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 September 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 November
13, 2003 was 12,638,990.
1
TORCH OFFSHORE, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002...................................................................3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2003 and 2002............................................4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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...............................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................24
Item 4. Controls and Procedures..............................................................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................24
Item 2. Changes in Securities and Use of Proceeds............................................26
Item 6. Exhibits and Reports on Form 8-K.....................................................26
Signature............................................................................27
Exhibit Index........................................................................
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED) (SEE NOTE 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 386 $ 327
Accounts receivable --
Trade, less allowance for doubtful accounts ........ 19,321 25,226
Other .............................................. -- 37
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................. 1,113 2,036
Prepaid expenses and other ............................. 4,894 3,747
-------- --------
Total current assets ............................... 25,714 31,373
PROPERTY AND EQUIPMENT, at cost,
less accumulated depreciation ......................... 135,067 67,561
DEFERRED DRYDOCKING CHARGES, at cost,
less accumulated amortization ......................... 1,084 2,831
SECURITY DEPOSIT (Note 5) ............................... 1,250 --
OTHER ASSETS ............................................ 136 139
-------- --------
Total assets ....................................... $163,251 $101,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade .............................. $ 13,286 $ 7,677
Accrued expenses ....................................... 3,555 3,696
Accrued payroll and related taxes ...................... 1,443 857
Financed insurance premiums ............................ 2,684 2,553
Deferred income taxes .................................. 287 287
Capital lease obligation ............................... 243 --
Finance Facility (Note 5) .............................. 37,795 --
Current portion of long-term debt ...................... 2,866 14
Receivable line of credit .............................. 7,440 4,271
-------- --------
Total current liabilities .......................... 69,599 19,355
DEFERRED INCOME TAXES ................................... 1,307 2,636
LONG-TERM DEBT, less current portion .................... 14,888 46
COMMITMENTS AND CONTINGENCIES (Note 6)...................
STOCKHOLDERS' EQUITY .................................... 77,457 79,867
-------- --------
Total liabilities and stockholders' equity ......... $163,251 $101,904
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues ................................. $ 15,262 $ 13,833 $ 46,167 $ 43,468
Cost of revenues:
Cost of sales ........................... 13,771 11,242 40,016 34,695
Depreciation and amortization ........... 1,983 1,842 5,632 5,633
General and administrative expenses ..... 1,614 1,226 4,317 3,497
-------- -------- -------- --------
Total cost of revenues ........... 17,368 14,310 49,965 43,825
-------- -------- -------- --------
Operating loss ........................... (2,106) (477) (3,798) (357)
-------- -------- -------- --------
Other income (expense):
Interest expense ..................... -- (38) -- (93)
Interest income ...................... -- 56 1 220
-------- -------- -------- --------
Total other income ............... -- 18 1 127
-------- -------- -------- --------
Loss before income tax benefit ........... (2,106) (459) (3,797) (230)
Income tax benefit ....................... 737 161 1,329 81
======== ======== ======== ========
Net loss ................................. $ (1,369) $ (298) $ (2,468) $ (149)
======== ======== ======== ========
Net loss per common share:
Basic ................................ $ (0.11) $ (0.02) $ (0.20) $ (0.01)
======== ======== ======== ========
Diluted .............................. $ (0.11) $ (0.02) $ (0.20) $ (0.01)
======== ======== ======== ========
Weighted average common stock outstanding:
Basic ................................ 12,639 12,689 12,637 12,749
======== ======== ======== ========
Diluted .............................. 12,639 12,689 12,637 12,749
======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
-------- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net loss .................................................... $ (2,468) $ (149)
Depreciation and amortization ............................. 5,632 5,633
Deferred income tax benefit ............................... (1,329) (81)
Deferred drydocking costs incurred ........................ (118) (2,332)
(Increase) decrease in working capital:
Accounts receivable ....................................... 5,942 (1,956)
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................... 923 379
Prepaid expenses, net of financed portion ................. (1,016) (125)
Accounts payable - trade .................................. 5,609 2,167
Accrued payroll and related taxes ......................... 586 283
Accrued expenses and other ................................ (62) 554
-------- --------
Net cash provided by operating activities ................... 13,699 4,373
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment ....................... (61,298) (20,038)
-------- --------
Net cash used in investing activities ....................... (61,298) (20,038)
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from receivable line of credit ............... 3,169 --
Net proceeds from Finance Facility ........................ 37,795 --
Net proceeds from long-term debt .......................... 6,712 --
Treasury stock purchases .................................. (18) (1,989)
-------- --------
Net cash provided by (used in) financing activities ......... 47,658 (1,989)
-------- --------
Net increase (decrease) in cash and cash equivalents ........ 59 (17,654)
Cash and cash equivalents at beginning of period ............ 327 24,493
-------- --------
Cash and cash equivalents at end of period .................. $ 386 $ 6,839
======== ========
Interest paid (net of amounts capitalized) .................. $ -- $ 77
======== ========
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.
5
TORCH OFFSHORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION, BASIS OF PRESENTATION AND LIQUIDITY MATTERS:
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 Torch Offshore, Inc.'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., Torch Express L.L.C., Torch Venture, L.L.C.
and Torch Offshore de Mexico S. de R.L. de C.V. (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 nine months ended September 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.
