UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
___________
Commission File Number 000-32855
___________
TORCH OFFSHORE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 74-2982117
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056-2596
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(504) 367-7030
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated
filer as defined in Rule 12b-2 of the Securities Exchange Act of
1934. Yes [ ] No [x]
The number of shares of the registrant's common stock outstanding
as of August 13, 2003 was 12,638,990, par value $0.01 per share.
TORCH OFFSHORE, INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of
Operations for the Three and Six
Months Ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash
Flows for the Six Months
Ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security
Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Exhibit Index 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
------------ ------------
(Unaudited) (see Note 1)
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 327
Accounts receivable --
Trade, less allowance for doubtful
accounts 17,021 25,226
Other 57 37
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,792 2,036
Prepaid expenses and other 2,894 3,747
------------ ------------
Total current assets 21,765 31,373
PROPERTY AND EQUIPMENT, at cost,
less accumulated depreciation 111,815 67,561
DEFERRED DRYDOCKING CHARGES, at cost,
less accumulated amortization 1,588 2,831
SECURITY DEPOSIT (Note 5) 1,250 --
OTHER ASSETS 347 139
------------ ------------
Total assets $ 136,765 $ 101,904
============ ============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable -- trade $ 9,156 $ 7,677
Accrued expenses 1,864 3,696
Accrued payroll and related taxes 729 857
Financed insurance premiums 935 2,553
Deferred income taxes 287 287
Finance Facility (Note 5) 19,630 --
Current portion of long-term debt 2,780 14
Receivable line of credit 4,868 4,271
------------ ------------
Total current liabilities 40,249 19,355
DEFERRED INCOME TAXES 2,044 2,636
LONG-TERM DEBT, less current portion 15,680 46
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY 78,792 79,867
------------ ------------
Total liabilities and
stockholders' equity $ 136,765 $ 101,904
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
------ ------ ------ ------
Revenues $ 13,876 $ 12,910 $ 30,905 $ 29,635
Cost of revenues:
Cost of sales 12,500 10,707 26,245 23,453
Depreciation and amortization 1,822 1,861 3,649 3,791
General and administrative
expenses 1,348 1,021 2,703 2,271
------ ------ ------ ------
Total cost of revenues 15,670 13,589 32,597 29,515
------ ------ ------ ------
Operating income (loss) (1,794) (679) (1,692) 120
------ ------ ------ ------
Other income (expense):
Interest expense -- (20) -- (55)
Interest income -- 62 1 164
------ ------ ------ ------
Total other income -- 42 1 109
------ ------ ------ ------
Income (loss) before income
taxes (1,794) (637) (1,691) 229
Income tax (expense) benefit 628 223 592 (80)
------ ------ ------ ------
Net income (loss) attributable
to common stockholders $ (1,166) $ (414) $(1,099) $ 149
====== ====== ====== ======
Net income (loss) per common
share:
Basic $ (0.09) $ (0.03) $ (0.09) $ 0.01
====== ====== ====== ======
Diluted $ (0.09) $ (0.03) $ (0.09) $ 0.01
====== ====== ====== ======
Weighted average common stock
outstanding:
Basic 12,636 12,723 12,636 12,788
====== ====== ====== ======
Diluted 12,636 12,723 12,636 12,788
====== ====== ====== ======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended
June 30,
----------------
2003 2002
------ ------
Cash flows provided by operating
activities:
Net income (loss) $(1,099) $ 149
Depreciation and amortization 3,649 3,791
Deferred income tax provision
(benefit) (592) 80
Deferred drydocking costs incurred -- (1,488)
(Increase) decrease in working capital:
Accounts receivable 8,185 (3,143)
Costs and estimated earnings in
excess of billings on
uncompleted contracts 244 1,600
Prepaid expenses, net of financed
portion (765) 255
Accounts payable - trade 1,479 311
Accrued payroll and related taxes (128) 238
Accrued expenses and other (1,996) (1,242)
------ ------
Net cash provided by operating
activities 8,977 551
------ ------
Cash flows used in investing
activities:
Purchases of property and equipment (36,931) (12,726)
------ ------
Net cash used in investing activities (36,931) (12,726)
------ ------
Cash flows provided by (used in)
financing activities:
Net proceeds from receivable line
of credit 597 --
Net proceeds from Finance Facility 19,630 --
Net proceeds from long-term debt 7,419 --
Treasury stock purchases (18) (1,781)
------ ------
Net cash provided by (used in)
financing activities 27,628 (1,781)
------ ------
Net decrease in cash and cash
equivalents (326) (13,956)
Cash and cash equivalents at beginning
of period 327 24,493
------ ------
Cash and cash equivalents at end of
period $ 1 $ 10,537
====== ======
Interest paid (net of amounts
capitalized) $ -- $ 55
====== ======
Income taxes paid $ -- $ --
====== ======
Supplementary non-cash investing and
financing activities:
Purchase of Midnight Wrangler (fully
financed - see Note 5) $(9,731) $ --
====== ======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation:
The interim condensed consolidated financial statements included
herein have been prepared by Torch Offshore, Inc. (a Delaware
corporation) and are unaudited, except for the balance sheet at
December 31, 2002, which has been prepared from the Company's
previously audited financial statements. The balance sheet at
December 31, 2002 has been derived from the audited financial
statements at that date but does not include all of the
information and footnotes required by accounting principles
generally accepted in the United States (U.S. GAAP) for complete
financial statements. The condensed consolidated financial
statements of Torch Offshore, Inc. include its wholly-owned
subsidiaries Torch Offshore, L.L.C. and Torch Express L.L.C.,
(collectively, the "Company"). Management believes that the
unaudited interim financial statements include all adjustments
(such adjustments consisting only of a normal recurring nature)
necessary for fair presentation. Certain information and note
disclosures normally included in annual financial statements
prepared in accordance with U.S. GAAP have been condensed or
omitted pursuant to those rules and regulations. The results for
the three and six months ended June 30, 2003 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, 2002.
The Company provides integrated pipeline installation, subsea
construction and support services to the offshore oil and natural
gas industry, primarily in the United States Gulf of Mexico (the
"Gulf of Mexico"). The Company's focus has been providing
services primarily for oil and natural gas production in water
depths of 20 to 300 feet in the Gulf of Mexico (the "Shelf").
Over the past few years, the Company has expanded its operations,
fleet capabilities and management expertise in order to enable it
to provide services analogous to those services it provides on
the Shelf in water depths up to 10,000 feet.
In June 2001, the Company completed its initial public offering
(the "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.
2. Stockholders' Equity:
Treasury Stock - In August 2001, the Company's Board of Directors
approved the repurchase of up to $5.0 million of the Company's
outstanding common stock. Purchases are made on a discretionary
basis in the open market or otherwise over a period of time as
determined by management, subject to market conditions,
applicable legal requirements and other factors. As of June 30,
2003, 712,471 shares had been repurchased at a total cost of $4.3
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 June 30, 2003,
stock options covering 440,423 shares of common stock with a
weighted average price of $10.25 per share, and 44,687 shares of
restricted stock, both vesting generally over five years, were
outstanding.
3. 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 by the number of additional common
shares (if deemed dilutive) 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 and restricted
stock) excluded from the calculation of diluted earnings per
share, because they were anti-dilutive, were approximately
348,000 shares and 264,000 shares for the second quarters of 2003
and 2002, respectively, and approximately 348,000 shares and
217,000 shares in the first six months of 2003 and 2002,
respectively.
4. Stock-Based Compensation:
The Company accounts for its stock-based compensation in relation
to the 2001 Long-Term Incentive Plan in accordance with
Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123, "Accounting for Stock-
Based Compensation," and SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure - An Amendment of
SFAS No. 123," permit the intrinsic value-based method prescribed
by APB No. 25, but require additional disclosures, including pro
forma calculations of earnings and net earnings per share as if
the fair-value method of accounting prescribed by SFAS No. 123
had been applied. If compensation expense had been determined
using the fair-value method in SFAS No. 123, the Company's net
income/ (loss) and earnings/(loss) per share would have been as
shown in the pro forma amounts below:
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------
2003 2002 2003 2002
------ ------ ------ ------
Net income (loss)
attributable to common
stockholders:
As reported $(1,166) $ (414) $(1,099) $ 149
Pro forma $(1,258) $ (506) $(1,279) $ (12)
Basic earnings (loss)
per share:
As reported $ (0.09) $ (0.03) $ (0.09) $ 0.01
Pro forma $ (0.10) $ (0.04) $ (0.10) $ (0.00)
Diluted earnings (loss)
per share:
As reported $ (0.09) $ (0.03) $ (0.09) $ 0.01
Pro forma $ (0.10) $ (0.04) $ (0.10) $ (0.00)
Stock-based employee
compensation cost, net of
tax, included in net
income (loss) as reported $ 15 $ 26 $ 62 $ 52
Stock-based employee
compensation cost, net of
tax, that would have been
included in net income
(loss) if the fair value-
based method had been
applied $ 107 $ 117 $ 242 $ 212
5. Debt:
In July 2002, the Company entered into a $35.0 million bank
facility (the "Bank Facility") consisting of a $25.0 million
asset-based five-year revolving credit facility and a $10.0
million accounts receivable-based working capital facility with
Regions Bank. The interest on the Bank Facility is the London
Interbank Offered Rate (LIBOR) plus a range of 1.75% to 2.25%,
depending on the level of the consolidated leverage ratio (as
defined) measured on a quarterly basis. Borrowings under the Bank
Facility are secured by first preferred ship mortgage liens on
certain vessels in the Company's fleet and a pledge of the
Company's accounts receivable. Amounts outstanding under the
accounts receivable-based working capital facility may not exceed
85% of eligible trade accounts receivable. Under the terms of the
Bank Facility, the Company must maintain tangible net worth of at
least $60.0 million, a minimum debt service coverage ratio of at
least 1.20 to 1, a consolidated leverage ratio of no more than
2.00 to 1 and a consolidated current ratio (defined below) of at
least 1.30 to 1. The Company had $4.9 million outstanding under
the $10.0 million accounts receivable-based working capital
facility as of June 30, 2003. In addition, the Company issued a
$1.5 million standby letter of credit as security for the charter
payments due under the charter agreement for the Midnight Hunter
against the $10.0 million accounts receivable-based working
capital facility and a $2.7 million standby letter of credit as
security for payments related to a crane to be constructed as
part of the Midnight Express conversion against the $25.0 million
asset-based five-year revolving credit facility.
