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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO.: 000-23225
TRANSCOASTAL MARINE SERVICES, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 72-1353528
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2925 BRIARPARK, SUITE 930 77042
HOUSTON, TEXAS (Zip code)
(Address of principal executive offices)
(713) 784-7429
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.001 per share Nasdaq National Market
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. Yes [X] No [ ]
As of March 16, 1998, there were 8,898,441 shares of common stock, par
value of $.001 per share, of the Registrant issued and outstanding, 5,739,550 of
which, having an aggregate market value of $60,982,719, based on the closing
price per share of the common stock of the Registrant reported on the Nasdaq
National Market on that date, were held by non-affiliates of the Registrant. For
purposes of the above statement only, all directors and executive officers of
the Registrant are assumed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's proxy statement in connection with the Annual Meeting is
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
General................................................... 1
Operations................................................ 1
Industry Overview......................................... 1
Materials................................................. 2
Safety and Quality Assurance.............................. 2
Customers and Contracts................................... 2
Competition............................................... 3
Backlog................................................... 4
Fluctuations in Operating Results......................... 4
Governmental Regulation and Environmental Matters......... 4
Risk Management........................................... 6
Intellectual Property..................................... 6
Employees................................................. 6
Forward-Looking Statements................................ 6
Item 2. Properties.................................................. 7
Marine Vessels and Equipment................................ 7
Facilities.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 100
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 100
Item 11. Executive Compensation...................................... 100
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 100
Item 13. Certain Relationships and Related Transactions.............. 100
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 100
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PART I
ITEM 1. BUSINESS.
GENERAL
TransCoastal Marine Services, Inc. ("TCMS") is a marine construction
company with operations focused in the transition zone (water depths up to 20
feet) and shallow water (from 20 to 200 feet) in the Gulf of Mexico. The
Company's primary services include pipeline construction, repair, maintenance,
trenching, testing, commissioning and related services, and fabrication and
refurbishment of offshore drilling rigs, barge drilling rigs and structural
components of fixed platforms.
TCMS commenced operations concurrently with the acquisition (the
"Acquisitions") of four privately owned marine construction businesses (each a
"Founding Company") and the completion of an initial public offering in November
1997 (the "Offering"). Unless otherwise indicated by the context, references
herein to (i) "TCMS" mean TransCoastal Marine Services, Inc. (and its
predecessor), prior to consummation of the Acquisitions, and (ii) the "Company"
mean TCMS (and its predecessor), together with the Founding Companies and its
other subsidiaries.
The Company currently conducts operations from port facilities and
fabrication yards strategically positioned along the U.S. Gulf Coast. The
Company's principal executive offices are located at 2925 Briarpark Drive, Suite
930, Houston, Texas 77042, and its telephone number is (713) 784-7429.
OPERATIONS
Pipeline Installation and Repair. The efficient development of an offshore
oil and gas field frequently involves the addition or extension of an
infrastructure of gathering lines and trunklines (large diameter pipelines). The
Company's pipeline installation operations are focused on the transition zone
and shallow water regions along the U.S. Gulf Coast. The Company believes it is
the only company providing pipeline installation and repair services from water
depths of 200 feet through the transition zone and to onshore gathering and
processing facilities in the Gulf of Mexico.
The Company's fleet includes (i) 15 spud barges and ancillary equipment,
operated in water depths of up to 20 feet, and (ii) three anchor barges and
three multipurpose vessels (used in both pipeline installation and repair and
hydrostatic testing, commissioning and related operations), primarily operated
in water depths beyond 20 feet. The Company also owns specialized equipment for
offshore pipeline jetting (a specialized pipeline burying technique) and testing
services, marine dredging and trench digging. See Item 2. Properties for a
listing of the Company's significant vessels and equipment.
Hydrostatic Testing and Commissioning Services. The Company performs
onshore and offshore hydrostatic testing and commissioning of pipelines for oil
and gas producers and pipeline construction companies along the U.S. Gulf Coast
and in certain international markets. During hydrostatic testing, water is
pumped into a newly installed or existing pipeline to increase the internal
pressure beyond the designed capacity of the pipeline in order to test its
structural integrity. Pipeline commissioning involves final preparation of a
completed and successfully tested pipeline for operation in accordance with
applicable regulatory standards. In connection with its hydrostatic testing and
commissioning services, the Company also performs pipeline cleaning, drying and
dehydration services.
Offshore Fabrication. The Company fabricates and refurbishes (i) structural
components of fixed platforms for use in the offshore development and production
of oil and gas and (ii) structural components, primarily deck structures, for
offshore drilling rigs and barge drilling rigs. The Company also manufactures
amphibious undercarriages for marine construction equipment used in transition
zone waters.
INDUSTRY OVERVIEW
The market for offshore pipeline installation and related services along
the U.S. Gulf Coast is primarily dependent on the levels of oil and gas
exploration, development and production activities and pipeline capacity
utilization in the Gulf of Mexico. The Company believes recent increases in oil
and gas production in the Gulf
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of Mexico have significantly reduced available pipeline capacity to transport
the hydrocarbons to onshore gathering, transmission and processing facilities.
In a report published in January 1997, the Minerals Management Service of the
U.S. Department of the Interior (the "MMS") projected an increase in Gulf of
Mexico oil production of up to 76% from 1,097 Mbpd (thousand barrels per day) in
1996 to 1,932 Mbpd by 2000, and an increase in natural gas production of up to
25% from 13.8 Bcfd (billion cubic feet per day) in 1996 to 17.2 Bcfd by 2000,
assuming increased use of new technologies, such as 3-D seismic and horizontal
drilling techniques, would offset declines in production from currently
producing fields. This outlook is supported by increases in offshore leases
awarded by the Department of the Interior in its semi-annual Outer Continental
Shelf ("OCS") lease auctions during 1996. The number of offshore leases awarded
to operators increased from 202 in 1992, covering approximately 1.0 million
acres, to 1,508 in 1996, covering approximately 8.0 million acres.
The MMS anticipates that a substantial portion of the increased oil and gas
production in the Gulf of Mexico will come from deep water projects. The Company
believes the continued development of deep water (depths of 200 feet to 1,000
feet) and very deep water (depths of 1,000 feet and deeper) oil and gas fields
will require construction of new pipelines and tie-ins to existing pipeline
systems in the transition zone and shallow water regions along the U.S. Gulf
Coast to transport future hydrocarbon production to shore. The Company also
expects increases in demand for its services resulting from new pipeline
construction needed to support incremental development activity within these
transition zone and shallow water regions, as well as the repair service
requirements of the existing pipeline infrastructure. According to a June 1997
report by Offshore Data Services, Inc., there were 255 pipeline construction
projects in the design or planning phase in the Gulf of Mexico, including 165 in
water depths of less than 150 feet.
MATERIALS
The principal materials used by the Company in its business are carbon and
alloy steel in various forms, welding supplies, fuel oil, gasoline and paint,
which are currently available in adequate supply from many sources. The Company
does not depend on any single supplier or source. Pipe used in the Company's
pipeline construction operations is generally provided by the Company's
customers.
SAFETY AND QUALITY ASSURANCE
Management sets as a high priority the safety and health of the Company's
employees and maintains a stringent safety assurance program to reduce the
possibility of costly accidents. The Company has established guidelines to
ensure compliance with all applicable state and federal safety regulations, and
provides ongoing training and safety education through orientations for new
employees and subcontractors, periodic crew safety training meetings and first
aid and CPR training. The Company has a comprehensive drug testing program and
conducts periodic employee health screenings.
The Company's operations are conducted in compliance with the applicable
standards of the American Petroleum Institute, the American Welding Society and
the American Society of Mechanical Engineers, as well as customer
specifications. Training programs have been instituted to upgrade the skills of
the Company's personnel and maintain high-quality standards. Management believes
these programs enhance the quality of its services and reduce the total cost of
work performed.
CUSTOMERS AND CONTRACTS
The Company's primary customers are major and independent oil and gas
exploration and production companies, drilling contractors, hydrocarbon
transportation companies and other marine construction companies. The level of
construction services required by any one customer depends on the amount of that
customer's capital expenditure budget devoted to marine construction in any
single year. Consequently, customers that account for a significant portion of
revenue in one fiscal year may represent an immaterial portion of revenue in
subsequent fiscal years. The five most significant customers of the Company on a
combined basis during fiscal 1997 (in alphabetical order) were: Bridgeline Gas
Distribution L.L.C., Koch Gateway Pipeline Co., Mobil Corporation, Nautilus Pipe
Line Co. L.L.C., and Texaco Trading & Transporta-
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tion, Inc. The Company had only two customers that represented more than 10% of
its revenues in fiscal 1997. While the Company is not dependent on any one
customer, the loss of one of its significant customers could, at least on a
short-term basis, have an adverse effect on the Company's results of operations.
The Company's contracts are typically of short duration, being completed in
one to six months. A substantial number of the Company's projects are performed
on a fixed-price basis, although some projects are performed on an
alliance/partnering or cost-plus basis. Under a fixed-price contract, the
Company receives the price fixed in the contract, subject to adjustment only for
change orders placed by the customer. As a result, the Company is responsible
for all cost overruns under fixed-price contracts. Under a typical alliance/
partnering arrangement, the Company and the customer agree in advance to a
target price that includes specified levels of labor and material costs and
profit margins. If the project is completed at less than the cost levels
targeted in the contract, the contract price is reduced by a portion of the
savings. If the cost to completion is greater than targeted costs, the contract
price is increased, but generally to the target price plus the actual
incremental cost of material and direct labor. Accordingly, under an
alliance/partnering arrangement, the Company has some protection against cost
overruns but must share a portion of any cost savings with the customer. Under
cost-plus arrangements, the Company receives a specified fee in excess of its
direct labor and material cost and therefore is protected against cost overruns
but does not benefit directly from cost savings. The revenue, costs and gross
profit realized on a contract will often vary from the estimated amounts on
which such contracts were originally based because of various reasons, including
errors in estimates or bidding, changes in the availability and cost of labor
and material and variations in productivity from the original estimates. These
variations and the risks inherent in the marine construction industry may result
in revenue and gross profits different from those originally estimated and can
result in reduced profitability or losses on projects. Depending on the size of
a project, variations from estimated contract performance can have a significant
impact on the Company's operating results for any particular fiscal quarter or
year.
COMPETITION
The marine construction services business is highly competitive and in
recent years has been characterized by overcapacity, which has resulted in
substantial pressure on pricing and operating margins. The Company expects the
overcapacity in the industry to reoccur from time to time in the future.
Contracts for marine construction services are usually awarded on a competitive
bid basis. Although the Company believes customers consider, among other things,
the availability and technical capabilities of equipment and personnel,
efficiency, condition of equipment, safety record and reputation, price
competition is currently a primary factor in determining which qualified
contractor with available equipment is awarded a contract. Some of the Company's
competitors are larger and have greater financial and other resources than the
Company.
The Company categorizes the market for offshore construction services into
four segments: (i) transition zone (less than 20 feet), (ii) shallow water (20
feet to 200 feet), (iii) deep water (200 feet to 1,000 feet) and (iv) very deep
water (1,000 feet or deeper). The Company generally focuses on projects in
transition zone and shallow water regions along the U. S. Gulf Coast. Activity
in these regions has increased significantly in recent years primarily because
of increases in oil and gas production in the Gulf of Mexico. Several companies
that have one or more derrick or pipelaying barges compete in the transition
zone and shallow water regions. The Company believes that it is the largest
transition zone marine construction services company focused on the U.S. Gulf
Coast and a significant provider of shallow water marine construction services
in that area. The Company believes that competition for projects in the deep
water (greater than 200 feet) and the very deep water (greater than 1,000 feet)
regions of the Gulf of Mexico is primarily limited to two large competitors,
Global Industries, Ltd. and J. Ray McDermott, S.A., with several other
international contractors capable of relocating equipment to the Gulf of Mexico
to work on specific deep or very deep water contracts. Because projects in the
deep and very deep water regions involve different vessels and equipment, as
well as different technical expertise, the Company does not presently intend to
compete in those markets.
The Company also competes with numerous competitors in connection with its
hydrostatic testing and commission services and fabrication operations.
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BACKLOG
As of December 31, 1997, the Company's unfilled contracts and backlog
orders (including verbal orders) amounted to approximately $47.3 million;
however, the Company does not consider its backlog amounts to be a reliable
indicator of future revenue because most of the Company's projects are awarded
and performed within a relatively short period of time. The Company's backlog
fluctuates significantly based on the timing of contract awards and varying
levels of operating activity throughout the year. The Company is generally able
to complete its projects within a 12-month period.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including the
timing of future acquisitions, seasonal fluctuations in the demand for marine
construction services (particularly during the winter months) and competitive
factors. Accordingly, quarterly comparisons of the Company's revenue and
operating results should not be relied on as an indication of future
performance, and the results of any quarterly period may not be indicative of
results to be expected for a full year. The Company recognizes most of its
contract revenue on a percentage-of-completion basis. Accordingly, contract
price and cost estimates are reviewed periodically as the work progresses, and
adjustments proportionate to the percentage of completion are reflected in
income in the period when the facts giving rise to a revised estimate become
known. To the extent that these adjustments result in a reduction or elimination
of previously reported profits with respect to a project, the Company would
recognize a charge against current earnings, which could be material. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Customers and Contracts."
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
General
Many aspects of the Company's operations are subject to governmental
regulation, including regulation by the U.S. Coast Guard, the National
Transportation Safety Board, the U.S. Customs Service and the Occupational
Safety and Health Administration, as well as by private industry organizations
such as the American Bureau of Shipping. The Coast Guard and the National
Transportation Safety Board set safety standards and are authorized to
investigate vessel accidents and recommend improved safety standards relating to
vessels. The Occupational Safety and Health Administration performs similar
functions with respect to the Company's onshore facilities and operations. In
addition, the Company depends on the demand for its services from the oil and
gas industry and, therefore, the Company's business is affected by the laws and
regulations, as well as changing taxes and governmental policies, relating to
the oil and gas industry generally.
Certain of the Company's barges and vessels are subject to safety and
classification standards imposing requirements for periodic inspections and the
maintenance of certain certificates and insurance coverages, generally depending
on the type and size of and service performed by the barge or vessel. In
addition, in order for a vessel to engage in the U.S. Coastwise Trade (providing
transportation services between the states), the vessel must have been built in
the United States. All the Company's barges and vessels are eligible for service
in the U.S. Coastwise Trade, except for the M/V Discovery, a Panamanian flagged
vessel. As a multi-purpose construction vessel providing non-transportation
services to the offshore oil and gas industry, the Company believes the market
for the services performed by the M/V Discovery is not materially limited by its
Panamanian registration.
The Company is required by various governmental and quasi-governmental
agencies to obtain certain permits, licenses and certificates with respect to
its operations. The Company believes that it has obtained all permits, licenses
and certificates necessary to the conduct of its business.
In addition to government regulation, various private industry
organizations, such as the American Petroleum Institute, the American Society of
Mechanical Engineers and the American Welding Society, promulgate technical
standards that must be adhered to during the course of the Company's fabrication
operations.
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Environmental
The operations of the Company are also affected by numerous federal, state
and local laws and regulations relating to protection of the environment. The
requirements of these laws and regulations have become more complex, stringent
and expensive in recent years, and may, in certain circumstances, impose strict
liability, rendering a company liable for environmental damages and remediation
costs without regard to negligence or fault on the part of such party. Aside
from possible liability for damages and costs associated with releases of
hazardous materials including oil into the environment, such laws and
regulations may expose the Company to liability for the conduct of or conditions
caused by others or acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. Sanctions for
noncompliance with these laws and regulations may include revocation of permits,
corrective action orders, administrative or civil penalties, and criminal
prosecution. The Company is not aware of any noncompliance with applicable
environmental laws and regulations that would likely have a material adverse
effect on the Company's business or financial conditions, and the Company does
not currently anticipate any material adverse effect on its business or
consolidated financial position as a result of future compliance with existing
environmental laws and regulations controlling the discharge of materials into
the environment or otherwise relating to the protection of the environment.
However, it is possible that changes in the environmental laws and regulations
and enforcement policies thereunder, or claims for damages to persons, property,
natural resources or the environment could result in substantial costs and
liabilities to the Company, and thus there can be no assurance that the Company
will not incur significant environmental compliance costs in the future. The
Company's insurance policies provide liability coverage for sudden and
accidental occurrences of pollution and cleanup and containment of the foregoing
in amounts the Company believes are comparable to policy limits carried by other
construction contractors in the offshore industry.
The Oil Pollution Act of 1990 ("OPA"), as amended, and regulations
promulgated pursuant thereto impose a variety of regulations on "responsible
parties" related to the prevention of oil spills and liability for damages
resulting from such spills. A "responsible party" includes the owner or operator
of an onshore facility, pipeline, or vessel, or the lessee or permittee of the
area in which an offshore facility is located. The OPA assigns liability to each
responsible party for oil removal costs and a variety of public and private
damages. Vessels subject to OPA other than tank vessels are subject to liability
limits of the greater of $500,000 or $600 per gross ton. A party cannot take
advantage of liability limits if the spill was caused by gross negligence or
willful misconduct or resulted from violation of a federal safety, construction,
or operating regulation. If the party fails to report a spill or to cooperate
fully in the cleanup, the liability limits likewise do not apply. Few defenses
exist to the liability imposed under OPA. The OPA also imposes ongoing
requirements on a responsible party including preparation of an oil spill
contingency plan and proof of financial responsibility (to cover at least some
costs in a potential spill) for vessels in excess of 300 gross tons. The Company
believes that it currently has in place appropriate spill contingency plans and
has established adequate proof of financial responsibility for its vessels.
The Outer Continental Shelf Lands Act ("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 could have a material adverse effect on the Company's
financial condition and the results of operations.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 ("CERCLA"), as amended, and comparable state laws impose liability for
releases of hazardous substances into the environment. CERCLA currently exempts
crude oil from the definition of hazardous substances for purposes of the
statute, but the Company's operations may involve the use or handling of other
materials that may be classified as hazardous substances. CERCLA assigns strict
liability to each responsible party for all response and remediation costs, as
well as natural resource damages. Few defenses exist to the liability imposed by
CERCLA. The Company believes that it is in compliance with CERCLA and currently
is not aware of any events that, if brought to the attention of regulatory
authorities, would lead to the imposition of CERCLA liability against the
Company.
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Health and Safety
The Company's operations are also governed by laws and regulations relating
to workplace and worker health, primarily the Occupational Safety and Health Act
and the regulations promulgated thereunder. In addition, various other
governmental and quasi-governmental agencies require the Company to obtain
certain permits, licenses and certificates from time to time with respect to its
operations. The Company believes it has all material permits, licenses and
certificates necessary to the conduct of its existing business.
Certain employees of the Company are covered by provisions of the Jones
Act, the Death on the High Seas Act and general maritime law, which laws operate
to make the liability limits established by state workers' compensation laws
inapplicable to these employees and, instead, permit them or their
representatives to pursue actions against the Company for damages or job-related
injuries, with generally no limitations on the Company's potential liability.
The Company's ownership and operation of vessels can give rise to large and
varied liability risks, such as risks of collisions with other vessels or
structures, sinking, spills, fires and other marine casualties, which can result
in significant claims for damages against both the Company and third parties
for, among other things, personal injury, death, property and natural resource
damage, pollution and loss of business.
