UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
Commission File Number 000-32855
___________
TORCH OFFSHORE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 74-2982117
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056-2596
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (504) 367-7030
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No __
The number of shares of the Registrant's Common Stock outstanding
as of May 13, 2002 was 12,728,946.
TORCH OFFSHORE, INC.
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2002 2001
--------- ---------
(Unaudited)
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 20,821 $ 24,493
Accounts receivable --
Trade, less allowance for doubtful
accounts 16,019 11,033
Other 61 290
Costs and estimated earnings in excess
of billings on uncompleted contracts 600 1,600
Prepaid expenses and other 1,986 2,659
--------- ---------
Total current assets 39,487 40,075
PROPERTY AND EQUIPMENT, net 50,064 49,179
INVESTMENTS, restricted 6 6
DEFERRED DRYDOCKING CHARGES, net 3,804 3,245
OTHER ASSETS 196 250
--------- ---------
Total assets $ 93,557 $ 92,755
========= =========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable -- trade $ 5,249 $ 4,124
Accrued expenses 3,238 2,909
Accrued payroll and related taxes 1,402 791
Financed insurance premiums 351 1,075
Deferred income taxes 535 535
--------- ---------
Total current liabilities 10,775 9,434
DEFERRED INCOME TAXES 2,583 2,280
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY 80,199 81,041
--------- ---------
Total liabilities and
stockholders' equity $ 93,557 $ 92,755
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
2002 2001
-------- --------
Revenues $ 16,725 $ 14,491
Cost of revenues:
Cost of sales 12,746 10,383
Depreciation and amortization 1,930 1,469
General and administrative
expenses 1,250 959
-------- --------
Total cost of revenues 15,926 12,811
-------- --------
Operating income 799 1,680
-------- --------
Other income (expense):
Interest expense (35) (911)
Interest income 102 --
-------- --------
Total other income (expense) 67 (911)
-------- --------
Income before income taxes 866 769
Income tax expense (303) --
-------- --------
Net income 563 769
Preferred unit dividends and
accretion -- (114)
-------- --------
Net income attributable to
common stockholders $ 563 $ 655
======== ========
Net income per common share:
Basic $ 0.04 $ 0.09
======== ========
Diluted $ 0.04 $ 0.09
======== ========
Weighted average common stock
outstanding:
Basic 12,833 7,505
======== ========
Diluted 12,833 7,505
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months Ended
March 31,
2002 2001
------- ------
Cash flows used in operating activities:
Net income $ 563 $ 769
Depreciation and amortization 1,930 1,469
Deferred income tax provision 303 --
Severance and reorganizational costs,
net unpaid (paid) -- (58)
Deferred drydocking costs incurred (1,359) --
(Increase) decrease in working capital:
Accounts receivable (4,757) (1,901)
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,000 (1,291)
Prepaid expenses, net of financed
portion (51) 103
Accounts payable -- trade 1,119 (1,231)
Accrued payroll and related taxes 611 211
Accrued expenses and other 416 (823)
------- ------
Net cash used in operating activities (225) (2,752)
------- ------
Cash flows used in investing activities:
Purchases of equipment (2,016) (110)
------- ------
Net cash used in investing activities (2,016) (110)
------- ------
Cash flows (used in) provided by
financing activities:
Net proceeds from revolving line of
credit -- 3,775
Payments on long-term debt -- (1,549)
Treasury stock purchases (1,431) --
Stockholder distributions -- (248)
------- ------
Net cash (used in) provided by
financing activities (1,431) 1,978
------- ------
Net decrease in cash and cash
equivalents (3,672) (884)
Cash and cash equivalents at beginning
of period 24,493 886
------- ------
Cash and cash equivalents at end
of period $20,821 $ 2
======= ======
Interest paid (net of amounts
capitalized) $ 35 $1,185
======= ======
Income taxes paid $ -- $ --
======= ======
The accompanying notes are an integral part of these consolidated
financial statements.
TORCH OFFSHORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation:
The interim consolidated financial statements included herein
have been prepared by Torch Offshore, Inc. (a Delaware
corporation) and are unaudited, except for the balance sheet at
December 31, 2001, which has been prepared from the Company's
previously audited financial statements. The consolidated
financial statements of Torch Offshore, Inc. include its wholly
owned subsidiary Torch Offshore, L.L.C., (collectively, the
"Company"). Management believes that the unaudited interim
financial statements include all adjustments (such adjustments
consisting only of a normal recurring nature) necessary for fair
presentation. Certain information and note disclosures normally
included in annual financial statements prepared in accordance
with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to those rules and
regulations. The results for the three months ended March 31,
2002 are not necessarily indicative of the results to be expected
for the entire year. The interim financial statements included
herein should be read in conjunction with the audited financial
statements and notes thereto together with Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2001.
