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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 0-28316
Trico Marine Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 72-1252405
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 North American Court
Houma, Louisiana 70363
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (504) 851-3833
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Preferred Stock Purchase Rights
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 19, 1999 was approximately $103,407,000.
The number of shares of the Registrant's common stock, $0.01 par value per
share, outstanding at March 19, 1999 was 20,378,416.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting of
stockholders have been incorporated by reference into Part III of this Form
10-K.
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TRICO MARINE SERVICES, INC.
ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
----
PART I................................................................... 1
Items 1 and 2. Business and Properties............................... 1
Item 3. Legal Proceedings..................................... 10
Item 4. Submission of Matters To a Vote Of Security Holders... 10
Item 4A. Executive Officers of The Registrant.................. 10
PART II.................................................................. 12
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters................................... 12
Item 6. Selected Financial Data............................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.................................................. 20
Item 8. Financial Statements and Supplementary Data........... 22
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.................. 48
PART III................................................................. 48
Item 10. Directors and Executive Officers of the Registrant.... 48
Item 11. Executive Compensation................................ 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 48
Item 13. Certain Relationships and Related Transactions........ 48
PART IV.................................................................. 48
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.............................................. 48
SIGNATURES............................................................... 49
FINANCIAL STATEMENT SCHEDULE............................................. S-1
EXHIBIT INDEX............................................................ E-1
i
PART I
Items 1 and 2. Business and Properties
General
Trico Marine Services, Inc. ("Trico" or the "Company") is a leading provider
of marine support vessels to the oil and gas industry in the U.S. Gulf of
Mexico (the "Gulf"), the North Sea and offshore Brazil. The services provided
by Trico's diversified fleet include the transportation of drilling materials,
supplies and crews to offshore facilities, towing mobile drilling rigs and
equipment from one location to another, and support for the construction,
installation, maintenance and removal of those facilities.
The Company has pursued a strategy of growth through acquisitions. As a
result of these acquisitions, Trico is now the second largest owner and
operator of supply boats in the Gulf and a leading operator in the North Sea.
In December 1997, the Company acquired all of the outstanding stock of Saevik
Supply ASA (together with its subsidiaries, "Saevik Supply"), a then publicly-
traded Norwegian company, for approximately $293.7 million, which amount
includes certain costs of the transaction. The acquisition of Saevik Supply
firmly established Trico in the North Sea market and significantly expanded
its international operations. Since its initial public offering in May 1996,
the Company has also acquired 37 supply boats for use in the Gulf at an
aggregate cost of $177.0 million. Trico currently has a total fleet of 101
vessels, including 55 supply vessels, 11 large capacity platform supply
vessels ("PSV"), seven large anchor handling, towing and supply vessels
("AHTS"), 13 crew boats, six lift boats and nine line-handling vessels.
Trico has also expanded its fleet through the construction of six new
vessels consisting of (i) a 275-foot, technologically advanced AHTS for use in
the North Sea, which is expected to be delivered in June 1999, (ii) two 230-
foot deepwater supply boats, one of which was delivered in December 1998 and
the second to be delivered in the second quarter of 1999, (iii) a "small water
area twin hull" crew boat ("SWATH vessel"), which began a five year contract
for Petrobras in Brazil in January 1999, (iv) a 276-foot PSV in Norway, which
began a three-year charter contract in the U.K. sector of the North Sea in
March 1998, and (v) a 200-foot supply boat, which began a four year contract
for Petrobras in Brazil in July 1998. The Company's new vessels are specially
designed vessels to increase the Company's presence in certain international
and deepwater markets.
Trico has been able to increase total revenues and achieve strong operating
results due to its aggressive strategy of growth through acquisitions and
strong vessel day rates and utilization levels. Beginning in the middle of
1998, however, day rates and utilization for the Gulf supply boat fleet began
to decrease in response to declining industry activity in the Gulf primarily
as a result of low oil prices. The entry of newly-built vessels has also
contributed to the increased competitive environment in the Gulf. However, day
rates and fleet utilization for the Company's Gulf supply boat fleet have
continued to decrease in 1999 primarily as a result of decreased industry
activity in the Gulf, and the Company expects day rates and utilization of its
North Sea fleet to also decline in 1999 compared to 1998. The Company cannot
predict when, or if, oil and gas prices will return to levels sufficient to
cause industry activity levels to increase. The Company believes the diversity
and quality of its fleet, the long-term contracts for many of its vessels in
the North Sea and Brazil, and the addition of its new, larger vessels, which
earn higher day rates, will help to mitigate the impact of the current
industry downturn in the Gulf.
The Industry
Marine support vessels are primarily used to transport personnel, equipment
and supplies to drilling rigs, to support the construction and ongoing
operation of offshore oil and gas production platforms and as work platforms
for offshore construction and platform maintenance. The principal services
provided are the transportation of equipment, fuel, water and supplies to
offshore facilities; the transfer of personnel between shore bases and
offshore facilities; and towing services for drilling rigs and platforms. The
principal types of vessels operated by the Company and its competitors can be
summarized as follows:
Supply Boats. Supply boats are generally at least 150 feet in length,
serve drilling and production facilities and support offshore construction
and maintenance work. Supply boats are differentiated from other types of
vessels by cargo flexibility and capacity. In addition to transporting deck
cargo, such as pipe or drummed materials, supply boats transport liquid
mud, potable and drilling water, diesel fuel,
1
dry bulk cement and dry bulk mud. Accordingly, larger supply boats which
have greater liquid mud and dry bulk cement capacities, as well as larger
areas of open deck space than smaller supply boats, are generally in higher
demand than vessels without those capabilities. However, other
characteristics such as maneuverability, fuel efficiency, anchor handling
ability and firefighting capacity may also be in demand in certain
circumstances.
Platform Supply Vessels. PSVs serve drilling and production facilities
and support offshore construction and maintenance work. They are
differentiated from other offshore support vessels by their cargo handling
capabilities, particularly their large capacity and versatility. Utilizing
space on and below deck, they are used to transport supplies such as fuel,
water, drilling fluids, equipment and provisions. PSVs range in size from
150 feet to 275 feet and are particularly suited for supporting large
concentrations of offshore production locations because of their large deck
space and below deck capacities. The Company's PSVs are primarily in this
classification but also are capable of providing construction support
services.
Anchor Handling, Towing and Supply Vessels. AHTSs are used to set anchors
for drilling rigs and tow mobile drilling rigs and equipment from one
location to another. In addition, these vessels typically can be used in
limited supply roles when they are not performing anchor handling and
towing services. They are characterized by large horsepower (generally up
to 18,000 brake horsepower ("BHP") for the most powerful North Sea Class
AHTS vessels), shorter after decks and special equipment such as towing
winches.
Crew Boats. Crew boats are generally at least 100 feet in length and are
chartered principally for the transportation of personnel and light cargo,
including food and supplies, to and among production platforms, rigs and
other offshore installations. These boats can be chartered together with
supply boats as support vessels for drilling or construction operations,
and also can be chartered on a stand-alone basis to support the various
requirements of offshore production platforms. Crew boats are constructed
from aluminum, and as a result generally have useful lives beyond those of
steel-hulled supply boats. These vessels also provide a cost-effective
alternative to airborne transportation services and can operate reliably in
virtually all types of weather conditions. Generally, utilization and day
rates for crew boats are more stable than those of other types of vessels
because crew boats are typically used to provide services for production
platforms and construction projects, as well as for exploration and
drilling activities. The majority of the Company's crew boats are the
larger 120-foot vessels.
Lift Boats. Lift boats are self-propelled, self-elevating and self-
contained vessels that can efficiently assist offshore platform
construction and well servicing tasks that traditionally have required the
use of larger, more expensive, mobile offshore drilling units or derrick
barges. For example, lift boats can dismantle offshore rigs, set production
facilities and handle a variety of tasks for existing platform upgrade
work. These boats have also been used successfully as the main work
platform for applications such as diving and salvaging, and have been used
as an adjacent support platform for applications ranging from crew
accommodations to full workovers on existing platforms. Historically, lift
boats command higher day rates but experience lower average utilization
rates than other classes of marine support vessels. Lift boats have
different water depth capacities, with leg lengths ranging from 65 to 200
feet. The Company's lift boats have leg lengths ranging from 130 to 170
feet, enabling them to operate in water depths where the majority of the
offshore structures currently in the Gulf are located.
Line Handling Boats. Line handling boats are generally outfitted with
special equipment to assist tankers while they are loading from single buoy
mooring systems. These vessels support oil off-loading operations from
production facilities to tankers and transport supplies and materials to
and between deepwater platforms.
Gulf of Mexico. As a result of newly-constructed vessels entering the
market, combined with the low price of oil that led to a decrease in drilling
activity in the Gulf, the Company's average supply boat day rates in the Gulf
decreased to $4,341 for the fourth quarter of 1998 compared to $8,037 in the
fourth quarter of 1997. While average supply boat day rates received by the
Company decreased substantially in 1998, average day rates had increased
substantially between 1995 and 1997. The Company's average Gulf supply boat
day rate, which management believes reflected industry-wide day rates,
increased to $8,037 for the fourth quarter of 1997 compared to $6,014 in the
fourth quarter of 1996 and $3,322 in the fourth quarter of 1995. The increased
day
2
rates in 1995 through 1997 were due in part to overall increased activity
levels in the Gulf and in part to the reduction in the number of vessels
serving the Gulf and overall industry consolidation. In response, however, to
the increase in day rates and high utilization levels experienced in 1996 and
1997, newly-built vessels have entered the market. The number of offshore
supply boats available for service in the Gulf decreased from a peak of
approximately 700 in 1985 to approximately 320 at the end of 1997 and then
increased to approximately 349 at the end of 1998. During the same period, the
number of companies operating supply boats of at least 150 feet in length
decreased from approximately 80 to 17. The Company estimates that
approximately 30 new supply boats are still in the process of being
constructed for the Gulf market. Many of these supply boats are 220 feet or
greater in length and are specially designed for the deepwater market.
Although the ongoing transportation, maintenance and repair requirements of
offshore production platforms create a baseline demand for marine support
vessels, incremental demand is primarily impacted by the level of offshore oil
and gas drilling activity. The level of drilling activity is influenced by a
number of factors, including oil and gas prices and drilling budgets of
exploration and production companies. As a result, utilization and day rates
generally correlate to oil and gas prices and drilling activity, both of which
declined in 1998. Natural gas currently accounts for approximately 70% of all
hydrocarbon production in the Gulf, and as a result, activity in this region
is highly dependent upon natural gas prices.