RISK MANAGEMENT
The Company's operations are subject to inherent risks of offshore and
inland marine activity, including hazards such as vessels capsizing, sinking,
grounding, colliding and sustaining damage from severe weather conditions. These
hazards can cause personal injury or loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage and
suspension of operations. The Company maintains such insurance protection as it
deems prudent, including hull insurance. However, certain risks are either not
insurable or insurance is available only at rates that the Company considers not
to be economical. There can be no assurance that any such insurance will be
sufficient or effective under all circumstances or against all hazards to which
the Company may be subject. A successful claim for which the Company is not
fully insured could have a material adverse effect on the Company. Moreover, no
assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.
INTELLECTUAL PROPERTY
Although the Company's intellectual property rights are, in the aggregate,
important to the Company's business, the Company believes its technical
knowledge and experience, reputation and customer relationships are more
important to its competitive position than any patents, licenses, trademarks or
other intellectual property rights.
EMPLOYEES
The size of the Company's work force, other than its clerical and
administrative personnel, is variable and depends on the Company's workload at
any particular time. As of February 28, 1998, the Company had approximately 758
employees. In addition, many workers are hired on a contract basis and are
available to the Company on short notice. None of the Company's employees are
covered by a collective bargaining agreement.
FORWARD-LOOKING STATEMENTS
The Annual Report on Form 10-K includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts,
included in this Annual Report on Form 10-K that relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, projected or anticipated benefits from acquisitions made by
or to be made by the Company, or projections involving anticipated revenues,
earnings, or other aspects of operating results are forward-looking statements.
The Company cautions readers that such statements are not guarantees of future
performance or events and are subject to a number of factors that may
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tend to influence the accuracy of the statements and the projections upon which
the statements are based. As noted elsewhere in this report, all phases of the
Company's operations are subject to a number of uncertainties, risks and other
influences, many of which are outside the control of the Company, and any one of
which, or a combination of which, could materially affect the results of the
Company's operations and whether forward-looking statements made by the Company
ultimately prove to be accurate.
ITEM 2. PROPERTIES.
MARINE VESSELS AND EQUIPMENT
The Company's fleet includes three multi-purpose vessels, three anchor
barges and 15 spud barges. During March 1997, the Company acquired the M/V
Discovery, a multi-purpose Panamanian flagged construction ship, for the purpose
of expanding the capabilities of the Company's offshore pipeline testing
operations. During February 1998, the Company expanded its oil and gas pipeline
installation capabilities with the acquisition of the LB-207 pipelaying barge
(now renamed the Vermilion Bay) from Essar Oil Ltd. The Vermilion Bay is
currently in transport from India and is expected to be available for service in
the Gulf of Mexico by May 1998.
The following table describes the Company's principal marine vessels and
construction equipment.
DIMENSIONS
NAME TYPE (FEET) FUNCTION
---- ---- --------------- --------
M/V Discovery........... Multi-purpose 270 x 42 x 19 Hydrostatic testing, pipeline jetting, diving
Construction Ship support, coring support; 8-point mooring
(Panamanian flagged) system; dynamic positioning system;
accommodations for 54 persons
M/V Sea Level 21........ Multi-purpose 165 x 40 x 12 Hydrostatic testing, diving support, coring
Construction Ship support; 4-point mooring system;
(U.S. flagged) accommodations for 28 persons
M/V Sand Queen.......... Multi-purpose 96 x 24 x 7 Hydrostatic testing and diving support;
Utility Vessel (U.S. accommodations for 19 persons
flagged)
Vermilion Bay........... Anchor Barge 350 x 60 x 22.5 Pipe laying (2"-48" diameter pipe) in 10(#)
to 300(#) water depths; 8-point mooring
system; accommodations for 211 persons
BH-400.................. Anchor Barge (U.S. 260 x 72 x 16 Pipe laying (2"-36" diameter pipe) in 10(#)
flagged) to 300(#) water depths; 8-point mooring
system; accommodations for 90 persons
BH-300.................. Anchor Barge 185 x 45 x 9 Pipe laying (2"-36" diameter pipe) in 5(#) to
40(#) water depths; 4-point mooring system
and spuds
BH-203.................. Spud/Utility Barge 90 x 26 x 5 Pipeline repair, pipeline burial in 4(#) to
25(#) water depths
BH-202.................. Spud/Bury Barge 100 x 32 x 5 Pipeline jetting, dredging in 5(#) to 25(#)
water depths
BH-200.................. Spud/Bury Barge 120 x 30 x 7 Pipeline jetting, dredging in 5(#) to 25(#)
water depths
BH-105.................. Spud/Anchor Barge 150 x 40 x 8 Pipe laying (2"-20" diameter pipe), dredging,
pile driving in 5(#) to 100(#) water depths
BH-104.................. Spud Barge 110 x 34 x 6 Pipe laying (2"-20" diameter pipe), dredging,
pile driving in 4(#) to 25(#) water depths
Woodson Marsh Pipelay 140 x 38 x 7 Pipe laying (2"-48" diameter pipe) in 1(#) to
Spread................ Three Interconnected 140 x 36 x 7 40(#) water depths
Spud Barges 140 x 36 x 7
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FACILITIES
Administration. The Company owns administrative buildings in Lafayette and
Belle Chasse, Louisiana, and leases office space in New Iberia, Louisiana and in
Houston, Texas.
Construction Support Facilities. The Company's marine construction
activities are supported by five onshore bases which provide administrative
functions for projects and dock space for the Company's floating equipment with
the ability to supply the vessels with provisions and fuel, and to perform
maintenance and repairs to vessels and equipment. The facility located in Belle
Chasse, Louisiana is owned by the Company. The facilities and dock frontage at
Berwick and Delcambre, Louisiana, and Mobile Bay, Alabama are leased, with
remaining lease terms ranging from month-to-month to 16 years.
Fabrication Yards. The Company's fabrication operations are primarily
conducted from three locations in Louisiana, one in New Iberia and two in the
greater New Orleans area. The New Iberia fabrication facility includes
approximately 14 acres of leased land and a 23,200 square foot fabrication shop
which is supplied with automatic welding, heavy fabrication and material
handling equipment. This fabrication yard, with waterfront docking and direct,
deep channel access to the Gulf of Mexico, has specially designed concrete
reinforcements and approximately 700 linear feet of water frontage. The Company
is improving the fabrication yard to provide it with the ability to load out
structures weighing up to 5,000 tons. The fabrication yard also has a rail spur,
which provides it direct access to rail transportation.
During the first quarter of 1998, the Company significantly expanded its
fabrication operations through two separate lease transactions. During January
1998, long-term lease rights were secured to a shipyard in New Orleans capable
of servicing deepwater drilling rigs, jack-ups, semi-submersibles and drill
ships. This 29-acre yard is located at the intersection of the Intracoastal
Waterway and the Michoud Canal. A 32-foot water depth is maintained at the site,
which has no height or width restrictions and a maximum 3,000 feet of bulkhead
dock space. During February 1998, the Company signed a long-term lease for a
manufacturing facility located on an 18-acre site on the Inner Harbor Navigation
Canal in eastern New Orleans. The site has 1,400 feet of waterfront and includes
a covered, 68,000 square foot fabrication shop with eave height exceeding 40
feet and overhead crane capacity totaling 75 tons with a hook height of 28 feet.
The Company also owns an 18,000 square foot fabrication facility situated
on approximately two acres of land in Lafayette, Louisiana, and has an option to
purchase a 10,000 square foot fabrication facility situated on approximately
five acres of land in Belle Chasse, Louisiana.
ITEM 3. LEGAL PROCEEDINGS.
The Company is currently involved in two class action lawsuits for
unspecified personal injury and property damages arising from events in October
1991 and January 1992 during the course of a pipeline installation project for a
third party gas transmission company. One of the class actions, involving
approximately 9,840 class members, entitled Rivera v. United Gas Pipeline Co.,
No. 28738, was instituted against Woodson Construction Company, Inc. on October
29, 1991 in the 40th Judicial District Court, Parish of St. John the Baptist,
State of Louisiana, and the other class action, involving approximately 7,858
class members, entitled Husseiney v. United Gas Pipeline Co., No. 29089, was
instituted on January 27, 1992 against Woodson Construction Company, Inc. in the
40th Judicial District Court, Parish of St. John the Baptist, State of
Louisiana. The claims of 24 representative class members in each case were tried
in 1995, and judgments were rendered against Woodson Construction Company, Inc.,
which were later affirmed by the court of appeal. In the Rivera lawsuit, five of
the 24 representative plaintiffs were awarded compensatory damages of $7,500 in
the aggregate, but punitive damages were denied. In the Husseiney lawsuit,
compensatory damages of $18,589 and punitive damages of $9,500 in the aggregate
were assessed against Woodson Construction Company, Inc. in favor of 16 of the
24 representative plaintiffs. In both lawsuits, the compensatory damages awarded
are expected to be covered by the Company's insurance, but punitive damage
awards are not expected to be covered by insurance. The compensatory and
punitive damages awarded to the 16 representative class members varied according
to the representatives' proximity to the incident and individual experience with
respect to it. The amount of compensatory and punitive damages applicable to the
remaining 7,834 class members who seek to adjudicate their damage claims will be
litigated on an individual
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basis. Until those remaining damage claims are finally adjudicated, settled,
dismissed or otherwise terminated, the total amount of the punitive damages to
which the Company may be subject cannot reasonably be estimated, and there can
be no assurance that it will not be materially adverse to the Company's
financial position or results of operations. In July 1997, all parties involved
applied to the Louisiana Supreme Court for further discretionary review of the
existing judgments. In December 1997, the Louisiana Supreme Court declined to
review the judgments in both cases.
The Company is involved in various other lawsuits arising in the ordinary
course of business, some of which involve substantial claims for damages. While
the outcome of these other lawsuits cannot be predicted with certainty,
management believes these other matters will not have a material adverse effect
on the consolidated financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Since October 30, 1997, the common stock of the Company (the "Common
Stock") has been listed for trading on the Nasdaq National Market under the
symbol "TCMS". The following table sets forth the range of high and low sale
prices for the Common Stock for the periods indicated:
HIGH LOW
---- ---
1997
Fourth quarter (from October 30).......................... $28 7/8 $13
1998
First quarter (through March 16, 1998).................... $14 1/2 $ 8 13/16
At March 16, 1998, there were approximately 2,200 stockholders of record of
the Company's Common Stock. On March 16, 1998, the last reported sale price of
the Common Stock on the Nasdaq National Market was $10 5/8 per share.
DIVIDENDS
TCMS currently intends to retain its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. Any future dividends will be at the discretion
of the Board of Directors, after taking into account various factors, including,
among others, the Company's financial condition, results of operations, cash
flows from operations, current and anticipated cash needs and expansion plans,
the income tax laws then in effect, the requirements of Delaware law, the
restrictions currently imposed by the Credit Agreement and any restrictions that
may be imposed by the Company's future credit arrangements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
SALE OF UNREGISTERED SECURITIES
The following information relates to securities of the Company issued or
sold by the Company during the past year which were not registered under the
Securities Act:
(i) 2,142,441 shares of Common Stock were issued to the Founding
Companies on closing of the Acquisitions and the initial public offering
(the "Offering"). Shareholders of the Founding Companies have certain
registration rights with respect to 1,975,775 shares of Common Stock
received by them in the Acquisitions, subject to the one-year Lockup Period
described below; and
(ii) 1,256,000 shares of Common Stock which were issued to founders of
TCMS and certain of its executive officers and consultants in conjunction
with the Offering.
All of the aforementioned shares, as well as: (1) an aggregate of 50,000
shares issuable pursuant to a warrant (the "MG Warrant") issued by TCMS to
McFarland, Grossman & Company, Inc. ("MGCO"), a financial advisory firm that
assisted the Company in connection with the Acquisitions and in arranging the
Credit Agreement, and (2) an aggregate of 175,000 shares issuable pursuant to a
warrant (the "Lender Warrant") issued by TCMS to Joint Energy Development
Investments, Limited Partnership, an affiliate of Enron Capital & Trade
Resources Corp., in connection with the Credit Agreement, may be resold publicly
only following their effective registration under the Securities Act or pursuant
to an exemption from the registration requirements of that act, such as Rule 144
thereunder.
At the time of and in conjunction with the Offering, TCMS and its directors
and executive officers, MGCO, J&D Capital Investments, L.C. (which is majority
owned by G. Darcy Klug, a promoter of TCMS), all of TCMS' other current
stockholders and all persons who received shares of Common Stock in connection
with the Acquisitions (other than Common Stock issuable upon exercise of the
Lender Warrant) agreed not
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to offer or sell any of those shares for a period of one year from October 31,
1997 (the "Lockup Period") without the prior written consent of Jefferies &
Company, Inc., with the following exceptions: the Company may issue Common Stock
in connection with future acquisitions, subject to certain conditions, and
pursuant to awards under the 1997 Stock Option Plan.
ITEM 6. SELECTED FINANCIAL DATA.
In accordance with the applicable accounting rules of the Securities and
Exchange Commission (the "Commission"), Woodson Construction Company
(collectively with three affiliated companies, "Woodson"), one of the Founding
Companies, has been identified as the "accounting acquiror" for financial
statement presentation purposes. Consequently, the Company's historical
financial statements for periods ended on or before October 31, 1997, the
effective date of the acquisitions of the Founding Companies for accounting
purposes, are the consolidated historical financial statements of Woodson. As
used in this discussion, the "Company" means (i) Woodson prior to October 31,
1997 and (ii) TCMS and its consolidated subsidiaries on that date and
thereafter. The following selected historical financial information has been
derived from the audited financial statements of the Company for each years
presented. The summary financial information below should be read in conjunction
with the historical financial statements and notes thereto included elsewhere
herein.
YEAR ENDED DECEMBER 31
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
HISTORICAL STATEMENT OF OPERATIONS:
Revenues............................... $14,302 $ 7,786 $18,075 $17,933 $ 57,517
Cost of revenues....................... 10,909 5,874 12,716 13,561 46,507
Selling, general and administrative
expenses............................ 2,991 3,011 2,672 2,968 6,309(1)
Depreciation and amortization.......... 831 728 574 562 2,102
------- ------- ------- ------- --------
Operating income (loss)................ (429) (1,827) 2,113 842 2,599
Interest income (expense), net......... (15) (81) (84) 51 (530)
Other income, net...................... 107 96 69 357 475
------- ------- ------- ------- --------
Income (loss) before income taxes...... (337) (1,812) 2,098 1,250 2,544
Provision (benefit) for income taxes... (141) -- 839 500 1,194(2)
Cumulative effect of accounting
change.............................. 225 -- -- -- --
------- ------- ------- ------- --------
Net income (loss).............. $ 29 $(1,812) $ 1,259 $ 750 $ 1,350
======= ======= ======= ======= ========
BALANCE SHEET DATA:
Working capital........................ $ 2,862 $ 1,402 $ 4,628 $ 3,803 $ 3,439
Total assets........................... 8,764 6,997 9,007 9,157 171,817
Total debt, including current
portion............................. 282 755 19 679 15,991
Stockholders' equity................... 7,335 5,609 7,616 7,718 115,145
- ---------------
(1) Includes a $2.2 million non-cash compensation charge related to the issuance
of shares of Common Stock to management of the Company.
(2) Represents pro forma provision for income taxes. See Note 2 to the
consolidated financial statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes thereto and "Selected
Financial Data" appearing elsewhere in this Annual Report on Form 10-K. The
following information contains forward-looking statements. For a discussion of
certain limitations inherent in such statements, see
"Business -- Forward-Looking Statements."
INTRODUCTION
The Company's revenues are primarily derived from providing services
related to pipeline installation and repair, hydrostatic testing and
commissioning of pipelines, and fabrication and refurbishment of components for
oil and gas production platforms and drilling rigs. To a lesser extent, the
Company generates revenue from (i) the manufacture and sale of amphibious
undercarriages for marine construction equipment used in stump-studded swamp
terrain and (ii) onshore environmental site assessments and on-site remediation
of petroleum-contaminated areas.
Most of the Company's services are provided under fixed-priced contracts
and are generally completed within one year. These contracts are usually
accounted for using the percentage-of-completion method of accounting. Under
this method, the percentage-of-completion is determined by comparing contract
costs incurred to date with total estimated contract costs. Any significant
revision in cost and income estimates is reflected in the accounting period in
which the facts that require the revision become known. Income is recognized by
applying the percentage completed to the projected total income for each
contract in progress. Cost of revenues consist of direct material, labor and
subcontracting costs and indirect costs related to contract performance, such as
indirect labor, supplies and tools. Cost of revenues also include the
manufacturing costs related to the amphibious undercarriages sold and costs
associated with the services provided for site assessments and remediation
activities. Selling, general and administrative expenses have historically
consisted primarily of compensation and benefits to owners as well as to sales
and administrative employees, fees for professional services and other general
office expenses. Selling, general and administrative expenses have also
historically included incentive and discretionary bonuses paid to owners,
including amounts paid in lieu of S corporation distributions to enable them to
meet their income tax obligations.
This Annual Report on Form 10-K and Management's Discussion and Analysis of
Results of Operations and Financial Condition include certain forward-looking
statements, which are identified by the use of the words "believes", "expects"
and similar expressions that contemplate future events. Numerous important
factors, risks and uncertainties affect the Company's operating results and
could cause the Company's actual results to differ materially from the results
implied by these or any other forward-looking statements made by, or on behalf
of the Company. There can be no assurance that future results will meet
expectations. These important factors, risks and uncertainties include, but are
not limited to, those described in the following paragraphs and in the
discussion above in this Annual Report under the heading "Business".
The marine construction industry along the U. S. Gulf Coast is highly
seasonal as a result of weather conditions, the availability of daylight hours
and the timing of capital expenditures by oil and gas companies. Historically,
the Founding Companies have performed a substantial portion of their services
during the period from March through November, and, therefore, a
disproportionate portion of their contract revenues, gross profit and net income
generally has been earned during the second and third quarters of the calendar
year. Because of this seasonality, the Company's future full year results are
not likely to be a direct multiple of any particular quarter or combination of
quarters.
Additionally, the Company's results of operations will also be affected by
the level of oil and gas exploration and development activity maintained by oil
and gas companies in the Gulf of Mexico. The level of exploration and
development activity is related to several factors, including trends of oil and
gas prices, exploration and production companies' expectations of future oil and
gas prices, and changes in technology which reduce costs and improve expected
returns on investment.
Certain risks are definitely inherent under contracts which are priced on a
fixed-price basis. The revenues, costs and gross profit realized on a contract
will often vary from the estimated amounts for various reasons, including errors
in estimates or bidding, changes in the availability and cost of labor and
material and
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variations in productivity from the original estimates. These variations and the
risks inherent in the marine construction industry may result in revenues and
gross profits different from those originally estimated and can result in
reduced profitability or losses on projects.
In accordance with the applicable accounting rules of the Commission,
Woodson Construction Company (collectively with three affiliated companies,
"Woodson") has been identified as the "accounting acquiror" for financial
statement presentation purposes. Consequently, the Company's historical
financial statements for periods ended on or before October 31, 1997, the
effective date of the acquisitions of the Founding Companies for accounting
purposes, are the consolidated historical financial statements of Woodson. As
used in this discussion, the "Company" means (i) Woodson prior to October 31,
1997 and (ii) TCMS and its consolidated subsidiaries on that date and
thereafter.
