UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
___________
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
Incorporation or Organization) Identification No.)
401 Whitney Avenue, Suite 400
Gretna, Louisiana 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 such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated
filer as defined in Rule 12b-2 of the Securities Exchange Act of
1934. Yes [ ] No [x]
The number of shares of the registrant's common stock outstanding
as of May 14, 2004 was 12,638,990, par value $0.01 per share.
TORCH OFFSHORE, INC.
TABLE OF CONTENTS
Page
Part I. Financial Information ----
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets as
of March 31, 2004 and December 31, 2003.. 3
Condensed Consolidated Statements of
Operations for the Three Months
Ended March 31, 2004 and 2003............ 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 2004 and 2003.................. 5
Notes to Condensed Consolidated Financial
Statements............................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................ 26
Item 4. Controls and Procedures.................... 26
Part II. Other Information
Item 1. Legal Proceedings.......................... 26
Item 2. Changes in Securities and Use of Proceeds.. 27
Item 6. Exhibits and Reports on Form 8-K........... 27
Signature.................................. 28
Exhibit Index.............................. 29
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2004 2003
--------- ------------
(Unaudited) (see Note 1)
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 41 $ 41
Accounts receivable --
Trade, less allowance for
doubtful accounts 8,849 20,479
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,321 --
Prepaid expenses and other 2,877 3,561
-------- --------
Total current assets 13,088 24,081
PROPERTY AND EQUIPMENT, at cost,
less accumulated depreciation 158,706 143,266
DEFERRED DRYDOCKING CHARGES,
less accumulated amortization 490 807
SECURITY DEPOSIT (Note 6) 1,250 1,250
OTHER ASSETS 513 502
-------- --------
Total assets $174,047 $169,906
======== ========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable -- trade $ 13,483 $ 15,148
Accrued expenses 4,749 4,597
Accrued payroll and related taxes 663 819
Financed insurance premiums 1,338 1,832
Billings in excess of costs and
estimated earnings on
uncompleted contracts -- 459
Finance Facility (Note 6) 59,884 45,639
Current portion of long-term
debt (Note 6) 3,376 3,396
Receivable line of credit (Note 6) 5,864 7,227
-------- --------
Total current liabilities 89,357 79,117
LONG-TERM DEBT, less current
portion (Note 6) 19,211 20,057
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY 65,479 70,732
-------- --------
Total liabilities and
stockholders' equity $174,047 $169,906
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Revenues $ 11,842 $ 17,029
Cost of revenues:
Cost of sales 13,244 13,745
Depreciation and amortization 2,109 1,827
General and administrative
expenses 1,615 1,355
Other operating expense 160 --
-------- --------
Total cost of revenues 17,128 16,927
-------- --------
Operating income (loss) (5,286) 102
-------- --------
Other income:
Interest income -- 1
-------- --------
Total other income -- 1
-------- --------
Income (loss) before income
taxes (5,286) 103
Income tax expense -- (36)
-------- --------
Net income (loss) $ (5,286) $ 67
======== ========
Net income (loss) per common
share (Note 4):
Basic $ (0.42) $ 0.01
======== ========
Diluted $ (0.42) $ 0.01
======== ========
Weighted average common stock
outstanding:
Basic 12,639 12,635
======== ========
Diluted 12,639 12,641
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Cash flows provided by operating
activities:
Net income (loss) $(5,286) $ 67
Depreciation and amortization 2,109 1,827
Deferred income tax provision -- 36
Deferred drydocking costs incurred (85) --
(Increase) decrease in working capital:
Accounts receivable 11,630 7,780
Costs and estimated earnings in excess
of billings on uncompleted contracts (1,780) (252)
Prepaid expenses, net of financed
portion 190 (383)
Accounts payable - trade (1,665) (2,874)
Accrued payroll and related taxes (156) 449
Accrued expenses and other 207 (559)
------- ------
Net cash provided by operating
activities 5,164 6,091
------- ------
Cash flows used in investing
activities:
Purchases of property and equipment (17,146) (9,345)
------- ------
Net cash used in investing activities (17,146) (9,345)
------- ------
Cash flows provided by financing
activities:
Net payments on receivable line of
credit (1,363) (4,271)
Net proceeds from long-term debt 13,345 7,998
------- ------
Net cash provided by financing
activities 11,982 3,727
------- ------
Net change in cash and cash equivalents -- 473
Cash and cash equivalents at beginning
of period 41 327
------- ------
Cash and cash equivalents at end of
period $ 41 $ 800
======= ======
Interest paid (net of amounts
capitalized) $ -- $ --
======= ======
Income taxes paid $ -- $ --
======= ======
Supplementary non-cash investing
activities:
Purchase of Midnight Wrangler $ -- $(9,731)
======= ======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
TORCH OFFSHORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation:
The interim condensed consolidated financial statements included
herein have been prepared by Torch Offshore, Inc. (a Delaware
corporation) and are unaudited, except for the balance sheet at
December 31, 2003, which has been prepared from the Company's
previously audited financial statements. The balance sheet at
December 31, 2003 has been derived from the audited financial
statements at that date but does not include all of the
information and footnotes required by accounting principles
generally accepted in the United States (U.S. GAAP) for complete
financial statements. The condensed consolidated financial
statements of Torch Offshore, Inc. include its wholly-owned
subsidiaries Torch Offshore, L.L.C., Torch Express L.L.C., and
Torch Venture L.L.C. (collectively, the "Company"). 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
financial statements prepared in accordance with U.S. GAAP have
been condensed or omitted pursuant to rules and regulations
governing interim period reporting. The results for the three
months ended March 31, 2004 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 Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.
The Company provides integrated pipeline installation, subsea
construction and support services to the offshore oil and natural
gas industry, primarily in the United States Gulf of Mexico (the
"Gulf of Mexico"). The Company's focus has been providing
services primarily for oil and natural gas production in water
depths of 20 to 300 feet in the Gulf of Mexico (the "Shelf").
Over the past few years, the Company has expanded its operations,
fleet capabilities and management expertise in order to enable it
to provide services analogous to those services it provides on
the Shelf in water depths up to 10,000 feet on a global basis.
The Company's financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. As further discussed in Note 2, the Company faces
significant financial liquidity issues in 2004 as a result of
adverse business conditions in its operating sector and as a
result of significant current debt obligations due in 2004
associated with the construction financing of the Midnight
Express, the construction progress for which has experienced
certain unbudgeted cost overruns and unexpected delays in the
timing of scheduled construction completion. In addition, earlier
in 2004 the Company was not in compliance with certain covenants
of its loan agreements and had to obtain forbearance waivers and
amendments from its lenders for such matters of noncompliance.
These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in
regard to these matters, which involve inherent uncertainties and
conditions beyond the Company's control, are also discussed in
Note 2. The accompanying financial statements have been prepared
on the basis that the Company will continue as a going concern
and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from
the outcome of these uncertainties.
2. Capital Resources and Liquidity:
As discussed in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003, the Company faces significant
financial liquidity issues in 2004 as a result of adverse
business conditions in its industry, significant costs of
expanding the Company's fleet of DP-2 vessels, the recent
arbitration ruling in the Midnight Hunter case, and other events
with a direct impact on the Company's earnings. The accompanying
financial statements reflect a net loss of $5.3 million for the
first quarter of 2004 and a working capital deficit of $76.3
million as of March 31, 2004, which includes the $59.9 million
amount due under the Company's Finance Facility to build the
Midnight Express. In addition, the Company generated a net loss
of $9.2 million for the year ended December 31, 2003, $6.8
million of which was realized in the fourth fiscal quarter of
2003.
Management of the Company has taken steps to address its
requirements for financial liquidity and has developed a
financial plan that it believes will provide the Company
sufficient financial resources to conduct its business plans for
the remainder of 2004 and beyond. This business plan involves
completing the conversion of the Midnight Express within current
financial constraints, raising additional capital to fund working
capital and debt obligation requirements, potentially disposing
of certain vessels and entering into an agreement(s) for
utilization of the Midnight Express upon completion of its sea
trials. Success in this business plan is essential for the
Company to continue its operations in the future and to meet both
its near-term and long-term financial obligations.
The steps taken by the Company in early 2004 and management's
plans to address the Company's financial liquidity requirements
are described below.
Conversion of the Midnight Express
In April 2004, the Company entered into an agreement with Regions
Bank and Export Development Canada (EDC) for an additional $19.0
million of funding under the Finance Facility (see Note 6) to
complete the conversion of the Midnight Express. In addition,
they have agreed to extend the time frame of the construction
period of the Finance Facility from June 30, 2004 to October 31,
2004 at which point the construction period financing will
convert to term status. Regions Bank and EDC have also amended
certain covenant obligations that the Company must meet in 2004.
The consolidated current ratio (as defined) covenant is now at
0.70 to 1 for all four quarters of 2004.
The Company has also come to a settlement with Davie Maritime,
Inc., the shipyard that is completing the conversion of the
Midnight Express in Quebec, Canada, in the amount of $8.3
million. This settlement covers all of the claims made by Davie
Maritime, Inc. against the Company. Since the initial contract
signing, the shipyard contract has grown from $37.1 million to
$52.6 million as of May 14, 2004 of which $7.2 million has been
approved change orders and $8.3 million has resulted from an
increase in price. The agreement also calls for a final delivery
date of the vessel of May 21, 2004. Should Davie Maritime, Inc.
not deliver the vessel on May 21, 2004, or a later date which
could arise due to permissible delays, Davie Maritime, Inc. will
incur liquidated damages following a seven-day grace period
ranging from $25,000 to $50,000 per day based on the number of
days delinquent in delivery of the vessel not to exceed 10% of
the total value of the contract. As of May 14, 2004, the expected
vessel delivery date remains late May 2004 and the vessel is
expected to commence its DP-2 sea trials in the North Atlantic
Ocean shortly thereafter.
