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 September 30, 2001
Commission file number 000-32855
TORCH OFFSHORE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2982117
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
401 Whitney Avenue, Suite 400
Gretna, LA 70056-2596
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (504) 367-7030
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes X No ___
The number of shares of the Registrant's Common Stock outstanding
as of November 7, 2001 was 13,112,546.
TORCH OFFSHORE, INC.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,601 $ 886
Accounts receivable:
Trade, less allowance for doubtful accounts 12,876 9,824
Other 458 42
Costs and estimated earnings in excess of
billings on uncompleted contracts 788 523
Prepaid expenses and other 3,260 1,664
Deferred income taxes 155 -
-------- --------
Total current assets 43,138 12,939
PROPERTY AND EQUIPMENT, net 49,434 40,202
INVESTMENTS, restricted 6 6
DEFERRED DRYDOCKING CHARGES 3,689 4,554
OTHER ASSETS 250 287
-------- --------
Total assets $ 96,517 $ 57,988
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 5,472 $ 7,809
Accrued expenses 3,269 3,384
Accrued payroll and related taxes 1,149 460
Financed insurance premiums 1,896 991
Current portion of long-term debt - 6,962
Revolving line of credit - 3,436
-------- --------
Total current liabilities 11,786 23,042
LONG-TERM DEBT, less current portion - 23,957
DEFERRED INCOME TAXES 3,283 -
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED - 4,678
STOCKHOLDERS' EQUITY 81,448 6,311
-------- --------
Total liabilities and stockholders' equity $ 96,517 $ 57,988
======== ========
The accompanying notes are an integral part of these financial statements.
TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
(Unaudited)
Revenues $15,596 $12,715 $44,404 $30,390
Cost of revenues:
Cost of sales 11,682 8,942 32,279 23,335
Depreciation and amortization 1,610 1,214 4,569 3,562
General and administrative expenses 970 975 2,996 2,800
Other operating (income) expense 0 974 0 955
------- ------- ------- -------
Total costs of revenues 14,262 12,105 39,844 30,652
------- ------- ------- -------
Operating income (loss) 1,334 610 4,560 (262)
------- ------- ------- -------
Other income (expense):
Interest expense (47) (943) (1,598) (2,882)
Interest income 246 0 314 1
------- ------- ------- -------
Total other income (expense) 199 (943) (1,284) (2,881)
------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item 1,533 (333) 3,276 (3,143)
Income tax expense (536) 0 (3,396) 0
------- ------- ------- -------
Net income (loss) before
extraordinary item 997 (333) (120) (3,143)
Extraordinary loss on early
extinguishment of debt, net of
taxes of $268 0 0 (498) 0
------- ------- ------- -------
Net income (loss) 997 (333) (618) (3,143)
Preferred unit dividends and accretion 0 (114) (190) (190)
------- ------- ------- -------
Net income (loss) attributable to
common stockholders $ 997 $ (447) $ (808) $(3,333)
======= ======= ======= =======
Earnings per share (Basic and Diluted):
Income before extraordinary loss $ 0.07 $ (0.06) $ (0.03) $ (0.44)
Extraordinary loss - - (0.05) -
------- ------- ------- -------
$ 0.07 $ (0.06) $ (0.08) $ (0.44)
======= ======= ======= =======
Weighted average shares
outstanding (Basic and Diluted) 13,337 7,505 10,097 7,505
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Nine Months Ended
September 30,
-------------------
2001 2000
-------- -------
(Unaudited)
Net cash provided by (used in) operations:
Net income (loss) $ (618) $(3,143)
Depreciation and amortization 4,569 3,562
Deferred drydocking expenditures (967) (1,161)
Deferred income tax provision 3,396 -
Extraordinary charge, net of taxes 498 -
Severance and reorganizational costs,
net accrual (payment) (1,725) -
Changes in work capital:
Accounts receivable (3,468) (2,710)
Costs and earnings in excess of billing (265) 328
Prepaid expenses, net of financed portion (690) 103
Accounts payable (2,337) 1,814
Accrued payroll 689 210
Accrued expenses and other 1,774 (148)
-------- -------
Net cash provided by (used in) operations 856 (1,145)
-------- -------
Net cash used in investing activities:
Equipment purchases (11,970) (895)
-------- -------
Net cash used in investing activities (11,970) (895)
-------- -------
Net cash provided by financing activities:
Borrowings (payments) on revolver (3,437) (793)
Payments on long-term debt (30,771) (3,192)
Gross proceeds from initial public offering 80,000 -
Initial public offering costs - paid (7,400) -
Repurchase of common stock (1,394) -
Debt extinguishment costs (766) -
Proceeds from issuance of preferred units - 5,300
Preferred unit issuance costs - (490)
Distributions to preferred unitholders (403) -
-------- -------
Net cash provided by financing activities 35,829 825
-------- -------
Net increase (decrease) in cash and cash equivalents 24,715 (1,215)
Cash and cash equivalents at beginning of period 886 1,215
-------- -------
Cash and cash equivalents at end of period $ 25,601 $ -
======== =======
Interest paid (net of amounts capitalized) $ 2,337 $ 2,877
======== =======
Income taxes paid $ - $ -
======== =======
The accompanying notes are an integral part of these financial statements.