RESULTS OF OPERATIONS -- THE COMPANY
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
Revenues.......................... $18,075 100.0% $17,933 100.0% $57,517 100.0%
Cost of revenues.................. 12,716 70.4% 13,561 75.6% 46,507 80.9%
Selling, general and
administrative expenses......... 2,672 14.8% 2,968 16.6% 6,309 11.0%
Depreciation and amortization..... 574 3.2% 562 3.1% 2,102 3.7%
------- ----- ------- ----- ------- -----
Operating income.................. 2,113 11.7% 842 4.7% 2,599 4.5%
Interest income (expense), net.... (84) (0.5)% 51 0.3% (530) (0.9)%
Other income, net................. 69 0.4% 357 2.0% 475 0.8%
------- ----- ------- ----- ------- -----
Income before income taxes........ 2,098 11.6% 1,250 7.0% 2,544 4.4%
Provision for income taxes(1)..... 839 4.6% 500 2.8% 1,194 2.1%
------- ----- ------- ----- ------- -----
Net income...................... $ 1,259 7.0% $ 750 4.2% $ 1,350 2.3%
======= ===== ======= ===== ======= =====
- ---------------
(1) Represents pro forma provision for income taxes. See Note 2 to the
consolidated financial statements.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues increased $39.6 million, or 220.7%, from $17.9 million
for the year ended December 31, 1996 to $57.5 million for the year ended
December 31, 1997. Approximately $14.0 million of the increase in revenues was
attributable to the acquisitions of the Founding Companies on November 4, 1997.
The remaining increase was primarily attributable to higher pipeline
construction revenues resulting from improved market activity in 1997.
Cost of revenues. Cost of revenues increased $32.9 million, or 242.9%, from
$13.6 million for the year ended December 31, 1996 to $46.5 million for the year
ended December 31, 1997. The increase in cost of revenues was consistent with
the revenue increase. As a percentage of revenues, cost of revenues increased to
80.9% during 1997 from 75.6% for 1996. The increase was due primarily to lower
margins achieved during 1997 on projects that were considerably larger in size
and scope than in 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3.3 million, or 112.6%, for the year ended
December 31, 1997 compared to the 1996 period. The single largest component of
the increase was a $2.2 million non-cash compensation charge reflected during
the fourth quarter of 1997 related to the issuance of shares of Common Stock to
management of the Company. As a percentage of revenues, selling, general and
administrative expenses (exclusive of the non-cash compensation charge) were
7.1% during 1997, compared to 16.6% during 1996. The percentage decrease was
primarily due to the significant increase in revenues without a commensurate
increase in overhead expenses.
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Depreciation and amortization. Depreciation and amortization expenses
increased $1.5 million, or 274.0%, from $0.6 million for the year ended December
31, 1996 to $2.1 million for the year ended December 31, 1997. The increase was
due to: (1) additional property, plant and equipment placed in service during
late 1996 and early 1997, and (2) the acquisition of equipment owned by the
Founding Companies effective November 4, 1997 under the purchase method of
accounting.
Interest income (expense), net. Interest expense, net of interest income
totaled $0.5 million during the year ended December 31, 1997, as compared to net
interest income of $0.05 million during 1996. The significant increase was due
to: (1) higher average debt levels resulting from drawdowns on the corporate
revolver after the completion of the Offering, and (2) amortization of debt
issuance costs related to the credit agreement, Lender Warrant, and MGCO
Warrant. See "Liquidity and Capital Resources -- The Company" below for
discussion of credit agreement and related financings.
Other income, net. During 1996 and 1997, other income, net consisted
primarily of gains recognized on the sale of available-for-sale securities.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues totaling $17.9 million for the year ended December 31,
1996 were virtually unchanged from the 1995 results as a $0.7 million decline in
environmental services revenues resulting from less work with the Louisiana
Department of Environmental Quality was offset by a $0.6 million increase in
revenues from sales of amphibious undercarriages.
Cost of revenues. Cost of revenues increased $0.8 million, or 6.6%, in 1996
compared to 1995. The increase was primarily due to additional maintenance costs
during equipment downtime. As a percentage of revenue, cost of revenues was
75.6% in 1996 compared to 70.4% in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses totaling $3.0 million reflected an increase of $0.3
million, or 11.1%, in 1996 compared to 1995. The increase was primarily due to a
one-time bonus paid to officers and the employment of a safety consultant. As a
percentage of revenues, selling, general and administrative expenses were 16.6%
in 1996 compared to 14.8% in 1995.
Depreciation and amortization. Depreciation and amortization expenses were
essentially unchanged for 1996 compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
On November 4, 1997, TCMS completed the Offering, which involved the
issuance of 5,750,000 shares of Common Stock at a price of $18.00 per share
(before deducting underwriting discounts and commissions), including 750,000
shares pursuant to an over-allotment option granted by the Company to the
underwriters in connection with the Offering. The net proceeds to TCMS after
deducting underwriter discounts and commissions totaled $94.7 million, of which
$85.7 million was used to pay the cash portion of the purchase prices relating
to the Acquisitions with the remainder being used to pay certain indebtedness of
the Founding Companies.
The Company generated $5.8 million in net cash from operating activities
during the year ended December 31, 1997. Net cash used in investing activities
totaled approximately $96.2 million, principally for the cash purchase price of
the Acquisitions as noted above. Reflecting the net proceeds from the Offering,
net cash provided by financing activities totaled $91.7 million. At December 31,
1997, the Company had working capital of $3.4 million, including $2.5 million in
current maturities of long-term debt.
The Company generated $2.7 million in net cash from operating activities in
the year ended December 31, 1996. Net cash used in investing activities was
approximately $1.8 million, principally for capital expenditures. Net cash used
in financing activities was $0.6 million, primarily for the payment of
dividends. At December 31, 1996, the Company had working capital of $3.8
million, including $0.7 million in short-term borrowings.
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On October 28, 1997, TCMS entered into a credit agreement (the "Credit
Agreement") with Joint Energy Development Investments, Limited Partnership, an
affiliate of Enron Capital & Trade Resources Corp. (the "Lender"). The Credit
Agreement extends through October 1999 and provides for borrowings up to $75.0
million, with the initial borrowing availability being $50.0 million (the
"Initial Availability") and the remaining $25.0 million being made available
from time to time and in such amounts as the Lender shall determine in its sole
discretion. The Credit Agreement is divided into two tranches: (a) a senior
secured revolving credit facility (the "Revolving Credit Facility"), providing
for borrowings of up to $60.0 million ($40.0 million of which comprises part of
the Initial Availability) and (b) $15.0 million of senior subordinated term loan
borrowings (the "Term Loan Facility"), of which $10.0 million comprises the
remainder of the Initial Availability. During 1997, borrowings were only made
under the Revolving Credit Facility and the outstanding balance totaled $10.0
million at December 31, 1997.
At December 31, 1997, the Company had commitments of $0.7 million for the
purchase or construction of capital assets. The Company plans to fund these
capital expenditures through cash flow from operations and, if necessary,
additional borrowings under the Credit Agreement.
The Company intends to continue pursuing attractive corporate and asset
acquisition opportunities. The timing, size or success of any acquisition effort
and the associated potential capital commitments are unpredictable. The Company
expects to fund future acquisitions through the issuance of additional equity as
well as through a combination of working capital, cash flow from operations and
borrowings, including borrowings under the Credit Agreement.
The Company is, from time to time, exposed to various contingencies arising
in the ordinary course of business, including, among others, legal actions
arising from accidents and other events resulting from the operational risks
inherent in the marine construction business. For a discussion of two class
action lawsuits involving large claims for compensatory and punitive damages
against one of the Founding Companies arising from events that occurred during
the course of a pipeline installation project for a third party gas transmission
company (and as to which the total amount of damages to which the Company may
have exposure cannot reasonably be estimated at this time), see
"Business -- Legal Proceedings." There can be no assurance that these lawsuits
or other legal actions or contingencies that may arise in the future will not
have a material adverse effect on the Company's business, financial condition,
results of operations and liquidity.
YEAR 2000
The Company is now assessing the potential impact of the situation commonly
referred to as the "Year 2000 Problem." The Year 2000 Problem, which is common
to most organizations, concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date sensitive
information related to the year 2000 and beyond. The Company is currently
evaluating the expected cost to be incurred in connection with the Year 2000
Problem.
INFLATION
Inflation has not had a material impact on the Company's results of
operations for the last three years.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
for the fiscal years of the individual Founding Companies is derived from the
respective audited financial statements of the individual Founding Companies
included elsewhere herein. The following discussion should be read in
conjunction with the separate company financial statements and related notes
thereto appearing elsewhere in this Annual Report on Form 10-K.
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RESULTS OF OPERATIONS -- CSI
The following table presents certain selected data (and that data as a
percentage of revenue) of CSI on a historical basis for the periods indicated
(dollars in thousands):
SIX MONTHS ENDED
JUNE 30
------------------------
1994(1) 1995(1) 1996(2) 1996 1997
-------------- ---------------- --------------- ---------------- -----
(UNAUDITED)
Revenue............................... $5,331 100.0% $5,226 100.0% $8,447 100.0% $3,815 100.0% $9,606
Costs and expenses:
Cost of revenue..................... 2,964 55.6 3,334 63.8 5,264 62.3 2,463 64.6 5,651
Selling, general and administrative
expenses.......................... 1,725 32.4 2,285 43.7 2,435 28.8 1,160 30.4 1,270
Depreciation and amortization......... 288 5.4 269 5.1 359 4.3 202 5.3 245
------ ----- ------ ------ ----- ------ ------ ------ -----
Operating income (loss)............... $ 354 6.6% $ (662) (12.7)% $389 4.7% $ (10) (0.3)% $2,440
====== ===== ====== ====== ===== ====== ====== ====== =====
- ---------------
(1) The financial information is presented for the twelve months ended May 31.
(2) Reflects results of operations for the twelve months ended December 31,
1996.
CSI's results for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996
Revenue. Revenue increased $5.8 million, or 152%, for the six months ended
June 30, 1997 compared to the corresponding period in the prior year. The
increase was primarily due to the additional revenue generated by the M/V
Discovery, which was acquired in early January 1997.
Cost of revenue. Cost of revenue increased $3.2 million, or 129%, for the
six months ended June 30, 1997 compared to the corresponding period in the prior
year. The increase was primarily due to costs associated with the operation of
the M/V Discovery. As a percentage of revenue, cost of revenue was 58.8% for the
six months ended June 30, 1997 compared to 64.6% for the corresponding period in
the prior year. The decrease as a percentage of revenue was due to increased
marine construction activity.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.1 million, or 9.5%, for the six months
ended June 30, 1997 compared to the corresponding period in the prior year. As a
percentage of revenue, selling, general and administrative expenses were 13.2%
for the six months ended June 30, 1997 compared to 30.4% for the corresponding
period in the prior year. The percentage decrease was primarily attributable to
the significant increase in revenue relating to the M/V Discovery without a
commensurate increase in overhead expenses.
Depreciation and amortization. Depreciation and amortization expenses
increased $43,000, or 21.3%, for the six months ended June 30, 1997 compared to
the corresponding period in the prior year. The increase was related to the
acquisition of, and improvements to, the M/V Discovery.
CSI's results for the year ended December 31, 1996 compared to the year ended
May 31, 1995
Revenue. Revenue increased $3.2 million, or 61.3%, in 1996 compared to the
1995 period. The increase was primarily due to an increase in marine
construction activity in the Gulf of Mexico.
Cost of revenue. Cost of revenue increased $1.9 million, or 57.9%, in 1996
compared to the 1995 period. The increase in cost of revenue was primarily due
to the corresponding increase in revenue and related direct costs resulting from
the increased activity. As a percentage of revenue, cost of revenue was 62.3% in
1996 compared to 63.8% in the 1995 period.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 6.6%, in 1996 compared to the
1995 period. As a percentage of revenue, selling, general and administrative
expenses were 28.8% in 1996 compared to 43.7% in the 1995 period. The percentage
decrease was primarily due to the significant increase in revenue experienced in
1996 without a commensurate increase in overhead expenses.
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Depreciation and amortization. Depreciation and amortization expenses
increased $0.1 million, or 33.5%, for 1996 compared to the 1995 period. The
increase was related to additions of property, plant and equipment in 1995 and
1996.
CSI's results for the year ended May 31, 1995 compared to the year ended May
31, 1994
Revenue. Revenue decreased nominally in 1995 compared to the 1994 period.
Cost of revenue. Cost of revenue increased $0.4 million, or 12.5%, in 1995
compared to the 1994 period. As a percentage of revenue, cost of revenue was
63.8% in 1995 compared to 55.6% in the 1994 period. The percentage increase was
primarily due to lower margins on contracts for hydrostatic testing services
performed in the 1995 period, resulting from price discounting.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.6 million, or 32.5%, in 1995 compared to
the 1994 period. The increase was primarily due to an expansion of the
administrative staff and the payment of a one-time bonus of $100,000 to CSI's
principal officers. As a percentage of revenue, selling, general and
administrative expenses were 43.7% in 1995 compared to 32.4% in the 1994 period.
Depreciation and amortization. Depreciation and amortization expenses were
essentially unchanged in 1995 compared to the 1994 period.
CSI's results for the seven months ended December 31, 1995
The following table presents certain selected data (and that data as a
percentage of revenue) of CSI on a historical basis for the period indicated
(dollars in thousands):
SEVEN MONTHS
ENDED
DECEMBER 31,
1995
---------------
Revenue..................................................... $6,041 100.0%
Costs and expenses:
Cost of revenue........................................... 3,010 49.8
Selling, general and administrative expenses.............. 1,282 21.2
Depreciation and amortization............................. 177 3.0
------ -----
Operating income............................................ $1,572 26.0%
====== =====
Revenue. Revenue for the seven months ended December 31, 1995 included
three significant high-margin jobs totaling $2.5 million, or 41.4% of the total
revenue for the period. These unusually high-margin, short-duration jobs were
bid on the basis of standard rental rates and included substantially higher
built-in margins compared to competitive bid projects.
Cost of revenue. As a percentage of revenue, cost of revenue was 49.8%,
compared to 63.8% for the twelve months ended May 31, 1995. The decrease as a
percentage of revenue was due primarily to the higher-margin jobs included in
the job mix in the seven-month period.
Selling, general and administrative expenses. As a percentage of revenue,
selling, general and administrative expenses were 21.2%, compared to 43.7% for
the twelve months ended May 31, 1995. The seven months represented an active
period during which revenues increased substantially while selling, general and
administrative expenses remained relatively constant.
Depreciation and Amortization. On a per-month basis, depreciation and
amortization expenses were relatively constant in the seven months ended
December 31, 1995 and the twelve months ended May 31, 1995.
17
20
LIQUIDITY AND CAPITAL RESOURCES -- CSI
CSI generated $0.5 million in net cash from operating activities during the
six months ended June 30, 1997. Net cash used in investing activities was $3.8
million, with $4.2 million used for capital expenditures being offset partially
by the sale of certain investments that generated net proceeds of $0.4 million.
Net cash provided by financing activities was approximately $3.7 million,
principally related to the issuance of notes payable. At June 30, 1997, CSI had
working capital of $2.1 million and $5.8 million of debt outstanding (of which
$1.1 million was classified as current). Long-term debt consisted of a $3.4
million mortgage note on the M/V Discovery and three bank notes aggregating $1.9
million.
CSI generated $1.2 million in net cash from operating activities during the
year ended December 31, 1996. Net cash used in investing activities was
approximately $0.2 million, principally for capital expenditures, which was
offset by proceeds from sales of investments. Net cash used in financing
activities was $1.2 million, which included borrowings of $2.5 million and
repayments of $1.2 million and purchase of treasury stock for $2.3 million. At
December 31, 1996, CSI had working capital of $1.7 million and $2.1 million of
debt outstanding.
RESULTS OF OPERATIONS -- HBH
The following table presents certain selected data (and that data as a
percentage of revenue) of HBH on a historical basis for the periods indicated
(dollars in thousands):
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30
---------------------------------------------------- ---------------------------------
1994 1995 1996 1996 1997
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
Revenue....................... $15,261 100.0% $14,771 100.0% $36,873 100.0% $19,062 100.0% $23,850 100.0%
Costs and expenses:
Cost of revenue............. 12,585 82.4 16,803 113.7 33,727 91.5 16,343 85.7 19,394 81.3
Selling, general and
administrative expenses... 929 6.1 867 5.9 1,000 2.7 484 2.5 671 2.8
Depreciation and
amortization.............. 503 3.3 871 5.9 1,482 4.0 719 3.8 750 3.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income (loss)..... $ 1,244 8.2% $(3,770) (25.5)% $ 664 1.8% $ 1,516 8.0% $ 3,035 12.7%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
HBH's results for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996
Revenue. Revenue increased $4.8 million, or 25.1%, for the six months ended
June 30, 1997 compared to the corresponding period in the prior year. The
revenue increase was attributable to improved pipeline construction activity in
1997, with two major projects contributing $16.8 million in revenue.
Cost of revenue. Cost of revenue increased $3.1 million, or 18.7%, for the
six months ended June 30, 1997 compared to the corresponding period in the prior
year. The increase was primarily attributable to costs related to the higher
level of activity in pipeline construction in 1997. Improved pricing and less
subcontracting costs as a percentage of overall cost on the major projects in
the current period have contributed to higher margins. As a percentage of
revenue, cost of revenue was 81.3% for the six months ended June 30, 1997
compared to 85.7% for the corresponding period in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 38.6%, for the six months
ended June 30, 1997 compared to the corresponding period in the prior year. The
increase was primarily attributable to accruals of performance bonuses in 1997,
which were partially offset by the elimination of consulting fees paid in 1996
to HBH's former sole shareholder. As a percentage of revenue, selling, general
and administrative expenses were 2.8% for the six months ended June 30, 1997
compared to 2.5% for the corresponding period in the prior year.
Depreciation and amortization. Depreciation and amortization expenses
increased $31,000, or 4.3%, for the six months ended June 30, 1997 compared to
the corresponding period in the prior year due to additions to its property,
plant and equipment.
18
21
HBH's results for 1996 compared to 1995
Revenue. Revenue increased $22.1 million, or 150%, in 1996 compared to
1995. The increase was due primarily to full year operating results of the
BH-400, which was placed in service in October 1995, and the completion of a
large pipeline installation project which generated $13.0 million in revenue.
Cost of revenue. Cost of revenue increased $16.9 million, or 101%, in 1996
compared to 1995. The increase was primarily attributable to direct costs, such
as labor, associated with the operations of the BH-400. As a percentage of
revenue, cost of revenue was 91.5% in 1996 compared to 113.7% in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.1 million, or 15.3%, in 1996 compared to
1995. The increase was primarily attributable to increased salaries. As a
percentage of revenue, selling, general and administrative expenses were 2.7% in
1996 compared to 5.9% in 1995.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.6 million, or 70.2%, in 1996 compared to 1995, due primarily to the
acquisition of the BH-400 in October 1995.
HBH's results for 1995 compared to 1994
Revenue. Revenue decreased $0.5 million, or 3.2%, in 1995 compared to 1994.
The decrease was due primarily to the completion of a large pipeline
installation project in 1994, which generated $5.6 million in revenue.
Cost of revenue. Cost of revenue increased $4.2 million, or 33.5%, in 1995
compared to 1994. The increase was primarily attributable to the late delivery
of the BH-400, which delayed the start of two fixed-price contract jobs, thereby
increasing costs relating to standby time, weather downtime and sub-contract
services. As a percentage of revenue, cost of revenue was 114% in 1995 compared
to 82.5% in 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.1 million, or 6.7%, in 1995 compared to
1994. The decrease was primarily attributable to the payment of performance
bonuses in 1994. As a percentage of revenue, selling, general and administrative
expenses were 5.9% in 1995 compared to 6.1% in 1994.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.4 million, or 73.2%, in 1995 compared to 1994, due primarily to the
acquisition of the BH-400 in October 1995 and other additions to property, plant
and equipment in 1994 and 1995.