During 2003, market conditions in the Gulf of Mexico have remained relatively
weak as offshore drilling has remained depressed. Although the U.S. land rig
count has increased, a similar development has not transpired in offshore
drilling. As of a recent date, there were 26% fewer jack-up rigs in the Gulf of
Mexico than just two years ago, a key measure of market strength for the
Company. These forces have driven market prices to lower levels, and as a
result, have impacted the gross margins that the Company has traditionally
experienced.
As a result of these market conditions and the recent arbitration ruling in the
Midnight Hunter case (see Note 6), the Company has experienced significant
financial losses in 2003. The Company has a significant working capital deficit
position primarily resulting from the current classification of the Midnight
Express construction finance facility which matures in mid-2004, the
construction project for which has recently experienced certain delays impacting
its estimated date of completion. In addition, for the two most recent fiscal
quarters, the Company was not in compliance with certain covenants under its
debt agreements and had to obtain waivers and certain revisions to prospective
financial performance measurement ratios from its lenders to enhance the
Company's ability to maintain compliance. These conditions place a high degree
of pressure on the Company's liquidity management and could ultimately
6
impact the Company's operations and future business plans. Management believes,
however, that the Company has the ability to sustain its operations and meet its
financial commitments, at least for the near-term, through effective management
of its operations and the available liquidity provided through its credit
facilities. However, if the Company continues to incur significant cash losses
or if availability provided through the Company's credit facilities is
curtailed, the Company's ability to continue to manage its liquidity needs and
meet its operating and other financial commitments may be jeopardized in the
future.
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 September 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 stock options, stock,
phantom stock, performance-based stock or stock appreciation rights. As of
September 30, 2003, stock options covering 454,048 shares of common stock with a
weighted average price of $9.97 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/loss per share is calculated by dividing
income/loss by the weighted-average number of common shares outstanding for the
applicable period, without adjustment for potential common shares outstanding in
the form of stock options, warrants, convertible securities or contingent stock
agreements. For calculation of diluted earnings/loss 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 336,000 shares and 365,000 shares for the
third quarters of 2003 and 2002, respectively, and approximately 361,000 shares
and 287,000 shares in the first nine 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 loss and loss per share
would have been as shown in the pro forma amounts below:
7
THREE MONTHS ENDED NINE MONTHS ENDED
(in thousands, except per share data) SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------- ------ ------- ------
Net loss ................................................. $(1,369) $ (298) $(2,468) $ (149)
Add: Stock-based compensation expense included in net
loss, net of tax .................................... 33 26 95 78
Less: Stock-based compensation expense using fair value
method, net of tax .................................. (125) (141) (369) (353)
------- ------ ------- ------
Pro forma net loss ..................................... $(1,461) $ (413) $(2,742) $ (424)
======== ====== ======= ======
Basic loss per share ..................................... $ (0.11) $(0.02) $ (0.20) $(0.01)
Pro forma basic loss per share ........................... $ (0.12) $(0.03) $ (0.22) $(0.03)
Diluted loss per share ................................... $ (0.11) $(0.02) $ (0.20) $(0.01)
Pro forma diluted loss per share ......................... $ (0.12) $(0.03) $ (0.22) $(0.03)
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 Company's ability to use the asset-based five-year
revolving credit facility was suspended in connection with our financing of the
Midnight Express. The Company continues to have available the $10.0 million
accounts receivable-based working capital facility from Regions Bank. Amounts
outstanding under the accounts receivable-based working capital facility may not
exceed 85% of eligible trade accounts receivable. The Company had $7.4 million
outstanding under the $10.0 million accounts receivable-based working capital
facility as of September 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. In July 2003, this letter of credit
was drawn by Cable Shipping, Inc., the owners of the Midnight Hunter. The
Company recorded the $1.5 million as a liability in full on the balance sheet
during the second quarter of 2003. See Note 6 for further discussion.
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. 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 from the Bank Facility to the Finance Facility. The $2.7 million
standby letter of credit was drawn upon during the third quarter of 2003.
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 $37.8 million outstanding
8
under the $60.0 million Finance Facility as of September 30, 2003 and
capitalized $0.9 million of 2003 year-to-date interest costs in relation to the
conversion of the Midnight Express.
Upon achievement of certain construction completion milestones, but no later
than June 30, 2004, the Finance Facility will convert to term status. The term
loan facility would then have a three-year term with a 10-year amortization
payment schedule consisting of semi-annual payments with a balloon payment at
the end of the three-year term. The interest rate for this facility is 3.25%
over LIBOR. 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 September 30, 2003, the Company was not in compliance with the amended
consolidated current ratio covenant of the Bank Facility, the Finance Facility
and the GE term loan. The amended 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.