North Sea. The North Sea market area consists of offshore Norway, Denmark,
the Netherlands, Germany, Great Britain and Ireland, and the area west of the
Shetlands. Historically, it has been the most demanding of all exploration
frontiers due to harsh weather, erratic sea conditions, significant water
depth and long sailing distances. Exploration and production operators in the
North Sea market are typically large and well capitalized entities (such as
major oil companies and state owned oil companies), in large part because of
the significant financial commitment required in this market. In comparison to
the Gulf, projects in the region tend to be fewer in number, but larger in
scope, with longer planning horizons. Consequently, vessel demand in the North
Sea is generally more steady and less susceptible to abrupt swings than vessel
demand in other regions. Activity in the North Sea generally is at its highest
level during the months from April to August and at their lowest levels during
November to February.
The North Sea market area can be broadly divided into three areas:
exploration, production platform support and field development or
construction. Support of the volatile exploration segment of the market
represents the primary demand for AHTS vessels. While PSVs also support the
exploration segment, they additionally support the production and field
construction segments, which generally are not affected by frequent short-term
swings in demand. However, because AHTS vessels are capable of performing in a
supply role during periods of weakness in the exploration segment, AHTS
vessels can put downward pressure on PSV demand.
The number of vessels in the North Sea has decreased significantly from the
mid-1980s, from a peak of approximately 290 in 1986 to approximately 215 in
1998. As a result of this reduction, together with increased activity in the
North Sea over the past two years, day rates for AHTSs and PSVs of comparable
size to those operated by the Company have increased significantly since
September 1996. Recently, however, there has been an increase in new building
activity in the North Sea market, and as a result of this, and the decrease in
the price of oil, the Company expects day rates and utilization of its North
Sea fleet to decline in 1999 compared to 1998.
Brazil. Offshore exploration and production activity in Brazil is
concentrated in the deep water Campos Basin, located 60 to 100 miles from the
Brazilian coast. Over 50 fields have been discovered in this Basin, including
an estimated 600 currently producing offshore oil wells. A number of fields in
the Campos Basin are being produced using floating production facilities. In
addition, exploration activity has expanded south to the Santos Basin and to
the northeastern and northern continental shelves. Activity levels in the
Brazilian market have primarily been driven by the establishment by the
Brazilian government of national goals for self-sufficiency in oil production.
The primary operator in this market is Petrobras, the Brazilian national oil
company, but in the future the Brazilian government will allow foreign
participation in exploration and production activities in Brazilian waters.
3
The Company's Fleet
Existing Fleet. The following table sets forth information regarding the
vessels owned by the Company as of March 1, 1999:
No. of
Type of Vessel Vessels Length Horsepower
-------------- ------- --------- -------------
Supply Boats............................. 55(1) 166'-230' 1,950-6,000
PSVs..................................... 11 176'-276' 4,050-10,800
AHTSs.................................... 7(2) 196'-275' 11,140-23,800
Lift Boats............................... 6 130'-170' --
Crew/Line Handling Boats................. 22(3) 105'-125' 1,200-10,600
- -------
(1) Includes the Hondo River, a 230-foot supply vessel that is scheduled for
delivery in the second quarter of 1999.
(2) Includes the Northern Admiral, a 275-foot AHTS that is scheduled for
delivery in the second quarter of 1999.
(3) Includes the Stillwater River, a SWATH crew boat with 10,600 horsepower.
All the Company's PSVs and AHTSs operate in the North Sea, and the average
age of the Company's North Sea fleet is approximately 11 years. All of the
Company's line-handling vessels are located in Brazil and operate under
charters with Petrobras. The average age of the Company's supply boat Gulf
fleet is approximately 18 years. However, the Company believes that its
upgrade and refurbishment program has significantly extended the service lives
of many of its Gulf supply boats.
Vessel Construction. Trico is completing the construction of the Northern
Admiral, a 275-foot multi-purpose AHTS, with 23,800 horsepower that is
scheduled for delivery in Norway in June 1999. The Company is also completing
the construction of the second of two 230-foot deepwater supply vessels in the
Gulf. The first vessel, the Spirit River, was delivered in December 1998,
while the second vessel, the Hondo River, is scheduled to be completed in the
1999 second quarter.
Lift Boat Management. All of the Company's lift boats are managed by Power
Offshore, Inc. ("Power Offshore"), a leading operator of lift boats in the
Gulf, pursuant to a management agreement that expires in March 1999. Power
Offshore receives a management fee of 10% of the lift boats' monthly gross
income and is eligible to receive an incentive fee based on a percentage of
the lift boats' net operating income. Total management and incentive fees paid
to Power Offshore cannot exceed 13% of the lift boats' gross monthly income.
The Company is also required to reimburse Power Offshore for all operating
expenses relating to the lift boats, excluding marketing and general and
administrative expenses. In addition, Power Offshore has a right of first
refusal if the Company intends to sell to a third party any of the lift boats
that are managed by Power Offshore. The Company is currently in the process of
negotiating a new contract with Power Offshore and expects to renew the
existing contract under similar terms and conditions.
Vessel Maintenance. The Company incurs routine drydock inspection,
maintenance and repair costs under U.S. Coast Guard Regulations and to
maintain American Bureau of Shipping ("ABS") certification for its vessels. In
addition to complying with these requirements, the Company also has its own
comprehensive vessel maintenance program which management believes will help
Trico to continue to provide its customers with well maintained, reliable
vessels. The Company incurred approximately $2.3 million, $10.0 million and
$24.2 million in drydocking and marine inspection costs for the years ended
December 31, 1996, 1997 and 1998, respectively.
Operations Bases
The Company supports its operations in the Gulf from a 62.5 acre docking,
maintenance and office facility in Houma, Louisiana located on the
intracoastal waterway that provides direct access to the Gulf. The Company
also leases a 3,600 square foot office in Houston, Texas.
4
The Company's North Sea operations are supported from leased offices in
Fosnavag, Norway, Kristiansand, Norway and Aberdeen, Scotland. Brazilian
operations are supported from a maintenance and administrative facility in
Macae, Brazil, and a sales and administrative office in Rio de Janeiro.
Customers and Charter Terms
The Company has entered into master service agreements with substantially
all of the major and independent oil companies operating in the Gulf. The
majority of the Company's charters in the Gulf are short-term contracts (60-90
days) or spot contracts (less than 30 days) and are cancelable upon short
notice. Because of frequent renewals, the stated duration of charters
frequently has little relationship to the actual time vessels are chartered to
a particular customer.
The principal customers in the North Sea market are major integrated oil
companies and large independent oil and natural gas exploration and production
companies as well as foreign government owned or controlled organizations and
companies that provide logistic, construction and other services to such oil
companies and foreign government organizations. The charters with these
customers are industry standard time charters. Current charters in the North
Sea market include periods ranging from just a few days or months to several
years. Eight of the Company's North Sea vessels are on long-term contracts (at
least one year in duration). Five of these eight vessels are on long-term
charters to Statoil and Norsk Hydro, which run to 2000 and 2005, respectively,
with options. Either charterer can, however, terminate its contract during the
period upon payment of agreed compensation. The Company's remaining North Sea
vessels are chartered on a short-term basis.
Charters are obtained through competitive bidding or, with certain
customers, through negotiation. The percentage of revenues attributable to an
individual customer varies from time to time, depending upon the level of
exploration and development activities undertaken by a particular customer,
the availability and suitability of the Company's vessels for the customer's
projects, and other factors, many of which are beyond the Company's control.
For the years ended December 31, 1996 and December 31, 1997, no customer
accounted for more than 10% of the Company's revenues. For the year ended
December 31, 1998, approximately 16% of the Company's total revenues were
received from Statoil AS.
Competition
The Company's business is highly competitive. Competition in the marine
support services industry primarily involves factors such as price, service
and reputation of vessel operators and crews, and availability and quality of
vessels of the type and size needed by the customer. Although some of the
Company's principal competitors are larger and have greater financial
resources and international experience than the Company, the Company believes
that its operating capabilities and reputation enable it to compete
effectively with other fleets in the markets in which the Company operates. In
addition to the new vessels the Company has built or is building, certain of
the Company's competitors have built, or are building, new vessels for use in
the Gulf, North Sea and other areas in which the Company operates. This new
construction of vessels has increased the levels of competition within these
markets.
Regulation
The Company's operations are materially affected by federal, state and local
regulation, as well as certain international conventions, private industry
organizations and laws and regulations in jurisdictions where the Company's
vessels operate and are registered. These regulations govern worker health and
safety and the manning, construction and operation of vessels. For example,
the Company is subject to the jurisdiction of the U.S. Coast Guard, the
National Transportation Safety Board, the U.S. Customs Service and the
Maritime Administration of the U.S. Department of Transportation, as well as
private industry organizations such as the American Bureau of Shipping. These
organizations establish safety criteria and are authorized to investigate
vessel accidents and recommend improved safety standards.
The U.S. Coast Guard regulates and enforces various aspects of marine
offshore vessel operations, such as classification, certification, routes,
drydocking intervals, manning requirements, tonnage requirements
5
and restrictions, hull and shafting requirements and vessel documentation.
Coast Guard regulations require that each of the Company's vessels be
drydocked for inspection at least twice within a five-year period. The Company
believes it is in compliance in all material respects with all U.S. Coast
Guard Regulations.
Under the Merchant Marine Act of 1920, as amended, the privilege of
transporting merchandise or passengers in domestic waters extends only to
vessels that are owned by U.S. citizens and are built in and registered under
the laws of the U.S. A corporation is not considered a U.S. citizen unless,
among other things, no more than 25% of any class of its voting securities are
owned by non-U.S. citizens. If the Company should fail to comply with these
requirements, during the period of such noncompliance it would not be
permitted to continue operating its vessels in coastwise trade.
The Company's operations are also subject to a variety of federal and state
statutes and regulations regarding the discharge of materials into the
environment or otherwise relating to environmental protection. Included among
these statutes are the Clean Water Act, the Resource Conservation and Recovery
Act ("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), the Outer Continental Shelf Lands Act ("OCSLA") and
the Oil Pollution Act of 1990 ("OPA").