In April 2003, the Company finalized a credit line maturing June
30, 2004 to finance the conversion of the Midnight Express (the
"Finance Facility"). Amounts outstanding under the credit line
will convert into a three-year term loan facility upon completion
of the conversion of the Midnight Express. The Finance Facility
commitment is equally provided by Regions Bank and Export
Development Canada (EDC) ($30.0 million participation by each).
As part of the terms and conditions of the Finance Facility,
Regions Bank suspended the $25.0 million asset-based five-year
revolving credit facility discussed above. The Company continues
to have available the $10.0 million accounts receivable-based
working capital facility discussed above from Regions Bank. In
addition, the $2.7 million standby letter of credit as security
for payments related to a crane to be constructed as part of the
Midnight Express conversion was transferred to the Finance
Facility.
The interest rate for the construction financing is LIBOR plus a
spread of 3.00% to 3.50% based upon the consolidated leverage
ratio of the Company. The Company is providing collateral in the
form of the Midnight Express as well as a first preferred ship
mortgage on the Midnight Fox, Midnight Star, Midnight Dancer,
Midnight Carrier, Midnight Brave and Midnight Rider. The Company
has to adhere to various conditions including maintaining a
tangible net worth of at least $60.0 million, a minimum debt
service coverage ratio of at least 1.20 to 1, a consolidated
leverage ratio of no more than 2.00 to 1 and a consolidated
current ratio (defined below) of 1.30 to 1. The Company is not
allowed to incur additional debt over $8.0 million without
consent from Regions Bank. The Company had $19.6 million
outstanding under the $60.0 million Finance Facility as of June
30, 2003 and capitalized $0.4 million of 2003 year-to-date
interest costs in relation to the conversion of the Midnight
Express.
The term loan facility of the Finance Facility is a three-year
term with a 10-year amortization payment schedule consisting of
semi-annual payments with a balloon payment at the end of the
three-year term. The interest rate for this facility is 3.25%
over LIBOR. Regions Bank and EDC will require the Company to
maintain the same collateral and covenants as included in the
construction financing depicted above.
In December 2002, the Company entered into a purchase agreement
with Global Marine Systems Limited (Global Marine) for the
Midnight Wrangler at a cost of approximately $10.8 million. The
Company took delivery of the vessel in March 2003. The purchase
of the vessel was financed by Global Marine over a five-year
period with monthly payments, including 7% per annum interest, of
approximately $0.2 million plus a $1.0 million payment at the
purchase date in March 2003 and another $1.0 million payment at
the end of the five-year period.
In March 2003, the Company finalized a $9.25 million, seven-year
term loan with GE Commercial Equipment Financing (GE). The loan
is structured so that the Company received $8.0 million
immediately and GE retained $1.25 million as a security deposit.
The interest rate on the term loan is the 30-day commercial paper
rate plus 2.03% and includes prepayment penalties of 2% for the
first twelve months, 1% for the second twelve months and 0%
thereafter. The term loan is structured to have monthly payments
over seven years. The loan agreement contains the same financial
covenants as the Bank Facility and Finance Facility discussed
above. The collateral for the loan is the Midnight Eagle and
the security deposit described above. The Company utilized the
proceeds from the loan to fund the improvements to the Midnight
Wrangler and a portion of the Midnight Express conversion
costs.
As of June 30, 2003, the Company was not in compliance with the
consolidated current ratio covenant of the Bank Facility, the
Finance Facility and the GE term loan. The consolidated current
ratio is calculated by adding the GE term loan security deposit
of $1.25 million to current assets and excluding from current
liabilities the current portion of the Finance Facility. The
Company has received covenant waivers from Regions Bank, EDC and
GE subsequent to June 30, 2003 for the non-compliance and amended
the consolidated current ratio financial covenant so
that the Company will have to meet a consolidated current ratio
of 1.00 to 1 for the quarters ending September 30, 2003 and
December 31, 2003. The consolidated current ratio requirement
returns to 1.30 to 1 in the first quarter of 2004. The Company
paid aggregate fees of $40,000 to the three institutions for
these waivers and amendments. The Company believes it will have
continued compliance with the consolidated current ratio as
amended. However, there can be no assurance that continued
compliance will be maintained.
In July 2003, the $1.5 million standby letter of credit against
the $10.0 million accounts receivable-based working capital
facility (part of the Bank Facility) was drawn by Cable Shipping,
Inc., the owners of the Midnight Hunter. The letter of credit was
issued as security for the charter payments due under the charter
agreement for the Midnight Hunter. The $1.5 million has been put
into escrow and settlement of the funds will be determined by
arbitration. The Company has recorded the $1.5 million as a
liability in full on the balance sheet as of June 30, 2003. See
Note 6 for further discussion.
6. 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 lawsuit, Karl L. Kapps, et. al. v. Torch Offshore,
Inc. et. al., No. 02-00582, which seeks unspecified monetary
damages, was filed on March 1, 2002 in U.S. District Court for
the Eastern District of Louisiana. The lawsuit was dismissed on
December 19, 2002 for failure to state a claim upon which relief
could be granted. The plaintiff has appealed to the U.S. Court of
Appeals for the Fifth Circuit. The Company believes the
allegations in this lawsuit are without merit and continues to
vigorously defend this lawsuit. Even so, an adverse outcome in
this class action litigation could have a material adverse effect
on the Company's financial condition or results of operations.
The Company has been named as a defendant in a lawsuit (Bluffview
Capital, LP v. Torch Offshore, Inc., No. 2002-7662, filed in the
134th Judicial District Court, Dallas County, Texas on August 26,
2002) brought by a former service provider. The plaintiff was
originally hired to assist the Company in obtaining financing,
among other services. The Company terminated the relationship and
is disputing the plaintiff's interpretation of certain provisions
regarding the services to be provided and the calculation of fees
allegedly earned. The Company's management believes that it has
complied with all of the provisions of the contract and intends
to continue to vigorously defend its position in this matter.
Nevertheless, an adverse outcome in the litigation could have an
adverse effect on the Company's financial condition or results of
operations.
In May 2002, the Company entered into an agreement with Cable
Shipping, Inc. to time charter a vessel, the G. Murray, under a
three-year contract at a rate of $18,500 per day. The time
charter commenced in the third quarter of 2002 and the vessel was
renamed the Midnight Hunter. However, on January 24, 2003, the
Company terminated the time charter because of the vessel's
failure to meet certain specifications outlined in the charter
agreement. The Company filed a lawsuit (Torch Offshore, L.L.C. v.
The M/V Midnight Hunter and Cable Shipping, Inc., et al., No. 03-
0343, filed in the United States District Court, Eastern District
of Louisiana on February 4, 2003) seeking an order, which was
granted by the court, attaching and arresting the Midnight Hunter
as security for the Company's claims related to such termination.
The Company's management believes the amount of the claim is
justified. The claims will be settled by arbitration in London,
England. The $1.5 million standby letter of credit issued to
secure the Company's payments under the charter was drawn by
Cable Shipping, Inc. in July 2003. Pursuant to an agreement
entered into in July 2003, the Company has released the vessel
from arrest and Cable Shipping, Inc. has placed the $1.5 million
obtained by it through the drawdown on the letter of credit into
an escrow account. The $1.5 million held in escrow will be
distributed based upon the arbitral award. The arbitration
hearing is scheduled to begin in October 2003. The Company
intends to vigorously pursue this matter; nevertheless, an
adverse outcome from the litigation/arbitration could have an
adverse effect on the Company's financial condition or results of
operations.
In March 2003, the Company filed a lawsuit (Torch Offshore, Inc.
v. Newfield Exploration Company, No. 03-0735, filed in the United
States District Court, Eastern District of Louisiana on March 13,
2003) against Newfield Exploration Company (Newfield) claiming
damages of approximately $2.1 million related to work completed
for Newfield in the Gulf of Mexico at Grand Isle Block 103-A. The
lawsuit alleges that the Company did not receive all compensation
to which it was entitled pursuant to the contract. As of June 30,
2003, the Company has recorded amounts attributable to this claim
based upon the Company's contractual rights under its agreement
with Newfield. The Company intends to vigorously pursue this
matter, the ultimate resolution of which could materially impact
currently recorded amounts in the future.
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.
In early 2000, the Company commenced a five-year new-build
charter for the Midnight Arrow, a dynamically positioned (DP-2)
deepwater subsea construction vessel. The long-term charter is
with Adams Offshore Ltd. and expires in March 2005. The charter
amount includes the marine crew, maintenance and repairs, drydock
costs and certain insurance coverages. Under the terms of the
charter, the Company has the exclusive option to purchase the
vessel for $8.25 million or the ability to extend the charter for
an additional two years at the end of the charter period. This
charter is being accounted for as an operating lease.