After the Midnight Express leaves the Davie Maritime, Inc.
shipyard, the Company expects an additional 90 days before the
vessel is ready to enter the Company's active fleet. During this
90-day period, the Company will install the patented pipelay
system at the manufacturer's operation in Amsterdam. In addition,
the Company will install the special-built 500-ton crane. Further
outfitting and installation of the pipe handling system will
occur in the Gulf of Mexico, as will the final pipelay system sea
trials for the vessel. The Company expects the vessel to enter
the active fleet in the latter portion of the third quarter of
2004.
Utilization of the Midnight Express
In August 2002, we developed a deepwater group to initiate our
entrance into the deepwater market using the Midnight Hunter and
Midnight Wrangler. The group has completed various pipelay
projects and subsea construction projects in the deepwater. This
group has also been dedicated to the marketing of the Midnight
Express. To date, we have submitted the Midnight Express to
multiple customers on various types of bids. We are in
discussions with several customers to perform work in the last
quarter of 2004 in the Gulf of Mexico as well as international
work in 2005. There is no assurance that such contracts or
charters will be awarded to the Company.
Collection of Disputed Receivable
In March 2004, the Company settled with Stolt Offshore, Inc.
(Stolt) in the amount of $6.2 million for recovery of work the
Company completed for Stolt in relation to the Boston Hubline
project in the first half of 2003. The Company collected these
funds in March 2004 and used them for general operating purposes
and for reducing amounts due under the Company's receivable line
of credit.
Additional Capital
The Company is also seeking other means of raising funds,
including the private and public equity markets. The Company's
ability to raise additional capital will depend on the status of
capital and industry markets. Raising additional capital during
2004 is a requirement for the Company to continue to conduct its
operations and meet its debt obligations. Failure to do so will
have a significant adverse impact on the Company's liquidity. The
amended Finance Facility specifies the Company is to raise
approximately $10.0 million by June 30, 2005 and requires that
the first $10.0 million of proceeds associated with such an
offering be used to reduce amounts outstanding under the Finance
Facility.
Disposal of Vessels
In connection with the Company's efforts to raise funds, the
Company is also pursuing the sale of certain vessels into foreign
markets either through charters to operators in these foreign
markets or the outright sale of these vessels. The Company has
had discussions with various parties about such a transaction;
however, no final agreements have been tendered. There is no
assurance that the Company will reach such an agreement and
complete a transaction during 2004. The Finance Facility
specifies that any proceeds from the sale of these vessels is
pledged to them, including the Midnight Carrier, Midnight Star,
Midnight Dancer, Midnight Fox, Midnight Brave and Midnight Rider.
The proceeds from such a sale are to be used to repay the amounts
due under the Finance Facility.
________________________________
Consummation of the above transactions is expected to occur
during 2004. Management believes that these transactions would
provide sufficient funding for the Company's debt and working
capital requirements for 2004. Because these transactions are not
complete, they involve inherent uncertainties, including
uncertainties beyond the Company's control. As a result, the
Company's independent public accountants, after considering the
plans described above, advised the Company that they had reached
a conclusion that such uncertainties raise substantial doubt
regarding the Company's ability to continue as a going concern
and as required by auditing standards generally accepted in the
United States, included in their auditors' report on the
Company's 2003 financial statements an explanatory paragraph to
reflect that conclusion.
Management believes that completion of the transactions described
above will provide sufficient financial resources to conduct the
Company's business plans during 2004. However, there are no
assurances that the Company will successfully accomplish the
objectives of such plans.
For more information regarding the Company's business plan, see
Note 14 to the Financial Statements located in Item 8 of the
Company's 2003 Form 10-K as filed with the Securities and
Exchange Commission.
3. Stockholders' Equity:
Treasury Stock - In August 2001, the Company's Board of Directors
approved the repurchase of up to $5.0 million of the Company's
outstanding common stock. Purchases are 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. As of March 31,
2004, 712,471 shares had been repurchased at a total cost of $4.3
million. There were no purchases made in the first quarter of
2004.
Stock Option Plan - The Company has a long-term incentive plan
under which 3.0 million shares of the Company's common stock are
authorized to be granted to employees and affiliates. The awards
can be in the form of options, stock, phantom stock, performance-
based stock or stock appreciation rights. As of March 31, 2004,
stock options covering 438,173 shares of common stock with a
weighted average price of $9.82 per share, and 44,687 shares of
restricted stock, both vesting generally over five years, were
outstanding.
4. Earnings Per Share:
The Company follows Statement of Financial Accounting Standards
(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 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 earnings per share, because they were
anti-dilutive, were approximately 483,000 shares and 350,000
shares for the first quarters of 2004 and 2003, respectively.
5. Stock-Based Compensation:
The Company accounts for its stock-based compensation in relation
to the 2001 Long-Term Incentive Plan in accordance with
Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." However, SFAS No. 123, "Accounting
for Stock-Based Compensation," and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An
Amendment of SFAS No. 123", permits the intrinsic value-based
method prescribed by APB No. 25, but requires additional
disclosures, including pro forma calculations of earnings and net
earnings per share as if the fair-value method of accounting
prescribed by SFAS No. 123 had been applied. If compensation
expense had been determined using the fair-value method in SFAS
No. 123, the Company's net income (loss) and earnings (loss) per
share would have been as shown in the pro forma amounts below:
Three Months Ended
(in thousands, except per share data) March 31,
------------------
2004 2003
---- ----
Net income (loss), as reported $(5,286) $ 67
Add: Stock-based compensation
expense included in net income
(loss), net of tax 33 47
Less: Stock-based compensation
expense using fair value method,
net of tax (183) (135)
------- ------
Pro forma net loss $(5,436) $ (21)
======= =======
Basic income (loss) per share $ (0.42) $ 0.01
Pro forma basic loss per share $ (0.43) $ (0.00)
Diluted income (loss) per share $ (0.42) $ 0.01
Pro forma diluted loss per share $ (0.43) $ (0.00)
6. Long-Term Debt:
In July 2002, the Company entered into a $35.0 million bank
facility (the "Bank Facility") consisting of a $25.0 million
asset-based five-year revolving credit facility and a $10.0
million accounts receivable-based working capital facility with
Regions Bank. The Company's ability to use the asset-based five-
year revolving credit facility was suspended in connection with
our financing of the Midnight Express and later terminated in
April 2004 as part of the $19.0 million increase to the
construction finance facility discussed below. The Company
continues to have available the accounts receivable-based working
capital facility from Regions Bank. In December 2003, the
accounts receivable-based working capital facility was increased
to a limit of $15.0 million. Amounts outstanding under the
accounts receivable-based working capital facility may not exceed
85% of eligible trade accounts receivable. The Company had $5.9
million outstanding under the $15.0 million accounts receivable-
based working capital facility as of March 31, 2004. In addition,
the Company issued a $1.5 million standby letter of credit as
security for the charter payments due under the charter agreement
for the Midnight Hunter against the accounts receivable-based
working capital facility. In July 2003, this letter of credit was
drawn by Cable Shipping, Inc., the owners of the Midnight Hunter.
The Company recorded the $1.5 million as a liability in full on
the balance sheet during the second quarter of 2003. The Company
had an available borrowing capacity of up to an additional $1.0
million under the $15.0 million accounts receivable-based working
capital facility based upon eligible receivables at March 31,
2004. The $15.0 million accounts receivable-based working capital
facility matures on July 1, 2004 and is renewable on an annual
basis.
In April 2003, the Company finalized a credit line maturing June
30, 2004 to finance the conversion of the Midnight Express (the
"Finance Facility"). Amounts outstanding under the credit line
will convert into a three-year term loan facility upon completion
of the conversion of the Midnight Express. The Finance Facility
commitment is equally provided by Regions Bank and Export
Development Canada (EDC) ($30.0 million participation by each).
In April 2004, the Company increased the credit line from Regions
Bank and EDC by $19.0 million to $79.0 million ($39.5 million
participation by each) and amended the maturity to October 31,
2004. The amounts outstanding under the credit line will convert
into two separate loans at the earlier of the facility's maturity
date or completion of the conversion of the Midnight Express. The
first loan represents the original $60.0 million borrowing and
will convert to a three-year term loan facility. The second loan
is for the additional $19.0 million and will convert to a twenty-
month term loan facility maturing on June 30, 2006. In addition,
as part of the increase to the credit facility, the $25.0 million
asset-based five-year revolving credit facility was cancelled as
discussed above. Regions Bank and EDC also have the right to the
first $10.0 million of any equity offering, to the proceeds from
the sale of any of the mortgaged vessels (see discussion below)
and to the interest rate buy-down expected from Industry Canada
upon conversion of the credit line to term status later in 2004.
The interest rate for the $60.0 million portion of the
construction financing is LIBOR plus a spread of 3.25% to 3.50%
based upon the consolidated leverage ratio of the Company. The
interest rate for the $19.0 million portion of the construction
financing is LIBOR plus 4.00%. In addition, the Company was
charged a 1% origination fee ($190,000) by Regions Bank and EDC
for the addition to the credit line and the interest rate on the
original $60.0 million financing increased to LIBOR plus 4.00%.