The Clean Water Act imposes strict controls on the discharge of pollutants
into the navigable waters of the U.S., and imposes potential liability for the
costs of remediating releases of petroleum and other substances. The Clean
Water Act provides for civil, criminal and administrative penalties for any
unauthorized discharge of oil and other hazardous substances in reportable
quantities and imposes substantial potential liability for the costs of
removal and remediation. Many states have laws that are analogous to the Clean
Water Act and also require remediation of accidental releases of petroleum in
reportable quantities. The Company's vessels routinely transport diesel fuel
to offshore rigs and platforms, and also carry diesel fuel for their own use.
The Company's supply boats transport bulk chemical materials used in drilling
activities, and also transport liquid mud which contains oil and oil by-
products. All offshore companies operating in the U.S. are required to have
vessel response plans to deal with potential oil spills.
RCRA regulates the generation, transportation, storage, treatment and
disposal of onshore hazardous and non-hazardous wastes, and requires states to
develop programs to ensure the safe disposal of wastes. The Company generates
non-hazardous wastes and small quantities of hazardous wastes in connection
with routine operations, and management believes that all of the wastes that
the Company generates are handled in compliance with RCRA and analogous state
statutes.
CERCLA contains provisions dealing with remediation of releases of hazardous
substances into the environment and imposes strict, joint and several
liability for the costs of remediating environmental contamination upon owners
and operators of contaminated sites where the release occurred and those
companies who transport, dispose of or who arrange for disposal of hazardous
substances released at the sites. Although the Company handles hazardous
substances in the ordinary course of business, the Company's management is not
aware of any hazardous substance contamination for which it may be liable.
OCSLA provides the federal government with broad discretion in regulating
the release of offshore resources of oil and gas production. Because the
Company's operations rely on offshore oil and gas exploration and production,
if the government were to exercise its authority under OCSLA to restrict the
availability of offshore oil and gas leases, such an action would have a
material adverse effect on the Company's financial condition and the results
of operations.
OPA contains provisions specifying responsibility for removal costs and
damages resulting from discharges of oil into navigable waters or onto the
adjoining shorelines. Among other requirements, OPA requires owners and
operators of vessels over 300 gross tons to provide the U.S. Coast Guard with
evidence of financial responsibility to cover the costs of cleaning up oil
spills from such vessels. The Company has provided satisfactory evidence of
financial responsibility to the U.S. Coast Guard for all of its Gulf vessels
over 300 tons.
Among the more significant of the conventions applicable to the Company's
North Sea operations are: (i) the International Convention for the Prevention
of Pollution of the Sea, 1973, 1979 Protocol, (ii) the
6
International Convention on the Safety of Life at Sea, 1974, 1978 and
1981/1983 Protocol, and (iii) the International Convention on Standards of
Training, Certification and Watchkeeping for Seafarers.
The Company believes it is in compliance in all material respects with all
applicable environmental laws and regulations to which it is subject.
Moreover, operations of Company vessels in foreign territories are potentially
subject to similar regulatory controls concerning environmental protection
similar to those in force in the Gulf. The Company believes that compliance
with any existing environmental requirements of foreign governmental bodies
will not materially affect the Company's capital expenditures, earnings, cash
flows or competitive position.
Insurance
The operation of the Company's vessels is subject to various risks, such as
catastrophic marine disaster, adverse weather conditions, mechanical failure,
collision and navigation errors, all of which represent a threat to personnel
safety and to Company vessels and cargo. The Company maintains insurance
coverage against certain of these risks, which management considers to be
customary in the industry. The Company believes that its insurance coverage is
adequate and the Company has not experienced a loss in excess of its policy
limits; however, there can be no assurance that the Company will be able to
maintain adequate insurance at rates which management considers commercially
reasonable, nor can there be any assurance that such coverage will be adequate
to cover all claims that may arise.
Employees
As of March 11, 1999, the Company had 1,203 employees worldwide, including
1,075 operating personnel and 128 corporate, administrative and management
personnel. None of the Company's U.S. employees are unionized or employed
pursuant to any collective bargaining agreement or any similar arrangement.
The Company's Norwegian seamen are covered by three union contracts that are
between the Norwegian Employer Association for Ship and Offshore Vessels and
(i) masters and mates on offshore vessels, (ii) able-bodied seamen,
electricians and cooks and (iii) engineers, respectively. The Company's U.K.
seamen are covered by two union contracts between Guernsey Ship Management
Limited acting on behalf of the Company and two separate unions, respectively.
The Company believes its relationship with its employees is satisfactory and
to date has not been interrupted by strikes or work stoppages.
Cautionary Statements
Certain statements made in this Report that are not historical facts are
"forward-looking statements" as defined in Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-
looking statements may include statements that relate to:
. our objectives, business plans or strategies, and projected or
anticipated benefits or other consequences of such plans or strategies;
. projected or anticipated benefits from future or past acquisitions; and
. projections involving anticipated capital expenditures or revenues,
earnings or other aspects of capital projects or operating results.
Also, you can generally identify forward-looking statements by such
terminology as "may," "will," "expect," "believe," "anticipate," "project,"
"estimate" or similar expressions. We caution you that such statements are
only predictions and not guarantees of future performance or events. In
evaluating these statements, you should consider various risk factors,
including but not limited to the risks listed below. These risk factors may
affect the accuracy of the forward-looking statements and the projections on
which the statements are based.
All phases of our operations are subject to a number of uncertainties, risks
and other influences, many of which are beyond our control. Any one of such
influences, or a combination, could materially affect the
7
results of our operations and the accuracy of forward-looking statements made
by us. Some important factors that could cause actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements include the following:
. dependence on the oil and gas industry, including the volatility of
prices of oil and gas and their effect on industry conditions;
. industry volatility, including the level of offshore drilling and
development activity and changes in the size of the offshore vessel fleet
in areas where we operate due to new vessel construction and the
mobilization of vessels between market areas;
. risks of our growth strategy, including the risks of rapid growth;
. operating hazards, including the significant possibility of accidents
resulting in personal injury, property damage or environmental damage;
. the effect on our performance of regulatory programs and environmental
matters;
. the highly competitive nature of the offshore vessel industry;
. the age of our fleet;
. seasonality of the offshore industry in the Gulf;
. the risks of international operations, including currency fluctuations,
risk of vessel seizure and political instability; and
. the continued active participation of our executive officers and key
operating personnel.
Many of these factors are beyond our ability to control or predict. We
caution investors not to place undue reliance on forward-looking statements.
We disclaim any intent or obligation to update the forward-looking statements
contained in this Report, whether as a result of receiving new information,
the occurrence of future events or otherwise.
A more detailed discussion of certain of the foregoing factors follows.
Market volatility may adversely affect operations
Our operations depend on activity in offshore oil and gas exploration,
development and production. The level of exploration and development activity
has traditionally been volatile as a result of fluctuations in oil and natural
gas prices and their uncertainty in the future. As a result of the decline in
energy prices that began in the middle of 1998, day rates and utilization of
our Gulf supply boat fleet have decreased in response to declining industry
activity. We are unable to predict when, or if, this condition will change. A
further significant decline in the worldwide demand for oil and gas or
prolonged low oil or natural gas prices in the future would likely continue to
depress offshore drilling and development activity. A prolonged low level of
activity in the Gulf and other areas where we operate is likely to adversely
affect the demand for our marine support services and our financial condition
and results of operations.
Charter rates for marine support vessels also depend on the supply of
vessels. Excess vessel capacity in the industry can result primarily from the
construction of new vessels and the mobilization of vessels between market
areas. During the last few years there has been a significant increase in
construction of vessels of the type operated by us, for use both in the Gulf
and the North Sea. The addition of new capacity to the worldwide offshore
marine fleet has increased competition in those markets where we operate. This
new capacity coupled with a prolonged period of low oil and gas prices in the
future would likely have a material adverse effect on our financial condition
and results of operations.
Management of growth may increase operating expenses
We have rapidly expanded our operations through acquisitions in the past few
years. The acquisition of Saevik Supply significantly increased the geographic
scope of our operations and our overall size. Our growth has placed, and may
continue to place, substantial demands on our managerial, operational,
financial and other
8
resources. In order to manage this growth, we will have to continue to invest
in our operations, including our financial and management information systems.
In addition, we will have to continue our efforts to retain, motivate and
effectively manage our employees. This may affect our operating expenses. If
we fail to achieve and manage this growth as planned, this could adversely
affect our business, financial condition and results of operations.
We operate in a highly competitive industry
Our business is highly competitive. Certain of our competitors have
significantly greater financial resources than us and more experience
operating in international areas. Competition in the marine support services
industry primarily involves factors such as:
. price, service and reputation of vessel operators and crews; and
. the quality and availability of vessels of the type and size needed by
the customer.
Operating hazards may increase operating costs; limited insurance coverage
Marine support vessels are subject to operating risks such as catastrophic
marine disaster, adverse weather conditions, mechanical failure, collisions,
oil and hazardous substance spills and navigation errors. The occurrence of
any of these events may result in damage to or loss of our vessels and our
vessels' tow or cargo or other property and in injury to passengers and
personnel. Such occurrences may also result in a significant increase in
operating costs or liability to third parties. We maintain insurance coverage
against certain of these risks, which our management considers to be customary
in the industry. We cannot assure you, however, that we can renew our existing
insurance coverage at commercially reasonable rates or that such coverage will
be adequate to cover future claims that may arise.
Compliance with governmental regulations may impose additional expenditures
Federal, state and local regulations, as well as certain international
conventions, private industry organizations and agencies and laws and
regulations in jurisdictions where our vessels operate and are registered,
materially affect our operations. These regulations govern worker health and
safety and the manning, construction and operation of vessels. These
organizations establish safety criteria and are authorized to investigate
vessel accidents and recommend approved safety standards. If we fail to comply
with the requirements of any of these laws or the rules or regulations of
these agencies and organizations, this could adversely affect our operations.
Our operations also are subject to federal, state and local laws and
regulations that control the discharge of pollutants into the environment and
that otherwise relate to environmental protection. While our insurance
policies provide coverage for accidental occurrence of seepage and pollution
or clean up and containment of the foregoing, pollution and similar
environmental risks generally are not fully insurable. We may incur
substantial costs in complying with such laws and regulations, and
noncompliance can subject us to substantial liabilities. The laws and
regulations applicable to us and our operations may change. If we violate any
of such laws or regulations, this could result in significant liability to us.