For the quarter ended June 30, 2003, the Company had received covenant waivers
from Regions Bank, EDC and GE for the non-compliance at that time. In addition,
the Company amended the consolidated current ratio financial covenant so that
the Company would 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 was to return to 1.30 to 1 in the first quarter of
2004. However, the Company did not meet the amended consolidated current ratio
covenant as of September 30, 2003 and received covenant waivers from Regions
Bank, EDC and GE for the non-compliance. In addition, the Company amended the
consolidated current ratio financial covenant again so that the Company will
have to meet a consolidated current ratio of 1.00 to 1 as of December 31, 2003
and 1.10 to 1 as of March 31, 2004. The consolidated current ratio requirement
returns to 1.30 to 1 in the second quarter of 2004. These measures have enhanced
the Company's ability to achieve compliance; however, there can be no assurance
that continued compliance will be maintained. If compliance is not maintained,
all credit agreements could be declared to be in default and creditors have the
right to seize the applicable collateral. The Company's obligations under its
credit agreements are secured by substantially all of the Company's assets. Any
defaults under the credit agreements would adversely impact the Company's
ability to sustain its operations in the normal course and have a material
adverse effect on its financial condition and results of operations.
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 the United
9
States District Court for the Eastern District of Louisiana. The lawsuit was
dismissed on December 19, 2002 for failure to state a claim upon which relief
could be granted. The plaintiffs have appealed to the United States Court of
Appeals for the Fifth Circuit. Oral arguments have been completed and the
Company is awaiting a decision of the court. The Company believes the
allegations in this lawsuit are without merit and continues to vigorously defend
this lawsuit. Even so, an adverse outcome in this class action litigation could
have a material adverse effect on the Company's financial condition or results
of operations.
The Company was 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 disputed the
plaintiff's interpretation of certain provisions regarding the services to be
provided and the calculation of fees allegedly earned. The case was settled in
October 2003 upon terms the Company considers favorable.
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, 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 $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 released the vessel from arrest and Cable Shipping, Inc. placed the
$1.5 million obtained by it through the drawdown on the letter of credit into an
escrow account. In November 2003, a London arbitrator issued a ruling against
the Company's recission claim, finding that the Company was not entitled to
terminate the charter, but did rule in favor of the Company on the warranty
claim for breach of contract. The Company intends to appeal the arbitrator's
ruling on several issues and intends to continue to vigorously pursue this
matter. An interim award of $2.2 million was made in favor of Cable Shipping,
Inc. Both parties are to make additional submissions regarding quantum of
damages and further interim amounts, in addition to the final award, may be
awarded to Cable Shipping, Inc. The Company has recorded the full amount of the
interim award in its financial statements as of September 30, 2003.
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 September 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.
In July 2003, the Company filed a lawsuit (Torch Offshore, Inc. et al v. Stolt
Offshore, Inc., Algonquin Gas Transmission Company and Duke Energy, No. 03-1915,
filed in the United States District Court, Eastern District of Louisiana on July
3, 2003) against Stolt Offshore, Inc. (Stolt), Algonquin Gas Transmission
Company (Algonquin) and Duke Energy (Duke), parent company of Algonquin, seeking
recovery of approximately $7.3 million related to work completed for Stolt in
Boston, Massachusetts. The
10
Company worked as a subcontractor to Stolt, who was engaged by Algonquin to
complete the Boston Hubline project, an underwater pipeline crossing the Boston
Harbor. The lawsuit alleges that the Company did not receive all compensation to
which the Company was entitled pursuant to the subcontract the Company had with
Stolt. Two other subcontractors to Stolt are also plaintiffs in the lawsuit.
Additionally, the Company has filed a lawsuit in Massachusetts (Civil Action No.
03-01585), which includes a claim for breach of contract as well as a claim to
assert a mechanic's lien against Algonquin's easement located in Weymouth,
Norfolk County, Massachusetts. All proceedings are in early procedural phases,
with pending motions regarding lack of jurisdiction, requests for summary
judgment, motions to stay, etc. 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.
The Company has executed contracts with several critical equipment suppliers
related to the conversion of the Midnight Express. In December 2002, the Company
entered into a contract with Davie Maritime Inc. of Quebec, Canada to complete
the conversion of the Midnight Express at a contract value of $25.6 million
($37.9 million inclusive of assigned critical equipment supplier contracts)
which became effective in April 2003. The remaining outstanding contracts for
the conversion of the Midnight Express, including the Davie Maritime Inc.
contract described above, aggregate $68.6 million, of which $52.1 million had
been paid as of September 30, 2003. In the event the Company terminates these
contracts, the Company is required to pay certain of these suppliers' costs
incurred to date while other suppliers are entitled to the full value of the
contract, depending upon the terms of the relevant agreement. The Company
believes its present termination cost exposure on these contracts totals
approximately $16.2 million.
In October 2003, Davie Maritime Inc. indicated to the Company that they will
claim additional funds under the contract and will deliver the Midnight Express
later than contractually stipulated on the original time schedule (originally
December 26, 2003), although no formal request has been made to date. It is
currently uncertain to what extent such potential delays may occur and the
impact such matters may have with respect to the construction project. The
Company is in the process of investigating the matter with Davie Maritime Inc.
as well as claims for liquidated damages of the conversion contract and the
guaranty of Investissement Quebec. If such claims transpire, they could
negatively impact the conversion of the project's financing arrangement to term
status and delay the entrance of the Midnight Express into the Company's active
fleet which could result in a material adverse effect on the Company's 2004
results of operations and the Company's ability to service its debt based upon
the current debt schedule. In the event the Midnight Express delivery date is
substantially extended, the current debt agreement will have to be renegotiated
to accommodate such late delivery.