The Company provides integrated pipeline installation, subsea
construction and support services to the offshore oil and natural
gas industry primarily in the United States Gulf of Mexico (the
"Gulf of Mexico"). The Company's focus has been providing
services primarily for oil and natural gas production in water
depths of 20 to 300 feet in the Gulf of Mexico (the "Shelf").
Over the past few years, the Company has expanded its operations,
fleet capabilities and management expertise to enable it to
provide deeper water services analogous to those services it
provides on the Shelf.
In June 2001, the Company completed its initial public offering
of 5.0 million shares of its common stock at $16.00 per share,
raising gross proceeds of $80.0 million; net proceeds were $72.6
million after underwriting commission and discounts and expenses
totaling $7.4 million (the "Public Offering").
2. Stockholders' Equity:
In connection with the Public Offering, predecessor interests of
the Company (including preferred unit interests) were exchanged
for common shares of the Company. For financial reporting
purposes, the transactions were considered a recapitalization of
the Company, and as such, all historical share data included in
the accompanying financial statements has been restated.
Treasury Stock - In August 2001, the Company's Board of Directors
approved the repurchase of up to $5.0 million of the Company's
outstanding common stock. Purchases will be made on a
discretionary basis in the open market or otherwise over a period
of time as determined by management subject to market conditions,
applicable legal requirements and other factors. As of March 31,
2002, 628,700 shares had been repurchased at a total cost of $3.7
million.
Stock Option Plan - The Company has a long-term incentive plan
under which 3.0 million shares of the Company's common stock are
authorized to be granted to employees and affiliates. The awards
can be in the form of options, stock, phantom stock, performance
based stock or stock appreciation rights. As of March 31, 2002,
stock options covering 229,068 shares of common stock at $16.00
per share, and 32,813 shares of restricted stock, both vesting
generally over five years, were outstanding.
3. Income Taxes:
Prior to the Public Offering, the Company had elected to be taxed
as a flow-through entity under the Internal Revenue Code. Income
taxes related to the operations of the Company were recognized
directly at the individual taxpayer level. Therefore, the Company
recognized no federal or state income tax for the three months
ended March 31, 2001.
In connection with the Public Offering, the Company became
subject to corporate level taxation and adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." The Company recorded a $0.3 million provision (a
35% effective tax rate) attributable to operating earnings for
the three months ended March 31, 2002.
4. Earnings Per Share:
The Company follows SFAS No. 128, "Earnings per Share." Basic
earnings per share is calculated by dividing income attributable
to common stockholders by the weighted-average number of common
shares outstanding for the applicable period, without adjustment
for potential common shares outstanding in the form of options,
warrants, convertible securities or contingent stock agreements.
For calculation of diluted earnings per share, the number of
common shares outstanding are increased (if deemed dilutive) by
the weighted-average number of additional common shares that
would have been outstanding if the dilutive potential common
shares had been issued, determined using the treasury stock
method where appropriate.
Common stock equivalents (related to stock options) excluded from
the calculation of diluted earnings per share were approximately
229,000 shares and zero shares for the first quarters of 2002 and
2001, respectively, because they were anti-dilutive. None of the
predecessor convertible preferred units were considered in the
calculation of diluted earnings per share because of their anti-
dilutive effect.
5. Commitments and Contingencies:
The Company has been named as a defendant in a stockholder class
action suit filed by purported stockholders regarding the Public
Offering. This suit, which seeks unspecified monetary damages,
has been filed in federal district court for the Eastern District
of Louisiana. Management believes the allegations in this suit
are without merit, and the Company intends to vigorously defend
the lawsuit. Even so, an adverse outcome in this class action
litigation could have an adverse effect on the Company's
financial condition or results of operations.
Because of the nature of its business, the Company is subject to
various other 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.