In addition, any amendment to such laws or regulations that mandates more
stringent compliance standards would likely cause an increase in our vessel
maintenance expenses.
Seasonality may adversely affect operations
Our marine operations are seasonal and depend, in part, on weather
conditions. Historically, we have enjoyed our highest utilization rates during
the second and third quarters, as mild weather provides favorable conditions
for offshore exploration, development and construction in the Gulf. Adverse
weather conditions during the winter months generally curtail offshore
development operations and can particularly impact lift boat utilization
rates. Activity in the North Sea is also subject to delays during periods of
adverse weather, but is not affected by seasonality to the extent activity in
the Gulf is affected. Accordingly, the results of any one quarter are not
necessarily indicative of annual results or continuing trends.
9
Age of fleet
The average age of our Gulf fleet vessels (based on the date of
construction) is approximately 18 years (approximately 11 years for our North
Sea fleet). Management believes that after a vessel has been in service for
approximately 30 years, repair, vessel certification and maintenance costs may
become no longer economically justifiable. We cannot assure you that we will
be able to maintain our fleet by extending the economic life of existing
vessels through major refurbishment or by acquiring new or used vessels.
Currency fluctuations could adversely affect results of operations
The acquisition of Saevik Supply substantially increased the percentage of
our operations conducted in currencies other than the United States dollar.
Changes in the value of foreign currencies relative to the United States
dollar could adversely affect our results of operations and financial
position. In addition, transaction gains and losses could contribute to
fluctuations in our results of operations. Fluctuations in foreign currency
rates may have a material adverse effect on our results of operations.
Our international operations are subject to a number of risks inherent to
any business operating in foreign countries. These risks include, among
others:
. political instability;
. potential vessel seizure or nationalization of assets;
. currency restrictions and exchange rate fluctuations; and
. import and export quotas and other forms of public and governmental
regulation.
All of these risks are beyond our control. We cannot predict the nature and
the likelihood of any such events. However, if such an event should occur, it
could have a material adverse effect on our financial condition and results of
operations.
We depend on key personnel
We depend on the continued services of our executive officers and other key
management personnel. If we were to lose any of these officers or other
management personnel, it could adversely affect our operations.
Item 3. Legal Proceedings
The Company is involved in various legal and other proceedings that are
incidental to the conduct of its business. The Company believes that none of
these proceedings, if adversely determined, would have a material adverse
effect on its financial condition, results of operations or cash flows.
Item 4. Submission of Matters To a Vote Of Security Holders
None.
Item 4A. Executive Officers of The Registrant
The name, age and offices held by each of the executive officers of the
Company as of March 11, 1999 are as follows:
Name Age Position
---- --- --------
Ronald O. Palmer..... 52 Chairman of the Board
Thomas E. Fairley.... 51 President and Chief Executive Officer
Victor M. Perez...... 46 Vice President, Chief Financial Officer and Treasurer
Kenneth W. Bourgeois. 51 Vice President and Controller
Michael D. Cain...... 50 Vice President, Marketing
C. Douglas Stroud.... 47 Vice President, Business Development
Charles E. Tizzard... 48 Vice President, Administration
10
Ronald O. Palmer has been a director of the Company since October 1993 and
Chairman of the Board since May 1997. Mr. Palmer also served as Executive Vice
President from February 1995 to May 1997. Mr. Palmer joined Mr. Fairley in
founding the Company's predecessor in 1980 and served as Vice President,
Treasurer and Chief Financial Officer until February 1995. From 1974 to 1980,
Mr. Palmer was employed by GATX Leasing Corporation ("GATX") where he was
responsible for the marketing of financial leases for industrial and marine
equipment in eight southwestern states and all marine activity in the Gulf of
Trans Marine International ("TMI"), an offshore marine service company and
wholly-owned subsidiary of GATX.
Thomas E. Fairley, who co-founded the Company's predecessor with Mr. Palmer
in 1980, has been President and Chief Executive Officer and a director of the
Company since October 1993. From October 1993 to May 1997, Mr. Fairley also
served as Chairman of the Board of the Company. From 1978 to 1980, Mr. Fairley
served as Vice President of TMI and from 1975 to 1978, Mr. Fairley served as
General Manager of International Logistics, Inc. ("ILI"), a company engaged in
the offshore marine industry. For more than five years prior to joining ILI,
Mr. Fairley held various positions with Petrol Marine Company, an offshore
marine service company. Mr. Fairley is also a director of Gulf Island
Fabrication, Inc.
Victor M. Perez has served as Vice President, Chief Financial Officer and
Treasurer of the Company since February 1995. From 1990 to 1995, Mr. Perez
served as Senior Vice President--Corporate Finance of Offshore Pipelines, Inc.
Mr. Perez was Vice President--Investments for Graham Resources, Inc., from
August 1987 to October 1990 and from January 1976 to August 1987 served as a
Vice President with InterFirst Bank Dallas in its international and energy
banking groups.
Kenneth W. Bourgeois has served as the Company's Vice President and
Controller since October 1993. Mr. Bourgeois also served as Controller of the
Company's predecessor from December 1981 to October 1993. From 1972 to
December 1981, Mr. Bourgeois worked for George Engine Company, Inc., where he
held the position of Assistant Controller and subsequently, Director of
Internal Auditing. From 1969 to 1972, Mr. Bourgeois was employed by Price
Waterhouse & Co. Mr. Bourgeois is a Certified Public Accountant.
Michael D. Cain has served as the Company's Vice President--Marketing since
February 1993. From 1986 to 1993, Mr. Cain served as Marketing Manager for the
Company's predecessor. Prior to 1986, Mr. Cain served in the same capacity for
Seahorse, Inc., an offshore marine services company.
C. Douglas Stroud joined the Company in October 1998 and has served as the
Company's Vice President, Business Development since March 1999. Mr. Stroud
was formerly with Ceanic Corporation (now Stolt Comex Seaway) from April 1997
to September 1998 as Corporate Vice President for Technical Sales, and from
1984 to 1997 as Vice President of Sales and Marketing for Perry Tritech, Inc.,
a leading subsea robotic and ROV manufacturing company.
Charles E. Tizzard has served as the Company's Vice President--
Administration since June 1997. From October 1994 to June 1997, Mr. Tizzard
served as Manager of Administration and Planning for the Company. From 1987 to
October 1994, Mr. Tizzard served as Vice President and General Manager of
Chrysler Capital Corporation's ("Chrysler Capital") Marine Asset Management
subsidiary and from 1979 to 1987 he served as District Operations Manager for
Chrysler Capital.
11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock, $0.01 par value per share (the "Common Stock"),
is listed for quotation on the Nasdaq National Market under the symbol "TMAR."
At March 19, 1999, the Company had 143 holders of record of Common Stock.
The following table sets forth the range of high and low closing bid prices
of the Company's Common Stock as reported by the Nasdaq National Market for
the periods indicated below (adjusted to give retroactive effect for a 100%
stock dividend paid in June 1997).
High Low
------- -------
1997
First quarter........................................... $28.125 $17.375
Second quarter.......................................... 24.375 15.250
Third quarter........................................... 37.000 21.500
Fourth quarter.......................................... 45.500 22.875
1998
First quarter........................................... $30.500 $15.750
Second quarter.......................................... 23.563 12.750
Third quarter........................................... 13.875 5.625
Fourth quarter.......................................... 9.250 4.375
1999
First quarter (through March 19, 1999).................. $ 6.438 $ 4.250
The Company has never paid cash dividends on its Common Stock. The Company
intends to retain any future earnings otherwise available for cash dividends
on its Common Stock for use in its operations and for expansion and does not
anticipate paying any cash dividends. In addition, the Company's Bank Credit
Facility contains provisions that prohibit the Company from paying dividends
on its Common Stock. Any future determination to pay cash dividends will be
made by the Board of Directors in light of the Company's earnings, financial
position, capital requirements, credit agreements and such other factors as
the Board of Directors deems relevant at that time.
12
Item 6. Selected Financial Data
The selected financial data presented below for the five fiscal years ended
December 31, 1998 is derived from the Company's audited Consolidated Financial
Statements and Notes thereto. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included
elsewhere in this report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Year ended December 31,
--------------------------------------------
1998 1997(1) 1996 1995 1994
-------- -------- -------- ------- -------
(Financial data in thousands, except per
share amounts)
Statement of Operations Data:
Revenues.......................... $186,245 $125,480 $ 53,484 $26,698 $29,034
Direct operating expenses......... 92,122 50,945 29,894 21,972 21,476
Depreciation and amortization..... 29,528 12,734 4,478 2,740 2,786
-------- -------- -------- ------- -------
Operating income.................. $ 64,595 $ 61,801 $ 19,112 $ 1,986 $ 4,772
======== ======== ======== ======= =======
Income (loss) before extraordinary
item............................. 25,280 35,299 10,891 (1,299) 486
Extraordinary item net of taxes... -- -- (917) -- --
-------- -------- -------- ------- -------
Net income (loss)................. 25,280 $ 35,299 $ 9,974 $(1,299) $ 486
======== ======== ======== ======= =======
Diluted Per Share Data:(2)
Income (loss) before extraordinary
item............................. 1.20 $ 2.11 $ 0.88 $ (0.21) $ 0.08
Extraordinary item, net of tax.... -- -- (0.07) -- --
-------- -------- -------- ------- -------
Net income (loss)................. $ 1.20 $ 2.11 $ 0.81 $ (0.21) $ 0.08
======== ======== ======== ======= =======
Balance Sheet Data:
Working capital (deficit)......... $ 9,358 $ 7,831 $ 10,753 $ (844) $ 1,550
Property and equipment, net....... $570,409 $505,056 $119,142 $39,264 $38,508
Total assets...................... $768,890 $698,781 $144,035 $52,113 $51,419
Long term debt.................... $402,518 $359,385 $ 21,000 $36,780 $35,452
Stockholders' equity.............. $284,240 $261,500 $103,980 $ 5,712 $ 7,002
- -------
(1) The data for 1997 reflects results of operations of Saevik Supply for
December 1997 only and the consolidation of Saevik Supply's assets and
liabilities with those of the Company at December 31, 1997.
