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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2001
REGISTRATION NO. 333-54120
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TORCH OFFSHORE, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 1389 74-2982117
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
401 WHITNEY AVENUE, SUITE 400
GRETNA, LOUISIANA 70056-2596
(504) 367-7030
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
WILLIAM J. BLACKWELL
401 WHITNEY AVENUE, SUITE 400
GRETNA, LOUISIANA 70056-2596
(504) 367-7030
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
R. JOEL SWANSON MARK W. COFFIN JAMES H. WILSON
BAKER BOTTS L.L.P. ADAMS AND REESE LLP VINSON & ELKINS L.L.P.
910 LOUISIANA ST. 1221 MCKINNEY, 44TH FLOOR 1001 FANNIN ST., SUITE 2300
HOUSTON, TX 77002-4995 HOUSTON, TX 77010 HOUSTON, TX 77002-6760
(713) 229-1234 (713) 652-5151 (713) 758-2222
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS Subject to completion May 15, 2001
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5,000,000 SHARES
[TORCH LOGO]
TORCH OFFSHORE, INC.
COMMON STOCK
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This is our initial public offering of shares of our common stock. We expect the
public offering price to be between $14.00 and $16.00 per share.
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "TORC," subject to notice of issuance.
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PER SHARE TOTAL
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Public offering price $ $
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Underwriting discount and commissions $ $
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Proceeds, before expenses, to Torch Offshore, Inc. $ $
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The underwriters may also purchase up to 750,000 shares of common stock from the
selling stockholders and us at the public offering price to cover
over-allotments, if any. Delivery of the shares will be made on or about
, 2001.
UBS WARBURG
CIBC WORLD MARKETS
HOWARD WEIL
A DIVISION OF LEGG MASON WOOD WALKER, INC.
The date of this prospectus is , 2001
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[Torch Offshore, Inc. logo with caption: "Torch Offshore, Inc."]
[depiction of vessel providing subsea construction services on Gulf of Mexico
Shelf with caption: "From the Gulf of Mexico Shelf Today . . ."]
[depiction of vessel providing subsea construction services in deepwater with
caption: ". . . To Deepwater Development Tomorrow"]
[photograph of the Midnight Carrier with caption: "The MIDNIGHT CARRIER is a 270
ft. diving support vessel."]
[photograph of the Midnight Brave with caption: "The MIDNIGHT BRAVE is a 275 ft.
pipelay/bury barge."]
[photograph of the Midnight Star with caption: "The MIDNIGHT STAR is a 197 ft.
diving support vessel."]
[Torch Offshore, Inc. logo]
[photograph of the Midnight Eagle with caption: "The MIDNIGHT EAGLE is a 190 ft.
DP-2 pipelay/bury barge."]
[depiction of the Midnight Warrior with caption: "The MIDNIGHT WARRIOR will be a
336 ft. DP-2 pipelay/subsea construction vessel."]
[photograph of the Midnight Dancer with caption: "The MIDNIGHT DANCER is a 195
ft. diving support vessel."]
[photograph of the Midnight Runner with caption: "The MIDNIGHT RUNNER is a 160
ft. pipelay/bury barge."]
[photograph of the Midnight Arrow with caption: "The MIDNIGHT ARROW is a 197 ft.
DP-2 diving support/subsea construction vessel."]
[text on middle left of page: "Torch owns and operates a fleet of specialized
vessels, ranging from shallow water pipelay barges to dynamically positioned
vessels for deepwater installation."]
[photograph of the Midnight Rider with caption: "The MIDNIGHT RIDER is a 260 ft.
pipelay/bury barge."]
[photograph of Midnight Fox with caption: "The MIDNIGHT FOX is a 130 ft.
4-point/DP supply/diving support vessel."]
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You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with different information. We are not
making an offer to sell these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
TABLE OF CONTENTS
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Prospectus summary.................... 1
The offering.......................... 5
Summary financial and operating
information......................... 6
Risk factors.......................... 8
Cautionary statement about forward-
looking statements.................. 14
Use of proceeds....................... 15
Dividend policy....................... 16
Capitalization........................ 16
Dilution.............................. 17
Selected historical financial and
operating data...................... 18
Unaudited pro forma condensed
financial information............... 20
Management's discussion and analysis
of financial condition and results
of operations....................... 26
Business.............................. 36
Management............................ 49
Certain relationships and related
party transactions.................. 57
Principal and selling stockholders.... 58
Description of capital stock.......... 60
Shares eligible for future sale....... 64
Material United States federal tax
consequences to Non-United States
holders of common stock............. 66
Underwriting.......................... 69
Legal matters......................... 72
Experts............................... 72
Where you can find more information... 72
Glossary of certain industry terms.... 73
Index to financial statements......... F-1
Until , 2001, all dealers that buy, sell or trade the common stock,
whether or not participating in the offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligations to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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Prospectus summary
The following summary highlights selected information from this prospectus and
may not contain all the information that is important to you. To learn more
about the offering and our business, you should read the entire prospectus,
including our financial statements and related notes appearing elsewhere in this
prospectus. Unless we indicate otherwise, the information contained in this
prospectus assumes that the underwriters' over-allotment option is not
exercised. If you are not familiar with some of the industry terms used in this
prospectus, please read the section of this prospectus entitled "Glossary of
certain industry terms."
OUR BUSINESS
We provide subsea construction services in connection with the infield
development of offshore oil and natural gas reservoirs. We are a leading service
provider in our market niche of installing and maintaining small diameter
flowlines and related infrastructure associated with the development of offshore
oil and natural gas reserves on the Continental Shelf of the Gulf of Mexico. Our
customers are major energy companies as well as independent oil and natural gas
operators. The primary services we provide include:
+ installation of flowlines and related infrastructure;
+ pipeline tie-ins and tie-backs;
+ riser installation;
+ pipeline surveys and installation engineering; and
+ integrated construction support.
The majority of our services are performed to facilitate the production of
natural gas. We believe we are one of the leading installers of pipelines in
water depths of less than 200 feet in the Gulf of Mexico. Based upon an annual
survey conducted by Mustang Engineering, Inc. and Offshore Magazine, we
increased our market share of all pipeline installation activities in water
depths of less than 200 feet in the Gulf of Mexico from 15.99% in 1997 to 31.13%
in 1999. Over the last three years, we have expanded our operations,
capabilities and management expertise to enable us to provide deepwater services
analogous to the services we provide on the Shelf.
Since 1997, we have increased the size of our fleet from three to eight
construction and service vessels and upgraded three vessels. We had revenues of
$39.0 million in 1997, $39.2 million in 1998, $21.3 million in 1999 and $46.2
million in 2000. We incurred net losses of $10.6 million in 1999 and $1.6
million in 2000. Our earnings or losses before interest, taxes, depreciation and
amortization, or EBITDA, was $14.5 million in 1997, $11.8 million in 1998,
$(5.0) million in 1999 and $7.5 million in 2000. For the twelve months ended
March 31, 2001, our revenues were $54.0 million and our EBITDA was $10.7
million.
Lyle Stockstill, our chairman and chief executive officer, and Lana Hingle
Stockstill, our senior vice president, started our business in 1978. Since
inception, they, together with their family trusts, have owned at least 90% of
our common stock.
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During the latest downturn in the oil and natural gas industry, we expanded,
upgraded and modernized our fleet. Specifically, we:
+ completed the required drydocking of our fleet;
+ increased the maximum water depth in which the Midnight Brave and the Midnight
Runner are capable of operating;
+ completed the conversion of the Midnight Carrier into a diving support vessel;
+ completed the construction of a new, fully redundant dynamically positioned
pipelay/bury barge, the Midnight Eagle;
+ obtained a new, fully redundant dynamically positioned deepwater subsea
construction vessel, the Midnight Arrow, under a long-term charter; and
+ completed the design, negotiated the construction contract and obtained a
commitment for a financing guarantee from the U.S. Department of
Transportation Maritime Administration, or MARAD, for a new, fully redundant
dynamically positioned deepwater pipelay and subsea construction vessel, the
Midnight Warrior.
BUSINESS DEVELOPMENTS
Since January 2000, we have reached several milestones, including:
+ In April 2001, we entered into an option to purchase a pipelay/bury barge, the
BH-400 (to be renamed the Midnight Rider), which would increase our
capabilities on the Shelf.
+ In January 2001, we renewed our alliance agreement with Unocal Corporation
under which we provide at least 80% of Unocal's Spirit Energy 76 unit's
pipelay, burial and riser installation service demands for its Gulf of Mexico
operations in water depths of up to 200 feet. Services performed under this
alliance accounted for 7.3% of our revenues for the year ended December 31,
2000.
+ For the year ended December 31, 2000, we installed more miles of pipeline than
in any previous year.
+ In November 2000, the Midnight Eagle became the first vessel using dynamic
positioning technology to simultaneously lay and bury pipe in the Gulf of
Mexico.
+ In August 2000, we completed a pre-route pipeline inspection for a potential
deepwater field development. The operations consisted of an inspection and
mapping of the seabed floor in approximately 3,700 feet of water in the Gulf
of Mexico.
+ In July 2000, the United States Coast Guard presented us with a certificate of
appreciation in recognition of our promotion of offshore safety.
CONDITIONS IN OUR INDUSTRY
The price levels of oil and natural gas are the primary determinants of offshore
exploration and development activity. From two year lows in February 1999 to May
9, 2001, NYMEX closing current oil contract prices have increased by 123% and
NYMEX closing current natural gas contract prices have increased by 163%. As oil
and natural gas prices increase or remain at favorable levels, our customers
generally increase their capital budgets for additional offshore exploration and
development. Portions of these budgets will be allocated towards the
construction of subsea infrastructure for the delivery of oil and natural gas to
production facilities or trunk lines.
Another major portion of the capital budgets will be allocated for exploration
and production drilling activity. Because capital expenditures on drilling
generally increase prior to any spending on construction, we consider the number
of active jack-up drilling rigs to be the leading indicator of subsea
construction activity on the Shelf. According to OneOffshore, Inc., the number
of active jack-up drilling rigs on the Shelf has increased from a low of 76 in
April 1999 to 144 in April 2001. Demand for our services on the Shelf generally
follows successful drilling activities by three to 12 months. This is consistent
with the recent improvement in our subsea construction activity on the Shelf, as
evidenced
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by our revenues of $54.0 million in the twelve month period ended March 31, 2001
as compared to our revenues of $22.0 million in the twelve month period ended
March 31, 2000.
In the Gulf of Mexico, the number of hydrocarbon prospects in water depths
greater than 1,500 feet increased from 93 in 1990, as reported by the Minerals
Management Service, to approximately 241 in October 2000, as reported by
Offshore Magazine. We have noticed that demand for pipeline installation for
deepwater projects exceeding 1,000 feet of water depth generally follows initial
exploration drilling activities by at least three years. According to
OneOffshore, Inc., as of December 2000, 128 subsea development projects were
under contemplation in water depths in excess of 1,000 feet in North America. As
these deepwater projects progress, we expect that there will be an increase in
the backlogs of companies providing relevant subsea construction services.
Relatively few vessels domiciled in the Gulf of Mexico are equipped to handle
these deepwater subsea construction jobs.
OUR STRATEGY
We believe that we are well positioned to benefit from the increased level of
activity in the Gulf of Mexico, both on the Shelf and in deepwater regions. We
also believe that our greatest long-term future growth opportunities lie in the
natural extension of our market niche of installing and maintaining small
diameter flowlines and related infrastructure to deepwater.
Our strategy is to add value for our stockholders by continuing to take
advantage of opportunities on the Shelf while expanding our niche services into
the deepwater markets of the Gulf of Mexico and of the South Atlantic Basin. We
intend to execute our deepwater expansion strategy by:
+ focusing on projects involving small diameter infield flowlines and related
infrastructure where we have analogous expertise on the Shelf;
+ providing cost effective services through an expanded fleet of specially
designed and equipped vessels; and
+ leveraging our customer relationships and alliances.
RISK FACTORS
You should review and consider carefully the matters set forth under the caption
"Risk factors," as well as the other information set forth in this prospectus,
including that our results will be affected by the volatile nature of oil and
gas prices, our plans to expand our services into the deepwater may not be
successful, we may have difficulty upgrading our existing vessels and acquiring
or constructing new vessels and we have incurred losses from operations in
recent years, before deciding whether to invest in our common stock. One or more
of these matters could negatively impact our ability to successfully implement
our business strategy and the value of your investment in our stock.
OUR FLEET
We operate a diversified fleet of eight construction and service vessels. In
April 2001, we entered into an option to purchase a pipelay/bury barge, the
BH-400, which terminates on July 31, 2001. We intend to exercise this option
following the completion of the offering. In March 2000, we entered into a
contract to construct a new generation, fully redundant dynamically positioned
vessel, the Midnight Warrior, for deepwater pipelay and subsea construction.
Dynamic positioning technology allows a vessel to maintain its position without
the use of anchors. Dynamic positioning technology allows vessels to operate in
deeper water than would otherwise be possible, lay pipe more quickly and work
more efficiently in congested areas like the Shelf. Three of our existing
vessels are equipped with dynamic positioning technology. Of these, two are
equipped with fully redundant dynamic positioning technology that can hold the
vessel in place in the event of multiple problems in the primary dynamic
positioning system. In addition, three of our vessels are specifically equipped
to simultaneously lay and bury pipelines. Regulations of the Minerals Management
Service require that all pipelines installed in water depths of less than 200
feet be buried.
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We also have an option to construct the Midnight Warrior II, a sister ship of
the same design as the Midnight Warrior. This option terminates on April 15,
2002. We believe significant advantages and savings can be realized by having
two substantially identical vessels in terms of scheduling, spare parts and
flexibility regarding optional equipment modules for use on either vessel. We
are currently consulting with our customers to determine when there will be
sufficient demand for the Midnight Warrior II and exploring the possibility of
MARAD-guaranteed financing for the vessel.
Complementing the Midnight Arrow by adding the Midnight Warrior, and potentially
the Midnight Warrior II, would facilitate our expansion into deepwater. We
designed the Midnight Warrior and the Midnight Warrior II to cost effectively
install small diameter infield flowlines and related infrastructure in
deepwater. We believe that further increasing our deepwater capabilities by
upgrading our existing vessels to use fully redundant dynamic positioning and
other advanced technologies and acquiring additional vessels with these
technologies will position us to take advantage of increases in deepwater
construction activities in the Gulf of Mexico and elsewhere.
STRUCTURE AND OWNERSHIP
Mr. and Mrs. Stockstill formed our predecessor, Torch, Inc., in 1978. In May
2000, Torch, Inc. and funds managed and advised by Lime Rock Partners LLC, or
Lime Rock, formed Torch Offshore, L.L.C. to hold substantially all of the assets
and liabilities of Torch, Inc. Lime Rock is a private equity firm focusing
exclusively on the energy industry. For financial reporting purposes, the
contribution of the assets and liabilities of Torch, Inc. to Torch Offshore,
L.L.C. was considered a recapitalization of Torch, Inc. All historical share and
unit data have been restated to reflect the impact of the recapitalization. In
this prospectus, historical share and common unit data are expressed in terms of
shares, and references to stockholders include unitholders for all relevant
periods.
Torch Offshore, Inc., the issuer of the common stock offered by this prospectus,
is a new holding company formed to own our business. Torch, Inc. and Lime Rock
collectively hold all of the membership interests in Torch Offshore, L.L.C.
Concurrent with the closing of the offering, Torch, Inc. and Lime Rock will
contribute their membership interests in Torch Offshore, L.L.C. to Torch
Offshore, Inc. in exchange for shares of common stock in Torch Offshore, Inc., a
transaction which we refer to as the "Contribution." As a result of the
Contribution our business will become a corporation subject to federal and state
income taxes, and we will record a charge to operations on the closing date of
the Contribution for deferred taxes. For more information regarding this charge,
you should read "Unaudited pro forma condensed financial information."
In this prospectus, the terms "we," "us" and "our" refer to Torch Offshore, Inc.
and, unless the context otherwise requires, its subsidiaries, including Torch
Offshore, L.L.C. (the successor to the historical operations of Torch, Inc.),
after giving effect to the Contribution.
Upon completion of the offering, Mr. and Mrs. Stockstill and their family trusts
will beneficially own the majority of our outstanding common shares.
Accordingly, these stockholders will have the ability to control the election of
our directors and the outcome of all other matters submitted to a vote of our
stockholders.
COMPANY INFORMATION
Our principal executive offices are located at 401 Whitney Ave., Suite 400,
Gretna, Louisiana 70056-2596, and our telephone number at that address is (504)
367-7030.
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The offering
Common stock we are offering........ 5,000,000 shares
Common stock to be outstanding after
the offering........................ 13,333,333 shares
Nasdaq National Market symbol....... "TORC"
Use of proceeds..................... We estimate that our net proceeds from
the offering will be approximately $69
million. We intend to use these net
proceeds as follows:
+ approximately $9 million to provide
the equity investment necessary to
build the Midnight Warrior;
+ approximately $11 million to provide
a portion of the interim construction
financing for the Midnight Warrior;
+ approximately $34 million to repay
indebtedness outstanding at the time
of the offering;
+ approximately $10 million to purchase
the BH-400;
+ approximately $3 million for
construction of a reel base shore
facility and miscellaneous equipment
upgrades; and
+ any balance for general corporate
purposes.
See "Use of proceeds."
Risk factors........................ Investing in our common stock involves
significant risks. See "Risk factors."
Except as otherwise indicated, the information in this prospectus, including the
number of shares to be outstanding after the offering, assumes the following:
+ the issuance of 7,505,000 shares (including 1,000 shares previously issued) in
consideration for the contribution of all of the outstanding interests in
Torch Offshore, L.L.C. held by Torch, Inc.;
+ the issuance of 828,333 shares in consideration for the contribution of all of
the outstanding interests in Torch Offshore, L.L.C. held by Lime Rock;
+ no exercise of the underwriters' over-allotment option; and
+ the exclusion of approximately 300,000 shares issuable upon exercise of
options to be granted in connection with the offering at an exercise price
equal to the initial public offering price.
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Summary financial and operating information
The following table presents summary financial and operating data of Torch
Offshore, L.L.C. and its predecessor, Torch, Inc., for the periods shown. The
information in the following table may not be indicative of our future results.
You should read the following data with the more detailed information appearing
in "Selected historical financial and operating data," "Management's discussion
and analysis of financial condition and results of operations," "Unaudited pro
forma condensed financial information" and the financial statements, including
the notes thereto, appearing elsewhere in this prospectus.
The unaudited pro forma condensed financial information set forth below gives
effect to:
+ the Contribution and our recording of $2.8 million in net deferred income
taxes in connection with the Contribution; and
+ the sale of common stock in the offering at an assumed initial public offering
price of $15.00 per share and the repayment of debt and the temporary
investment of the remaining net proceeds to us pending application thereof as
described in "Use of proceeds."
The unaudited pro forma condensed statement of operations data for the year
ended December 31, 2000 and the three months ended March 31, 2001 is presented
as if such transactions had occurred on January 1, 2000. The unaudited condensed
pro forma balance sheet data as of March 31, 2001 is presented as if such
transactions occurred on March 31, 2001.
UNAUDITED UNAUDITED
UNAUDITED PRO FORMA PRO FORMA
THREE MONTHS YEAR THREE MONTHS
(in thousands, except per share ENDED ENDED ENDED
and operating data) YEARS ENDED DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
STATEMENT OF OPERATIONS DATA 1997 1998 1999 2000 2000 2001 2000 2001
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Revenues.......................... $ 38,955 $ 39,224 $ 21,252 46,205 $ 6,661 $ 14,491 $46,205 $14,491
Cost of sales..................... 22,243 25,198 21,190 34,011 5,862 10,383 34,011 10,383
Gross profit...................... 16,712 14,026 62 12,194 799 4,108 12,194 4,108
Depreciation and amortization..... 1,229 2,187 3,469 4,941 1,171 1,469 4,941 1,469
Income (loss) from operations..... 13,245 9,566 (8,475) 2,540 (1,231) 1,680 2,540 1,680
Income (loss) before income
taxes............................ 11,567 9,075 (9,888) (1,273) (2,170) 769 2,541 1,680
Net income (loss) before
extraordinary item............... 11,415 9,032 (9,892) (1,273) (2,170) 769 1,614 1,067
Net income (loss) attributable to
common stockholders.............. 11,415 9,032 (10,568) (1,578)(1) (2,170) 655(1) 1,614 1,067
Diluted income (loss) per share... 5.68 4.48 (5.50) (0.82)(1) (1.13) 0.34(1) 0.12(2) 0.08(2)
Diluted income (loss) per share,
as adjusted(3)................... 1.45 1.15 (1.41) (0.21) (0.29) 0.09
OTHER FINANCIAL DATA
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EBITDA(4)......................... $ 14,474 $ 11,753 $ (5,006) $ 7,481 $ (60) $ 3,149 $ 7,481 $ 3,149
Net cash provided by (used in):
Operating activities............. 8,195 9,997 (4,206) 1,746 474 (2,752)
Investing activities............. (13,968) (22,047) (6,451) (2,538) (71) (110)
Financing activities............. 6,455 11,467 11,557 463 (1,618) 1,978
BALANCE SHEET DATA (AT END OF PERIOD)
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Working capital................... $ 2,825 $ (663) $ (7,772) $(10,103) $(10,259) $ (9,768) $36,442
Property, net..................... 10,971 31,702 41,120 40,202 40,324 39,418 39,418
Total assets...................... 28,802 47,586 54,069 57,988 51,363 60,241 92,181
Long-term debt, excluding current
portion.......................... 6,540 17,915 29,522 23,957 28,167 22,340 --
Mandatorily redeemable convertible
preferred units(5)............... -- -- -- 4,678 -- 4,699 --
Stockholders' equity.............. 13,590 18,723 7,889 6,311 5,719 6,966 76,715
OPERATING DATA
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Available revenue days(6)......... 959 1,521 1,953 2,603 647 720
Revenue days worked............... 847 1,092 981 1,820 292 459
Total pipelay mileage............. 122 137 125 186 29 60
Average revenue per mile of pipe
laid............................. $319,303 $236,482 $145,632 $218,300 $228,600 $213,700
Average miles per pipelay job..... 2.7 3.1 4.0 2.9 4.1 4.6
Total vessels in operation (at end
of period)....................... 3 6 6 8 8 8
AVERAGE PRICE(7)
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Crude oil (per barrel)............ $ 20.61 $ 14.40 $ 19.32 $ 30.28 $ 28.77 $ 28.68
Natural gas (per thousand cubic
feet)............................ 2.47 2.16 2.31 4.31 2.61 6.23
(See
footnotes on next page)
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(1)On a pro forma basis, as if we had been subject to income taxes, for the year
ended December 31, 2000 and the three months ended March 31, 2001, net income
(loss) attributable to common stockholders would have been $(1,002) and $416,
respectively, and diluted income per share would have been $(0.52) and $0.22,
respectively.
(2)On a pro forma basis, assuming that the offering is limited to only that
number of shares required to generate sufficient net proceeds to repay debt
outstanding at March 31, 2001, our diluted income per share for the year
ended December 31, 2000 and the three months ended March 31, 2001 would have
been $0.15 and $0.10, respectively.
(3)Represents historical diluted income (loss) per share adjusted for the
assumed recapitalization resulting from the contribution of 1,920,000 common
membership units to us in exchange for 7,505,000 shares of our common stock.
Does not reflect the contribution of 212,000 preferred membership units to us
in exchange for 828,333 shares of our common stock.
(4)EBITDA represents earnings before net interest, income taxes, depreciation
and amortization. EBITDA is presented here to provide additional information
about our operations. EBITDA is not a calculation based on generally accepted
accounting principles and should not be considered as an alternative to net
income, as an indicator of our operating performance or as an alternative to
cash flow as a better measure of liquidity. In addition, our EBITDA
calculation may not be comparable to similarly titled measures of other
companies.
(5)Represents $4.7 million of mandatorily redeemable convertible preferred
membership units that will be exchanged for common stock as part of the
Contribution.
(6) Represents total calendar days for each vessel less any days a vessel was
non-operational.
(7)Based on the monthly average closing current contract prices posted by the
NYMEX.
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Risk factors
You should consider carefully the following risk factors and all other
information in this prospectus before you decide to purchase our common stock.
Investing in our common stock is speculative and involves significant risk. Any
of the following risks could impair our business, financial condition and
operating results, could cause the trading price of our common stock to decline
and could result in a partial or total loss of your investment.
RISKS RELATED TO OUR BUSINESS AND OPERATIONS
A SUBSTANTIAL OR EXTENDED DECLINE IN OIL OR NATURAL GAS PRICES COULD RESULT IN
LOWER EXPENDITURES BY THE OIL AND NATURAL GAS INDUSTRY, THEREBY REDUCING OUR
REVENUE.
Demand for our services is greatly influenced by oil and natural gas prices.
Because of the volatility of these prices, demand for our services may vary
significantly. The capital expenditure programs of our customers, which include
major energy companies and independent oil and natural gas operators, are
primarily influenced by the level of oil and natural gas prices and the
availability of funds.
Oil and natural gas prices and the level of offshore drilling and exploration
activity have varied substantially in recent years, resulting in significant
fluctuations in demand for our services. Significant downturns in the oil and
natural gas industry in the past have adversely impacted our financial
performance, resulting in operating losses. A significant or prolonged reduction
in oil or natural gas prices in the future would likely depress offshore
drilling and development activity. A substantial reduction in such activity
would reduce demand for our services and have a material adverse effect on our
financial condition and results of operations.
OUR PLANS TO EXPAND OUR SERVICES INTO THE DEEPWATER MAY NOT BE SUCCESSFUL.
An important part of our growth strategy is our ability to successfully expand
our current services into the deepwater market. We are devoting significant
resources to this strategy. Specifically, we recently expanded our deepwater
capabilities by upgrading an existing vessel and chartering a new vessel. We
also have entered into a contract to construct a new generation, specially
designed and equipped, deepwater pipelay and subsea construction vessel. We may
not be successful in obtaining or executing contracts to provide deepwater
services.
WE MAY HAVE DIFFICULTY UPGRADING OUR EXISTING VESSELS AND ACQUIRING OR
CONSTRUCTING NEW VESSELS ON ACCEPTABLE TERMS, WHICH COULD ADVERSELY AFFECT OUR
STRATEGY TO GROW AND EXPAND OUR DEEPWATER SERVICES.
Upgrading our existing vessels and acquiring or constructing new vessels are key
elements of our strategy to initiate and expand our deepwater services. We
intend to use a portion of the net proceeds of the offering to construct an
additional vessel, and we may pursue the acquisition of existing vessels for
modification or the acquisition of other companies with operations related to or
complementary with our current operations and our deepwater expansion strategy.
We may not be able to identify and acquire acceptable marine equipment or
complementary companies on financial or other terms acceptable to us.
Additionally, we may not be able to obtain financing for the acquisitions on
acceptable terms. A significant or prolonged reduction in oil or natural gas
prices in the future would depress offshore drilling and development activity
and adversely affect our ability to obtain financing for acquisitions. The
construction and refurbishment of marine equipment involves potential delays and
increased costs due to unanticipated delays in equipment deliveries, scheduling
of service providers, equipment condition problems and unforeseen difficulties
with assembly or construction. Any inability on our part to purchase additional
marine equipment or other complementary vessels on
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acceptable financial or other terms could have a material adverse effect on our
strategy to grow and expand our deepwater services business.
DELAYS OR COST OVERRUNS IN THE CONSTRUCTION OF THE MIDNIGHT WARRIOR COULD
ADVERSELY AFFECT OUR BUSINESS, AND EXPECTED CASH FLOWS FROM THE MIDNIGHT WARRIOR
UPON COMPLETION MAY NOT BE IMMEDIATE OR AS HIGH AS EXPECTED.
In the second quarter of 2001, we expect to begin construction of the Midnight
Warrior at an estimated cost of $70 million. The Midnight Warrior is currently
scheduled to be placed into service by mid-2003. Any delay in finalizing the
financing of the cost of the Midnight Warrior or in obtaining the required
interim financing could delay construction. Additionally, we may not be able to
obtain the required interim financing on acceptable terms. This project is
subject to the risks of delays or cost overruns inherent in vessel construction
projects. These risks include:
+ unforeseen quality or engineering problems;
+ work stoppages;
+ weather interference;
+ unanticipated cost increases;
+ delays in receipt of necessary equipment; and
+ inability to obtain the requisite permits or approvals.
Significant delays could have a material adverse effect on expected contract
commitments for this vessel and our future revenues and cash flows. We will not
receive any revenues or cash flow from the Midnight Warrior until it is placed
in service and customers enter into binding arrangements with us, potentially
several months or more after the vessel is completed. Furthermore, customer
demand for the Midnight Warrior may not be as high as we currently anticipate,
and, as a result, our future cash flows may be adversely affected.
AFTER NOVEMBER 6, 2001, MARAD WILL HAVE THE OPTION TO TERMINATE ITS COMMITMENT
TO GUARANTEE FINANCING FOR THE MIDNIGHT WARRIOR.
MARAD will have the option to terminate its commitment to guarantee the
long-term financing of up to 87.5% of the cost of the Midnight Warrior if we
have not placed a portion of the permanent long-term financing, as authorized by
MARAD, by November 6, 2001. If we are unable to place a portion of the long-term
financing by that time and MARAD elects to terminate its commitment, we will be
required to obtain the long-term financing without the benefit of MARAD's
guarantee. We may not be able to obtain the long-term financing without MARAD's
guarantee, and any long-term financing that we are able to obtain will be on
terms less favorable than MARAD guaranteed financing.
WE HAVE INCURRED LOSSES IN RECENT PERIODS AND MAY INCUR ADDITIONAL LOSSES IN THE
FUTURE.
We have, from time to time, incurred losses from operations, particularly during
periods of low industry-wide demand for marine construction services. We
incurred net losses of $10.6 million in 1999 and $1.6 million in 2000, primarily
because of weaker demand for our services. We may not be profitable in the
future. If we do achieve profitability in any period, we may not be able to
sustain or increase such profitability on a quarterly or annual basis. We have
had little cash flow during several recent periods. Insufficient cash flow may
adversely affect our ability to fund anticipated capital expenditures required
to achieve profitability.
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THE SEASONAL NATURE OF THE OFFSHORE CONSTRUCTION INDUSTRY MAY CAUSE OUR
QUARTERLY RESULTS TO FLUCTUATE.