The Company is providing collateral in the form of the Midnight
Express as well as a first preferred ship mortgage on the
Midnight Fox, Midnight Star, Midnight Dancer, Midnight Carrier,
Midnight Brave and Midnight Rider. The Company has to adhere to
various conditions including maintaining a tangible net worth of
at least $60.0 million, a minimum debt service coverage ratio of
at least 1.20 to 1, a consolidated leverage ratio of no more than
2.00 to 1 and a consolidated current ratio (defined below) of
1.30 to 1 (see below for details of amendments). The Company is
not allowed to incur additional debt over $8.0 million without
consent from Regions Bank. The Company had $59.9 million
outstanding under the $60.0 million Finance Facility as of March
31, 2004 and capitalized $0.9 million of 2004 interest costs in
the quarter ended March 31, 2004 in relation to the conversion of
the Midnight Express as compared to $0.1 million capitalized in
the first quarter of 2003. The additional $19.0 million was not
available until April 2004, and the funding of the additional
$19.0 million was subject to, among other things, (1) the
completion of certain customary documentation submission
requirements, (2) that no events of default shall have occurred
and be continuing, and (3) no material adverse change in the
properties, assets, liabilities, business, operations, prospects,
income or condition (financial or otherwise) of the Company and
its subsidiaries taken as a whole shall have occurred since the
effective date (April 8, 2004) and be continuing. All of these
conditions were fulfilled and the Company has drawn approximately
$5.0 million as of May 14, 2004 under the $19.0 million facility.
Upon achievement of certain construction completion milestones,
but no later than October 31, 2004, the $79.0 million Finance
Facility will convert to term status. The $60.0 million term loan
facility would then have a three-year term with a 10-year
amortization payment schedule consisting of semi-annual payments
(beginning in the first half of 2005) with a balloon payment at
the end of the three-year term. The interest rate for this
facility is 3.25% over LIBOR. The $19.0 million term loan
facility would then have a twenty-month term with a $6.0 million
principal payment due on June 30, 2005, a $6.0 million principal
payment due on December 30, 2005 and the remaining $7.0 million
principal payment due on June 30, 2006. Interest would be payable
on a monthly basis based on a rate of LIBOR plus 4.00%. Regions
Bank and EDC will require the Company to maintain the same
collateral and covenants as included in the construction
financing depicted above.
In December 2002, the Company entered into a purchase agreement
with Global Marine Systems Limited (Global Marine) for the
Midnight Wrangler at a cost of approximately $10.8 million. The
Company took delivery of the vessel in March 2003. The purchase
of the vessel was financed by Global Marine over a five-year
period with monthly payments, including 7% per annum interest, of
approximately $0.2 million per month plus a $1.0 million payment
at the purchase date in March 2003 and another $1.0 million
payment at the end of the five-year period.
In March 2003, the Company finalized a $9.25 million, seven-year
term loan with General Electric Commercial Equipment Financing
(GE Commercial). The loan was structured so that the Company
received $8.0 million immediately and GE Commercial retained
$1.25 million as a security deposit. The interest rate on the
term loan is the 30-day commercial paper rate plus 2.03% and
includes prepayment penalties of 2% for the first twelve months,
1% for the second twelve months and 0% thereafter. The term loan
is structured to have monthly payments over seven years. The loan
agreement contains the same financial covenants as the Bank
Facility and Finance Facility, as amended, discussed above. The
collateral for the loan is the Midnight Eagle and the security
deposit described above. The Company utilized the proceeds from
the loan to fund the improvements to the Midnight Wrangler and a
portion of the Midnight Express conversion costs.
In December 2003, the Company refinanced the debt used to acquire
the Midnight Wrangler with General Electric Capital Corporation
(GE Capital) by entering into a secured term loan in the
principal amount of $15.0 million. The secured term loan is
structured to have quarterly payments over seven years. The
interest rate on the term loan is 4.25% over LIBOR and the terms
contained an origination discount of 1.50%. The loan agreement
contains various covenants beginning on March 31, 2005, including
a minimum EBITDA (as defined) of $18.5 million, a minimum fixed
charge ratio (as defined) of 1.05 to 1, and a maximum leverage
ratio (as defined) of 5.25 to 1 for the financial quarters ended
in the period from October 1, 2004 through September 30, 2005.
These maximum leverage ratios decline by 0.50 to 1 for each of
the following four years before reaching 3.25 to 1 that applies
for the financial quarters ended from October 1, 2008 and
thereafter. The collateral for the loan is the Midnight Wrangler,
Midnight Runner and Midnight Gator. A final payment was made to
Global Marine in December 2003. This early termination of debt
resulted in a gain to the Company of $0.9 million that is
recorded in the December 31, 2003 financial statements.
Earlier in 2004 the Company was not in compliance with the
current ratio or the debt service coverage ratio requirements
under the Finance Facility (with respect to the December 31, 2003
testing period). As a result, in early April 2004 the Company
obtained forbearance waivers from its lenders and effected
amendments to its loan agreements to provide certain levels of
relief with respect to the required level of minimum coverage as
well as changes related to certain components of the computation
of the minimum current ratio, as defined, and the minimum debt
service coverage ratio, as defined, for the quarterly testing
periods of 2004. As of March 31, 2004, the Company was in
compliance with the financial covenants (as amended in early
April 2004) of the Bank Facility, the Finance Facility and the GE
Commercial term loan. The Company must comply with the amended
consolidated current ratio covenant (as defined) of 0.70 to 1 for
the four quarters of 2004 and then the consolidated current ratio
covenant (as defined) returns to 1.00 to 1 as of March 31, 2005.
There can be no assurance that compliance will be maintained. If
compliance is not maintained, all credit agreements could be
declared to be in default and all amounts outstanding, including
the $19.2 million of debt associated with the Midnight Eagle and
Midnight Wrangler facilities, currently classified as long-term
could be demanded for payment and creditors would have the right
to seize the applicable collateral. The Company's obligations
under its credit agreements are secured by substantially all of
the Company's assets. Any defaults under the credit agreements
would adversely impact the Company's ability to sustain its
operations in the normal course and have a material effect on its
financial condition and results of operations.
7. Income Taxes:
Income Taxes - SFAS 109, "Accounting for Income Taxes," provides
for the weighing of positive and negative evidence in determining
whether it is more likely than not that a deferred tax asset is
recoverable. The Company has incurred losses in 2001 and 2003 and
has losses on an aggregate basis for the three-year period ended
December 31, 2003. In addition, the Company has incurred losses
in the quarter ended March 31, 2004. Deferred income tax assets
are reduced by a valuation allowance when it is more likely than
not that some portion or all of the deferred income tax assets
will not be realized. Despite management projections of future
income, relevant accounting guidance suggests that a recent
history of cumulative losses constitutes significant negative
evidence, and that future expectations about income are
overshadowed by such recent losses. The Company recognized no
income tax benefit in the first quarter of 2004 for this reason.
8. Commitments and Contingencies:
Contingencies - The Company has been named as a defendant in a
stockholder class action suit filed by purported stockholders
regarding the Public Offering. This lawsuit, Karl L. Kapps, et.
al. v. Torch Offshore, Inc. et. al., No. 02-00582, which seeks
unspecified monetary damages, was filed on March 1, 2002 in the
United States District Court for the Eastern District of
Louisiana. The lawsuit was dismissed on December 19, 2002 for
failure to state a claim upon which relief could be granted. The
plaintiffs have appealed to the United States Court of Appeals
for the Fifth Circuit. Oral arguments have been completed and the
Company is awaiting the decision of the Court. The Company
believes the allegations in this lawsuit are without merit and
continues to vigorously defend this lawsuit. Even so, an adverse
outcome in this class action litigation could have a material
adverse effect on the Company's financial condition or results of
operations.
In May 2002, the Company entered into an agreement with Cable
Shipping, Inc. to time charter a vessel, the G. Murray, under a
three-year contract at a rate of $18,500 per day. The time
charter commenced in the third quarter of 2002 and the vessel was
renamed the Midnight Hunter. However, on January 24, 2003, the
Company terminated the time charter because of the vessel's
failure to meet certain specifications outlined in the charter
agreement. In November 2003, a London arbitrator issued a ruling
against the Company's recission claim, finding that the Company
was not entitled to terminate the charter, but did rule in favor
of the Company on the warranty claim for breach of contract. An
interim award of $2.2 million was made in favor of Cable
Shipping, Inc. The Company has recorded the full amount of the
interim award in its financial statements. The Company attempted
to appeal the ruling, but on April 7, 2004 the appeal was denied.
The escrowed award has been released to Cable Shipping, Inc. Each
party will now make submissions as to quantum of damages for the
claim upon which it was successful and a further hearing will be
held. Additional amounts awarded to the parties will likely be
netted in favor of Cable Shipping, Inc. While an estimate of the
net impact of the damages to be awarded with respect to this
matter is not currently quantifiable, it is possible that future
damages to be awarded to Cable Shipping, Inc. in this matter
could have a material adverse effect on the Company's financial
condition and/or results of operations.