LIQUIDITY AND CAPITAL RESOURCES -- HBH
HBH generated $1.2 million in net cash from operating activities during the
six months ended June 30, 1997. Net cash used in investing activities was $0.3
million, principally for capital expenditures. Net cash used in financing
activities was $0.9 million, which included $20.2 million proceeds from a bank
line of credit and $21.2 million of repayments. At June 30, 1997, HBH had a
working capital deficit of $0.2 million, including $1.5 million of current
maturities of debt.
HBH generated $0.1 million in net cash from operating activities during the
year ended December 31, 1996. Net cash provided by investing activities was
approximately $0.1 million, principally for capital expenditures of $1.0 million
which was offset by $0.9 million of collections on notes. Net cash used in
financing activities was $0.1 million, which included $29.0 million of
borrowings throughout the year under a bank line of credit, $0.6 million from
subordinated debt and $0.3 million from capital contributions from HBH's sole
shareholder, together with debt repayments throughout the year of $30.5 million.
At December 31, 1996, HBH had a working capital deficit of $3.5 million,
including $2.4 million of current maturities of debt.
19
22
RESULTS OF OPERATIONS -- RFCNI
The following table presents certain selected data (and that data as a
percentage of revenue) of RFCNI on a historical basis for the periods indicated
(dollars in thousands):
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
-------------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
--------------- --------------- -------------- -------------- --------------
(UNAUDITED)
Revenue........................... $5,611 100.0% $10,497 100.0% $9,730 100.0% $3,159 100.0% $4,536 100.0%
Costs and expenses:
Cost of revenue................. 4,715 84.0 9,426 89.8 8,260 84.9 2,708 85.7 3,825 84.3
Selling, general and
administrative expenses....... 650 11.6 698 6.7 885 9.1 363 11.5 674 14.9
Depreciation and amortization..... 16 .3 15 .1 12 .1 8 .3 8 .2
------ ------ ------- ----- ------ ----- ------ ----- ------ -----
Operating income.................. $ 230 4.1% $ 358 3.4% $ 573 5.9% $ 80 2.5% $ 29 0.6%
====== ====== ======= ===== ====== ===== ====== ===== ====== =====
RFCNI's results for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996
Revenue. Revenue increased $1.4 million, or 43.6%, in the six months ended
June 30, 1997 compared to the corresponding period in the prior year. Revenue
from general fabrication work increased $0.8 million and revenue from
fabrication of sewage treatment units increased $0.6 million for the 1997
period.
Cost of revenue. Cost of revenue increased $1.1 million, or 41.2%, for the
six months ended June 30, 1997 compared to the corresponding period in the prior
year. As a percentage of revenue, cost of revenue was 84.3% for the six months
ended June 30, 1997 compared to 85.7% for the corresponding period in the prior
year.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.3 million, or 85.7%, for the six months
ended June 30, 1997 compared to the corresponding period in the prior year. The
increase was primarily attributable to higher levels of marketing personnel and
related costs. As a percentage of revenue, selling, general and administrative
expenses were 14.9% for the six months ended June 30, 1997 compared to 11.5% for
the corresponding period in the prior year.
Depreciation and amortization. Depreciation and amortization expenses were
unchanged for the period ended June 30, 1997 compared to the corresponding
period in the prior year.
RFCNI's results for 1996 compared to 1995
Revenue. Revenue decreased $0.8 million, or 7.3%, in 1996 compared to 1995.
The decrease was due primarily to the completion of a large deck and jacket
fabrication project in 1995, which generated $4.7 million in revenue.
Cost of revenue. Cost of revenue decreased $1.2 million, or 12.4%, in 1996
compared to 1995. The decrease was primarily attributable to less subcontracting
of fabrication work in 1995 compared to 1996. As a percentage of revenue, cost
of revenue was 84.9% in 1996 compared to 89.8% in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 26.8%, in 1996 compared to
1995. The increase was primarily attributable to an increase in payroll and
related costs due to personnel added to expand RFCNI's marketing capabilities.
As a percentage of revenue, selling, general and administrative expenses were
9.1% for 1996 compared to 6.7% in 1995.
Depreciation and amortization. Depreciation and amortization expenses were
essentially unchanged in 1996 compared to 1995.
20
23
RFCNI's results for 1995 compared to 1994
Revenue. Revenue increased $4.9 million, or 87.1%, in 1995 compared to
1994. The increase was due primarily to revenue generated from a large deck and
jacket fabrication project in 1995, which generated $4.7 million in revenue.
Cost of revenue. Cost of revenue increased $4.7 million, or 99.9%, in 1995
compared to 1994. The increase was primarily attributable to high material
procurement costs associated with the above-mentioned deck and jacket
fabrication project. As a percentage of revenue, cost of revenue was 89.8% in
1995 compared to 84.0% in 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $48,000, or 7.4%, in 1995 compared to 1994. As
a percentage of revenue, selling, general and administrative expenses were 6.7%
in 1995 compared to 11.6% in 1994.
Depreciation and amortization. Depreciation and amortization expenses were
essentially unchanged in 1995 compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES -- RFCNI
RFCNI generated $0.7 million in net cash from operating activities during
the six months ended June 30, 1997. Net cash used in investing activities was
minimal. At June 30, 1997, RFCNI had working capital of $0.5 million and no debt
outstanding.
RFCNI used $0.6 million in net cash from operating activities during the
year ended December 31, 1996. Net cash provided from investing activities was
approximately $0.1 million, principally from collections of debt from related
parties. Net cash used in financing activities was $0.2 million, primarily for
dividend payments to RFCNI's sole shareholder. At December 31, 1996, RFCNI had
working capital of $0.5 million and no debt outstanding.
21
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
HISTORICAL FINANCIAL STATEMENTS:
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants............... 23
Consolidated Balance Sheets............................ 24
Consolidated Statements of Operations.................. 25
Consolidated Statements of Stockholders' Equity........ 26
Consolidated Statements of Cash Flows.................. 27
Notes to Consolidated Financial Statements............. 28
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY:
Report of Independent Public Accountants............... 43
Consolidated Balance Sheets............................ 44
Consolidated Statements of Operations.................. 45
Consolidated Statements of Stockholders' Equity
(Deficit)............................................. 46
Consolidated Statements of Cash Flows.................. 47
Notes to Consolidated Financial Statements............. 48
FOUNDING COMPANIES:
THE WOODSON COMPANIES
Report of Independent Public Accountants............... 53
Combined Balance Sheets................................ 54
Combined Statements of Operations...................... 55
Combined Statements of Shareholders' Equity............ 56
Combined Statements of Cash Flows...................... 57
Notes to Combined Financial Statements................. 58
THE CSI COMPANIES
Report of Independent Public Accountants............... 67
Combined Balance Sheets................................ 68
Combined Statements of Operations...................... 69
Combined Statements of Owners' Equity.................. 70
Combined Statements of Cash Flows...................... 71
Notes to Combined Financial Statements................. 72
HBH, INC.
Independent Auditors' Report........................... 79
Balance Sheets......................................... 80
Statements of Operations............................... 81
Statements of Shareholder's Equity (Deficit)........... 82
Statements of Cash Flows............................... 83
Notes to Financial Statements.......................... 84
THE RED FOX COMPANIES OF NEW IBERIA, INC.
Report of Independent Public Accountants............... 89
Balance Sheets......................................... 90
Statements of Operations............................... 91
Statements of Shareholder's Equity..................... 92
Statements of Cash Flows............................... 93
Notes to Financial Statements.......................... 94
22
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the stockholders of TransCoastal Marine Services, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of
TransCoastal Marine Services, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TransCoastal Marine Services, Inc. and subsidiaries as of December 31, 1996 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis with the Woodson Companies ("Woodson")
as the accounting acquiror.
ARTHUR ANDERSEN LLP
Houston, Texas
February 24, 1998
23
26
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31
-----------------
1996 1997
------ --------
CURRENT ASSETS:
Cash and cash equivalents................................. $1,117 $ 2,416
Contracts and accounts receivable......................... 1,418 19,214
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. -- 3,272
Available-for-sale securities, at fair value.............. 1,603 131
Other current assets...................................... 1,104 2,833
------ --------
Total current assets.............................. 5,242 27,866
PROPERTY, PLANT AND EQUIPMENT, net.......................... 2,956 66,907
GOODWILL, net of amortization of $-- and $275,
respectively.............................................. -- 70,757
OTHER NONCURRENT ASSETS..................................... 959 6,287
------ --------
Total assets...................................... $9,157 $171,817
====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings..................................... $ 229 $ --
Notes payable to stockholders............................. 450 --
Current maturities of long-term debt...................... -- 2,520
Accounts payable.......................................... 510 12,105
Accrued expenses.......................................... 250 7,860
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. -- 1,651
Deferred income taxes payable............................. -- 291
------ --------
Total current liabilities......................... 1,439 24,427
LONG-TERM DEBT, net of current maturities................... -- 13,471
DEFERRED INCOME TAXES....................................... -- 18,774
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 2,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.001 par value, 20,000,000 shares
authorized, 2,006,331 and 8,898,441 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 2 9
Restricted common stock, $.001 par value, 3,000,000 shares
authorized, none and 250,000 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... -- --
Additional paid-in capital................................ 122 128,375
Retained earnings (deficit)............................... 7,275 (13,277)
Net unrealized gain on available-for-sale securities, net
of deferred income taxes............................... 319 38
------ --------
Total stockholders' equity........................ 7,718 115,145
------ --------
Total liabilities and stockholders' equity........ $9,157 $171,817
====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
24
27
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-----------------------------
1995 1996 1997
------- ------- -------
REVENUES.................................................... $18,075 $17,933 $57,517
COSTS AND EXPENSES:
Cost of revenues.......................................... 12,716 13,561 46,507
Selling, general and administrative expenses.............. 2,672 2,968 6,309
Depreciation and amortization............................. 574 562 2,102
------- ------- -------
Operating income....................................... 2,113 842 2,599
OTHER INCOME (EXPENSE), net:
Interest income (expense), net............................ (84) 51 (530)
Other income, net......................................... 69 357 475
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 2,098 1,250 2,544
PROVISION FOR INCOME TAXES.................................. 91 91 527
------- ------- -------
NET INCOME.................................................. $ 2,007 $ 1,159 $ 2,017
======= ======= =======
PRO FORMA INFORMATION (UNAUDITED) (Note 2)
Income before income taxes................................ $ 2,098 $ 1,250 $ 2,544
Pro forma income taxes.................................... 839 500 1,194
------- ------- -------
Pro forma net income...................................... $ 1,259 $ 750 $ 1,350
======= ======= =======
PRO FORMA EARNINGS PER SHARE (UNAUDITED):
Basic..................................................... $ 1.22 $ 0.44 $ 0.40
Diluted................................................... $ 1.22 $ 0.44 $ 0.40
NUMBER OF SHARES USED IN PER SHARE COMPUTATIONS:
Basic..................................................... 1,031 1,722 3,363
Diluted................................................... 1,031 1,722 3,393
The accompanying notes are an integral part of these consolidated financial
statements.
25
28
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
RESTRICTED NET UNREALIZED
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED GAIN (LOSS) ON
------------------ ---------------- PAID-IN EARNINGS AVAILABLE-FOR-SALE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES TOTAL
--------- ------ ------- ------ ---------- --------- ------------------ --------
BALANCE AT DECEMBER 31, 1994..... 1,031,331 $ 1 -- $-- $ 122 $ 5,465 $(235) $ 5,353
DIVIDENDS........................ -- -- -- -- -- (90) -- (90)
NET INCOME..................... -- -- -- -- -- 2,007 -- 2,007
CHANGE IN VALUATION ALLOWANCE
FOR NET UNREALIZED GAIN
(LOSS) ON AVAILABLE-FOR-SALE
SECURITIES................... -- -- -- -- -- -- 346 346
--------- --- ------- --- -------- -------- ----- --------
BALANCE AT DECEMBER 31, 1995..... 1,031,331 1 -- -- 122 7,382 111 7,616
FOUNDER SHARES................. 975,000 1 -- -- -- -- -- 1
DIVIDENDS...................... -- -- -- -- -- (1,266) -- (1,266)
NET INCOME..................... -- -- -- -- -- 1,159 -- 1,159
CHANGE IN VALUATION ALLOWANCE
FOR NET UNREALIZED GAIN
(LOSS) ON AVAILABLE-FOR-SALE
SECURITIES................... -- -- -- -- -- -- 208 208
--------- --- ------- --- -------- -------- ----- --------
BALANCE AT DECEMBER 31, 1996..... 2,006,331 2 -- -- 122 7,275 319 7,718
ISSUANCE OF COMMON SHARES TO
MANAGEMENT................... 275,000 -- -- -- 2,200 -- -- 2,200
ISSUANCE OF COMMON SHARES TO
CONSULTANTS.................. 6,000 -- -- -- 44 -- -- 44
INITIAL PUBLIC OFFERING, NET OF
OFFERING COSTS............... 5,750,000 6 -- -- 94,733 -- -- 94,739
SHARE EXCHANGE (NOTE 6)........ (250,000) -- 250,000 --
ACQUISITIONS OF FOUNDING
COMPANIES.................... 1,111,110 1 -- -- 15,999 -- -- 16,000
REVALUATION OF FOUNDERS' SHARES
IN CONNECTION WITH
ACQUISITIONS (NOTE 3)........ -- -- -- -- 14,039 -- -- 14,039
ISSUANCE OF MGCO WARRANT AND
LENDER WARRANT............... -- -- -- -- 1,238 -- -- 1,238
DIVIDENDS...................... -- -- -- -- -- (2,733) -- (2,733)
DISTRIBUTIONS TO WOODSON
STOCKHOLDERS................. -- -- -- -- -- (19,836) -- (19,836)
NET INCOME..................... -- -- -- -- -- 2,017 -- 2,017
CHANGE IN VALUATION ALLOWANCE
FOR NET UNREALIZED GAIN
(LOSS) ON AVAILABLE-FOR-SALE
SECURITIES................... -- -- -- -- -- -- (281) (281)
--------- --- ------- --- -------- -------- ----- --------
BALANCE AT DECEMBER 31, 1997..... 8,898,441 $ 9 250,000 $-- $128,375 $(13,277) $ 38 $115,145
========= === ======= === ======== ======== ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
29
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
------------------------------
1995 1996 1997
------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,007 $ 1,159 $ 2,017
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 574 562 2,102
(Gain) loss on sale of property, plant and equipment... 98 (340) --
Gain on sale of investments............................ -- -- (281)
Compensation expense on stock issuance to senior
management............................................ -- -- 2,200
Deferred income taxes.................................. 91 91 139
Other.................................................. 4 (36) 170
Changes in operating assets and liabilities --
(Increase) decrease in --
Contracts and accounts receivable................. (1,580) 1,796 (17,796)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 179 45 (3,272)
Other current assets.............................. 272 7 (1,729)
Other noncurrent assets........................... (9) (15) (446)
Increase (decrease) in --
Accounts payable and accrued expenses............. 176 388 19,205
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 1,000 (1,000) 1,651
Other current liabilities......................... -- -- 291
Deferred income taxes............................. -- -- 1,510
------- ------- --------
Net cash provided by operating activities....... 2,812 2,657 5,761
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment....... 182 427 --
Capital expenditures...................................... (1,039) (1,801) (6,759)
Purchase of investments and annuity contract.............. (124) (93) (3,000)
Proceeds from sale of investments......................... -- 113 1,472
Cash paid for Acquisitions including related costs, net of
cash acquired of $1,726................................ -- -- (87,177)
Other..................................................... 147 (392) (696)
------- ------- --------
Net cash used in investing activities........... (834) (1,746) (96,160)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Credit Agreement............................ -- -- 10,000
Proceeds from notes payable............................... 3,846 615 --
Principal payments on notes payable....................... (4,582) (445) (229)
Proceeds from issuance of notes payable to stockholders... -- 450 --
Principal payments on notes payable to stockholders....... (420) -- (450)
Borrowings on long-term debt.............................. -- -- 3,432
Principal payments on long-term debt...................... -- -- (441)
Payment of dividends to stockholders...................... (90) (1,266) (2,733)
Issuance of Common Stock to consultants................... -- -- 44
Issuance of Common Stock, net of offering costs........... -- -- 94,739
Debt issuance costs....................................... -- -- (2,052)
Principal payments on debt assumed in Acquisitions........ -- -- (10,612)
------- ------- --------
Net cash provided by (used in) financing
activities.................................... (1,246) (646) 91,698
------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 732 265 1,299
CASH AND CASH EQUIVALENTS, beginning of year................ 120 852 1,117
------- ------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 852 $ 1,117 $ 2,416
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
30
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
TransCoastal Marine Services, Inc. ("TCMS") was organized in April 1996 to
create a fully integrated marine construction company focusing on transition
zone and shallow water regions of the U.S. Gulf Coast. On November 4, 1997, TCMS
acquired, simultaneously with the closing of its initial public offering (the
"Offering"), four privately owned marine construction businesses (the "Founding
Companies") and certain real properties used in the businesses of the Founding
Companies in exchange for consideration consisting of cash, common stock of TCMS
(the "Common Stock") and debt assumption. Unless otherwise indicated, all
references herein to the "Company" include the Founding Companies, and
references to "TCMS" mean TransCoastal Marine Services, Inc., prior to the
consummation of the acquisitions of the Founding Companies.
The Woodson Companies ("Woodson"), one of the Founding Companies, has been
identified as the "accounting acquiror" for financial statement presentation
purposes. The acquisitions of the remaining Founding Companies were accounted
for using the purchase method of accounting, with the results of operations
included from October 31, 1997, the effective closing date of the acquisitions
for accounting purposes. The allocation of purchase price to the assets acquired
and liabilities assumed has been initially assigned and recorded based on
preliminary estimates of fair value and may be revised as additional information
concerning the valuation of such assets and liabilities becomes available.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TCMS and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The Company's financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP"). Financial statements prepared
in accordance with GAAP require the use of management estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Additionally, management estimates affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents excluding certain
restricted amounts. Restricted cash represents cash equivalent investments to
support letters of credit established by the Company in the normal course of
business with certain vendors.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets ranging from 3 years to 31.5 years.
Leasehold improvements are capitalized and amortized over the lesser of the
lives of the leases or the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
28
31
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Goodwill represents the excess of the aggregate purchase price paid by the
Company over the fair market value of the net tangible assets acquired. Goodwill
is being amortized on a straight-line basis over 40 years, which represents
management's estimation of the related benefit to be derived from the acquired
businesses. Under Accounting Principles Board ("ABP") Opinion No. 17 and SFAS
No. 121, the Company periodically evaluates whether events and circumstances
after the acquisition date indicate that the remaining balance of goodwill may
not be recoverable. If factors indicate that goodwill should be evaluated for
possible impairment, the Company would compare estimated undiscounted future
cash flow from the related operations to the carrying amount of goodwill. If the
carrying amount of goodwill were greater than undiscounted future cash flow, an
impairment loss would be recognized. Any impairment loss would be computed as
the excess of the carrying amount of goodwill over the estimated fair value of
the goodwill (calculated based on discounting estimated future cash flows).
Accumulated amortization of goodwill was $275,000 as of December 31, 1997.
Dry-dock Costs
Dry-dock costs are third-party costs associated with scheduled maintenance
on the Company's marine construction vessels. Costs incurred in connection with
dry dockings are capitalized and amortized over the period to the next scheduled
dry docking.
Mobilization Costs
Mobilization costs incurred on moving marine vessels and associated
equipment to their contractual locations to commence operations are capitalized
and amortized over the contract term.