11
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
expected to be presented to the FASB for clearance in the first quarter of 2004
and would be applicable for fiscal years beginning after December 15, 2004. If
adopted in its present form, the portion of this SOP relating to planned major
maintenance activities would require the Company 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 October
1, 2003 for VIEs existing prior to February 1, 2003. The Company has no VIEs and
believes there will be no material impact on the financial position or results
of operations from the adoption of FIN 46.
12
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
is being converted to a dynamically positioned (DP-2) offshore construction
vessel with our patented pipelay system at an estimated cost of approximately
$90.0 - $95.0 million. In December 2002, we committed to purchase a cable-lay
vessel, renamed the Midnight Wrangler, for the purpose of deepwater pipelay and
subsea construction. We took possession of this vessel in March 2003 and the
vessel entered our active fleet in August 2003 after various modifications 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.
13
During the three months ended September 30, 2003, we incurred approximately $0.3
million of costs to establish and commence bidding operations in Mexico through
our wholly-owned subsidiary, Torch Offshore de Mexico S. de R.L. de C.V. The
costs incurred during the third quarter of 2003 mostly relate to personnel costs
associated with the submission of a pipelay bid to Petroleos Mexicanos (PEMEX)
which we were unsuccessful in attaining. However, we expect additional bid
requests to be released by PEMEX in the near future and we will continue to bid
on those projects that we believe our fleet, personnel and financial
capabilities are best suited to compete for.
In October 2003, the shipyard converting the Midnight Express, Davie Maritime
Inc., indicated to us that they will claim additional funds under the contract
and will deliver the vessel later than contractually stipulated on the original
time schedule (originally December 26, 2003), although no formal request has
been made to date. It is currently uncertain to what extent such potential
delays may occur and the impact such matters may have with respect to the
construction project. We are in the process of investigating the matter with
Davie Maritime Inc. as well as claims for liquidated damages of the conversion
contract and the guaranty of Investissement Quebec. If such claims transpire,
they could negatively impact the conversion of the project financing arrangement
to term status and delay the entrance of the Midnight Express into our active
fleet which could result in a material adverse effect on our 2004 results of
operations and our ability to service our debt based upon the current debt
schedule. In the event the Midnight Express delivery date is substantially
extended, the current debt agreement will have to be renegotiated to accommodate
such late delivery.
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;
14
>> 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 as deepwater installations typically
require much more engineering design work than Shelf installations.
During 2003, market conditions in the Gulf of Mexico have remained relatively
weak as offshore drilling has remained depressed. Although the U.S. land rig
count has increased, a similar development has not transpired in offshore
drilling. As of a recent date, there were 26% fewer jack-up rigs in the Gulf of
Mexico than just two years ago. These forces have driven market prices to lower
levels, and as a result, have adversely impacted the gross margins that the
Company has traditionally experienced.
As a result of these market conditions and the recent arbitration ruling in the
Midnight Hunter case, we have experienced significant financial losses in 2003.
We have a significant working capital deficit position primarily resulting from
the current classification of the Midnight Express construction finance facility
which matures in mid-2004, the construction project for which has recently
experienced certain delays in impacting its estimated date of completion. In
addition, for the two most recent fiscal quarters, we were not in compliance
with certain covenants under our debt agreements and had to obtain waivers and
certain revisions to prospective financial performance measurement ratios from
its lenders to enhance our ability to maintain compliance. These conditions
place a high degree of measure on our liquidity management and could ultimately
impact our operations and future business plans. Management believes, however,
that we have the ability to sustain our operations and meet our financial
commitments, at least for the near-term, through effective management of our
operations and the available liquidity provided through our credit facilities.
However, if we continue to incur significant cash losses or if availability
provided through our credit facilities is curtailed, our ability to continue to
manage our liquidity needs and meet our operating and other financial
commitments may be jeopardized in the future.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2003 TO THE QUARTER ENDED
SEPTEMBER 30, 2002
The following table highlights revenue days (days of vessel utilization),
revenue and gross profit for the quarters ended September 30, 2003 and September
30, 2002.
15
(dollars in thousands, except per revenue day,
unaudited)
QUARTER ENDED SEPTEMBER 30,
---------------------------
2003 2002
--------- ---------
Revenue Days 484 503
Revenue $15,262 $13,833
Gross Profit $ 1,491 $ 2,591
Average per Revenue Day:
Revenue $31,533 $27,501
Gross Profit $ 3,081 $ 5,151
Revenues. Revenues were $15.3 million for the three months ended September 30,
2003 compared to $13.8 million for the three months ended September 30, 2002, an
increase of 10.3%. The increase in third quarter 2003 revenues was caused by a
14.7% increase in the average revenue per revenue day experienced by our fleet
offset slightly by a decline in the number of revenue days worked by our fleet.
Average revenue per revenue day in the third quarter of 2003 was $31,533 as
compared to the average revenue per revenue day of $27,501 in the third quarter
of 2002. Our fleet worked 484 revenue days in the third quarter of 2003
resulting in a utilization rate of 62%, compared to 503 revenue days worked in
the three months ended September 30, 2002, or a 64% utilization rate. The
Midnight Wrangler, the newest addition to the fleet, added 19 revenue days
during the 2003 third quarter as it joined the active fleet in late August 2003.