In March 2003, the Company filed a lawsuit (Torch Offshore, Inc.
v. Newfield Exploration Company, No. 03-0735, filed in the United
States District Court, Eastern District of Louisiana on March 13,
2003) against Newfield Exploration Company (Newfield) claiming
damages of approximately $2.1 million related to work completed
for Newfield in the Gulf of Mexico at Grand Isle Block 103-A. The
lawsuit alleges that the Company did not receive all compensation
to which it was entitled pursuant to the contract. The Company
has recorded a provision for the full amount of this claim;
however, the Company intends to continue to pursue the claim.
In July 2003, the Company filed a lawsuit (Torch Offshore, Inc.
et al v. Stolt Offshore, Inc., Algonquin Gas Transmission Company
and Duke Energy, No. 03-1915, in the United States District
Court, Eastern District of Louisiana on July 3, 2003) against
Stolt Offshore, Inc. (Stolt), and its customer, seeking recovery
of approximately $7.6 million related to work completed for Stolt
in Boston, Massachusetts. The Company worked as a subcontractor
to Stolt, who was engaged by Algonquin Gas Transmission Company
to complete the Boston Hubline project, an underwater pipeline
crossing the Boston Harbor. The lawsuit alleged that the Company
did not receive all compensation to which the Company was
entitled pursuant to the subcontract the Company had with Stolt.
Two other subcontractors to Stolt joined with the Company and
filed as plaintiffs in the lawsuit. Additionally, the Company,
along with two other subcontractors, filed a lawsuit in
Massachusetts (Civil Action No. 03-01585), which included a claim
for breach of contract as well as a claim to assert mechanics'
liens against Algonquin's easement located in Weymouth, Norfolk
County, Massachusetts. In March 2004, the Company reached a
settlement with Stolt in the amount of $6.2 million and the full
amount of the difference between the claim and the final
settlement (a loss of approximately $1.4 million) was recorded in
the financial statements as of December 31, 2003. The lawsuits
have been dismissed, and the lien claims have been released.
Because of the nature of its business, the Company is, from time
to time, involved in routine litigation or subject to various
other disputes or claims related to its business operations
(other miscellaneous legal matters). The Company has engaged
legal counsel to assist in defending all such legal matters, and
management intends to vigorously defend all claims. The Company
does not believe, based on all available information, that the
outcome of these other miscellaneous legal matters will have a
material effect on its financial position or results of
operations.
Lease Commitments - In early 2000, the Company commenced a five-
year new-build charter for the Midnight Arrow, a DP-2 deepwater
subsea construction vessel. The long-term charter is with Adams
Offshore Ltd. and expires in March 2005, but can be terminated on
July 23, 2004 by paying $300,000, or on November 24, 2004 by
paying $100,000. The charter amount includes the marine crew,
maintenance and repairs, drydock costs and certain insurance
coverages. Under the terms of the charter, the Company has the
exclusive option to purchase the vessel for $8.25 million or the
ability to extend the charter for an additional two years at the
end of the charter period. This charter is being accounted for as
an operating lease.
In January 2004, the Company entered into a time charter for the
Midnight Hunter, a 340-foot DP-2 deepwater capable vessel. The
time charter for the Midnight Hunter is at a day rate of $14,500
per day and extends through September 2, 2005, with provisions
for extension or outright purchase. The charter amount includes
the marine crew, maintenance and repairs, drydock costs and
certain insurance coverages. The vessel was previously under
charter by the Company, but the Company cancelled the charter in
January 2003 because the vessel did not meet certain
specifications as outlined in the charter agreement which
prevented the Company from performing some types of work,
particularly deepwater pipelay (see further discussion above).
However, the Company has re-chartered the vessel at a lower day
rate and has altered its intentions for use of the vessel. The
Company intends to utilize the DP-2 vessel in a diving support
capacity, which will allow it to perform deepwater tie-ins with
the Company's 1,000-foot saturation system that has been
installed on the vessel.
Other Commitments - The Company has executed contracts with
several critical equipment suppliers related to the conversion of
the Midnight Express. In December 2002, the Company entered into
a contract with Davie Maritime, Inc. of Quebec, Canada to
complete the conversion of the Midnight Express at a contract
value of $25.3 million ($37.1 million inclusive of assigned
critical equipment supplier contracts) that became effective in
April 2003. Due to the recent settlement with Davie Maritime,
Inc., the shipyard contract, inclusive of assigned critical
equipment supplier contracts, is now valued at $51.9 million of
which $6.5 million has come from approved change orders and $8.3
million from an agreed increase in contract price. The remaining
outstanding contracts for the conversion of the Midnight Express,
including the Davie Maritime, Inc. contract described above,
aggregate $83.0 million, of which $75.6 million had been paid as
of March 31, 2004. In the event the Company terminates these
contracts, the Company is required to pay certain of these
suppliers' costs incurred to date while other suppliers are
entitled to the full value of the contract, depending upon the
terms of the relevant agreement. The Company believes its present
termination cost exposure on these contracts totals approximately
$7.4 million.
9. New Accounting Standards:
In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, which provides alternative methods of
transition for a voluntary change to the fair-value based method
of accounting for stock-based employee compensation, and the new
standard, which is now effective, amends certain disclosure
requirements. The Company continues to apply APB No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation;
therefore, the alternative methods of transition do not apply.
The Company has adopted the disclosure requirements of SFAS No.
148 (see "Stock-Based Compensation" above).
In June 2001, the American Institute of Certified Public
Accountants (AICPA) issued an exposure draft of a proposed
Statement of Position (SOP), "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment." This
proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic
repairs and maintenance costs related to "in service" fixed
assets. It would require that these types of expenses be
recognized when incurred rather than recognizing expense for
these costs while the asset is productive. The proposed SOP was
presented to the FASB for clearance, however on April 14, 2004,
the FASB did not approve the draft SOP and decided to consider
the relevant concepts within the SOP in connection with the
FASB's short-term convergence project on property, plant and
equipment, including depreciation currently scheduled to take
place in the 2005-2006 timeframe.
In January 2003, the FASB issued Financial Interpretation 46,
"Consolidation of Variable Interest Entities - An Interpretation
of Accounting Research Bulletin (ARB) 51" ("FIN 46" or the
"Interpretation"). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIEs). The primary
objective of the Interpretation is to provide guidance on the
identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights;
such entities are known as VIEs. The provisions of FIN 46 apply
immediately to VIEs created after January 31, 2003. Application
is required for interests in special-purpose entities in the
period ending after December 15, 2003 and is required for all
other types of VIE's in the period ending after March 15, 2004.
The Company has no VIEs and there was no material impact on the
Company's financial position or results of operations from the
adoption of FIN 46.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, and the unaudited
interim condensed consolidated financial statements and related
notes contained in "Item 1. Financial Statements" above.
This Quarterly Report on Form 10-Q contains statements that are
"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, as amended, 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 in this Form 10-Q. Many of these factors are
beyond our ability to control or predict. Accordingly, we caution
investors not to place undue reliance on forward-looking
statements. 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 Annual Report on Form 10-K for the fiscal year ended December
31, 2003 under the captions "Forward-Looking Statements" and
"Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors."
GENERAL
We provide subsea construction services in connection with the in-
field 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 on the Shelf. Over the last few years, we have
expanded our operations, fleet capabilities and management
expertise to enable us to provide analogous services in water
depths up to 10,000 feet. In addition, we have begun to enter the
international markets of the world, including Mexico, as we
believe these areas present opportunities for utilization of our
fleet.
In the first quarter of 2004, we reported revenues of $11.8
million, a 30.5% decrease compared with the first quarter of 2003
revenues of $17.0 million. The operating loss for the first
quarter of 2004 was $5.3 million, compared with an operating
income of $0.1 million in the first quarter of 2003. During the
first quarter of 2004, based upon management's experience, market
conditions in the Gulf of Mexico remained relatively weak as
offshore drilling remained depressed as capital expenditures by
oil and natural gas companies were below normal levels. In
addition, our fleet-wide utilization is generally lower during
the first half of the year because of winter weather conditions
in the Gulf of Mexico. Furthermore, during the first quarter, a
substantial number of our customers finalize capital budgets and
solicit bids for construction projects. These forces have driven
market prices and fleet utilization to low levels, and as a
result, have adversely impacted our revenues and gross margin.
We have a significant working capital deficit position primarily
resulting from the current classification of the Midnight Express
construction finance facility that matures on October 31, 2004.
This position places a high degree of pressure on our liquidity
management and could ultimately impact our operations and future
business plans. Management believes, however, that we have the
ability to sustain our operations and meet our financial
commitments, at least for the near-term, through effective
management of our operations and the available liquidity provided
through our credit facilities. However, if we continue to incur
significant cash losses or if our ability to access our credit
facilities is curtailed, our ability to continue to manage our
liquidity needs and meet our operating and other financial
commitments may be jeopardized in the future.
We believe that certain factors are critical to our success,
including having sufficient financial liquidity to fund the
completion of the conversion of the Midnight Express in 2004;
ascertaining utilization for the Midnight Express as soon as
possible upon completion of its sea trials, which is expected in
the second half of 2004; raising additional funds through the
public or private placement of equity; reducing certain fixed
costs and paying down outstanding debt through the sale of
certain vessels; managing the utilization of our existing fleet
of vessels by strategically positioning our DP-2 vessels on jobs
to promote efficiency and greater margins; continuing to expand
our market from the shallow water into the intermediate water
depths and the deepwater with the use of our DP-2 vessels; and
developing an international presence.
In order to accomplish our business plan and meet our financial
obligations, we must:
- Complete the conversion of the Midnight Express in a timely
manner and within the financial constraints of the $19.0
million increase to our credit facility.