TORCH OFFSHORE, INC.
Notes to Consolidated Financial Statements (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The interim consolidated financial statements included herein
have been prepared by Torch Offshore, Inc. (a Delaware
corporation) and are unaudited. The consolidated financial
statements of Torch Offshore, Inc. include its wholly owned
subsidiary Torch Offshore, LLC. Management believes that the
unaudited interim financial statements include all adjustments
(such adjustments consisting only of a normal recurring nature)
necessary for fair presentation. Certain information and note
disclosures normally included in annual audited financial
statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or
omitted pursuant to those rules and regulations. The results for
the nine months ended September 30, 2001 are not necessarily
indicative of the results to be expected for the entire year. The
interim financial statements included herein should be read in
conjunction with the audited financial statements and notes
thereto together with management's discussion and analysis of
financial condition and results of operations included in the
Company's Registration Statement on Form S-1 (Registration No.
333-54120).
In June 2001, Torch Offshore, Inc. (the "Company") completed its
initial public offering of 5.0 million shares of its common stock
at $16.00 per share, raising gross proceeds of $80.0 million; net
proceeds were $72.6 million after underwriting commission and
discounts and expenses totaling $7.4 million. The Company used
$31.3 million to repay all outstanding indebtedness (including
prepayment fees) and purchased and drydocked the Midnight Rider
for $10.5 million (See Note 5). As of September 30, 2001, $25.6
million was invested in short-term securities, pending its
targeted use for the Company's deepwater expansion program and
general corporate purposes.
2. STOCKHOLDERS' EQUITY
In connection with the public offering, discussed above,
predecessor interests of the Company (including preferred unit
interests) were exchanged for common shares of the Company. For
financial reporting purposes, the transactions were considered a
recapitalization of the Company, and all historical share data
have been retroactively restated.
The Company has a long-term incentive plan under which 3.0
million shares of its common stock are authorized to be granted
to employees and affiliates. The awards can be in the form of
options, stock, phantom stock, cash, performance stock or stock
appreciation rights. Concurrent with the initial public
offering, the Company granted stock options covering 248,443
shares of common stock at $16.00 per share, and 32,813 shares of
restricted stock, both vesting generally over five years. Prior
to this grant, no options to purchase the Company's common stock
were outstanding.
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 September 30, 2001,
240,600 shares had been repurchased at a total cost of $1.394
million.
3. EXTRAORDINARY LOSS
In June 2001, the Company repaid all debt, incurring an
extraordinary loss on the early retirement of debt of $0.8
million ($0.5 million after tax).
4. INCOME TAXES
In connection with the initial public offering, the Company
became subject to corporate level taxation and recorded a $2.6
million charge based upon cumulative book and tax basis
differences at the date of change in taxpayer status. In
addition, the Company has recorded an $0.8 million provision (a
35% effective tax rate) attributable to operating earnings after
the initial public offering. From 1997 until the initial public
offering the Company had not been subject to income taxes.
5. PURCHASE OF THE MIDNIGHT RIDER
In June 2001, the Company purchased an existing pipelay/bury
barge, the BH-400 (renamed the Midnight Rider), for $9.5 million.