Debt Issuance Costs
Debt issuance costs are included in other noncurrent assets and are
amortized to interest expense over the scheduled maturity of the debt. As of
December 31, 1997, debt issuance costs and accumulated amortization totaled $3.3
million and $0.2 million, respectively.
Revenue Recognition
Revenues from construction contracts, which are typically of short
duration, are recognized on the percentage-of-completion method. Under this
method, the percentage of completion is determined by comparing contract costs
incurred to date with total estimated contract costs. Income is recognized by
applying the percentage complete to the projected total income for each contract
in progress. Contract costs include all direct material, labor and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, supplies and tools. Revisions in cost and income estimates are reflected
in the accounting period in which the facts requiring revision become known. In
addition, anticipated losses to be incurred on contracts in progress are charged
to income in the period such losses are determined. With regard to pipeline
testing services performed, the Company recognizes revenues on an as-billed
basis, with an accrual made at each period end for unbilled revenue.
Fair Value of Financial Instruments
The Company considers the fair value of all financial instruments to not be
materially different from their carrying values at each year-end based on
management's estimate of the Company's ability to borrow funds under terms and
conditions similar to those applicable to the Company's existing debt.
29
32
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of events that have been recognized
differently in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax basis of assets and
liabilities using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse. Deferred tax assets are evaluated for
realization based on a more-likely-than-not criteria in determining if a
valuation allowance should be provided. Income tax expense is the tax payable
for the year and the change during the year in deferred tax assets and
liabilities.
Two of the three companies comprising the Woodson Companies elected to be
taxed as S Corporations for federal and state income tax purposes whereby
shareholders are liable for individual federal and state income taxes on their
allocated portions of the applicable entity's taxable income. Upon the closing
of the Offering, the S Corporation status was changed to that of a C
Corporation. Accordingly, the historical financial statements as they relate to
the period prior to the Offering do not include provisions for income taxes
relating to those entities.
Pro forma net income consists of the historical net income of the Company,
including two S Corporations, adjusted for income taxes that would have been
recorded had each company operated as a C Corporation.
Concentrations of Credit and Business Risk
The Company's customers are primarily major and independent oil and gas
exploration and production companies, drilling contractors, hydrocarbon
transportation companies and other marine construction companies, which
potentially expose the Company to concentrations of credit risk. The Company
performs ongoing credit evaluation of its customers and requires posting of
collateral when deemed appropriate. The Company provides allowances for possible
credit losses when necessary. Additionally, the Company's results of operations
will also be affected by the level of oil and gas exploration and development
activity maintained by oil and gas companies in the Gulf of Mexico. The level of
exploration and development activity is related to several factors, including
trends of oil and gas prices, exploration and production companies' expectations
of future oil and gas prices, and changes in technology which reduce costs and
improve expected returns on investment. Although the Company is directly
affected by the financial stability of the oilfield services industry,
management does not believe significant credit risk exists at December 31, 1997.
Earnings Per Share
SFAS No. 128 "Earnings Per Share" was issued in February 1997.
Implementation of SFAS No. 128 is required for periods ending after December 15,
1997. SFAS No. 128 requires dual presentation of earnings per share (EPS); basic
EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
30
33
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
Shares issued in the acquisition of Woodson................. 1,031 1,031 1,031
Shares issued in the formation of TCMS...................... 691 975
Shares issued to the stockholders of the remaining Founding
Companies................................................. 185
Shares sold to certain employees............................ 209
Shares issued to consultants................................ 4
Shares sold in the Offering................................. 959
----- ----- -----
Weighted average shares outstanding for basic earnings per
share calculation......................................... 1,031 1,722 3,363
===== ===== =====
The calculation of diluted earnings per share is similar to basic earnings
per share except that the denominator includes dilutive common stock equivalents
such as stock options and warrants. Weighted average shares outstanding for
calculation of diluted earnings per share totaled 1,031,000, 1,722,000, and
3,393,000 for 1995, 1996, and 1997, respectively. Weighted average diluted
shares outstanding at December 31, 1997 included 30,000 shares related to a
warrant issued to a financial advisory firm that provided services in
conjunction with the Acquisitions (see Note 9).
Available-for-Sale Securities
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company's marketable equity securities are
included in an available-for-sale caption in the accompanying consolidated
balance sheets and are carried at market value, with the difference between cost
and market value, net of related tax effects, included as a component of
stockholders' equity.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for the Company's year ending December 31, 1998.
SFAS No. 130 establishes standards for the reporting and displaying of
comprehensive income and its components. The Company will be analyzing SFAS No.
130 during 1998 to determine what, if any, additional disclosures will be
required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is effective for the Company's
year ended December 31, 1998. This statement establishes standards for the
reporting of information about operating segments. The Company will be analyzing
SFAS No. 131 during 1998 to determine what, if any, additional disclosures will
be required.
3. BUSINESS COMBINATIONS
On November 4, 1997, TCMS acquired in separate transactions (collectively,
the "Acquisitions"), simultaneously with the closing of the Offering, the
Founding Companies and certain real properties used in the businesses of the
Founding Companies. The Acquisitions have been accounted for under the purchase
method of accounting. The aggregate consideration paid for the Acquisitions was
$85.7 million in cash, issuance of $3.0 million in 8% notes payable over a
ten-year term ending in 2007, and 2,142,441 shares of Common Stock. Funding of
the cash portion of the consideration was provided by funds raised through the
Offering. The accompanying consolidated balance sheet at December 31, 1997
includes allocations of the respective purchase prices and is subject to final
adjustment. One of the Acquisitions is subject to a post-closing adjustment,
based on a multiple of estimated earnings before interest, taxes, depreciation
and amortization ("EBITDA") and payable in shares of Common Stock. Based on a
preliminary determination,
31
34
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company currently estimates that such post-closing adjustment will not
exceed $0.5 million. The allocations resulted in goodwill recognized of $71.1
million representing the excess of purchase price over fair value of the net
assets acquired. The goodwill allocation includes $14.0 million of excess
purchase price attributable to the 975,000 shares of Common Stock issued to the
founders of TCMS during 1996 which were revalued to a fair market value of
$14.40 per share.
Set forth below are unaudited pro forma combined revenues and income data
reflecting the pro forma effect of the Acquisitions on the Company's results
from operations for the years ended December 31, 1996 and 1997. The unaudited
pro forma data presented below consists of the income statement data from
operations as presented in these consolidated financial statements plus the
Founding Companies for the year ended December 31, 1996 and the ten months ended
October 31, 1997 (in thousands, except per share amounts). These pro forma
results are not necessarily indicative of the results which would actually have
occurred if the Acquisitions had taken place at the beginning of the periods
presented, nor are they necessarily indicative of future results.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
--------- ----------
(UNAUDITED)
Revenues.................................................... $72,744 $119,268
Net income (loss)........................................... (2,406) 5,028
Diluted earnings per share.................................. (0.26) 0.55
Pro forma adjustments included in the amounts above primarily relate to:
(a) the issuance of Common Stock as of the beginning of the year presented for
the Offering, the Acquisitions, and for the founders of TCMS and certain of its
executive officers and consultants, (b) adjustment for nonrecurring compensation
expense of $2.2 million, (c) adjustment for pro forma goodwill amortization
expense using 40-year estimated life, (d) elimination of historical interest
expense related to certain obligations which were repaid by the Company reduced
by interest expense on borrowed funds used to pay the cash portion of the
Acquisitions, and (e) adjustment to the federal and state income tax provisions
based on pro forma results.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Contracts and accounts receivable consisted of the following (in
thousands):
DECEMBER 31,
-----------------
1996 1997
------ -------
Completed contracts......................................... $ 908 $ 3,141
Contracts in progress --
Current................................................... 250 7,941
Retainage due within one year............................. 157 4,569
Accounts receivable......................................... 103 3,563
------ -------
$1,418 $19,214
====== =======
32
35
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information with respect to uncompleted contracts is as follows (in
thousands):
DECEMBER 31,
------------------
1996 1997
------ --------
Costs incurred on uncompleted contracts..................... $ -- $ 46,506
Estimated profit earned to date............................. -- 11,831
------ --------
-- 58,337
Less -- Billings to date.................................... -- (56,716)
------ --------
$ -- $ 1,621
====== ========
The above amounts are included in the accompanying balance sheets
under the following captions (in thousands):
DECEMBER 31,
-----------------
1996 1997
------ -------
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ -- $ 3,272
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... -- (1,651)
------ -------
Total............................................. $ -- $ 1,621
====== =======
Other current assets consisted of the following (in thousands):
DECEMBER 31,
----------------
1996 1997
------ ------
Prepaid insurance........................................... $ -- $2,366
Deposits.................................................... -- 109
Inventory................................................... 243 146
Other....................................................... 861 212
------ ------
$1,104 $2,833
====== ======
Property, plant and equipment consisted of the following (in thousands):
DECEMBER 31,
------------------
1996 1997
------- -------
Land........................................................ $ -- $ 1,098
Marine vessels and transportation equipment................. 1,500 39,404
Buildings and improvements.................................. 490 4,269
Furniture and fixtures...................................... 661 637
Machinery and equipment..................................... 5,953 28,974
------- -------
8,604 74,382
Less -- Accumulated depreciation and amortization........... (5,648) (7,475)
------- -------
$ 2,956 $66,907
======= =======
33
36
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other noncurrent assets consisted of the following (in thousands):
DECEMBER 31,
--------------
1996 1997
---- ------
Restricted annuity investment collateralizing note
payable................................................... $ -- $2,950
Debt issuance costs......................................... -- 3,052
Other....................................................... 959 305
---- ------
$959 $6,287
==== ======
Accrued expenses consisted of the following (in thousands):
DECEMBER 31,
--------------
1996 1997
---- ------
Purchase price obligations.................................. $ -- $2,887
Accrued accounts payable.................................... -- 1,623
Federal and state income tax payable........................ 23 1,138
Payroll, payroll taxes and employee benefits................ 156 990
Retainage payable........................................... -- 653
State sales tax............................................. -- 311
Other....................................................... 71 258
---- ------
$250 $7,860
==== ======
5. SUMMARY OF FINANCING ARRANGEMENTS
Short-term borrowings at December 31, 1996 consisted of: (a) notes payable
to stockholders totaling $450,000, (b) a note payable to an insurance company of
$209,000, and (c) a note payable to an equipment company of $20,000. The notes
payable to stockholders are payable on demand and bear interest at 8%. The note
payable to an insurance company is payable in monthly installments of $70,000,
including interest at 7.45%. All short-term borrowings outstanding as of
December 31, 1996 were repaid during 1997.
There was no long-term debt outstanding at December 31, 1996. Long-term
debt at December 31, 1997 consisted of the following (in thousands):
DECEMBER 31,
1997
------------
Credit Agreement............................................ $10,000
Note payable to a Founding Company, interest at 8%, due over
ten-year term ending in 2007, secured by insurance annuity
(see Note 4).............................................. 2,950
Note payable to a finance company, payable in monthly
installments of $170,000, including interest at 7.81%,
maturing September 1998................................... 1,682
Note payable to a bank, payable in monthly installments of
$15,000, including interest at 10.1%, maturing July 2002,
secured by machinery and equipment........................ 632
Capital lease payable, payable in monthly installments of
$18,000, due June 1998, unsecured......................... 616
Other notes, varying interest rates, due during 1998,
unsecured................................................. 111
-------
15,991
Less -- Current maturities.................................. (2,520)
-------
Long-term debt............................................ $13,471
=======
34
37
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Agreement
On October 28, 1997, TCMS entered into a credit agreement ("Credit
Agreement") with Joint Energy Development Investments, Limited Partnership, an
affiliate of Enron Capital & Trade Resources Corp. (the "Lender"). The Credit
Agreement provides for borrowings up to $75.0 million, with the initial
borrowing availability being $50.0 million (the "Initial Availability") and the
remaining $25.0 million being made available from time to time and in such
amounts as the Lender shall determine at its sole discretion. The Credit
Agreement is divided into two tranches: (a) a senior secured revolving credit
facility (the "Revolving Credit Facility"), providing for borrowings of up to
$60.0 million ($40.0 million of which comprises part of the Initial
Availability) and (b) $15.0 million of senior subordinated term loan borrowings
(the "Term Loan Facility"), of which $10.0 million comprises the remainder of
the Initial Availability.
Borrowings under the Revolving Credit Facility bear interest, at the option
of the Company, at either the Base Rate plus 25 basis points (8.75% at December
31, 1997) or at LIBOR plus 275 basis points. The Base Rate is defined as the
higher of the federal funds rate plus 50 basis points or the prime rate.
Borrowings under the Term Loan Facility bear interest, at the option of the
Company, at either the Base Rate plus 75 basis points or at LIBOR plus 375 basis
points. Interest under both facilities is payable quarterly. During 1997,
borrowings were made only under the Revolving Credit Facility and were based
upon the Base Rate option. Commitment fees on the daily average unused
commitment under the Revolving Credit Facility and the Term Loan Facility is
payable quarterly at a rate per annum of .375% and .5%, respectively. Borrowings
under the Credit Agreement are secured by liens on substantially all of the
Company's assets (including accounts receivable and after-acquired property) and
a pledge of the capital stock of the Founding Companies and each of the
Company's remaining subsidiaries.
The Credit Agreement requires the Company to comply with various loan
covenants, including (a) maintenance of certain financial ratios, (b)
restrictions on additional indebtedness and (c) restrictions on liens,
guarantees, advances and dividends. The Company did not borrow under the Term
Loan Facility during 1997; the balance outstanding under the Revolving Credit
Facility totaled $10.0 million at December 31, 1997.
The Credit Agreement extends through October 1999 and all outstanding
principal and accrued and unpaid interest under the Revolving Credit Facility
and the Term Loan Facility is due and payable on that date. The Credit Agreement
contains mandatory prepayment provisions requiring prepayment of outstanding
borrowings from the issuance of debt or equity securities for cash and any
proceeds from other borrowings. In connection with the Credit Agreement, the
Company issued to the Lender a warrant to acquire 175,000 shares of Common Stock
at an exercise price equal to the initial per share price to the public in the
Offering of $18.00. The consideration for that warrant was $1,750 and the
warrant is exercisable for five years from its date of issuance. Upon issuance,
the warrant was valued at $1.1 million based on fair market value as determined
by management.
6. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Board of Directors is authorized to issue preferred stock of
the Company, of which none was outstanding at December 31, 1996 and 1997.
Common Stock
On November 4, 1997, TCMS completed the Offering, which involved the
issuance of 5,750,000 shares of Common Stock at a price of $18.00 per share
(before deducting underwriting discounts and commissions), including 750,000
shares pursuant to an over-allotment option granted by the Company to the
underwriters in connection with the Offering. The net proceeds to TCMS after
deducting underwriter discounts and commissions totaled $94.7 million.
35
38
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1997, TCMS effected a 1,000-for-one stock split of the
outstanding shares of Common Stock. In addition, TCMS increased the number of
authorized shares of Common Stock to 20,000,000 and authorized 3,000,000 shares
of restricted common stock ("Restricted Common Stock"). The effect of the stock
split has been retroactively reflected in the accompanying financial statements
and related notes thereto.
In March and April 1997, 175,000 shares and 100,000 shares of Common Stock,
respectively, were sold to management at $.001 per share. TCMS recorded a
non-recurring, non-cash compensation charge of $2.2 million effective with the
closing of the Offering, representing the difference between the amount paid for
the shares and the estimated fair value of the shares on the date of sale of
such Common Stock.
In April 1997, TCMS issued 3,000 shares of Common Stock to a consultant for
services performed in connection with the Offering. The $12,200 difference
between the amount paid and the estimated fair market value of the shares on the
date of issue was recorded as deferred offering costs in the second quarter of
1997. In July 1997, an additional 3,000 shares of Common Stock were issued with
the same terms to another consultant for services performed in connection with
the Offering. An additional $32,000 was recorded as deferred offering costs in
the third quarter of 1997. Such costs were charged to additional paid in capital
upon consummation of the Offering.
Restricted Common Stock
Shares of Restricted Common Stock have no voting rights. Shares of
Restricted Common Stock are convertible into shares of Common Stock on a
share-for-share basis (a) in the event of certain ownership changes, (b) 18
months after the Offering or (c) in the event of approval by a majority of
holders of the Common Stock.
Effective November 4, 1997, the Company executed and delivered an agreement
whereby certain shareholders exchanged an aggregate of 250,000 shares of their
registered Common Stock for Restricted Common Stock effective with the closing
of the Offering. No shares of Restricted Common Stock were outstanding at
December 31, 1996.
Stock Options
In August 1997, the Board of Directors and the stockholders of TCMS
approved the 1997 Stock Option Plan (the "Plan"). The Plan provides for the
granting of stock options to directors, executive officers, certain other
employees and certain non-employee consultants of the Company. The Plan, which
permits up to 750,000 shares of Common Stock to be issued, terminates on August
2007. In general, the terms of the option awards (including vesting schedules)
will be established by the Compensation Committee of the Company's Board of
Directors.
The following table summarizes activity under the Plan for the year ended
December 31, 1997:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
Outstanding at December 31, 1996............................ -- --
Granted................................................... 444,325 $18.00
Exercised................................................. -- --
Canceled/expired.......................................... (16,167) 18.00
-------
Outstanding at December 31, 1997............................ 428,158 $18.00
=======
Weighted average fair value of options granted during
1997...................................................... $17.83
36
39
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, no option shares were exercisable. Unexercised
options expire during 2007.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities to
choose between a fair value-based method of accounting for employee stock
options or similar equity instruments and the current intrinsic, value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. TCMS has elected to account
for the issuance of stock options pursuant to APB Opinion No. 25. Therefore,
there is no effect on the Company's financial position and results of operations
as a result of this pronouncement.
The following pro forma summary of the Company's consolidated results of
operations have been prepared as if the fair value based method of accounting
for stock based compensation as required by SFAS No. 123 had been applied (in
thousands, except per share amounts):
YEAR ENDED
DECEMBER 31, 1997
-----------------
Net income, as adjusted for pro forma income taxes (see Note
2)........................................................ $1,350
Pro forma net income attributable to common stockholders.... $1,192
Earnings per Share ("EPS"):
Diluted EPS as reported................................... $ 0.40
Diluted EPS pro forma..................................... $ 0.35
Fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997.
YEAR ENDED
DECEMBER 31, 1997
-----------------
Risk-free interest rate..................................... 5.9%
Dividend yield.............................................. 0
Volatility factor........................................... 47%
Weighted average expected life.............................. 9.5 years
Common Stock Warrants
During the first quarter of 1997, TCMS entered into an advisory agreement
with an investment banking firm, which was amended in June 1997 to provide for
the sale of a warrant to acquire 50,000 shares of Common Stock (see Note 9).
Additionally, in connection with the Credit Agreement, the Company issued to its
primary lender a warrant to acquire 175,000 shares of Common Stock at an
exercise price equal to the initial per share price to the public in the
Offering of $18.00. As of December 31, 1997, no warrants had been exercised.
These warrants were valued at approximately $1.2 million and are being amortized
over the two-year term of the Credit Agreement.
37
40
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASES
The Company leases facilities under noncancellable operating leases. The
following represents future minimum rental payments under noncancellable
operating leases (in thousands):
YEAR ENDING DECEMBER 31, -----------------------------------
1998...................................................... $ 46
1999...................................................... 35
2000...................................................... 28
2001...................................................... 27
2002...................................................... 27
2003 and thereafter....................................... 95
----
$258
====
Rental expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $142,000, $142,000 and $163,000, respectively. Included in these
amounts are rent expenses and commissions paid to related parties of
approximately $142,000, $142,000, and $90,000, respectively.