- Raise additional capital to fund working capital require-
ments, including the payment of monthly lease amounts for
the Midnight Hunter and Midnight Arrow, which are approx-
imately $6.9 million for the remaining three quarters of the
year ended December 31, 2004, and to make monthly and
quarterly interest and principal payments to General Electric
Commercial Equipment Financing (GE Commercial) as part of the
Midnight Eagle term loan and General Electric Capital
Corporation (GE Capital) as part of the Midnight Wrangler
term loan (together $4.4 million for the year ended December
31, 2004 of which as of May 14, 2004 we have met $1.3
million).
- Dispose of certain non-essential vessels to reduce debt and
associated fixed costs.
- Enter into an agreement(s) for utilization of the Midnight
Express near the time of the completion of its final sea
trials in the second half of 2004.
We have been actively pursuing transactions to address the above
matters as well as others described in Note 2 to the Company's
financial statements, the ultimate resolution of which is beyond
our control and will have a significant impact on our financial
condition and liquidity. As a result, no assurances can be given
that these transactions will be completed as contemplated or at
all, which could have a detrimental effect on our ability to
continue our operations. For more information regarding our
business plan and these transactions, see Note 2 to the Financial
Statements located in Item 1 of this Form 10-Q, and for the
related risks, see "Risk Factors" in "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors" in our Annual Report on Form 10-K
filing for the fiscal year ended December 31, 2003.
We remain focused on our strategy of moving into the deepwater
markets of the world through the establishment of our fleet of DP-
2 vessels. Since 1997, we have increased the size of our total
fleet from three to twelve construction and service vessels. In
2002, we acquired a 520-foot vessel from Smit International,
renamed the Midnight Express, which is being converted to a DP-2
offshore construction vessel with our patented pipelay system at
an estimated cost of approximately $109.0 million. In December
2002, we committed to purchase a cable-lay vessel, renamed the
Midnight Wrangler, for the purpose of deepwater pipelay and
subsea construction. We took possession of this vessel in March
2003 and the vessel entered our active fleet in August 2003 after
various modifications and upgrades were made to it. In January
2004, we entered into a new charter for the Midnight Hunter, a
deepwater capable diving support vessel. These critical additions
to our fleet over the past few years have positioned us to grow
our business while achieving better margins as we move into the
intermediate depths and the deepwater. These DP-2 vessels are the
core of our fleet and the key to the future successes of the
Company.
Business Environment
The demand for subsea construction services has historically
depended upon the prices of oil and natural gas. These prices
reflect the general condition of the industry and influence the
willingness of our customers to spend capital to develop oil and
natural gas reservoirs. We are unable to predict future oil and
natural gas prices or the level of offshore construction activity
related to the industry. 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 and jack-up rig counts;
- forecasts of capital expenditures by major, independent, and
state oil and natural gas companies; and
- recent lease sale activity levels.
Even when demand for subsea construction services is strong,
several factors may affect our profitability, including the
following:
- competition;
- availability of qualified personnel;
- equipment and labor productivity;
- cost of third party services such as catering and labor services;
- fuel cost;
- weather conditions;
- contract estimating uncertainties;
- global economic and political circumstances; 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 for field
development following a commercial discovery. 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 drilling activities by three to twelve months.
We have noticed that demand for pipeline installation for
projects exceeding 1,000 feet of water depth generally follows
drilling activities by at least eighteen months to three years as
deepwater installations typically require much more engineering
design work than Shelf installations.
RESULTS OF OPERATIONS
Comparison of the Quarter Ended March 31, 2004 to the Quarter
Ended March 31, 2003
The following table highlights revenue days (days of vessel
utilization), revenue and gross profit for the quarters ended
March 31, 2004 and March 31, 2003.
(dollars in thousands, except
per revenue day, unaudited) Quarter Ended March 31,
----------------------
2004 2003
---- ----
Revenue Days 378 490
Revenue $ 11,842 $ 17,029
Gross Profit (Deficit) $ (1,402) $ 3,284
Average per Revenue Day:
Revenue $ 31,328 $ 34,753
Gross Profit (Deficit) $ (3,709) $ 6,702
Revenues. Revenues were $11.8 million for the three months ended
March 31, 2004 compared to $17.0 million for the three months
ended March 31, 2003, a decrease of 30.5%. The decrease in first
quarter 2004 revenues was caused by the overall decline in the
utilization of our fleet during the period and the decrease in
average pricing realizations (revenues divided by revenue days)
when compared to the comparable first quarter 2003 statistics.
The number of revenue days worked declined 22.9% between periods.
In addition, average pricing realizations in the first quarter of
2004 were 9.9% lower than the average pricing realizations in the
first quarter of 2003. Our fleet worked 378 revenue days in the
first quarter of 2004 resulting in a utilization rate of 40.3%,
compared to 490 revenue days worked in the three months ended
March 31, 2003, or a 60.9% utilization rate. A majority of the
decrease in fleet utilization came from the pipelay barges as the
Midnight Brave, Midnight Eagle and Midnight Rider worked 92 fewer
revenue days combined as compared to the first quarter of 2003.
In addition, the Midnight Arrow contributed 67 fewer revenue days
in the first quarter of 2004 than in the comparable period of
2003. However, offsetting these declines in utilization was the
addition of 49 revenue days from the Midnight Wrangler, which was
not in the active fleet in the first quarter of 2003.
Gross Profit (Deficit). Gross profit (defined as revenues less
cost of sales) was a deficit of $1.4 million for the three months
ended March 31, 2004, compared to a margin of $3.3 million for
the three months ended March 31, 2003. Cost of sales consists of
job related costs such as vessel wages, insurance and repairs and
maintenance. The gross profit deficit in the quarter ended March
31, 2004 was primarily a result of the decline in the utilization
of our fleet combined with the lower average revenue per day, as
discussed above, which led to a revenue level that did not cover
our cost structure. Overall, our costs of sales decreased from
$13.7 million in the quarter ended March 31, 2003 to $13.2
million in the quarter ended March 31, 2004. The overall decline
in cost of sales was due to decreases in vessel wages, repairs
and maintenance, support vessel costs, catering and job
consumables offset by increases in subcontract costs and
insurance.
Depreciation and Amortization. Depreciation and amortization
expense was $2.1 million for the three months ended March 31,
2004 compared to $1.8 million for the three months ended March
31, 2003, an increase of 15.4%. This increase was a result of
depreciation expense for the Midnight Wrangler and the Midnight
Gator in the first quarter of 2004 as compared to none in the
first quarter of 2003. This was partially offset by the decrease
in the amortization of the drydock costs for the Midnight Carrier
in the first quarter of 2004 as compared to the first quarter of
2003.
General and Administrative Expenses. General and administrative
expenses totaled $1.6 million (13.6% of revenues) for the three
months ended March 31, 2004 compared to $1.4 million (8.0% of
revenues) for the three months ended March 31, 2003. The first
quarter 2004 general and administrative expenses were higher due
to increases in legal expenses, professional expenses and
financing fees.
Other Income. Other income was zero for the three months ended
March 31, 2004 compared to other income of $1,000 for the three
months ended March 31, 2003. We capitalized all of our first
quarter 2004 and 2003 interest costs, totaling $0.9 million and
$0.1 million, respectively, in relation to the conversion of the
Midnight Express.
Income Taxes. For the quarter ended March 31, 2004, we increased
our deferred tax asset valuation allowance by $1.9 million,
recognizing no net income tax benefit associated with our
operating loss due to the uncertainty of future taxable income.
We recorded a $36,000 expense (a 35% effective tax rate) during
the three months ended March 31, 2003.
Net Income (Loss). Net loss for the three months ended March 31,
2004 was $5.3 million, compared with a net income of $0.1 million
for the three months ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Needs and Our Financial Plan
We expect to need a significant amount of capital to finance our
operations and meet our debt service obligations. We are taking
steps to address our capital requirements for financial liquidity
and have developed a financial plan that we believe will provide
us with sufficient financial resources to continue to conduct our
operations. Please refer to Note 2 to the Financial Statements
located in Item 1 of this Form 10-Q for more details on our plan.
However, no assurances can be given that we will successfully
accomplish the objectives of our plan.
As part of our financial plan, in April 2004 we executed an
amendment with Regions Bank and EDC for a $19.0 million increase
to our existing credit facility (the "Finance Facility") to
complete the conversion of the Midnight Express. In addition,
these lenders have agreed to extend the time frame of the
construction period of the Finance Facility from June 30, 2004 to
October 31, 2004, at which point the construction period
financing will convert to term status. Regions Bank and EDC have
also amended certain covenant obligations that we must meet as
discussed below. We also executed amendments in April 2004 with
GE Commercial and GE Capital relating to our Midnight Eagle and
Midnight Wrangler term loans, respectively.