In June 2003, the Midnight Eagle damaged two of its thrusters as
it was en route to safe harbor in order to avoid Tropical Storm
Bill. The expected cost of repairs is approximately $1.2 million,
which the Company expects will be largely covered by insurance.
In July 2001, the Company rented two replacement thrusters from a
third party on a short-term basis for a cost of $0.2 million, 75%
of which would be applied to a purchase price of $0.4 million at
the end of the lease term in the event the Company elects to
purchase the thrusters.
The Company has executed contracts with several critical
equipment suppliers related to the conversion of the Midnight
Express. During April 2003, the Company entered into a contract
with Davie Maritime Inc. of Quebec, Canada to complete the
conversion of the Midnight Express at a contract value of $25.6
million ($37.9 million inclusive of assigned critical equipment
supplier contracts). The remaining outstanding contracts for the
conversion of the Midnight Express, including the Davie Maritime
Inc. contract described above, aggregate $65.6 million, of which
$39.7 million had been paid as of June 30, 2003. In the event the
Company terminates these contracts, the Company is required to
pay certain of these suppliers' costs incurred to date plus 10%
while other suppliers are entitled to the full value of the
contract, depending upon the terms of the relevant agreement. The
Company believes its present termination cost exposure on these
contracts totals approximately $25.6 million. In addition, the
Company has executed contracts with several suppliers for various
equipment to be used in connection with the installation of a
modular lay system on the Midnight Wrangler, as well as other
equipment. The remaining outstanding commitment and the present
termination cost exposure on these contracts totals approximately
$1.2 million.
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 requires the Company to record the fair
value of liabilities related to future asset retirement
obligations in the period the obligation is incurred. The Company
adopted SFAS No. 143 on January 1, 2003, which did not impact its
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections," which revises current guidance with
respect to gains and losses on early extinguishment of debt.
Under SFAS No. 145, gains and losses on early extinguishment of
debt are not treated as extraordinary items unless they meet the
criteria for extraordinary treatment in APB No. 30. The Company
adopted SFAS No. 145 effective January 1, 2003, and as a result,
will be required to reclassify the extraordinary losses on early
extinguishment of debt from prior periods in future filings as
these amounts will no longer qualify for extraordinary treatment
under SFAS No. 145.
In December 2002, the FASB issued SFAS No. 148, which provides
alternative methods of transition for a voluntary change to the
fair-value based method of accounting for stock-based employee
compensation, and the new standard, which is now effective,
amends certain disclosure requirements. The Company continues to
apply APB No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its stock-based
compensation; therefore, the alternative methods of transition do
not apply. The Company has adopted the disclosure requirements of
SFAS No. 148 (see "Stock-Based Compensation" above).
In June 2001, the American Institute of Certified Public
Accountants (AICPA) issued an exposure draft of a proposed
Statement of Position (SOP), "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment." This
proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic
repairs and maintenance costs related to "in service" fixed
assets. It would require that these types of expenses be
recognized when incurred rather than recognizing expense for
these costs while the asset is productive. The proposed SOP is
still under consideration, and uncertainties currently exist with
respect to the ultimate timing of its release and its final
scope. The Company is assessing the impact of the change should
this SOP, or any portion of this SOP, be adopted and continues to
monitor the progress of this proposed standard. If the portion of
this SOP relating to planned major maintenance activities is
adopted, the Company would be required to expense regulatory
maintenance cost on its vessels as incurred (currently
capitalized and recognized as "drydocking cost amortization"),
and capitalized costs at the date of adoption would be charged to
operations as a cumulative effect of change in accounting
principle.
In January 2003, the FASB issued Financial Interpretation 46,
"Consolidation of Variable Interest Entities - An Interpretation
of Accounting Research Bulletin (ARB) 51" ("FIN 46" or the
"Interpretation"). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIEs). The primary
objective of the Interpretation is to provide guidance on the
identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights;
such entities are known as VIEs. For the Company, this guidance
applies immediately to VIEs created after January 31, 2003, and
July 1, 2003 for VIEs existing prior to February 1, 2003. The
Company believes there will be no material impact on the
financial position or results of operations from the adoption of
FIN 46.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, and the unaudited
interim condensed consolidated financial statements and related
notes contained in "Item 1. Financial Statements" above.
This Quarterly Report on Form 10-Q contains statements that are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended, concerning, among
other things, our prospects, expected revenues, expenses and
profits, developments and business strategies for our operations,
all of which are subject to certain risks, uncertainties and
assumptions. Our actual results may differ materially from those
expressed or implied in this Form 10-Q. Many of these factors are
beyond our ability to control or predict. Accordingly, we caution
investors not to place undue reliance on forward-looking
statements. There is no assurance that our expectations will be
realized. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
our Annual Report on Form 10-K for the fiscal year ended December
31, 2002 under the captions "Forward-Looking Statements" and
"Item 1. Business - Risk Factors."
GENERAL
Torch Offshore, Inc. provides subsea construction services in
connection with the in-field development of offshore oil and
natural gas reservoirs. We are a leading service provider in our
market niche of installing and maintaining small diameter
flowlines and related infrastructure on the 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 in water depths up to
10,000 feet. In addition, we have begun to enter the
international markets of the world, including Mexico, as we see
these areas holding possibilities for utilization of our fleet.
Since 1997, we have increased the size of our total fleet from
three to eleven construction and service vessels. In 2002, we
acquired a 520-foot vessel from Smit International, that we
renamed the Midnight Express. The Midnight Express will be
converted to a dynamically positioned (DP-2) offshore
construction vessel with our patented pipelay system. In December
2002, we committed to purchase a cable-lay vessel, renamed the
Midnight Wrangler, for the purpose of deepwater pipelay and
subsea construction. We took possession of this vessel in March
2003 and the vessel entered our active fleet in August 2003 after
various modifications were made to the vessel.
In addition, we purchased the Midnight Gator, a supply barge, in
September 2002. We converted this piece of equipment into a sand
dredge and it became available for use in the second quarter of
2003 for the purpose of jetting trenches for pipe burial in
shallow waters.
In November 2002, we signed a contract to provide pipeline
installation support in the Boston, Massachusetts Harbor. The
contract commenced in the fourth quarter of 2002 and was extended
into the second quarter of 2003. The contract called for the
Midnight Rider to work outside of Gulf of Mexico waters for the
duration of the contract. The contract provided for the
mobilization and demobilization of the vessel in addition to the
pipelay and burial work to be completed by the Midnight Rider.
The contract was completed in June 2003.
Factors Affecting Results of Operations
The demand for subsea construction services primarily depends
upon the prices of oil and natural gas. These prices reflect the
general condition of the industry and influence the willingness
of our customers to spend capital to develop oil and natural gas
reservoirs. We are unable to predict future oil and natural gas
prices or the level of offshore construction activity related to
the industry. In addition to the prices of oil and natural gas,
we use the following leading indicators, among others, to
forecast the demand for our services:
- the offshore mobile and jack-up rig counts;
- forecasts of capital expenditures by major, independent, and
state oil and natural gas companies; and
- recent lease sale activity levels.
Even when demand for subsea construction services is strong,
several factors may affect our profitability, including the
following:
- competition;
- equipment and labor productivity;
- cost of third party services such as catering and labor
services;
- fuel cost;
- weather conditions;
- contract estimating uncertainties;
- global economic and political circumstances; and
- other risks inherent in marine construction.
Although greatly influenced by overall market conditions, our
fleet-wide utilization is generally lower during the first half
of the year because of winter weather conditions in the Gulf of
Mexico. Accordingly, we endeavor to schedule our drydock
inspections and routine and preventative maintenance during this
period. Additionally, during the first quarter, a substantial
number of our customers finalize capital budgets and solicit bids
for construction projects. For this reason, individual
quarterly/interim results are not necessarily indicative of the
expected results for any given year.
In the life of an offshore field, capital is allocated to the
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 drilling activities by three to twelve
months. We have noticed that demand for pipeline installation for
deepwater projects exceeding 1,000 feet of water depth generally
follows drilling activities by at least eighteen months to three
years. These deepwater installations typically require much more
engineering design work than Shelf installations.
RESULTS OF OPERATIONS
Comparison of the Quarter Ended June 30, 2003 to the Quarter
Ended June 30, 2002
The following table highlights revenue days (days of vessel
utilization), revenue and gross profit for the quarters ended
June 30, 2003 and June 30, 2002.
(dollars in thousands, except per revenue day, unaudited)
Quarter Ended June 30,
----------------------
2003 2002
------ ------
Revenue Days 504 411
Revenue $ 13,876 $ 12,910
Gross Profit $ 1,376 $ 2,203
Average per Revenue Day:
Revenue $ 27,532 $ 31,411
Gross Profit $ 2,730 $ 5,360
Revenues. Revenues were $13.9 million for the three months ended
June 30, 2003 compared to $12.9 million for the three months
ended June 30, 2002, an increase of 7.5%. The increase in second
quarter 2003 revenues was caused by a 22.6% increase in the
number of revenue days offset by the overall decline in the
average revenue per revenue day experienced by our fleet during
the quarter. Average revenue per revenue day in the second
quarter of 2003 was $27,532 as compared to the average revenue
per revenue day of $31,411 in the second quarter of 2002, a
decrease of 12.3%. Our fleet worked 504 revenue days in the
second quarter of 2003 resulting in a utilization rate of 63%,
compared to 411 revenue days worked in the three months ended
June 30, 2002, or a 54% utilization rate. The Midnight Rider
worked all 91 days of the second quarter of 2003 versus only 48
revenue days in the second quarter of 2002. All of its
utilization in the 2003 second quarter was on the project in the
Boston, Massachusetts Harbor. The Midnight Runner, which is now
commissioned to work only in State waters (inside of
approximately three miles offshore), had 50 days of utilization
in the second quarter of 2003 versus only five days of
utilization in the year ago quarter. Also contributing to the
increase in utilization was the Midnight Eagle, which worked 74
revenue days in the second quarter of 2003 as opposed to 52
revenue days in the year ago quarter. These increases in revenue
days were offset by slight decreases in the revenue days worked
of the Midnight Star, Midnight Dancer and Midnight Brave.