The offshore construction industry in the Gulf of Mexico is seasonal as a result
of weather conditions and the timing of capital expenditures by our customers.
Typically, the greatest demand for offshore construction services is during the
period from May through September. Because of the seasonal nature of the
business, our quarterly results may fluctuate. In addition, the results of any
particular quarter are not necessarily indicative of annual results or
continuing trends.
OUR ORIGINAL ESTIMATES OF COSTS ASSOCIATED WITH OUR LUMP-SUM FIXED-PRICED
CONTRACTS MAY BE INCORRECT AND RESULT IN LOSSES ON PROJECTS AND, THEREFORE,
ADVERSELY EFFECT OUR OPERATING RESULTS.
Because of the nature of the offshore construction industry, the majority of our
projects are performed on a lump-sum fixed-price basis. Changes in offshore job
conditions and variations in labor and equipment productivity may adversely
affect the costs and gross profit realized on a lump-sum fixed-price contract
and may cause variations from the original estimates of those items. Since we
expect that our deepwater contracts may extend over several quarters, variations
from the original estimates of these items on our deepwater contracts may result
in a reduction or elimination of previously reported profits. In addition, we
typically bear the risk of delays caused by adverse weather conditions,
excluding hurricanes and named tropical storms. The risks inherent in the
offshore construction industry may result in the profits we realize on projects
differing from those originally estimated and may result in reduced
profitability or losses on our projects.
WE DEPEND ON SEVERAL SIGNIFICANT CUSTOMERS, AND A LOSS OF ONE OR MORE
SIGNIFICANT CUSTOMERS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Our customers consist primarily of major energy companies and independent oil
and natural gas operators. In recent years, single customers have accounted for
10% or more of our revenues. In 2000, our two largest customers accounted for
15.5% and 11.1%, respectively, of our revenues. The loss of any one of our
largest customers or a sustained decrease in demand by our customers could
result in a substantial loss of revenues and could have a material adverse
effect on our operating performance.
THE LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
Our success depends heavily on the continued services of our senior management.
Our senior management consists of a small number of individuals relative to
other comparable or larger companies. These individuals are Lyle G. Stockstill,
our Chief Executive Officer, Lana J. Hingle Stockstill, our Senior Vice
President -- Administration, Eric N. Smith, our Executive Vice President and
William J. Blackwell, our Chief Financial Officer. If we lost or suffered an
extended interruption in the services of one or more of our senior officers, our
results of operations could be adversely affected. Moreover, we may not be able
to attract and retain qualified personnel to succeed members of our senior
management. See "Management."
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN OUR INDUSTRY.
The industry in which we operate is highly competitive. Several of our
competitors are substantially larger than we are and have greater financial and
other resources. Price is the primary factor in determining which qualified
contractor is awarded the job. Customers also consider the availability and
capabilities of equipment and the reputation and experience of the contractor in
awarding jobs. Competitors with greater financial resources may be willing to
sustain losses on projects to prevent further market entry by competitors, to
cover the fixed costs of their fleets or to avoid the expense of temporarily
idling vessels. Marine construction vessels have few alternative uses and
relatively high maintenance costs whether or not they are in operation. As we
increase the portion of our operations conducted in deepwater, we will face
additional competitors, many of which have more vessels and
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greater experience in deepwater operations. As large international companies
relocate vessels to the Gulf of Mexico, levels of competition may increase and
our business involving deepwater projects could be adversely affected.
OFFSHORE CONSTRUCTION IS SUBJECT TO VARIOUS OPERATING RISKS, AND WE MAY LACK
ADEQUATE INSURANCE TO COVER THESE OPERATING RISKS.
Offshore construction involves a high degree of operational risk. Hazards, such
as vessels capsizing, sinking, grounding, colliding and sustaining damage from
severe weather conditions, are inherent in marine operations. In addition,
vessels engaged in pipeline operations can disrupt existing pipelines. These
hazards can cause personal injury or loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage and the
suspension of production operations. The failure of offshore pipelines and
structural components during and after installation can also result in similar
injuries and damages. Our insurance may not be sufficient or effective to
protect us from these operating risks. A successful claim for damages resulting
from a hazard for which we are not fully insured could have a material adverse
effect on us. Moreover, we may not be able to maintain adequate insurance in the
future at rates that we consider reasonable.
REGULATORY AND ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD ADVERSELY
AFFECT OUR BUSINESS.
Our operations are subject to and affected by various types of governmental
regulation, including numerous federal, state and local environmental protection
laws and regulations. Compliance with these laws and regulations may be
difficult and expensive. In addition, significant fines and penalties may be
imposed for noncompliance. Some environmental laws impose strict liability for
remediation of spills and releases of oil and hazardous substances, rendering a
party liable for environmental damages without regard to its negligence or
fault. Sanctions for noncompliance with these laws and regulations may include
revocation of permits, corrective action orders, administrative or civil
penalties and criminal prosecutions. These laws and regulations may expose us to
liability for the conduct of or conditions caused by others, including our
subcontractors, or for our acts that were in compliance with all applicable laws
at the time these acts were performed. The adoption of laws or regulations
curtailing exploration and development drilling for oil and natural gas for
economic, environmental or other policy reasons could adversely affect our
operations by limiting demand for our services. In addition, new legislation or
regulations or changes in existing regulations may adversely affect our future
operations and earnings.
IF WE ARE UNABLE TO ATTRACT AND RETAIN SKILLED WORKERS OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
Our ability to remain productive and profitable depends substantially upon our
ability to continue to retain and attract project managers, project engineers
and skilled construction workers such as divers, welders, pipefitters and
equipment operators. Our ability to expand our operations is impacted by our
ability to increase our labor force. The demand for skilled workers is currently
high and the supply is limited. A significant increase in the wages paid or
benefits offered by competing employers could result in a reduction in our
skilled labor force, increases in our employee costs, or both. If either of
these events occur, our capacity and profitability could be diminished and our
growth potential could be impaired.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
WE HAVE A LIMITED CALL RIGHT ON SHARES OF OUR COMMON STOCK OWNED BY NON-UNITED
STATES CITIZENS THAT MAY REQUIRE THEM TO SELL THEIR SHARES AT AN UNDESIRABLE
TIME OR PRICE.
Our certificate of incorporation contains limitations on the percentage of our
outstanding common stock and other classes of voting securities that can be
owned by persons who are not United States
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citizens within the meaning of statutes relating to the ownership of United
States flagged vessels. At present, our certificate of incorporation provides
that no more than 23% of our outstanding common stock may be owned by persons
other than United States citizens. The restrictions imposed by our certificate
of incorporation will in some cases allow us to, among other things, redeem
shares owned by non-United States citizens at a price based on the then-current
market price of the shares. As a result, non-United States citizens may be
required to sell their shares at an undesirable time or price.
THE OWNERSHIP OF OUR COMMON STOCK BY OUR PRINCIPAL STOCKHOLDERS WILL LIMIT THE
INFLUENCE OF PUBLIC STOCKHOLDERS.
Upon completion of the offering, Mr. and Mrs. Stockstill and their family trusts
will beneficially own approximately 56.3% of our outstanding shares of common
stock, or 52.0% if the over-allotment option is exercised in full and the
selling stockholders sell the maximum number of shares that they are entitled to
sell in the over-allotment option. Accordingly, these stockholders will have the
ability to control the election of our directors and the outcome of all other
matters submitted to a vote of our stockholders, which may have the effect of
delaying or preventing a change in control. The interests of these stockholders
may differ from yours, and these stockholders may vote their common stock in a
manner that may adversely affect you.
THE CONTROLLING OWNERSHIP POSITION OF MR. AND MRS. STOCKSTILL AND THEIR FAMILY
TRUSTS AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY
DISCOURAGE ACQUISITION BIDS, WHICH MAY REDUCE OR ELIMINATE THE LIKELIHOOD OF A
CHANGE OF CONTROL TRANSACTION AND, THEREFORE, YOUR ABILITY TO SELL YOUR SHARES
FOR A PREMIUM.
In addition to the controlling ownership position of Mr. and Mrs. Stockstill and
their family trusts, provisions of our certificate of incorporation and bylaws
may discourage acquisition bids and may make it more difficult for a third party
to acquire control of our company, including in transactions that a stockholder
might consider in his or her best interests or that might result in a premium
over the market price of the common stock. Our certificate of incorporation and
bylaws:
+ limit stockholder proposals at stockholder meetings;
+ prohibit our stockholders from calling special meetings of stockholders; and
+ limit our stockholders' ability to act by written consent in lieu of a
meeting.
Our board of directors has the authority to issue up to 10,000,000 shares of
preferred stock. The board of directors can fix the terms of the preferred stock
without any action on the part of our stockholders. The issuance of shares of
preferred stock may delay or prevent a change in control transaction or could be
used to put in place a "poison pill." This may adversely affect the market price
and interfere with the voting and other rights of the holders of our common
stock.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. As a result, they may limit
the price that some investors might be willing to pay in the future for shares
of our common stock. These provisions may also impede changes in our management.
THE AVAILABILITY OF SHARES OF OUR COMMON STOCK FOR FUTURE SALE COULD DEPRESS OUR
STOCK PRICE.
Sales by Mr. and Mrs. Stockstill, their family trusts or Lime Rock of a
substantial number of shares of our common stock in the public markets following
the offering and after the expiration of applicable lock-up restrictions, or the
perception that such sales might occur, could have a material adverse affect on
the price of our common stock or could impair our ability to obtain capital
through an offering of equity securities. See "Shares eligible for future sale."
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OUR DEBT AGREEMENT RESTRICTIONS MAY LIMIT OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING, TO PURSUE OTHER BUSINESS OPPORTUNITIES AND TO PAY DIVIDENDS.
Covenants contained in our debt arrangements require us to meet certain
financial tests, which may limit:
+ our flexibility in planning for, and reacting to, changes in our business;
+ our ability to dispose of assets, withstand current or future economic or
industry downturns and compete with others in our industry for strategic
opportunities;
+ our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate and other purposes may be
limited; and
+ our ability to pay dividends.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the pre-offering
pro forma net tangible book value per share of our common stock. If you buy our
common stock in the offering, you will incur immediate and substantial dilution.
The dilution will be approximately $9.25 per share in pro forma net book value,
based on an assumed initial public offering price of $15.00 per share. See
"Dilution."
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Cautionary statement about forward-looking statements
This prospectus, including the sections entitled "Prospectus summary," "Risk
factors," "Management's discussion and analysis of financial condition and
results of operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance,
including our business strategy, and involve known and unknown risks and
uncertainties. These factors may cause our company's or our industry's actual
results, levels of activity, performance or achievements to be materially
different from those expressed or implied by the forward-looking statements.
These risks and other factors include those listed under "Risk factors" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"intends," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue," or the negative of these terms or other comparable
terminology.
These statements are only predictions. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. When
considering these forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this prospectus.
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Use of proceeds
We estimate that the net proceeds to us from the offering, based upon an assumed
initial public offering price of $15.00 per share, will be approximately $69
million, or $74 million if the underwriters exercise their over-allotment option
in full and the selling stockholders sell the maximum number of shares they are
entitled to sell in the over-allotment option, after deducting underwriting
discounts and commissions and estimated offering expenses. We will not receive
any proceeds from the sale of common stock by the selling stockholders in the
over-allotment option. We intend to use the net proceeds to us as follows:
+ approximately $9 million to provide the equity investment necessary to build
the Midnight Warrior;
+ approximately $11 million to provide a portion of the interim construction
financing for the Midnight Warrior;
+ approximately $34 million to repay indebtedness under a loan with Transamerica
Equipment Financial Services Corporation and loans with Regions Bank;
+ approximately $10 million to purchase the BH-400;
+ approximately $3 million for construction of a reel base shore facility and
miscellaneous equipment upgrades; and
+ any balance for general corporate purposes.
Pending these uses, we intend to invest the net proceeds in short-term,
interest-bearing, investment-grade securities or government obligations.
The Transamerica loan matures in August 2005 and bears interest at a fixed rate
of 10.56% per year. At April 30, 2001, approximately $25.8 million was
outstanding under the Transamerica loan. In addition, we will pay a prepayment
penalty of approximately $0.8 million to Transamerica in connection with the
repayment of the loan. We have an $8.0 million revolving line of credit and an
equipment loan with Regions Bank. The revolving line of credit matures in
November 2001 and bears interest at a variable annual rate equal to 3.0% plus
the 30-day LIBOR rate. The equipment loan matures in August 2002 and bears
interest at a fixed rate of 8.5% per year. At April 30, 2001, approximately $6.1
million was outstanding under the revolving line of credit and approximately
$1.2 million was outstanding under the equipment loan.
The amount required to build the Midnight Warrior will be approximately $70
million, including MARAD's guarantee fee and interest costs incurred during
construction. We have a written commitment from MARAD to provide a government
guarantee supporting the long-term financing of up to 87.5% of the cost of the
Midnight Warrior when it is delivered. The balance of the funding requirements
are represented by the approximately $9 million in equity we will provide from
the proceeds of the offering. We expect the interest rate on this long-term
financing will be comparable to United States agency financing at the time. We
expect that we will be required to provide approximately $11 million of interim
construction financing for the Midnight Warrior, with additional interim
construction funds of approximately $50 million to be provided by commercial
lenders pending completion of the vessel and long-term financing. We are
currently in discussions with lenders to provide this interim construction
financing for the vessel. MARAD has the option to terminate the commitment if we
have not placed a portion of the permanent long-term financing, as authorized by
MARAD, by November 6, 2001. The commitment is also subject to customary
conditions. In the past, MARAD has not terminated commitments where the
applicant was making demonstrable progress towards a closing. We cannot assure
you that we will be able to demonstrate sufficient progress or that MARAD will
continue to honor the commitment beyond November 6, 2001.
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Dividend policy
We do not plan to declare or pay any cash dividends in the foreseeable future.
Instead, we intend to retain any future earnings for use in our business.
Capitalization
The following table sets forth our capitalization as of March 31, 2001:
+ on an actual basis;
+ on a pro forma basis giving effect to the Contribution and our recording of
$2.8 million in net deferred income taxes in connection with the Contribution;
and
+ on a pro forma basis as adjusted for the sale of common stock in the offering
at an assumed initial public offering price of $15.00 per share and the
repayment of debt and the temporary investment of the remaining net proceeds
to us pending application thereof as described in "Use of proceeds."
You should read the information below in conjunction with "Use of proceeds,"
"Management's discussion and analysis of financial condition and results of
operations," our financial statements and related notes included elsewhere in
this prospectus.
PRO FORMA
FOR THE
PRO FORMA CONTRIBUTION
FOR THE AND THE
(IN THOUSANDS) ACTUAL CONTRIBUTION OFFERING
---------------------------------------------------------------------------------------------------
Cash and cash equivalents................................... $ 2 $ 2 $31,298
======= ======= =======
Short-term borrowings and current portion of long-term
debt...................................................... $14,242 $14,242 $ --
======= ======= =======
Long-term debt (excluding current portion).................. $22,340 $22,340 $ --
Mandatorily redeemable convertible preferred units.......... 4,699 -- --
Stockholders' equity:
Preferred stock; par value $0.01 per share, 10,000,000
shares authorized; none issued and outstanding actual,
pro forma and as adjusted............................... -- -- --
Common stock; par value $0.01 per share, 100,000,000
shares authorized; 1,000 shares issued and outstanding
actual, 8,333,333 shares issued and outstanding pro
forma and 13,333,333 shares issued and outstanding as
adjusted(1)............................................. -- 83 133
Additional paid-in capital................................ 239 8,782 77,382
Retained earnings......................................... 6,727 -- (800)
------- ------- -------
Total stockholders' equity......................... 6,966 8,865 76,715
------- ------- -------
Total capitalization............................... $48,247 $45,447 $76,715
======= ======= =======
(1) Does not include approximately 300,000 shares issuable upon exercise of
options to be granted in connection with the offering at an exercise price
equal to the initial public offering price.
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Dilution
Our net tangible book value at March 31, 2001 after giving effect to the
Contribution, was approximately $8.9 million, or $1.06 per share of our common
stock. Net tangible book value per share represents our total tangible assets
reduced by our total liabilities and divided by the number of shares of common
stock outstanding. Dilution in net tangible book value per share represents the
difference between the amount per share that you pay in the offering and the net
tangible book value per share immediately after the offering.
After giving further effect to the receipt of the estimated net proceeds from
the sale by us of 5,000,000 shares of our common stock at an assumed initial
public offering price of $15.00 per share, our net tangible book value at March
31, 2001, would have been approximately $76.7 million, or $5.75 per share of
common stock. This represents an immediate increase in net tangible book value
per share of $4.69 to existing holders who will receive shares in the
Contribution and an immediate decrease in net tangible book value per share of
$9.25 to you. The following table illustrates this dilution.
Assumed initial public offering price per share............. $ 15.00
Net tangible book value per share at March 31, 2001....... $ 1.06
Increase per share attributable to new investors.......... 4.69
--------
Net tangible book value per share after the offering........ 5.75
--------
Dilution per share to new investors......................... $ 9.25
========
The following table sets forth, as of March 31, 2001, the differences between
the amounts paid or to be paid by the groups set forth in the table with respect
to the aggregate number of shares of our common stock acquired or to be acquired
by each group.
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE
NUMBER % AMOUNT % PER SHARE
Mr. and Mrs. Stockstill and their family
trusts(1)............................... 7,505,000 56.3 $ 3,565,000 4.3 $ 0.48
Lime Rock................................. 828,333 6.2 5,300,000 6.3 6.40
New investors(2).......................... 5,000,000 37.5 75,000,000 89.4 15.00
----------- ----- ----------- -----
Total.............................. 13,333,333 100.0 $83,865,000 100.0
=========== ===== =========== =====
(1) Represents their interest in the book value of Torch Offshore, L.L.C. at the
time of the Contribution.
(2) Before underwriters' commissions and our expenses.
If the underwriters fully exercise their over-allotment option and the selling
stockholders sell the maximum number of shares that they are entitled to sell in
the over-allotment option, the number of shares of common stock held by existing
holders will be reduced to 7,958,333, or 58.1% of the aggregate number of shares
of common stock outstanding after the offering, and the number of shares of
common stock held by new investors will be increased to 5,750,000, or 41.9% of
the aggregate number of shares of common stock outstanding after the offering.
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Selected historical financial and operating data
The following table presents selected financial and operating data of Torch
Offshore, L.L.C. and its predecessor, Torch, Inc., for the periods shown. You
should read the following data with the more detailed information appearing in
"Management's discussion and analysis of financial condition and results of
operations" and our financial statements, including the notes thereto, appearing
elsewhere in this prospectus. The information set forth below for the three
months ended March 31, 2000 and 2001 is derived from our unaudited financial
statements that include, in our opinion, all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation in all material
respects of the financial position and the results for the interim periods when
read in connection with our annual financial statements and the notes to our
annual financial statements appearing elsewhere in this prospectus. The results
of operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the full year.
UNAUDITED
THREE MONTHS
(IN THOUSANDS, EXCEPT PER SHARE ENDED
AND OPERATING DATA) YEARS ENDED DECEMBER 31, MARCH 31,
STATEMENT OF OPERATIONS DATA 1996 1997 1998 1999 2000 2000 2001
-------------------------------------------------------------------------------------------
Revenues............................. $ 20,873 $ 38,955 $ 39,224 $ 21,252 $ 46,205 $ 6,661 $ 14,491
Cost of sales........................ 13,602 22,243 25,198 21,190 34,011 5,862 10,383
-------- -------- -------- -------- -------- -------- --------
Gross profit(1)...................... 7,271 16,712 14,026 62 12,194 799 4,108
Depreciation and amortization........ 681 1,229 2,187 3,469 4,941 1,171 1,469
General and administrative........... 3,147 2,126 2,275 3,327 3,759 875 959
Other operating (income) expense..... (252) 112 (2) 1,741 954 (16) --
-------- -------- -------- -------- -------- -------- --------
Operating income (loss).............. $ 3,695 $ 13,245 $ 9,566 $ (8,475) $ 2,540 $ (1,231) $ 1,680
======== ======== ======== ======== ======== ======== ========
Interest expense, net................ (748) (637) (491) (1,413) (3,813) (939) (911)
Extraordinary loss on early
extinguishment of debt............. -- -- -- (676) -- -- --
Net income (loss) attributable to
common stockholders................ $ 1,876 $ 11,415 $ 9,032 $(10,568) $ (1,578)(2) $ (2,170) $ 655(2)
======== ======== ======== ======== ======== ======== ========
Earnings per share:
Basic.............................. $ 0.98 $ 5.95 $ 4.70 $ (5.50) $ (0.82) $ (1.13) $ 0.34
======== ======== ======== ======== ======== ======== ========
Diluted............................ $ 0.95 $ 5.68 $ 4.48 $ (5.50) $ (0.82)(2) $ (1.13) $ 0.34(2)
======== ======== ======== ======== ======== ======== ========
Common equivalent shares:
Basic.............................. 1,920 1,920 1,920 1,920 1,920 1,920 1,920
======== ======== ======== ======== ======== ======== ========
Diluted............................ 1,975 2,010 2,017 1,920 1,920 1,920 1,920
======== ======== ======== ======== ======== ======== ========
Cash dividends per common share...... $ -- $ 0.37 $ 2.06 $ 0.14 $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA
-------------------------------------------------------------------------------------------------------------------
EBITDA(3)............................ $ 4,376 $ 14,474 $ 11,753 $ (5,006) $ 7,481 $ (60) $ 3,149
Net cash provided by (used in):
Operating activities............... 3,550 8,195 9,997 (4,206) 1,746 474 (2,752)
Investing activities............... (449) (13,968) (22,047) (6,451) (2,538) (71) (110)
Financing activities............... (2,900) 6,455 11,467 11,557 463 (1,618) 1,978
BALANCE SHEET DATA (AT END OF PERIOD)
-------------------------------------------------------------------------------------------------------------------
Working capital...................... $ (671) $ 2,825 $ (663) $ (7,772) $(10,103) $(10,259) $ (9,768)
Property, net........................ 3,010 10,971 31,702 41,120 40,202 40,324 39,418
Total assets......................... 10,821 28,802 47,586 54,069 57,988 51,363 60,241
Long-term debt, excluding current
portion............................ 1,281 6,540 17,915 29,522 23,957 28,167 22,340
Mandatorily redeemable convertible
preferred units(4)................. -- -- -- -- 4,678 -- 4,699
Stockholders' equity................. 2,072 13,590 18,723 7,889 6,311 5,719 6,966
--------------------------------------------------------------------------------
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23
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
--------------------------------------------------------------------------------
UNAUDITED THREE
(IN THOUSANDS, EXCEPT PER SHARE MONTHS ENDED
AND OPERATING DATA) YEARS ENDED DECEMBER 31, MARCH 31,
OPERATING DATA 1996 1997 1998 1999 2000 2000 2001
-------------------------------------------------------------------------------------------------------------------
Available revenue days(5)............ 1,095 959 1,521 1,953 2,603 647 720
Revenue days worked(6)............... 615 847 1,092 981 1,820 292 459
Total pipelay mileage................ 111 122 137 125 186 29 60
Average revenue per mile of pipe
laid............................... $188,288 $319,303 $236,482 $145,632 $218,300 $228,600 $213,700
Average miles per pipelay job........ 3.3 2.7 3.1 4.0 2.9 4.1 4.6
Total vessels in operation (at end of
period)............................ 3 3 6 6 8 8 8
AVERAGE PRICE(7)
-------------------------------------------------------------------------------------------------------------------
Crude oil (per barrel)............... $ 20.02 $ 20.61 $ 14.40 $ 19.32 $ 30.28 $ 28.77 $ 28.68
Natural gas (per thousand cubic
feet).............................. 2.52 2.47 2.16 2.31 4.31 2.61 6.23
(1) Gross profit is revenues less cost of sales.
(2) On a pro forma basis, as if we had been subject to income taxes, for the
year ended December 31, 2000 and the three months ended March 31, 2001, net
income (loss) attributable to common stockholders would have been $(1,002)
and $416, respectively, and diluted income per share would have been
$(0.52) and $0.22, respectively.
(3) EBITDA represents earnings before net interest, income taxes, depreciation
and amortization. EBITDA is presented here to provide additional
information about our operations. EBITDA is not a calculation based on
generally accepted accounting principles and should not be considered as an
alternative to net income, as an indicator of our operating performance or
as an alternative to cash flow as a better measure of liquidity. In
addition, our EBITDA calculation may not be comparable to similarly titled
measures of other companies.
(4) Represents mandatorily redeemable convertible preferred membership units
that will be exchanged for common stock as part of the Contribution.
(5) Represents total calendar days for each vessel less any days a vessel was
nonoperational.
(6) Number of days vessels are offshore performing services, in transit or
waiting on inclement weather, while under contract.
(7) Based on the monthly average closing current contract prices posted by the
NYMEX.
--------------------------------------------------------------------------------
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24
--------------------------------------------------------------------------------
Unaudited pro forma condensed financial information
The following unaudited pro forma condensed financial information for our
company gives effect to:
+ the Contribution and our recording of $2.8 million in net deferred income
taxes in connection with the Contribution; and
+ the sale of common stock in the offering at an assumed initial public
offering price of $15.00 per share and the repayment of debt and the
temporary investment of the remaining net proceeds to us pending
application thereof as described in "Use of proceeds."
The information presented is derived from, should be read in conjunction with,
and is qualified in its entirety by reference to our historical financial
statements and notes thereto appearing elsewhere in this prospectus.
The unaudited pro forma condensed balance sheet was prepared as if these
transactions had occurred on March 31, 2001. The unaudited pro forma condensed
statements of operations for the year ended December 31, 2000 and the three
months ended March 31, 2001 were prepared as if these transactions had occurred
on January 1, 2000.
The pro forma adjustments are based upon currently available information and
certain estimates and assumptions, and therefore the actual adjustments may
differ from the unaudited pro forma adjustments. However, we believe that the
assumptions provide a reasonable basis for presenting the significant effects of
these transactions as contemplated and that the unaudited pro forma adjustments
give appropriate effect to those assumptions and are properly applied in the
unaudited pro forma financial statements. The unaudited pro forma condensed
balance sheet and statements of operations are not necessarily indicative of our
financial position or results of operations as they might have been if these
transactions had actually occurred on the dates indicated above. In addition,
the unaudited pro forma information is not necessarily indicative of our future
financial position or future results of operations.
--------------------------------------------------------------------------------
20
25
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF MARCH 31, 2001
PRO FORMA
ADJUSTMENTS PRO FORMA
FOR THE ADJUSTMENTS FOR
(IN THOUSANDS) HISTORICAL CONTRIBUTION THE OFFERING PRO FORMA
-----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash........................................... $ 2 $ -- $ 31,296(f) $31,298
Accounts receivable............................ 11,766 -- -- 11,766
Deferred taxes................................. -- 672(a) -- 672
Other current assets........................... 4,700 -- -- 4,700
------- ------- -------- -------
Total current assets............................. 16,468 672 31,296 48,436
Property and equipment, net...................... 39,418 -- -- 39,418
Deferred drydocking charges...................... 3,979 -- -- 3,979
Other assets..................................... 376 -- (28)(g) 348
------- ------- -------- -------
Total assets..................................... $60,241 $ 672 $ 31,268 $92,181
======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade...................... $ 6,578 $ -- $ -- $ 6,578
Other accrued expenses......................... 5,416 -- -- 5,416
Current portion of long-term debt.............. 7,031 -- (7,031)(h) --
Revolving line of credit....................... 7,211 -- (7,211)(h) --
------- ------- -------- -------
Total current liabilities........................ 26,236 -- (14,242) 11,994
Deferred taxes................................. -- 3,472(a) -- 3,472
Long-term debt, less current portion........... 22,340 -- (22,340)(h) --
Mandatorily redeemable convertible preferred
units.......................................... 4,699 (4,699)(b) -- --
Stockholders' equity:
Common stock................................... -- 83(c) 50(i) 133
Additional paid-in-capital..................... 239 (2,800)(a) 68,600(j) 77,382
(83)(c)
4,699(d)
6,727(e)
Retained earnings.............................. 6,727 (6,727)(e) (800)(k) (800)
------- ------- -------- -------
Total stockholders' equity....................... 6,966 1,899 67,850 76,715
------- ------- -------- -------
Total liabilities and stockholders' equity....... $60,241 $ 672 $ 31,268 $92,181
======= ======= ======== =======
See accompanying notes to unaudited pro forma condensed balance sheet.
--------------------------------------------------------------------------------
21
26
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(a) We have operated as a non-taxable entity since 1997. However, following the
Contribution we will be subject to federal and state income taxation.
Accordingly, pro forma adjustments to record the deferred income tax impact
associated with the Contribution as of March 31, 2001 include the following:
DEFERRED TAX
(IN THOUSANDS) ASSET/(LIABILITY)
------------------------------------------------------------
Differences between book and tax bases of property and
equipment and other....................................... $(1,168)
Deferred drydocking charges................................. (1,452)
Reserves for doubtful accounts.............................. 222
Prepaid expenses............................................ (852)
Accrued severance........................................... 450
-------
Net deferred tax liability.................................. $(2,800)
=======
The net deferred tax impact that is expected to be recorded as a charge to
operations in 2001 will be calculated based on the book and tax differences on
the closing date of the Contribution.
(b) Reflects the contribution of 212,000 preferred membership units of Torch
Offshore, L.L.C. for 828,333 shares of our common stock.
(c) Reflects the issuance of 7,505,000 and 828,333 shares of our common stock in
exchange for 1,920,000 common membership units and 212,000 preferred membership
units, respectively, of Torch Offshore, L.L.C.
(d) Reflects the impact to additional paid-in capital from the issuance of
828,333 shares of our common stock in exchange for 212,000 preferred membership
units of Torch Offshore, L.L.C.
(e) Represents the reclassification of retained earnings to additional
paid-in-capital to reflect a constructive distribution to our stockholders
followed by a contribution of capital to our company related to the issuance of
7,505,000 shares of our common stock in exchange for 1,920,000 common membership
units in Torch Offshore, L.L.C.
(f) Represents cash proceeds of $31.3 million from the sale of 5,000,000 shares
of our common stock at an offering price of $15.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses of $6.4
million, and net of the application of $37.3 million of the offering proceeds to
retire existing debt (including prepayment penalties). See "Use of proceeds"
regarding our intended application of the remaining proceeds.