6. New Accounting Standards:
In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for fiscal years beginning after June 15,
2002. This statement will require the Company to record the fair
value of liabilities related to future asset retirement
obligations in the period the obligation is incurred. The
Company expects to adopt SFAS No. 143 on January 1, 2003. Due to
the nature of the Company's assets, management believes that the
adoption of this statement will not materially impact the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The provisions of
this statement revise current guidelines with respect to the
process for measuring impairment of long-lived assets. The
Company adopted this statement effective January 1, 2002, which
did not have a material impact on the Company's financial
position or results of operations.
In June 2001, the American Institute of Certified Public
Accountants ("AICPA") issued an exposure draft of a proposed
Statement of Position ("SOP"), "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment." This
proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic
repairs and maintenance costs related to "in service" fixed
assets. It would require that these types of expenses be
recognized when incurred rather than recognizing expense for
these costs while the asset is productive. The Company is
assessing the impact of the change should this SOP be adopted. If
adopted, the Company would be required to expense regulatory
maintenance cost on its vessels as incurred (currently
capitalized and recognized as "drydocking cost amortization").
7. Subsequent Event:
In May 2002, the Company entered into an agreement with Cable
Shipping Inc. to bareboat charter a vessel, the G. Murray, under
a three-year contract for $9,500 per day. The 340-foot, DP-2
class vessel, which will be renamed the Midnight Hunter, will be
used by the Company as a deepwater vessel having the capability
of laying pipe (utilizing up to four reels) in water depths of
approximately 3,000 to 4,000 feet and providing diving and ROV
support work. The Company has the option of purchasing the vessel
for a fixed price after two years and at the end of the contract
period.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2001, and the unaudited
interim consolidated financial statements and related notes
contained in "Item 1. Financial Statements" above.
This Quarterly Report on Form 10-Q contains statements that are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended, concerning, among
other things our prospects, expected revenues, expenses and
profits, developments and business strategies for our operations
all of which are subject to certain risks, uncertainties and
assumptions. Our actual results may differ materially from those
expressed or implied in this Form 10-Q. Many of these factors are
beyond our ability to control or predict. We caution investors
not to place undue reliance on forward-looking statements.
Accordingly, there is no assurance that our expectations will be
realized. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
our Annual Report on Form 10-K for the fiscal year ended December
31, 2001 under the captions "Forward-Looking Statements" and
"Item 1. Business - Risk Factors."
GENERAL
Torch Offshore, Inc. provides subsea construction services in
connection with the infield development of offshore oil and
natural gas reservoirs. We are a leading service provider in our
market niche of installing and maintaining small diameter
flowlines and related infrastructure associated with the
development of offshore oil and natural gas reserves on the
Continental Shelf of the Gulf of Mexico (the "Shelf"). Over the
last few years, we have expanded our operations, fleet
capabilities and management expertise to enable us to provide
deeper water services analogous to the services we provide on the
Shelf.
From 1997 to 2001, we had increased the size of our fleet from
three to nine construction and service vessels. In April 2002, we
also completed the acquisition of a 520-foot vessel from Smit
International for $9.75 million. This vessel will be converted
to a DP-2 offshore construction vessel with our patent-pending
pipelay system and renamed the Midnight Express. Additionally,
in May 2002, we entered into an agreement to bareboat charter the
Midnight Hunter for a three-year period. This DP-2 vessel will be
used as a deepwater pipelay vessel in water depths of
approximately 3,000 to 4,000 feet. In addition, we are actively
seeking 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. We are unable to predict future oil and natural gas
prices or the level of offshore construction activity related to
the industry. In addition to the prices of oil and natural gas,
we use the following leading indicators, among others, to
forecast the demand for our services:
O the offshore mobile rig count and jack-up rig count;
O forecasts of capital expenditures by major and independent
oil and gas companies;
O recent lease sale activity levels; and
O 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:
O competition;
O equipment and labor productivity;
O weather conditions;
O contract estimating uncertainties; and
O other risks inherent in marine construction.
Although greatly influenced by overall market conditions, our
fleet-wide utilization is generally lower during the first half
of the year because of winter weather conditions in the Gulf of
Mexico. Accordingly, we endeavor to schedule our drydock
inspections and routine and preventative maintenance during this
period. Additionally, during the first quarter, a substantial
number of our customers finalize capital budgets and solicit bids
for construction projects. For this reason, individual
quarterly/interim results are not necessarily indicative of the
expected results for any given year.
In the life of an offshore field, capital is allocated for field
development of a well following a commercial discovery. The time
that elapses between a successfully drilled well and the
development phase in which we participate, varies depending on
the water depth of the field. On the Shelf, demand for our
services generally follows 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.