This barge completed a required $1.0 million drydocking and was
placed into service in September 2001.
6. EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." Basic earnings per share
is calculated by dividing income attributable to common
stockholders by the weighted-average number of common shares
outstanding for the applicable period, without adjustment for
potential common shares outstanding in the form of options,
warrants, convertible securities or contingent stock agreements.
For calculation of diluted earnings per share, the number of
common shares outstanding are increased (if deemed dilutive) by
the 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 243,300 shares
and 39,000 shares for the third quarters of 2001 and 2000,
respectively, and 103,600 shares and 39,000 shares for the first
nine months of 2001 and 2000, respectively, because they were
anti-dilutive. None of the predecessor convertible preferred
units were considered in the calculation of diluted earnings per
share (prior to their being converted to common stock) because of
their anti-dilutive effect.
7. NEW ACCOUNTING 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
FASB Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." The
provisions of this statement are required to be applied for
fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. Given current conditions,
this statement, which revises current guidance with respect to
the process for measuring impairment of long-lived assets, is not
expected to have a significant impact on the Company's financial
position or results of operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our
Consolidated Financial Statements and Management's Discussion and
Analysis contained in our Registration Statement on Form S-1
(Registration No. 333-54120), relating to our initial public
offering, and the unaudited interim consolidated financial
statements and related notes contained in Item 1 above.
This Quarterly Report on Form 10-Q contains forward looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934 concerning, among other things our
prospects, expected revenues, expenses and profits, developments
and business strategies for our operations all of which are
subject to certain risks, uncertainties and assumptions. Our
actual results may differ materially from those expressed or
implied. Accordingly, there is no assurance that our expectations
will be realized. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
our Registration Statement on Form S-1 (Registration No. 333-
54120) under the caption "Risk factors."
GENERAL
We provide subsea construction services in connection with the
infield development of offshore oil and natural gas reservoirs.
We are a leading service provider in our market niche of
installing and maintaining small diameter flowlines and related
infrastructure associated with the development of offshore oil
and natural gas reserves on the Continental Shelf of the Gulf of
Mexico (the "Shelf"). Over the last three years, we have
expanded our operations, capabilities and management expertise to
enable us to provide deepwater services analogous to the services
we provide on the Shelf.
Since 1997, we have increased the size of our fleet from three to
nine construction and service vessels. In 1998, we added two
diving support vessels and one supply/diving support vessel. In
the first quarter of 2000, we added one fully redundant
dynamically positioned, or DP-2, pipelay/bury barge and one DP-2
subsea construction vessel. In June 2001, we purchased a
pipelay/bury barge, the BH-400 (renamed the Midnight Rider),
which increased our capabilities on the Shelf and was placed into
service in September 2001. We also have a contract to construct
a new generation DP-2 vessel (the Midnight Warrior) for deepwater
pipelay and subsea construction. As part of that construction
contract, we have an option from the shipyard to construct a
sister vessel. We continue to actively seek opportunities to
expand our fleet either through construction or acquisition of
vessels.
FACTORS AFFECTING RESULTS OF OPERATIONS
The demand for subsea construction services primarily depends on
the prices of oil and natural gas. These prices reflect the
general condition of the industry and influence our customers'
willingness to spend capital to develop oil and natural gas
reservoirs. In addition to the prices of oil and natural gas, we
use the following leading indicators, among others, to forecast
the demand for our services:
* the offshore mobile rig count and jack-up rig count;
* forecasts of capital expenditures by major and independent
oil and gas companies;
* recent lease sale activity levels; and
* the expiration dates of existing Gulf of Mexico leases.
Even when demand for subsea construction services is strong,
several factors may affect our profitability, including the
following:
* competition;
* equipment and labor productivity;
* weather conditions;
* contract estimating uncertainties; and
* other risks inherent in marine construction.
Although greatly influenced by overall market conditions, our
fleet-wide utilization is generally lower during the first half
of the year because of winter weather conditions in the Gulf of
Mexico. Accordingly, we endeavor to schedule our drydock
inspections and routine and preventative maintenance during this
period. Additionally, during the first quarter, a substantial
number of our customers finalize capital budgets and solicit bids
for construction projects. For this reason, individual
quarterly/interim results are not necessarily indicative of the
expected results for any given year.