(g) Reflects the write-off of previously deferred financing costs associated
with the early retirement of existing debt.
(h) Reflects the repayment of $36.6 million of existing debt.
(i) Reflects the issuance of 5,000,000 shares of our common stock in the
offering.
(j) Reflects the impact to additional paid-in-capital from the proceeds (in
excess of par value) of the issuance of 5,000,000 shares of common stock in the
offering, net of underwriting discounts and commissions and other offering
expenses.
(k) Represents estimated prepayment penalties and the write-off of previously
deferred financing costs associated with the early retirement of existing debt.
--------------------------------------------------------------------------------
22
27
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL ADJUSTMENTS PRO FORMA
--------------------------------------------------------------------------------------------------
Revenues.................................................... $14,491 $ -- $14,491
Cost of revenues:
Cost of sales............................................. 10,383 -- 10,383
Depreciation and amortization............................. 1,469 -- 1,469
General and administrative expenses....................... 959 -- 959
Other operating (income) expense.......................... -- -- --
------- ------- -------
Total cost of revenues............................. 12,811 -- 12,811
------- ------- -------
Operating income............................................ 1,680 -- 1,680
Other income (expense):
Interest expense.......................................... (911) 911(b) --
Interest income........................................... -- -- --
------- ------- -------
Total other income (expense)....................... (911) 911 --
------- ------- -------
Income before income taxes.................................. 769 911 1,680
Income taxes................................................ -- (613)(c) (613)
------- ------- -------
Net income.................................................. 769 298 1,067
Preferred unit dividends and accretion...................... (114) 114(d) --
------- ------- -------
Net income attributable to common stockholders.............. $ 655 $ 412 $ 1,067(e)
======= ======= =======
Basic income per share...................................... $ 0.34 $ 0.08
======= =======
Diluted income per share.................................... $ 0.34 $ 0.08(g)
======= =======
Weighted average shares:
Basic..................................................... 1,920 13,333(f)
======= =======
Diluted................................................... 1,920 13,333(f)
======= =======
Unaudited pro forma data:
Net income attributable to common stockholders reported
above................................................... $ 655
Pro forma income taxes.................................... (239)(a)
-------
Pro forma net income attributable to common
stockholders............................................ $ 416
=======
Pro forma basic and diluted income per share.............. $ 0.22
=======
See accompanying notes to unaudited pro forma condensed statement of operations.
--------------------------------------------------------------------------------
23
28
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL ADJUSTMENTS PRO FORMA
--------------------------------------------------------------------------------------------------
Revenues.................................................... $46,205 $ -- $46,205
Cost of revenues:
Cost of sales............................................. 34,011 -- 34,011
Depreciation and amortization............................. 4,941 -- 4,941
General and administrative expenses....................... 3,759 -- 3,759
Other operating (income) expense.......................... 954 -- 954
------- ------- -------
Total cost of revenues............................. 43,665 -- 43,665
------- ------- -------
Operating income............................................ 2,540 -- 2,540
Other income (expense):
Interest expense.......................................... (3,814) 3,814(b) --
Interest income........................................... 1 -- 1
------- ------- -------
Total other income (expense)....................... (3,813) 3,814 1
------- ------- -------
Income (loss) before income taxes........................... (1,273) 3,814 2,541
Income taxes................................................ -- (927)(c) (927)
------- ------- -------
Net income (loss)........................................... (1,273) 2,887 1,614
Preferred unit dividends and accretion...................... (305) 305(d) --
------- ------- -------
Net income (loss) attributable to common stockholders....... $(1,578) $ 3,192 $ 1,614(e)
======= ======= =======
Basic income (loss) per share............................... $ (0.82) $ 0.12
======= =======
Diluted income (loss) per share............................. $ (0.82) $ 0.12(g)
======= =======
Weighted average shares:
Basic..................................................... 1,920 13,333(f)
======= =======
Diluted................................................... 1,920 13,333(f)
======= =======
Unaudited pro forma data:
Net loss attributable to common stockholders reported
above................................................... $(1,578)
Pro forma income taxes.................................... 576(a)
-------
Pro forma net loss attributable to common stockholders.... $(1,002)
=======
Pro forma basic and diluted loss per share................ $ (0.52)
=======
See accompanying notes to unaudited pro forma condensed statement of operations.
--------------------------------------------------------------------------------
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29
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(a) Represents an income tax benefit (expense) for federal and state income
taxes at an effective tax rate of 36.5% as if we had operated as a taxable
entity throughout the periods presented.
(b) Represents the elimination of interest expense to reflect the repayment of
existing debt with a portion of the proceeds from the offering. We will incur
significant new debt associated with the construction of the Midnight Warrior,
discussed elsewhere in this prospectus. However, until the Midnight Warrior is
placed into service, expected by mid-2003, associated interest costs will be
capitalized for accounting purposes.
(c) Reflects the income tax effect (36.5% effective rate) of the adjustments
discussed in (b) and (d) combined with the pro forma income tax adjustment
discussed in (a).
(d) Represents the elimination of preferred membership unit dividends and
accretion to reflect the issuance of our common stock in exchange for the
preferred membership units.
(e) The pro forma net income amounts do not include an extraordinary charge of
approximately $0.8 million related to a prepayment penalty for the early
retirement of existing debt. This charge will be reflected as an extraordinary
loss associated with the early retirement of debt included in earnings in the
period in which such debt is repaid.
(f) Reflects the issuance of 7,505,000 and 828,333 shares of our common stock in
exchange for 1,920,000 common membership units and 212,000 preferred membership
units, respectively, of Torch Offshore, L.L.C., and the issuance of 5,000,000
shares of our common stock pursuant to the offering.
(g) On a pro forma basis, assuming that the offering is limited to only that
number of shares required to generate sufficient net proceeds to repay debt
outstanding at March 31, 2001, our diluted income per share for the year ended
December 31, 2000 and the three months ended March 31, 2001 would have been
$0.15 and $0.10, respectively.
--------------------------------------------------------------------------------
25
30
--------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations
The following discussion and analysis should be read in conjunction with our
financial statements and related notes included elsewhere in this prospectus.
The discussion below contains forward looking statements that involve risks and
uncertainties. Our actual results may differ materially from those expressed or
implied in this prospectus. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the caption
"Risk factors."
OVERVIEW
We provide subsea construction services in connection with the infield
development of offshore oil and natural gas reservoirs. We are a leading service
provider in our market niche of installing and maintaining small diameter
flowlines and related infrastructure associated with the development of offshore
oil and natural gas reserves on the Continental Shelf of the Gulf of Mexico.
Over the last three years, we have expanded our operations, capabilities and
management expertise to enable us to provide deepwater services analogous to the
services we provide on the Shelf.
Since 1997, we have increased the size of our fleet from three to eight
construction and service vessels. In 1998, we added two diving support vessels
and one supply/diving support vessel. In the first quarter of 2000, we added one
fully redundant dynamically positioned, or DP-2, pipelay/bury barge and one DP-2
subsea construction vessel. In April 2000, we entered into an option to purchase
a pipelay/bury barge, the BH-400, which would increase our capabilities on the
Shelf. We also have entered into a contract to construct a new generation DP-2
vessel for deepwater pipelay and subsea construction. As part of that
construction contract, we have an option from the shipyard to construct a sister
vessel. We continue to actively seek opportunities to expand our fleet either
through construction or acquisition of vessels.
FACTORS AFFECTING RESULTS OF OPERATIONS
The demand for subsea construction services primarily depends on the prices of
oil and natural gas. These prices reflect the general condition of the industry
and influence our customers' willingness to spend capital to develop oil and
natural gas reservoirs. In addition to the prices of oil and natural gas, we use
the following leading indicators, among others, to forecast the demand for our
services:
+ the offshore mobile rig count and jack-up rig count;
+ forecasts of capital expenditures by major and independent oil and gas
companies;
+ the recent lease sale activity levels; and
+ the expiration dates of existing Gulf of Mexico leases.
Even when demand for subsea construction services is strong, several factors may
affect our profitability, including the following:
+ competition;
+ equipment and labor productivity;
+ weather conditions;
+ contract estimating uncertainties; and
+ other risks inherent in marine construction.
--------------------------------------------------------------------------------
26
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
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 results are not necessarily indicative of
the expected results for any given year.
In the life of an offshore field, capital is allocated to the development of a
well following successful drilling activities. The time that elapses between a
successfully drilled well and the development phase in which we participate
varies depending on the water depth of the field. On the Shelf, demand for our
services generally follows successful drilling activities by three to 12 months.
We have noticed that demand for pipeline installation for deepwater projects
exceeding 1,000 feet of water depth generally follows initial exploration
drilling activities by at least three years. These deepwater installations
typically require much more engineering design work than Shelf installations.
OUTLOOK
The pronounced decline in oil prices experienced during 1998 and part of 1999
led to a dramatic cutback in industry-wide offshore exploration and development
expenditure levels. The reduced offshore activity levels, combined with our
fleet expansion, significantly lowered fleet utilization and revenue levels,
resulting in a net loss for 1999 and 2000. However, oil and natural gas price
improvements which began in 1999 prompted limited increases in exploration and
development expenditure levels in the year 2000 and the first part of 2001,
resulting in recent increases in the demand for our services. Although operators
were initially hesitant to significantly raise their overall expenditure levels,
this increase in activity has facilitated higher utilization of our fleet and
increases in prices for our services, resulting in improved revenues and
increased margins. We believe that our future financial and operating results
will continue to be highly dependent on overall market conditions in the oil and
natural gas industry.
We anticipate that the Gulf of Mexico offshore construction industry in general
and our position in particular will benefit from improved industry fundamentals.
We base our expectation on several factors, including the following:
ENERGY DEMAND IS EXPECTED TO INCREASE
--------------------------------------------------------------------------------
+ The International Energy Agency forecasts that world natural gas
consumption should increase at an annual rate of approximately 3% through
2020.
+ According to the Energy Information Administration of the U.S. Department
of Energy, natural gas is the fuel source for virtually all new power
generation capacity. From 2000 to 2020, natural gas-fired power generation
capacity is expected to grow from 11.3% of total generation capacity to
32.6%.
+ The International Energy Agency forecasts that world oil consumption should
increase at an annual rate of approximately 2% through 2020.
+ Our management believes that significant capital must be continually
invested in order to maintain existing energy production levels.
--------------------------------------------------------------------------------
27
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
SHELF TRENDS ARE POSITIVE
--------------------------------------------------------------------------------
+ Our management believes that increased demand for natural gas and the
dominant role of independent oil and natural gas companies on the Shelf
should allow the Gulf of Mexico to maintain and even increase its position
as a major source of North American natural gas supplies.
+ According to OneOffshore, Inc., the Shelf jack-up rig count increased from
a low of 76 in April 1999 to 144 in April 2001.
+ According to OneOffshore, Inc., rig day rates for conventional 300 foot,
independent leg jack-ups increased from $16,500 in April 1999 to $56,000 in
April 2001, while utilization has risen from 67% to 96% over the same
period.
+ According to OneOffshore, Inc., standard supply vessel day rates increased
from $2,300 in April 1999 to $8,000 in April 2001, while utilization has
risen from 60% to 84% over the same period. These vessels are used to
support offshore drilling and production programs.
+ Our management believes that technological advances have enabled oil and
natural gas companies to improve exploration success rates.
+ Our management believes that improved technology and higher natural gas
prices now permit the exploration for and development of marginal
prospects, resulting in increased activity on the natural gas-rich Shelf
where we have a strong market position.
+ The Minerals Management Service has proposed to offer royalty relief for
deep gas subsalt wells on the Shelf in the near term.
DEEPWATER TRENDS ARE POSITIVE
--------------------------------------------------------------------------------
+ According to Simmons & Company International, deepwater basins are one of
the few non-OPEC areas to have major reserve potential, with numerous
individual discoveries expected to produce more than one billion barrels
each.
+ According to Infield Systems Limited and Douglas-Westwood Limited,
deepwater expenditures are estimated at over $20 billion per year through
2004. This expenditure level is estimated to require the drilling and
completion of approximately 1,400 wells and the supply of approximately
1,000 subsea trees, 300 templates and manifolds, 6,100 miles of subsea
control lines, 7,400 miles of flowlines and risers and more than 100 fixed
or floating platforms.
+ According to Infield Systems Limited, identified fields and announced
discoveries worldwide in water depths greater than 1,000 feet now exceed
44.2 billion BOE. This compares to total U.S. proved reserves of 57.6
billion BOE, according to the Energy Information Administration.
+ According to OneOffshore, Inc., as of December 2000, 128 subsea development
projects were under contemplation in water depths in excess of 1,000 feet
in North America.
+ According to OneOffshore, Inc., as of April 2001, the number of deepwater
drilling rigs in operation or under construction which are capable of
drilling in water depths greater than 3,000 feet has increased from 38 in
1993 to 94. Of these 94 deepwater rigs, 15 are currently under construction
and are scheduled for delivery by year-end 2001. We believe the increase in
deepwater drilling assets should serve to accelerate the pace of deepwater
field developments and increase the subsequent demand for deepwater
construction and pipelay vessels.
--------------------------------------------------------------------------------
28
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
OUR COMPETITIVE MARKET POSITION
--------------------------------------------------------------------------------
+ We expanded our fleet from three to eight vessels during a time of weak
market conditions and are now positioned to take advantage of improved
conditions.
+ The common contracting practice, by majors in the deepwater Gulf of Mexico,
of dividing large development projects into discrete segments and selecting
the "best in class" contractor for each segment favors our deepwater market
niche strategy. See "Business -- Our Strategy."
+ The extensive transportation infrastructure present in the Gulf of Mexico
facilitates the development of incremental fields that can be tied into
existing trunk lines originally constructed to service fields that are now
in the process of decline, favoring our Shelf market niche strategy.
Although we have based our expectations on the factors listed above, in the past
the energy industry has been extremely volatile, and we cannot assure you that
these factors will be correct or that they will have the effects that we expect.
STRUCTURE AND OWNERSHIP
In May 2000, we formed Torch Offshore, L.L.C. to hold the assets and liabilities
of Torch, Inc. At that time, Lime Rock purchased preferred membership units in
Torch Offshore, L.L.C. representing approximately 10% of the total membership
units outstanding for $5.3 million. These preferred membership units are
entitled to cumulative distributions at a rate of 7% per year.
Torch Offshore, Inc. is a new holding company that we formed to hold all of the
membership interests of Torch Offshore, L.L.C. In connection with the offering
and as part of the Contribution:
+ Lime Rock will contribute its preferred membership units in Torch Offshore,
L.L.C. to us in exchange for 828,333 shares of our common stock and will be
paid accrued distributions of approximately $0.1 million; and
+ Torch, Inc. will contribute its common membership units in Torch Offshore,
L.L.C. to us in exchange for 7,505,000 shares of our common stock.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 TO THREE MONTHS ENDED MARCH
31, 2000
Revenues. Revenues were $14.5 million for the three months ended March 31, 2001
compared to $6.7 million for the three months ended March 31, 2000, an increase
of 118%. We were able to increase our fleet-wide working days 57% primarily
because of strengthening in the offshore construction market allowing us to
achieve an average vessel utilization of 68.9%, up from 45.1% achieved for the
first quarter of 2000. This increased activity level allowed average pricing
levels for our services to rise 33% over average levels for the three months
ended March 31, 2000 (up 21% and 11% from average pricing levels for the year
2000 and the fourth quarter of 2000, respectively).
Gross Profit. Gross profit, which is revenues less cost of sales, was $4.1
million (28.3% of revenues) for the three months ended March 31, 2001 compared
to $0.8 million (12.0% of revenues) for the three months ended March 31, 2000,
an increase of 414%. This increase resulted from the expanded revenue base and
the improving pricing levels for our services.
Depreciation and Amortization. Depreciation and amortization expense was $1.5
million for the three months ended March 31, 2001 compared to $1.2 million for
the three months ended March 31, 2000, an increase of 25%. This increase
reflects the amortization of the two drydockings incurred during 2000.
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General and Administrative Expenses. General and administrative expenses
totaled $1.0 million (6.6% of revenues) for the three months ended March 31,
2001 compared to $0.9 million (13.1% of revenues) for the three months ended
March 31, 2000, an increase of 10%. This increase was primarily caused by
greater sales and related promotional costs and the introduction of two
additional vessels during the year 2000. We anticipate that total general and
administrative expenses will continue to be impacted by costs related to our
fleet expansion, our efforts to strengthen our deepwater activity levels and the
additional costs associated with being a public entity.
Net Income (Loss) Attributable to Common Stockholders. Net income to common
stockholders for the three months ended March 31, 2001 was $0.7 million,
including a $0.1 million charge for preferred dividends associated with the Lime
Rock investment, compared with a net loss of $2.2 million for the three months
ended March 31, 2000.
Since 1997, we have not been subject to, and there has been no provision for,
income taxes. If we had been subject to payment of income taxes, we would have
recorded an additional charge of $0.2 million for the three months ended March
31, 2001 and a credit of $0.8 million for the three months ended March 31, 2000.
Upon completion of the offering, we will become subject to corporate level
taxation and will record a charge in 2001 calculated based upon the book and tax
basis differences on the closing date of the Contribution (estimated on a pro
forma basis as of March 31, 2001 to be approximately $2.8 million).
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31,
1999
Revenues. Revenues were $46.2 million for the year ended December 31, 2000
compared to $21.3 million for the year ended December 31, 1999, an increase of
117%. This increase was primarily caused by an 86% improvement in our fleet-wide
working days resulting from strengthening in the overall offshore construction
market activity levels and the introduction into service of the Midnight Eagle
pipelay/bury barge and the Midnight Arrow subsea construction vessel in early
2000. Additionally, we benefited from incurring fewer scheduled drydock days in
2000, as the Midnight Brave and Midnight Dancer underwent longer required
"5-year" surveys in 1999, while the Midnight Runner and the Midnight Carrier
underwent shorter drydock inspections in 2000. These combined factors allowed us
to achieve an average vessel utilization of 70.4%, up from 52.5% achieved in
1999. In addition, although market conditions remained extremely price sensitive
throughout 2000, the improved offshore construction activity level allowed
average pricing levels for our services to strengthen 11% over 1999 average
levels, with the improvement coming during the second half of 2000.
Gross Profit. Gross profit was $12.2 million (26.4% of revenues) for the year
ended December 31, 2000 compared to $0.1 million for the year ended December 31,
1999. This increase resulted from the expanded revenue base and the improving
pricing levels received for our services.
Depreciation and Amortization. Depreciation and amortization expense was $4.9
million for the year ended December 31, 2000 compared to $3.5 million for the
year ended December 31, 1999, an increase of 42%. This increase reflects the
amortization of the two drydockings during the year ended December 31, 1999 and
the Midnight Eagle being introduced into service in 2000.
General and Administrative Expenses. General and administrative expenses were
$3.8 million (8.1% of revenues) for the year ended December 31, 2000 compared to
$3.3 million (15.7% of revenues) for the year ended December 31, 1999, an
increase of 13%. This increase was primarily caused by expanded sales efforts
and related promotional costs. The continued competitive market situation
experienced during the year ended December 31, 2000 and the introduction of two
additional vessels during this year contributed to these costs. We anticipate
that total general and administrative
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expenses will continue to be impacted by costs related to our fleet expansion,
our efforts to strengthen our deepwater activity levels and the additional costs
associated with being a public entity.
Other Operating (Income) Expense. Other operating expense was $1.0 million for
the year ended December 31, 2000 compared to $1.7 million for the year ended
December 31, 1999, a decrease of 45%. Other operating expense for the year ended
December 31, 2000 primarily related to severance costs associated with a former
employee and the provision for doubtful trade receivables. During the year ended
December 31, 1999, in an effort to facilitate certain improvements to our
overall operating capabilities and to eliminate the duplicate costs of operating
two separate offices, we consolidated our corporate and operations offices. As
part of this process, we incurred certain one-time employee severance, office
closure and relocation costs totaling approximately $0.2 million. In addition,
because of this consolidation process, we recognized a charge of approximately
$1.5 million for the termination agreement associated with one employee (see
Notes 11 and 12 to the financial statements).
Interest Expense, Net. Net interest expense was $3.8 million for the year ended
December 31, 2000 compared to $1.4 million for the year ended December 31, 1999,
an increase of 170%. This increase was attributable to higher overall debt
levels incurred in connection with our August 1999 refinancing of our fleet.
During the year ended December 31, 1999, we capitalized $1.4 million of interest
costs associated with construction of the Midnight Eagle, which we placed into
service in 2000.
Extraordinary Loss. In August 1999, we refinanced our fleet, resulting in a
longer repayment schedule and additional borrowings. In connection with this
debt refinancing, we recognized a $0.7 million charge on the early
extinguishment of debt (see Note 7 to the financial statements).
Net Income (Loss) Attributable to Common Stockholders. Net loss to common
stockholders for the year ended December 31, 2000 was $1.6 million, including a
$0.3 million charge for preferred dividends associated with the Lime Rock
investment, compared with a net loss of $10.6 million for the year ended
December 31, 1999.
If we had been subject to payment of income taxes, we would have recorded a
credit of $0.6 million for the year ended December 31, 2000 and a credit of $3.9
million in the year ended December 31, 1999.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998
Revenues. Revenues were $21.3 million for the year ended December 31, 1999
compared to $39.2 million for the year ended December 31, 1998, a decrease of
46%. The decrease in revenues during 1999, despite the additional capacity
generated as a result of the three vessel additions occurring throughout 1998,
was caused by the significant reduction in industry-wide offshore construction
activity levels in late 1998. Consequently, our average vessel utilization fell
from 75.4% in 1998 to 52.5% in 1999. These factors contributed to an extremely
price sensitive market environment, causing pricing levels for our services to
decline over 30% from 1998 levels.
Gross Profit. Gross profit was $0.1 million for the year ended December 31,
1999 compared to $14.0 million (35.8% of revenues) for the year ended December
31, 1998. The decrease was a result of lower offshore construction activity
levels and the decline in average pricing for our services.
Depreciation and Amortization. Depreciation and amortization expense was $3.5
million for the year ended December 31, 1999 compared to $2.2 million for the
year ended December 31, 1998, an increase of 59%. The increase was attributable
to vessel additions occurring throughout 1998.
General and Administrative Expenses. General and administrative expenses were
$3.3 million (15.7% of revenues) for the year ended December 31, 1999 compared
to $2.3 million (5.8% of revenues) for the year ended December 31, 1998, an
increase of 46%. This increase in general and administrative expenses was
primarily attributable to the additional management and related administration
costs to
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support a doubling of our fleet from 1997 to 1998. Additionally, we increased
our sales force and substantially increased our marketing efforts associated
with our then current fleet, as well as contemplated fleet additions for the
year ended December 31, 2000.
Other Operating (Income) Expense. Other operating expense was $1.7 million for
the year ended December 31, 1999. The other operating expense for the year ended
December 31, 1999 was primarily related to employee severance and relocation
costs incurred as a result of consolidating our corporate and operations offices
(see Notes 11 and 12 to the financial statements). There was no other operating
income or expense in the year ended December 31, 1998.
Interest Expense, Net. Net interest expense was $1.4 million for the year ended
December 31, 1999 compared to $0.5 million for the year ended December 31, 1998,
an increase of 188%. This increase was attributable to higher overall debt
levels as a result of fleet additions experienced throughout 1998. Additionally,
during 1999, we capitalized $1.4 million of interest costs associated with the
construction of the Midnight Eagle, compared to $0.7 million of capitalized
interest costs during 1998.
Net Income (Loss) Attributable to Common Stockholders. Net loss to common
stockholders was $10.6 million for the year ended December 31, 1999 compared to
net income of $9.0 million for the year ended December 31, 1998. The net loss
for the year ended December 31, 1999, which included an extraordinary charge of
$0.7 million related to the refinancing of our credit facility described in Note
7 to the financial statements, reflected the significant decline in offshore
construction activities and the resulting impact on the pricing for our
services.
If we had been subject to payment of income taxes, we would have recorded a
credit of $3.9 million for the year ended December 31, 1999 and a charge of $3.3
million for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund identified vessel additions,
improvements associated with our expansion program and to provide working
capital. We intend to use the proceeds from the offering, as well as cash
provided from operations and additional borrowings, to proceed with identified
expansion opportunities and to eliminate our existing borrowings. We intend to
continue to expand our operating capabilities. Such an expansion may include the
acquisition of existing vessels or of other businesses consistent with our
deepwater expansion strategy, although we are engaged in no active discussions
related to such acquisitions at the present time.
Historically, our capital requirements have been primarily for the acquisition
and improvement of our vessels and other related equipment. Capital expenditures
totaled $22.1 million for 1998, $11.7 million for 1999, $2.5 million for 2000
and $0.1 million for the three months ended March 31, 2001. These capital
expenditures represent the significant expansion of our fleet since 1997 and
were funded with cash flow from operations and additional indebtedness. In
addition, in 1999 we withdrew the remaining $5.2 million from our Merchant
Marine Capital Construction Fund account (see Note 2 to the Financial
Statements) to use for payment of the Midnight Eagle construction expenditures.
In the future, we expect to contribute the approximately $9 million representing
our permanent equity in the Midnight Warrior to our Merchant Marine Capital
Construction Fund account to take advantage of the tax timing benefits
associated with this program. In addition, we expect to fund our equity
requirements for any future qualified investments in the same manner. We
currently estimate capital expenditures for 2001-2003 to be approximately $28
million for 2001, $33 million for 2002 and $22 million for 2003, primarily
representing the construction of, and the equipment and support facilities
associated with, the Midnight Warrior and the purchase of the BH-400. These
estimates exclude a total of approximately $5 million for routine drydock
inspections of our vessels to be incurred over these three periods. If we were
to exercise our option to construct the Midnight
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Warrior II sister ship, we would increase our estimated capital expenditures by
approximately $75 million, primarily incurring those costs in 2002 and 2003.
This option terminates on April 15, 2002.
On April 10, 2001, the United States Bankruptcy Court for the Southern District
of Texas, Houston Division, approved an agreement that provides us the option to
purchase an additional pipelay/bury barge, the BH-400, for a purchase price of
$9,450,000. The option period extends through July 31, 2001. As consideration
for the option, we were required to pay $100,000 on May 1, 2001. We will be
required to pay $100,000 on each of June 1, 2001 and July 1, 2001, unless we
exercise the option prior to these dates, to maintain our purchase right under
the agreement. We intend to exercise the option in the event that adequate
proceeds are realized from the offering to fund the purchase of the BH-400.
Consistent with the focus towards investing in newer technology, deepwater
capable assets such as the Midnight Warrior and the Midnight Warrior II sister
ship discussed above, the last two vessels added to our fleet have been DP-2
deepwater capable. Through year-end 2000 we have expended approximately $22
million (in combined capital expenditures and operating lease payments) for
these vessels, with an additional estimated $12 million to be incurred in
associated operating lease payments through early 2005 (see Note 12 to the
financial statements).
MARAD has issued a commitment, subject to customary conditions, to guarantee the
20-year financing covering 87.5% of the cost of constructing the Midnight
Warrior. MARAD has the option to terminate the commitment if we have not placed
a portion of the permanent long-term financing, as authorized by MARAD, by
November 6, 2001. In the past, MARAD has not terminated commitments where the
applicant was making demonstrable progress towards a closing. We cannot assure
you that we will be able to demonstrate sufficient progress or that MARAD will
not terminate its commitment after November 6, 2001. Although we have not
entered into the underlying financing arrangements, we believe that this MARAD
commitment will provide us with more attractive financing terms than could
otherwise be achieved. To the extent any of our future vessel construction
qualifies for a MARAD guarantee, we plan to apply to use this program.
If MARAD terminates its commitment, we intend to proceed with the construction
of the Midnight Warrior using non-guaranteed financing. Any such non-guaranteed
financing would be on terms less favorable than MARAD-guaranteed financing and
would result in higher interest costs to us. We cannot assure you that we will
be able to obtain any non-guaranteed financing or that any non-guaranteed
financing that we are able to obtain will not require a greater equity
investment by us in the vessel or provide a shorter maturity period. If we are
not able to obtain any non-guaranteed financing, our ability to implement our
business strategy would be negatively impacted.
We currently are seeking at least $50 million from commercial lenders to provide
interim construction financing for the Midnight Warrior pending the completion
of the vessel and long-term financing guaranteed by MARAD. Our discussions
regarding interim financing for the Midnight Warrior have been limited to
preliminary meetings with various commercial lenders. Upon completion of the
offering, we believe that we will have several interim financing sources
available to us.
We have a loan with Transamerica that bears interest at a fixed annual rate of
10.56%. The loan calls for the payment of equal monthly installments through
August 2005. Amounts outstanding are secured by a first priority security
interest in all of our marine equipment and a personal guarantee from Mr. and
Mrs. Stockstill. The loan also provides for a 3% prepayment penalty. At April
30, 2001, $25.8 million was outstanding. We intend to fully repay this loan,
including the prepayment penalty of $0.8 million, with the proceeds of the
offering.
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In August 1999, we closed a $2.5 million, three-year installment loan from
Regions Bank at a fixed interest rate of 8.5%. The loan is secured by a modular
reel lay system, our eligible trade accounts receivable and a personal guarantee
from Mr. Stockstill. At April 30, 2001, $1.2 million was outstanding under the
loan. We intend to fully repay this loan with the proceeds of the offering.
We also have an $8.0 million revolving line of credit with Regions Bank, which
bears interest at a rate of 3.0% plus the 30-day LIBOR rate. Amounts outstanding
under the revolving line of credit may not exceed 80% of eligible trade accounts
receivable. The revolving line of credit matures on November 12, 2001 and is
secured by some of our eligible trade accounts receivable and a personal
guarantee from Mr. and Mrs. Stockstill. At April 30, 2001, $6.1 million was
outstanding under the revolving line of credit. We intend to fully repay the
outstanding amounts under the revolving line of credit with the proceeds of this
offering.
Under the terms of the revolving line of credit, we must maintain a minimum
tangible net worth (including mandatorily redeemable preferred stock) of at
least $10 million, a minimum debt service ratio of not less than 1.2 to 1 and a
maximum debt to tangible net worth ratio of 3 to 1. In the near future, we hope
to renegotiate our revolving line of credit to include a greater maximum advance
limit and an extended maturity date. Although we may not be able to achieve
these objectives, we believe that the revolving line of credit can be replaced
with a new facility having similar terms.