RESULTS OF OPERATIONS
Comparison of the Quarter Ended March 31, 2002 to the Quarter
Ended March 31, 2001
Revenues. Revenues were $16.7 million for the three months ended
March 31, 2002 compared to $14.5 million for the three months
ended March 31, 2001, an increase of 15%. The stronger first
quarter 2002 revenues were driven primarily by the increase in
the utilization of our fleet. For the three months ended March
31, 2002, our fleet worked 548 revenue days resulting in a
utilization rate of 75%, compared to 459 revenue days worked in
the three months ended March 31, 2001, resulting in a 69%
utilization rate. The Midnight Rider, which was put into service
in September 2001, contributed 77 revenue days in the first
quarter of 2002. Average pricing realizations for the three
months ended March 31, 2001 and the three months ended March 31,
2002 remained relatively steady, decreasing only 2%. However,
pricing realizations for the three months ended March 31, 2002
increased approximately 5% from the fourth quarter of 2001.
Domestic natural gas and crude oil prices remained relatively
volatile throughout the first quarter of 2002 before finishing
with a slight increase at the end of the quarter to reach levels
of $2.84 per Mcf and $25.50 per barrel, respectively. Despite the
increase, these prices are much lower than the year ago-quarter
levels experienced in the industry. From an activity standpoint,
our expectations of a resumption of stronger growth continues to
be delayed until the latter half of 2002 and into 2003.
Additionally, we expect the offshore construction market to
remain extremely price competitive until such time as growth in
demand for our services occurs. 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 are unable to predict future oil and natural gas
prices or the level of offshore construction activity related to
the industry.
Gross Profit. Gross profit, which is revenues less cost of
sales, was $4.0 million (23.8% of revenues) for the three months
ended March 31, 2002 compared to $4.1 million (28.3% of revenues)
for the three months ended March 31, 2001. The decrease in the
gross profit margin is primarily caused by slightly lower price
realizations, as discussed above, a lower day rate on the charter
of the Midnight Arrow in Mexico and certain unusual operating
costs.
Depreciation and Amortization. Depreciation and amortization
expense was $1.9 million for the three months ended March 31,
2002 compared to $1.5 million for the three months ended March
31, 2001, an increase of 31%. This increase primarily reflects
the addition of the Midnight Rider, which was put into service in
September 2001, and the amortization of more drydocking costs in
the first quarter of 2002 versus the first quarter of 2001.
General and Administrative Expenses. General and administrative
expenses totaled $1.3 million (7.5% of revenues) for the three
months ended March 31, 2002 compared to $1.0 million (6.6% of
revenues) for the three months ended March 31, 2001. The
increase in general and administrative expenses for the first
quarter of 2002 is due to certain personnel additions and costs
associated with being a public entity. We anticipate that future
general and administrative expenses will be impacted by costs
related to our fleet expansion, our efforts to strengthen our
deepwater activity levels and the additional costs associated
with being a public entity.
Interest Income (Expense), Net. Net interest income was $0.1
million for the three months ended March 31, 2002 compared to net
interest expense of $0.9 million for the three months ended March
31, 2001. This reflects the repayment of debt in mid-June of
2001 following our initial public offering.
Income Taxes. In connection with our initial public offering, we
became subject to corporate level taxation. We recorded a $0.3
million provision (a 35% effective tax rate) during the three
months ended March 31, 2002. From 1997 until our initial public
offering we had not been subject to income taxes, including the
three months ended March 31, 2001.
Net Income Attributable to Common Stockholders. Net income to
common stockholders for the three months ended March 31, 2002 was
$0.6 million, compared with net income to common stockholders of
$0.7 million for the three months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, pursuant to our Registration Statement on Form S-1
(Registration No. 333-54120) which was declared effective on June
6, 2001, we completed an initial public offering of 5.0 million
shares of our common stock for gross proceeds of $80.0 million;
net proceeds were $72.6 million after underwriting commission and
discounts and expenses (the "Public Offering"). We subsequently
retired all debt, purchased the Midnight Rider and initiated the
detailed engineering for the construction of the Midnight Warrior
(discussed below). As of March 31, 2002, $20.8 million was
invested in short-term securities, pending its targeted use for
our deepwater expansion program (discussed below) and general
corporate purposes.