In April 2004, we came to a settlement with Davie Maritime, Inc.,
the shipyard that is completing the conversion of the Midnight
Express in Quebec, Canada, through an increase in the contract
price of $8.3 million. Since the initial contract signing, the
contract price has increased from $37.1 million to $52.6 million
as of May 14, 2004 of which $7.2 million has resulted from
approved change orders and $8.3 million from an agreed increase
in contract price. This settlement covers all of the claims made
by Davie Maritime, Inc. against us. The settlement is to be paid
from March 1, 2004 through the delivery date from the additional
$19.0 million from the Finance Facility. The agreement also calls
for a revised delivery date of May 21, 2004. Should Davie
Maritime, Inc. not deliver the vessel on May 21, 2004, or a later
date which could arise due to permissible delays, Davie Maritime,
Inc. will incur liquidated damages following a seven-day grace
period based on the number of days delinquent in delivery of the
vessel. After the Midnight Express leaves the Davie Maritime,
Inc. shipyard, we expect that an additional 90 days of
modifications will be required before the vessel is ready to
enter our active fleet. During this time period, our patented
pipelay system and special-built 500-ton crane will be installed
onboard the vessel before it enters a period of sea trials. We
expect the vessel to enter the active fleet in the third quarter
of 2004.
We have entered into discussions with various customers to
utilize the Midnight Express in both U.S. and foreign waters
under both standard pipeline project work and on multi-year
charter arrangements. There is no guarantee that such contracts
or charters will be awarded to us.
Also as part of our business plan, we settled with Stolt
Offshore, Inc. (Stolt) in the amount of $6.2 million for recovery
of work we completed for Stolt in relation to the Boston Hubline
project in the first half of 2003. We collected these funds in
March 2004 and have used them for general operating purposes and
for reducing amounts due under the Company's receivable line of
credit.
In connection with our efforts to raise funds, we are also
considering the sale of certain of our vessels. We have had
preliminary discussions with various parties, however, there can
be no guarantee that we will reach an agreement and complete a
transaction during 2004. We are also seeking other means of
raising funds, including the equity market. Our ability to raise
additional capital will depend upon the status of capital markets
and industry conditions. Our Finance Facility specifies we must
raise approximately $10.0 million by June 30, 2005 and requires
that the first $10.0 million of proceeds associated with such an
offering be used to reduce amounts outstanding under the Finance
Facility.
Current Liquidity and Capital Resources
The net cash provided by or used in our operating, investing and
financing activities is summarized below:
(in thousands, unaudited) Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Cash flows provided by (used in):
Operating activities $ 5,164 $ 6,091
Investing activities (17,146) (9,345)
Financing activities 11,982 3,727
-------- -------
Net change in cash and cash
equivalents $ -- $ 473
======== =======
Our cash flow from operating activities is affected by a number
of factors, including our net results, depreciation and
amortization, and changes in our working capital. In the quarter
ended March 31, 2004, our operating activities provided net cash
of $5.2 million as compared to $6.1 million in the quarter ended
March 31, 2003.
Cash flow used in investing activities in the quarter ended March
31, 2004 was related to the purchase of equipment, primarily
related to the conversion of the Midnight Express. Cash
expenditures totaled $17.1 million for the quarter ended March
31, 2004 compared to $9.3 million for the quarter ended March 31,
2003. The cash expenditures in the first quarter of 2003 do not
include the $9.7 million expended for the purchase of the
Midnight Wrangler, as this amount was fully financed (see
discussion below).
Cash flow provided by financing activities was $12.0 million in
the quarter ended March 31, 2004 and related primarily to the
borrowings under our various credit agreements, principally the
construction finance facility. Cash flow provided by financing
activities for the quarter ended March 31, 2003 was $3.7 million
and consisted primarily of proceeds from long-term debt offset by
payments on the receivable line of credit.
We had negative working capital (current assets less current
liabilities) of $76.3 million at March 31, 2004. This is
primarily the result of the inclusion in current liabilities of
$59.9 million of borrowings to finance the Midnight Express. As
this debt is associated with the conversion work on the Midnight
Express, it is classified as current as of March 31, 2004.
However, once the conversion of the Midnight Express is completed
and the vessel meets certain requirements as specified by the
finance agreement, the amounts borrowed to finance the conversion
of the Midnight Express are expected to convert to term loan
status and be classified accordingly.
The significant changes in our financial position from December
31, 2003 to March 31, 2004 are the increase in debt, the increase
in property and equipment, and the decrease in the accounts
receivable balance. Total debt has increased to $88.3 million as
of March 31, 2004 and consists primarily of the borrowings to
finance the conversion of the Midnight Express, the GE Capital
Midnight Wrangler term loan, the GE Commercial Midnight Eagle
term loan, and the receivable line of credit, which are discussed
below. Property and equipment has increased by $15.4 million due
to the capital expenditures primarily related to the conversion
of the Midnight Express and our accounts receivable balance has
decreased by $11.6 million.
Historically, our capital requirements have been primarily for
the acquisition and improvement of our vessels and related
equipment. We expect that as we continue our entrance into the
deepwater market our capital requirements will continue to be
primarily for the conversion and improvement of our vessels.
Capital expenditures totaled $17.1 million for the quarter ended
March 31, 2004, compared to $19.1 million for the quarter ended
March 31, 2003. Capital expenditures in 2004 primarily relate to
the conversion of the Midnight Express. We currently estimate
capital expenditures for the remainder of 2004 to be
approximately $21.2 million, primarily representing the
conversion of, and the equipment associated with, the Midnight
Express. We expect to fund these capital requirements by
utilizing our bank and debt facilities in addition to cash flow
from operations. Included in this estimate are approximately $2.5
million for routine capital and drydock inspections of our
vessels to be incurred during the remainder of 2004.
Available Credit Facilities and Debt
Regions Bank Facility. In July 2002, we entered into a $35.0
million bank facility (the "Bank Facility") with Regions Bank,
consisting of a $25.0 million asset-based five-year revolving
credit facility and a $10.0 million accounts receivable-based
working capital facility. Our ability to use the asset-based five-
year revolving credit facility was suspended in connection with
our financing of the conversion of the Midnight Express and later
terminated in April 2004 as part of the $19.0 million increase to
the construction finance facility as mentioned above and
discussed below. We continue to have available to us the accounts
receivable-based working capital facility from Regions Bank. In
December 2003, the accounts receivable-based working capital
facility was increased to a limit of $15.0 million. Amounts
outstanding under the accounts receivable-based working capital
facility may not exceed 85% of eligible trade accounts
receivable. We had $5.9 million outstanding under the $15.0
million accounts receivable-based working capital facility as of
March 31, 2004. In addition, we issued a $1.5 million standby
letter of credit as security for the charter payments due under
the charter agreement for the Midnight Hunter against the
accounts receivable-based working capital facility. In July 2003,
this letter of credit was drawn by Cable Shipping, Inc., the
owners of the Midnight Hunter. We have recorded the $1.5 million
as a liability on our balance sheet as of December 31, 2003 as
part of the receivable line of credit. We had available borrowing
capacity of up to an additional $1.0 million under the $15.0
million accounts receivable-based working capital facility based
upon eligible receivables at March 31, 2004. The $15.0 million
accounts receivable-based working capital facility matures on
July 1, 2004 and is renewable on an annual basis.
Midnight Express $79.0 Million Finance Facility. In April 2003,
we finalized a credit line that matures on June 30, 2004 to
finance the conversion of the Midnight Express (the "Finance
Facility"). Amounts outstanding under the credit line will
convert into a three-year term loan facility upon completion of
the conversion of the Midnight Express. The Finance Facility
commitment is equally provided by Regions Bank and Export
Development Canada (EDC) ($30.0 million participation by each).
In April 2004, we increased the credit line from Regions Bank and
EDC by $19.0 million to $79.0 million ($39.5 million
participation by each) and amended the maturity to October 31,
2004. The amounts outstanding under the credit line will convert
into two separate loans at the earlier of the facility's maturity
date or completion of the conversion of the Midnight Express. The
first loan represents the original facility of $60.0 million
borrowing and will convert to a three-year term loan facility.
The second loan is for the additional $19.0 million and will
convert to a twenty-month term loan facility maturing on June 30,
2006. In addition, as part of the increase to the credit
facility, the $25.0 million asset-based five-year revolving
credit facility was cancelled as discussed above. Regions Bank
and EDC also have the right to the first $10.0 million of any
equity offering, to the proceeds from the sale of any of the
mortgaged vessels (see discussion below), and to the interest
rate buy-down expected from Industry Canada upon conversion of
the credit line to term status later in 2004.
The interest rate for the $60.0 million portion of the
construction financing is at a floating rate equal to LIBOR plus
a spread of 3.25% to 3.50% based upon our consolidated leverage
ratio. The interest rate for the $19.0 million portion of the
construction financing is LIBOR plus 4.00%. In addition, a 1%
origination fee ($190,000) was charged by Regions Bank and EDC
for the addition to the credit line and the interest rate on the
original $60.0 million financing increased to LIBOR plus 4.00%.
We are providing collateral in the form of the Midnight Express
as well as a first preferred ship mortgage on the Midnight Fox,
Midnight Star, Midnight Dancer, Midnight Carrier, Midnight Brave
and Midnight Rider. We have to adhere to various conditions
including maintaining tangible net worth of at least $60.0
million, a minimum debt service coverage ratio of at least 1.20
to 1, a consolidated leverage ratio of no more than 2.00 to 1 and
a consolidated current ratio (defined below) of 1.30 to 1 (see
below for details of amendments). We are not allowed to incur
additional debt over $8.0 million without consent from Regions
Bank. As of March 31, 2004, we had $59.9 million outstanding
under the $60.0 million Finance Facility, leaving us a borrowing
capacity of $0.1 million under the Finance Facility. The
additional $19.0 million was not available until April 2004, and
the funding of the additional $19.0 million was subject to, among
other things, (1) the completion of certain customary
documentation submission requirements, (2) that no events of
default shall have occurred or be continuing, and (3) no material
adverse change in our properties, assets, liabilities, business,
operations, prospects, income or condition (financial or
otherwise) shall have occurred since the effective date (April 8,
2004) and be continuing. All of these conditions were fulfilled
and we have drawn approximately $5.0 million as of May 14, 2004
under the $19.0 million facility.