As of December 31, 2000, we were not in compliance with certain financial
covenants under our loan with Transamerica and our facilities with Regions Bank.
However, we have obtained waivers from each of these lenders regarding these
matters through January 1, 2002.
In May 2000, Lime Rock purchased preferred membership units in Torch Offshore,
L.L.C. for $5.3 million. The preferred membership units are entitled to a 7% per
year cumulative distribution. Lime Rock will contribute its preferred membership
units to us in exchange for 828,333 shares of our common stock and will be paid
accrued distributions of approximately $0.1 million in connection with the
Contribution.
We believe that our cash flow from operations and available borrowings under our
revolving line of credit will be sufficient to meet our existing liquidity needs
for the next year. We also believe that the proceeds from the offering and the
interim construction financing, in addition to our cash flow from operations,
will be sufficient to complete our identified growth plans. If we are unable to
complete the offering, our growth plans will be negatively impacted. If our
plans or assumptions change or prove to be inaccurate, if we cannot obtain the
interim construction financing on satisfactory terms or if we make any
additional acquisitions of existing vessels or other businesses, we may need to
raise additional capital. We may not be able to raise these additional funds, or
we may not be able to raise such funds on favorable terms.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which we adopted effective January 1, 1999.
SFAS No. 133 requires us to record all derivatives as assets or liabilities at
fair value. Changes in derivative fair values are either recognized in earnings,
offset against changes in the fair value of the related hedged assets,
liabilities and firm commitments or, for forecasted transactions, recorded as a
component of other comprehensive income in stockholders' equity until the hedged
transactions occur and are recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value is recognized in earnings immediately.
We have not engaged in activities or entered into arrangements associated with
derivative instruments.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements" which provides
guidance related to revenue
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recognition based on interpretations and practices followed by the Securities
and Exchange Commission. We have adopted the provisions of SAB 101 which had no
impact on our previously existing revenue recognition practices.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in the financial
instruments arising from transactions that we enter into in the normal course of
our business. In the past, it has not been our practice to enter into derivative
financial instrument transactions to manage or reduce market risks or for
speculative purposes, but our business is subject to interest rate risk on our
debt obligations. Our revolving credit facility has a variable rate which
results in potential exposure to interest rate risk from a cash flow
perspective. The fair value of debt with a fixed interest rate generally will
increase as interest rates fall, given consistency in all other factors.
Conversely, the fair value of fixed rate debt will generally decrease as
interest rates rise.
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Business
OUR COMPANY
We provide subsea construction services in connection with the infield
development of offshore oil and natural gas reservoirs. Our vessels primarily
install marine pipelines that transport oil and natural gas to production
platforms and subsea production systems. We also connect production platforms to
trunk lines that transport oil and natural gas to shore. In a typical offshore
field, several development wells are drilled to produce the field. The
production from each of the wells is then transported through relatively small
diameter flowlines to a production platform where it is aggregated and sometimes
treated before being transported through a larger trunk line to shore. The wells
frequently are completed on the ocean floor with production systems that need to
be connected by umbilicals to the platform so that power can be supplied to the
subsea systems and communications and control can be maintained. Umbilicals are
control lines arranged in a bundle that can include power cables and injection
lines. We specialize in the installation and connection of these smaller
flowlines and umbilicals, including the simultaneous laying and burying of
flowlines, the laying of both flexible flowlines and coiled tubing, and the
installation of subsea power and communication cables. Combining our dive
support vessels and remotely operated vehicles with our pipelay vessels allows
us to install pipelines in a more coordinated fashion than is typical in our
industry.
Historically, we have focused on performing projects involving pipelines of 12
inches or less in diameter on the Shelf. Based upon an annual survey conducted
by Mustang Engineering, Inc. and Offshore Magazine, in 1997 we had a 15.99%
market share of total miles of pipe of 12 inches or less in diameter laid in the
Gulf of Mexico. This share grew to 31.13%, on the same basis, for 1999.
We provide additional services in connection with the infield development of
offshore oil and natural gas fields, including inspection and maintenance
services, pipeline tie-ins and tie-backs, riser installation, pipeline surveys
and installation engineering and integrated construction support. These services
support offshore infrastructure construction projects involving pipelines,
production platforms and subsea production systems and are frequently performed
in conjunction with our pipelay or umbilical installations. Our vessels provide
a mobile above water platform that functions as an operational base for divers
in water depths up to 1,000 feet and for remotely operated vehicles at all
practical water depths. In water depths up to 1,000 feet, we typically use our
own divers and dive support personnel because we believe it provides greater
control over project costs and improves the quality of work performed. We own
and operate two saturation diving systems and provide remotely operated vehicles
services through our alliance with Sonsub Inc. See "-- Alliances." We also
provide support services for hook-up and structure abandonment, including barge
and logistic support, minimal steel fabrication, call-out diving and the
chartering of vessels.
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The following table sets forth our historical operating data for the periods
indicated:
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1996 1997 1998 1999 2000 2000 2001
---------------------------------------------------------------------------------------------------------
Pipelay:
Total mileage.............. 111 122 137 125 186 29 60
Number of jobs............. 34 45 44 31 64 7 13
Water depth range (feet)... 6-200 20-235 15-235 8-275 9-310 25-160 25-196
Diameter range (inches).... 3-10 3-12 2-8 2-12 2-10 3-8 4-10
Diameter breakdown (as % of
revenues)(1):
2"-3".................... 4% 10% 12% 11% 7% 0%
4"-6".................... 80% 78% 63% 72% 73% 83%
8"-10"................... 12% 12% 22% 17% 20% 17%
12"...................... 4% 0% 3% 0% 0% 0%
Average length per job
(miles).................. 3.3 2.7 3.1 4.0 2.9 4.1 4.6
Average revenue per mile... $188,288 $319,303 $236,482 $145,632 $218,300 $228,600 $213,700
Other:(2)
Number of jobs............. -- -- 29 21 8 1 2
Water depth range (feet)... -- -- 20-480 15-328 50-3,700 700 500
Average revenue per job.... -- -- $235,345 $154,667 $696,800 $ 98,000 $834,000
(1) This data is not available for 1996.
(2) Other includes inspection and maintenance services, pipeline tie-ins and
tie-backs, riser installation, pipeline surveys and installation
engineering and integrated construction support. Prior to 1998, our
operations were limited to pipelaying.
THE INDUSTRY
General. The subsea construction industry installs and maintains platforms,
pipelines and subsea production equipment for offshore oil and natural gas
producers. Demand for subsea construction services is driven by:
+ worldwide demand for oil and natural gas;
+ discoveries of new reserves;
+ the amount of capital spending associated with developing new oil and natural
gas fields;
+ the need to maintain and repair existing offshore production facilities during
their economic life; and
+ regulatory requirements to remove production facilities after depletion of the
fields.
These factors are predominantly influenced by oil and natural gas prices. The
time required to drill an exploratory well and formulate a development plan
creates a time lag between the start of drilling activities and increased demand
for offshore construction services. Shelf fields may require from three to 12
months from successful drilling activities to development. Deepwater fields
typically require at least three years from exploratory drilling activities to
development. Oil and natural gas producers are only now beginning to increase
their capital budgets for infield marine services following the recovery in oil
and natural gas prices that commenced in the spring of 1999.
The International Energy Agency forecasts that world natural gas consumption
should increase at an annual rate of approximately 3% through 2020 and that
world oil consumption should increase at an annual rate of approximately 2% over
the same period. Increased natural gas demand in the U.S. is expected to come
from continued growth in electric power requirements. Environmental and economic
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considerations dictate that a large percentage of this increased electric power
will come from newly constructed natural gas-fired power generation facilities.
Domestic natural gas supply and production capacity have declined due to the
depletion of reservoirs and the reduction in drilling activity during the recent
period of low oil and natural gas prices in 1998 and 1999, leading to a limited
supply of natural gas. This imbalance between supply and demand has led to
recent increases in natural gas prices. If higher natural gas price and volume
demands are sustained, we expect significant drilling activity to continue on
the Shelf, where, according to the Minerals Management Service, over 70% of the
hydrocarbons produced since 1990 have been natural gas. As a result of the
current environment, the number of active jack-up drilling rigs on the Shelf has
increased from a low of 76 in April 1999 to 144 in April 2001 according to
Offshore Data Services.
The decline in oil prices during the second half of 1997 was predominantly due
to excess worldwide supply, which resulted from a reduction in demand for oil
from countries in Southeast Asia following economic and currency problems in
that region. Lower production and prices reduced oil company cash flows and
offshore drilling and construction activity. Oil prices began to recover in the
second quarter of 1999 primarily because OPEC stabilized oil prices through
voluntary production limits, reducing oil inventories worldwide.
While the economic fundamentals of the Shelf are strong, major energy companies
and large independent oil and natural gas operators are increasingly focusing
their exploration and development efforts on frontier areas, particularly the
deepwater regions of the Gulf of Mexico and off the coasts of South America and
West Africa. These regions offer greater oil and natural gas reserve and
production growth potential relative to the existing Shelf regions. However, for
many of the independent oil and natural gas companies, the Shelf remains a core
area for future production growth.
Shelf Market Compared to Deepwater Market. There are a number of
characteristics about the deepwater market that differentiate it from the Shelf
market.
On the Shelf, wells are generally drilled using conventionally moored
semisubmersible drillings rigs or jack-ups. Fixed platforms can be installed
using conventionally moored construction vessels. Afterwards, the pipeline and
riser infrastructure can be installed using conventionally moored S-lay vessels
and 4-point dive boats equipped with mixed gas or saturation diving equipment.
Collectively these technologies are mature, and while there have been
improvements, the basic processes have not fundamentally changed in the last 25
years.
In deepwater, exploration and development techniques are significantly
different. Deepwater drilling and construction vessels are larger and more
sophisticated than Shelf vessels and are typically equipped with dynamic
positioning, or DP, systems that allow them to move or hold position within
tight tolerances without using conventional moorings. This capability is a
requirement for holding position in deepwater and for umbilical and pipelay
installation operations. In addition, fixed structures are replaced by either
floating production systems or subsea facilities.
Several different physical configurations have been used for floating production
systems. In the U.S. Gulf of Mexico, tension leg platforms, Spars, and floating
production units have been used. In other deepwater regions of the world,
floating production, storage and offloading vessels have also been used. Each of
these systems requires subsea field development hardware, including mooring
equipment, wellheads, manifolds, infield pipelines, risers and infield
umbilicals. We intend to focus our deepwater expansion efforts generally on the
installation of this equipment and particularly on the installation of infield
flowlines and related infrastructure, where we have analogous expertise
operating on the Shelf.
Because of the higher absolute cost of production, construction and drilling
equipment, the deepwater and ultra-deepwater markets are dominated by major oil
and natural gas companies and a few large
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independents and state owned oil and natural gas companies. In the U.S. Gulf of
Mexico, deepwater production has been much more prolific and oil prone than
existing production on the Shelf. According to the Minerals Management Service,
in 1999 in the Gulf of Mexico:
+ 72.2% of the hydrocarbons produced from shallow water fields were natural gas
and 61.5% of the hydrocarbons produced from deepwater fields were oil; and
+ over half of all of the oil produced came from just 26 deepwater fields.
Our management believes that the net effect has been that, despite the high
absolute costs of deepwater production, the costs per barrel produced have been
relatively modest.
Industry Budgets. Given the current oil and natural gas demand and price
environment, we believe exploration and production companies may be preparing to
increase their capital budgets for offshore projects, especially in the Gulf of
Mexico and the South Atlantic Basin. According to Spears & Associates, Inc., the
number of offshore wells drilled worldwide per year is expected to increase from
2,632 in 1999 to 3,221 in 2005, with total drilling and new completion
expenditures for offshore wells drilled worldwide expected to increase from
$23.7 billion in 1999 to $37.9 billion in 2005. As drilling activity continues
to increase, the need to expand and extend infrastructure that can transport
greater volumes of oil and natural gas from production platforms and subsea
production systems to shore will also increase. Infield marine pipeline
installation and related services will be required to transport the new supplies
of natural gas and oil, thus increasing the demand for subsea vessels and
services in the near term. We expect that the increases in capital spending on
drilling activities will create opportunities for the offshore construction
industry over the next 12 to 18 months.
OUR STRATEGY
We believe that we are well positioned to take advantage of the increased level
of activity in the Gulf of Mexico and that our greatest long-term future growth
opportunities lie in the natural extension of our niche services into deepwater.
Our strategy, therefore, is to continue to take advantage of opportunities on
the Shelf while expanding our niche services into the deepwater markets of the
Gulf of Mexico and of the South Atlantic Basin. We intend to execute our
deepwater expansion strategy by:
+ focusing on projects involving small diameter infield flowlines and related
infrastructure where we have analogous expertise on the Shelf;
+ providing cost effective services through an expanded fleet of specially
designed and equipped vessels; and
+ leveraging our customer relationships and alliances.
Our expertise and experience in our market niche on the Shelf should provide us
with an advantage in the analogous deepwater market. Development projects in
deepwater require many of the same types of services we currently provide on the
Shelf. For example, deepwater production facilities such as tension leg
platforms, Spars and floating production, storage and offloading vessels all
require the extensive use of small diameter pipelines and umbilicals. These
small diameter lines provide the same functions in deepwater that they provide
on the Shelf.
We believe that we have an advantage in our market niche on the Shelf because of
the cost efficiencies derived from the design and capabilities of our vessels,
as well as from our operating methodology which takes advantage of our dive
support vessels and divers, both of which are used to complete riser and
pipeline tie-ins without impeding the progress of our pipelay barges. The
vessels used to install trunk lines are larger and require larger crews than the
vessels we operate, making it less cost effective for them to compete with us
for small diameter infield installation services. We believe that we can
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extend this "compact vessel" advantage to deepwater markets by employing
purpose-built vessels that are specially designed and equipped to provide our
niche services in the most efficient and cost effective manner. To that end, in
2000 we initiated our deepwater capabilities by completing the construction of a
DP-2 vessel and chartering a new DP-2 vessel. We also have entered into a
contract to construct a new generation, specially designed and equipped
deepwater pipelay and subsea construction vessel capable of operating in depths
up to 10,000 feet. We have an option to build a sister ship of the same design.
It has been our management's experience that major integrated oil companies
approach large development projects in deepwater regions by dividing them into
discrete functional work packets which are then bid and awarded to a series of
individual contractors who have been pre-qualified to perform a particular
function. Major integrated oil companies maintain a group of construction
experts on staff to divide up the work scope, to identify qualified contractors,
and to coordinate and supervise the work program using these multiple
contractors. This approach to contracting is frequently referred to as
"best-in-class" contracting.
It has been management's experience that the other major approach, termed "EPIC"
contracting (engineer, procure, install, and commission), is preferred by
independents as well as by many foreign national oil companies. In EPIC
contracting, a large engineering firm undertakes to deliver the completed
project for a lump sum regardless of the functional requirements. That
contractor then directly performs those portions of the scope within its
capabilities and subcontracts out those where it does not have "in house" talent
or capacity. The integration functions are the responsibility of the EPIC
contractor.
Because the major integrated oil companies are disproportionately present in
deepwater, we believe that best-in-class contracting will dominate for the
deepwater portions of our business activity. We are able to pre-qualify and to
bid directly to the major integrated oil companies without having to provide
other engineering/contracting services. At the same time, on the Shelf, where
independents predominate, we can continue to bid through the engineering firms
who provide project management and other EPIC services to these clients.
Many of our Shelf customers are also active in deepwater exploration and
development. We intend to leverage our customer relationships, including our
alliance with Unocal Corporation's Spirit Energy 76 unit, to obtain deepwater
projects. According to James K. Dodson Company, Unocal operates the third
largest drilling program on the Shelf. Additionally, according to Infield
Systems Limited and Douglas-Westwood Limited, Unocal currently has one of the 10
largest reserve bases worldwide in water depths greater than 1,000 feet. We also
have technology alliances with two leading offshore technology, equipment and
service providers. These alliances provide us with access to sophisticated
technology applicable to deepwater projects. See "-- Alliances."
In addition to our deepwater expansion strategy, we intend to maintain a
flexible fleet in order to take advantage of periods of increased activities on
the Shelf. The design and capabilities of our existing vessels allow us to be a
low-cost provider of pipeline installation and subsea construction services on
the Shelf. In the near term, we expect the demand for our services on the Shelf
will be maintained or will increase as a result of improved natural gas market
fundamentals. See "Management's discussion and analysis of financial condition
and results of operations -- Outlook."
OUR FLEET
We operate a diversified fleet of eight construction and service vessels. In
April 2001, we entered into an option to purchase a pipelay/bury barge, the
BH-400, which terminates on July 31, 2001. Upon purchasing the vessel, we will
change its name to the Midnight Rider. In March 2000, we entered into
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a contract to construct a new generation DP-2 vessel, the Midnight Warrior, for
deepwater pipelay and subsea construction. The following table summarizes the
capabilities of the eight vessels in our current Gulf of Mexico fleet, the
BH-400 (to be renamed the Midnight Rider) and the Midnight Warrior:
VESSEL CAPABILITIES
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Midnight Brave.............. Simultaneous lay and bury up to 20" diameter pipe.
Sequential lay and bury operations for up to 12" diameter
pipe in water depths of up to 400 feet.
Midnight Runner............. Simultaneous lay and bury up to 20" diameter pipe in water
depths of up to 80 feet. Sequential lay and bury operations
for up to 8" diameter pipe in water depths of up to 200
feet.
Midnight Dancer............. Subsea construction with surface supply diving.
Midnight Star............... Subsea construction with surface supply or saturation
diving.
Midnight Carrier............ Subsea construction with surface supply or saturation
diving.
Midnight Fox................ Support vessel (fuel, water, crew change) with capability to
perform limited surface supply diving and diverless subsea
construction.
Midnight Eagle.............. Simultaneous lay and bury up to 8" diameter pipe in water
depths of up to 100 feet. Sequential lay and bury operations
for up to 10" diameter pipe in water depths of up to 200
feet and reel lay of up to 6" diameter pipe in water depths
of up to 2,400 feet.
Midnight Arrow.............. Diverless subsea construction in water depths of up to
10,000 feet.
Midnight Rider.............. Lay pipe up to 36" in diameter in water depths of up to 30
feet. Simultaneous lay and bury up to 10" diameter pipe in
water depths up to 600 feet and up to 12" diameter pipe in
water depths up to 300 feet.
Midnight Warrior............ Designed to lay pipe up to 10" in diameter, umbilical and
cable in water depths of up to 6,000 feet and to provide
diverless subsea construction support in water depths of up
to 10,000 feet.
MIDNIGHT BRAVE -- PIPELAY/BURY BARGE
The Midnight Brave was built as a logistic support barge in 1972. We purchased
the vessel in 1987 and added a pipelay ramp, five work stations, a stinger and a
30 Kip tensioner. In 1998, we upgraded the vessel through the addition of a
digitally controlled 50 Kip tensioner enabling the barge to extend its range to
water depths of up to 400 feet. The vessel is 275 feet long and 70 feet wide and
has accommodations for 80 workers and is controlled using a seven-point mooring
system.
MIDNIGHT RUNNER -- PIPELAY/BURY BARGE
The Midnight Runner was a flat top cargo barge built in 1983. In that year, we
purchased the vessel and added a seven-point mooring system, two spuds, four
work stations, generators and ancillary equipment as well as accommodations for
30 workers. An improved 30 Kip tensioner was added in 1998. The vessel is 160
feet long and 54 feet wide.
MIDNIGHT DANCER -- DIVING SUPPORT VESSEL
The Midnight Dancer was a supply vessel built in 1978. We purchased the vessel
in 1994 and added a 30 ton crane, a four-point mooring system, an air diving
system and additional accommodations. The vessel is 195 feet long and 40 feet
wide and accommodates 46 workers.
MIDNIGHT STAR -- DIVING SUPPORT VESSEL
The Midnight Star was a supply vessel built in 1976. We purchased the vessel in
1997 and added a four-point mooring system, a moonpool, a 650 foot saturation
diving system, an air diving control room, a 40 ton crane, a 20 ton crane and
additional accommodations. These modifications were completed in May 1998. The
vessel is 197 feet long and 42 feet wide and accommodates 42 workers.
MIDNIGHT CARRIER -- DIVING SUPPORT VESSEL
The Midnight Carrier was a pipe carrier built in 1975. We purchased the vessel
in May 1998. We then initiated a series of overhauls and upgrades to allow the
vessel's use as a large four-point diving support vessel. We added a 650 foot
four-point mooring system, a 1,000 foot saturation diving system
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and additional accommodations in October 2000. The vessel is 270 feet long and
58 feet wide and accommodates 36 workers.
MIDNIGHT FOX -- SUPPLY/DIVING SUPPORT VESSEL
Built in 1998, the Midnight Fox is equipped with a bow thruster, a four-point
mooring system and a joystick for live boat operations. While this vessel can
serve as a diving support vessel, its present primary role is as a personnel
transport and supply vessel supporting the rest of our fleet. The vessel is 130
feet long and 28 feet wide.
MIDNIGHT EAGLE -- PIPELAY/BURY BARGE
The Midnight Eagle was originally built as a dredging barge. We purchased the
vessel in 1997 and placed it in service in 2000 after adding a DP-2 system, a 20
foot long hull mid section, two 10 foot wide sponsons, four diesel driven
azimuthing thrusters, a mooring/abandonment and recovery winch, accommodations
for 57 workers, generators and ancillary equipment. A conventional firing line
consisting of four work stations for S-lay, a reeled pipelay system for J-lay
and a simultaneous jetting system were also installed. The vessel is 190 feet
long and 76 feet wide. We believe the Midnight Eagle is the only DP vessel
capable of simultaneously laying and burying pipelines in water depths of up to
100 feet. The vessel can install reeled pipe or umbilicals in water depths of up
to 2,400 feet.
MIDNIGHT ARROW -- SUBSEA CONSTRUCTION VESSEL
Built in 1999 and delivered to us in early 2000 on a five-year charter, the
Midnight Arrow is currently our most advanced deepwater vessel. Under the
charter, we have an exclusive option to purchase the vessel for $8.25 million
and the ability to extend the charter for an additional two years. The vessel
has a DP-2 system, accommodations for 54 workers, a helideck and a 50 ton crane.
The vessel is 197 feet long and 44 feet wide.
MIDNIGHT RIDER (BH-400) -- PIPELAY/BURY BARGE
The BH-400 was built in 1995. The vessel is equipped to lay and bury pipe using
the conventional S-lay method. Equipped with five work stations, the vessel
features a 50 foot stinger, a 110 foot stinger, and a 50 Kip tensioner. The
vessel is 260 feet long, 72 feet wide, has accommodations for up to 84 workers
and is controlled using an eight-point mooring system. We entered into an option
to purchase the vessel for $9.45 million in April 2001 which expires if not
exercised prior to July 31, 2001. As consideration for the option, we were
required to pay $100,000 on May 1, 2001. We will be required to pay $100,000 on
each of June 1, 2001 and July 1, 2001, unless we exercise the option prior to
these dates. All conditions in the option to purchase have been satisfied.
MIDNIGHT WARRIOR -- PIPELAY/SUBSEA CONSTRUCTION VESSEL
We have contracted with Bender Shipbuilding & Repair Co., Inc. in Mobile,
Alabama to build the Midnight Warrior. This contract expires on August 15, 2001
and requires us to secure construction financing and to obtain MARAD approval
prior to becoming effective. Construction of the Midnight Warrior may require as
long as 22 months from the date we commit to financing. We have contracted with
SAS Gouda B.V. to fabricate the reel lay system. The Midnight Warrior has been
designed to serve as a multi-purpose installation vessel and is intended to
carry out installation of rigid flowlines, flexible flowlines, coiled tubing and
umbilicals, as well as to perform subsea construction and maintenance operations
in deepwater. The Midnight Warrior has also been designed with a DP-2 system, a
cruising speed of 13 knots, one moonpool, a 250 ton crane and self sufficient
capabilities to work for extensive periods of time without returning to port. We
believe that the Midnight Warrior will be the first new-build vessel of its
specifications to be commissioned in the United States and equipped with
advanced technology for deepwater installation. As designed, the vessel is 336
feet long and 85 feet wide, which is longer and wider than a normal offshore
construction DP-2 vessel. This
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allows the vessel to operate with a larger vertical reel in place without
encountering the stability problems inherent in operating a shorter, narrower
vessel with the same load. Moreover, this vessel can perform the bulk of the
deepwater installation activities at a capital cost of one-half to one-third of
that required by the next class of vessels, the 500 foot units owned or being
constructed by our competitors.
MAINTENANCE
We incur routine drydock inspection, maintenance and repair costs pursuant to
Coast Guard regulations in order to maintain classification for our vessels. In
addition to complying with these requirements, we have our own vessel
maintenance program which we believe permits us to continue to provide our
customers with well maintained, reliable vessels.
ALLIANCES
Since May 1999, we have had an alliance agreement with Unocal Corporation under
which we provide at least 80 percent of the pipelay, burial and riser
installation projects for Unocal's Spirit Energy 76 operations in the Gulf of
Mexico in water depths of up to 200 feet. The Spirit Energy 76 unit conducts
Unocal's exploration, development and production activities on the Shelf and
deepwater areas of the Gulf of Mexico. Under the alliance agreement, Unocal also
considers us for projects, on a non-exclusive basis, in depths greater than 200
feet. According to James K. Dodson Company, since 1998, Unocal has ranked in the
top three in wells drilled in water less than 200 feet. In addition, according
to Infield Systems Limited and Douglas-Westwood Limited, Unocal currently ranks
in the top ten globally for total reserves in depths greater than 1,000 feet.
We have also entered into two alliances to obtain access to sophisticated
technology developments applicable to the deepwaters of the Gulf of Mexico and
the South Atlantic Basin. The first is a cooperation agreement with Sonsub Inc.,
a wholly owned subsidiary of Saipem and one of the foremost companies supplying
remotely operated vehicles worldwide, to bid jointly on deepwater construction
and maintenance projects requiring diverless subsea construction techniques. The
first two projects undertaken by this alliance were successfully completed
during the second quarter of 2000. The second alliance is a non-exclusive,
five-year preferred supplier agreement with SAS Gouda B.V., a leading
manufacturer of advanced pipe tensioning and pipelaying equipment based in the
Netherlands. The agreement with SAS Gouda gives us access to sophisticated
pipelaying equipment, engineering support and current North Sea pipelaying
technology that we believe will be applicable to the deepwaters of the Gulf of
Mexico and of the South Atlantic Basin.
FACILITIES
Our corporate headquarters are located in Gretna, Louisiana, near New Orleans.
We also maintain a commercial office in Houston, Texas, a logistics support base
and fabrication yard in Dulac, Louisiana and a deepwater support facility in New
Orleans, Louisiana. All of our facilities are leased. The following chart
describes our facilities:
APPROXIMATE TERMINATION
LOCATION FUNCTION SIZE DATE OF LEASE
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Gretna, Louisiana...................... Corporate Office 10,500 sq. ft. December 2003
Houston, Texas......................... Commercial Office 1,000 sq. ft. November 2001
Dulac, Louisiana....................... Logistics Support Base 21.9 acres November 2003
and Fabrication Yard
New Orleans, Louisiana................. Deepwater Support 42,500 sq. ft. July 2001
Facility
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SAFETY AND QUALITY ASSURANCE
We maintain an award winning safety assurance program to reduce the possibility
of accidents. Our Health, Safety and Loss Prevention Department establishes
guidelines to ensure compliance with all applicable state and federal safety
regulations and provides training and safety education through new employee
orientations, which include first aid and CPR training. In addition, prospective
employees are required to submit to alcohol and drug testing. After an accident
or other health or safety occurrence, the HSLP Department investigates the
incident and further evaluates and, when necessary, refines its safety
procedures to prevent similar incidents from occurring. Employees who do not
adhere to our health, safety and environmental guidelines could face immediate
termination. We believe that our commitment to our safety program is vital to
attracting and retaining customers and employees, as well as controlling costs.
Industry associations and government regulators have recognized our commitment
to safety. In 2000, we received special recognition by the National Ocean
Industries Association, the main trade organization for the offshore services
industry, for our "highly innovative and meritorious" Top to Bottom Safety
Program. We have also received recent commendations from the Minerals Management
Service and the Marine Board of the National Research Council for our
significant safety achievements and continuing dedication to the safety of life
at sea. The United States Coast Guard has also honored us with a certificate of
appreciation in recognition of our promotion of offshore safety.
CUSTOMERS AND CONTRACTING
Our customers are primarily major energy companies and independent oil and
natural gas companies operating in the Gulf of Mexico. During 2000, we provided
subsea construction services to 33 customers. Of these customers, Coastal Oil
accounted for 15.5% of our revenues and Oceanografia accounted for 11.1% of our
revenues for the year ended December 31, 2000. The level of construction
services required by any particular customer depends on the size of that
customer's capital expenditure budget devoted to development in any particular
year. Consequently, customers that account for a significant portion of contract
revenues in one fiscal year may represent an immaterial portion of contract
revenues in a subsequent fiscal year. With the exception of the alliance
agreement with Unocal's Spirit Energy 76 unit, our Shelf construction contracts
are typically of short duration, ranging from several days to two months.
We are normally awarded contracts from our customers by means of a highly
competitive bidding process whereby customers typically request bids a few
months prior to commencement of a project. We maintain a focused marketing
effort through market analysis and a dedicated sales force. We also maintain an
up-to-date database of market studies and statistical bidding analyses. We
further market ourselves to customers through localized efforts in Houston,
Texas and southeastern Louisiana. Most contracts are awarded on a fixed-price
basis, but we also perform work under "cost-plus" and "day rate" arrangements as
well as under hybrids of these arrangements. Under fixed-price contracts, we
provide specified services at a fixed price regardless of the amount of time and
materials actually required. As a result, we are responsible for all cost
overruns. Consequently, although fixed-price contracts may offer greater
potential profits, they also involve more risk than a cost-plus arrangement.
Under cost-plus arrangements, we receive a specified fee in excess of the direct
labor and material costs incurred. We are therefore protected against cost
overruns, but do not benefit directly from cost savings. For projects involving
day rate arrangements, our charges are based upon a rate schedule for the
services provided.
As we expand our operations into deepwater, the typical contract profile is
likely to change so that lead time, duration and our backlog of awarded but
unexecuted projects will increase. We also expect
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that a larger portion of our contracts will be with major oil companies as the
deepwater market continues to develop.