8. INCOME TAXES
Federal and state income tax provisions (benefits) are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
----- ----- ------
Federal
Current................................................... $-- $-- $ 583
Deferred.................................................. 91 91 (164)
State
Current................................................... -- -- 83
Deferred.................................................. -- -- 25
--- --- -----
$91 $91 $ 527
=== === =====
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34% to income before
income tax as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
Income tax expense at the statutory rate................... $ 713 $ 425 $ 865
Increase (decrease) resulting from-
State income taxes, net of related federal tax effect.... 2 7 71
Woodson S Corp. income................................... (642) (346) (667)
Nondeductible goodwill................................... -- -- 94
Other.................................................... 18 5 164
----- ----- -----
$ 91 $ 91 $ 527
===== ===== =====
38
41
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of revenues and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences representing
deferred assets and liabilities result principally from the following (in
thousands):
DECEMBER 31,
----------------
1996 1997
---- --------
Deferred tax assets:
Current................................................... $ -- $ 197
Long-term................................................. 275 --
---- --------
Total............................................. 275 197
---- --------
Deferred tax liabilities:
Current................................................... -- 488
Long-term................................................. 169 18,774
---- --------
Total............................................. 169 19,262
---- --------
Net deferred income tax assets (liabilities)...... $106 $(19,065)
==== ========
9. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is currently involved in two class action lawsuits for
unspecified personal injury and property damages arising from events in October
1991 and January 1992 during the course of a pipeline installation project for a
third party gas transmission company. One of the class actions, involving
approximately 9,840 class members, entitled Rivera v. United Gas Pipeline Co.,
No. 28738, was instituted against Woodson Construction Company, Inc. on October
29, 1991 in the 40th Judicial District Court, Parish of St. John the Baptist,
State of Louisiana, and the other class action, involving approximately 7,858
class members, entitled Husseiney v. United Gas Pipeline Co., No. 29089, was
instituted on January 27, 1992 against Woodson Construction Company, Inc. in the
40th Judicial District Court, Parish of St. John the Baptist, State of
Louisiana. The claims of 24 representative class members in each case were tried
in 1995, and judgments were rendered against Woodson Construction Company, Inc.,
which were later affirmed by the court of appeal. In the Rivera lawsuit, five of
the 24 representative plaintiffs were awarded compensatory damages of $7,500 in
the aggregate, but punitive damages were denied. In the Husseiney lawsuit,
compensatory damages of $18,589 and punitive damages of $9,500 in the aggregate
were assessed against Woodson Construction Company, Inc. in favor of 16 of the
24 representative plaintiffs. In both lawsuits, the compensatory damages awarded
are expected to be covered by the Company's insurance, but punitive damage
awards are not expected to be covered by insurance. The compensatory and
punitive damages awarded to the 16 representative class members varied according
to the representatives' proximity to the incident and individual experience with
respect to it. The amount of compensatory and punitive damages applicable to the
remaining 7,834 class members who seek to adjudicate their damage claims will be
litigated on an individual basis. Until those remaining damage claims are
finally adjudicated, settled, dismissed or otherwise terminated, the total
amount of the punitive damages to which the Company may be subject cannot
reasonably be estimated, and there can be no assurance that it will not be
materially adverse to the Company's financial position or results of operations.
In July 1997, all parties involved applied to the Louisiana Supreme Court for
further discretionary review of the existing judgments. In December 1997, the
Louisiana Supreme Court declined to review the judgments in both cases.
The Company is involved in various other lawsuits arising in the ordinary
course of business, some of which involve substantial claims for damages. While
the outcome of these other lawsuits cannot be predicted with certainty,
management believes these other matters will not have a material adverse effect
on the consolidated financial position or results of operations of the Company.
39
42
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advisory Agreement
In February 1997, TCMS entered into an advisory agreement with a financial
advisory firm ("the firm") for a period of six months in connection with the
Acquisitions and related financings. Under the terms of the agreement between
the Company and the firm, as amended on June 25, 1997, TCMS paid the firm an
initial financial advisory fee of $15,000, plus monthly fees aggregating
$30,000, and reimbursed the firm for its out-of-pocket expenses relating to the
services provided. TCMS also issued a warrant to the firm for $100 in cash. The
warrant provides for the purchase of up to 50,000 shares of Common Stock, at a
per share exercise price equal to $8.00. The warrant may be exercised in whole
or, from time to time, in part, at any time during the five-year period
beginning six months after the Offering closes. In connection with the warrant,
TCMS granted certain registration rights to the firm.
The firm received a $400,000 success fee upon the closing of the
Acquisitions and an $800,000 senior debt placement fee upon the closing of the
Credit Agreement. The firm is entitled to receive a private placement fee equal
to five percent of the amount of any private placement made by the Company
within two years of August 12, 1997 with any capital source introduced to the
Company by the firm, together with a warrant to purchase an amount equal to 10%
of the securities issued in any such private placement.
Consulting Agreements
During February 1997, TCMS entered into a consulting and financial advisory
agreement (the "Consulting Agreement") with a promoter of TCMS ("J&D"). The
Consulting Agreement provided for a monthly fee of $12,500 through the closing
of the Offering and was to provide for a monthly consulting fee and
non-qualified stock options under the 1997 Stock Option Plan. Shortly after the
Offering, the Consulting Agreement was terminated in exchange for the payment to
J&D of approximately $.8 million. In connection with the Consulting Agreement, a
total of 36,667 options were issued to J&D. The options expired concurrent with
the termination of the Consulting Agreement.
In April 1997, TCMS entered into consulting services agreements with
certain officers of the Company. Pursuant to these agreements, the officers
provided executive services in connection with the formation of TCMS and the
closing of the Offering. Expenses related to these contract services totaled
$64,000 through the closing of the Offering, at which time these agreements
terminated.
Employment Agreements
In August 1997, TCMS entered into employment agreements with three officers
of the Company. Two of the agreements were effective August 1, 1997 and one upon
closing of the Offering. The term of the agreements extends three years
following the closing of the Offering. Additionally, the Company offered
employment agreements to certain members of management and key operating
personnel of the Founding Companies on similar terms and conditions to existing
agreements.
10. EMPLOYEE BENEFIT PLANS
Woodson had an employee profit sharing plan (the "Plan") which provided for
contributions of up to 10 percent of the annual compensation of each
participant. The Plan includes employees of at least 21 years of age with one
year of completed service. Participants who became eligible after January 1,
1990 remain nonvested until the completion of five years of service, at which
time the participants become 100 percent vested. Woodson has obtained a
favorable tax determination letter from the Internal Revenue Service with
respect to the Plan. Woodson made Plan contributions of $30,000, $26,000 and
$59,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Subsequent to December 31, 1997, the Plan was merged into the TCMS 401K
Plan, which was established effective January 1, 1998, for the benefit of its
employees. The Company has agreed to fund 50%
40
43
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
per dollar of contribution by eligible employee, up to contributions totaling 6%
of the employee's annual salary. Employees of the Founding Companies were
eligible to commence participation in the TCMS 401K plan at either January 1 or
March 1, 1998, dependent upon the termination date of their specific benefit
plan.
11. SALES TO MAJOR CUSTOMERS
The customer bases for the Company are primarily concentrated in the oil
and gas industry. The revenues earned from each customer vary from year to year
based on the contracts awarded. Sales to customers comprising 10% or more of the
Company's total revenues are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
Customer A................................................ 13.7% 10.1% --
Customer B................................................ 32.8% 55.0% --
Customer C................................................ -- -- 34.5%
Customer D................................................ -- -- 32.2%
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental cash flow information for each of the three years in the
period ended December 31, 1997 are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- -------
Cash Paid For:
Interest.................................................. $35 $109 $ 370
Income taxes.............................................. -- -- 420
Non-cash Investing and Financing Activities:
Assumption of long-term debt in connection with
Acquisitions........................................... -- -- 10,612
13. SUBSEQUENT EVENTS
Fabrication Facilities
During the first quarter of 1998, the Company significantly expanded its
fabrication operations through two separate lease transactions. During January
1998, long-term lease rights were secured to a shipyard in the New Orleans,
Louisiana area capable of servicing deepwater drilling rigs, jack-ups,
semi-submersibles and drill ships. The lease term on this 29-acre yard is for
five years with committed lease payments totaling $0.2 million. During February
1998, the Company signed a long-term lease for a manufacturing facility located
on an 18-acre site in eastern New Orleans, Louisiana. The lease term is for
three years with committed lease payments totaling $.5 million.
Vessel Acquisition
During February 1998, the Company expanded its oil and gas pipeline
installation capabilities with the acquisition of the LB-207 pipelaying barge
(now renamed the Vermilion Bay). The purchase price was $8.0 million and was
financed through borrowings under the Credit Agreement. The Vermilion Bay is
expected to be available for service in the Gulf of Mexico by May 1998.
41
44
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Grants
During the first quarter of 1998, a total of 184,000 stock options were
granted to employees of TCMS, including members of management. The option price
was set at the market price on date of grant and ranged from $10.75 to $11.00.
Cash Performance Bonus Plan
During the first quarter of 1998, the Board of Directors approved a cash
performance bonus plan (the "Bonus Plan") for key management employees. The cash
performance bonus is based on three principal components, namely TCMS' overall
financial performance, the financial performance of each business unit, and the
performance of the individual employee. The Bonus Plan is effective for the
fiscal year commencing January 1, 1998.
42
45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TransCoastal Marine Services, Inc.:
We have audited the accompanying consolidated balance sheet of TransCoastal
Marine Services, Inc. and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from inception (April 2, 1996) through December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TransCoastal Marine Services, Inc. and subsidiary as of December 31, 1996, and
the consolidated results of their operations and their cash flows for the period
from inception (April 2, 1996) through December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 11, 1997
43
46
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
Cash and cash equivalents................................... $ 1 $ 1
Deferred offering costs..................................... -- 462
Other assets................................................ -- 40
--- ----
Total assets...................................... $ 1 $503
=== ====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Short-term borrowings from related party.................. $-- $187
Accounts payable and accrued expenses..................... -- 375
--- ----
Total liabilities................................. -- 562
--- ----
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 2,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.001 par value, 20,000,000 shares
authorized, 975,000 and 1,253,000 shares issued and
outstanding at December 31, 1996 and June 30, 1997,
respectively........................................... 1 1
Restricted common stock, $.001 par value, 3,000,000 shares
authorized, none issued and outstanding................ -- --
Additional paid-in capital................................ -- 12
Retained deficit.......................................... -- (72)
--- ----
Total stockholders' equity (deficit).............. 1 (59)
--- ----
Total liabilities and stockholders' equity........ $ 1 $503
=== ====
The accompanying notes are an integral part of these consolidated financial
statements.
44
47
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
INCEPTION
(APRIL 2, 1996) SIX MONTHS
THROUGH ENDED JUNE 30,
DECEMBER 31, --------------------------
1996 1996 1997
--------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
REVENUE............................................... $-- $-- $ --
GENERAL AND ADMINISTRATIVE EXPENSES................... -- -- 72
--- --- ----
LOSS BEFORE INCOME TAXES.............................. -- -- (72)
INCOME TAXES.......................................... -- -- --
--- --- ----
NET LOSS.............................................. $-- $-- $(72)
=== === ====
The accompanying notes are an integral part of these consolidated financial
statements.
45
48
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
RESTRICTED
COMMON STOCK COMMON STOCK ADDITIONAL
------------------ --------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ------ ------ ---------- -------- -----
BALANCE AT INCEPTION (April 2,
1996).............................. -- $-- -- $-- $ -- $ -- $ --
SALE OF COMMON STOCK............... 975,000 1 -- -- -- -- 1
--------- --- -- --- ---- ---- ----
BALANCE AT DECEMBER 31, 1996....... 975,000 1 -- -- -- -- 1
SALE OF COMMON STOCK............... 278,000 -- -- -- -- -- --
ADDITIONAL PAID-IN CAPITAL......... -- -- -- -- 12 12
NET LOSS (Unaudited)............... -- -- -- -- -- (72) (72)
--------- --- -- --- ---- ---- ----
BALANCE AT JUNE 30, 1997
(Unaudited)........................ 1,253,000 $ 1 -- $-- $ 12 $(72) $(59)
========= === == === ==== ==== ====
The accompanying notes are an integral part of these consolidated financial
statements.
46
49
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
INCEPTION
(APRIL 2, 1996) SIX MONTHS
THROUGH ENDED JUNE 30,
DECEMBER 31, --------------------------
1996 1996 1997
--------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $-- $-- $ (72)
Adjustments to reconcile net loss to net cash used
in operating activities --
Changes in operating assets and liabilities --
Deferred operating costs....................... -- -- (462)
Other assets................................... -- -- (40)
Accounts payable and accrued expenses.......... -- -- 375
--- --- -----
Net cash used in operating activities....... -- -- (199)
--- --- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance........................ 1 1 12
Proceeds from short-term borrowings................. -- -- 187
--- --- -----
Net cash provided by financing activities... 1 1 199
--- --- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS............. 1 1 --
CASH AND CASH EQUIVALENTS, beginning of period........ -- -- 1
--- --- -----
CASH AND CASH EQUIVALENTS, end of period.............. $ 1 $ 1 $ 1
=== === =====
The accompanying notes are an integral part of these consolidated financial
statements.
47
50
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
TransCoastal Marine Services, Inc., a Delaware corporation ("TCMS"),
commenced operations in April 1996. TCMS intends to acquire four businesses (the
"Founding Companies") in separate transactions (collectively, the
"Acquisitions") simultaneously with an Offering (the "Offering") of its common
stock (the "Common Stock"). Unless otherwise indicated, all references herein to
the "Company" include the Founding Companies, and references herein to "TCMS"
mean TransCoastal Marine Services, Inc., prior to the consummation of the
Acquisitions.
TCMS operations to date have related to the Offering and the Acquisitions.
All expenditures to date have been funded through loans from J&D Capital
Investments, L.C. ("J&D"). J&D is owned by two of the Company's founders. At
December 31, 1996, no costs had been incurred in connection with the Offering.
At June 30, 1997, approximately $462,000 has been incurred in connection with
the Offering. TCMS has accounted for these costs as deferred offering costs.
TCMS is dependent on the Offering to complete the pending Acquisitions and to
repay J&D. There is no assurance that the pending Acquisitions will be completed
or that the Company will be able to generate future operating revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TCMS and its wholly owned subsidiary, Red Fox International, Inc., a Louisiana
corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
Income Taxes
TCMS accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, the Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized differently
in the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax basis of assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation allowance
should be provided. Income tax expense is the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
Recent Accounting Pronouncements
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities to
choose between a new fair value-based method of accounting for employee stock
options or similar equity instruments and the current intrinsic, value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. TCMS has elected to account
for the issuance of stock options pursuant to APB Opinion No. 25 and will
48
51
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provide pro forma disclosure of net income and earnings per share, as
applicable, in the notes to future consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." For the Company, SFAS No. 128 will be effective for
the year ended December 31, 1997. SFAS No. 128 simplifies the standards required
under current accounting rules for computing earnings per share and replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share ("basic EPS") and diluted
earnings per share ("diluted EPS"). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted earnings per share under
current accounting rules. The implementation of SFAS No. 128 is not expected to
have a material effect on the Company's earnings per share as determined under
current accounting rules.
Interim Financial Information
The interim consolidated balance sheet as of June 30, 1997, and statements
of operations for the six months ended June 30, 1996 and 1997, are unaudited,
and certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the
consolidated financial position, results of operations and cash flows with
respect to the interim financial statements have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
3. SUMMARY OF FINANCING ARRANGEMENTS
In February 1997, TCMS and J&D entered into an agreement providing for an
unsecured revolving credit facility (the "J&D Loan Agreement"), which was
amended in June 1997 to provide for borrowings up to $1.0 million, with interest
of 10 percent per annum due on the unpaid principal balance outstanding computed
from the date of each advance until maturity. Amounts outstanding under the J&D
Loan Agreement are due and payable on the earlier of June 19, 1998 or 30 days
following the successful completion of the Offering. As of June 30, 1997,
advances of $187,000 were outstanding.
4. SHAREHOLDERS' EQUITY
Preferred Stock
TCMS's Board of Directors is authorized to designate the voting power,
preferences, dividends, liquidation rights, redemption and other features
related to the TCMS's preferred stock. As of December 31, 1996 and June 30,
1997, no TCMS preferred stock had been issued.
Common Stock
TCMS effected a 1,000-for-one stock split in August 1997 of the outstanding
shares of Common Stock. In addition, TCMS increased the number of authorized
shares of Common Stock to 20,000,000 and authorized 3,000,000 shares of
restricted common stock ("Restricted Common Stock"). The effects of the stock
split and the increase in the shares of authorized Common Stock and Restricted
Common Stock have been retroactively reflected on the accompanying balance
sheets and in those notes.
In March and April 1997, 175,000 shares and 100,000 shares of Common Stock,
respectively, were sold to management at $.001 per share. TCMS will record a
non-recurring, non-cash compensation charge of
49
52
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2.2 million effective with the closing of the Offering, representing the
difference between the amount paid for the shares and the estimated fair value
of the shares on the date of sale of such Common Stock.
In April 1997, TCMS issued 3,000 shares of Common Stock to a consultant for
services performed in connection with the Offering. The $12,200 difference
between the amount paid and the estimated fair market value of the shares on the
date of issue was recorded as deferred offering costs in the second quarter of
1997. In July 1997, an additional 3,000 shares of Common Stock were issued with
the same terms to another consultant for services performed in connection with
the Offering. An additional $32,000 will be recorded as deferred offering costs
in the third quarter of 1997.
Restricted Common Stock
Shares of Restricted Common Stock, if issued, will have no voting rights.
Shares of Restricted Common Stock, if issued, would be convertible into shares
of Common Stock on a share-for-share basis (i) in the event of certain ownership
changes, (ii) 18 months after the Offering or (iii) in the event of approval by
a majority of holders of the Common Stock. As of December 31, 1996 and June 30,
1997, no Restricted Common Stock has been issued.
Employee Stock Option Plan
In August 1997, TCMS' stockholders approved the TCMS 1997 Stock Option Plan
(the "Plan"), which provides for the granting of stock options to directors,
executive officers, certain other employees and certain non-employee consultants
of the Company. The Plan permits the granting of options for up to 750,000
shares of Common Stock. The terms of the option awards will be established by
the compensation committee of the board of directors of TCMS. TCMS has granted
stock options to purchase an estimated 97,000 shares of Common Stock to certain
members of the executive management team of the Company. The number of shares
estimated to be issued is based upon 2.5 times the annual compensation of the
respective executives divided by the Offering price. These options will be
exercisable at an exercise price equal to the per share Offering price, vest
over a five-year period from the date of grant and expire 10 years from the date
of grant. Additionally, the Company expects to grant stock options to purchase
an estimated 360,000 shares of Common Stock to certain other members of
management and key operating personnel of the Founding Companies.
5. COMMITMENTS AND CONTINGENCIES
Advisory Agreement
In February 1997, the Company entered into an advisory agreement with a
financial advisory firm (the firm) for a period of six months in connection with
the Acquisitions and related financings. Under the terms of the agreement
between the Company and the firm, as amended on June 25, 1997, the Company paid
the firm an initial financial advisory fee of $15,000, plus monthly fees
aggregating $30,000, and reimbursed the firm for its out-of-pocket expenses
relating to the services provided. The Company also issued a warrant to the firm
for $100 in cash. The warrant provides for the purchase of up to 50,000 shares
of Common Stock, at a per share exercise price equal to the lesser of $8.00 or
70% of the Offering price. The warrant may be exercised in whole or, from time
to time, in part, at any time during the five-year period beginning six months
after the Offering closes. In connection with the warrant, the Company granted
certain registration rights to the firm.