In addition, the Midnight Runner added 22 revenues days in the third quarter of
2003 as compared to zero revenue days during the same period of 2002 and the
Midnight Dancer added 68 revenue days during the 2003 third quarter as compared
to 51 revenue days in the 2002 second quarter. However, the Midnight Fox,
Midnight Eagle and Midnight Star contributed fewer revenue days in the third
quarter of 2003 than in the same period of 2002. Finally, the Midnight Hunter
had contributed 35 revenue days in the three months ended September 30, 2002,
but zero revenue days during the third quarter of 2003 as the vessel is no
longer in the fleet.
Gross Profit. Gross profit (defined as revenues less cost of sales) was $1.5
million (9.8% of revenues) for the three months ended September 30, 2003,
compared to $2.6 million (18.7% of revenues) for the three months ended
September 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 $0.7 million of costs related to the termination
of the Midnight Hunter charter combined with higher subcontract costs and direct
labor costs, an increase in insurance costs, an increase in catering costs, and
higher costs for support vessels and job consumables in the third quarter of
2003 than in the third quarter of 2002. These factors were offset somewhat by
higher revenues in the third quarter of 2003 when compared to the third quarter
of 2002.
Depreciation and Amortization. Depreciation and amortization expense was $2.0
million for the three months ended September 30, 2003 compared to $1.8 million
for the three months ended September 30, 2002, an increase of 7.7%. This
increase was the result of the addition of depreciation for the Midnight
Wrangler and the Midnight Gator during the third quarter of 2003 in addition to
the commencement of depreciation on certain office equipment. In addition, the
amortization of the Midnight Eagle drydock expenses was higher in the third
quarter of 2003 as compared to the same period of 2002 as the vessel was
drydocked in the second half of 2002. These increases were offset by minimal
decreases in the depreciation of the Midnight Hunter and the amortization of
drydock costs of the Midnight Dancer.
General and Administrative Expenses. General and administrative expenses totaled
$1.6 million (10.6% of revenues) for the three months ended September 30, 2003
compared to $1.2 million (8.9% of revenues) for the three months ended September
30, 2002. The third quarter 2003 general and administrative
16
expenses were higher due to increases in legal expenses (of which $0.2 million
related to legal expenses associated with the Midnight Hunter termination) and
personnel costs offset minimally by a decline in investor relations costs and
consulting fees.
Interest Income, Net. Net interest income was zero for the three months ended
September 30, 2003 compared to net interest income of $18,000 for the three
months ended September 30, 2002. The decline in net interest income reflects the
lower cash balances in the third quarter of 2003 versus the year-ago period
because of the use of cash related to the expansion of our fleet and the
purchase and conversion of the Midnight Express. We capitalized all of our third
quarter 2003 interest costs, totaling $0.5 million, in relation to the
conversion of the Midnight Express.
Income Taxes. We recorded a $0.7 million benefit (a 35% effective tax rate)
during the three months ended September 30, 2003. We recorded a $0.2 million
benefit (a 35% effective tax rate) during the three months ended September 30,
2002.
Net Loss. Net loss for the three months ended September 30, 2003 was $1.4
million, compared with a net loss of $0.3 million for the three months ended
September 30, 2002.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
The following table highlights revenue days (days of vessel utilization),
revenue and gross profit for the nine-month periods ended September 30, 2003 and
September 30, 2002.
(dollars in thousands, except per revenue day,
unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
----------- ------------
Revenue Days 1,478 1,456
Revenue $46,167 $43,468
Gross Profit $ 6,151 $ 8,773
Average per Revenue Day:
Revenue $31,236 $29,854
Gross Profit $ 4,162 $ 6,025
Revenues. Revenues were $46.2 million for the nine months ended September 30,
2003 compared to $43.5 million for the nine months ended September 30, 2002, an
increase of 6.2%. The increase in revenues for the nine-month period ended
September 30, 2003 as compared to the year-ago period is primarily the result of
an increase in the average revenue per revenue day combined with an increase in
the number of revenue days worked by the fleet. During the first nine months of
2003, average revenue per revenue day increased 4.6% to $31,236 per revenue day
as compared to $29,854 per revenue day in the first nine months of 2002. Our
fleet worked 1,478 revenue days in the first nine months of 2003 resulting in a
utilization rate of 62%, compared to 1,456 revenue days worked in the nine
months ended September 30, 2002, or a 64% utilization rate. The Midnight Eagle
and the Midnight Rider had increases in revenue days during the first nine
months of 2003 as compared to the 2002 period. The Midnight Eagle worked 179
revenue days in the nine months ended September 30, 2003 as compared to 114
revenue days in the year-ago period and the Midnight Rider worked 268 revenue
days in the first nine months of 2003 versus 211 revenue days in the same period
of 2002. In addition, the Midnight Wrangler (19 revenue days in year-to-date
2003 versus zero revenue days in year-to-date 2002), the Midnight Brave (203
revenue days in year-to-date 2003 versus 187 revenue days in year-to-date 2002)
and the Midnight Arrow (265
17
revenue days in year-to-date 2003 versus 253 revenue days in year-to-date 2002)
all contributed increases in the 2003 period as compared to the 2002 period. The
increases were offset by declines in utilization from the Midnight Star (108
revenue days in year-to-date 2003 versus 176 revenue days in year-to-date 2002),
the Midnight Fox (216 revenue days in year-to-date 2003 versus 233 revenue days
in year-to-date 2002) and the Midnight Carrier (zero revenue days in
year-to-date 2003 versus 15 revenue days in year-to-date 2002). Finally, the
Midnight Hunter had contributed 35 revenue days in the nine months ended
September 30, 2002, but zero revenue days during the comparable 2003 period as
the vessel is no longer in the fleet.
