2001 compared to $17.7 million for the six months ended
June 30, 2000, an increase of 63%. We were able to increase our
fleet-wide working days 24% primarily because of strengthening in
the offshore construction market allowing us to achieve an
average vessel utilization of 69%, up from 57% achieved for the
first half of 2000. This increased activity level allowed
average pricing levels for our services to rise 30% over average
levels for the first half of 2000.
Gross Profit. Gross profit was $8.2 million (28.5% of revenues)
for the six months ended June 30, 2001 compared to $3.3 million
(18.6% of revenues) for the six months ended June 30, 2000, an
increase of 150%. This increase resulted from the expanded
revenue base and improved pricing levels for our services.
Depreciation and Amortization. Depreciation and amortization
expense was $3.0 million for the six months ended June 30, 2001
compared to $2.3 million for the six months ended June 30, 2000,
an increase of 26%. This increase primarily reflects the
amortization of two drydockings incurred during 2000.
General and Administrative Expenses. General and administrative
expenses totaled $2.0 million (7.0% of revenues) for the six
months ended June 30, 2001 compared to $1.8 million (10.3% of
revenues) for the six months ended June 30, 2000, an increase of
11%. This increase was primarily caused by greater sales and
related promotional costs and the introduction of two additional
vessels during the year 2000.
Interest Expense, Net. Net interest expense was $1.5 million for
the six months ended June 30, 2001 compared to $1.9 million for
the six months ended June 30, 2000, a decrease of 23%. This
decline reflects the repayment of debt in mid-June of 2001
following the initial public offering.
Income Taxes. See discussion above.
Extraordinary Loss. See discussion above.
Net Income (Loss) Attributable to Common Stockholders. Net loss
to common stockholders for the six months ended June 30, 2001 was
$1.8 million, compared with a net loss of $2.9 million for the
six months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, we completed an initial public offering of 5.0
million shares of our common stock for gross proceeds of $80.0
million; net proceeds were $72.6 million after underwriting
commission and discounts and expenses totaling $7.4 million. We
subsequently retired all debt, purchased the Midnight Rider and
initiated the detailed engineering for the construction of the
Midnight Warrior, discussed below. The balance of the proceeds,
$29.4 million at June 30, 2001, is being invested in short-term
securities, pending its targeted use for our deepwater expansion
program (discussed below) and general corporate purposes.
Concurrent with our initial public offering, the predecessor
company's $5.3 million of preferred membership units were
exchanged for 828,333 shares of our common stock.
Historically, our capital requirements have been primarily for
the acquisition and improvement of our vessels and other related
equipment. Capital expenditures totaled $9.9 million for the six
months ended June 30, 2001, primarily representing the purchase
of an additional pipelay/bury barge, the Midnight Rider. In the
future, we expect to contribute approximately $9 million
representing our permanent equity in the Midnight Warrior to our
Merchant Marine Capital Construction Fund account to take
advantage of the income tax timing benefits associated with this
program. In addition, we expect to fund our equity requirement
for any future qualified investments in the same manner. We
currently estimate capital expenditures for the remainder of 2001
to be $17 million, $35 million for 2002 and $22 million for
2003, primarily representing the construction of, and the
equipment and support facilities associated with, the Midnight
Warrior. These estimates exclude a total of approximately $4
million for routine dry-dock inspections of our vessels to be
incurred over these three periods. If we were to exercise our
option to construct the Midnight Warrior II sister ship, we would
increase our estimated capital expenditures by approximately $75
million, primarily incurring those costs in 2002 and 2003. This
option terminates on August 15, 2002.
We have an $8.0 million revolving line of credit with a bank,
which bears incurs interest at a rate of 3.0% plus the 30-day
LIBOR rate. At June 30, 2001, no borrowings were outstanding
under the revolving line of credit. Amounts outstanding under
the revolving line of credit may not exceed 80% of eligible trade
accounts receivable. The revolving line of credit matures on
November 12, 2001. We expect to renegotiate our revolving line
of credit to include a greater maximum advance limit and an
extended maturity date or replace it.
On August 8, 2001, Board of Directors approved the repurchase of
up to $5.0 million of the Company's outstanding common stock.
Purchases will be made on a discretionary basis in the open
market or otherwise over a period of time as determined by
management subject to market conditions, applicable legal
requirements and other factors.
Consistent with the focus towards investing in new technology,
including deepwater capable assets such as the Midnight Warrior
and the Midnight Warrior II sister ship discussed below, two of
the last three vessels added to our fleet have been DP-2
deepwater capable. Through June 30, 2001 we have expended
approximately $23 million (in combined capital expenditures and
operating lease payments) for these vessels, with an additional
estimated $12 million to be incurred in associated operating
lease payments through early 2005.
Upon completion of our initial public offering, we confirmed the
Midnight Warrior's technical specifications and began the
detailed engineering phase of the vessel and its pipelay
equipment. This has resulted in several meetings with the naval
architect, the designated shipyard and the major equipment
suppliers. As part of these discussions, we have extended our
contract with the shipyard until November 15, 2001. We expect to
submit a complete closing package to the U.S. Department of
Transportation Maritime Administration ("MARAD") by the end of
August 2001 in order to allow them adequate time for review prior
to MARAD's commitment expiration (discussed below).