The firm will be entitled to receive the following fees in the future: (i)
a $400,000 success fee, payable on closing the Acquisitions; (ii) a senior debt
placement fee of up to 2% of a new credit agreement (the "Credit Agreement")
(see Note 6), payable on closing of the Credit Agreement; and (iii) a private
placement fee equal to five percent of the amount of any private placement made
by the Company within two years of
50
53
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
August 12, 1997 with any capital source introduced to the Company by the firm,
together with a warrant to purchase an amount equal to 10% of the securities
issued in any such private placement.
Consulting Agreements
In February 1997, TCMS entered into a consulting and financial advisory
agreement (the "Consulting Agreement") with J&D. The Consulting Agreement
provides for a monthly fee of $12,500, payable on the closing of the Offering
and terminates on the earlier of the closing of the Offering or December 31,
1997. All amounts incurred through June 30, 1997 were capitalized as deferred
offering costs. On September 24, 1997, TCMS and J&D amended the consulting
agreement, so that, following the completion of the Offering, J&D will provide
the Company financial advisory and related services in connection with its
acquisition program. J&D will receive a consulting fee of $23,500 per month and
non-qualified options under the 1997 Stock Option Plan, to purchase 44,000
shares (assuming an Offering price of $15.00 per share) for an exercise price
equal to the Offering price per share. These options will vest at the rate of
20% per year, commencing on the first anniversary of the closing of the
Offering, and will expire at the earlier of ten years from the date of grant or
three months following termination of the consulting and financial services
agreement. In addition, J&D will be eligible to receive annual performance-based
bonuses.
In April 1997, TCMS entered into consulting services agreements with
certain officers of the Company. Pursuant to these agreements, the officers will
provide executive services in connection with the formation of TCMS and the
closing of the Offering. Expenses related to these contract services are
estimated to be approximately $30,000 per month until the date the Offering
closes, at which time these agreements automatically terminate.
Employment Agreements
In August 1997, TCMS entered into employment agreements with three officers
of the Company. Two of the agreements are effective August 1, 1997 and one upon
closing of the Offering. The term of the agreements extends three years
following the closing of the Offering. Additionally, the Company is committed to
offer employment agreements to certain members of management and key operating
personnel of the Founding Companies on similar terms and conditions to existing
agreements.
6. SUBSEQUENT EVENTS
Acquisitions
The Company has entered into definitive agreements to acquire the Founding
Companies and related real estate on the date the Offering closes. The Founding
Companies are The Woodson Companies, The CSI Companies, HBH, Inc. and The Red
Fox Companies of New Iberia, Inc. The aggregate consideration expected to be
paid by TCMS to acquire the Founding Companies is approximately $85,650,000 in
cash, $3,000,000 in debt and 2,570,933 shares of Common Stock (including certain
estimated post-closing adjustments). In addition, the Company will be assuming
debt on certain of the Founding Companies.
Credit Agreement
Prior to the closing of the Offering, TCMS intends to enter into the Credit
Agreement with Joint Energy Development Investments, Limited Partnership, an
affiliate of Enron Capital & Trade Resources Corp. (the "Lender"). TCMS expects
that the Credit Agreement will provide for borrowings up to $75.0 million, with
the initial borrowing availability being $50.0 million (the "Initial
Availability") and the remaining $25.0 million being made available from time to
time and in such amounts as the Lender shall determine in its sole discretion.
The Credit Agreement will be divided into two tranches: (i) a senior secured
revolving credit facility (the "Revolving Credit Facility"), providing for
borrowings of up to $60.0 million ($40.0 million of
51
54
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which will comprise part of the Initial Availability), and (ii) $15.0 million of
senior subordinated term loan borrowings (the "Term Loan Facility") ($10.0
million of which will comprise the remainder of the Initial Availability). The
Company also expects (i) borrowings under the Credit Agreement will bear
interest at LIBOR plus 275 basis points (8.37% at October 3, 1997), payable
quarterly, and (ii) borrowings under the Term Loan Facility will bear interest
at LIBOR plus 375 basis points (9.37% at October 3, 1997), payable quarterly.
Borrowings under the Credit Agreement will be secured by liens on substantially
all the Company's assets (including accounts receivable and after-acquired
property) and a pledge of the capital stock of the Founding Companies and each
of the Company's other subsidiaries. Borrowings under the Credit Agreement are
expected to be used to pay a portion of the aggregate purchase price for the
Acquisitions and for general corporate purposes, which may include future
acquisitions. The Company expects that the Credit Agreement will require the
Company to comply with various loan covenants, including (i) maintenance of
certain financial ratios; (ii) restrictions on additional indebtedness; and
(iii) restrictions on liens, guarantees, advances and dividends. The Company
anticipates the Credit Agreement will extend through October 1999 and all
outstanding principal and accrued and unpaid interest under the Revolving Credit
Facility and the Term Loan Facility as of that date will be due and payable on
that date. The Company also anticipates the Credit Agreement will contain
mandatory prepayment provisions requiring prepayment of outstanding borrowings
from the issuance of debt or equity securities for cash and any proceeds from
other borrowings. In connection with the Credit Agreement, the Company will
issue to the Lender a warrant to acquire 175,000 shares of Common Stock at an
exercise price equal to the initial per share price to the public in the
Offering. The consideration for that warrant will be $1,750 and the warrant is
expected to be exercisable for five years from its date of issuance.
Registration Statement
In August 1997, the Company filed a registration statement on Form S-1 for
the Offering. An investment in shares of Common Stock involves a high degree of
risk, including, among others, absence of a combined operating history, risks
relating to the Company's acquisition strategy, risks relating to acquisition
financing, reliance on key personnel and a substantial portion of the proceeds
from the Offering payable to affiliates of the Founding Companies.
52
55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Woodson Companies:
We have audited the accompanying combined balance sheets of The Woodson
Companies (as defined in Note 1) as of December 31, 1995 and 1996, and the
related combined statements of operations, shareholders' equity and cash flows
for the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the management of The Woodson Companies.
Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Woodson
Companies as of December 31, 1995 and 1996, and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 18, 1997 (except with respect
to the matter discussed in
Note 12, as to which
the date is July 31, 1997).
53
56
THE WOODSON COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31
---------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 852 $1,117 $ 1,919
Accounts receivable....................................... 343 103 433
Contracts receivable...................................... 2,871 1,315 4,320
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 45 -- 1,053
Inventory................................................. 179 243 364
Available-for-sale securities, at fair value.............. 1,249 1,603 81
Other current assets...................................... 480 861 203
------ ------ -------
Total current assets.............................. 6,019 5,242 8,373
PROPERTY, PLANT AND EQUIPMENT, net.......................... 1,872 2,956 4,348
OTHER ASSETS:
Notes receivable from related parties..................... 560 657 657
Other..................................................... 556 301 270
------ ------ -------
Total assets...................................... $9,007 $9,156 $13,648
====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Short-term borrowings..................................... $ -- $ 229 $ 994
Notes payable to shareholders............................. -- 450 --
Current maturities of long-term debt...................... 19 -- --
Accounts payable.......................................... 234 510 1,813
Accrued expenses.......................................... 138 250 1,416
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 1,000 -- 718
------ ------ -------
Total liabilities................................. 1,391 1,439 4,941
------ ------ -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock.............................................. 98 98 98
Additional paid-in capital................................ 25 25 25
Retained earnings......................................... 7,382 7,275 8,570
Net unrealized gain on available-for-sale securities, net
of deferred income taxes............................... 111 319 14
------ ------ -------
Total shareholders' equity........................ 7,616 7,717 8,707
------ ------ -------
Total liabilities and shareholders' equity........ $9,007 $9,156 $13,648
====== ====== =======
The accompanying notes are an integral part of these combined financial
statements.
54
57
THE WOODSON COMPANIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
REVENUE...................................... $ 7,786 $18,075 $17,933 $10,689 $18,104
COSTS AND EXPENSES:
Cost of revenue............................ 5,874 12,716 13,561 7,833 15,243
Selling, general and administrative
expenses................................ 3,011 2,672 2,968 1,479 1,435
Depreciation and amortization.............. 728 574 562 291 455
------- ------- ------- ------- -------
Operating income (loss)................. (1,827) 2,113 842 1,086 971
OTHER INCOME (EXPENSE):
Interest income............................ 20 25 86 40 64
Interest expense........................... (101) (109) (35) (6) (45)
Other...................................... 96 69 357 99 496
------- ------- ------- ------- -------
Total other income (expense)....... 15 (15) 408 133 515
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES...................................... (1,812) 2,098 1,250 1,219 1,486
INCOME TAXES PROVISION (BENEFIT)............. (86) 91 91 17 191
------- ------- ------- ------- -------
NET INCOME (LOSS)............................ $(1,726) $ 2,007 $ 1,159 1,202 1,295
======= ======= ======= ======= =======
PRO FORMA INFORMATION (UNAUDITED) (Note 2)
Income (loss) before income taxes.......... $(1,812) $ 2,098 $ 1,250 1,219 1,486
Pro forma income taxes..................... -- 839 500 488 594
------- ------- ------- ------- -------
Pro forma net income (loss)................ $(1,812) $ 1,259 $ 750 731 892
======= ======= ======= ======= =======
The accompanying notes are an integral part of these combined financial
statements.
55
58
THE WOODSON COMPANIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NET UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) ON
------------------ PAID-IN RETAINED AVAILABLE-FOR-SALE
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
--------- ------ ---------- -------- ------------------ ---------------
BALANCE AT DECEMBER 31,
1993..................... 76,057.50 $98 $25 $ 7,384 $(138) $ 7,369
Dividends................ -- -- -- (193) -- (193)
Net loss................. -- -- -- (1,726) -- (1,726)
Change in valuation
allowance for net
unrealized gain (loss)
on available-for-sale
securities............ -- -- -- -- (97) (97)
--------- --- --- ------- ----- -------
BALANCE AT DECEMBER 31,
1994..................... 76,057.50 98 25 5,465 (235) 5,353
Dividends................ -- -- -- (90) -- (90)
Net income............... -- -- -- 2,007 -- 2,007
Change in valuation
allowance for net
unrealized gain (loss)
on available-for-sale
securities............ -- -- -- -- 346 346
--------- --- --- ------- ----- -------
BALANCE AT DECEMBER 31,
1995..................... 76,057.50 98 25 7,382 111 7,616
dividends................ -- -- -- (1,266) -- (1,266)
Net income............... -- -- -- 1,159 -- 1,159
Change in valuation
allowance for net
unrealized gain (loss)
on available-for-sale
securities............ -- -- -- -- 208 208
--------- --- --- ------- ----- -------
BALANCE AT DECEMBER 31,
1996..................... 76,057.50 98 25 7,275 319 7,717
Net income............... -- -- -- 1,295 -- 1,295
Change in valuation
allowance for net
unrealized gain (loss)
on available-for-sale
securities............ -- -- -- -- (305) (305)
--------- --- --- ------- ----- -------
BALANCE AT JUNE 30, 1997... 76,057.50 $98 $25 $ 8,570 $ 14 $ 8,707
========= === === ======= ===== =======
The accompanying notes are an integral part of these combined financial
statements.
56
59
THE WOODSON COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,726) $ 2,007 $ 1,159 $ 1,202 $ 1,295
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization........................... 728 574 562 291 455
Provision for doubtful accounts......................... 217 4 -- -- --
(Gain) loss on sale of property, plant and equipment.... (68) 98 (340) (101) --
Realized gains on sale of available-for-sale
securities............................................ -- -- -- -- (517)
Dividend income......................................... -- -- (36) (24) --
Deferred income taxes................................... (86) 91 91 17 190
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable................................. 67 (231) 240 288 (330)
Contracts receivable................................ 1,036 (1,349) 1,556 (891) (3,005)
Cost and estimated earnings in excess of billings on
uncompleted contracts............................. (141) 179 45 (328) (1,053)
Inventory........................................... 17 24 (64) (86) (121)
Other current assets................................ (193) 248 71 373 207
Other assets........................................ 75 (9) (15) (20) (2)
Increase (decrease) in --
Accounts payable and accrued expenses............... (708) 176 388 1,108 2,469
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... -- 1,000 (1,000) (550) 718
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities...................................... (782) 2,812 2,657 1,279 306
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of capital assets...................... 71 182 427 1 239
Capital expenditures...................................... (314) (1,039) (1,801) (562) (994)
Purchase of investments................................... (30) (124) (93) (56) --
Proceeds from sale of investments......................... -- -- 113 -- 2,028
Collections on amounts due from affiliate................. 19 192 -- -- --
(Advances) collections on notes receivable, net........... 5 (45) (392) 25 --
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities...................................... (249) (834) (1,746) (592) 1,273
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans against cash surrender value of
officers' life insurance policies....................... 142 -- -- -- --
Proceeds from notes payable............................... 1,206 3,846 615 -- --
Proceeds from issuance of notes payable to shareholders... 1,260 -- 450 -- --
Principal payments on notes payable....................... (733) (4,582) (445) (14) (327)
Principal payments on notes payable to shareholders....... (1,050) (420) -- -- (450)
Payment of dividends to shareholders...................... (193) (90) (1,266) (1,260) --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities...................................... 632 (1,246) (646) (1,274) (777)
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (399) 732 265 (587) 802
CASH AND CASH EQUIVALENTS, beginning of period.............. 519 120 852 852 1,117
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 120 $ 852 $ 1,117 $ 265 $ 1,919
======= ======= ======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest................................................ $ 101 $ 102 $ 35 $ 6 $ 45
Non-cash investing and financing activities:
Purchase of assets through assumption of debt........... -- -- -- -- 1,093
The accompanying notes are an integral part of these combined financial
statements.
57
60
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Principles of Combination
The accompanying combined financial statements include the accounts of the
following corporations, all headquartered in Lafayette, Louisiana, which are
related by the common ownership of immediate family members:
Woodson Construction Company, Inc. (WCC)
Laine Construction Company, Inc. (Laine)
Kori Corporation (Kori)
EnviroSystems, Inc. (Enviro)
Financial statements for the aforementioned companies (collectively, "The
Woodson Companies" or the "Companies") have been prepared on a combined basis
due to the Companies' common ownership by immediate family members acting as a
control group.
Description of Operations
WCC and Laine are in the business of constructing pipelines for the oil and
gas industry primarily offshore Louisiana, Texas, Mississippi and Alabama. WCC
secures contracts with customers and subcontracts substantially all the work to
Laine, which is owned by several officers of WCC.
Kori manufactures amphibious undercarriages for use primarily in marine
construction in the transition zone (from zero to 20 feet in depth). As an
Original Equipment Manufacturer ("OEM"), Kori supplies amphibious undercarriages
to companies that manufacture and/or distribute excavators
Enviro performs sight assessments and on-site remediation of
petroleum-based products. Enviro also assists customers in the preparation and
submission of applications for reimbursement to the Louisiana Department of
Environmental Quality. All of Enviro's revenue is derived from sources within
the State of Louisiana.
Although the Companies have experienced growth in revenue over the past few
years, there is an inherent concentration of credit risk associated with
contracts receivable from their major customers. At December 31, 1995 and 1996,
two customers comprised approximately 42 percent and 61 percent, respectively,
of the total contracts receivable balance. As the Companies have historically
funded their operations with cash flows from operations, the combined entity may
be impacted by its dependence on a limited number of customers. Management
believes the risk is mitigated by the long-standing business relationships with
and reputation of the Companies' major customers. Although there is no assurance
with regard to the future business associations between the Companies and their
major customers, management believes the Companies do not have a significant
concentration of risk at December 31, 1995 and 1996. See Note 13 for a summary
of sales to major customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
58
61
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
original maturities of three months or less.
Inventory
Inventories represent raw materials and production supplies and are stated
at cost using the specific-identification method. Cost is not in excess of
market. At December 31, 1995 and 1996, the amount of inventory (including
materials and work-in-process) held was approximately $179,000 and $243,000,
respectively. Work-in-process inventory historically has not been significant.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line and accelerated
methods based on the estimated useful lives of the assets, which range from five
to 31.5 years. Additions, improvements and renewals significantly adding to the
asset value or extending the life of the asset are capitalized. Ordinary
maintenance and repairs which do not extend the physical or economic lives of
the plant or equipment are charged to expense as incurred (see Note 5 for a
summary of property, plant and equipment).
Revenue Recognition
Revenues from construction contracts, which are typically of short
duration, are recognized on the percentage-of-completion method. Under this
method, the percentage of completion is determined by comparing contract costs
incurred to date with total estimated contract costs. Income is recognized by
applying the percentage complete to the projected total income for each contract
in progress. Contract costs include all direct material, labor and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, supplies and tools. Revisions in cost and income estimates are reflected
in the accounting period in which the facts requiring revision become known. In
addition, anticipated losses to be incurred on contracts in progress are charged
to income as soon as such losses can be determined.
Fair Value of Financial Instruments
The Woodson Companies consider the fair value of all financial instruments
to not be materially different from their carrying values at each year-end based
on management's estimate of the Companies' ability to borrow funds under terms
and conditions similar to those applicable to the Companies' existing debt.
Income Taxes
The Companies account for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the Companies recognize deferred tax liabilities and assets
for the expected future tax consequences of events recognized differently in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax basis of assets and liabilities using enacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation allowance should be
provided. Income tax expense is the tax payable for the year and the change
during the year in deferred tax assets and liabilities.
The Woodson Companies' shareholders have elected to have two of the
combined companies (Laine and Enviro) taxed as S Corporations for federal and
state income tax purposes whereby shareholders are liable for individual federal
and state income taxes on their allocated portions of the applicable entity's
taxable income.
59
62
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, the historical financial statements do not include provisions for
income taxes relating to those entities.
Pro forma net income (loss) consists of the historical net income (loss) of
the Companies, including two S Corporations, adjusted for income taxes that
would have been recorded had each company operated as a C Corporation.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Woodson Companies
adopted SFAS No. 121 on January 1, 1996. The impact of adopting this standard
did not have a material impact on the Companies' combined results of operations.
Interim Financial Information
The interim combined balance sheet as of June 30, 1997 and combined
statements of operations for the six months ended June 30, 1996 and 1997 are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim combined financial statements have been included. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
3. CONTRACTS AND ACCOUNTS RECEIVABLE
Amounts due on contracts as of the dates shown are as follows (in
thousands):
DECEMBER 31
----------------
1995 1996
------ ------
Completed contracts......................................... $ 469 $ 908
Contracts in progress --
Current................................................... 1,496 250
Retainage due within one year............................. 906 157
------ ------
$2,871 $1,315
====== ======
The portion of the retainage due in excess of one year is not significant.
The Woodson Companies' accounts receivable balances as of December 31, 1995
and 1996 were approximately $343,000 and $103,000, respectively. The Woodson
Companies charge uncollectible receivables (contracts and accounts) to expense
when available information indicates that it is probable that the assets have
been impaired. Bad debt expense amounted to $217,000, $4,000 and $-- for the
years ended December 31, 1994, 1995 and 1996, respectively.