Gross Profit. Gross profit (defined as revenues less cost of sales) was $6.2
million (13.3% of revenues) for the nine months ended September 30, 2003,
compared to $8.8 million (20.2% of revenues) for the nine months ended September
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
for the nine months ended September 30, 2003 was primarily caused by $2.1
million of costs related to the termination of the Midnight Hunter charter in
the nine months ended September 30, 2003 combined with higher direct labor costs
and fixed vessel wages, an increase in insurance costs, an increase in catering
costs, higher costs for support vessels and job consumables, and higher repairs
and maintenance costs than in the year-ago period. These increases were offset
somewhat by higher revenues in the nine months ended September 30, 2003, lower
subcontract costs and a decrease in equipment rental costs when compared to the
first nine months of 2002.
Depreciation and Amortization. Depreciation and amortization expense was $5.6
million for the nine months ended September 30, 2003 compared to $5.6 million
for the nine months ended September 30, 2002. These parallel results were the
result of the addition of depreciation for the Midnight Wrangler and the
Midnight Gator during the third quarter of 2003 in addition to the commencement
of depreciation on certain office equipment and increases in the depreciation of
the Midnight Runner, Midnight Eagle and certain leasehold improvements. Also,
the amortization of drydocking costs of the Midnight Runner and Midnight Fox
increased in the nine months ending September 30, 2003 as compared to the
year-ago period. These increases were offset by decreases in the depreciation of
the Midnight Hunter and the Midnight Brave and in the amortization of drydock
costs of the Midnight Dancer, Midnight Brave and Midnight Star.
General and Administrative Expenses. General and administrative expenses totaled
$4.3 million (9.4% of revenues) for the nine months ended September 30, 2003
compared to $3.5 million (8.0% of revenues) for the nine months ended September
30, 2002. The general and administrative expenses were higher in the first nine
months of 2003 as compared to the nine months ended September 30, 2002 due to
increases in legal expenses (of which $0.3 million related to legal expenses
associated with the Midnight Hunter termination), personnel costs and
miscellaneous expenses offset by a decline in investor relations costs, taxes
and licenses expense and communications expense.
Interest Income, Net. Net interest income was $1,000 for the nine months ended
September 30, 2003 compared to net interest income of $0.1 million for the nine
months ended September 30, 2002. The decline in net interest income reflects the
lower cash balances in the first nine months of 2003 versus the year-ago period
because of the use 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 $0.9 million, in relation to the
conversion of the Midnight Express.
Income Taxes. We recorded a $1.3 million benefit (a 35% effective tax rate)
during the nine months ended September 30, 2003. We recorded a $0.1 million
benefit (a 35% effective tax rate) during the nine months ended September 30,
2002.
18
Net Loss. Net loss for the nine months ended September 30, 2003 was $2.5
million, compared with the net loss of $0.1 million for the nine months ended
September 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) NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
-------- --------
Cash flows provided by (used in):
Operating activities $ 13,699 $ 4,373
Investing activities (61,298) (20,038)
Financing activities 47,658 (1,989)
-------- --------
Net increase (decrease) in cash and cash equivalents $ 59 $(17,654)
======== ========
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 nine months ended September 30, 2003, our operating
activities provided net cash of $13.7 million as compared to $4.4 million in the
nine months ended September 30, 2002.
Cash flow used in investing activities in the nine months ended September 30,
2003 was related to the purchase of equipment, primarily related to our entrance
into the deepwater market. Cash expenditures totaled $61.3 million for the first
nine months of 2003 compared to $20.0 million for the nine months ended
September 30, 2002, an increase of 206%. The cash expenditures in the first nine
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 $47.7 million in the first nine
months of 2003 and related mostly to the borrowings under our various credit
agreements, primarily the construction finance facility. The first nine months
of 2002 resulted in cash used in financing activities of $2.0 million related
entirely to stock repurchases.
We had negative working capital (current assets less current liabilities) of
$43.9 million at September 30, 2003. This is primarily the result of the
inclusion of $37.8 million of borrowings to finance the Midnight Express in
current liabilities. As this debt is associated with the conversion work on the
Midnight Express, it is classified as current as of September 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 are expected to convert to a
three-year term loan and be classified accordingly.
19
The significant changes in our financial position from December 31, 2002 to
September 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 $63.0 million as of September 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 $67.5 million due the capital expenditures related to the expansion
of our deepwater fleet and our accounts receivable balance has declined by $5.9
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 $71.0 million for the nine months ended September
30, 2003, compared to $20.0 million for the nine months ended September 30,
2002. Capital expenditures in the first nine months of 2003 primarily relate to
the deepwater expansion of our fleet. We currently estimate capital expenditures
for the remainder of 2003 and 2004 to be approximately $27.8 million, primarily
representing the conversion of, and the equipment associated with, the Midnight
Express. We expect to fund these capital requirements from cash flow from
operations and by utilizing our bank and debt facilities. Included in this
estimate are approximately $3.6 million for routine capital and drydock
inspections of our vessels to be incurred over this period.