Gross Profit. Gross profit (defined as revenues less cost of
sales) was $1.4 million (9.9% of revenues) for the three months
ended June 30, 2003, compared to $2.2 million (17.1% of revenues)
for the three months ended June 30, 2002. Cost of sales consists
of job related costs such as vessel wages, insurance and repairs
and maintenance. The decrease in the gross profit margin was
primarily caused by higher direct labor costs, an increase in
catering costs, an increase in insurance costs, and higher costs
for support vessels and job consumables in the second quarter
of 2003 than in the second quarter of 2002. Intense
competition in the shallow water Gulf of Mexico also contributed
to the decrease in the gross profit margin as the pricing
structure was depressed contributing to a lower average revenue
per day. These factors were offset somewhat by slightly higher
revenues in the second quarter of 2003, lower subcontract costs
and a decrease in repairs and maintenance when compared to the
second quarter of 2002. In addition, included in cost of sales
were $0.7 million of additional costs related to the termination
of the Midnight Hunter charter for the three months ended June
30, 2003.
Depreciation and Amortization. Depreciation and amortization
expense was $1.8 million for the three months ended June 30, 2003
compared to $1.9 million for the three months ended June 30,
2002, a decrease of 2.1%. This decrease was the result of a
decrease in the amortization of drydock costs in the second
quarter of 2003 as compared to the second quarter of 2002 for the
Midnight Dancer and Midnight Runner offset by an increase in the
amortization of drydock costs of the Midnight Eagle which was
drydocked in the second half of 2002.
General and Administrative Expenses. General and administrative
expenses totaled $1.3 million (9.7% of revenues) for the three
months ended June 30, 2003 compared to $1.0 million (7.9% of
revenues) for the three months ended June 30, 2002. The second
quarter 2003 general and administrative expenses were higher due
to increases in personnel costs and legal expenses offset by a
decline in investor relations costs.
Interest Income, Net. Net interest income was zero for the three
months ended June 30, 2003 compared to net interest income of
$42,000 for the three months ended June 30, 2002. The decline in
net interest income reflects the lower cash balances in the
second quarter of 2003 versus the year-ago period because of the
usage of cash related to the expansion of our fleet and the
purchase and conversion of the Midnight Express. We capitalized
all of our second quarter 2003 interest costs, totaling $0.3
million, in relation to the conversion of the Midnight Express.
Income Taxes. We recorded a $0.6 million benefit (a 35% effective
tax rate) during the three months ended June 30, 2003. We
recorded a $0.2 million benefit (a 35% effective tax rate) during
the three months ended June 30, 2002.
Net Loss Attributable to Common Stockholders. Net loss to common
stockholders for the three months ended June 30, 2003 was $1.2
million, compared with a net loss to common stockholders of $0.4
million for the three months ended June 30, 2002.
Comparison of the Six Months Ended June 30, 2003 to the Six
Months Ended June 30, 2002
The following table highlights revenue days (days of vessel
utilization), revenue and gross profit for the six-month periods
ended June 30, 2003 and June 30, 2002.
(dollars in thousands, except per revenue day, unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
------ ------
Revenue Days 994 953
Revenue $ 30,905 $ 29,635
Gross Profit $ 4,660 $ 6,182
Average per Revenue Day:
Revenue $ 31,092 $ 31,097
Gross Profit $ 4,688 $ 6,487
Revenues. Revenues were $30.9 million for the six months ended
June 30, 2003 compared to $29.6 million for the six months ended
June 30, 2002, an increase of 4.3%. The increase in revenues for
the six month period ended June 30, 2003 as compared to the year-
ago period is the result of an increase in the number of revenue
days worked by the fleet offset only minimally by a decline in
the average revenue per revenue day equaling less than 1%. Our
fleet worked 994 revenue days in the first six months of 2003
resulting in a utilization rate of 62%, compared to 953 revenue
days worked in the six months ended June 30, 2002, or a 65%
utilization rate. The Midnight Eagle and the Midnight Rider had
increases in revenue days during the first six months of 2003 as
compared to the 2002 period of 81 revenue days and 56 revenue
days, respectively. The increases were offset by declines in
utilization from the Midnight Star (53 revenue days),the Midnight
Runner (31 revenue days) and the Midnight Dancer (20 revenue
days).
Gross Profit. Gross profit (defined as revenues less cost of
sales) was $4.7 million (15.1% of revenues) for the six months
ended June 30, 2003, compared to $6.2 million (20.9% of revenues)
for the six months ended June 30, 2002. Cost of sales consists of
job related costs such as vessel wages, insurance and repairs and
maintenance. The decrease in the gross profit margin was
primarily caused by higher direct labor costs, an increase in
catering costs, an increase in insurance costs and higher costs
for support vessels and job consumables than in the year-ago
period. These increases were offset somewhat by slightly higher
revenues in the six months ended June 30, 2003, lower subcontract
costs and a decrease in equipment rental costs when compared to
the first six months of 2002. In addition, included in cost of
sales were $1.3 million of additional costs related to the
termination of the Midnight Hunter charter in the six months
ended June 30, 2003.
Depreciation and Amortization. Depreciation and amortization
expense was $3.6 million for the six months ended June 30, 2003
compared to $3.8 million for the six months ended June 30, 2002,
a decrease of 3.7%. This decrease was a result of less
amortization of drydock costs in the first six months of 2003 as
compared to the first six months of 2002 offset by an increase in
the depreciation of vessels. The amortization of drydock expense
for the Midnight Brave, Midnight Dancer and Midnight Runner
decreased during the period and was offset by the inclusion of
amortization expense from the Midnight Eagle which was drydocked
in the second half of 2002. The increases in depreciation expense
during the first six months of 2003 came from the Midnight Eagle,
Midnight Runner and Midnight Rider as well as from leasehold
improvements.
General and Administrative Expenses. General and administrative
expenses totaled $2.7 million (8.7% of revenues) for the six
months ended June 30, 2003 compared to $2.3 million (7.7% of
revenues) for the six months ended June 30, 2002. The general and
administrative expenses were higher in the first six months of
2003 as compared to the six months ended June 30, 2002 due to
increases in legal expenses, personnel costs and miscellaneous
expenses offset by a decline in investor relations costs.
Interest Income, Net. Net interest income was $1,000 for the six
months ended June 30, 2003 compared to net interest income of
$0.1 million for the six months ended June 30, 2002. The decline
in net interest income reflects the lower cash balances in the
first six months of 2003 versus the year-ago period because of
the usage of cash related to the expansion of our fleet and the
purchase and conversion of the Midnight Express. We capitalized
all of our year-to-date 2003 interest costs, totaling $0.4
million, in relation to the conversion of the Midnight Express.
Income Taxes. We recorded a $0.6 million benefit (a 35% effective
tax rate) during the six months ended June 30, 2003. We recorded
a $0.1 million expense (a 35% effective tax rate) during the six
months ended June 30, 2002.
Net Income (Loss) Attributable to Common Stockholders. Net loss
to common stockholders for the six months ended June 30, 2003 was
$1.1 million, compared with net income to common stockholders of
$0.1 million for the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, we completed an initial public offering (the
"Public Offering") of 5.0 million shares of our common stock. Our
Public Offering generated gross proceeds of $80.0 million. Net
proceeds from the Public Offering were $72.6 million after
underwriting commission and discounts and expenses. We used the
net proceeds from the Public Offering to retire all debt, acquire
the Midnight Rider, and initiate the detailed engineering for the
construction of the Midnight Warrior. We also used the proceeds
from the Public Offering to acquire the Midnight Express and
commence the conversion of the vessel in 2002.
The net cash provided by or used in our operating, investing and
financing activities is summarized below:
(in thousands, unaudited) Six Months Ended June 30,
-------------------------
2003 2002
------ ------
Cash flows provided by (used in):
Operating activities $ 8,977 $ 551
Investing activities (36,931) (12,726)
Financing activities 27,628 (1,781)
------ ------
Net decrease in cash and cash
equivalents $ (326) $(13,956)
====== ======
Our cash flow from operating activities is affected by a number
of factors including our net results, depreciation and
amortization, and changes in our working capital. In the six
months ended June 30, 2003, our operating activities provided net
cash of $9.0 million as compared to $0.6 million in the six
months ended June 30, 2002.
Cash flow used in investing activities in the six months ended
June 30, 2003 was related to the purchase of equipment, primarily
related to our entrance into the deepwater market. Cash
expenditures totaled $36.9 million for the first six months of
2003 compared to $12.7 million for the six months ended June 30,
2002, an increase of 190%. The cash expenditures in the first six
months of 2003 do not include the $9.7 million expended for the
purchase of the Midnight Wrangler as this was fully financed (see
discussion below).