COMPETITION
The offshore marine construction industry is highly competitive. While we
believe that availability and the capability of equipment and personnel, the
reputation and experience of management and the efficiency and safety record of
the contractor are important factors in this industry, price is the primary
factor that determines which qualified contractor is awarded the contract.
Contracts for work on the Shelf are typically awarded on a competitive bid basis
one to three months prior to commencement of operations. Customers usually
request bids from all companies which they believe are technically qualified to
perform the project. In order to ensure that our company has an opportunity to
bid for these projects, our sales staff contacts offshore operators known to
have projects scheduled as well as the engineering firms which manage their
construction projects.
The lower degree of complexity and capital costs involved in Shelf marine
construction activities has allowed many entrants into that subsegment of the
market, most of whom are involved only in Shelf activities. For conventional
pipelay projects on the Shelf, we primarily compete with Global Industries, Ltd.
and Horizon Offshore, Inc. For deepwater pipelay projects, we primarily compete
with J. Ray McDermott, S.A. and Global Industries. We also compete with Saipem
SpA, Coflexip Stena, Stolt Offshore, Inc. and Allseas. However, these
competitors typically have not domiciled permanent pipelaying vessels in the
Gulf of Mexico. For projects involving deepwater construction, we primarily
compete with Cal Dive International, Inc. and Stolt Offshore, Inc.
BACKLOG
We do not consider our backlog amounts to be a reliable indicator of future
revenue because most of our Shelf-based contracts are awarded and performed
within a relatively short period of time. Thus, our backlog can fluctuate
significantly based on the level of drilling activity on the Shelf, the timing
of contract awards and the seasonal operating activity level throughout the
year. As deepwater projects become more prevalent in our product mix, we expect
to see an increased backlog because these projects have longer lead times than
their Shelf-based counterparts.
EMPLOYEES
As of December 31, 2000, we had a total of 238 employees. Approximately 208 were
operating personnel and 30 were corporate, administrative and management
personnel. None of our employees belong to a union or are employed pursuant to
any collective bargaining agreement or any similar arrangement.
GOVERNMENT AND ENVIRONMENTAL REGULATION
GENERAL
Many aspects of our offshore marine construction industry are subject to
extensive governmental regulation by the United States Coast Guard, the National
Transportation Safety Board, the United States Customs Service and the
Occupational Safety and Health Administration, as well as by private industry
organizations such as the American Bureau of Shipping. The Coast Guard and the
National Transportation Safety Board set safety standards and are authorized to
investigate vessel accidents and recommend improved safety standards, and the
Customs Service is authorized to inspect vessels at will.
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The Occupational Safety and Health Administration performs similar functions
with respect to both offshore and onshore facilities.
We are required by various governmental and quasi-governmental agencies to
obtain various permits, licenses and certificates with respect to our
operations. We believe that we have obtained or will be able to obtain, when
required, all permits, licenses and certificates necessary to conduct our
business.
MARITIME
Some of our employees are covered by provisions of the Jones Act, the Death on
the High Seas Act and general maritime law. Other non-maritime employees are
covered by the U.S. Longshoremen and Harbor Workers Compensation Act. These laws
typically operate to make liability limits established by state workers'
compensation laws inapplicable to these employees and to permit these employees
and their representatives to pursue actions against employers for job related
injuries in federal courts. Since we are not protected by the limits imposed by
state workers' compensation statutes, we may have greater exposure for any claim
made by these employees.
Because we engage in certain activities that may constitute "coastwise trade"
within the meaning of federal maritime regulations, we are also subject to
regulation by MARAD, in addition to the Coast Guard and the Customs Service.
Under these regulations, only vessels owned by United States citizens which are
built and registered under the laws of the United States may engage in
"coastwise trade." Furthermore, the foregoing citizenship requirements must be
met in order for us to qualify for financing guaranteed by MARAD. To enjoy the
benefits of United States registry, United States coastwise trade and
MARAD-guaranteed financing, we must maintain United States citizenship as
defined in the Shipping Act of 1916 and the regulations thereunder. Under these
regulations, to maintain United States citizenship, our president or chief
executive officer, the chairman of our board of directors and a majority of a
quorum of our board of directors must be United States citizens. Further, at
least 75% of the ownership and voting power of our capital stock must be held by
United States citizens, as defined in the Shipping Act and the regulations
thereunder.
ENVIRONMENTAL
Numerous federal, state and local laws and regulations relating to protection of
the environment affect our operations. The technical requirements of these laws
and regulations have become more complex and stringent in recent years, and
compliance is becoming increasingly difficult and expensive. However, we do not
believe that compliance with current environmental laws and regulations is
likely to have a material adverse affect on our business or financial condition.
Some environmental laws provide for strict liability for remediation of spills
and releases of hazardous substances, including oil, into the environment, and
some impose liability for damages to natural resources or threats to public
health and safety. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties, and
criminal prosecution. It is possible that changes in the environmental laws and
enforcement policies under these laws, or claims for damages to persons,
property, natural resources or the environment, could result in substantial
costs and liabilities. Our insurance policies provide liability coverage for
sudden and accidental occurrences of pollution and/or cleanup and containment of
the foregoing in amounts that we believe are comparable to policy limits carried
by others in the offshore construction industry.
The Oil Pollution Act of 1990 and regulations promulgated thereunder impose a
variety of regulations on "responsible parties" related to the prevention of oil
spills and liability for damages resulting from such spills. A "responsible
party" includes the owner or operator of an onshore facility, pipeline, or
vessel, or the lessee or permittee of the area in which an offshore facility is
located. The Oil Pollution Act assigns liability to each responsible party for
oil removal costs and a variety of public and private damages. Vessels subject
to the Oil Pollution Act other than tank vessels are subject to liability limits
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of the greater of $500,000 or $600 per gross ton. A party cannot take advantage
of liability limits if the spill was caused by gross negligence or willful
misconduct or resulted from violation of a federal safety, construction or
operating regulation. If the party fails to report a spill or to cooperate fully
in the cleanup, the liability limits likewise do not apply. Few defenses exist
to the liability imposed under the Oil Pollution Act. The Oil Pollution Act also
imposes ongoing requirements on a responsible party including preparation of an
oil spill contingency plan and proof of financial responsibility (to cover at
least some costs in a potential spill) for vessels in excess of 300 gross tons.
We believe that we currently have in place appropriate spill contingency plans
and have established adequate proof of financial responsibility for our vessels.
The Clean Water Act and analogous state laws provide strict controls on the
discharge of pollutants into the navigable waters of the United States and
impose liability for the costs of remediating releases of petroleum and other
hazardous substances. These laws provide for administrative, civil and criminal
penalties for any unauthorized discharge of oil and other hazardous substances
in reportable quantities and impose substantial potential liability for the
costs of removal, remediation and damages. Our vessels routinely transport small
amounts of hazardous substances and also carry diesel fuel for their own use.
All vessels we operate have vessel response plans to deal with potential spills
of hazardous substances including oil or its derivatives.
The Outer Continental Shelf Lands Act provides the federal government with broad
discretion in regulating the release of oil and natural gas in connection with
offshore oil and natural gas production. Because our operations rely on offshore
oil and natural gas exploration and production, if the government were to
exercise its authority under the Outer Continental Shelf Lands Act to restrict
the availability of offshore oil and natural gas leases, such an action could
have a material adverse effect on our financial condition.
The Comprehensive Environmental Response, Compensation and Liability Act and
similar laws impose liability for releases of hazardous substances into the
environment. CERCLA currently exempts crude oil from the definition of hazardous
substances for purposes of the statute, but our operations may involve the use
or handling of other materials that may be classified as hazardous substances.
CERCLA assigns strict liability to each responsible party for all response and
remediation costs, as well as natural resource damages. Few defenses exist to
the liability imposed by CERCLA. We are not currently aware of any events that,
if brought to the attention of regulatory authorities, would lead to the
imposition of CERCLA liability.
EXPLORATION AND PRODUCTION INDUSTRY
We depend on the demand for our services from the oil and natural gas industry.
Therefore, changes to laws, regulations, taxes and policies relating to the oil
and natural gas industry can also affect our business. For example, the
exploration and development of oil and natural gas properties located on the
Outer Continental Shelf of the United States is regulated primarily by the
Minerals Management Service. The Minerals Management Service has broad authority
over such operations. It must approve and grant permits in connection with
drilling and development plans submitted by oil and natural gas companies.
Additionally, the Minerals Management Service has promulgated regulations
requiring offshore production facilities to meet stringent engineering and
construction specifications restricting the flaring or venting of natural gas,
governing the plugging and abandonment of wells and controlling the removal of
production facilities. Further, under some circumstances, the Minerals
Management Service has the authority to require the suspension or termination of
any operations on federal leases, and has proposed regulations that would permit
it to expel unsafe operators from offshore operations. The Minerals Management
Service also has established rules governing the calculation of royalties and
the valuation of crude oil produced from federal offshore leases. The Minerals
Management Service has issued regulations regarding costs for natural gas
transportation, which are deductible for royalty
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valuation purposes when natural gas is sold off lease. Delays in the approval of
plans and issuance of permits by the Minerals Management Service because of
staffing, economic, environmental or other reasons could adversely affect our
operations by limiting demand for our services. We cannot predict how the
Minerals Management Service regulations may be amended in the future. However,
any change in Minerals Management Service regulations that adversely affects
offshore oil and natural gas operations has the potential to limit demand for
our services and adversely impact our future operations and earnings.
Other federal agencies like the Federal Energy Regulatory Commission and state
authorities continue to heavily regulate the natural gas transportation market.
These regulations affect the price and terms for access to pipeline
transportation and the economics of natural gas production, transportation and
sales. To a lesser degree, transportation of crude oil by pipeline is also
subject to regulation. Any changes in these regulations that adversely affect
the market for natural gas or crude oil may adversely affect our business by
limiting demand for our services.
INSURANCE
Our operations are subject to the risks inherent in offshore marine activity.
These risks include personal injury and loss of life or property, environmental
accidents, mechanical failures and collisions. Damages arising from an
occurrence may in the future result in the assertion of potentially large claims
against us.
We maintain comprehensive insurance covering our assets and operations,
including marine employers' liability insurance and workers' compensation, at
levels we believe are consistent with industry standards. Our workers'
compensation and marine employers' liability insurance includes U.S.
Longshoremen and Harbor Workers Compensation Act and maritime and outer
continental shelf endorsements. In addition to our primary liability insurance,
we maintain excess and umbrella policies for up to a $30 million limit. We also
maintain other coverage for water pollution, automobile, property, hull and
commercial crimes. We do not maintain insurance for the cost of replacing the
constructive total loss of vessels. However, we believe that some risks are not
insurable, or that insurance to cover such risks is available only at rates that
we do not consider to be commercially reasonable. We cannot assure you that our
insurance coverage will be adequate in all circumstances or against all hazards,
nor can we assure you that we will be able to maintain adequate insurance
coverage in the future at commercially reasonable rates or on acceptable terms.
LEGAL PROCEEDINGS
We are involved in legal proceedings arising in the ordinary course of business.
In our opinion, these matters will not have a material adverse effect on our
financial position or results of operations.
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Management
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information regarding our directors and executive
officers as of March 31, 2001:
NAME AGE POSITION(S)
------------------------------------------------------------------------------------------------------
Lyle G. Stockstill............................. 57 Chairman of the Board and Chief Executive
Officer
Lana J. Hingle Stockstill...................... 56 Senior Vice President-Administration and
Director
Eric N. Smith.................................. 57 Executive Vice President
William J. Blackwell........................... 42 Chief Financial Officer and Director
Curtis Lemons.................................. 73 Director
John Reynolds.................................. 30 Director
Ken Wallace.................................... 75 Director
Lyle G. Stockstill is one of our co-founders and has served as our Chairman of
the Board and Chief Executive Officer since 1978. Mr. Stockstill has over 36
years of experience in all aspects of offshore pipelay and construction
operations. Mr. Stockstill has previously held positions at Brown & Root, Inc.
and Taylor Diving, Inc. and has worked both domestically and internationally.
Mr. Stockstill is the husband of Lana J. Hingle Stockstill.
Lana J. Hingle Stockstill is one of our co-founders and has served as a director
and Senior Vice President -- Administration since 1978. Mrs. Stockstill has 28
years of experience handling our administrative duties and the administrative
duties of other oil service companies. Mrs. Stockstill holds a Bachelor of Arts
degree from Louisiana State University. Mrs. Stockstill is the wife of Lyle G.
Stockstill.
Eric N. Smith joined our company in September 2000 as Executive Vice President.
From May 2000 to September 2000, Mr. Smith was a consultant for IMA Offshore, a
business unit of International Maritime Associates, a consulting firm
specializing in analysis of marine-related projects. From May 1998 to May 2000,
Mr. Smith served as President and Chairman of Saipem, Inc., a United States
subsidiary of Saipem SpA, a major Italian drilling and construction company.
From August 1995 to May 1998, Mr. Smith worked in Italy for Saipem SpA as
Manager of Market Analysis, Strategic Planning for the Saipem Group. In April
1994, Mr. Smith co-founded Delta Energy Management, a financial services company
focusing on oil and gas companies, and served as its Executive Vice President
until August 1995. From 1984 to 1994, Mr. Smith served in a number of capacities
for J. Ray McDermott, S.A., a service provider to offshore oil and natural gas
exploration and production companies and to other marine construction companies.
Mr. Smith has 17 years of experience in the offshore construction business. Mr.
Smith holds a Bachelor of Science degree in Chemical Engineering from Georgia
Tech and a Masters of Business Administration from Tulane University.
William J. Blackwell has served as our Chief Financial Officer since June 1998
and has been a director since June 2000. From September 1997 to May 1998, Mr.
Blackwell was self employed, working as a mergers and acquisitions consultant.
From July 1988 to August 1997, Mr. Blackwell was a financial officer of the
affiliated public companies Freeport-McMoRan Inc. and McMoRan Oil & Gas Co.,
each a company engaged in mineral extraction, and Stratus Properties Inc., a
real estate development company, most recently serving as controller of
Freeport-McMoRan Inc. From January 1981 to July 1988, he was employed by Arthur
Andersen LLP. Mr. Blackwell is a certified public accountant and holds a
Bachelor of Accountancy degree from the University of Mississippi.
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Curtis Lemons has been a director since November 1998. From 1985 to November
1998, Mr. Lemons was retired. He has 31 years of experience in the offshore oil
and natural gas industry in the Gulf of Mexico and international locations. From
1954 to 1985, Mr. Lemons was employed by Conoco Inc., an integrated energy
company, in senior management positions, including Vice President of
Production -- South China Sea, General Manager -- North Sea, and Production
Manager -- Europe. Mr. Lemons holds a Bachelor of Science degree in Petroleum
Engineering from Texas A&M University.
John Reynolds has been a director since May 2000. In July 1998, Mr. Reynolds
co-founded Lime Rock Partners LLC and has been a managing member since its
formation. From 1992 to July 1998, Mr. Reynolds was employed in a number of
positions by Goldman Sachs & Co., most recently as a Vice President and the
senior research analyst responsible for the oil service sector. Mr. Reynolds
currently serves on the boards of directors of IPEC, Ltd., a pipeline and
oilfield construction company, Roxar ASA, an oil services and reservoir
management company, Sensa Ltd., a developer of fiber optic based reservoir
management solutions, Noble Rochford Drilling Ltd., an offshore rig joint
venture with Noble Drilling, and OneOffshore Inc., an offshore energy industry
business intelligence company. He holds a Bachelor of Arts degree from Bucknell
University.
Ken Wallace has been a director since May 2000. From 1987 to May 2000, Mr.
Wallace was retired. From 1983 to 1987, Mr. Wallace was President and a director
of Taylor Diving & Salvage Co., Inc., a subsidiary of Haliburton Co. which
provides diving services. From 1967 to 1983, Mr. Wallace held numerous positions
for Taylor Diving & Salvage Co., Inc., including Research and Development
Manager, Superintendent, Department Manager, Vice President of Research and
Development, Senior Vice President of Operations, and Executive Vice President.
Mr. Wallace also spent 24 years in the U.S. Navy where his positions included
Division Officer, Senior Master Diver and Senior Chief Petty Officer.
OTHER KEY EMPLOYEES
Willie Bergeron joined our company in September 1995 as a Project Manager. Mr.
Bergeron was promoted to General Manager of Operations in December 1997 and then
to General Manager -- Shallow Water Division in March 1999. In September 2000,
Mr. Bergeron was promoted to Operations Manager for both shallow and deepwater
activities. From 1988 to 1995, Mr. Bergeron was employed in the areas of
operations management and engineering by McDermott International, Inc., an
international offshore contractor. Prior to that, Mr. Bergeron co-owned a civil
engineering firm that conducted offshore, commercial and residential
engineering. Mr. Bergeron has 23 years of oilfield related experience and holds
a degree in Engineering Technology from Nicholls State University. Mr. Bergeron
is 51 years old.
Jackson Bullock joined our company in October 1999 as Senior Project Manager.
From August 1997 to October 1999, Mr. Bullock worked as senior mechanical
engineer on the deepwater consulting alliance team for the Mars Expansion
Project for Waldemar S. Nelson, an engineering firm. He also held the position
of district manager for Flint Engineering & Construction, an engineering
company, from June 1995 to August 1997. Mr. Bullock has over ten years of oil
and natural gas related engineering experience ranging from petro-marine
engineering to design engineering. He holds a Bachelor of Engineering Degree in
Naval Architecture and Marine Engineering from the University of New Orleans.
Mr. Bullock is 34 years old.
Vincent Lecarme joined our company as Engineering Manager -- Deepwater in
February 1998. From 1971 to February 1998, Mr. Lecarme was employed by various
divisions of Stolt Offshore, Inc., an international offshore contractor, in
positions ranging from Project Manager to Senior Vice President. Mr. Lecarme has
over 31 years of experience in the offshore construction industry, including the
design and fabrication of diving and construction equipment and vessels for
offshore installation, the
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management of construction projects in West Africa, Asia Pacific and the Middle
East and the management of operations and projects in Asia Pacific. Mr. Lecarme
has a Masters Degree in Civil Engineering from the University of Grenoble. Mr.
Lecarme is 62 years old.
James Mermis joined our company in June 2000 as Senior Sales Engineer. From
October 1997 to June 2000, Mr. Mermis was the Senior Project Manager for Stolt
Offshore, Inc., where he was responsible for the management of the DP MSV Seaway
Hawk. From September 1997 to October 1997, he held the position of Project
Manager for DonJon Marine/Gulf South Marine Divers, a company which provides
diving services. From 1994 to August 1997, he was the Diving Group Manager for
Subsea International Inc., an offshore contractor. Mr. Mermis received a
Bachelor of Science degree from the University of North Alabama, a Marine
Technology degree from Santa Barbara City College and a Masters of Business
Administration from Tulane University. He is also a member of the Board of
Directors and of the Hazardous/Contaminated Water Diving Committee for the
Association of Diving Contractors International. He is also a member of the
ADCI/MCA Committee for Joint Diving Standards and a member of the American
Welding Society. Mr. Mermis is 51 years old.
E.T. "Robbie" Robinson joined our company in September 1998 as General
Manager -- Shallow Water. In March 1999, Mr. Robinson was promoted to Vice
President -- Operations. In September 2000, Mr. Robinson was promoted to Vice
President -- Business Development. From August 1997 to August 1998, he served as
Senior Project Manager for Pegasus International, an engineering firm. From
January 1997 to August 1997, he served as Vice President of Operations for
Subsea International Inc. From 1988 to December 1996, he served as Division
Operations Manager for Subsea International Inc. Mr. Robinson has over 35 years
of experience in the offshore fabrication and pipeline industry. Mr. Robinson
holds a Bachelor of Science Degree in Business Administration from Northwestern
State University of Louisiana. Mr. Robinson is 58 years old.
BOARD COMMITTEES
Our board of directors has an Audit Committee and a Compensation Committee. The
Audit Committee, which consists of Messrs. Lemons, Reynolds and Wallace:
+ recommends to the board the annual selection of independent auditors;
+ approves the plan and scope of the annual audit of our financial statements
and any other services provided by independent auditors and the fees for the
audit and those services;
+ reviews our annual audited financial statements prior to publication and
discusses the results of the audit with management and independent auditors;
and
+ discusses with management and independent auditors the design, quality and
adequacy of our internal controls.
The Compensation Committee, which consists of Messrs. Lemons, Reynolds and
Wallace, reviews and recommends to our board the compensation and benefits of
our executive officers, establishes and reviews general policies relating to our
compensation and benefits, and administers the Torch Offshore, Inc. 2001
Long-Term Incentive Plan (the "2001 Incentive Plan"), which is further described
below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers has served as a member of a compensation
committee or of a board of directors of any other entity that has an executive
officer serving as a member of our board of directors or Compensation Committee.
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DIRECTOR COMPENSATION
Directors who are our employees do not receive cash compensation for their
services as directors or members of committees of our board of directors. Our
non-employee directors will receive an annual fee of $12,000, which may be paid
in a combination of cash or common stock at the discretion of the board of
directors, and fees of $1,000 for each committee meeting attended in person. All
directors are reimbursed for out-of-pocket expenses incurred in attending
meetings of the board of directors or committees thereof and for other expenses
incurred in their capacity as directors.
Each of our directors is eligible to participate in our 2001 Incentive Plan. The
terms of our 2001 Incentive Plan provide that each of our non-employee directors
will be awarded options to purchase 2,500 shares of our common stock upon
completion of the offering and options to purchase 1,000 shares of our common
stock on the first business day of the month following each annual meeting after
which they continue to serve. The options will become exercisable six months and
one day from the date of the grant and will expire ten years from the date of
the grant. All grants are subject to the general terms and conditions of the
2001 Incentive Plan. See "-- 2001 Incentive Plan."
EXECUTIVE COMPENSATION
The following table presents information regarding the compensation paid by us
during 2000 to our Chief Executive Officer and our five other most highly
compensated employees. These six persons are collectively referred to in this
prospectus as the "named executive officers."
2000 SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
------------------------------------------------------------------------------------------------
Lyle G. Stockstill.......................................... $245,000 $ -- $ 13,841
Chairman of the Board and Chief Executive Officer
Patrice Chemin.............................................. 230,192 -- 396,841
President(2)
Vincent Lecarme............................................. 153,642 -- 12,849
Engineering Manager -- Deepwater
William J. Blackwell........................................ 133,000 -- 11,621
Chief Financial Officer
E. T. Robinson.............................................. 123,461 -- 11,049
Vice President -- Business Development
Lana J. Hingle Stockstill................................... 122,308 -- 7,338
Senior Vice President -- Administration
(1) Amounts include: (a) 401(k) contributions as follows: Mr. Stockstill,
$10,200; Mr. Chemin, $10,200; Mr. Lecarme, $9,208; Mr. Blackwell, $7,980;
Mr. Robinson, $7,408; Mrs. Stockstill, $7,338; (b) health insurance
premiums as follows: Mr. Stockstill, $3,641; Mr. Chemin, $3,641; Mr.
Lecarme, $3,641; Mr. Blackwell, $3,641; Mr. Robinson, $3,641; and (c)
amounts related to the severance of Mr. Chemin of approximately $383,000.
See "Certain relationships and related party transactions."
(2) Mr. Chemin ceased being employed by us in December 2000.
OPTION GRANTS
In connection with the offering, we intend to grant options under the 2001
Incentive Plan to purchase an aggregate of approximately 300,000 shares of our
common stock at an exercise price equal to the
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initial public offering price for such shares. Prior to the offering, no options
to purchase shares of our common stock were outstanding.
During 2000, no options were granted to or exercised by any named executive
officers.
2001 INCENTIVE PLAN
We have adopted the 2001 Incentive Plan effective as of April 27, 2001. Its
objectives are to attract and retain employees, consultants, and directors, to
give them a sense of proprietorship in our company, and to allow them to
participate in our development and financial success.
ADMINISTRATION
Our Compensation Committee administers the plan. The Compensation Committee is
authorized to select the participants who will receive awards under the plan
and, subject to the terms and conditions of the plan, to determine the type or
types of awards made to each participant and the terms and conditions applicable
to each award. In addition, the Compensation Committee has full and exclusive
power to interpret the plan and to adopt such rules, regulations and guidelines
for carrying out the plan as it may deem necessary or appropriate. The
Compensation Committee may delegate its duties under the plan to our Chief
Executive Officer or other executive officers, subject to such rules and
regulations as the Compensation Committee establishes.
SHARES SUBJECT TO THE 2001 INCENTIVE PLAN
We have reserved 3,000,000 shares of our common stock for issuance under the
plan, subject to adjustment as described below. Shares subject to awards that
are forfeited or terminated or expire unexercised such that the shares covered
thereby are not issued, become available for awards.
ELIGIBILITY AND TYPES OF AWARDS
All employees and consultants of our company and subsidiaries are eligible for
awards under the plan. Directors of our company are also eligible for awards
under the plan. Non-employee directors of our company will receive automatic
rewards under the plan as described in "Management -- Director Compensation."
Awards under the plan may be in the form of options, stock awards, phantom stock
awards, cash awards, performance stock awards, or stock appreciation rights.
Awards may be granted singly, in combination, or in tandem.
Options may be either incentive stock options that comply with the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonqualified stock options that do not comply with such requirements. Director
and consultant awards may not include incentive stock options. Options generally
will have an exercise price as specified in the award agreement, and incentive
stock options will have an exercise price not less than the fair market value
(as defined in the plan) of our common stock on the date of grant. The exercise
price of any options must be paid in full, at the time the option is exercised,
in cash or, if permitted by the Compensation Committee, by tendering our common
stock or surrendering all or part of another award under the plan (including
restricted stock), held by the participant for at least six months and valued at
fair market value on the date of exercise, or any combination thereof. The
Compensation Committee may provide for procedures to permit the exercise or
purchase of awards by loans from our company or by use of the proceeds to be
received from the sale of our common stock issuable pursuant to an award. The
Compensation Committee will determine all other terms, conditions, and
limitations applicable to any options.
Stock awards may consist of restricted and unrestricted grants of our common
stock or may be denominated in units of our common stock. Stock awards may be
subject to conditions established by
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the Compensation Committee, including, but not limited to, continuous employment
or service with our company or subsidiary, achievement of specific business
objectives, increases in specified indices, and attaining specified growth
rates. Rights to dividends or dividend equivalents may be extended to and made a
part of any stock award, subject to the terms, conditions, and restrictions
established by the Compensation Committee. The Compensation Committee will
determine all other terms, conditions, and limitations applicable to any stock
awards.
Phantom stock awards are rights to receive the value of a specified number of
shares of our common stock. The Compensation Committee will determine the terms,
conditions, and limitations applicable to any phantom stock awards.
Cash awards consist of grants denominated in cash. The Compensation Committee
will determine the terms, conditions, and limitations applicable to any cash
awards.
Performance stock awards consist of grants that are contingent on the
achievement of certain performance objectives established by our board of
directors, with the satisfaction of such objectives determined by reference to
the fair market value of our common stock, or increase thereof, or by reference
to performance measures other than our common stock, or a combination thereof,
over a specified period of time. The Compensation Committee will determine the
terms, conditions, and limitations applicable to any performance share awards.
Stock appreciation rights are rights to receive an amount in cash or of shares
of our common stock equal to the appreciation in value of a specified number of
shares of our common stock over a particular period of time. The Compensation
Committee will determine the terms, conditions, and limitations applicable to
any stock appreciation rights.
No participant may be granted awards consisting of options or stock appreciation
rights exercisable for more than 25% of the total number of shares of our common
stock authorized for awards under the plan, subject to adjustment as described
below. If the number of shares authorized for awards under the plan is
subsequently increased, then the 25% limitation will apply to the new number of
shares authorized.
The Compensation Committee may, in its discretion, provide for the extension of
the exercisability of an award, accelerate the vesting or exercisability of an
award, eliminate or make less restrictive any restrictions contained in an award
agreement, waive any restriction or other provision of the plan or an award
agreement, or otherwise amend or modify an award in any manner that either is
not adverse to the participant holding the award or is consented to by such
participant.
PAYMENT OF AWARDS
Payment of awards may be made in cash or with shares of our common stock or
combinations thereof and may include such restrictions as the Compensation
Committee will determine including, in the case of payment with shares of our
common stock, restrictions on transfer and forfeiture provisions. The
Compensation Committee may permit selected participants to elect to defer
payment of some or all types of awards or may provide for the deferral of an
award in an award agreement or otherwise. The Compensation Committee may also
establish rules and procedures for the crediting of interest on deferred cash
payments and dividend equivalents for deferred payment of stock awards. At the
discretion of the Compensation Committee, a participant may be offered an
election to substitute an award for another award or awards of the same or
different type.
PERFORMANCE-BASED AWARDS
We have an annual incentive performance award program that provides for the
grant of performance-based awards to employees based on certain business
criteria including after-tax net income, return on capital or other performance
criteria identified by the Compensation Committee.
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The terms, conditions and limitations applicable to any performance-based awards
under such program will be determined by the Compensation Committee.
Performance-based awards may be in the form of performance stock awards or
restricted stock.
TERMINATION OF EMPLOYMENT OR SERVICE
Upon the termination of employment or service of a participant, any unexercised,
deferred, or unpaid awards will be treated as provided in the specific award
agreement evidencing the award. Unless otherwise specifically provided in the
award agreement, each award granted under the plan that is an option will
immediately terminate to the extent the option is not vested (or does not become
vested as a result of such termination of employment or service) on the date the
participant terminates employment or service with our company or subsidiary.
Special plan provisions apply with respect to terminations of service of
non-employee directors.
ASSIGNABILITY
In general, awards under the plan may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated by a participant other than by
will or the laws of descent and distribution. Subject to approval by the
Compensation Committee in its sole discretion, other than with respect to
incentive stock options, all or a portion of the awards granted to a participant
under the plan may be transferred to the participant's immediate family members,
to a trust or trusts established for such immediate family members, or to a
partnership or partnerships in which such immediate family members have at least
99% of the equity, profit, and loss interests.
ADJUSTMENT
The plan provides for adjustments to the number of shares of our common stock
reserved under the plan and covered by outstanding awards, the exercise price of
such awards, and the appropriate fair market value and other price
determinations for such awards in the event of any distribution, stock split,
recapitalization, extraordinary distribution, merger, consolidation, combination
or exchange of shares of our common stock or similar change, or upon the
occurrence of any other event that the Compensation Committee, in its sole
discretion, deems appropriate.