(2) Per share data has been adjusted to reflect a 3.0253-for-1 common stock
split effective April 26, 1996 and a 100% stock dividend effective June 9,
1997.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's business strategy has focused on growth and diversifying its
operations through acquisitions. Trico is now the second largest owner and
operator of supply boats in the Gulf and a leading operator in the North Sea.
Trico implemented this strategy by acquiring Saevik Supply in December 1997
for a total acquisition cost of approximately $293.7 million in cash and
purchasing, during 1996 and 1997, 37 supply boats for use in the Gulf at an
aggregate cost of $177.0 million. The Company has also constructed, or is
completing the construction of, six new vessels, and has upgraded and
refurbished the majority of its Gulf supply boat fleet. The Company's newly-
constructed vessels are specially designed vessels to increase the Company's
international and deepwater capabilities.
The Company's results of operations are affected primarily by day rates and
fleet utilization. Demand for the Company's vessels is primarily impacted by
the level of offshore oil and gas drilling activity, which can be influenced
by a number of factors, including oil and gas prices and drilling budgets of
exploration and production companies, and, to a lesser extent, the market for
the maintenance, repair and salvage of existing platforms. As a result, trends
in oil and gas prices may significantly affect utilization and day rates. The
weakness in oil and gas prices experienced in 1998, which resulted in the
lowest price for both oil and gas in recent years, has led to
13
a general decline in activity in most areas of the Company's business and has
significantly affected the Company's 1998 results of operations. Day rates and
fleet utilization for the Company's Gulf supply boat fleet have continued to
decrease in 1999 primarily as a result of decreased drilling and development
activity in the Gulf. The Company cannot predict when, or if, oil and gas
prices will return to levels sufficient to cause industry activity levels to
increase.
The Company's day rates and utilization rates are also affected by the size,
configuration and capabilities of the Company's fleet. In the case of supply
boats, PSVs and AHTSs, the deck space and liquid mud and dry bulk cement
capacity are important attributes. In certain markets and for certain
customers, horsepower and dynamic positioning systems are also important
requirements. For crew boats, size and speed are important factors, and in the
case of lift boats, longer leg length and greater crane capacity add
versatility and marketability. The Company's day rates and utilization can
also be affected by the supply of other vessels available in a given market
with a similar configuration and capabilities.
The Company's operating costs primarily are a function of fleet size and
utilization levels. The most significant direct operating costs are wages paid
to vessel crews, maintenance and repairs and marine insurance. Generally,
increases or decreases in vessel utilization only affect that portion of the
Company's direct operating costs that is incurred when the vessels are active.
As a result, direct operating costs as a percentage of revenues may vary
substantially due to changes in day rates and utilization.
In addition to these variable costs, the Company incurs fixed charges
related to the depreciation of its fleet and costs for the routine drydock
inspection, maintenance and repair designed to ensure compliance with U.S.
Coast Guard regulations and to maintain ABS certification for its vessels.
Maintenance and repair expense and marine inspection amortization charges are
generally determined by the aggregate number of drydockings and other repairs
undertaken in a given period. Costs incurred for drydock inspection and
regulatory compliance are capitalized and amortized over the period between
such drydockings, typically two to three years.
Results of Operations
The table below sets forth by vessel class, the average day rates and
utilization for the Company's vessels and the average number of vessels owned
during the periods indicated.
Year ended December 31
------------------------
1998 1997 1996
------- ------- ------
Average vessel day rates:
Supply boats........................................ $ 6,844 $ 7,377 $4,917
Supply/Anchor handling (North Sea)(1)............... 14,604 14,056 --
Lift boats.......................................... 6,199 5,955 4,995
Crew/line handling boats............................ 2,056 1,964 1,579
Average vessel utilization rate:
Supply boats........................................ 62% 85% 94%
Supply/Anchor handling (North Sea)(1)............... 95% 97% --
Lift boats.......................................... 63% 71% 67%
Crew/line handling boats............................ 94% 97% 95%
Average number of vessels:
Supply boats........................................ 50.6 42.0 21.2
Supply/Anchor handling (North Sea)(1)............... 16.8 1.4 --
Lift boats.......................................... 6.0 6.0 6.0
Crew/line handling boats............................ 21.8 23.8 23.3
- -------
(1) Includes results of operations of the vessels purchased through the
acquisition of Saevik Supply in December 1997. The 1997 day rate and
utilization data is for December only.
14
Set forth below is the Company's internal allocation of its charter revenues
and charter revenues less direct operating expenses among vessel classes for
each of the periods indicated.
Year ended December 31,
---------------------------------------
1998 % 1997 % 1996 %
-------- --- -------- --- ------- ---
Charter Revenues:
Supply boats....................... $ 78,777 42% $ 95,817 76% $35,723 67%
Supply/Anchor handling (North
Sea)(1)........................... 85,089 46% 7,244 6% -- --
Crew and line-handling boats....... 12,776 7% 11,989 10% 9,733 18%
Lift boats......................... 9,495 5% 10,426 8% 7,986 15%
-------- --- -------- --- ------- ---
$186,137 100% $125,476 100% $53,442 100%
======== === ======== === ======= ===
Charter Revenues less direct
operating expenses:
Supply boats....................... $ 47,299 41% $ 69,145 83% $23,481 80%
Supply/Anchor handling (North
Sea)(1)........................... 60,115 53% 4,739 6% -- --
Crew and line-handling boats....... 3,101 3% 4,913 6% 2,645 9%
Lift boats......................... 3,813 3% 4,412 5% 3,166 11%
-------- --- -------- --- ------- ---
$114,382 100% $ 83,209 100% $29,292 100%
======== === ======== === ======= ===
- -------
(1) Includes results of operations of the vessels purchased through the
acquisition of Saevik Supply in December 1997. Data for 1997 is for
December only.
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997
Revenues for 1998 were $186.2 million, an increase of 48.4%, compared to
$125.5 million in revenues for 1997. This increase was primarily due to the
addition, for a full year, of North Sea operations that were acquired in
December 1997. The increase in revenues from the Company's North Sea
operations was partially offset by a decrease in revenues from the Gulf of
Mexico, principally due to the decrease in average day rates and utilization
for the Company's supply boats. This decrease in supply boat day rates and
utilization was the result of reduced industry activity in the Gulf. Day rates
and utilization for the Company's supply boats was also impacted by the market
entry of newly-constructed vessels, which have increased the competitive
environment in the Gulf.
Average supply boat day rates in the Gulf decreased 7.2% to $6,844 for 1998,
compared to $7,377 for 1997; average lift boat day rates increased 4.1% to
$6,199, compared to $5,955 for 1997; and average day rates for the Company's
crew boats and line handling vessels increased 4.7% to $2,056, compared to
$1,964 during 1997.
Utilization rates for the Company's Gulf supply boats was also impacted by
the significant vessel downtime associated with the Company's extensive vessel
upgrade and refurbishment program for the Gulf of Mexico supply boat fleet.
Utilization for the Company's Gulf supply boat fleet decreased to 62% in 1998
from 85% in 1997. Utilization for the Company's lift boats was 63% during
1998, compared to 71% for the year-ago period. Utilization for the crew boats
and line handling vessels decreased to 94% in 1998, compared to 97% in 1997.
During 1998, direct vessel operating expenses increased to $71.8 million
(38.6% of revenues), compared to $42.2 million (33.6% of revenues) for 1997,
due to the addition of the North Sea fleet and the consolidation for
accounting purposes of the Company's Brazilian subsidiary on July 1, 1998.
Direct vessel operating expenses increased as a percentage of revenues as a
result of the decrease in average vessel day rates and utilization levels
during 1998 in the Gulf.
Depreciation and amortization expense increased to $29.5 million for 1998,
up from $12.7 million for 1997, due to the acquisition of the North Sea
vessels in December 1997, and the expanded vessel fleet in the Gulf of Mexico
and Brazil. Amortization of marine inspection costs increased to $8.9 million
for 1998, from $3.0 million in 1997, because of the amortization of increased
drydocking and marine inspection costs associated with the Company's fleet
upgrade and refurbishment program.
15
General and administrative expenses increased to $10.9 million (5.9% of
revenues) in 1998, from $5.7 million (4.6% of revenues) for 1997, as a result
of the addition of the North Sea operations and the consolidation of the
Company's Brazilian subsidiary beginning July 1, 1998. General and
administrative expenses, as a percentage of revenues, increased in 1998 due to
the decrease in average supply boat day rates and utilization levels in the
Gulf of Mexico.
Interest expense increased to $27.7 million during 1998 compared to $8.0
million for 1997. This increase was due to increased debt in 1998 associated
with the acquisition of the North Sea fleet in December 1997 and increased
borrowings that were used to partially fund the Company's vessel construction
and vessel upgrade and refurbishment program.
In 1998, the Company had income tax expense of $11.8 million, compared to
income tax expense of $19.0 million in 1997.
Comparison of the Year Ended December 31, 1997 to the Year Ended December 31,
1996
Revenues for 1997 were $125.5 million, an increase of 134.6%, compared to
$53.5 million in revenues for 1996. This increase was primarily due to the
growth in the Company's Gulf fleet, improved average vessel day rates for the
Company's vessels and the addition of North Sea operations beginning in
December 1997.
Average supply boat day rates in the Gulf rose 50% to $7,377 for 1997,
compared to $4,917 for 1996; average lift boat day rates increased 19.2% to
$5,955, compared to $4,995 for 1996; and average day rates for the Company's
crew boats and line handling vessels increased 24.3% to $1,964, compared to
$1,579 during 1996. The increase in vessel day rates was primarily the result
of strong market conditions in the Gulf for marine support vessels and, with
respect to the lift boats, improved market conditions in the Gulf for offshore
platform repair and maintenance and well-servicing activities.
While the Company's supply boats experienced strong demand and effectively
full utilization during the year, utilization for the Company's Gulf of Mexico
supply boat fleet decreased in 1997 due to the large number of scheduled
vessel drydockings in 1997 compared to 1996. Utilization for the Company's
lift boats was 71% during 1997, compared to 67% for the year-ago period.
Utilization for the crew boats and line handling vessels increased to 97% in
1997, compared to 95% in 1996 due to continued strong demand for crew boats in
the Gulf and the long-term contracts for the line handling vessels in Brazil.