Regions Bank Facility. In July 2002, we entered into a $35.0 million bank
facility (the "Bank Facility") with Regions Bank consisting of a $25.0 million
asset-based five-year revolving credit facility and a $10.0 million accounts
receivable-based working capital facility. Our ability to use the asset-based
five-year revolving credit facility was suspended in connection with our
financing of the conversion of the Midnight Express. We continue to have
available to us the $10.0 million accounts receivable-based working capital
facility from Regions Bank. Amounts outstanding under the accounts
receivable-based working capital facility may not exceed 85% of eligible trade
accounts receivable. We had $7.4 million outstanding under the $10.0 million
accounts receivable-based working capital facility as of September 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. In July
2003, this letter of credit was drawn by Cable Shipping, Inc., the owners of the
Midnight Hunter. We have recorded the $1.5 million as a liability on our balance
sheet as of September 30, 2003 as part of the receivable line of credit. We had
available borrowing capacity of up to $1.1 million under the $10.0 million
accounts receivable-based working capital facility based upon eligible
receivables at September 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. 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 from the Bank Facility to the
Finance Facility. The $2.7 million standby letter of credit was drawn upon
during the third quarter of 2003.
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
20
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
September 30, 2003, we had $37.8 million outstanding under the $60.0 million
Finance Facility, including the $2.7 million standby letter of credit as
discussed above, leaving us a borrowing capacity of $22.2 million under the
Finance Facility.
Upon achievement of certain construction completion milestones, but no later
than June 30, 2004, the Finance Facility will convert to term status. The term
loan facility would then have a three-year term with a 10-year amortization
payment schedule consisting of semi-annual payments with a balloon payment at
the end of the three-year term. The interest rate for this facility is 3.25%
over LIBOR. Regions Bank and EDC will require us to maintain the same collateral
and covenants as included in the construction financing depicted above.
As of September 30, 2003, we were not in compliance with the amended
consolidated current ratio covenant of 1.00 to 1, as stipulated by the Bank
Facility, the Finance Facility and the GE Commercial Equipment Financing (GE)
term loan (see discussion below). The amended 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. For the quarter ended June 30, 2003, we received covenant
waivers from Regions Bank, EDC and GE for the non-compliance at that time. In
addition, we amended the consolidated current ratio financial covenant 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. However, we did
not meet the amended consolidated current ratio covenant as of September 30,
2003 and received covenant waivers from Regions Bank, EDC and GE for the
non-compliance. In addition, we amended the consolidated current ratio financial
covenant again so that we will have to meet a consolidated current ratio of 1.00
to 1 as of December 31, 2003 and 1.10 to 1 as of March 31, 2004. The
consolidated current ratio requirement returns to 1.30 to 1 in the second
quarter of 2004. These measures have enhanced our ability to achieve compliance;
however, there can be no assurance that continued compliance will be maintained.
If compliance is not maintained, all credit agreements could be declared to be
in default and creditors have the right to seize the applicable collateral. Our
obligations under the credit agreements are secured by substantially all of our
assets. Any defaults under the credit agreements would adversely impact our
ability to sustain our operations in the normal course and have a material
adverse effect on our financial condition and results of operations.
Purchase of the Midnight Wrangler. In December 2002, we entered into a purchase
agreement with Global Marine Systems Limited (Global Marine) for the purchase of
the Wave Alert, to be renamed the Midnight Wrangler, at a cost of approximately
$10.8 million. We took possession of the vessel in March 2003. The purchase of
the vessel was financed by Global Marine over a five-year period with monthly
payments, including 7% per annum interest, of approximately $0.2 million plus a
$1.0 million payment at the purchase in March 2003 and another $1.0 million
payment at the end of the five-year period.
GE 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
21
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 September 30, 2003 (in
thousands):
Payments Due by Period
-------------------------------------------------------
Less Than After 5
--------- -------
Total 1 Year 1-3 Years 4-5 Years Years
------- --------- --------- --------- -------
Finance Facility ................. $37,795 $37,795 $ -- $ -- $ --
Long-Term Debt ................... 17,754 2,866 6,095 6,535 2,258
Capital Lease Obligations ........ 243 243 -- -- --
Operating Leases ................. 6,732 4,207 2,452 73 --
Unconditional Purchase Obligations 16,128 16,128 -- -- --
Other Long-Term Obligations ...... 100 100 -- -- --
------- ------- ------- ------- -------
Total Contractual Cash Obligations $78,752 $61,339 $ 8,547 $ 6,608 $ 2,258
======= ======= ======= ======= =======
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 nine months of 2003, we made payments of approximately $2.7
million for the operating lease obligation relating to our deepwater technology
vessel, the Midnight Arrow, under a five-year charter agreement. We paid
approximately $50.2 million during the first nine months of 2003 in relation to
the purchase price and conversion of the Midnight Express bringing our total as
of September 30, 2003 to $69.7 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. We expect to finance the Midnight Express contracts
with proceeds from the Finance Facility.