Cash flow provided by financing activities was $27.6 million in
the first six months of 2003 and related mostly to the borrowings
under our various credit agreements, primarily the construction
finance facility. The first six months of 2002 resulted in cash
used in financing activities of $1.8 million related entirely to
stock repurchases.
We had a negative working capital (current assets less current
liabilities) as shown on our balance sheet at June 30, 2003. This
is the result of the inclusion of $19.6 million of borrowings to
finance the Midnight Express in current liabilities. As this debt
is associated with the current conversion work on the Midnight
Express, it is classified as current as of June 30, 2003.
However, once the conversion of the Midnight Express is
completed and the vessel meets certain requirements as specified
by the finance agreement, the amounts borrowed to finance the
conversion of the Midnight Express will convert to a three-year
term loan and be classified accordingly.
The significant changes in our financial position from December
31, 2002 to June 30, 2003 are the increase in debt, the increase
in property and equipment and the decrease in the accounts
receivable balance. Total debt has increased to $43.0 million as
of June 30, 2003 and consists primarily of the borrowings to
finance the conversion of the Midnight Express, the financing for
the purchase of the Midnight Wrangler and the GE Commercial
Equipment Financing term loan which are discussed below. Property
and equipment has increased by $44.3 million due the capital
expenditures related to the expansion of our deepwater fleet and
our accounts receivable balance has declined by $8.2 million.
Historically, our capital requirements have been primarily for
the acquisition and improvement of our vessels and other related
equipment. We expect that as we continue our entrance into the
deepwater market our capital requirements will continue to be
primarily for the conversion and improvement of our vessels.
Capital expenditures totaled $46.7 million for the six months
ended June 30, 2003, compared to $12.7 million for the six months
ended June 30, 2002. Capital expenditures in the first six months
of 2003 primarily relate to the deepwater expansion of our fleet.
We expect to fund our cash requirements for any future capital
investments from cash flow from operations and by utilizing our
bank and debt facilities. We currently estimate capital
expenditures for the remainder of 2003 to be approximately $34.7
million, primarily representing the conversion of, and the
equipment associated with, the Midnight Express. Included in this
estimate are approximately $1.2 million of improvements on the
Midnight Wrangler and approximately $0.8 million for routine
capital and drydock inspections of our vessels to be incurred
over this period.
Regions Bank $35.0 Million Bank Facility. In July 2002, we
entered into a $35.0 million bank facility (the "Bank Facility")
with Regions Bank consisting of a $25.0 million asset-based five-
year revolving credit facility and a $10.0 million accounts
receivable-based working capital facility. The interest on the
Bank Facility is at a floating rate based upon the London
Interbank Offered Rate (LIBOR) plus a range of 1.75% to 2.25%,
depending upon the level of the consolidated leverage ratio (as
defined) measured on a quarterly basis. Borrowings under the Bank
Facility are secured by first preferred ship mortgage liens on
certain vessels in our fleet and a pledge of our accounts
receivable. Amounts outstanding under the accounts receivable-
based working capital facility may not exceed 85% of eligible
trade accounts receivable. Under the terms of the Bank Facility,
we must maintain tangible net worth of at least $60.0 million, a
minimum debt service coverage ratio of at least 1.20 to 1, a
consolidated leverage ratio of no more than 2.00 to 1 and a
consolidated current ratio (defined below) of at least 1.30 to 1.
We had $4.9 million outstanding under the $10.0 million accounts
receivable-based working capital facility as of June 30, 2003. In
addition, we issued a $1.5 million standby letter of credit as
security for the charter payments due under the charter agreement
for the Midnight Hunter against the $10.0 million accounts
receivable-based working capital facility and a $2.7 million
standby letter of credit as security for payments related to a
crane to be constructed as part of the Midnight Express
conversion against the $25.0 million asset-based five-year
revolving credit facility. We had a borrowing capacity of up to
an additional $2.0 million under the $10.0 million accounts
receivable-based working capital facility based upon eligible
receivables at June 30, 2003.
Midnight Express $60.0 Million Finance Facility. In April 2003,
we finalized a credit line that matures on June 30, 2004 to
finance the conversion of the Midnight Express (the "Finance
Facility"). The credit line will convert into a three-year term
loan facility upon completion of the conversion of the Midnight
Express. The Finance Facility commitment is equally provided by
Regions Bank and Export Development Canada (EDC) ($30.0 million
participation by each). As part of the terms and conditions of
the Finance Facility, Regions Bank suspended our ability to
borrow under the $25.0 million asset-based five-year revolving
credit facility discussed above. We continue to have available to
us the $10.0 million accounts receivable-based working capital
facility discussed above from Regions Bank. In addition, the $2.7
million standby letter of credit as security for payments related
to a crane to be constructed as part of the Midnight Express
conversion was transferred to the Finance Facility.
The interest rate for the construction financing is at a floating
rate equal to LIBOR plus 3.00% to 3.50% based upon our
consolidated leverage ratio. We are providing collateral in the
form of the Midnight Express as well as a first preferred ship
mortgage on the Midnight Fox, Midnight Star, Midnight Dancer,
Midnight Carrier, Midnight Brave and Midnight Rider. We have to
adhere to various conditions including maintaining tangible net
worth of at least $60.0 million, a minimum debt service coverage
ratio of at least 1.20 to 1, a consolidated leverage ratio of no
more than 2.00 to 1 and a consolidated current ratio (defined
below) of 1.30 to 1. We are not allowed to incur additional debt
over $8.0 million without consent from Regions Bank. As of June
30, 2003, we had $19.6 million outstanding under the $60.0
million Finance Facility, in addition to the $2.7 million standby
letter of credit as discussed above, leaving us a borrowing
capacity of $37.7 million under the Finance Facility.
The term loan facility of the Finance Facility is a three-year
term with a 10-year amortization payment schedule consisting of
semi-annual payments with a balloon payment at the end of the
three-year term. The interest rate for this facility is 3.25%
over LIBOR. Regions Bank and EDC will require us to maintain the
same collateral and covenants as included in the construction
financing depicted above.
As of June 30, 2003, we were not in compliance with the
consolidated current ratio covenant of 1.30 to 1, as stipulated
by the Bank Facility, the Finance Facility and the GE Commercial
Equipment Financing (GE) term loan (see discussion below). The
consolidated current ratio is calculated by adding the GE term
loan security deposit of $1.25 million to current assets and
excluding from current liabilities the current portion of the
Finance Facility. We have received covenant waivers from Regions
Bank, EDC and GE subsequent to June 30, 2003 for the non-
compliance and we amended the consolidated current ratio
financial convenant so that we have to meet a consolidated
current ratio of 1.00 to 1 for the quarters ending September
30, 2003 and December 31, 2003. The consolidated current ratio
requirement returns to 1.30 to 1 in the first quarter of 2004.
We paid aggregate fees of $40,000 to the three institutions for
these waivers and amendments. We believe we will have
continued compliance with the consolidated current ratio as
amended. However, there can be no assurance that continued
compliance will be maintained.
In July 2003, the $1.5 million standby letter of credit against
the $10.0 million accounts receivable-based working capital
facility (part of the Bank Facility) was drawn by Cable Shipping,
Inc., the owners of the Midnight Hunter. The letter of credit was
issued as security for the charter payments due under the charter
agreement for the Midnight Hunter. The $1.5 million has been put
into escrow and settlement of the funds will be determined by
arbitration. We have recorded the $1.5 million as a liability on
our balance sheet as of June 30, 2003 as part of the receivable
line of credit.
Purchase of the Midnight Wrangler. In December 2002, we entered
into a purchase agreement with Global Marine Systems Limited
(Global Marine) for the purchase of the Wave Alert, to be renamed
the Midnight Wrangler, at a cost of approximately $10.8 million.
We took possession of the vessel in March 2003. The purchase of
the vessel was financed by Global Marine over a five-year period
with monthly payments, including 7% per annum interest, of
approximately $0.2 million plus a $1.0 million payment at the
purchase in March 2003 and another $1.0 million payment at the
end of the five-year period.
GE Term Loan. In March 2003, we finalized a seven-year term loan
with GE. Although the principal amount of the term loan is $9.25
million, we received $8.0 million and GE retained $1.25 million
as a security deposit. The interest rate on the term loan is the
30-day commercial paper rate plus 2.03% and includes prepayment
penalties of 2% for the first twelve months, 1% for the second
twelve months and 0% thereafter. The term loan is structured to
have monthly payments over seven years. The loan agreement
contains the same financial covenants as the Bank Facility and
Finance Facility discussed above. The collateral for the loan is
the Midnight Eagle and the security deposit described above. We
used the proceeds from the loan to fund the improvements to the
Midnight Wrangler and a portion for the Midnight Express
conversion cost.
The following table presents our long-term contractual
obligations and the related amounts due, in total and by period,
as of June 30, 2003 (in thousands):
Payments Due by Period
----------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
------- --------- ----- ----- -------
Finance Facility $19,630 $ 19,630 $ -- $ -- $ --
Long-Term Debt 18,460 2,780 6,013 7,047 2,620
Operating Leases 7,394 4,052 3,266 76 --
Unconditional Purchase
Obligations 26,765 26,765 -- -- --
Other Long-Term
Obligations 90 90 -- -- --
------- --------- ----- ----- -------
Total Contractual
Cash Obligations $72,339 $ 53,317 $9,279 $7,123 $2,620
======= ========= ====== ====== =======
As discussed, we expect the Midnight Express construction loan
(Finance Facility) to convert to a three-year term loan with a 10-
year amortization payment schedule with semi-annual payments. The
majority of the long-term debt obligation consists of the term
loan with GE and the financing of the purchase of the Midnight
Wrangler from Global Marine, both of which are discussed above.