TAX WITHHOLDING
We may deduct applicable taxes from any award payment and withhold, at the time
of delivery or vesting of cash or shares of our common stock under the plan, an
appropriate amount of cash or number of shares of our common stock or a
combination thereof for payment of taxes required by law or may take such other
action as may be necessary, in our opinion, to satisfy all obligations for
withholding of such taxes. The Compensation Committee may also permit
withholding to be satisfied by the transfer of shares of our common stock
previously owned by the holder of the award for which withholding is required.
If shares of our common stock are used to satisfy tax withholding, such shares
will be valued based on the fair market value when the tax withholding is
required to be made.
AMENDMENT OR TERMINATION OF THE 2001 INCENTIVE PLAN
We may amend, alter, or discontinue the plan, except that no amendment or
alteration that would impair the rights of any participant under any award
previously granted will be made without the participant's consent, and no
amendment or alteration will be effective prior to its approval by our
stockholders, to the extent such approval is determined by our board of
directors to be required by applicable laws, regulations or exchange
requirements.
401(k) PLAN
We have adopted the Torch, Inc. 401(k) Retirement Plan effective as of January
1, 2001. The 401(k) plan covers substantially all employees, subject to age and
service requirements. Contributions to the
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401(k) plan are elective deferrals by the employee which we match on a
dollar-for-dollar basis, up to a maximum of 6% of an employee's base salary.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Bergeron, Blackwell,
Lecarme, Mermis, Robinson and Smith. Pursuant to these agreements, each employee
has:
+ an employment agreement expiring on December 31, 2002, which can be renewed
for successive one-year terms;
+ a severance benefit equal to six months salary (unless terminated for cause),
during which period he has agreed not to compete with us; and
+ the ability to participate in our various employee benefit plans.
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Certain relationships and related party transactions
THE CONTRIBUTION
In connection with the offering, Lime Rock will contribute its preferred
membership units in Torch Offshore, L.L.C. to Torch Offshore, Inc. in exchange
for 828,333 shares of Torch Offshore, Inc. common stock, and Torch, Inc. will
contribute its membership units in Torch Offshore, L.L.C. to Torch Offshore,
Inc. in exchange for 7,505,000 shares of Torch Offshore, Inc. common stock. In
addition, we will pay Lime Rock accrued distributions on its membership units of
approximately $0.1 million in connection with the Contribution. See
"Management's discussion and analysis of financial condition and results of
operations -- Recent events."
We will enter into a registration rights agreement with Lime Rock upon
completion of the offering and the Contribution. This agreement will give Lime
Rock the right, on three occasions, to demand that we register all or any
portion of its shares of our common stock for sale under the Securities Act.
Lime Rock may not make a demand prior to the expiration of the 180 day lock-up
period, and the gross proceeds of any proposed demand registration must
reasonably be expected to be at least $5 million. The registration rights
agreement also will provide Lime Rock with the right, if we propose to register
any of our common stock under the Securities Act, to include their shares of
common stock in the registration, subject to limitations.
The agreement will provide customary registration procedures. We will pay all
registration-related expenses, other than underwriters' discounts and
commissions. The registration rights under the agreement will be assignable to
any purchaser of registrable securities. Demand registration rights will
terminate on the tenth anniversary of the agreement. The registration rights
agreement will contain customary indemnification and contribution provisions by
us for the benefit of any selling stockholders and any underwriters.
TRANSACTIONS BEFORE THE CONTRIBUTION
Effective December 2000, Patrice Chemin entered into an employment termination
agreement with us. Under the terms of this agreement, we agreed to make
severance payments of approximately $283,000 to Mr. Chemin. Upon execution of
the agreement we paid Mr. Chemin $50,000, and we will pay the remaining amounts
to him in substantially equal periodic installments through December 2001. As
consideration for such payments, Mr. Chemin agreed to, among other things:
+ the immediate termination of his employment agreement; and
+ the cancellation of all options to purchase our common stock held by him.
The separation agreement also provides for a $100,000 lump sum payment to Mr.
Chemin upon the closing of the offering.
We have purchased catering services from a company owned by Mrs. Stockstill and
her relatives. We incurred $178,000 in costs to this company in 1998.
We have purchased fuel from a company owned by Mrs. Stockstill and her
relatives. We incurred $282,000 in costs to this company in 2000.
We believe that the terms associated with the purchases of catering services and
fuel from related parties are comparable to the terms that would be associated
with similar transactions with unrelated third parties. In the future, we may
enter into additional transactions with related parties. We intend that the
terms of any future transactions with related parties will be comparable to the
terms that would be associated with similar transactions with unrelated third
parties.
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Principal and selling stockholders
The following table sets forth information regarding beneficial ownership of our
common stock, as of March 31, 2001 giving effect to the Contribution and as
adjusted to reflect our sale of common stock in the offering, by:
+ each person who we know to be the beneficial owner of more than 5% of our
outstanding common stock;
+ each executive officer;
+ each director;
+ all directors and executive officers as a group; and
+ each selling stockholder.
To our knowledge, except as indicated in the footnotes to this table or as
provided by applicable community property laws, all persons listed have sole
voting and investment power with respect to the shares of common stock
indicated.
MAXIMUM BENEFICIAL OWNERSHIP PERCENTAGE
NUMBER OF --------------------------------------------
SHARES TO BE AFTER OFFERING AFTER OFFERING
SOLD UPON (ASSUMING NO (ASSUMING FULL
SHARES EXERCISE OF EXERCISE OF EXERCISE OF
BENEFICIALLY OVER-ALLOTMENT BEFORE OVER-ALLOTMENT OVER-ALLOTMENT
NAME OF BENEFICIAL OWNERS(1) OWNED OPTION(2) OFFERING OPTION) OPTION)(3)
--------------------------------------------------------------------------------------------------------------------
Torch, Inc........................... 7,505,000 375,000 90.1% 56.3% 52.0%
Riverside Investments LLC(4)......... 789,952 357,624 9.4 5.9 3.2
The Lyle G. Stockstill Trust No.
1(5)............................... 1,876,250 93,750 22.5 14.1 13.0
The Lana Hingle Stockstill Trust No.
1(6)............................... 1,876,250 93,750 22.5 14.1 13.0
Donald J. Webre(7)................... 1,876,250 93,750 22.5 14.1 13.0
Geraldine Cook(7).................... 1,876,250 93,750 22.5 14.1 13.0
Lyle G. Stockstill(8)................ 7,505,000 375,000 90.1 56.3 52.0
Lana J. Hingle Stockstill(9)......... 7,505,000 375,000 90.1 56.3 52.0
Eric N. Smith........................ -- -- * * *
William J. Blackwell(10)............. 17,500 -- * * *
Vincent Lecarme...................... -- -- * * *
E.T. Robinson........................ -- -- * * *
Curtis Lemons........................ -- -- * * *
John Reynolds(4)(11)................. 828,333 375,000 9.9 6.2 3.3
Ken Wallace.......................... -- -- * * *
Friends of Lime Rock LP(4)........... 38,381 17,376 * * *
All Executive Officers and Directors
as a group (10 persons)(10)........ 8,350,833 375,000 100 62.5 58.1
* less than one percent
(1) Unless otherwise indicated, the address of each person is c/o Torch
Offshore, Inc., 401 Whitney Avenue, Suite 400, Gretna, Louisiana
70056-2596.
(2) If the over-allotment option is fully exercised, then the selling
stockholders will be entitled to sell an aggregate of 375,000 shares of
common stock (the "Full Amount"). If the over-allotment option is
partially exercised, then the aggregate number of shares that the selling
stockholders will be entitled to sell will be equal to one half of the
number of shares to be sold in the over-allotment (the "Partial Amount").
Torch, Inc. will be entitled to sell 90.06% of the Full Amount or the
Partial Amount, as the case may be, and Riverside Investments LLC and
Friends of Lime Rock LP, acting as a single party, will be entitled to
sell 9.94% of the Full Amount or the Partial Amount, as the case may be.
To the extent either party does not sell the entire amount it is entitled
to sell, the other party will be entitled to sell such amount not sold, up
to the maximum number indicated in the table.
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PRINCIPAL AND SELLING STOCKHOLDERS
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(3) Assumes that each selling stockholder sells the maximum number of shares
indicated.
(4) The address of each of Riverside Investments LLC, Friends of Lime Rock LP
and John Reynolds is c/o Lime Rock Partners LLC, 518 Riverside Avenue,
Building 11, 2nd Floor, Westport, Connecticut 06880.
(5) Represents shares owned by Torch, Inc. The Lyle G. Stockstill Trust No. 1,
which owns 25% of the outstanding capital stock of Torch, Inc., disclaims
beneficial ownership of the shares shown in the table.
(6) Represents shares owned by Torch, Inc. The Lana Hingle Stockstill Trust
No. 1, which owns 25% of the outstanding capital stock of Torch, Inc.,
disclaims beneficial ownership of the shares shown in the table.
(7) Donald J. Webre and Geraldine Cook are the members of the trustee
investment committee of The Lyle G. Stockstill Trust No. 1. Each of Donald
J. Webre and Geraldine Cook disclaims beneficial ownership of the shares
shown in the table.
(8) Represents shares owned by Torch, Inc. Mr. Stockstill serves as Chief
Executive Officer and Chairman of the Board of Directors of Torch, Inc.,
which is currently comprised of three members. Mrs. Stockstill serves as
Secretary, Treasurer and a Director of Torch, Inc.
(9) Represents shares owned by Torch, Inc. Mrs. Stockstill serves as
Secretary, Treasurer and a member of the Board of Directors of Torch,
Inc., which is currently comprised of three members. Mr. Stockstill serves
as Chief Executive Officer and Chairman of the Board of Directors of
Torch, Inc.
(10) Includes 17,500 shares issuable upon exercise of options granted in
connection with the offering that will become exercisable within 60 days.
(11) Includes 789,952 shares owned by Riverside Investments LLC and 38,381
shares owned by Friends of Lime Rock LP. Mr. Reynolds serves as managing
member of entities which control the investment decisions of Riverside
Investments LLC and Friends of Lime Rock LP. Riverside Investments LLC and
Friends of Lime Rock LP make all voting and investment decisions in
concert with each other. Mr. Reynolds disclaims beneficial ownership of
the shares shown in the table.
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Description of capital stock
The following information describes our common stock, preferred stock,
certificate of incorporation and bylaws as will be in effect upon the closing of
the offering. This description is only a summary and is qualified by reference
to our certificate of incorporation and our bylaws, copies of which have been
filed with the SEC as exhibits to the registration statement of which this
prospectus forms a part.
Upon completion of the offering, our authorized capital stock will consist of
100,000,000 shares of common stock, par value $0.01 per share, and 10,000,000
shares of preferred stock, par value $0.01 per share.
Prior to the offering, there has been no public market for our common stock.
Although the common stock has been approved for quotation on the Nasdaq National
Market, subject to notice of issuance, we cannot assure you that a market for
our common stock will develop or, if one develops, that it will be sustained.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters to be voted on by stockholders generally, including the election of
directors. There are no cumulative voting rights, meaning that the holders of a
majority of the shares voting for the election of directors can elect all of the
directors standing for election, if they choose to do so. Following the
Contribution and the offering, Mr. and Mrs. Stockstill and their family trusts
will own approximately 56.3% of our outstanding common stock, which would
entitle them to elect all our directors.
Our common stock carries no preemptive or other subscription rights to purchase
shares of our stock and is not convertible, redeemable or assessable or entitled
to the benefits of any sinking fund. Holders of our common stock are entitled to
dividends in the amounts and at the times declared by our board of directors out
of funds legally available for the payment of dividends.
If we are liquidated, dissolved or wound up, the holders of our common stock
will share pro rata in our assets after satisfaction of all of our liabilities
and the prior rights of any outstanding class of our preferred stock. All issued
and outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Our board has the authority, without stockholder approval, to issue shares of
preferred stock in one or more series and to fix the number of shares and terms
of each series. The board may determine the designation and other terms of each
series, including, among others:
+ dividend rights;
+ voting powers;
+ preemptive rights;
+ conversion rights;
+ redemption rights; and
+ liquidation preferences.
The issuance of preferred stock, while providing desired flexibility in
connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power of holders of
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DESCRIPTION OF CAPITAL STOCK
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common stock. It also could affect the likelihood that holders of common stock
will receive dividend payments and payments upon liquidation. We have no present
plans to issue any preferred stock.
ANTI-TAKEOVER PROVISIONS OF OUR CHARTER AND BYLAWS
Our certificate of incorporation and bylaws contain provisions that could delay
or make more difficult the acquisition of control of our company through a
hostile tender offer, open market purchases, proxy contest, merger or other
takeover attempt that a stockholder might consider in his or her best interest,
including those attempts that might result in a premium over the market price of
our common stock.
Authorized but Unissued Stock. One of the consequences of our authorized but
unissued common stock and undesignated preferred stock may be to enable our
board to make more difficult or to discourage an attempt to obtain control of
our company. Use of the common or preferred stock for this purpose might also
protect incumbent management. If, in the exercise of its fiduciary obligations,
our board determined that a takeover proposal was not in our best interest, the
board could authorize the issuance of those shares without stockholder approval.
The shares could be issued in one or more transactions that might prevent or
make the completion of the change of control transaction more difficult or
costly by:
+ diluting the voting or other rights of the proposed acquiror or insurgent
stockholder group;
+ creating a substantial voting block in institutional or other hands that might
undertake to support the position of the incumbent board; or
+ effecting an acquisition that might complicate or preclude the takeover.
In this regard, our certificate of incorporation grants our board of directors
broad power to establish the rights and preferences of the authorized and
unissued preferred stock. Our board could establish one or more series of
preferred stock that entitle holders to:
+ vote separately as a class on any proposed merger or consolidation;
+ cast a proportionately larger vote together with the common stock on any
transaction or for all purposes;
+ elect directors having terms of office or voting rights greater than those of
other directors;
+ convert preferred stock into a greater number of shares of common stock or
other securities;
+ demand redemption at a specified price under prescribed circumstances related
to a change of control of our company; or
+ exercise other rights designed to impede a takeover.
Stockholder Action by Written Consent. Our certificate of incorporation
provides that, on and after the date when Mr. and Mrs. Stockstill, together with
their family trusts, cease to own a majority of the shares of our outstanding
securities entitled to vote in the election of directors, no action that is
required or permitted to be taken by our stockholders at any annual or special
meeting may be effected by written consent of stockholders in lieu of a meeting.
Until that date, any action required or permitted to be taken by our
stockholders may be taken at a duly called meeting of stockholders or by the
written consent of stockholders owning the minimum number of shares required to
approve the action.
Amendment of the Bylaws. Under Delaware law, the power to adopt, amend or
repeal bylaws is conferred upon the stockholders. A corporation may, however, in
its certificate of incorporation also confer upon the board of directors the
power to adopt, amend or repeal its bylaws. Our certificate of incorporation and
bylaws grant our board the power to adopt, amend and repeal our bylaws at any
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DESCRIPTION OF CAPITAL STOCK
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regular or special meeting of the board on the affirmative vote of a majority of
the directors then in office. Our stockholders may adopt, amend or repeal our
bylaws only at a regular or special meeting of stockholders and only by the
affirmative vote of holders of a majority of the voting power of our capital
stock present at that meeting.
Special Meetings of Stockholders. Our certificate of incorporation precludes
the ability of our stockholders to call special meetings of stockholders.
Foreign Ownership. Our certificate of incorporation contains provisions that
limit foreign ownership of our capital stock to protect our ability to register
our vessels under federal law and operate our vessels in United States coastwise
trade. To enjoy the benefits of United States registry, United States coastwise
trade and MARAD-guaranteed financing, we must maintain United States citizenship
as defined in the Merchant Marine Act of 1936, as amended, the Shipping Act of
1916, as amended, and the regulations thereunder. Under these regulations, to
maintain United States citizenship and therefore be qualified to engage in
coastwise trade, our president or chief executive officer, the chairman of our
board of directors and a majority of a quorum of our board of directors must be
United States citizens. Further, at least 75% of the ownership and voting power
of our capital stock must be held by United States citizens, as defined in the
Merchant Marine Act, the Shipping Act and the regulations thereunder.
Our certificate of incorporation provides that:
+ any transfer, or attempted transfer, of any shares of capital stock which
would result in the ownership or control by one or more persons who is not a
United States citizen for purposes of United States coastwise domestic
shipping (as defined in the Merchant Marine Act and the Shipping Act) of an
aggregate percentage of the shares of our capital stock or voting power in
excess of a fixed percentage (the "Permitted Percentage"), which is equal to
2% less than the percentage that would prevent us from being a United States
citizen for purposes of engaging in United States coastwise domestic shipping
(currently 25%), will, until such ownership no longer exceeds the Permitted
Percentage, be void and ineffective as against us; and
+ if at any time ownership of capital stock or voting power (either of record or
beneficial) by persons other than United States citizens exceeds the Permitted
Percentage, we will withhold payment of dividends on and suspend the voting
rights of such shares and may redeem such shares deemed to be in excess of the
Permitted Percentage.
Certificates representing our common stock bear legends concerning the
restrictions on ownership by persons other than United States citizens. In
addition, our certificate of incorporation:
+ permits us to require, as a condition precedent to the transfer of shares on
our records, representations and other proof as to the identity of existing or
prospective stockholders and
+ permits us to establish and maintain a dual stock certificate system under
which different forms of certificates may be used to indicate whether the
owner thereof is a United States citizen.
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DESCRIPTION OF CAPITAL STOCK
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DELAWARE ANTI-TAKEOVER LAW
Under the terms of our certificate of incorporation and as permitted under
Delaware law, we have elected not to be subject to Section 203 of the Delaware
General Corporation Law in order to give our significant stockholders greater
flexibility in transferring their shares of common stock. That section prohibits
Delaware corporations from engaging in a wide range of specified transactions
with any interested stockholder. An interested stockholder is any person, other
than the corporation and any of its majority-owned subsidiaries, who owns 15% or
more of any class or series of stock entitled to vote generally in the election
of directors. Section 203 has the effect of discouraging any potential
unfriendly offers or other efforts to obtain control of our company that are not
approved by our board. By opting out of Section 203, a transferee of one of our
significant stockholders could pursue a takeover transaction that was not
approved by our board.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Co. is the transfer agent and registrar for our
common stock. Its telephone number is (212) 936-5100.
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Shares eligible for future sale
Prior to the offering, there has been no public market for our common stock.
Sales of substantial amounts of our common stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing
market price of our common stock and could impair our ability to raise equity
capital in the future.
Upon completion of the offering, 13,333,333 shares of our common stock will be
outstanding. The shares sold in the offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradable
without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act or by
a person who is subject to a lock-up agreement as described below.
The remaining 8,333,333 shares outstanding upon completion of the offering will
be restricted securities under Rule 144. Restricted securities may be sold in
the public market only if the sale is registered or if it qualifies for an
exemption from registration, such as under Rule 144, which is summarized below.
Of these remaining shares, 828,333 are owned by Lime Rock and are subject to
registration rights. See "Certain relationships and related party transactions."
Each of our company, our executive officers and directors and our stockholders
has agreed that, without the prior written consent of UBS Warburg LLC on behalf
of the underwriters, it will not, during the period ended 180 days after the
date of this prospectus, sell shares of common stock or take other related
actions, subject to limited exceptions, all as described under "Underwriting."
The lock-up agreements cover an aggregate of 8,333,333 shares.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person, or persons whose shares are aggregated, who
has beneficially owned restricted securities for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
+ one percent of the number of shares of common stock then outstanding, which
will equal approximately 133,333 shares immediately after the offering; and
+ the average weekly trading volume of the common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing with the SEC of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to other requirements regarding the manner
of sale, notice and availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been one of our affiliates
at any time during the 90 days preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, including the holding
period of any prior owner other than an affiliate, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. No shares outstanding upon
completion of the offering that are restricted securities under Rule 144 may be
sold immediately under Rule 144(k) without so complying.
Because Lime Rock is among our affiliates, subject to the exercise of its
registration rights described under "Certain relationships and related party
transactions," the Rule 144 restrictions and requirements would be applicable to
Lime Rock's shares for as long as it retains affiliate status.
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SHARES ELIGIBLE FOR FUTURE SALE
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STOCK OPTIONS
Upon completion of the offering, we expect that options to purchase an aggregate
of approximately 300,000 shares of our common stock will have been granted under
the 2001 Incentive Plan. We intend to file a registration statement on Form S-8
under the Securities Act as soon as practicable to register shares of our common
stock reserved or to be available for issuance under that plan. This
registration will permit the resale of these shares by nonaffiliates in the
public market without restriction under the Securities Act. Shares registered
under the Form S-8 registration statement held by affiliates will be subject to
the volume and other limitations of Rule 144. The shares issued under the 2001
Incentive Plan also may be subject to the lock-up agreements described above.
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Material United States federal tax consequences
to Non-United States holders of common stock
The following is a general discussion of the material U.S. federal income and
estate tax considerations with respect to the ownership and disposition of
common stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" is
any of the following for U.S. federal income tax purposes:
+a nonresident alien individual;
+a foreign corporation;
+a foreign estate, the income of which is not subject to U.S. federal income
taxation regardless of its source;
+a trust that is not subject to the supervision of a court within the United
States and the control of one or more U.S. persons;
+a trust that does not have a valid election in effect under the applicable U.S.
treasury regulations to be treated as a U.S. person;
+a foreign partnership.
This discussion is based on current provisions of the Internal Revenue Code,
Treasury Regulations promulgated under the Internal Revenue Code, judicial
opinions, published positions of the Internal Revenue Service, and all other
applicable authorities, all of which are subject to change, possibly with
retroactive effect. This discussion does not address all aspects of income and
estate taxation or any aspects of state, local, or non-U.S. taxes, nor does it
consider any specific facts or circumstances that may apply to a particular
Non-U.S. Holder that may be subject to special treatment under the U.S. federal
tax laws, such as insurance companies, tax-exempt organizations, financial
institutions, brokers, dealers in securities, and U.S. expatriates.
Prospective investors are urged to consult their tax advisors regarding the U.S.
federal, state, local and non-U.S. income and other tax considerations of
acquiring, holding and disposing of shares of common stock.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to U.S.
withholding tax at a rate of 30% of the gross amount, or a lower rate prescribed
by an applicable income tax treaty, unless the dividends are effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States. To receive a reduced treaty rate, you must furnish to us or our
paying agent a duly completed Form W-8BEN, W-8IMY, or similar appropriate
documentation, or substitute form certifying your qualification for the reduced
rate.
Dividends that are effectively connected with such a U.S. trade or business
generally will not be subject to U.S. withholding tax if the Non-U.S. Holder
files the required forms, including Internal Revenue Service, Form W-8ECI, or
any successor form, with the payor of the dividend, and generally will be
subject to U.S. federal income tax on a net income basis, in the same manner as
if the Non-U.S. Holder were a resident of the United States. An applicable
treaty may require only the dividends attributable to a permanent establishment
in the United States to be subject to United States tax on a net income basis. A
Non-U.S. Holder that is a corporation may be subject to an additional branch
profits tax at a rate of 30%, or such lower rate as may be specified by an
applicable income
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF
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tax treaty, on the repatriation from the United States of its "effectively
connected earnings and profits," subject to adjustments.
Special rules also apply to dividend payments made to foreign intermediaries,
U.S. or non-U.S. wholly owned entities that are disregarded for U.S. federal
income tax purposes and entities that are treated as fiscally transparent in the
United States, the applicable income tax treaty jurisdiction, or both.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of U.S.
federal income tax withholding under a tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service.
GAIN ON SALE OR OTHER DISPOSITION OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to U.S. federal income tax on
any gain realized upon the sale or other taxable disposition of the holder's
shares of common stock unless one of the following applies:
+The gain is effectively connected with a trade or business conducted by the
Non-U.S. Holder in the United States and, if a tax treaty applies, the gain is
attributable to a U.S. permanent establishment, in which case the Non-U.S.
Holder would be taxed on the net gain derived from the sale or other
disposition under applicable graduated U.S. federal income tax rates. If the
Non-U.S. Holder is a foreign corporation, such Non-U.S. Holder may be subject
to an additional "branch profits tax" at a rate of 30% or a lower rate
specified by an applicable income tax treaty.
+The Non-U.S. Holder is an individual and is present in the United States for
183 or more days in the taxable year of the sale or other disposition, and
other conditions are met, in which case the Non-U.S. Holder will be subject to
a flat 30% tax on the gain derived from the sale or other disposition, which
may be offset by certain U.S. capital losses (even though the Non-U.S. Holder
is not considered to be a resident of the United States).
+We are or have been a "U.S. real property holding corporation" for U.S. federal
income tax purposes at any time during the shorter of the five-year period
ending on the date of the disposition or the period during which the Non-U.S.
Holder held the common stock, in which case such Non-U.S. Holder will be taxed
on the gain from the sale pursuant to the effectively connected rules above. We
believe that we never have been, are not currently and do not anticipate
becoming a U.S. real property holding corporation for U.S. federal income tax
purposes. If we were to become a U.S. real property holding corporation, a
Non-U.S. Holder still would not be subject to U.S. tax if the shares of our
common stock are considered to be "regularly traded on an established
securities market" and the Non-U.S. Holder does not own, actually or
constructively, at any time during the shorter of the periods described above,
more than five percent of our common stock.
Special rules may apply to certain Non-U.S. holders such as "controlled foreign
corporations," "passive foreign investment companies," "foreign personal holding
companies" and corporations that accumulate earnings to avoid U.S. federal
income tax, that are subject to special tax treatment under the Internal Revenue
Code. Such entities should consult their own tax advisors to determine the U.S.
federal, state, local and other tax consequences that may be relevant to them.
ESTATE TAX
Common stock owned or treated as owned by an individual who is not a citizen or
resident, as defined for U.S. federal estate tax purposes, of the United States
at the time of death will be includible in the
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individual's gross estate for U.S. federal estate tax purposes and therefore may
be subject to U.S. federal estate tax, unless an applicable estate tax treaty
provides otherwise.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
We must report annually to the Internal Revenue Service and to each non-U.S.
Holder the amount of dividends paid to, and the tax withheld with respect to,
each Non-U.S. Holder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
this information also may be made available under the provisions of a specific
treaty or agreement with the tax authorities in the country in which the
Non-U.S. Holder resides or is established.
U.S. federal backup withholding generally is a withholding tax imposed at the
rate of 31% on specified payments to persons that fail to furnish required
information under the U.S. information reporting requirements.
A Non-U.S. Holder generally will be subject to U.S. backup withholding tax on
dividends at a 31% rate under the backup withholding rules, rather than at a 30%
rate or other reduced rate as described above, unless such Non-U.S. Holder
complies with Internal Revenue Service certification procedures or, in the case
of payments made outside the United States with respect to an offshore account,
documentary evidence procedures.
As a general matter, information reporting and backup withholding will not apply
to a payment by or through a foreign office of a foreign broker of the proceeds
of a sale of our common stock effective outside the U.S. However, information
reporting requirements, but not backup withholding, will apply to a payment by
or through a foreign office of a broker of the proceeds of a sale of our common
stock effected outside the U.S. if that broker:
+is a U.S. person;
+is a foreign person that derives 50% or more of its gross income for specified
periods from the conduct of a trade or business in the U.S.;
+is a "controlled foreign corporation" as defined in the Internal Revenue Code;
or
+is a foreign partnership with certain specified U.S. connections.
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. Holder and specified conditions are met or the beneficial owner
otherwise establishes an exemption.
Payment by or through a U.S. office of a broker of the proceeds of a sale of our
common stock is subject to both backup withholding and information reporting
unless the holder certifies to the payor in the manner required as to its status
as a Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder can be refunded or
credited against the Non-U.S. Holder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the Internal Revenue
Service in a timely manner.
Each prospective Non-U.S. Holder of common stock should consult that holder's
own tax adviser with respect to the federal, state, local and non-U.S. tax
consequences of the acquisition, ownership and disposition of shares of common
stock.
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Underwriting
We, the selling stockholders and the underwriters for the offering named below
have entered into an underwriting agreement concerning the shares being offered.
Subject to conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. UBS Warburg LLC, CIBC World
Markets Corp. and Howard Weil, a division of Legg Mason Wood Walker, Inc. are
the representatives of the underwriters.
NUMBER OF
UNDERWRITER SHARES
-----------------------------------------------------------------------
UBS Warburg LLC.............................................
CIBC World Markets Corp. ...................................
Howard Weil, a division of Legg Mason Wood Walker, Inc. ....
---------
Total.............................................. 5,000,000
=========
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy up to an additional
750,000 shares from the selling stockholders and us at the initial public
offering price less the underwriting discounts and commissions to cover these
sales. If any shares are purchased under this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above. The following table shows the per share and total underwriting
discounts and commissions we and the selling stockholders will pay to the
underwriters. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase up to an additional 750,000
shares.
PER SHARE NO EXERCISE FULL EXERCISE
------------------------------------------------------------------------------------------------------
Underwriting discount....................................... $ $ $
Proceeds, before expenses, to us............................
Proceeds, before expenses, to the selling stockholders......
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $1.1 million.
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms. Sales of shares made outside of the United States will be made by
affiliates of the underwriters. The underwriters have informed us that they do
not expect discretionary sales to exceed 5% of the shares of common stock to be
offered.
Our company and each of our directors, executive officers and stockholders have
agreed with the underwriters not to offer, sell, contract to sell, hedge or
otherwise dispose of, directly or indirectly, or
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file with the SEC a registration statement under the Securities Act relating to,
any shares of our common stock or securities convertible into or exchangeable
for shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, without
the prior written consent of UBS Warburg LLC. This agreement does not generally
apply to issuances under our employee benefits plans. Although it has advised us
that it has no intent or understanding to do so, UBS Warburg LLC, in its sole
discretion, may permit early release of the shares of our common stock subject
to the restrictions detailed above prior to the expiration of the 180-day lock
up period. UBS Warburg LLC has advised us that, prior to granting an early
release of our common stock, it would consider factors including need, market
conditions, the performance of our common stock price, trading liquidity, prior
trading habits of the selling stockholder and other relevant considerations.
The underwriters have reserved for sale, at the initial public offering price,
up to 250,000 shares of our common stock being offered for sale to our
directors, officers, employees and certain business associates and other
persons, including family members, with a relationship to such persons. The
number of shares available for sale to the general public in the offering will
be reduced to the extent these persons purchase reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares in the offering.