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 November 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 September 30, 2003, we have expended approximately $122.3
million (in combined capital expenditures, operating lease payments and purchase
payments) for these vessels, with an additional estimated $30.2 million to be
incurred in associated construction costs, operating lease payments and drydock
expenses through early 2005 (see Note 6 to the financial statements).
22
We believe that our cash flow from operations and the 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
expected to be presented to the FASB for clearance in the first quarter of 2004
and would be applicable for fiscal years beginning after December 15, 2004. If
adopted in its present form, the portion of this SOP relating to planned major
maintenance activities would require us 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 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
23
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 October 1, 2003
for VIEs existing prior to February 1, 2003. We have no VIEs and 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, 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 the United States
District Court for the Eastern District of Louisiana. The lawsuit was dismissed
on December 19, 2002 for failure to state a claim upon which relief could be
granted. The plaintiffs have appealed to the United
24
States Court of Appeals for the Fifth Circuit. Oral arguments have been
completed and we are awaiting a decision of the court. We believe the
allegations in this lawsuit are without merit and we continue to vigorously
defend this lawsuit. Even so, an adverse outcome in this class action litigation
could have a material adverse effect on our financial condition or results of
operations.
We were 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 disputed the plaintiff's
interpretation of certain provisions regarding the services to be provided and
the calculation of fees allegedly earned. The case was settled in October 2003
upon terms we consider favorable.
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, 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. 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. placed the $1.5
million obtained by it through the drawdown on the letter of credit into an
escrow account. In November 2003, a London arbitrator issued a ruling against
our recission claim, finding that we were not entitled to terminate the charter,
but did rule in favor of us on the warranty claim for breach of contract. We
intend to appeal the arbitrator's ruling on several issues and to continue to
vigorously pursue this matter. An interim award of $2.2 million was made in
favor of Cable Shipping, Inc. Both parties are to make additional submissions
regarding quantum of damages and further interim amounts, in addition to the
final award, may be awarded to Cable Shipping, Inc. We have recorded the full
amount of the interim award in the financial statements as of September 30,
2003.
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 September 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.
In July 2003, we filed a lawsuit (Torch Offshore, Inc. et al v. Stolt Offshore,
Inc., Algonquin Gas Transmission Company and Duke Energy, No. 03-1915, filed in
the United States District Court, Eastern District of Louisiana on July 3, 2003)
against Stolt Offshore, Inc. (Stolt), Algonquin Gas Transmission Company
(Algonquin) and Duke Energy (Duke), parent company of Algonquin, seeking
recovery of approximately $7.3 million related to work completed for Stolt in
Boston, Massachusetts. We worked as a subcontractor to Stolt, who was engaged by
Algonquin to complete the Boston Hubline project, an underwater pipeline
crossing the Boston Harbor. The lawsuit alleges that we did not receive all
compensation to which we were entitled pursuant to the subcontract we had with
Stolt. Two other subcontractors to Stolt are also plaintiffs in the lawsuit.
Additionally, we have filed a lawsuit in Massachusetts (Civil Action No.
03-01585), which includes a claim for breach of contract as well as a claim to
assert a mechanic's lien against Algonquin's easement located in Weymouth,
Norfolk County, Massachusetts. All proceedings are in early procedural phases,
with pending motions regarding lack of
25
jurisdiction, requests for summary judgment, motions to stay, etc. 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits filed as part of this report are listed below.
Exhibit 10.1 Waiver and Third Amendment to Amended and Restated Loan
Agreement among Torch Offshore, Inc. and Regions Bank
Exhibit 10.2 Waiver and Third Amendment to Credit Agreement among
Torch Offshore, Inc., Regions Bank and Export
Development Canada
Exhibit 10.3 Waiver and Amendment No. 2 to Loan Agreement dated
March 21, 2003 between General Electric Capital
Corporation, Torch Offshore, L.L.C. and Torch Offshore,
Inc.
Exhibit 10.4 Lease Agreement by and between Thrustmaster of Texas,
Inc. and Torch Offshore, Inc.
Exhibit 10.5 Employment Agreement between Torch Offshore, Inc. and
Patrice Chemin dated September 22, 2003
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 August 8, 2003, we filed a report on Form 8-K, reporting under Item
12, announcing the release of the operating results for the quarter
ended June 30, 2003.
On September 24, 2003, we filed a report on Form 8-K, reporting under
Item 5, announcing the immediate resignation of John Reynolds from the
Company's Board of Directors.
26
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: November 13, 2003 By: /s/ ROBERT E. FULTON
--------------------
Robert E. Fulton
Chief Financial Officer
(Principal Accounting and
Financial Officer)
27
EXHIBIT INDEX
10.1 -- Waiver and Third Amendment to Amended and Restated Loan Agreement among Torch Offshore,
Inc. and Regions Bank
10.2 -- Waiver and Third Amendment to Credit Agreement among Torch Offshore, Inc., Regions Bank and
Export Development Canada
10.3 -- Waiver and Amendment No. 2 to Loan Agreement dated March 21, 2003 between General Electric
Capital Corporation, Torch Offshore, L.L.C. and Torch Offshore, Inc.
10.4 -- Lease Agreement by and between Thrustmaster of Texas, Inc. and Torch Offshore, Inc.
10.5 -- Employment Agreement between Torch Offshore, Inc. and Patrice Chemin dated September 22, 2003
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