During 1997, direct vessel operating expenses increased to $42.2 million
(33.6% of revenues), compared to $24.5 million (45.7% of revenues) for 1996,
due to the expanded vessel fleet and increased labor, repair and maintenance
costs. Direct vessel operating expenses decreased as a percentage of revenues
due to the increase in average vessel day rates during 1997 and the growth in
the Company's supply boat fleet which enjoys higher profit margins than the
overall fleet.
Depreciation and amortization expense increased to $12.7 million for 1997,
up from $4.5 million for 1996 due to the expanded vessel fleet. Amortization
of marine inspection costs increased to $3.0 million for 1997, from $2.2
million in 1996, due to the amortization of increased drydocking and marine
inspection costs associated with the Company's larger vessel fleet and the
Company's fleet refurbishment program.
General and administrative expenses increased to $5.7 million (4.6% of
revenues) in 1997, from $3.3 million (6.1% of revenues) for 1996, due to
additions of personnel in connection with the growth in the Company's
operations. General and administrative expenses, as a percentage of revenues,
decreased in 1997 as the increase in revenues and additions to the vessel
fleet did not require proportionate increases in administrative expenses.
Interest expense increased to $8.0 million during 1997 compared to $2.3
million for 1996. This increase was due to increased borrowings in 1997 which
were used to fund the Company's acquisition of supply boats in the Gulf, the
Company's various vessel construction and upgrade projects and the acquisition
of Saevik Supply. In July 1997, the Company issued $110.0 million principal
amount of 8 1/2% Senior notes due 2005 (the "Notes"), the proceeds of which
were used to purchase 11 supply boats in the Gulf and to repay outstanding
amounts
16
under the Company's revolving credit facility. In November and December 1997,
the Company issued an additional $170 million principal amount of the Notes,
the proceeds of which were used to fund the acquisition of Saevik Supply.
Interest expense decreased in 1996 due to the repayment of all borrowings
under the Company's credit facility and all of its subordinated debt in May
1996 with proceeds from the Company's initial public offering.
In 1997, the Company had income tax expense of $19.0 million, compared to
income tax expense of $5.8 million in 1996.
Comparison of the Year Ended December 31, 1996 to the Year Ended December 31,
1995
Revenues for 1996 were $53.5 million, an increase of 100% compared to $26.7
million in revenues for 1995. This increase was primarily due to the expansion
in the Company's vessel fleet, both in the Gulf and offshore Brazil, the
strong improvement in average day rates and utilization for the Company's
supply boats, and the increase in utilization for the Company's lift boats.
In 1996, the Company added 26 vessels to its total fleet. In March 1996, the
Company acquired eight line handling vessels, including one vessel owned by
the Company's then 40%-owned affiliate, that currently operate under charters
offshore Brazil. In May 1996 with the proceeds from the Company's initial
public offering, the Company acquired four supply boats and in the remainder
of 1996, acquired a total of 13 additional supply boats in three separate
transactions.
All classes of vessels in the Company's fleet reported higher utilization
during 1996 compared to 1995. The greatest increase in utilization was
experienced by the Company's supply boats and lift boats. Supply boat
utilization averaged 94% for 1996, up from 78% for 1995. Average supply boat
day rates for 1996 increased 60.7% to $4,917 compared to $3,060 for 1995.
These increases reflected strong market conditions in the Gulf during 1996 and
the substantial downtime incurred in 1995 for the vessel upgrade program,
during which three of the Company's supply boats were lengthened from 165 feet
to 180, one was lengthened from 165 feet to 190 feet, and the boats'
capacities for liquid mud and bulk cargo were increased. Additionally, the
Company rebuilt and lengthened a crew boat which was placed in service late in
1995.
Utilization of the Company's lift boats increased to 67% for 1996, from 45%
during 1995. The lift boats experienced unusually low utilization in 1995 due
to drydocking related downtime and weak market conditions which existed in the
first half of 1995. The Company's lift boats are operated by Power Offshore, a
leading operator of lift boats in the Gulf. Management and incentive fees
payable to Power Offshore in 1996 totaled $979,000 as compared to $468,000 for
1995 due to the increased revenue and operating income generated by the lift
boats.
Utilization of the crew boats and line handling vessels increased to 95% for
1996, compared to 85% during the same period in 1995, due to the improved
market conditions in the Gulf for crew boats and the additional eight line
handling vessels acquired in March 1996, which operate under long-term
charters offshore Brazil.
During 1996, direct vessel operating expenses increased to $24.2 million
from $17.0 million during 1995, due to the expanded vessel fleet and increased
labor, repair and maintenance costs. Due to the increase in average vessel day
rates, direct vessel operating expenses decreased as a percentage of revenues
from 63.6% during 1995 to 45.2% during 1996.
Depreciation expense increased to $4.5 million during 1996 from $2.7 million
for 1995 due to the expanded vessel fleet. Amortization of marine inspection
costs increased to $2.2 million during 1996 from $1.9 million for 1995 due to
the amortization of increased drydocking and marine inspection costs.
General and administrative expense increased to $3.3 million during 1996
from $2.5 million during 1995 due to the additional personnel needed in
connection with the growth in the Company's vessel fleet and the addition of
operations in Brazil. General and administrative expenses, as a percentage of
revenues,
17
decreased from 9.4% during 1995 to 6.1% in 1996 because the increase in
revenues and additions to the vessel fleet did not require proportionate
increases in administrative expenses.
Interest expense decreased to $2.3 million for 1996, from $3.9 million for
1995. The decrease in interest expense was due to a reduction in the Company's
average bank debt outstanding and lower borrowing costs for the Company in
1996 as compared to 1995. As a result of the Company's two public offerings of
Common Stock completed in May and November 1996, respectively, average bank
debt outstanding decreased to $18.5 million for 1996, compared to $26.6
million for 1995. In 1995 the Company recorded gains on the sales of certain
crew boats of $247,000 versus gains of $50,000 in 1996.
In 1996, the Company had income tax expense of $5.8 million compared to an
income tax benefit of $670,000 in 1995.
As a result of the prepayment of all debt outstanding under the Company's
bank credit facility and its subordinated debt in the second quarter of 1996,
the Company recorded an extraordinary charge of $917,000, net of taxes of
$494,000, for the write-off of unamortized debt issuance costs.
Liquidity and Capital Resources
The Company's business strategy for the past several years has been to
enhance its position as a leading supplier of marine support services by
pursuing opportunities to acquire vessel fleets and by diversifying into
international markets. Primarily as a result of acquisitions, the Company's
total assets have grown from $52.1 million at December 31, 1995, to $768.9
million at December 31, 1998. During 1996 and 1997, the Company completed the
acquisition of Saevik Supply, a publicly traded Norwegian company, for a total
acquisition cost of approximately $293.7 million, including transaction costs,
and acquired 37 supply boats in the Gulf for $177.0 million.
The Company has also constructed, or is in the process of constructing, six
new vessels, to increase its international market presence and increase its
deepwater capabilities. Additionally, in 1998, the Company completed its
vessel upgrade and refurbishment program involving a significant portion of
its Gulf supply boat fleet. While this program resulted in significant vessel
downtime in 1998, the Company believes it has extended the service lives of
many of its vessels and has significantly reduced required maintenance
spending in the future.
Capital expenditures for 1998 consisted principally of $101.4 million for
the construction of new vessels and other vessel improvements, and $24.2
million of U.S. Coast Guard drydocking and vessel refurbishment costs. During
1998, $158.2 million in funds were provided by borrowings under the Company's
bank credit facilities, $84.9 million in funds from operating activities and
$6.9 million from the sale of assets. During the period, the Company repaid
$123.3 million of debt.
The Company has outstanding $280.0 million in aggregate principal amount of
the Notes. The Notes are unsecured and are required to be guaranteed by all of
the Company's Significant Subsidiaries (as such term is defined in the
indenture governing the Notes, the "Subsidiary Guarantors"). Except in certain
circumstances, the Notes may not be prepaid until August 1, 2001, at which
time they may be redeemed, at the option of the Company, in whole or in part,
at a redemption price equal to 104.25% plus accrued and unpaid interest, with
the redemption price declining ratably on August 1 of each of the succeeding
three years. The indenture governing the Notes contains certain covenants
that, among other things, limit the ability of the Company to incur additional
indebtedness, pay dividends or make other distributions, create certain liens,
sell assets, or enter into certain mergers or acquisitions.
The Company maintains a bank credit facility that provides up to a $100.0
million revolving line of credit that can be used for acquisitions and general
corporate purposes (the "Bank Credit Facility"). The Bank Credit Facility is
collateralized by a mortgage on certain of the Company's vessels. Amounts
borrowed under the Bank Credit Facility mature on December 1, 2002 and bear
interest at a Eurocurrency rate plus a margin that depends on the Company's
leverage ratio. The weighted average interest rate for the Bank Credit
Facility was 6.8% as of March 1, 1999. The Bank Credit Facility was amended in
December 1998 to reduce permitted borrowings to $85
18
million and increasing to $100 million after June 30, 1999 depending on the
Company's leverage ratio. The Bank Credit Facility requires the Company to
maintain certain financial ratios and limits the ability of the Company to
incur additional indebtedness, make capital expenditures, pay dividends or
make certain other distributions, create certain liens, sell assets or enter
into certain mergers or acquisitions. Although the Bank Credit Facility does
impose some limitations on the ability of the Company's subsidiaries to make
distributions to the Company, it expressly permits distributions to the
Company by the Subsidiary Guarantors for scheduled principal and interest
payments on the Notes.
In June 1998, the Company refinanced Saevik Supply's existing bank credit
facilities with a revolving credit facility in the amount of NOK 650 million,
or $81.8 million (the "Saevik Bank Facility"). As of March 1, 1999, the
Company had approximately NOK 395 million ($49.7 million) of debt outstanding
under the Saevik Bank Facility. The Saevik Bank Facility is collateralized by
a security interest in certain of the Company's North Sea vessels, requires
Saevik Supply to maintain certain financial ratios and limits the ability of
Saevik Supply to create liens, or merge or consolidate with other entities.
Amounts borrowed under the Saevik Bank Facility bear interest at NIBOR
(Norwegian Interbank Offered Rate) plus a margin. The weighted average
interest rate for the Saevik Bank Facility was 7.66% as of March 1, 1999. The
commitment amount for the Saevik Bank Facility reduces by NOK 50 million ($6.3
million) every six months beginning December 1998, with the balance of the
commitment to expire in June 2003.