During the first six months of 2003, we made payments of
approximately $1.8 million for the operating lease obligation
relating to our deepwater technology vessel, the Midnight Arrow,
under a five-year charter agreement. We paid approximately $31.3
million during the first six months of 2003 in relation to the
purchase price and conversion of the Midnight Express bringing
our total as of June 30, 2003 to $50.8 million.
Included in the operating leases are the monthly payments for
certain facilities used in the normal course of operations.
However, the majority of the operating leases obligation relates
to our five-year charter agreement of the Midnight Arrow.
Included in unconditional purchase obligations and other long-
term obligations are the contracts with equipment suppliers
related to the conversion of the Midnight Express ($25.9 million)
as well as equipment purchases for the Midnight Wrangler ($1.2
million). We expect to finance the Midnight Express contracts
with proceeds from the Finance Facility and any equipment
purchases for the Midnight Wrangler with cash flow from
operations.
In August 2001, our Board of Directors approved the repurchase of
up to $5.0 million of our outstanding common stock. Purchases
are made on a discretionary basis in the open market or otherwise
over a period of time as determined by management, subject to
market conditions, applicable legal requirements and other
factors. In August 2002, we elected to suspend our repurchase
program. However, during 2003, 2,603 shares were repurchased as
part of the vesting of restricted shares for three employees.
Under current conditions and to support our vessel expansion
strategy, we do not expect to repurchase shares in the near
future. As of August 13, 2003, 712,471 shares had been
repurchased at a total cost of $4.3 million.
Consistent with the focus toward investing in new technology,
including deepwater capable assets such as the Midnight Express
and the Midnight Wrangler, four of the last five vessels added to
our fleet have been DP-2 deepwater capable (Midnight Eagle,
Midnight Arrow, Midnight Express and Midnight Wrangler). Through
June 30, 2003, we have expended approximately $98.3 million (in
combined capital expenditures, operating lease payments and
purchase payments) for these vessels, with an additional
estimated $48.2 million to be incurred in associated construction
costs, operating lease payments and drydock expenses through
early 2005 (see Note 6 to the financial statements).
We believe that our cash flow from operations and Bank Facility
will be sufficient to meet our existing liquidity needs for the
operations of the business. We also believe that the options
offered by the Finance Facility and GE term loan, 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 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 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
requires us to record the fair value of liabilities related to
future asset retirement obligations in the period the obligation
is incurred. We adopted SFAS No. 143 on January 1, 2003, which
did not impact our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections," which revises current guidance with
respect to gains and losses on early extinguishment of debt.
Under SFAS No. 145, gains and losses on early extinguishment of
debt are not treated as extraordinary items unless they meet the
criteria for extraordinary treatment in Accounting Principles
Board (APB) Opinion No. 30. We adopted SFAS No. 145 effective
January 1, 2003, and as a result, will be required to reclassify
the extraordinary losses on early extinguishment of debt from
prior periods in future filings as these amounts will no longer
qualify for extraordinary treatment under SFAS No. 145.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an
Amendment of SFAS No. 123," which provides alternative methods of
transition for a voluntary change to the fair-value based method
of accounting for stock-based employee compensation, and the new
standard, which is now effective, amends certain disclosure
requirements. We continue to apply APB No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in
accounting for our stock-based compensation; therefore, the
alternative methods of transition do not apply. We have adopted
the disclosure requirements of SFAS No. 148 (see Note 4 to the
financial statements).
In June 2001, the American Institute of Certified Public
Accountants (AICPA) issued an exposure draft of a proposed
Statement of Position (SOP), "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment." This
proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic
repairs and maintenance costs related to "in service" fixed
assets. It would require that these types of expenses be
recognized when incurred rather than recognizing expense for
these costs while the asset is productive. The proposed SOP is
still under consideration, and uncertainties currently exist with
respect to the ultimate timing of its release and its final
scope. We are assessing the impact of the change should this SOP,
or any portion of this SOP, be adopted and will continue to
monitor the progress of this proposed standard. If the portion of
this SOP relating to planned major maintenance activities is
adopted, we would be required to expense regulatory maintenance
cost on our vessels as incurred (currently capitalized and
recognized as "drydocking cost amortization"), and capitalized
costs at the date of adoption would be charged to operations as a
cumulative effect of change in accounting principle.
In January 2003, the FASB issued Financial Interpretation (FIN)
46, "Consolidation of Variable Interest Entities - An
Interpretation of Accounting Research Bulletin (ARB) 51" ("FIN
46" or the "Interpretation"). FIN 46 addresses consolidation by
business enterprises of variable interest entities (VIEs). The
primary objective of the Interpretation is to provide guidance on
the identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights;
such entities are known as VIEs. This guidance applies
immediately to VIEs created after January 31, 2003, and July 1,
2003 for VIEs existing prior to February 1, 2003. We believe
there will be no material impact on our financial position or
results of operations from the adoption of FIN 46.
Significant Accounting Policies and Estimates.
For a discussion of significant accounting policies and
estimates, see our Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Interest Rate Risk. We are subject to market risk exposure
related to changes in interest rates on our Bank Facility (when
drawn upon), our Finance Facility and our term loan with GE.
Interest on borrowings under the Bank Facility accrue at a
variable rate, using LIBOR plus a range of 1.75% to 2.25%,
depending upon the level of our consolidated leverage ratio (as
defined) measured on a quarterly basis. Under the Finance
Facility, the interest rate during the construction financing
phase will be based upon our consolidated leverage ratio and
ranges from LIBOR plus a range of 3.00% to 3.50% based upon these
levels. The term facility of the Finance Facility is priced at
3.25% over LIBOR. Our term loan with GE includes an interest rate
consisting of the 30-day commercial paper rate plus 2.03%. We do
not have any interest rate swap agreements in place to manage our
interest rate risk.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. As of the end
of the period covered by this report, our chief executive officer
and chief financial officer, with the participation of
management, have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. Based on
their evaluation, the chief executive officer and chief financial
officer have concluded that our disclosure controls and
procedures have been designed and are functioning effectively in
alerting them in a timely manner to material information relating
to Torch Offshore, Inc. required to be disclosed in our periodic
Securities and Exchange Commission filings under the Securities
Exchange Act of 1934.
Changes in Internal Controls. There were no significant changes
in our internal controls or in other factors that could
significantly affect these internal controls subsequent to the
date of their most recent evaluation, including any corrective
actions taken with regard to significant deficiencies and
material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We 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 initial public
offering. This lawsuit, Karl L. Kapps, et. al. v. Torch Offshore,
Inc. et. al., No. 02-00582, which seeks unspecified monetary
damages, was filed on March 1, 2002 in U.S. District Court for
the Eastern District of Louisiana. The lawsuit was dismissed on
December 19, 2002 for failure to state a claim upon which relief
could be granted. The plaintiff has appealed to the U.S. Court of
Appeals for the Fifth Circuit. We believe the allegations in this
lawsuit are without merit and we continue to vigorously defend
this lawsuit. Even so, an adverse outcome in this class action
litigation could have a material adverse effect on our financial
condition or results of operations.
We have been named as a defendant in a lawsuit (Bluffview
Capital, LP v. Torch Offshore, Inc., No. 2002-7662, filed in the
134th Judicial District Court, Dallas County, Texas on August 26,
2002) brought by a former service provider. The plaintiff was
originally hired to assist us in obtaining financing, among other
services. We terminated the relationship and are disputing the
plaintiff's interpretation of certain provisions regarding the
services to be provided and the calculation of fees allegedly
earned. It is our position that we have complied with all of the
provisions of the contract and we intend to continue to
vigorously defend our position in this matter. Nevertheless, an
adverse outcome in the litigation could have an adverse effect on
our results of operations.
We terminated our charter of the Midnight Hunter on January 24,
2003, as, among other things, the vessel did not meet certain
specifications as outlined in the charter agreement and this
prevented us from performing some types of work. We filed a
lawsuit (Torch Offshore, L.L.C. v. The M/V Midnight Hunter and
Cable Shipping, Inc., et al., No. 03-0343, filed in the United
States District Court, Eastern District of Louisiana on February
4, 2003) seeking an order, which was granted by the court,
attaching and arresting the Midnight Hunter as security for our
claims related to such termination. Management believes the
amount of the claim is justified. The claims will be settled by
arbitration in London, England. The $1.5 million standby letter
of credit issued to secure our payments under the charter was
drawn by Cable Shipping, Inc. in July 2003. Pursuant to an
agreement entered into in July 2003, we released the vessel from
arrest and Cable Shipping, Inc. has placed the $1.5 million
obtained by it through the drawdown on the letter of credit into
an escrow account. The $1.5 million held in escrow will be
distributed based upon the arbitral award. The arbitration
hearing is scheduled to begin in October 2003. We intend to
vigorously pursue this matter; nevertheless, an adverse outcome
from the litigation/arbitration could have an adverse effect on
our results of operations.
We filed a lawsuit (Torch Offshore, Inc. v. Newfield Exploration
Company, No. 03-0735, filed in the United States District Court,
Eastern District of Louisiana on March 13, 2003) against Newfield
Exploration Company (Newfield) claiming damages of approximately
$2.1 million related to work completed for Newfield in the Gulf
of Mexico at Grand Isle Block 103-A. Our lawsuit alleges that we
did not receive all compensation to which we were entitled
pursuant to the contract. As of June 30, 2003, we have recorded
amounts attributable to this claim based upon our contractual
rights under our agreement with Newfield. We intend to vigorously
pursue this matter, the ultimate resolution of which could
materially impact currently recorded amounts in the future.