Upon achievement of certain construction completion milestones,
but no later than October 31, 2004, the $79.0 million Finance
Facility will convert to term status. The $60.0 million term loan
facility would then have a three-year term with a 10-year
amortization payment schedule consisting of semi-annual payments
with a balloon payment at the end of the three-year term. The
interest rate for this facility is 3.25% over LIBOR. The $19.0
million term loan facility would then have a twenty-month term
with a $6.0 million principal payment due on June 30, 2005, a
$6.0 million principal payment due on December 30, 2005 and the
remaining $7.0 million principal payment due on June 30, 2006.
Interest would be payable on a monthly basis based on a rate of
LIBOR plus 4.00%. Regions Bank and EDC will require us to
maintain the same collateral and covenants as included in the
construction financing depicted above.
Earlier in 2004 we were not in compliance with the current ratio
or the debt service coverage ratio requirements under the Finance
Facility (with respect to the December 31, 2003 testing period).
As a result, in early April 2004 we obtained forbearance waivers
from our lenders and effected amendments to our loan agreements
to provide certain levels of relief with respect to the required
level of minimum coverage as well as changes related to certain
components of the computation of the minimum current ratio, as
defined, and the minimum debt service coverage ratio, as defined,
for the quarterly testing periods of 2004. As of March 31, 2004,
we were in compliance with the financial covenants (as amended in
early April 2004) of the Bank Facility, the Finance Facility and
the GE Commercial term loan. We must comply with the amended
consolidated current ratio covenant (as defined) of 0.70 to 1 for
the four quarters of 2004 and then the consolidated current ratio
covenant (as defined) returns to 1.00 to 1 as of March 31, 2005.
There can be no assurance that compliance will be maintained. If
compliance is not maintained, all credit agreements could be
declared to be in default and all amounts outstanding, including
the $19.2 million of debt associated with the Midnight Eagle and
Midnight Wrangler facilities, currently classified as long-term
could be demanded for payment and our creditors would have the
right to seize the applicable collateral. Our obligations under
these credit agreements are secured by substantially all of our
assets. Any defaults under the credit agreements would adversely
impact our ability to sustain our operations in the normal course
and have a material effect on our financial condition and results
of operations.
Purchase of the Midnight Wrangler. In December 2002, we entered
into a purchase agreement with Global Marine Systems Limited
(Global Marine) for the purchase of the Wave Alert, to be renamed
the Midnight Wrangler, at a cost of approximately $10.8 million.
We took possession of the vessel in March 2003. The purchase of
the vessel was financed by Global Marine over a five-year period
with monthly payments, including 7% per annum interest, of
approximately $0.2 million plus a $1.0 million payment at the
purchase in March 2003 and another $1.0 million payment at the
end of the five-year period.
GE Commercial Midnight Eagle Term Loan. In March 2003, we
finalized a seven-year term loan with GE Commercial. Although the
principal amount of the term loan is $9.25 million, we received
$8.0 million and GE Commercial retained $1.25 million as a
security deposit. The interest rate on the term loan is the 30-
day commercial paper rate plus 2.03% and includes prepayment
penalties of 2% for the first twelve months, 1% for the second
twelve months and 0% thereafter. The term loan is structured to
have monthly payments over seven years. The loan agreement
contains the same financial covenants as the Bank Facility and
Finance Facility discussed above. The collateral for the loan is
the Midnight Eagle and the security deposit described above. We
used the proceeds from the loan to fund the improvements to the
Midnight Wrangler and a portion for the Midnight Express
conversion costs.
GE Capital Midnight Wrangler Term Loan. In December 2003, we
refinanced the debt used to acquire the Midnight Wrangler (as
discussed above) by entering into a secured term loan with GE
Capital in the principal amount of $15.0 million. The secured
term loan is structured to have quarterly payments over seven
years. The interest rate on the term loan is 4.25% over LIBOR and
the terms contained an origination discount of 1.50%. The loan
agreement contains various covenants beginning on March 31, 2005,
including a minimum EBITDA (as defined) of $18.5 million, a
minimum fixed charge ratio (as defined) of 1.05 to 1, and a
maximum leverage ratio (as defined) of 5.25 to 1 for the
financial quarters ended in the period from October 1, 2004
through September 30, 2005. These maximum leverage ratios decline
by 0.50 to 1 for each of the following four years (on an annual
basis at October 1st) before reaching 3.25 to 1, which applies
for the financial quarters ended from October 1, 2008 and
thereafter. The collateral for the loan is the Midnight Wrangler,
Midnight Runner and Midnight Gator. A final payment was made to
Global Marine in December 2003. This early retirement of debt
resulted in a gain $0.9 million that we recorded in our income
statement for the year ended December 31, 2003.
Cash Requirements
The following table presents our long-term contractual
obligations and the related amounts due, in total and by period,
as of March 31, 2004 (in thousands):
Payments Due by Period
----------------------------------------
Less After
Than 1 1-3 4-5 5
Total Year Years Years Years
----- ------ ----- ----- -----
Finance Facility $ 59,884 $59,884 $ -- $ -- $ --
Long-Term Debt 22,587 3,376 6,877 7,027 5,307
Receivable Line of
Credit 5,864 5,864 -- -- --
Capital Lease
Obligations 217 217 -- -- --
Operating Leases 12,271 9,536 2,697 38 --
Unconditional Purchase
Obligations 7,070 7,070 -- -- --
Other Long-Term
Obligations 300 300 -- -- --
------ ------ ----- ----- -----
Total Contractual Cash
Obligations $108,193 $86,247 $9,574 $7,065 $5,307
======== ======= ====== ====== ======
As discussed above, we expect the Midnight Express construction
loan (Finance Facility) to convert to two different term loans
with varying amortization payment schedules. The majority of the
long-term debt obligation consists of the Midnight Eagle term
loan with GE Commercial, the Midnight Wrangler term loan with GE
Capital and the receivable line of credit from Regions Bank, all
of which are discussed above.
Included in long-term debt is a note assumed by us as part of the
purchase of a leisure fishing vessel from an investment holding
company wholly-owned by Mr. Stockstill to be used for customer
entertainment purposes. The total cost of the vessel was
approximately $0.1 million, of which $41,000 was paid during
2002. The debt assumed will be paid in monthly installments over
a five-year period.
During the quarter ended March 31, 2004, we made payments of
approximately $0.7 million for the operating lease obligation
relating to our deepwater technology vessel, the Midnight Arrow,
under a five-year charter agreement. We also paid $0.3 million in
the quarter ended March 31, 2004 for the charter of the Midnight
Hunter, a DP-2 diving support vessel. We paid approximately $14.3
million during the quarter ended March 31, 2004 in relation to
the purchase price and conversion of the Midnight Express
bringing our total as of March 31, 2004 to $90.6 million.
Included in the operating leases are the monthly payments for
certain facilities used in the normal course of operations.
However, the majority of the operating lease obligation relates
to our charter agreements of the Midnight Arrow and the Midnight
Hunter. Included in unconditional purchase obligations and other
long-term obligations are the contracts with equipment suppliers
related to the conversion of the Midnight Express. We expect to
finance the Midnight Express contracts with proceeds from the
$79.0 million Finance Facility discussed above.
In August 2001, our Board of Directors approved the repurchase of
up to $5.0 million of our outstanding common stock. Purchases
were 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. In August 2002, we elected to suspend our
repurchase program. Under current conditions and to support our
vessel expansion strategy, we do not expect to repurchase shares
in the near future except for certain events related to the
vesting of employee's restricted shares. As of May 14, 2004,
712,471 shares had been repurchased at a total cost of $4.3
million.
Consistent with the focus toward investing in new technology,
including deepwater capable assets such as the Midnight Express
and the Midnight Wrangler, five of the last six vessels added to
our fleet have been DP-2 deepwater capable (Midnight Eagle,
Midnight Arrow, Midnight Express, Midnight Wrangler and Midnight
Hunter). Through March 31, 2004, we have expended approximately
$150.1 million (in combined capital expenditures, operating lease
payments and purchase payments) for these vessels, with an
additional estimated $30.0 million to be incurred in associated
construction costs, operating lease payments and drydock expenses
through 2005.
We believe that our cash flow from operations and the Bank
Facility will not be sufficient to meet our existing liquidity
needs for the operation of the business in 2004. We also believe
that the options offered by the Finance Facility, the GE
Commercial Midnight Eagle term loan, and the GE Capital Midnight
Wrangler term loan, in addition to our cash flow from operations,
will not be sufficient to complete our identified growth plans.
Raising additional capital during 2004 is a requirement for us to
continue to conduct our operations and meet our debt obligations.
We may not be able to raise these additional funds, or we may not
be able to raise such funds on favorable terms.
NEW ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of SFAS No. 123," which
provides alternative methods of transition for a voluntary change
to the fair-value based method of accounting for stock-based
employee compensation, and the new standard, which is now
effective, amends certain disclosure requirements. We continue to
apply APB No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for our stock-based
compensation; therefore, the alternative methods of transition do
not apply. We have adopted the disclosure requirements of SFAS
No. 148 (see Note 2 to the financial statements).