In connection with the construction of the Company's SWATH vessel, in April
1998 the Company issued $10.0 million aggregate principal amount of 8 year,
6.08% Ship Financing Bonds (the "Ship Bonds") guaranteed by the United States
Government. The Ship Bonds are due in 16 semi-annual installments of principal
and interest, with the first principal payment due March 1, 1999, and are
secured by a first preferred ship mortgage on the SWATH vessel and by an
assignment of the vessel's charter. The proceeds of the Ship Bonds were used
to repay a portion of the amounts outstanding under the Company's Bank Credit
Facility.
Due to industry conditions, the Company intends to limit 1999 capital
expenditures to those required to complete existing vessel construction
projects and regulatory-mandated drydocking costs. In order to further reduce
its maintenance capital expenditures, the Company expects to deactivate, or
"stack," an average of between 10 and 12 of its Gulf supply boats during 1999
that were not refurbished as part of its vessel upgrade and refurbishment
program.
Capital expenditures planned for 1999 consist primarily of the remaining
costs to complete two new vessels currently under construction. Expenditures
for the two new vessels in 1999 are expected to total approximately $24.4
million. The Company is completing construction in Norway of the Northern
Admiral, a 275-foot, technologically advanced AHTS with 23,800 horsepower that
is scheduled to be delivered in June 1999. The Company is also completing
construction in the Gulf of the Hondo River, the second of two deepwater 230-
foot supply vessels. The first vessel, the Spirit River, was delivered in
December 1998, while the Hondo River will be completed in the second quarter
of 1999. The Company has a pending application and expects to receive a
commitment from the U.S. Maritime Administration's Title XI ship financing
program to provide long-term financing for approximately $18.8 million of the
cost of the Spirit River and the Hondo River.
The Company believes that cash generated from operations together with
available borrowings under its bank credit facilities will be sufficient to
fund the Company's currently planned capital projects and working capital
requirements. The Company's business strategy has historically been to grow
through acquisitions to expand its operating capabilities and international
operations. As a result of depressed worldwide oil prices and reduced drilling
and development activity in most international areas, the Company believes
that in 1999 it may identify additional acquisition opportunities. Depending
upon the size of any acquisition, it is likely that the Company would require
additional equity financing and may incur additional debt financing in order
to complete the acquisition. The Company believes that any such financing
would involve the issuance of either common stock, convertible preferred stock
or other securities entitling the holders to acquire common stock.
Year 2000 Compliance
In accordance with the U.S. Securities and Exchange Commission's ("SEC")
Staff Legal Bulletin No. 5 and the SEC's subsequent interpretive release, the
Company has assessed both the cost of addressing and the cost
19
or the consequence of incomplete or untimely resolution of the Year 2000
("Y2K") issue. This process includes (i) the development of Y2K awareness,
(ii) a comprehensive review to identify systems that could be affected by the
Y2K issue, (iii) an assessment of potential risk factors (including non-
compliance by the Company's suppliers, subcontractors and customers), (iv) the
allocation of required resources, (v) a determination of the extent of
remediation work required, (vi) the development of an implementation plan and
time table, and (vii) the development of contingency plans.
The Company, in the normal course of business, is in the process of
replacing its accounting and certain other information systems, and has
established a target date of mid-1999 for their installation at all locations.
While the Company's growth is driving the Company's efforts to replace these
systems, the Company does expect the implementation of the new systems to
mitigate any potential Y2K issues related to any of its existing systems.
In addition, the Company's information systems personnel are currently
working with its third party vendors to resolve the potential problems
associated with the year 2000 and the processing of date sensitive information
by the Company's computer and other systems. The Company is still evaluating
the Y2K effect on other computer systems and non-information technology
systems, including telephone systems, office and vessel-based electronic
equipment and devices with embedded microprocessors. Additionally, the Company
has contacted key vendors and suppliers to ensure that they have a Y2K
compliance plan in an effort to minimize the Company's exposure to their
potential Y2K problems. The Company anticipates completion of its evaluation
of non-information technology equipment, key vendors and suppliers and any
remedial action and/or a contingency plan, if necessary, by mid-1999.
Because of the Company's purchase of new software and conversions to new
software, the Y2K issue is not expected to pose significant operational
problems for the Company's computer systems. However, if such modifications or
conversions are not made or are not completed on time, the Y2K issue could
have an adverse impact on the Company's operations. Among other things the
Company could be impacted by: the inability of the Company to retain qualified
personnel and outside consultants to successfully remediate Y2K issues and
implement a new business system as demand for their services rises; the
inability of the Company's customers to accurately and timely pay invoices;
the inability of the Company to access necessary capital from lenders or other
sources when required; and the inability of the Company's significant
suppliers, subcontractors and others to provide the necessary materials,
services or systems required to operate the Company's business.
The Company believes that it will be able to implement successfully the
changes necessary to address the Y2K issues with reliance on its third party
vendors and does not expect the cost of such changes to have a material impact
on the Company's financial position, results of operations or cash flows in
future periods.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company is
currently evaluating the impact SFAS No. 133 will have on its financial
statements, if any.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk exposures primarily include interest rate and
exchange rate fluctuation on derivative and financial instruments as detailed
below. The Company's market risk sensitive instruments are classified as
"other than trading". The following sections address the significant market
risks associated with the financial activities of the Company during 1998. The
Company's exposure to market risk as discussed below includes "forward-looking
statements" and represents estimates of possible changes in fair values,
future earnings or cash flows that would occur assuming hypothetical future
movements in foreign currency exchange rates or interest rates. The Company's
views on market risk are not necessarily indicative of actual results that may
occur and do not represent the maximum possible gains and losses that may
occur, since actual gains and losses will differ from those estimated, based
upon actual fluctuations in foreign currency exchange rates, interest rates
and the timing of transactions.
20
Interest Rate Sensitivity
The Company has entered into a number of variable and fixed rate debt
obligations, denominated in both the U.S. Dollar and the Norwegian Kroner
(Norwegian debt payable in Norwegian Kroner), as detailed in Note 7 to the
Company's December 31, 1998 financial statements. These instruments are
subject to interest rate risk.
The Company manages this risk by monitoring its ratio of fixed and variable
rate debt obligations in view of changing market conditions and from time to
time altering that ratio by, for example, refinancing balances outstanding
under its variable rate bank credit facilities with fixed-rate debt or by
entering into interest rate swap agreements.
As of December 31, 1998 the Company had $60.0 million (NOK 455.0 million) in
variable rate, Norwegian denominated debt. The Company has entered into an
interest rate swap agreement in order to manage its interest rate exposure on
this debt. The agreement requires the Company to pay a fixed rate of interest
on a notional amount of principal to a counterparty. The counterparty, in
turn, pays the Company a variable rate of interest on the same notional amount
of principal. The effect of the swap is to limit the interest rate exposure to
a fixed percentage on the related debt obligation.
As of December 31, 1998, the carrying value of the Company's long-term fixed
rate debt, including accrued interest, was approximately $303.7 million, which
included the Notes ($289.9 million), the Ship Bonds ($10.2 million) and the
Norwegian fixed rate debt ($3.6 million). The fair value of this debt was
approximately $253.4 million. Fair value was determined using quoted market
prices, where available, or discounted future cash flows based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements as of the balance sheet date. A hypothetical 1% increase in the
applicable interest rates would decrease the fair value of the Company's long-
term fixed rate debt by approximately $9.3 million. The hypothetical fair
values are based on the same assumptions utilized in computing fair values at
December 31, 1998.
As of December 31, 1998, the carrying value of the Company's long-term
variable rate debt, including accrued interest, was approximately $111.5
million and included the Company's Bank Credit Facility and the Saevik Bank
Facility. The fair value of this debt approximates the carrying value because
the interest rates are based on floating rates identified by reference to
market rates. A hypothetical 1% increase in the applicable interest rates
would increase interest expense by approximately $1.1 million.
As of December 31, 1998, the Company's interest rate swap agreement had a
fair value of $179,000 based on estimated amounts that the Company would
receive or pay to terminate the contract at the reporting date. A hypothetical
1% increase in the pay rate would result in an increase in interest expense of
approximately $264,000. A hypothetical 1% increase in the receive rate would
decrease interest expense by a corresponding amount.
Foreign Currency Exchange Rate Sensitivity
The Company's foreign subsidiaries collect revenues and pay expenses in
several different foreign currencies. The Company monitors the exchange rate
of its foreign currencies and, when deemed appropriate, entries into hedging
transactions in order to mitigate the risk from foreign currency fluctuations.
The Company also manages its foreign currency risk by attempting to contract
foreign revenue in U.S. Dollars whenever practicable.
The Company has exposure to fluctuations in foreign currency exchange rates
resulting from several of its Norwegian vessels operating in the United
Kingdom under long-term contracts denominated in the Great Britain Pound
(GBP). As of December 31, 1998, the Company had approximately $7.1 million of
firmly committed sales contracts through December 31, 1999, denominated in the
GBP. A hypothetical 10% increase in the applicable exchange rates would result
in an increase in future cash flows of approximately $706,000. A 10% decrease
would result in a corresponding decrease in future cash flows. The Company
manages this risk through the use of foreign currency forward exchange
contracts.
21
The Company's foreign currency forward exchange contracts would offset the
resulting increases/decreases in cash flows generated by exchange rate
fluctuations of firmly committed sales contracts. A hypothetical 10% increase
in the applicable exchange rates would result in approximately $918,000
decrease in future cash flows. A 10% decrease would result in a corresponding
increase in future cash flows. Foreign currency forward exchange contracts had
a fair value of $139,000 as of December 31, 1998. Fair value is estimated by
obtaining quotes from brokers.