MARAD has issued a commitment to us, subject to customary
conditions, to guarantee a 20-year financing covering 87.5% of
the cost of constructing the Midnight Warrior. MARAD has the
option to terminate the commitment if we have not placed a
portion of the permanent long-term financing, as authorized by
MARAD, by November 6, 2001. In the past, MARAD has not
terminated commitments where the applicant was making
demonstrable progress towards a closing. We cannot assure you
that we will be able to demonstrate sufficient progress or that
MARAD will not terminate its commitment after November 6, 2001.
Although we have not yet entered into the underlying financing
arrangements, we believe that this MARAD commitment will provide
us with more attractive financing terms than could otherwise be
achieved. To the extent any of our future vessel construction
qualifies for a MARAD guarantee, we plan to apply to use this
program.
If MARAD should terminate its commitment, we intend to proceed
with the construction of the Midnight Warrior using alternative
financing. Any such alternative financing would be on terms less
favorable than MARAD-guaranteed financing which would result in
higher interest costs to us. We cannot assure you that we will
be able to obtain any alternative financing or that any
alternative financing that we are able to obtain will not require
a greater equity investment by us in the vessel or provide a
shorter maturity period. If we were not able to obtain
alternative financing, our ability to implement our business
strategy will be negatively impacted.
We currently are seeking at least $50 million from commercial
lenders to provide interim construction financing for the
Midnight Warrior pending the completion of the vessel and long-
term financing guaranteed by MARAD. Our discussions regarding
interim financing for the Midnight Warrior have been limited to
preliminary meetings with various commercial lenders.
Our primary liquidity needs going forward are to fund identified
vessel additions, to provide improvements associated with our
expansion program, to provide working capital and to acquire our
common stock (if any) on a discretionary basis. We intend to
continue to expand our operating capabilities. Such an expansion
may include the acquisition of existing vessels or of other
businesses consistent with our deepwater expansion strategy,
although we are engaged in no active discussions related to such
acquisitions at the present time.
We believe that our existing cash and short-term investments,
cash flow from operations and available borrowings under our
revolving line of credit will be sufficient to meet our existing
liquidity needs for the near term. We also believe that our
existing cash and short-term investments and the interim
construction financing we are seeking, in addition to our cash
flow from operations, will be sufficient to complete our
identified growth plans. If our plans or assumptions change or
prove to be inaccurate, if we cannot obtain interim construction
financing on satisfactory terms or if we make any additional
acquisitions of existing vessels or other businesses, we may need
to raise additional capital. We may not be able to raise
additional funds, or we may not be able to raise such funds on
favorable terms.
NEW ACCOUNTING STANDARD
In July 2001, the Financial Accounting Standards Board issued
SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective for fiscal years beginning after June 15, 2002. This
statement will require us to record the fair value of liabilities
related to future asset retirement obligations in the period the
obligation is incurred. We expect to adopt SFAS No. 143 on
January 1, 2003. Upon adoption, we will be required to recognize
cumulative transition amounts for existing asset retirement
obligation liabilities. We have not yet determined the
transition amounts.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
We are exposed to certain market risks that are inherent in the
financial instruments arising from transactions that we enter
into in the normal course of our business. In the past, it has
not been our practice to enter into derivative financial
instrument transactions to mange or reduce market risks or for
speculative purposes, but our business is subject to interest
rate risk on our debt obligations. Our revolving credit facility
has a variable rate which results in potential exposure to
interest rate risk from a cash flow perspective. The fair value
of debt with a fixed interest rate generally will increase as
interest rates fall, given consistency in all other factors.
Conversely, the fair value of fixed rate debt will generally
decrease as interest rates rise.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On June 6, 2001 the Securities and Exchange Commission declared
our Registration Statement on Form S-1 (Registration No. 333-
54120) effective. That day we sold 5.0 million shares of common
stock, par value $0.01 per share, in an Initial Public Offering
at $16.00 per share, raising gross proceeds of $80.0 million.
The underwriting discount was $1.12 per share or $5.6 million.
Expenses of the Initial Public Offering payable by us, excluding
underwriting discounts and commissions, totaled $1.8 million.
The net offering proceeds to us after deducting such expenses and
underwriting discounts and commissions totaled $72.6 million.
The managing underwriters in the offering were UBS Warburg LLC,
CIBC World Markets Corp. and Howard Weil, a division of Legg
Mason Wood Walker, Inc.
With the net proceeds received in the Initial Public Offering, we
paid $25.8 million to Transamerica (including prepayment fees)
and $5.5 million to Regions Bank, as repayment of all outstanding
indebtedness, purchased the Midnight Rider for $9.5 million and
used $2.4 million for general corporate purposes. The balance of
the proceeds, $29.4 million at June 30, 2001, is being invested in
short-term securities, pending their targeted use for our deepwater
expansion program and general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed as part of this report are listed below:
None.
(b) Reports on Form 8-K.
A current report on Form 8-K was filed with the Securities and
Exchange Commission on June 6, 2001, reporting that we entered
into a Registration Rights Agreement with Friends of Lime Rock LP
and Riverside Investments LLC relating to the registration of
certain shares of our common stock, par value $0.01 per share.
SIGNATURES
Pursuant to the requirements 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.
Torch Offshore, Inc.
Date August 14, 2001 William J. Blackwell
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William J. Blackwell
Chief Financial Officer and Director
(Principal Financial and Chief
Accounting Officer)