In the life of an offshore field, capital is allocated to the
development of a well following successful drilling activities.
The time that elapses between a successfully drilled well and the
development phase, in which we participate, varies depending on
the water depth of the field. On the Shelf, demand for our
services generally follows successful drilling activities by
three to 12 months. We have noticed that demand for pipeline
installation for deepwater projects exceeding 1,000 feet of water
depth generally follows initial exploration drilling activities
by at least three years. These deepwater installations typically
require much more engineering design effort than is the case with
Shelf installations.
RESULTS OF OPERATIONS
Quarter Ended September 30, 2001 Compared to the Quarter Ended
September 30, 2000
Revenues. Revenues were $15.6 million for the three months ended
September 30, 2001 compared to $12.7 million for the three months
ended September 30, 2000, an increase of 23%. Our third-quarter
2001 fleet-wide working days rose 15% from the year-ago quarter,
as expansions to our fleet's available workdays resulted in an
average vessel utilization of 76%, down from 82% achieved for the
year-ago quarter. We were successful in making certain vessel
substitutions within our fleet to accomplish that level of
utilization amid very volatile market conditions. However, these
vessel substitutions impacted our current quarter's effective
pricing realizations. As a result, third-quarter 2001 average
pricing levels for our services were 2% below average levels for
the third quarter of 2000 and 14% below average levels for the
second quarter of 2001.
Late in the second quarter of 2001, domestic natural gas and
crude oil prices began to decline. This created caution
throughout the industry, with a resultant dampening of market
growth, and we started to note delays in the completion of
shallow water drilling projects. Moreover, the tragic events of
September 11th were a tremendous blow to an already weak economy.
Our industry sector immediately felt the impact, with spot
natural gas prices continuing to fall and reaching a low of $1.77
per thousand cubic feet (Mcf) on October 2, 2001. Recently, spot
natural gas prices have rallied somewhat and closed at $2.75 per
Mcf on November 7, 2001. From an activity standpoint, the
weakened economy has caused our expectations of a resumption of
stronger growth to be delayed until mid-2002. Additionally, we
expect the offshore construction market to remain extremely price
competitive until such time as growth in demand for our services
occurs.
Gross Profit. Gross profit, which is revenues less cost of
sales, was $3.9 million (25.1% of revenues) for the three months
ended September 30, 2001 compared to $3.8 million (29.7% of
revenues) for the three months ended September 30, 2000. The
impact of an increase in our fleet's workdays was essentially
offset by the lower realizations discussed above.
Depreciation and Amortization. Depreciation and amortization
expense was $1.6 million for the three months ended September 30,
2001 compared to $1.2 million for the three months ended
September 30, 2000, an increase of 33%. This increase primarily
reflects the amortization of two drydockings incurred during late
2000 and mid-2001, as well as the placement of the Midnight Rider
into service in September 2001.
General and Administrative Expenses. General and administrative
expenses totaled $1.0 million (6.2% of revenues) for the three
months ended September 30, 2001 compared to $1.0 million (7.7% of
revenues) for the three months ended September 30, 2000. 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.
Other Operating (Income) Expense, Net. Other operating expense
was $1.0 million for the three months ended September 30, 2000
that was related to severance costs associated with a former
employee and a provision for doubtful trade receivables.
Interest Income (Expense), Net. Net interest income was $0.2
million for the three months ended September 30, 2001 compared to
net interest expense of $0.9 million for the three months ended
September 30, 2000. 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
$0.5 million provision (a 35% effective tax rate) during the
three months ended September 30, 2001. From 1997 until the
initial public offering we had not been subject to income taxes.
Net Income (Loss) Attributable to Common Stockholders. Net
income to common stockholders for the three months ended
September 30, 2001 was $1.0 million, compared with a net loss of
$0.4 million for the three months ended September 30, 2000.
Nine Months Ended September 30, 2001 Compared to the Nine Months
Ended September 30, 2000
Revenues. Revenues were $44.4 million for the nine months ended
September 30, 2001 compared to $30.4 million for the nine months
ended September 30, 2000, an increase of 46%. We were able to
increase our fleet-wide working days 20%, primarily because of a
strengthening in the offshore construction market versus the 2000
period, allowing us to achieve an average vessel utilization of
71%, up from 65% achieved for the first nine months of 2000.