Item 8. Financial Statements and Supplementary Data
Page
----
Index to Consolidated Financial Statements
Report of Independent Accountants....................................... 23
Consolidated Balance Sheet as of December 31, 1998 and 1997............. 24
Consolidated Statement of Operations for the Years Ended December 1998,
1997 and 1996.......................................................... 25
Consolidated Statement of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996....................................... 26
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996....................................... 27
Consolidated Statement of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................... 28
Notes to Consolidated Financial Statements.............................. 29
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Trico Marine Services, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Trico Marine Services, Inc. and Subsidiaries (the "Company") at
December 31, 1998 and 1997, and results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
February 17, 1999
23
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998 and 1997
ASSETS 1998 1997
------ ----------- -----------
(Dollars in thousands)
Current assets:
Cash and cash equivalents.......................... $ 9,236 $ 10,940
Accounts receivable, net........................... 30,936 34,519
Prepaid expenses and other current assets.......... 2,295 3,448
Deferred income taxes.............................. 616 38
----------- -----------
Total current assets............................. 43,083 48,945
----------- -----------
Property and equipment, at cost:
Land and buildings ................................ 3,402 2,429
Marine vessels..................................... 565,397 480,920
Construction-in-progress .......................... 45,861 42,256
Transportation and other........................... 3,604 2,433
----------- -----------
618,264 528,038
Less accumulated depreciation and amortization....... 47,855 22,982
----------- -----------
Net property and equipment....................... 570,409 505,056
----------- -----------
Goodwill, net........................................ 116,170 118,737
Other assets......................................... 39,228 26,043
----------- -----------
$ 768,890 $ 698,781
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt.................. $ 2,033 $ 12,701
Accounts payable................................... 11,058 9,114
Accrued expenses................................... 9,894 9,062
Accrued interest................................... 10,674 6,464
Income tax payable................................. 66 3,773
----------- -----------
Total current liabilities........................ 33,725 41,114
----------- -----------
Long-term debt....................................... 402,518 359,385
Deferred income taxes................................ 45,622 32,561
Other liabilities.................................... 2,785 4,221
----------- -----------
Total liabilities................................ 484,650 437,281
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 and no
shares authorized at
December 31, 1998 and 1997, respectively, no
shares issued..................................... -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 20,450,448 and 20,367,098 shares
issued and 20,378,416 and 20,295,066 shares
outstanding at December 31, 1998 and 1997,
respectively...................................... 205 204
Additional paid-in capital......................... 218,807 218,528
Retained earnings.................................. 70,586 45,306
Accumulated other comprehensive loss............... (5,357) (2,537)
Treasury stock, at par value, 72,032 shares at
December 31, 1998 and 1997, respectively ......... (1) (1)
----------- -----------
Total stockholders' equity....................... 284,240 261,500
----------- -----------
$ 768,890 $ 698,781
=========== ===========
The accompanying notes are integral part of these consolidated financial
statements.
24
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands, except
share and per share amounts)
Revenues:
Charter fees............................. $ 186,137 $ 125,476 $ 53,442
Other vessel income...................... 108 4 42
---------- ---------- ----------
Total revenues......................... 186,245 125,480 53,484
---------- ---------- ----------
Operating expenses:
Direct vessel operating expenses and
other................................... 72,312 42,188 24,459
General and administrative............... 10,939 5,736 3,277
Amortization of marine inspection costs.. 8,871 3,021 2,158
---------- ---------- ----------
Total operating expenses............... 92,122 50,945 29,894
Depreciation expense and amortization...... 29,528 12,734 4,478
---------- ---------- ----------
Operating income........................... 64,595 61,801 19,112
Interest expense........................... (27,696) (7,994) (2,282)
Amortization of deferred financing costs... (1,784) (372) (263)
Gain on sales of assets.................... 908 252 59
Other income, net.......................... 1,061 594 79
---------- ---------- ----------
Income before income taxes and
extraordinary item........................ 37,084 54,281 16,705
Income tax expense......................... 11,804 18,982 5,814
---------- ---------- ----------
Income before extraordinary item........... 25,280 35,299 10,891
Extraordinary item, net of taxes........... -- -- (917)
---------- ---------- ----------
Net income................................. $ 25,280 $ 35,299 $ 9,974
========== ========== ==========
Basic earnings per common share:
Income before extraordinary item......... $ 1.24 $ 2.22 $ 0.99
Extraordinary item, net of taxes......... -- -- (0.09)
---------- ---------- ----------
Net income............................... $ 1.24 $ 2.22 0.90
========== ========== ==========
Average common shares outstanding........ 20,342,244 15,895,023 11,044,884
========== ========== ==========
Diluted earnings per common share:
Income before extraordinary item......... $ 1.20 $ 2.11 $ 0.88
Extraordinary item, net of taxes......... -- -- (0.07)
---------- ---------- ----------
Net income............................... $ 1.20 $ 2.11 0.81
========== ========== ==========
Average common shares outstanding........ 21,015,313 16,758,466 12,380,902
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
25
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------- ------- ------
(Dollars in thousands)
Net income............................................. $25,280 $35,299 $9,974
Other comprehensive loss:
Foreign currency translation adjustments............. (2,820) (2,537) --
------- ------- ------
Comprehensive income............................... $22,460 $32,762 $9,974
======= ======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
26
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1998, 1997 and 1996
Treasury
Common Stock Accumulated Stock
------------------ Additional Other ------------ Total
Paid-in Retained Comprehensive Par Stockholders'
Shares Dollars Capital Earnings Loss Shares Value Equity
---------- ------- ---------- -------- ------------- ------ ----- -------------
(Dollars in thousands)
Balance, January 1,
1996................... 6,174,684 $ 61 $ 5,619 $ 33 $ -- 72,032 $(1) $ 5,712
Issuance of common
stock................. 8,285,000 83 79,455 -- -- -- -- 79,538
Debt conversion........ 935,226 10 7,471 -- -- -- -- 7,481
Stock options
exercised............. 207,050 2 1,273 -- -- -- -- 1,275
Net income............. -- -- -- 9,974 -- -- -- 9,974
---------- ---- -------- ------- ------- ------ --- --------
Balance, December 31,
1996................... 15,601,960 156 93,818 10,007 -- 72,032 (1) 103,980
Issuance of common
stock................. 4,600,000 46 123,259 -- -- -- -- 123,305
Stock options
exercised............. 165,138 2 1,451 -- -- -- -- 1,453
Loss on foreign
currency translation.. -- -- -- -- (2,537) -- -- (2,537)
Net income............. -- -- -- 35,299 -- -- -- 35,299
---------- ---- -------- ------- ------- ------ --- --------
Balance, December 31,
1997................... 20,367,098 204 218,528 45,306 (2,537) 72,032 (1) 261,500
Stock options
exercised............. 83,350 1 279 -- -- -- -- 280
Loss on foreign
currency translation.. -- -- -- -- (2,820) -- -- (2,820)
Net income............. -- -- -- 25,280 -- -- -- 25,280
---------- ---- -------- ------- ------- ------ --- --------
Balance, December 31,
1998................... 20,450,448 $205 $218,807 $70,586 $(5,357) 72,032 $(1) $284,240
========== ==== ======== ======= ======= ====== === ========
Share amounts have been adjusted to reflect a 3.0253-for-1 common stock split
effective April 26, 1996 and a 100% stock dividend effective June 9, 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
27
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------- --------- --------
(Dollars in thousands)
Net income.................................... $ 25,280 $ 35,299 $ 9,974
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 40,139 16,141 6,899
Deferred income taxes....................... 13,204 11,689 3,811
Interest on subordinated debt............... -- -- 461
Extraordinary item.......................... -- -- 1,411
Gain on sales of assets..................... (908) (252) (59)
Provision for doubtful accounts............. 120 (310) 130
Equity in loss of affiliate................. 317 160 18
Change in operating assets and liabilities:
Accounts receivable......................... 3,947 (9,076) (10,123)
Prepaid expenses and other current assets... 1,212 624 (435)
Accounts payable and accrued expenses....... 3,550 14,207 3,526
Other, net.................................. (1,924) (1,158) (661)
--------- --------- --------
Net cash provided by operating activities. 84,937 67,324 14,952
--------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment......... (101,430) (141,986) (79,135)
Deferred marine inspection costs............ (24,245) (9,950) (2,292)
Proceeds from sales of assets............... 6,874 1,152 439
Investment in unconsolidated affiliate...... (213) (670) (1,293)
Acquisition of business, net of cash
acquired................................... (134) (270,551) --
Other ...................................... (1,238) 987 --
--------- --------- --------
Net cash used in investing activities..... (120,386) (421,018) (82,281)
--------- --------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock.. 280 123,732 79,726
Proceeds from issuance of Senior Notes...... -- 280,603 --
Proceeds from issuance of long-term debt.... 158,239 223,907 57,669
Repayment of long-term debt................. (123,332) (254,000) (63,364)
Deferred financing costs and other.......... (1,078) (10,331) (707)
Payments of subordinated debt and accrued
interest thereon........................... -- -- (6,065)
--------- --------- --------
Net cash provided by financing activities. 34,109 363,911 67,259
--------- --------- --------
Effect of exchange rate changes on cash and
cash equivalents............................. (364) (324) --
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................. (1,704) 9,893 (70)
Cash and cash equivalents at beginning of
period....................................... 10,940 1,047 1,117
--------- --------- --------
Cash and cash equivalents at end of period.... $ 9,236 $ 10,940 $ 1,047
========= ========= ========
Supplemental information:
Income taxes paid........................... $ 3,871 $ 2,563 $ 6
========= ========= ========
Income taxes refunded....................... $ 329 $ -- $ --
========= ========= ========
Interest paid............................... $ 27,561 $ 2,969 $ 4,737
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Trico Marine Services, Inc. (the "Company") is a leading provider of marine
support vessels and related services to the oil and gas industry in the U.S.
Gulf of Mexico (the "Gulf"), offshore Brazil and the North Sea. The Company is
the second largest owner and operator of supply boats in the Gulf and a
leading operator in the North Sea. At December 31, 1998, the Company had a
total fleet of 99 vessels, including 54 supply vessels, 11 large capacity
platform supply vessels ("PSV"), six large anchor handling, towing and supply
vessels ("AHTS"), 13 crew boats, six lift boats and nine line-handling
vessels. The services provided by the Company's diversified fleet include
transportation of drilling materials, supplies and crews to offshore
facilities and support for the construction, installation, maintenance and
removal of those facilities.
The Company's financial position, results of operations and cash flows are
affected primarily by day rates and fleet utilization in the Gulf of Mexico
and the North Sea which primarily depend on the level of drilling activity,
which ultimately is dependent upon both short-term and long-term trends in oil
and natural gas prices.
2. Summa