In the three months ended March 31, 2002, our operations used
$0.2 million as compared to $2.8 million in the three months
ended March 31, 2001. This improvement between quarters was
caused primarily by an increase in accounts payable and accrued
expenses partially offset by increased deferred drydocking costs
incurred. Investing activities resulted in cash used for the
purchase of equipment as discussed below. Cash flow used in
financing activities was $1.4 million in the first quarter of
2002 and related entirely to stock repurchases. The first quarter
of 2001 resulted in cash flows from financing activities of $2.0
million mostly due to borrowings under a revolving line of
credit.
Historically, our capital requirements have been primarily for
the acquisition and improvement of our vessels and other related
equipment. Capital expenditures totaled $2.0 million for the
three months ended March 31, 2002, compared to $0.1 million for
the three months ended March 31, 2001. Capital expenditures in
the first quarter of 2002 primarily relate to the deepwater
expansion of our fleet. We expect to fund our equity requirement
for any future capital investments from cash-on-hand, borrowings
and cash flow from operations. We currently estimate capital
expenditures for the remainder of 2002 and 2003 to be
approximately $80.0 million, primarily representing the
construction of, and the equipment and support facilities
associated with, the Midnight Express. Included in this estimate
is approximately $1.0 million of improvements expected on the
Midnight Hunter and a total of approximately $6.0 million for
routine capital and drydock inspections of our vessels to be
incurred over this period.
The following table presents our long-term contractual
obligations and the related amounts due, in total and by period
as of March 31, 2002 (inclusive of the Midnight Hunter charter
payments as discussed below) (in thousands):
Payments Due by Period
-------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
------- ------- ------- ------ -------
Long-Term Debt $ -- $ -- $ -- $ -- $ --
Capital Lease
Obligations -- -- -- -- --
Operating Leases 21,367 6,486 14,300 581 --
Unconditional Purchase
Obligations 8,775 8,775 -- -- --
Other Long-Term
Obligations -- -- -- -- --
------- ------- ------- ----- -------
Total Contractual Cash
Obligations $30,142 $15,261 $14,300 $ 581 $ --
======= ======= ======= ===== =======
During the first quarter of 2002, we made payments of
approximately $0.8 million for the operating lease obligation
relating to our deepwater technology vessel, the Midnight Arrow,
under a five-year charter agreement. In addition, we paid $1.0
million during the first quarter of 2002 in relation to the
purchase price of the Midnight Express. The unconditional
purchase obligation in the above table relates to the balance of
the purchase price of the Midnight Express, which was paid in the
second quarter of 2002.
Included in the operating leases are the monthly payments for
certain facilities used in the normal course of operations.
However, the majority of the operating lease obligation relates
to our Midnight Arrow charter agreement and our three-year
bareboat charter contract of the Midnight Hunter.
In August 2001, the Board of Directors approved the repurchase of
up to $5.0 million of our outstanding common stock. Purchases
will be made on a discretionary basis in the open market or
otherwise over a period of time as determined by management
subject to market conditions, applicable legal requirements and
other factors. As of May 3, 2002, 637,200 shares had been
repurchased at a total cost of $3.7 million.
Consistent with the focus towards investing in new technology,
including deepwater capable assets such as the Midnight Express
and the Midnight Hunter, four of the last five vessels added to
our operations have been DP-2 deepwater capable. Through March
31, 2002 we have expended approximately $27.1 million (in
combined capital expenditures and operating lease payments) for
these DP-2 vessels, with an additional estimated $100.0 million
to be incurred in associated construction, operating lease
payments and drydock expenses through early 2005.
We are currently working with several parties to determine the
best option to finance the conversion of the Midnight Express,
currently estimated at a total cost of approximately $75.0
million. The Midnight Express was purchased in lieu of
constructing the Midnight Warrior. There were several advantages
to purchasing and converting the Midnight Express rather than
following through on the new-build plans for the Midnight
Warrior. First, the Midnight Express should complete sea trials
and be ready for work beginning as soon as the third quarter of
2003, whereas, the Midnight Warrior would have taken at least one
additional year. Secondly, the Midnight Express provides a better
platform for the installation of our patent-pending pipelay
system as the vessel is over 500 feet in length and has more deck
space than the Midnight Warrior would have had. The Midnight
Express was delivered in April 2002 to assist in the detailed
engineering related to the conversion. Upon completion of the
detailed engineering in the second quarter of 2002, a shipyard
will be selected and the final stage of the conversion process
will commence. The selection of the shipyard is a critical
factor in the determination of the financing arrangements because
if the shipyard selected is in a foreign country there may be
different financing options available. Some of the options being
reviewed include guaranteed financing through MARAD or a similar
agency of another country. In addition, non-guaranteed financing
options are being considered as well. These could be at a higher
interest cost to us than the guaranteed financing. We cannot
assure you that we will be able to obtain any financing, either
guaranteed or non-guaranteed. If we are unable to obtain any
financing, it would have a negative impact on our ability to
implement our business strategy. However, we believe that we
will have several financing sources available to us.