Prior to the offering, there has been no public market for our common stock. The
initial public offering price was negotiated by us and the representatives. The
principal factors to be considered in determining the initial public offering
price included:
+ the information set forth in this prospectus and otherwise available to the
representatives;
+ the history and the prospects for the industry in which we compete;
+ the ability of our management;
+ our prospects for future earnings, the present state of our development and
our current financial position;
+ the general condition of the securities markets at the time of the offering;
and
+ recent market prices of, and demand for, publicly traded common stock of
comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. "Naked" short sales are any
sales in excess of the over-allotment option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of our common stock while
the offering is in progress.
--------------------------------------------------------------------------------
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75
UNDERWRITING
--------------------------------------------------------------------------------
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of our common stock. As a result, the price of our common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
We and, if they sell shares under the over-allotment option, the selling
stockholders, have agreed to indemnify the several underwriters against
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the underwriters may be required to make in respect thereof.
--------------------------------------------------------------------------------
71
76
--------------------------------------------------------------------------------
Legal matters
The validity of the issuance of, and legal matters relating to, the shares of
common stock offered by this prospectus will be passed on for us by Baker Botts
L.L.P., Houston, Texas, and Adams and Reese LLP, New Orleans, Louisiana. Certain
legal matters relating to the common stock offered by this prospectus will be
passed on by Vinson & Elkins L.L.P., Houston, Texas, as counsel for the
underwriters.
Experts
The audited financial statements of Torch Offshore, L.L.C. and Torch Offshore,
Inc. included in this prospectus have been audited by Arthur Andersen LLP,
independent public accounts, as indicated in their reports with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act for the common stock being sold in the offering. This prospectus
constitutes a part of that registration statement. This prospectus does not
contain all of the information included in the registration statement and the
exhibits and schedules to the registration statement because we have omitted
some parts in accordance with the rules and regulations of the SEC. For further
information about us and about the common stock being sold in the offering, you
should refer to the registration statement and the exhibits and schedules filed
as a part of the registration statement.
The registration statement, including related exhibits and schedules, may be
inspected without charge at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any part of the registration
statement may be obtained after payment of fees prescribed by the SEC. You may
obtain information regarding the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants, including us, that file electronically with the SEC. The address of
the site is www.sec.gov.
Upon completion of the offering, we will be required to comply with the
informational requirements of the Securities Exchange Act of 1934 and,
accordingly, will file current, quarterly and annual reports, proxy statements
and other information with the SEC. You may read and copy those reports, proxy
statements and other information at the SEC's Public Reference Room or through
its web site. We intend to furnish holders of our common stock with annual
reports containing audited financial statements certified by an independent
public accounting firm.
--------------------------------------------------------------------------------
72
77
--------------------------------------------------------------------------------
Glossary of certain industry terms
BOE: Barrels of oil equivalent. A measure of aggregate
production which includes oil, condensate and
natural gas.
Coiled tubing: A prefabricated single length of reeled pipe (2" to
4 1/2" in diameter) used for delivering tools "down
hole" for maintenance purposes, as a flowline, and
occasionally for drilling small diameter wells.
Conventional pipelay: Process of offshore pipe installation whereby
40-foot segments, or multiples thereof, of up to
60" diameter pipe are welded together, coated, and
tested on the deck of the pipelay barge. Each
segment is then connected to the prior segment and
is submerged in the water as the barge is moved by
its anchor winches or thrusters.
Conventional mooring: One of three methods of positioning a floating
drilling, installation or production unit over a
position on the sea floor. A vessel is
conventionally moored when from one to 12 anchor
lines extend from the vessel to the sea floor where
they are attached to embedded anchors of various
types.
While adequate for positioning permanent or
transient vessels in shallow to intermediate
depths, conventional moorings are impractical in
deeper waters as the combined weight of the anchors
and lines can exceed the variable deck load of the
vessel being moored.
Deepwater: Generally considered to be water depths between
1,000 and 7,500 feet.
DP: Dynamic positioning. A positioning system effected
by thrusters on the bow and stern of a vessel that
holds the vessel in place without a mooring system.
Computers, which use satellite, acoustic and taut
wire reference systems, and which take into account
wind and current effects on the vessel, direct the
thrusters. A fully redundant DP-2 system is capable
of using more than one reference system in case its
primary system is not operational and can maintain
position even with the loss of an engine, computer
or a thruster (either at the bow or at the stern).
Drydock: A submersible floating barge, equipped with wing
walls, which can be submerged in order to allow a
normal vessel to float into position between the
wing walls. The submerged barge is then
de-ballasted in order to lift the normal vessel
completely out of the water. Major maintenance and
required inspections can then be performed. Upon
successful completion of these activities, the
submersible barge is again submerged. The normal
vessel is re-floated and then removed from between
the wing walls.
Periodic "drydockings" are required on a three to
five year cycle in order for vessels to be
maintained in class and hence to be eligible for
insurance and for commercial use on offshore
projects. The cost
--------------------------------------------------------------------------------
73
78
GLOSSARY OF CERTAIN INDUSTRY TERMS
--------------------------------------------------------------------------------
of any given drydocking is initially capitalized
and then amortized over the period until the next
scheduled drydocking.
Flowline: Small diameter (3" to 12") pipelines that carry
fluids. Flowlines are used to collect produced
fluids from wells and transport them to treating
and storage facilities, as well as to deliver other
fluids for injection into the wellbore.
J-lay: Describes one of two basic profiles used when
installing subsea pipelines, the other being S-lay.
The "J" in the term describes the curve in the pipe
maintained by the dynamic positioning system and
the tensioners onboard the lay vessel.
The J-lay technique is only used on vessels
equipped with dynamic positioning and is favored
for use in deepwater. The J-lay methodology has
intrinsic cost disadvantages that result from the
use of a single welding station as opposed to S-lay
methodology where multiple welding stations can be
used, accelerating the lay rate of the vessel and
thereby reducing the installed cost of the
pipeline. However, the advantages inherent in
reducing the number of times the pipe is bent, as
well as in the need for less tensioning capacity as
water depths increase, make this the favored method
in deepwater.
Kips: 1,000 pounds. Unit used for measuring the tension
which can be applied to a pipeline. Tension
capability is one determinant of the depth
capability of a pipelay vessel.
MARAD: U.S. Department of Transportation Maritime
Administration.
Moonpool: A protected opening in the center of a vessel
through which a saturation diving system, remotely
operated vehicle or other specialized equipment may
be deployed, allowing deployment in adverse weather
conditions.
Mooring: A means of anchoring a vessel to the seabed.
Reeled pipe: A prefabricated flowline or pipeline reeled onboard
a lay vessel for transportation, followed by
offshore installation. Pipe up to 18" in diameter
can be installed using reels operating in either
the S-lay or J-lay mode.
Reel lay: Process of offshore pipe installation whereby pipe
segments are welded, tested and coated onshore and
then wound onto a pipe reel in one continuous
length. Once the reel vessel is in position, the
pipe is unspooled onto the ocean floor as the
vessel moves forward.
Riser: Typically a rigid or flexible section of pipe that
connects a subsea pipeline or well head to either a
fixed or floating surface processing facility.
Remotely operated vehicle: Robotic vehicle that is manipulated from a mother
ship, via an umbilical, in order to perform tasks
and increase the efficiency of subsea operations at
depths where the use of divers is either unsafe,
uneconomical or technically impossible.
--------------------------------------------------------------------------------
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79
GLOSSARY OF CERTAIN INDUSTRY TERMS
--------------------------------------------------------------------------------
S-lay: Describes one of two basic profiles used when
installing subsea pipelines, the other being J-lay.
The "S" in the term describes the curve in the pipe
maintained by the positioning system and the
tensioners onboard the lay vessel.
The S-lay technique can be used on either a
conventionally moored vessel or on one equipped
with dynamic positioning. While more than adequate
in shallow and intermediate depths, S-lay
installation is impractical in ultra-deepwater
because of ever increasing mooring and tensioning
loads.
Saturation diving: A type of diving normally required at water depths
greater than 200 feet. Divers are kept under
pressure for an extended period of time, often many
days, in a specially designed habitat and lowered
to the seabed by way of a "diving bell" to perform
subsea construction tasks. At the end of a work
shift, they return to the surface but remain under
pressure until they descend for their next work
shift. At the end of the project, they are slowly
decompressed over several days until they return to
surface conditions.
Shelf: Continental shelf of the Gulf of Mexico with waters
from 50 feet to 1,500 feet in depth.
Spar: A type of floating production hull, resembling a
large annular cylinder, with air chambers at the
top, to provide buoyancy, and ballast at the
bottom, to provide stability.
Sponson: A structure projecting from the side of a vessel,
designed to increase lateral stability.
Stinger: A structural member extending from the stern of a
laybarge which is designed to support the pipeline
as it enters the water. The member may be either
rigid or articulated. Its purpose is to maintain
the minimum bending radius of the pipe.
Surface supply diving: Also called "mixed gas diving" or "bounce diving,"
it is a diving technique performed in water depths
of less than 200 feet. Divers are linked to the
surface by an umbilical containing compressed gas,
communication and safety lines. Such diving may be
done for only a limited duration and requires
subsequent decompression to avoid serious injury to
the diver.
Tension leg platform: A form of floating production system characterized
by the use of rigid tendons which extend vertically
from the sea floor to the hull. These tendons are
in "tension" as a result of the hull's buoyancy.
Tie-in: The process of connecting a pipeline to another
pipeline, or a pipeline to a riser, by means of
flanges, mechanical connectors or hyperbaric
welding.
Trunk line: Also called a "transmission line" or an "export
line," it is a pipeline of 14" to 42" in diameter
and lengths of up to hundreds of miles that
transports hydrocarbons from multiple production
facilities to an onshore pipeline network or to a
process facility.
--------------------------------------------------------------------------------
75
80
GLOSSARY OF CERTAIN INDUSTRY TERMS
--------------------------------------------------------------------------------
Ultra-Deepwater: Water depths in excess of 5,000 feet.
Umbilical: Control lines arranged in a bundle that sometimes
also include power cables and injection lines.
--------------------------------------------------------------------------------
76
81
INDEX TO FINANCIAL STATEMENTS
PAGE
------------------------------------------------------------------
TORCH OFFSHORE, L.L.C.
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1999 and 2000 and March
31, 2001 (unaudited)...................................... F-3
Statements of Operations for the Years Ended December 31,
1998, 1999 and 2000....................................... F-4
Statements of Operations for the Three Months Ended March
31, 2000 and 2001 (unaudited)............................. F-5
Statements of Changes in Common Stockholders' Equity for the
Years ended December 31, 1998, 1999 and 2000 and the Three
Months Ended March 31, 2001 (unaudited)................... F-6
Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000....................................... F-7
Statements of Cash Flows for the Three Months Ended March
31, 2000 and 2001 (unaudited)............................. F-8
Notes to Financial Statements............................... F-9
TORCH OFFSHORE, INC.
Report of Independent Public Accountants.................... F-20
Balance Sheets as of January 19, 2001 and March 31, 2001
(unaudited) and Note to Balance Sheets.................... F-21
--------------------------------------------------------------------------------
F- 1
82
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Managers of Torch Offshore, L.L.C.:
We have audited the accompanying balance sheets of Torch Offshore, L.L.C. and
its predecessor as of December 31, 2000 and 1999, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Torch Offshore, L.L.C. and its
predecessor as of December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana,
February 9, 2001, (except with
respect to Note 17, as to which
the date is April 10, 2001)
--------------------------------------------------------------------------------
F- 2
83
TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
BALANCE SHEETS
(IN THOUSANDS)
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
2001 2001 (NOTE 15)
1999 2000 (unaudited) (unaudited)
----------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,215 $ 886 $ 2 $ 2
Accounts receivable --
Trade, less allowance for doubtful accounts of $132 and
$607, respectively.................................... 4,477 9,824 11,514 11,514
Other................................................... 220 42 252 252
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 892 523 1,814 1,814
Deferred taxes............................................ -- -- -- 672
Prepaid expenses.......................................... 2,082 1,664 2,886 2,886
------- ------- ------- -------
Total current assets................................ 8,886 12,939 16,468 17,140
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation.............................................. 41,120 40,202 39,418 39,418
INVESTMENTS, restricted..................................... 6 6 6 6
DEFERRED DRYDOCKING CHARGES................................. 3,868 4,554 3,979 3,979
OTHER ASSETS................................................ 189 287 370 370
------- ------- ------- -------
Total assets........................................ $54,069 $57,988 $60,241 $60,913
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade................................. $ 4,364 $ 7,809 $ 6,578 $ 6,578
Accrued expenses.......................................... 1,214 3,384 2,428 2,428
Accrued payroll and related taxes......................... 332 460 673 673
Financed insurance premiums............................... 1,567 991 2,315 2,315
Current portion of long-term debt......................... 5,852 6,962 7,031 7,031
Revolving line of credit.................................. 3,329 3,436 7,211 7,211
------- ------- ------- -------
Total current liabilities........................... 16,658 23,042 26,236 26,236
DEFERRED TAXES.............................................. -- -- -- 3,472
LONG-TERM DEBT, less current portion........................ 29,522 23,957 22,340 22,340
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED UNITS, net of
offering costs, liquidation value $5,300.................. -- 4,678 4,699 --
STOCKHOLDERS' EQUITY:
Common shares, no par value, 1,920 shares issued and
outstanding............................................. -- -- -- --
Additional paid-in-capital................................ 239 239 239 8,865
Retained earnings......................................... 7,650 6,072 6,727 --
------- ------- ------- -------
Total stockholders' equity.......................... 7,889 6,311 6,966 8,865
------- ------- ------- -------
Total liabilities and stockholders' equity.......... $54,069 $57,988 $60,241 $60,913
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F- 3
84
TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
1998 1999 2000
-------------------------------------------------------------------------------------------
Revenues.................................................... $39,224 $ 21,252 $ 46,205
Cost of revenues:
Cost of sales............................................. 25,198 21,190 34,011
Depreciation and amortization............................. 2,187 3,469 4,941
General and administrative expenses....................... 2,275 3,327 3,759
Other operating (income) expense (Note 11)................ (2) 1,741 954
------- -------- --------
Total cost of revenues............................. 29,658 29,727 43,665
------- -------- --------
Operating income (loss)..................................... 9,566 (8,475) 2,540
------- -------- --------
Other income (expense):
Interest expense.......................................... (675) (1,484) (3,814)
Interest income........................................... 184 71 1
------- -------- --------
Total other income (expense)....................... (491) (1,413) (3,813)
------- -------- --------
Income (loss) before income taxes and extraordinary item.... 9,075 (9,888) (1,273)
Income tax expense.......................................... (43) (4) --
------- -------- --------
Net income (loss) before extraordinary item................. 9,032 (9,892) (1,273)
Extraordinary loss on early extinguishment of debt (Note
7)........................................................ -- (676) --
------- -------- --------
Net income (loss)........................................... 9,032 (10,568) (1,273)
Preferred unit dividends and accretion...................... -- -- (305)
------- -------- --------
Net income (loss) attributable to common stockholders....... $ 9,032 $(10,568) $ (1,578)
======= ======== ========
Basic earnings (loss) per share (Note 2).................... $ 4.70 $ (5.50) $ (0.82)
======= ======== ========
Diluted earnings (loss) per share (Note 2).................. $ 4.48 $ (5.50) $ (0.82)
======= ======== ========
Weighted average shares outstanding:
Basic..................................................... 1,920 1,920 1,920
======= ======== ========
Diluted................................................... 2,017 1,920 1,920
======= ======== ========
Unaudited pro forma data (Note 15):
Net loss attributable to common stockholders reported
above................................................... $ (1,578)
Pro forma income tax benefit.............................. 576
--------
Pro forma net loss........................................ $ (1,002)
========
Pro forma basic and diluted loss per share (Note 2)......... $ (0.52)
========
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F- 4
85
TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
2000 2001
-------------------------------------------------------------------------------
Revenues.................................................... $ 6,661 $14,491
Cost of revenues:
Cost of sales............................................. 5,862 10,383
Depreciation and amortization............................. 1,171 1,469
General and administrative expenses....................... 875 959
Other operating (income) expense.......................... (16) --
------- -------
Total cost of revenues............................. 7,892 12,811
------- -------
Operating income (loss)..................................... (1,231) 1,680
------- -------
Other income (expense):
Interest expense.......................................... (940) (911)
Interest income........................................... 1 --
------- -------
Total other income (expense)....................... (939) (911)
------- -------
Income (loss) before income taxes........................... (2,170) 769
Income tax expense.......................................... -- --
------- -------
Net income (loss)........................................... (2,170) 769
Preferred unit dividends and accretion...................... -- (114)
------- -------
Net income (loss) attributable to common stockholders....... $(2,170) $ 655
======= =======
Basic earnings (loss) per share (Note 2).................... $ (1.13) $ 0.34
======= =======
Diluted earnings (loss) per share (Note 2).................. $ (1.13) $ 0.34
======= =======
Weighted average shares outstanding:
Basic..................................................... 1,920 1,920
======= =======
Diluted................................................... 1,920 1,920
======= =======
Unaudited pro forma data (Note 15):
Net income attributable to common stockholders reported
above................................................... $ 655
Pro forma income tax expense.............................. (239)
-------
Pro forma net income...................................... $ 416
=======
Pro forma basic and diluted income per share (Note 2)....... $ 0.22
=======
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F- 5
86
TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
AND FOR THE THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
COMMON STOCK TOTAL
OUTSTANDING ADDITIONAL DEFERRED RETAINED STOCKHOLDERS'
(IN THOUSANDS) SHARES AMOUNT PAID-IN-CAPITAL COMPENSATION EARNINGS EQUITY
---------------------------------------------------------------------------------------------------------------
BALANCE, January 1, 1998.......... 1,920 -- $ 239 $ (59) $ 13,410 $ 13,590
Stock option vesting............ -- -- -- 59 -- 59
Distribution to Stockholder..... -- -- -- -- (3,958) (3,958)
Net income...................... -- -- -- -- 9,032 9,032
----- ---- ----- ------ -------- --------
BALANCE, December 31, 1998........ 1,920 -- 239 -- 18,484 18,723
Distribution to Stockholder..... -- -- -- -- (266) (266)
Net loss........................ -- -- -- -- (10,568) (10,568)
----- ---- ----- ------ -------- --------
BALANCE, December 31, 1999........ 1,920 -- 239 -- 7,650 7,889
Net loss........................ -- -- -- -- (1,273) (1,273)
Preferred unit dividends and
accretion..................... -- -- -- -- (305) (305)
----- ---- ----- ------ -------- --------
BALANCE, December 31, 2000........ 1,920 -- 239 -- 6,072 6,311
Net income...................... -- -- -- -- 769 769
Preferred unit dividends and
accretion..................... -- -- -- -- (114) (114)
----- ---- ----- ------ -------- --------
BALANCE, March 31, 2001
(unaudited)..................... 1,920 $ -- $ 239 $ -- $ 6,727 $ 6,966
===== ==== ===== ====== ======== ========
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F- 6
87
TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1998 1999 2000
----------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)........................................... $ 9,032 $(10,568) $ (1,273)
Depreciation and amortization............................. 2,187 3,469 4,941
Provision for doubtful accounts........................... -- -- 475
Extraordinary loss on extinguishment of debt.............. -- 676 --
Severance and reorganizational costs, net unpaid.......... -- 1,464 300
Deferred drydocking costs incurred........................ -- (4,885) (2,171)
(Increase) decrease in working capital:
Accounts receivable....................................... (1,783) 4,003 (5,643)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 1,228 (325) 369
Prepaid expenses, net of financed portion................. 49 76 (159)
Accounts payable -- trade................................. 784 1,066 3,445
Accrued payroll and related taxes......................... (434) 5 127
Accrued expenses and other................................ (1,066) 813 1,335
-------- -------- --------
Net cash provided by (used in) operating activities......... 9,997 (4,206) 1,746
-------- -------- --------
CASH FLOWS (USED IN) INVESTING ACTIVITIES:
Purchases of equipment.................................... (22,098) (11,681) (2,538)
Net investment in Merchant Marine Capital Construction
Fund.................................................... -- 5,230 --
Proceeds from sale of property and equipment.............. 51 -- --
-------- -------- --------
Net cash used in investing activities....................... (22,047) (6,451) (2,538)
-------- -------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from revolving line of credit................ 1,165 615 108
Proceeds from long-term debt.............................. 16,516 35,500 --
Payments on long-term debt................................ (2,256) (23,727) (4,455)
Proceeds from issuance of preferred units................. -- -- 5,300
Preferred unit issuance costs............................. -- -- (490)
Premium/cost of debt extinguishment....................... -- (565) --
Stockholder distributions................................. (3,958) (266) --
-------- -------- --------
Net cash provided by financing activities................... 11,467 11,557 463
-------- -------- --------
Net increase (decrease) in cash............................. (583) 900 (329)
Cash at beginning of year................................... 898 315 1,215
-------- -------- --------
Cash at end of year......................................... $ 315 $ 1,215 $ 886
======== ======== ========
Interest paid (net of amounts capitalized).................. $ 632 $ 1,207 $ 3,863
======== ======== ========
Income taxes paid........................................... $ 43 $ 4 $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F- 7
88
TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2000 2001
----------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)........................................... $ (2,170) $ 769
Depreciation and amortization............................. 1,171 1,469
Provision for doubtful accounts........................... -- --
Severance and reorganizational costs, net unpaid.......... -- (58)
Deferred drydocking costs incurred........................ (32) --
(Increase) decrease in working capital:
Accounts receivable....................................... 2 (1,901)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 132 (1,291)
Prepaid expenses, net of financed portion................. (66) 103
Accounts payable -- trade................................. 1,530 (1,231)
Accrued payroll and related taxes......................... 143 211
Accrued expenses and other................................ (236) (823)
-------- --------
Net cash provided by (used in) operating activities......... 474 (2,752)
-------- --------
CASH FLOWS (USED IN) INVESTING ACTIVITIES:
Purchases of equipment.................................... (71) (110)
Proceeds from sale of property and equipment.............. -- --
-------- --------
Net cash used in investing activities....................... (71) (110)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from revolving line of credit................ (392) 3,775
Proceeds from long-term debt.............................. -- --
Payments on long-term debt................................ (1,226) (1,549)
Preferred unit distributions.............................. -- (248)
-------- --------
Net cash provided by (used in) financing activities......... (1,618) 1,978
-------- --------
Net decrease in cash........................................ (1,215) (884)
Cash at beginning of year................................... 1,215 886
-------- --------
Cash at end of period....................................... $ -- $ 2
======== ========
Interest paid (net of amounts capitalized).................. $ 962 $ 1,185
======== ========
Income taxes paid........................................... $ -- $ --
======== ========
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS WITH RESPECT TO THE PERIODS ENDED MARCH 31, 2000 AND 2001 ARE
UNAUDITED)
1. NATURE OF BUSINESS:
Torch, Inc. ("Torch"), predecessor in interest to Torch Offshore, L.L.C. ("Torch
Offshore"), was incorporated in Louisiana in 1978. Torch 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"). Torch's focus has been providing services primarily for oil
and natural gas production in water depths of 50 to 300 feet in the Gulf of
Mexico (the "Shelf"). Over the last three years, Torch expanded its operations,
capabilities and management expertise to enable it to provide deepwater services
analogous to the services it provides on the Shelf.
As discussed in Note 3, on May 5, 2000 Torch and funds managed and advised by
Lime Rock Partners LLC ("Lime Rock") formed Torch Offshore to hold substantially
all of the assets and liabilities of Torch. References hereinafter to "the
Company" represent the operations, activities and financial reporting matters of
Torch and its successor, Torch Offshore. For reporting purposes, the transaction
was considered a recapitalization of Torch, and as such, Torch's 950,000 shares
of outstanding common stock were considered to be converted into 1,920,000
common membership units of Torch Offshore, and all historical share data
included in the accompanying financial statements have been restated
retroactively to reflect the impact of the recapitalization, and such amounts
have been described as "shares" (rather than units) when referred to herein.
On January 11, 2001, the Board of Directors of Torch approved the formation of a
new entity, Torch Offshore, Inc., which filed a registration statement on Form
S-1 with the Securities and Exchange Commission ("SEC") to register and sell up
to $86.25 million of common stock of Torch Offshore, Inc. (the "Public
Offering"). Concurrently with the closing of the Public Offering, Torch and Lime
Rock will contribute their membership interests in Torch Offshore to Torch
Offshore, Inc. in exchange for common shares of Torch Offshore, Inc. In the
aggregate, Torch and Lime Rock expect to own a majority of Torch Offshore, Inc.
subsequent to the Public Offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States.
BASIS OF INTERIM PRESENTATION
The unaudited interim financial statements as of March 31, 2001 and for the
three months ended March 31, 2000 and 2001 have been prepared pursuant to the
rules and regulations of the SEC. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to those rules and regulations. However, all
adjustments that, in the opinion of management, are necessary for fair
presentation have been included. These adjustments were of a normal recurring
nature.
The results for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the fiscal year ending December 31,
2001.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
--------------------------------------------------------------------------------
F- 9
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides allowances for doubtful accounts based on historical
experience and a review of the current status of existing accounts receivable
balances at the end of each reporting period. Provisions for doubtful accounts
are recorded as charges to other operating expense. Activity within the
allowance for doubtful accounts follows (in thousands):
1998 1999 2000
---- ---- ----
Beginning balance........................................... $132 $132 $132
Provision................................................... -- -- 475
---- ---- ----
Ending Balance.............................................. $132 $132 $607
==== ==== ====
INVESTMENTS
Long-term investments represent net remaining deposits made by the Company under
the U.S. Government sponsored Merchant Marine Capital Construction Fund ("CCF")
program. The CCF program allows the Company to set aside and use our own funds
for the purpose of funding current or future construction of "qualified" marine
vessels to be used in the Company's operations, while allowing the Company to
receive accelerated tax deductions equal to the amount originally deposited.
These investments are comprised of deposits in an interest bearing, money-market
account, with interest income recorded as earned. Although these investments are
short-term in nature, similar to "cash and cash equivalents," because of the
purpose of the deposits the Company has reflected these as a long-term asset.
There are no restrictions on these investments. However, "unqualified"
withdrawals from this program would result in that amount being included as
additional taxable income to the stockholders for that period. The fair value of
investments approximated carrying value as of December 31, 1999 and 2000.
DEFERRED DRYDOCKING CHARGES
The Company is obligated by regulation to periodically incur refurbishment costs
(known as "drydocking" costs) related to the maintenance and operation of its
marine vessels. The Company capitalizes periodic scheduled drydocking charges
when incurred and amortizes such costs on a straight-line basis over a term
which approximates the amount of time until the next required drydocking
refurbishment, generally two to three years.
Amortization expense for deferred drydocking charges totaled $605,000 in 1998,
$1,206,000 in 1999 and $1,485,000 in 2000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less applicable depreciation.
Depreciation is calculated principally using the straight-line method over the
estimated useful lives of the various classes of depreciable assets.
Expenditures for maintenance and repairs are expensed as incurred. Major
expenditures for renewals and improvements that extend the useful lives of
existing assets, interest incurred during vessel construction, and, when
material, vessel construction related overhead are capitalized.
--------------------------------------------------------------------------------
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
REVENUE RECOGNITION
The Company accounts for its contracts in-progress using the
percentage-of-completion method, as its contracts contain multiple phases of
work whereby title to and ownership of the work-in-process inures to its
customers as each phase in completed. Additionally, the Company believes that it
has a demonstrated the ability to produce reasonably dependable estimates of the
costs under such contracts, and that its business has not been subject to the
types of inherent risks that would raise questions about the ability of either
the Company or the customer to perform their obligations under the contract or
would make otherwise reasonably dependable contract estimates doubtful.
Under this method, recognition of earnings on contracts in-progress is
calculated based on the ratio of costs incurred as of the reporting date to
total expected costs to be incurred on each contract. The SEC has issued Staff
Accounting Bulletin ("SAB") 101 which presents the SEC staff's views on and
guidance in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company has adopted the provisions of
SAB 101 which had no impact with respect to the Company's previously existing
revenue recognition practices.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies,
insurance and benefits. General and administrative costs are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period during which such losses are first forecast.
The asset caption "costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed.
INCOME TAXES
The Company operates as a Subchapter S Corporation. As such, income taxes
associated with the Company's operations have been recognized at the individual
taxpayer level. Concurrently with the closing of the Public Offering, Torch
Offshore, Inc. will recognize a net deferred tax liability calculated at
applicable federal and state income tax rates (see Note 15).
SEGMENTS
The Company's business is considered a single operation with no separately
reportable segments included within.
EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standard ("SFAS") No. 128,
"Earnings per Share." Basic earnings per share is calculated by dividing income
attributable to common stockholders by the weighted-average number of common
shares outstanding for the applicable period, without adjustment for potential
common shares outstanding in the form of options, warrants, convertible
securities or contingent stock agreements. For the calculation of diluted
earnings per share, the number of common shares outstanding are increased (if
deemed dilutive) by the number of additional common
--------------------------------------------------------------------------------
F- 11
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
shares that would have been outstanding if the dilutive potential common shares
had been issued, determined using the treasury stock method where appropriate.
PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA) NET INCOME SHARES AMOUNT
-------------------------------------------------------------------------------------------------
1998
Basic Earnings Per Share:
Income attributable to common stockholders................ $ 9,032 1,920 $ 4.70
=======
Impact of stock options (Note 12)......................... -- 97
------------ -------
Diluted Earnings Per Share.................................. $ 9,032 2,017 $ 4.48
============ ======= =======
1999
Basic Loss Per Share:
Loss attributable to common stockholders.................. $ (10,568) 1,920 $ (5.50)
=======
Impact of stock options (none due to anti-dilutive
effect)................................................. -- --
------------ -------
Diluted Loss Per Share...................................... $ (10,568) 1,920 $ (5.50)
============ ======= =======
2000
Basic Loss Per Share:
Loss attributable to common stockholders.................. $ (1,578) 1,920 $ (0.82)
=======
Impact of stock options (none due to anti-dilutive
effect)................................................. -- --
------------ -------
Diluted Loss Per Share...................................... $ (1,578) 1,920 $ (0.82)
============ ======= =======
There were no differences between basic and diluted earnings per share amounts
for the three-month periods ending March 31, 2000 and 2001 because the
consideration of common stock equivalents would have had an anti-dilutive impact
to basic earnings per share amounts.