This increased activity level allowed average pricing levels for
our services to rise 17% over average levels for the first nine
months of 2000.
Gross Profit. Gross profit was $12.1 million (27.3% of revenues)
for the nine months ended September 30, 2001 compared to $7.1
million (23.2% of revenues) for the nine months ended September
30, 2000, an increase of 72%. This increase resulted from the
expanded revenue base, higher overall fleet utilization and
improved pricing levels for our services.
Depreciation and Amortization. Depreciation and amortization
expense was $4.6 million for the nine months ended September 30,
2001 compared to $3.6 million for the nine months ended September
30, 2000, an increase of 28%. This increase primarily reflects
the amortization of three drydockings incurred during mid-to-late
2000 and mid-2001, as well as the placement of the Midnight Rider
into service in September 2001.
General and Administrative Expenses. General and administrative
expenses totaled $3.0 million (6.7% of revenues) for the nine
months ended September 30, 2001 compared to $2.8 million (9.2% of
revenues) for the nine months ended September 30, 2000, an
increase of 7%. Greater sales costs and the introduction of two
additional vessels during the year 2000 primarily caused this
increase.
Other Operating (Income) Expense, Net. Other operating expense
was $1.0 million for the nine months ended September 30, 2000
that was related to severance costs associated with a former
employee and the provision for doubtful trade receivables.
Interest Income (Expense), Net. Net interest expense was $1.3
million for the nine months ended September 30, 2001 compared to
$2.9 million for the nine months ended September 30, 2000, a
decrease of 55%. This decline 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 and recorded a $2.6
million charge based upon cumulative book and tax basis
differences at the date of change in taxpayer status. In
addition, we recorded an $0.8 million provision (a 35% effective
tax rate) attributable to operating earnings after the initial
public offering. From 1997 until the initial public offering we
had not been subject to income taxes.
Extraordinary Loss. In June 2001, we repaid our debt and
recognized a $0.5 million after-tax charge resulting from related
prepayment penalties.
Net Income (Loss) Attributable to Common Stockholders. Net loss
to common stockholders for the nine months ended September 30,
2001 was $0.8 million, compared with a net loss of $3.3 million
for the nine months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, we completed an initial public offering of 5.0
million shares of our common stock for gross proceeds of $80.0
million; net proceeds were $72.6 million after underwriting
commission and discounts and expenses totaling $7.4 million. We
subsequently retired all debt, purchased the Midnight Rider and
initiated the detailed engineering for the construction of the
Midnight Warrior, discussed below. As of September 30, 2001,
$25.6 million was invested in short-term securities, pending its
targeted use for our deepwater expansion program (discussed
below) and general corporate purposes. Concurrent with our
initial public offering, the predecessor company's $5.3 million
of preferred membership units were exchanged for 828,333 shares
of our common stock.
Historically, our capital requirements have been primarily for
the acquisition and improvement of our vessels and other related
equipment. Capital expenditures totaled $12.0 million for the
nine months ended September 30, 2001, primarily representing the
purchase of an additional pipelay/bury barge, the Midnight Rider.
In the future, we expect to contribute approximately $10 million
representing our permanent equity in the Midnight Warrior to our
Merchant Marine Capital Construction Fund account to take
advantage of the income tax timing benefits associated with this
program. In addition, we expect to fund our equity requirement
for any future qualified capital investments in the same manner.
We currently estimate capital expenditures for the remainder of
2001 to approximate $1 million, $35 million for 2002 and $35
million for 2003 and $8 million for 2004, primarily representing
the construction of, and the equipment and support facilities
associated with, the Midnight Warrior. These estimates exclude a
total of approximately $8 million for routine dry-dock
inspections of our vessels to be incurred over the 2002 through
2004 period. If we were to exercise our option to construct the
Midnight Warrior II sister ship, we would increase our estimated
capital expenditures by approximately $80 million, primarily
incurring those costs in late 2002 through 2004. This option
terminates on September 15, 2002.
In August 2001, the Board of Directors approved the repurchase of
up to $5.0 million of the Company's outstanding common stock.