MARAD has issued a commitment, subject to customary conditions,
to guarantee the 20-year financing covering 87.5% of the cost of
constructing the initial design of the Midnight Warrior. MARAD's
commitment officially expired on May 6, 2002, which gives MARAD
the option to terminate the commitment as we have not placed a
portion of the permanent long-term financing. We currently have
no intent to complete the construction of the Midnight Warrior
and have indefinitely postponed the project.
In May 2002, we entered into an agreement with Cable Shipping
Inc. to bareboat charter a vessel, the G. Murray, under a three-
year contract for $9,500 per day. The 340-foot, DP-2 class
vessel, which will be renamed the Midnight Hunter, will be used
as a deepwater vessel having the capability of laying pipe
(utilizing up to four reels) in water depths of approximately
3,000 to 4,000 feet and providing diving and ROV support work. We
have the option of purchasing the vessel for a fixed price after
two years and at the end of the contract period.
We believe that our existing cash and short-term investments and
cash flow from operations will be sufficient to meet our existing
liquidity needs for the near term. We also believe that our
existing cash and short-term investments and the interim
construction financing we are seeking, in addition to our cash
flow from operations, will be sufficient to complete our
identified growth plans. If our plans or assumptions change or
prove to be inaccurate, if we cannot obtain interim construction
financing on satisfactory terms or if we make any additional
acquisitions of existing vessels or other businesses, we may need
to raise additional capital. We may not be able to raise
additional funds, or we may not be able to raise such funds on
favorable terms.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
143, "Accounting for Asset Retirement Obligations," effective for
fiscal years beginning after June 15, 2002. This statement will
require us to record the fair value of liabilities related to
future asset retirement obligations in the period the obligation
is incurred. We expect to adopt SFAS No. 143 on January 1, 2003.
Due to the nature of our assets, management believes that the
adoption of this statement will not materially impact our
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The provisions of
this statement revise current guidelines with respect to the
process for measuring impairment of long-lived assets. We adopted
this statement effective January 1, 2002 which did not have a
material impact on our financial position or results of
operations.
In June 2001, the American Institute of Certified Public
Accountants ("AICPA") issued an exposure draft of a proposed
Statement of Position ("SOP"), "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment." This
proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic
repairs and maintenance costs related to "in service" fixed
assets. It would require that these types of expenses be
recognized when incurred rather than recognizing expense for
these costs while the asset is productive. We are assessing the
impact of the change should this SOP be adopted. If adopted, we
would be required to expense regulatory maintenance cost on our
vessels as incurred.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
We are exposed to certain market risks that are inherent in the
financial instruments arising from transactions that we enter
into in the normal course of our business. In the past, it has
not been our practice to enter into derivative financial
instrument transactions to manage or reduce market risks or for
speculative purposes, but our business has been subject to
interest rate risk on our debt obligations in periods when such
debt was outstanding. The fair value of debt with a fixed
interest rate generally will increase as interest rates fall,
given consistency in all other factors. Conversely, the fair
value of fixed rate debt will generally decrease as interest
rates rise.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in legal proceedings arising in the ordinary
course of business. Although we cannot give you any assurance
with respect to the ultimate outcome of such legal actions, in
our opinion, these matters will not have a material adverse
effect on our financial position or results of operations.
We have been named as a defendant in a stockholder class action
suit filed by purported stockholders regarding our Public
Offering. This suit, which seeks unspecified monetary damages,
was filed on March 1, 2002 in federal district court for the
Eastern District of Louisiana. We believe the allegations in this
suit are without merit, and we intend to vigorously defend this
lawsuit. Even so, an adverse outcome in this class action
litigation could have an adverse effect on our financial
condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed as part of this report are listed below.
None.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TORCH OFFSHORE, INC.
Date May 13, 2002 By: /s/ WILLIAM J. BLACKWELL
------------------------
William J. Blackwell
Chief Financial Officer and Director
(Principal Accounting and Financial Officer)