Common stock equivalents (related to stock options) excluded from the
calculation of diluted loss per share were 152,000 shares for 1999 and 93,000
shares for 2000 and 101,000 shares for the three-month period ended March 31,
2000. None of the 212,000 outstanding shares of convertible preferred stock were
considered in the calculation of diluted earnings per share for 2000 or the
three-month period ended March 31, 2001 because of their anti-dilutive effect.
The basic and diluted loss per share effect of the extraordinary loss on early
extinguishment of debt for the year ended December 31, 1999 follows:
---------------------------------------------------------------------------
Basic and diluted loss per share before extraordinary
loss...................................................... $ (5.15)
Extraordinary loss.......................................... (0.35)
-------
Basic and diluted loss per share............................ $ (5.50)
=======
OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting and
presentation of comprehensive income. Comprehensive income is the total of net
income and all other non-owner changes in equity. Other comprehensive income
includes foreign currency items, derivative hedging activities, minimum pension
liability adjustments, and unrealized gains/losses on certain investments in
debt and equity investments. Adoption of this standard did not have a
significant impact on the Company's financial position or results of operations,
and the Company has not had any items of other comprehensive income since
adoption.
--------------------------------------------------------------------------------
F- 12
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
FINANCIAL INSTRUMENTS
Effective January 1, 1999, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which established accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The Company has not historically
entered into these derivative instruments and the adoption of SFAS No. 133 did
not have a significant impact on its financial position or results of
operations.
3. RECAPITALIZATION:
On May 5, 2000, the Company transferred, at historical cost, substantially all
assets, liabilities and operations to a newly formed subsidiary, Torch Offshore,
in exchange for 1,920,000 common membership units of Torch Offshore. Immediately
following the transfer, Torch Offshore issued 212,000 7% Convertible Preferred
Membership Units ("Preferred Units") to an outside investor for $5.3 million.
The distribution on the Preferred Units is payable in cash or in stock. The
Preferred Units have a mandatory redemption after eight years and can be put, at
the option of the holder, to Torch Offshore after four years (both at par
value). The Preferred Units automatically convert to common equity (which would
represent an approximate 10 percent ownership of the present common equity
position) upon the completion of a Qualified Initial Public Offering (as
defined), and are callable, at a premium, after four years. The holders of the
Preferred Units have representation on the Torch Offshore Board of Directors,
and they have "Affirmative Vote" consent rights on certain corporate governance
matters.
The Preferred Units are recorded at par/liquidation value ($25 per unit) net of
offering costs of approximately $0.6 million that are being recognized in a
manner that approximates the interest method over the life of the Preferred
Units.
4. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits and trade accounts receivable.
The Company at times has cash on deposit at financial institutions that is in
excess of federally insured limits. Also, the Company's trade receivables are
generally unsecured except for lien rights, and are due from customers,
substantially all of whom are engaged in the production and development of oil
and natural gas located in the Gulf of Mexico.
--------------------------------------------------------------------------------
F- 13
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
Costs and estimated earnings on uncompleted contracts consisted of the following
(in thousands):
DECEMBER 31,
1999 2000
---------------------------------------------------------------------------
Costs incurred.............................................. $849 $2,358
Estimated earnings.......................................... 43 480
---- ------
892 2,838
Less billings to date....................................... -- 2,315
---- ------
$892 $ 523
==== ======
6. PROPERTY AND EQUIPMENT:
The major classifications and estimated useful lives of property and equipment
follow (in thousands, except useful life data):
ESTIMATED
DECEMBER 31, USEFUL LIVES
1999 2000 (IN YEARS)
----------------------------------------------------------------------------------------------
Leasehold improvements...................................... $ 247 $ 247 5
Vessels..................................................... 27,330 49,491 7-20
Vessels under construction.................................. 20,805 1,014 --
Furniture and fixtures...................................... 438 472 2-5
Equipment................................................... 486 499 5
Automobiles and trucks...................................... 282 317 3-5
------- -------
49,588 52,040
Accumulated depreciation.................................... (8,468) (11,838)
------- -------
$41,120 $40,202
======= =======
Depreciation expense totaled $1,582,000 for 1998, $2,263,000 for 1999 and
$3,456,000 for 2000. During the years ended December 31, 1998 and 1999, $676,000
and $1,354,000, respectively, of interest related to vessel construction was
capitalized. Certain property and equipment are pledged as security for
indebtedness described in Note 7.
Included in "Vessels Under Construction" at December 31, 2000 are the
engineering design, legal and other costs associated with the Company's efforts
to pursue construction of the Midnight Warrior. The Midnight Warrior will be a
new $70 million, DP-2 deepwater pipelay and subsea construction vessel. The
Company has completed the design, negotiated the construction contract and
obtained a commitment for a financing guarantee from the U.S. Department of
Transportation Maritime Administration. The Company is presently pursuing a
Public Offering (Note 1) to raise funds to continue with this project.
7. LONG-TERM DEBT:
Prior to 1999, the Company incurred indebtedness for its vessel acquisitions and
major refurbishments. These borrowings were made in individual tranches, with
varying maturities and interest rates (fixed interest rates ranging from 8.2% to
10.2%). In August 1999, the Company refinanced its fleet-related borrowings with
a six-year, $33 million installment loan. This loan provided additional funding
for the capital expenditures and drydocking costs incurred in 1999, as well as,
extended the maturity schedule of the Company's indebtedness (fixed interest
rate of 10.56%). In connection with this debt refinancing, the Company
recognized a $676,000 extraordinary loss on the early extinguishment of
--------------------------------------------------------------------------------
F- 14
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
debt, consisting of $565,000 for prepayment fees and associated refinancing
costs and $111,000 for the write-off of previously deferred financing costs
related to prior borrowings.
Borrowings under the loan are secured by first preferred ship mortgage liens on
the Company's entire fleet and are guaranteed by Mr. and Mrs. Stockstill, the
Company's primary stockholders. The loan has various affirmative and negative
covenants including the maintenance of certain levels of insurance coverage,
restrictions on distributions above specified levels, restrictions on certain
asset sales/purchases and changes to the Company's current business,
restrictions on affiliate advances, as well as certain limits imposed with
respect to other borrowings. The loan also carries certain prepayment penalties
that decrease over the term of the agreement.
In August 1999, the Company closed a $2.5 million, three-year installment loan
(fixed interest rate of 8.5%) secured by a modular reel lay system ("Reel
System") and guaranteed by Lyle Stockstill. The Company's eligible trade
accounts receivable are also cross-pledged. Additionally, the Company has a
revolving line of credit facility (the "Credit Line") with the same bank for
advances of up to $8.0 million (interest rate of 3.0% plus the 30-Day LIBOR
Rate). The Credit Line matures in November 2001 and is secured by the Company's
eligible trade accounts receivable (as defined) and guaranteed by Mr. and Mrs.
Stockstill. Under the terms of those facilities, the Company must maintain
tangible net worth (including the Mandatorily Redeemable Preferred Stock) of at
least $10 million, a minimum debt service ratio of not less than 1.2 to 1 and,
under the Reel System loan, a debt to tangible net worth ratio not to exceed 2
to 1 and, under the Credit Line, a debt to tangible net worth ratio not to
exceed 3 to 1. The Company is in the process of extending the Credit Line's
maturity into 2002. Although there is no assurance that the Company's objective
in this regard will be achieved, based on management's discussions with its
lender the Company believes the Credit Line will be extended beyond December 31,
2001.
As of December 31, 1999 and 2000 the fair value of the Company's debt
obligations approximated carrying value.
Long-term debt consists of the following (in thousands):
MARCH 31,
DECEMBER 31, 2001
1999 2000 (UNAUDITED)
----------------------------------------------------------------------------------------------
Fleet loan.................................................. $31,597 $ 27,404 $ 26,259
Reel system loan............................................ 2,253 1,537 1,263
Credit line................................................. 3,329 3,436 7,211
Other debt (Note 12)........................................ 1,524 1,978 1,849
------- -------- --------
Total debt......................................... 38,703 34,355 36,582
Less current portion............................... (9,181) (10,398) (14,242)
------- -------- --------
Total long-term debt............................... $29,522 $ 23,957 $ 22,340
======= ======== ========
Scheduled maturities of the Company's debt obligations totaled $10.4 million for
2001, $6.2 million for 2002, $6.1 million for 2003, $6.8 million for 2004 and
$4.9 million for 2005.
As of December 31, 1999 and 2000, the Company was not in compliance with certain
of the financial covenants under its debt agreements. However, the Company has
obtained waivers from its lenders on these matters through January 1, 2002, and
as discussed above, the Company is also negotiating to extend the maturity date
of the Credit Line beyond December 2001.
--------------------------------------------------------------------------------
F- 15
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES:
The Company has elected to be taxed as a flow-through entity under the Internal
Revenue Code. Therefore, income taxes related to the operations of the Company
are recognized directly at the individual taxpayer level, and the Company
recognizes no federal or state income tax. However, the Company is subject to a
certain "built-in" gains tax for the difference between the fair value and the
tax reporting basis of assets at the date of election, if such assets are sold
(and a gain is recognized) prior to 2007. During 1998 and 1999, the Company
recognized such taxes related to gains from the sale of certain assets. The
Company currently has no plans to dispose of any additional assets that would be
subject to the "built-in" gains tax.
Income tax expense consisted of the following (in thousands):
YEARS ENDED DECEMBER 31,
1998 1999 2000
-----------------------------------------------------------------------------------------
Current tax expense......................................... $ (43) $ (4) $ --
Deferred tax expense........................................ -- -- --
----- ---- ----
$ (43) $ (4) $ --
===== ==== ====
Reconciliations of the differences between income taxes from operations computed
at the federal statutory tax rate and income taxes recorded follow (in
thousands):
YEARS ENDED DECEMBER 31,
1998 1999 2000
-----------------------------------------------------------------------------------------
Income tax benefit (expense) computed at the federal
statutory tax rate........................................ $(3,133) $ 3,697 $ 552
(Increase) decrease attributable to:
Non-taxable income due to change in tax status.......... 3,133 (3,697) (552)
Other................................................... (43) (4) --
------- ------- -------
Income tax expense.......................................... $ (43) $ (4) $ --
======= ======= =======
If the Company was subject to income taxes as a taxable C Corporation under the
Internal Revenue Code, net deferred tax liabilities of approximately $7.1
million would have been recorded as of December 31, 1999 and 2000. If the
Company had consummated the Public Offering (Note 1) as of March 31, 2001, its
proposed successor, Torch Offshore, Inc., would have recorded a net deferred tax
liability of approximately $2.8 million (pro forma, unaudited) as of that date.
9. RELATED PARTY TRANSACTIONS:
The Company purchases catering services for the galleys of some of its boats and
barges from a company owned by Mrs. Stockstill and her relatives. Purchases for
1998, 1999 and 2000 totaled $178,000, $8,000 and zero, respectively.
The Company also purchased fuel from a company owned by Mrs. Stockstill and her
relatives. Purchases for 2000 totaled $282,000.
10. SIGNIFICANT CUSTOMERS:
Approximately 24% and 27% of the Company's revenues were derived from two
customers during 1999 and 2000, with 30% of the Company's revenues derived from
three customers during 1998.
--------------------------------------------------------------------------------
F- 16
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
11. SEVERANCE AND REORGANIZATIONAL COSTS:
During 1999, the Company consolidated its corporate and operations offices. As
part of this process, the Company incurred certain one-time employee severance,
office closure and relocation costs totaling approximately $0.2 million. In
addition, because of this consolidation process, the Company recognized an
approximately $1.5 million charge during 1999 for the termination agreement
associated with one employee (Note 12). The Company also recorded a $0.5 million
charge in 2000 primarily associated with the termination of another employee
(Note 12). These severance and reorganization costs have been reflected in the
caption "Other Operating Income/Expense" in the Statements of Operations.
12. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS
The Company had an employment agreement with an employee, calling for an annual
base salary of $150,000 and profit sharing based on 1.5% of net income in excess
of $1.4 million. The profit sharing portion of this arrangement totaled $127,000
for 1998 and zero for 1999. In 1996, this employee also was granted a ten-year
option to purchase 101,053 shares of the Company's common stock with an exercise
price of $1.98 per share. Upon granting the option, the Company recorded
deferred compensation of $237,500, representing the difference between the
exercise price and the fair value of the Company's common stock at the date of
grant, which was recognized in earnings as the options became exercisable. In
mid-1999, the Company entered into a termination agreement with this employee,
canceling the employment agreement and the options. The termination agreement
called for installment payments totaling $1.5 million, subject to certain
accelerations. The Company believes that the former employee breached certain
provisions of this agreement and is contesting payment of the remaining
$1,464,000 (included in "other debt"). A lawsuit has been filed by both parties
in this matter.
In January 1998, the Company entered into an employment agreement with an
employee, calling for an annual base salary of $225,000 and profit sharing based
on .75% of net income in excess of $1.4 million. The profit sharing portion of
this arrangement totaled $58,000 for 1998 and zero for 1999 and 2000. The
Company also granted a ten-year option to this employee to purchase 19,934
shares of the Company's common stock with an exercise price of $18.05 per share.
This option vested over a five-year period, with twenty percent option
allotments becoming exercisable each anniversary. An additional "fair market
value" grant of options to purchase 81,659 shares of the Company's common stock
was made to this employee in July 1998, with an exercise price of $39.06 per
share, vesting in equal one-eighth increments on each anniversary date
thereafter. The exercise prices of the respective options equaled or exceeded
management's estimate of the fair value of the Company's stock at the dates of
grant. In late 2000, the Company entered into a termination agreement with this
employee, canceling the employment agreement and the options. The termination
agreement calls for payments totaling approximately $280,000, with an additional
$100,000 payable upon closing of the Public Offering (both accrued as of
December 31, 2000).
The Company has other employment agreements with six key employees expiring on
December 31, 2002, which include severance benefits equal to six months salary
for those individuals. Additionally, in connection with the Public Offering the
Company expects to adopt a new management incentive plan to provide employees an
opportunity to participate in certain stock and cash based performance award
programs.
--------------------------------------------------------------------------------
F- 17
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
LEASE COMMITMENTS
The Company's obligations under non-cancellable operating lease commitments as
of December 31, 2000, totaled $2.7 million for 2001, $2.9 million for 2002, $3.1
million for 2003, $3.1 for 2004, $0.7 million for 2005 and zero thereafter. The
majority of the obligation relates to the Company taking delivery of a deepwater
technology vessel under a five-year charter agreement (the charter amount
includes the marine crew, maintenance and repairs, drydock costs, and certain
insurance coverages), with certain early termination options. At the end of the
five-year initial term, the Company has the option of returning the vessel,
exercising an additional two-year leasing option, or purchasing the vessel for a
fixed price which approximated the Company's estimate of fair value upon
executing the lease.
CONTINGENCIES
Because of the nature of its business, the Company is subject to various claims.
The Company has engaged legal counsel to assist in defending all 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 matters
will have a material effect on its financial position or results of operations.
13. STOCKHOLDERS EQUITY:
The Company sponsors a long-term incentive plan under which approximately
400,000 shares of the Company's common stock are authorized to be granted to
employees and affiliates in the form of stock options, restricted stock,
performance based stock, phantom stock or stock appreciation rights. The only
options outstanding during the periods presented in the accompanying financial
statements are those which are discussed in Note 12.
The Company has adopted the disclosure only provisions of SFAS No. 123 and
continues to apply Accounting Principles Board Opinion ("APB") No. 25 and
related interpretations in accounting for its stock-based compensation plan.
Under SFAS No. 123 compensation methods, the Company's stock based compensation
cost would have increased by $143,000 ($0.07 per share), $158,000 ($0.08 per
share) and $145,000 ($0.08 per share) for 1998, 1999 and 2000, respectively. For
the pro forma computation, the fair value of the stock option grant was
estimated using the Black-Scholes option-pricing model. The weighted-average
fair value of the 1998 stock option grants was $11.45 per share, calculated
using a risk-free interest rate of 5.6%, expected volatility of 37%, an expected
life of ten years and no annual dividend. The fair value of the 1996 stock
option grant was $3.40 per share, calculated using a risk-free interest rate of
6.5%, expected volatility of 37%, an expected life of ten years and no annual
dividend.
Under the terms of the Company's loan agreements, dividend distributions to
common stockholders are limited to those which are required to reimburse the
income tax obligation that results from the Company's operations as a Subchapter
S corporation.
14. EMPLOYEE BENEFIT PLAN:
The Company has a 401-K defined contribution plan whereby eligible employees are
allowed to contribute on a tax deferred basis up to 15% of their compensation
(subject to certain limitations) for investment within the plan. Earnings from
the plan accumulate to the benefit of the employees on a tax deferred basis. The
Company matches employee contributions limited to 6% of the respective
employees' compensation. Plan participants vest in the Company's matching
contributions over a five-year period. The amount contributed to the plan by the
Company totaled $215,000 for 1998, $298,000 for 1999 and $341,000 for 2000.
--------------------------------------------------------------------------------
F- 18
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TORCH OFFSHORE, L.L.C.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
15. PRO FORMA BALANCE SHEET AND INCOME STATEMENT DATA (UNAUDITED):
Concurrently with the closing of the Public Offering, Torch Offshore, Inc. will
recognize a net deferred tax liability calculated at applicable federal and
state income tax rates.
The pro forma balance sheet of the Company as of March 31, 2001 reflects a net
deferred income tax liability of approximately $2.8 million resulting from the
assumed change in tax payer status and a reclassification of historical retained
earnings as additional paid-in-capital of approximately $6.7 million.
Additionally, as discussed in Note 1, in connection with the Public Offering,
Lime Rock will contribute its preferred membership interests in Torch Offshore
to Torch Offshore, Inc. in exchange for common shares of Torch Offshore, Inc.
Therefore, the March 31, 2001 pro forma balance sheet reflects the
reclassification of the Company's $4.7 million of mandatorily redeemable
preferred units to additional paid-in-capital. Lime Rock will receive certain
registration rights related to the common stock it receives in exchange for its
contributed preferred membership interests.
Pro forma net income (loss) consists of the Company's historical earnings as an
S Corporation/limited liability company, adjusted for income taxes that would
have been recorded had the Company operated as a C Corporation. This amount is
divided by the weighted average common shares and common share equivalents
outstanding to derive pro forma net income (loss) per share amounts.
16. QUARTERLY FINANCIAL DATA (UNAUDITED):
FISCAL YEAR 1999 QUARTERS
(in thousands, except per share data) FIRST SECOND THIRD FOURTH
-----------------------------------------------------------------------------------------------------
Revenues................................................... $ 5,887 $ 3,570 $ 6,749 $ 5,046
Operating Income (Loss).................................... (510) (3,475) (1,470) (3,020)
Loss Before Extraordinary Item............................. (812) (3,728) (1,829) (3,523)
Net Loss................................................... (812) (3,728) (2,505) (3,523)
Basic and Diluted Loss Per Share Before
Extraordinary Item....................................... (0.42) (1.94) (0.95) (1.84)
Basic and Diluted Loss Per Share........................... (0.42) (1.94) (1.30) (1.84)
FISCAL YEAR 2000 QUARTERS
FIRST SECOND THIRD FOURTH
-----------------------------------------------------------------------------------------------------
Revenues................................................... $ 6,661 $11,014 $12,715 $15,815
Operating Income (Loss).................................... (1,231) 359 610 2,802
Net Income (Loss).......................................... (2,170) (640) (333) 1,870
Net Income (Loss) Attributable to Common Stockholders...... (2,170) (716) (447) 1,755
Basic Earnings (Loss) Per Share............................ (1.13) (0.37) (0.23) 0.91
Diluted Earnings (Loss) Per Share.......................... (1.13) (0.37) (0.23) 0.87
17. SUBSEQUENT EVENT:
On April 10, 2001, the United States Bankruptcy Court for the Southern District
of Texas, Houston Division, approved an agreement that provides the Company the
option to purchase an additional pipelay/bury vessel (the BH-400) for a purchase
price of $9,450,000. The option period extends through July 31, 2001. As
consideration for the option, the Company is required to pay $100,000 on May 1,
2001. The Company will be required to pay $100,000 on each of June 1, 2001 and
July 1, 2001, unless it exercises the option prior to these dates, to maintain
its purchase right under the agreement. The Company intends to exercise the
option in the event that adequate proceeds are realized from the Public Offering
(Note 1) to fund the purchase of the BH-400.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board
of Directors of Torch Offshore, Inc.:
We have audited the accompanying balance sheet of Torch Offshore, Inc. as of
January 19, 2001. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Torch Offshore, Inc. as of January
19, 2001, in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana,
January 19, 2001
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TORCH OFFSHORE, INC.
--------------------------------------------------------------------------------
BALANCE SHEETS
MARCH 31,
JANUARY 19, 2001
2001 (UNAUDITED)
------------- -----------
ASSETS
Cash...................................................... $1,000 $1,000
------ ------
Total assets....................................... $1,000 $1,000
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities............................................... $ -- $ --
Stockholders' Equity:
Common shares, par value $0.01 per share, 100,000,000
shares authorized, 1,000 shares issued and
outstanding............................................ 10 10
Additional paid-in-capital.............................. 990 990
------ ------
Total stockholders' equity......................... 1,000 1,000
------ ------
Total liabilities and stockholders' equity......... $1,000 $1,000
====== ======
NOTE TO BALANCE SHEETS
On January 10, 2001, Torch, Inc. formed Torch Offshore, Inc. to own and operate
the operations of Torch Offshore, L.L.C. At inception, Torch Offshore, Inc.
issued 1,000 shares of its $0.01 par value common stock to Torch, Inc. for
$1,000. On January 15, 2001, Torch, Inc., Riverside Investments LLC and Friends
of Lime Rock LP entered into a contribution agreement pursuant to which each
entity will contribute its membership interest in Torch Offshore, L.L.C. to
Torch Offshore, Inc. concurrently with the initial public offering of the common
stock of Torch Offshore, Inc.
In addition to its common stock, Torch Offshore, Inc. has 10,000,000 shares of
preferred stock (par value $0.01 per share) authorized, none of which are issued
or outstanding.
As of March 31, 2001, Torch Offshore, Inc. has not yet commenced independent
operations, therefore no accompanying statements of operations or cash flows for
the interim period ended March 31, 2001 have been included.
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Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by Torch Offshore, Inc. (the "Company") in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fees.
Securities and Exchange Committee registration fee.......... $ 21,563
NASD filing fee............................................. 8,625
Nasdaq National Market listing fee.......................... 75,625
Legal fees and expenses..................................... 600,000
Accounting fees and expenses................................ 125,000
Blue Sky fees and expenses (including legal fees)........... 25,000
Printing expenses........................................... 175,000
Transfer Agent fees......................................... 20,000
Miscellaneous............................................... 49,187
----------
Total............................................. $1,100,000
==========
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware (the
"DGCL") gives a corporation power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful.
Section 145 also gives a corporation power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
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PART II
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expenses which the Delaware Court of Chancery or such other court shall deem
proper. Section 145 further provides that, to the extent that a present or
former director or officer of a corporation has been successful on the merits or
otherwise in defense of any such action, suit or proceeding, or in defense of
any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
Section 145 also authorizes a corporation to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, arising out of his status as such,
whether or not the corporation would otherwise have the power to indemnify him
under Section 145.
The Company's Certificate of Incorporation and Bylaws provide for the
indemnification of officers and directors to the fullest extent permitted by the
DGCL. The underwriting agreement also provides for the indemnification of the
directors and officers in certain circumstances. The Company has also entered
into indemnification agreements with each of its directors and executive
officers.
The Certificate of Incorporation of the Company provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, as the same exists as of the date of the Certificate of Incorporation
or as such provision may be thereafter amended, supplemented or replaced or (iv)
for any transaction from which the director derived an improper personal
benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has not sold any securities, registered or otherwise, within the
past three years, except for the shares issued in connection with the formation
of the Company on January 11, 2001 in an offering exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
NUMBER DESCRIPTION
---------------------------------------------------------------------
1.1* Form of Underwriting Agreement
3.1+ Certificate of Incorporation
3.2+ Bylaws
3.3* Certificate of Amendment to Certificate of Incorporation
4.1 Form of specimen common stock certificate
4.2+ Form of Registration Rights Agreement among the Company and
the stockholders named therein
5.1 Opinion of Baker Botts L.L.P.
10.1+ Contribution Agreement dated January 15, 2001 among Torch,
Inc., Friends of Lime Rock LP, Riverside Investments LLC and
Torch Offshore, Inc.
10.2 Torch Offshore, Inc. 2001 Long-Term Incentive Plan
10.3+ Employment Agreement between Torch Offshore, Inc. and Willie
J. Bergeron, Jr., dated January 15, 2001
10.4+ Employment Agreement between Torch Offshore, Inc. and
William J. Blackwell, dated January 15, 2001
10.5+ Employment Agreement between Torch Offshore, Inc. and
Vincent Lecarme, dated January 15, 2001
10.6+ Employment Agreement between Torch Offshore, Inc. and James
J. Mermis, dated January 15, 2001
10.7+ Employment Agreement between Torch Offshore, Inc. and Eric
N. Smith, dated January 15, 2001
10.8+ Employment Agreement between Torch Offshore, Inc. and E. T.
Robinson III, dated January 15, 2001
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--------------------------------------------------------------------------------
NUMBER DESCRIPTION
---------------------------------------------------------------------
10.9+ Form of Indemnification Agreement
10.10 Vessel Construction Contract by and between Bender
Shipbuilding & Repair Co., Inc. and Torch Deepwater Inc.,
dated March 30, 2000, as amended
10.11* Working Capital Line of Credit Agreement between Regions
Bank and Torch Offshore, L.L.C., as Borrower, dated May 11,
2001
10.12+ Pipelay Services Contract between Union Oil Company of
California and Torch, Inc., a Louisiana corporation, dated
January 4, 2001
10.13+ Co-operation Agreement between Sonsub Inc., a Delaware
corporation, and Torch, Inc., a Louisiana corporation, dated
March 17, 2000
10.14+ Agreement between Torch, Inc. and SAS Gouda B.V, dated March
18, 1998
10.15+ Option to Purchase between Robbye Waldron, as trustee of the
Chapter 7 bankruptcy estate of HBH, Inc. and Torch Offshore
L.L.C., dated March 2, 2001
21.1+ List of subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.5 Consent of Baker Botts L.L.P. (contained in Exhibit 5.1
hereto)
24.1+ Powers of Attorney.
* To be filed by amendment.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the information is inapplicable or is
contained in the Financial Statements or Notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Gretna,
State of Louisiana, on the 14th day of May, 2001.
TORCH OFFSHORE, INC.
By: /s/ LYLE G. STOCKSTILL
------------------------------------
Name: Lyle G. Stockstill
Title: Chairman of the Board and
Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LYLE G. STOCKSTILL Chairman of the Board and May 14, 2001
-------------------------------------------------------- Chief Executive Officer
Lyle G. Stockstill (Principal Executive
Officer)
/s/ WILLIAM J. BLACKWELL Chief Financial Officer May 14, 2001
-------------------------------------------------------- and Director (Principal
William J. Blackwell Financial and Accounting
Officer)
/s/ LANA J. HINGLE STOCKSTILL* Senior Vice President -- May 14, 2001
-------------------------------------------------------- Administration and
Lana J. Hingle Stockstill Director
/s/ ERIC N. SMITH* Executive Vice President May 14, 2001
--------------------------------------------------------
Eric N. Smith
/s/ CURTIS LEMONS* Director May 14, 2001
--------------------------------------------------------
Curtis Lemons
/s/ JOHN REYNOLDS* Director May 14, 2001
--------------------------------------------------------
John Reynolds
/s/ KEN WALLACE* Director May 14, 2001
--------------------------------------------------------
Ken Wallace
*By: /s/ WILLIAM J. BLACKWELL
--------------------------------------------------------
William J. Blackwell
Attorney-in-Fact
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Index to Exhibits
NUMBER DESCRIPTION
---------------------------------------------------------------------
1.1* Form of Underwriting Agreement
3.1+ Certificate of Incorporation
3.2+ Bylaws
3.3* Certificate of Amendment to Certificate of Incorporation
4.1 Form of specimen common stock certificate
4.2+ Form of Registration Rights Agreement among the Company and
the stockholders named therein
5.1 Opinion of Baker Botts L.L.P.
10.1+ Contribution Agreement dated January 15, 2001 among Torch,
Inc., Friends of Lime Rock LP, Riverside Investments LLC and
Torch Offshore, Inc.
10.2 Torch Offshore, Inc. 2001 Long-Term Incentive Plan
10.3+ Employment Agreement between Torch Offshore, Inc. and Willie
J. Bergeron, Jr., dated January 15, 2001
10.4+ Employment Agreement between Torch Offshore, Inc. and
William J. Blackwell, dated January 15, 2001
10.5+ Employment Agreement between Torch Offshore, Inc. and
Vincent Lecarme, dated January 15, 2001
10.6+ Employment Agreement between Torch Offshore, Inc. and James
J. Mermis, dated January 15, 2001
10.7+ Employment Agreement between Torch Offshore, Inc. and Eric
N. Smith, dated January 15, 2001
10.8+ Employment Agreement between Torch Offshore, Inc. and E. T.
Robinson III, dated January 15, 2001
10.9+ Form of Indemnification Agreement
10.10 Vessel Construction Contract by and between Bender
Shipbuilding & Repair Co., Inc. and Torch Deepwater Inc.,
dated March 30, 2000, as amended
10.11* Working Capital Line of Credit Agreement between Regions
Bank and Torch Offshore, L.L.C., as Borrower, dated May 11,
2001
10.12+ Pipelay Services Contract between Union Oil Company of
California and Torch, Inc., a Louisiana corporation, dated
January 4, 2001
10.13+ Co-operation Agreement between Sonsub Inc., a Delaware
corporation, and Torch, Inc., a Louisiana corporation, dated
March 17, 2000
10.14+ Agreement between Torch, Inc. and SAS Gouda B.V, dated March
18, 1998
10.15+ Option to Purchase between Robbye Waldron, as trustee of the
Chapter 7 bankruptcy estate of HBH, Inc. and Torch Offshore
L.L.C., dated March 2, 2001
21.1+ List of subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.5 Consent of Baker Botts L.L.P. (contained in Exhibit 5.1
hereto)
24.1+ Powers of Attorney.
* To be filed by amendment.
+ Previously filed.
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