Item 2. Changes in Securities and Use of Proceeds.
The information on the use of proceeds from our Public Offering
required by this item is set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" in Part I of this report, which
section is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders was held on May 15, 2003.
(a) At such meeting, each of the following persons listed below
was elected as a director of the Company to serve during the
ensuing year.
Votes For Votes Withheld
---------- --------------
Lyle G. Stockstill 12,376,478 101,900
Lana J. Hingle Stockstill 12,376,478 101,900
Curtis Lemons 12,370,078 108,300
Andrew L. Michel 12,393,478 84,900
John Reynolds 12,370,078 108,300
Ken Wallace 12,370,078 108,300
(b) At such meeting, the stockholders also approved the
appointment of Ernst & Young LLP as the Company's independent
public accountants for 2003.
Votes For Votes Against Abstained
---------- ------------- ---------
12,451,888 24,390 2,100
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed as part of this report are listed below.
Exhibit 10.1 Waiver and Second Amendment to
Amended and Restated Loan Agreement
among Torch Offshore, Inc. and Regions Bank
Exhibit 10.2 Waiver and Second Amendment to Credit
Agreement among Torch Offshore, Inc.,
Regions Bank and Export Development Canada
Exhibit 10.3 Waiver and Amendment No. 1 to Loan
Agreement dated March 21, 2003 between
General Electric Capital Corporation, Torch
Offshore, L.L.C. and Torch Offshore, Inc.
Exhibit 31.1 Certification by Lyle G. Stockstill
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification by Robert E. Fulton
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification by Lyle G. Stockstill
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification by Robert E. Fulton
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On April 22, 2003, we filed a report on Form 8-K,
reporting under Item 5, announcing that substantially
all of the conditions required for the conversion
contract of the Midnight Express to become effective
had been satisfied. The conversion contract is with
Davie Maritime Inc. of Quebec, Canada and was signed
through the Company's subsidiary, Torch Express,
L.L.C. The Company announced that the remaining
conditions were expected to be satisfied soon
thereafter.
On May 9, 2003, we filed a report on Form 8-K,
reporting under Item 9, announcing the release of the
operating results for the quarter ended March 31,
2003.
On May 12, 2003, we filed a report on Form 8-K,
reporting under Item 5, announcing the $60.0 million
finance facility with Regions Bank and Export
Development Canada to fund the conversion of the
Midnight Express had been completed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TORCH OFFSHORE, INC.
Date: August 13, 2003 By: /s/ ROBERT E. FULTON
--------------------
Robert E. Fulton
Chief Financial Officer
(Principal Accounting and
Financial Officer)
EXHIBIT INDEX
10.1 -- Waiver and Second Amendment to Amended and
Restated Loan Agreement among Torch Offshore, Inc.
and Regions Bank
10.2 -- Waiver and Second Amendment to Credit Agreement
among Torch Offshore, Inc., Regions Bank and Export
Development Canada
10.3 -- Waiver and Amendment No. 1 to Loan Agreement
dated March 21, 2003 between General Electric
Capital Corporation, Torch Offshore, L.L.C. and
Torch Offshore, Inc.
31.1 -- Certification by Lyle G. Stockstill Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 -- Certification by Robert E. Fulton Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 -- Certification by Lyle G. Stockstill Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 -- Certification by Robert E. Fulton Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 10.1
WAIVER AND SECOND AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
This Waiver and Second Amendment to Amended and Restated
Loan Agreement is entered into effective the 8th day of August,
2003, and is executed in connection with that certain Amended and
Restated Loan Agreement effective as of December 20, 2002 (as the
same may be amended, restated, modified or supplemented from time
to time, the "Loan Agreement") among Torch Offshore, Inc.
("Borrower") and Regions Bank ("Bank").
WHEREAS, Borrower and Bank desire to amend the Loan
Agreement.
NOW THEREFORE, for good and adequate consideration the
receipt of which is hereby acknowledged, the parties hereto do
hereby agree as follows:
1. As used herein, capitalized terms not defined herein
shall have the meanings attributed to them in the Loan Agreement.
2. Bank hereby waives compliance by Borrower with the
minimum Consolidated Current Ratio covenant contained in Section
5.02(k)(i) of the Loan Agreement for the fiscal quarter ending on
June 30, 2003. Borrower acknowledges and agrees that this waiver
of compliance with the financial covenant contained in Section
5.02(k)(i) of the Loan Agreement shall apply only to the fiscal
quarter ending on June 30, 2003 and shall not constitute a waiver
of compliance for any other fiscal quarter.
3. Section 5.02 (k)(i) of the Loan Agreement is amended
and restated to read as follows:
(i) Borrower will have and maintain, as of the end
of each fiscal quarter, a Consolidated Current Ratio of
at least:
Periods Ending Ratio
-------------- -----
On or before December 31, 2003 1.00
After December 31, 2003 1.30.
4. BORROWER HEREBY RELEASES BANK AND SOLIDARILY AGREES TO
HOLD BANK HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS ARISING
PRIOR TO THE EFFECTIVE DATE OF THIS WAIVER AND SECOND AMENDMENT
TO AMENDED AND RESTATED LOAN AGREEMENT ARISING OUT OF, RESULTING
FROM OR RELATING TO (A) ANY SECURED OBLIGATIONS OR (B) ANY OF
THE LOAN DOCUMENTS.
5. In connection with the foregoing and only in connection
with the foregoing, the Loan Agreement is hereby amended, but in
all other respects all of the terms, conditions and provisions of
the Loan Agreement remain unaffected.
6. Except as may be specifically set forth herein, this
Waiver and Second Amendment to Amended and Restated Loan
Agreement shall not constitute a waiver of any Default(s) under
the Amended and Restated Loan Agreement or any documents executed
in connection therewith, all rights and remedies of Bank being
preserved and maintained.
7. This Waiver and Second Amendment to Amended and
Restated Loan Agreement may be executed in two or more
counterparts, and it shall not be necessary that the signatures
of all parties hereto be contained on any one counterpart hereof;
each counterpart shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this instrument
to be duly executed.
TORCH OFFSHORE, INC.
By:/s/ ROBERT E. FULTON
--------------------
Robert E. Fulton
Its Chief Financial Officer
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056
Telecopy number: (504)367-7075
REGIONS BANK
By:/s/ BILL POPE
--------------
Bill Pope
Its: Executive Vice President
301 St. Charles Avenue
New Orleans, LA 70130
Telecopier: (504)584-2165
Exhibit 10.2
WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT
This Waiver and Second Amendment to Credit Agreement is
entered into effective the 8th day of August, 2003, and is
executed in connection with that certain Credit Agreement
effective as of April 23, 2003 (as the same may be amended,
restated, modified or supplemented from time to time, the "Credit
Agreement") among Torch Offshore, Inc. ("Borrower") and the
Lenders, including Regions Bank in its capacity as a Lender and
as Agent for the Lenders.
WHEREAS, Borrower and the Lenders desire to amend the Credit
Agreement.
NOW THEREFORE, for good and adequate consideration the
receipt of which is hereby acknowledged, the parties hereto do
hereby agree as follows:
1. As used herein, capitalized terms not defined herein
shall have the meanings attributed to them in the Credit
Agreement.
2. Lenders hereby waive compliance by Borrower with the
minimum Consolidated Current Ratio covenant contained in Section
8.1(k)(i) of the Credit Agreement for the fiscal quarter ending
on June 30, 2003. Borrower acknowledges and agrees that this
waiver of compliance with the financial covenant contained in
Section 8.1(k)(i) of the Credit Agreement shall apply only to the
fiscal quarter ending on June 30, 2003 and shall not constitute a
waiver of compliance for any other fiscal quarter.
3. Section 8.1(k)(i) of the Credit Agreement is amended
and restated to read as follows:
(i) Borrower will have and maintain, as of the end
of each fiscal quarter, a Consolidated Current Ratio of
at least:
Periods Ending Ratio
-------------- -----
On or before December 31, 2003 1.00
After December 31, 2003 1.30.
4. Borrower shall pay an amendment fee to the Agent with
respect to this Waiver and Second Amendment to Credit Agreement,
for the benefit of the Lenders, in the amount of $30,000 to be
distributed by Agent to the Lenders based on each Lender's Pro
Rata Share of the Line of Credit Loans. This agreement will
become effective upon the payment of such fee.
5. BORROWER HEREBY RELEASES THE INDEMNITEES AND SOLIDARILY
AGREES TO HOLD THE INDEMNITEES HARMLESS FROM AND AGAINST ANY AND
ALL CLAIMS ARISING PRIOR TO THE EFFECTIVE DATE OF THIS WAIVER AND
SECOND AMENDMENT TO CREDIT AGREEMENT ARISING OUT OF, RESULTING
FROM OR RELATING TO (A) ANY SECURED OBLIGATIONS OR (B) ANY OF
THE TRANSACTION DOCUMENTS.
6. In connection with the foregoing and only in connection
with the foregoing, the Credit Agreement is hereby amended, but
in all other respects all of the terms, conditions and provisions
of the Credit Agreement remain unaffected.
7. Except as may be specifically set forth herein, this
Waiver and Second Amendment to Credit Agreement shall not
constitute a waiver of any Default(s) under the Credit Agreement
or any documents executed in connection therewith, all rights and
remedies of the Lenders being preserved and maintained.