Purchases will be made on a discretionary basis in the open
market or otherwise over a period of time as determined by
management subject to market conditions, applicable legal
requirements and other factors. As of November 7, 2001, 253,600
shares had been repurchased at a total cost of $1.459 million.
We had an $8.0 million revolving line of credit with a bank that
we recently let expire. Amounts outstanding under this revolving
line of credit could not exceed 80% of eligible trade accounts
receivable. We did not renew this revolving line of credit
because we had no need for this facility in the near future and
we are confident that this facility could be replaced, at similar
terms, in a relatively short period of time.
Consistent with the focus towards investing in new technology,
including deepwater capable assets such as the Midnight Warrior
and the Midnight Warrior II sister ship, two of the last three
vessels added to our fleet have been DP-2 deepwater capable.
Through September 30, 2001 we have expended $24.5 million (in
combined capital expenditures and operating lease payments) for
these vessels, with an additional estimated $11.7 million to be
incurred in associated operating lease payments through early
2005.
Upon completion of our initial public offering, we confirmed the
Midnight Warrior's technical specifications and began the
detailed engineering phase of the vessel and its pipelay
equipment. This engineering work is due to be completed by
December 1, 2001. As part of these discussions, we are in the
process of extending our contract with the shipyard from December
15, 2001 until March 15, 2002.
The U.S. Department of Transportation Maritime Administration
("MARAD") has already issued a commitment to us, subject to
customary conditions, to guarantee a 20-year financing covering
87.5% of the cost of constructing the initial design for the
Midnight Warrior. However, because of changes to the size,
capabilities, and cost of the vessel, we also completed and
submitted a revised closing package to MARAD in September 2001.
Recent events, including the September 11th terrorist attacks,
have resulted in delays to MARAD's processing of our revised
closing request. As a result, we requested, and received, an
extension of their commitment from November 6, 2001 until May 6,
2002. After that date, MARAD has the option to terminate the
commitment if we have not placed a portion of the permanent long-
term financing. 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 May 6, 2002. Although we have not yet
entered into the underlying financing arrangements, we continue
to believe that this MARAD commitment will provide us with more
attractive financing terms than could otherwise be achieved. To
the extent that any of our future vessel construction qualifies
for a MARAD guarantee, we plan to apply to use this program.
If MARAD should terminate its commitment, we intend to proceed
with the construction of the Midnight Warrior using alternative
financing. We believe that any such alternative 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 alternative financing or
that any alternative financing that we are able to obtain will
not require a greater equity investment by us in the vessel or
provide a shorter maturity period. If we were not able to obtain
alternative financing, our ability to implement our deepwater
business strategy would be negatively impacted.
We currently are seeking at least $55 million from commercial
lenders to provide interim construction financing for the
Midnight Warrior pending the completion of the vessel and
activation of the long-term financing guaranteed by MARAD. Our
discussions with various commercial lenders regarding interim
financing for the Midnight Warrior started in earnest in August
of 2001. However, the September 11th terrorist attacks
dramatically impacted banks' lending policies. Although we have
received several preliminary term sheets to provide the required
interim financing, they required significantly more collateral
than we originally thought would be required. As a result, we
are presently investigating several alternate sources, including
a request of MARAD to provide construction period financing
guarantees. If we were successful in obtaining these alternate
financing sources, although no assurances can be given that we
can obtain them, they would likely require significantly less
collateral to be pledged during the construction of the vessel.
Our primary liquidity needs going forward are to fund identified
vessel additions, to provide improvements associated with our
expansion program, to provide working capital and to acquire our
common stock (if any) on a discretionary basis. We intend to
continue expanding our operating capabilities. Such an expansion
may include the acquisition of existing vessels or of other
businesses consistent with our deepwater strategy, although we
are engaged in no definitive discussions related to such
acquisitions at the present time.
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 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
FASB Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." The
provisions of this statement are required to be applied for
fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. Given current conditions,
this statement, which revises current guidance with respect to
the process for measuring impairment of long-lived assets, is not
expected to have a significant impact on the Company's financial
position or results of operations.
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 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 November 12, 2001 /s/ William J. Blackwell
---------------------------
William J. Blackwell
Chief Financial Officer and Director
(Principal Financial and Chief
Accounting Officer)