In June 2001, the American Institute of Certified Public
Accountants (AICPA) issued an exposure draft of a proposed
Statement of Position (SOP), "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment." This
proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic
repairs and maintenance costs related to "in service" fixed
assets. It would require that these types of expenses be
recognized when incurred rather than recognizing expense for
these costs while the asset is productive. The proposed SOP was
presented to the FASB for clearance, however on April 14, 2004,
the FASB did not approve the draft SOP and decided to consider
the relevant concepts within the SOP in connection with the
FASB's short-term convergence project on property, plant and
equipment, including depreciation currently scheduled to take
place in the 2005-2006 timeframe.
In January 2003, the FASB issued Financial Interpretation 46,
"Consolidation of Variable Interest Entities - An Interpretation
of Accounting Research Bulletin (ARB) 51" ("FIN 46" or the
"Interpretation"). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIEs). The primary
objective of the Interpretation is to provide guidance on the
identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights;
such entities are known as VIEs. The provisions of FIN 46 apply
immediately to VIEs created after January 31, 2003. Application
is required for interests in special-purpose entities in the
period ending after December 15, 2003 and is required for all
other types of VIE's in the period ending after March 15, 2004.
We have no VIEs and there was no material impact on our financial
position or results of operations from the adoption of FIN 46.
Significant Accounting Policies and Estimates.
For a discussion of significant accounting policies and
estimates, see our Annual Report on Form 10-K for the fiscal year
ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Interest Rate Risk. We are subject to market risk exposure
related to changes in interest rates on our Bank Facility (when
drawn upon), Midnight Eagle term loan with GE Commercial,
Midnight Wrangler term loan with GE Capital, and our Finance
Facility. Interest on borrowings under the Bank Facility accrue
at a variable rate, using LIBOR plus a range of 1.75% to 2.25%,
depending upon the level of our consolidated leverage ratio (as
defined) measured on a quarterly basis. Our Midnight Eagle term
loan with GE Commercial includes an interest rate consisting of
the 30-day commercial paper rate plus 2.03%. Our Midnight
Wrangler term loan with GE Capital includes an interest rate
consisting of LIBOR plus 4.25%. Under the Finance Facility, the
interest rate during the construction financing phase is based
upon our consolidated leverage ratio and ranges from a LIBOR
spread of 3.25% to 3.50% based upon these levels. The $60.0
million term facility of the Finance Facility is priced at 4.00%
over LIBOR and the $19.0 million term facility of the Finance
Facility is priced at LIBOR plus 4.00%.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. As of the end
of the period covered by this report, our Chief Executive Officer
and Chief Financial Officer, with the participation of
management, have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. Based on
their evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures have been designed and are functioning effectively in
alerting them in a timely manner to material information relating
to Torch Offshore, Inc. required to be disclosed in our periodic
Securities and Exchange Commission filings under the Securities
Exchange Act of 1934.
Changes in Internal Controls. There were no significant changes
in our internal controls or in other factors that could
significantly affect these internal controls subsequent to the
date of their most recent evaluation, including any corrective
actions taken with regard to significant deficiencies and
material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We have been named as a defendant in a stockholder class action
suit filed by purported stockholders regarding our initial public
offering. This lawsuit, Karl L. Kapps, et. al. v. Torch Offshore,
Inc. et. al., No. 02-00582, which seeks unspecified monetary
damages, was filed on March 1, 2002 in the United States District
Court for the Eastern District of Louisiana. The lawsuit was
dismissed on December 19, 2002 for failure to state a claim upon
which relief could be granted. The plaintiffs have appealed to
the United States Court of Appeals for the Fifth Circuit. Oral
arguments have been completed and we are awaiting the decision of
the Court. We believe the allegations in this lawsuit are without
merit and we continue to vigorously defend this lawsuit. Even so,
an adverse outcome in this class action litigation could have a
material adverse effect on our financial condition or results of
operations.
We terminated our charter of the Midnight Hunter on January 24,
2003, as, among other things, the vessel did not meet certain
specifications as outlined in the charter agreement and this
prevented us from performing some types of work. In November
2003, a London arbitrator issued a ruling against our recission
claim, finding that we were not entitled to terminate the
charter, but did rule in favor of us on the warranty claim for
breach of contract. An interim award of $2.2 million was made in
favor of Cable Shipping, Inc. and such amount was placed in
escrow pending further proceedings. We have recorded the full
amount of the interim award in the financial statements. We
attempted to appeal the ruling, but on April 7, 2004 the appeal
was denied. The escrowed award has been released to Cable
Shipping, Inc. Each party will now make submissions as to quantum
of damages for the claim upon which it was successful and a
further hearing will be held. Additional amounts awarded to the
parties will likely be netted in favor of Cable Shipping, Inc.
While an estimate of the net impact of the damages to be awarded
with respect to this matter is not currently quantifiable, it is
possible that future damages to be awarded to Cable Shipping,
Inc. in this matter could have a material adverse effect on our
financial condition and/or results of operations.
We filed a lawsuit (Torch Offshore, Inc. v. Newfield Exploration
Company, No. 03-0735, filed in the United States District Court,
Eastern District of Louisiana on March 13, 2003) against Newfield
Exploration Company (Newfield) claiming damages of approximately
$2.1 million related to work completed for Newfield in the Gulf
of Mexico at Grand Isle Block 103-A. Our lawsuit alleges that we
did not receive all compensation to which we were entitled
pursuant to the contract. We have recorded a provision for the
full amount of this claim; however, we intend to continue to
pursue the claim.
In July 2003, we filed a lawsuit (Torch Offshore, Inc. et al v.
Stolt Offshore, Inc., et al, No. 03-1915, in the United States
District Court, Eastern District of Louisiana on July 3, 2003)
against Stolt Offshore, Inc. (Stolt), and its customer, seeking
approximately $7.6 million related to work completed for Stolt in
Boston, Massachusetts. We worked as a subcontractor to Stolt, who
was engaged by Algonquin Gas Transmission Company to complete the
Boston Hubline project, an underwater pipeline crossing the
Boston Harbor. The lawsuit alleged that we did not receive all
compensation to which we were entitled pursuant to the
subcontract we had with Stolt. Two other subcontractors to Stolt
joined with us and filed as plaintiffs in the lawsuit.
Additionally, we, along with two other subcontractors, filed a
lawsuit in Massachusetts (Civil Action No. 03-01585), which
included a claim for breach of contract as well as a claim to
assert mechanics' liens against Algonquin's easement located in
Weymouth, Norfolk County, Massachusetts. In March 2004, we
reached a settlement with Stolt in the amount of $6.2 million and
we recorded the full amount of the difference between our
original claim and the final settlement (a loss of approximately
$1.4 million) in our financial statements as of December 31,
2003. The lawsuits have been dismissed, and the lien claims have
been released
Additionally, due to the nature of our business, we are, from
time to time, involved in routine litigation or subject to
disputes or claims related to our business activities (other
miscellaneous litigation). In our management's opinion, none of
this other miscellaneous litigation will have a material adverse
effect on our financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
The information on the use of proceeds from our Public Offering
required by this item is set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" in Part I of this report, which
section is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed as part of this report are listed below.
Exhibit 31.1 Certification by Lyle G. Stockstill
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification by Robert E. Fulton
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification by Lyle G. Stockstill
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification by Robert E. Fulton
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On February 25, 2004, we filed a report on Form 8-K,
reporting under Item 5, that the Company had entered
into a new time charter for the Midnight Hunter.
On March 18, 2004, we filed a report on Form 8-K,
reporting under Item 5, that the Company had announced
updated guidance for its earnings estimates based upon
management's unaudited review.
SIGNATURE
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: May 14, 2004 By: /s/ ROBERT E. FULTON
-------------------------
Robert E. Fulton
Chief Financial Officer
(Principal Accounting and
Financial Officer)
EXHIBIT INDEX
31.1 -- Certification by Lyle G. Stockstill Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 -- Certification by Robert E. Fulton Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 -- Certification by Lyle G. Stockstill Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 -- Certification by Robert E. Fulton Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
CERTIFICATION BY LYLE G. STOCKSTILL PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Lyle G. Stockstill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Torch
Offshore, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
(a)designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
(c)evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
controls over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b)any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 14, 2004 /s/ LYLE G. STOCKSTILL
----------------------
Lyle G. Stockstill
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION BY ROBERT E. FULTON PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Robert E. Fulton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Torch
Offshore, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
(a)designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
(c)evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
controls over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b)any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 14, 2004 /s/ ROBERT E. FULTON
--------------------
Robert E. Fulton
Chief Financial Officer
Exhibit 32.1
CERTIFICATION BY LYLE G. STOCKSTILL PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report of Torch Offshore, Inc.
(the "Company") on Form 10-Q for the period ending March 31, 2004
as filed with the Securities and Exchange Commission of the date
hereof (the "Report"), I, Lyle G. Stockstill, Chairman of the
Board and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ LYLE G. STOCKSTILL
----------------------
Lyle G. Stockstill
Chairman of the Board and Chief Executive Officer
Exhibit 32.2
CERTIFICATION BY ROBERT E. FULTON PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report of Torch Offshore, Inc.
(the "Company") on Form 10-Q for the period ending March 31, 2004
as filed with the Securities and Exchange Commission of the date
hereof (the "Report"), I, Robert E. Fulton, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ ROBERT E. FULTON
--------------------
Robert E. Fulton
Chief Financial Officer