8. This Waiver and Second Amendment to Credit Agreement
may be executed in two or more counterparts, and it shall not be
necessary that the signatures of all parties hereto be contained
on any one counterpart hereof; each counterpart shall be deemed
an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have caused this instrument
to be duly executed.
TORCH OFFSHORE, INC.
By:/s/ ROBERT E. FULTON
--------------------
Its Chief Financial Officer
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056
Telecopy number: (504)367-7075
REGIONS BANK
By:/s/ BILL POPE
-------------
Executive Vice President
301 St. Charles Avenue
New Orleans, LA 70130
Telecopier: (504)584-2165
EXPORT DEVELOPMENT CANADA
By:/s/ ANTONIO CAMINITI
--------------------
Loan Asset Manager
By:/s/ BRUCE DUNLOP
----------------
Loan Portfolio Manager
151 O'Connor
Ottawa, Canada K1A1K3
(Telecopier: (613)598-3186
Exhibit 10.3
WAIVER AND AMENDMENT NO. 1
TO LOAN AGREEMENT
dated March 21, 2003
This Waiver and Amendment No. 1 ("Amendment") to Loan
Agreement dated March 21, 2003 ("Loan Agreement"), is entered
into this 12th day of August, 2003, by and between General
Electric Capital Corporation, a Delaware corporation ("Lender"),
Torch Offshore, L.L.C., a Delaware limited liability company
("Borrower") and Torch Offshore, Inc. a Delaware corporation
("Guarantor"). All capitalized terms not otherwise defined in
this Amendment have the meanings ascribed to them in the Loan
Agreement.
WITNESSETH:
A. Borrower is a party to that certain Credit Agreement,
as amended by the First Amendment to Credit Agreement effective
as of April 23, 2003, as further amended by the Waiver and Second
Amendment to Credit Agreement dated on or about August 8, 2003
("Credit Agreement"), by and among Borrower, Regions Bank (as
Agent) and Regions Bank and Export Development Canada (as
Lenders).
B. The Credit Agreement contains financial covenants which
differ from those contained in the Loan Agreement.
C. Borrower has requested that the parties amend the Loan
Agreement to replace the existing financial covenants therein
with the financial covenants contained in the Credit Agreement
and waive compliance with certain covenants in the Loan
Agreement, compliance with which have been waived under the
Credit Agreement.
D. Lender is willing to waive and amend those financial
covenants.
NOW, THEREFORE, in consideration of the foregoing, the
parties hereby agree to amend the Loan Agreement as follows:
1. Section 9(a), the definition of "Consolidated Current
Ratio", is hereby amended by deleting it in its entirety and
inserting the following in lieu thereof:
"Consolidated Current Ratio" shall mean, as of any date for
which it is being determined, the ratio of (a) current
assets of Guarantor and its Subsidiaries as of such date,
determined on a consolidated basis in accordance with GAAP,
to (b) current liabilities of Guarantor and its Subsidiaries
as of such date, determined on a consolidated basis in
accordance with GAAP; provided that, for purposes of
determining the Consolidated Current Ratio, (x) during the
Line of Credit Period, the principal amount of the Line of
Credit Loans outstanding as of such date shall be classified
as a long-term liability and (y) the $1,250,000 non-interest
bearing deposit pledged to Lender pursuant to the Pledge
will be classified as a current asset.
2. Section 9(d), the definition of "Consolidated Leverage
Ratio", is hereby amended by deleting the following phrase:
"provided that for purposes of determining the Consolidated
Leverage Ratio, the $1,250,000 non interest bearing deposit
pledged to Lender pursuant to the Pledge will be deducted from
the Consolidated Indebtedness."
3. Section 9(h), the definition of "Distribution" is
amended by deleting the word "personal" in the first line and
inserting the word "Person" in lieu thereof.
4. By adding a new subsection 9(t)(1) as follows:
"Lien" shall mean any interest in Property securing an
obligation owed to, or a claim by, a Person other than the
owner of the Property, whether such interest is based on
common law, statute or contract, including, without
limitation, any security interest, mortgage, deed of trust,
hypothec, prior claim, right of retention, maritime lien, or
right in rem, pledge, assignment, judgment lien, deemed
trust or other lien or encumbrance of any kind or nature
whatsoever, any conditional sale or trust receipt, and any
consignment or bailment for security purposes. The term
"Lien" shall include reservations, exceptions,
encroachments, easements, servitudes, rights-of-way,
covenants, conditions, restrictions, leases and other title
exceptions and encumbrances affecting Property.
5. Section 9(j), the definition of "Subsidiary," is hereby
amended by inserting the following phrase at the end of the
paragraph: "and any other entity described on Schedule 7.13 of
the Line of Credit Loan."
6. Section 9(n), the definition of "Line of Credit
Period," is hereby amended by deleting the text thereof in its
entirety and inserting in lieu thereof the following: " `Line of
Credit Period' shall mean the period commencing on April 23, 2003
and ending June 30, 2004."
7. Section 9(o), the definitions of "Line of Credit Loan"
and "Line of Credit Loans" shall mean the Credit Agreement, as
amended by the First Amendment to Credit Agreement effective
April 23, 2003, by and among Guarantor, Regions Bank, as agent,
and Regions Bank and Export Development Canada, and their
respective successors and assigns, as lenders, as the same may be
amended or replaced from time to time.
8. Lender hereby waives compliance by Guarantor with the
minimum Consolidated Current Ratio covenant contained in Section
9(a) of the Loan Agreement for the fiscal quarter ending on June
30, 2003. Guarantor acknowledges and agrees that this waiver of
compliance with the financial covenant contained in Section 9(a)
of the Loan Agreement shall apply only to the fiscal quarter
ending on June 30, 2003 and shall not constitute a waiver of
compliance for any other fiscal quarter.
9. Section 9(a) of the Loan Agreement is amended and
restated to read as follows:
(a) Guarantor will have and maintain, as of the end of each
fiscal quarter, a Consolidated Current Ratio of at least:
Periods Ending: Ratio:
-----------------------------------------
On or before December 31, 2003 1.00
After December 31, 2003 1.30
10. Borrower shall pay an amendment fee to Lender with
respect to this Waiver and Amendment No. 1 to Loan Agreement,
for the benefit of Lender, in the amount of $10,000. In
addition, Borrower shall pay all attorneys' fees and costs
incurred by Lender in connection with this Amendment No. 1.
11. BORROWER HEREBY RELEASES LENDER (AS DEFINED IN SECTION
5 OF THE LOAN AGREEMENT) AND SOLIDARILY AGREES TO HOLD LENDER (AS
SO DEFINED) HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS ARISING
PRIOR TO THE EFFECTIVE DATE OF THIS WAIVER AND AMENDMENT NO. 1 TO
LOAN AGREEMENT ARISING OUT OF, RESULTING FROM OR RELATING TO (A)
ANY SECURED OBLIGATIONS OR (B) ANY OF THE TRANSACTION DOCUMENTS.
12. Except as amended herein, the Loan Agreement is
unchanged and remains in full force and effect, and Borrower
specifically acknowledges its continuing obligations to pay all
sums as they become due under the Loan Agreement or any document
related thereto.
13. Except as may be specifically set forth herein, this
Waiver and Amendment No. 1 to Loan Agreement shall not constitute
a waiver of any Event(s) of Default under the Loan Agreement or
any documents executed in connection therewith, all rights and
remedies of the Lender are being preserved and maintained.
14. This Amendment may be executed in counterparts, each of
which when so executed will be deemed to be an original and all
of which taken together will constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their duly authorized representatives as of the date
first above written.
LENDER:
GENERAL ELECTRIC CAPITAL CORPORATION
BY: /s/ WILLIAM S. ANDERSON
-----------------------
Name: William S. Anderson
Title: Risk Analyst
BORROWER:
TORCH OFFSHORE, L.L.C.
BY: /s/ ROBERT E. FULTON
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Name: Robert E. Fulton
Title: Chief Financial Officer
GUARANTOR:
TORCH OFFSHORE, INC.
BY: /s/ ROBERT E. FULTON
--------------------
Name: Robert E. Fulton
Title: Chief Financial Officer
Exhibit 31.1
CERTIFICATION BY LYLE G. STOCKSTILL PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Lyle G. Stockstill, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Torch
Offshore, Inc.;
2.Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3.Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4.The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a)designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
(b)evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c)disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5.The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
controls over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b)any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: August 13, 2003 /s/ LYLE G. STOCKSTILL
----------------------
Lyle G. Stockstill
Chairman of the Board and Chief
Executive Officer
Exhibit 31.2
CERTIFICATION BY ROBERT E. FULTON PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Robert E. Fulton, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Torch
Offshore, Inc.;
2.Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3.Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4.The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a)designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
(b)evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c)disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5.The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
controls over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b)any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: August 13, 2003 /s/ ROBERT E. FULTON
--------------------
Robert E. Fulton
Chief Financial Officer
Exhibit 32.1
CERTIFICATION BY LYLE G. STOCKSTILL PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report of Torch Offshore, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2003
as filed with the Securities and Exchange Commission of the date
hereof (the "Report"), I, Lyle G. Stockstill, Chairman of the
Board and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ LYLE G. STOCKSTILL
----------------------
Lyle G. Stockstill
Chairman of the Board and Chief Executive Officer
Exhibit 32.2
CERTIFICATION BY ROBERT E. FULTON PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report of Torch Offshore, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2003
as filed with the Securities and Exchange Commission of the date
hereof (the "Report"), I, Robert E. Fulton, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ ROBERT E. FULTON
--------------------
Robert E. Fulton
Chief Financial Officer