60
63
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of the dates shown is
as follows (in thousands):
DECEMBER 31
---------------
1995 1996
------- ----
Costs incurred on uncompleted contracts..................... $ 5,736 $--
Estimated profit earned to date............................. 1,270 --
------- ---
7,006 --
Less -- Billings to date.................................... (7,961) --
------- ---
$ (955) $--
======= ===
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
DECEMBER 31
---------------
1995 1996
------- ----
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 45 $--
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (1,000) --
------- ---
$ (955) $--
======= ===
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the dates shown
(in thousands):
DECEMBER 31,
----------------
1995 1996
------ ------
Buildings................................................... $ 750 $ 490
Machinery and equipment..................................... 5,325 5,953
Furniture and fixtures...................................... 594 661
Transportation equipment.................................... 1,520 1,500
------ ------
8,189 8,604
Less -- Accumulated depreciation and amortization........... 6,317 5,648
------ ------
$1,872 $2,956
====== ======
The Woodson Companies lease certain equipment used in the normal course of
their operations typically under month-to-month lease agreements. During the
years ended December 31, 1994, 1995 and 1996, the Companies expensed $650,000,
$1,783,000 and $1,920,000, respectively, relating to these leases.
6. AVAILABLE-FOR-SALE SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Companies' marketable equity securities are
included in an available-for-sale caption in the accompanying
61
64
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
balance sheets and are carried at market value, with the difference between cost
and market value, net of related tax effects, included as a component of
shareholders' equity computed as follows (in thousands):
DECEMBER 31
----------------
1995 1996
------ ------
Fair value.................................................. $1,249 $1,603
Cost........................................................ 1,084 1,121
------ ------
Gross unrealized gain..................................... 165 482
Deferred tax effects........................................ 54 163
------ ------
Net unrealized gain....................................... $ 111 $ 319
====== ======
Subsequent to December 1996, the Companies sold certain marketable equity
securities for net proceeds of $1,578,000. This transaction resulted in a gain
of $516,000, before related tax effects. Additionally, as a result of this sale,
the net unrealized gain on available-for-sale securities, net of deferred income
taxes, will be reduced by $305,000.
7. SUMMARY OF FINANCING ARRANGEMENTS
Short-term borrowings and notes payable to nonaffiliates consist of the
following (in thousands):
DECEMBER 31
-------------
1995 1996
---- -----
Note payable to an insurance company in monthly installments
of $70,000, including interest at 7.45%, maturing April
15, 1997.................................................. $ -- $ 209
Note payable to an equipment company in monthly installments
of $3,000, including interest, maturing July 9, 1997,
secured by machinery and equipment........................ -- 20
Note payable to contractor in monthly installments of
$2,000, including interest, paid in 1996, secured by
machinery and equipment................................... 19 --
---- -----
Total financing obligations to nonaffiliates...... 19 229
Less -- Current portion..................................... (19) (229)
---- -----
Long-term balance......................................... $ -- $ --
==== =====
8. INCOME TAXES
Federal income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31
------------------------
1994 1995 1996
---- ---- ----
Federal provision (benefit) --
Current................................................. $ --
Deferred................................................ (86) 91 91
62
65
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows (in thousands):
YEAR ENDED DECEMBER 31
-----------------------
1994 1995 1996
----- ----- -----
Provision at the statutory rate............................ $(616) $ 713 $ 425
Increase resulting from --
Permanent differences --
S Corporation nontaxable income....................... 300 (642) (346)
Recognition of valuation allowance on net operating
loss carryforwards.................................. 237 -- --
Expenses not deductible for tax purposes.............. 7 18 5
State income tax and other, net....................... (14) 2 7
----- ----- -----
$ (86) $ 91 $ 91
===== ===== =====
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
DECEMBER 31
--------------
1995 1996
---- ------
Tax benefit of net operating loss carryforwards, net of
valuation allowance of $237............................... $272 $ 265
Tax effect on deferred gain on available-for-sale
securities................................................ (54) (163)
Other accrued expenses not deductible for tax purposes...... 84 10
Basis differences on property, plant and equipment.......... 5 (6)
---- ------
Net deferred tax assets........................... $307 $ 106
==== ======
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
DECEMBER 31
------------
1995 1996
---- ----
Deferred tax assets --
Current................................................... $ -- $ --
Long-term................................................. 361 275
---- ----
Total............................................. 361 275
---- ----
Deferred tax liabilities --
Current................................................... -- --
Long-term................................................. 54 169
---- ----
Total............................................. 54 169
---- ----
Net deferred income tax assets.................... $307 $106
==== ====
9. RELATED-PARTY TRANSACTIONS
On December 31, 1996, the Companies advanced to their shareholders $450,000
pursuant to three promissory notes. The promissory notes are payable to the
Companies on demand, bear interest annually at a rate of 8 percent and are
included in other current assets in the accompanying balance sheets.
63
66
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During December 1996, the Companies issued three unsecured promissory notes
to their shareholders, payable on demand and bearing interest at 8 percent. The
balance on the notes payable to the shareholders at December 31, 1996, was
$450,000.
The companies lease office space from certain of their shareholders. The
amount recorded as expense related to this lease was $142,200 for each of the
three years ended December 31, 1994, 1995 and 1996.
In addition to the above transactions, WCC sold certain buildings, land and
improvements during the years ended December 31, 1995 and 1996 to companies
owned by three of its officers who are also immediate family members of a major
shareholder for a total of $567,000 and $106,000, respectively. WCC realized a
loss on the transaction in the amount of $96,000 and a gain of $100,000 during
the years ended December 31, 1995 and 1996, respectively. These transactions
resulted in notes receivable from related parties as follows (in thousands):
DECEMBER 31
------------
1995 1996
---- ----
Notes receivable from related parties, dated December 29,
1995 and January 2, 1996, payable in 30 annual
installments ranging from $2,000 to $9,000, including
principal and interest.................................... $567 $665
Less -- Current portion................................... (7) (8)
---- ----
Long-term receivable................................... $560 $657
==== ====
These notes receivable resulted in interest income of $43,000 for the year
ended December 31, 1996.
10. RETIREMENT PLAN
The Woodson Companies Employee Profit Sharing Plan ("the Plan") provides
for contributions of up to 10 percent of the annual compensation of each
participant. The Plan includes employees of at least 21 years of age with one
year of completed service. Participants who became eligible after January 1,
1990 remain nonvested until the completion of five years of service, at which
time the participants become 100 percent vested. The Companies have obtained a
favorable tax determination letter from the Internal Revenue Service with
respect to the Plan.
The Woodson Companies made Plan contributions of $--, $30,000 and $26,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
11. SHAREHOLDERS' EQUITY
The components of capital stock as of December 31, 1995 and 1996 are as
follows (in thousands except share and per-share information):
PAR VALUE
CLASS OF SHARES SHARES STATED STATED
COMPANY SHARES AUTHORIZED ISSUED PER SHARE VALUE
------- -------- ---------- --------- --------- ------
WCC............................... Common 200,000 75,000.00 $ 1 $75
Laine............................. Common 500 7.50 $ 100 1
Kori.............................. Common 5,000 750.00 $ 10 7
Enviro............................ Common 10,000 300.00 No Par 15
--------- ---
Total capital stock..... 76,057.50 $98
========= ===
64
67
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
Insurance
The Woodson Companies are subject to numerous risks and uncertainties
because of the nature and status of their operations. The Woodson Companies
maintain insurance coverage for events and in amounts that they deem
appropriate. With the exception of certain uninsured punitive damage claims
which cannot reasonably be estimated at this time as described under the heading
"Litigation," management believes that uninsured losses, if any, will not be
materially adverse to the Companies' financial position or results of
operations.
The Woodson Companies maintain a self-insurance program for their workers'
compensation claims. The insurance carrier requires the Companies to retain
$81,000 in a money market account and a $37,000 escrow fund, which the Companies
have included in other assets in the accompanying balance sheets. The program
provides for self-insurance coverage of $10,000 per occurrence, subject to a
maximum exposure of $50,000 per year. No expenses were accrued relative to the
self-insurance program for the periods shown in the statements of operations.
Litigation
The Companies are currently involved in two class action lawsuits for
unspecified personal injury and property damages arising from events in October
1991 and January 1992 during the course of a pipeline installation project for a
third party gas transmission company. One of the class actions, involving
approximately 9,840 class members, entitled Rivera v. United Gas Pipeline
Co.,No. 28738, was instituted against Woodson Construction Company, Inc. on
October 29, 1991 in the 40th Judicial District Court, Parish of St. John the
Baptist, State of Louisiana, and the other class action, involving approximately
7,858 class members, entitled Husseiney v. United Gas Pipeline Co., No. 29089,
was instituted on January 27, 1992 against Woodson Construction Company, Inc. in
the 40th Judicial District Court, Parish of St. John the Baptist, State of
Louisiana. The claims of 24 representative class members in each case were tried
in 1995, and judgments were rendered against Woodson Construction Company, Inc.,
which were later affirmed by the court of appeal. In the Rivera lawsuit, five of
the 24 representative plaintiffs were awarded compensatory damages of $7,500 in
the aggregate, but punitive damages were denied. In the Husseiney lawsuit,
compensatory damages of $18,589 and punitive damages of $9,500 in the aggregate
were assessed against Woodson Construction Company, Inc. in favor of 16 of the
24 representative plaintiffs. In both lawsuits, the compensatory damages awarded
are expected to be covered by the Companies' insurance, but punitive damage
awards are not expected to be covered by insurance. The compensatory and
punitive damages awarded to the 16 representative class members varied according
to the representatives' proximity to the incident and individual experience with
respect to it. The amount of compensatory and punitive damages applicable to the
remaining 7,834 class members who seek to adjudicate their damage claims will be
litigated on an individual basis. Until those remaining damage claims are
finally adjudicated, settled, dismissed or otherwise terminated, the total
amount of the punitive damages to which the Companies may be subject cannot
reasonably be estimated, and there can be no assurance that it will not be
materially adverse to the Woodson Companies' financial position or results of
operations. In July 1997, all parties involved applied to the Louisiana Supreme
Court for further discretionary review of the existing judgments. The Companies
believe that there are meritorious arguments favorable to their position, but
are unable to predict whether the Louisiana Supreme Court will grant relief from
the judgments.
The Companies are involved in various other lawsuits arising in the
ordinary course of business, some of which involve substantial claims for
damages. While the outcome of these other lawsuits cannot be predicted with
certainty, management believes these other matters will not have a material
adverse effect on the combined financial position or results of operations of
the Companies.
65
68
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
13. SALES TO MAJOR CUSTOMERS
The customer bases for the Companies are primarily concentrated in the oil
and gas industry. The revenue earned from each customer varies from year to year
based on the contracts awarded. Sales to customers comprising 10 percent or more
of the Companies' total revenue are summarized as follows:
YEAR ENDED DECEMBER 31
-----------------------
1994 1995 1996
----- ----- -----
Customer A.................................................. 19.7% 13.7% 10.1%
Customer B.................................................. 17.8 -- --
Customer C.................................................. -- 32.8 55.0
14. SUBSEQUENT EVENTS
The Woodson Companies and their shareholders expect to enter into
definitive agreements with TransCoastal Marine Services, Inc. ("TCMS"), pursuant
to which all the outstanding shares of the common stock of WCC, Kori and Enviro
will be acquired for TCMS common stock in three separate merger transactions,
and all the outstanding shares of the common stock of Laine will be purchased
for cash and shares of TCMS common stock concurrently with the closing of the
Offering (the "Offering") of the common stock of TCMS.
Shortly before the closing of the Offering, the Companies' shareholders
will elect to terminate the status as an S corporation for Laine and Enviro and
those companies will become subject to federal and state income taxes. Prior to
their termination as S corporations, subject to the terms of the acquisition
agreements, the Companies must refrain from declaring or paying any dividends or
Subchapter S distributions to any shareholders, directors, management sales
agents, employees or other personnel, except for dividends and distributions to
shareholders paid or declared in 1997 which in the aggregate do not exceed 43.2%
of the Companies' pretax income during 1997 excluding certain other mutually
agreed-to distributions, through the earlier of September 30, 1997 or the
Closing Date.
66
69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The CSI Companies:
We have audited the accompanying combined balance sheets of The CSI
Companies (as defined in Note 1), as of December 31, 1995 and 1996, and the
related combined statements of operations, owners' equity and cash flows for
each of the two years in the period ended May 31, 1995, the seven months ended
December 31, 1995, and the year ended December 31, 1996. These financial
statements are the responsibility of the management of The CSI Companies. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The CSI
Companies, as of December 31, 1995 and 1996, and the combined results of their
operations and their cash flows for each of the two years in the period ended
May 31, 1995, the seven months ended December 31, 1995 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 18, 1997 (except with
respect to the matter discussed
in Note 10, as to which the date is
July 31, 1997)
67
70
THE CSI COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
-----------------
1995 1996 JUNE 30, 1997
------ ------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................ $ 758 $ 571 $ 872
Restricted cash equivalents.............................. -- 460 460
Accounts receivable...................................... 2,534 1,368 4,490
Available-for-sale securities, at fair value............. 2,418 522 151
Receivables from related parties......................... 282 746 760
Other current assets..................................... 167 708 478
------ ------- -------
Total current assets............................. 6,159 4,375 7,211
PROPERTY, PLANT AND EQUIPMENT, net......................... 1,400 3,109 7,053
OTHER ASSETS............................................... 42 18 39
------ ------- -------
Total assets..................................... $7,601 $ 7,502 $14,303
====== ======= =======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt..................... $1,144 $ 355 $ 1,069
Accounts payable......................................... 718 1,591 140
Accrued expenses......................................... 192 282 2,780
Income taxes payable..................................... 217 478 1,196
------ ------- -------
Total current liabilities........................ 2,271 2,706 5,185
------ ------- -------
DEFERRED INCOME TAX LIABILITY.............................. 630 561 670
LONG-TERM DEBT............................................. 25 1,738 4,696
COMMITMENTS AND CONTINGENCIES
OWNERS' EQUITY:
Common stock............................................. 264 264 264
Additional paid-in capital............................... 380 380 380
Retained earnings........................................ 4,031 4,417 5,672
Treasury stock, at cost, 83.3 shares as of December 31,
1996 and March 31, 1997............................... -- (2,564) (2,564)
------ ------- -------
Total owners' equity............................. 4,675 2,497 3,752
------ ------- -------
Total liabilities and owners' equity............. $7,601 $ 7,502 $14,303
====== ======= =======
The accompanying notes are an integral part of these combined financial
statements.
68
71
THE CSI COMPANIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS
YEAR ENDED SEVEN MONTHS ENDED
MAY 31 ENDED YEAR ENDED JUNE 30
--------------- DECEMBER 31, DECEMBER 31, ---------------
1994 1995 1995 1996 1996 1997
------ ------ ------------- ------------ ------ ------
(UNAUDITED)
REVENUE........................... $5,331 $5,226 $6,041 $8,447 $3,815 $9,606
COSTS AND EXPENSES:
Cost of revenue................. 2,964 3,334 3,010 5,264 2,463 5,651
Selling, general and
administrative expenses...... 1,725 2,285 1,282 2,435 1,160 1,270
Depreciation and amortization... 288 269 177 359 202 245
------ ------ ------ ------ ------ ------
Operating income (loss)...... 354 (662) 1,572 389 (10) 2,440
OTHER INCOME (EXPENSE):
Interest income................. 84 117 80 159 33 72
Interest expense................ (14) (5) (11) (137) (28) (214)
Other........................... 73 14 (6) (25) 54 (28)
------ ------ ------ ------ ------ ------
Total other income
(expense)............. 143 126 63 (3) 59 (170)
------ ------ ------ ------ ------ ------
INCOME (LOSS) BEFORE
INCOME TAXES.................... 497 (536) 1,635 386 49 2,270
INCOME TAXES PROVISION
(BENEFIT)....................... 190 (150) 642 205 84 931
EXTRAORDINARY GAIN................ -- -- -- 342 342 --
------ ------ ------ ------ ------ ------
NET INCOME (LOSS)................. $ 307 $ (386) $ 993 $ 523 $ 307 $1,339
====== ====== ====== ====== ====== ======
PRO FORMA INFORMATION
(UNAUDITED)(NOTE 2)
Income (loss) before income
taxes........................ $ 497 $ (536) $1,635 $ 386 $ 49 $2,270
Extraordinary gain.............. -- -- -- 342 342 --
Pro forma income taxes.......... 222 (125) 684 356 156 940
------ ------ ------ ------ ------ ------
Pro forma net income (loss)....... $ 275 $ (411) $ 951 $ 372 $ 235 $1,330
====== ====== ====== ====== ====== ======
The accompanying notes are an integral part of these combined financial
statements.
69
72
THE CSI COMPANIES
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------ ------ ---------- -------- -------- -------
BALANCE AT MAY 31, 1993............... 1,166 $264 $380 $3,117 $ -- $ 3,761
NET INCOME............................ -- -- -- 307 -- 307
----- ---- ---- ------ ------- -------
BALANCE AT MAY 31, 1994............... 1,166 264 380 3,424 -- 4,068
NET LOSS.............................. -- -- -- (386) -- (386)
----- ---- ---- ------ ------- -------
BALANCE AT MAY 31, 1995............... 1,166 264 380 3,038 -- 3,682
NET INCOME............................ -- -- -- 993 -- 993
----- ---- ---- ------ ------- -------
BALANCE AT DECEMBER 31, 1995.......... 1,166 264 380 4,031 -- 4,675
DISTRIBUTION TO PARTNER OF HARGETT
INVESTMENTS LLC..................... -- -- -- (137) -- (137)
NET INCOME............................ -- -- -- 523 -- 523
PURCHASE OF TREASURY STOCK............ (83) -- -- -- (2,564) (2,564)
----- ---- ---- ------ ------- -------
BALANCE AT DECEMBER 31, 1996.......... 1,083 264 380 4,417 (2,564) 2,497
DISTRIBUTION TO PARTNER OF HARGETT
INVESTMENT LLC...................... -- -- -- (84) -- (84)
NET INCOME (Unaudited)................ -- -- -- 1,339 -- 1,339
----- ---- ---- ------ ------- -------
BALANCE AT JUNE 30, 1997
(Unaudited)......................... 1,083 $264 $380 $5,672 $(2,564) $ 3,752
===== ==== ==== ====== ======= =======
The accompanying notes are an integral part of these combined financial
statements.
70
73
THE CSI COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEVEN MONTHS SIX MONTHS ENDED
MAY 31 ENDED YEAR ENDED JUNE 30
----------------- DECEMBER 31, DECEMBER 31, ------------------
1994 1995 1995 1996 1996 1997
------- ------ ------------ ------------ ------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 307 $ (386) $ 993 $ 523 $ 307 $ 1,339
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........... 288 269 177 359 202 245
Provision for doubtful accounts......... 41 6 6 24 -- 40
Deferred tax provision (benefit)........ 214 (97) 349 (69) (74) 109
Extraordinary gain...................... -- -- -- (342) (342) --
(Gain) loss on sale of property, plant
and equipment......................... 61 13 -- 19 6 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Restricted cash equivalents......... -- -- -- (460) -- --
Accounts receivable................. (53) 146 (1,872) 1,142 433 (3,162)
Receivables from related parties.... (264) -- (18) (728) (401) (14)
Other current assets................ 200 (168) 171 (541) (153) 230
Other assets........................ 258 96 (6) 24 41 (21)
Increase (decrease) in --
Accounts payable and accrued
expenses.......................... 173 132 307 963 96 1,047
Income taxes payable................ (24) (52) 291 261 91 717
------- ------ ------- ------- ------- -------
Net cash provided by (used in) in
operating activities............ 1,201 (41) 398 1,175 206 530
------- ------ ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of capital assets...... 90 -- -- 3 3 --
Capital expenditures...................... (142) (408) (238) (2,090) (374) (4,188)
Proceeds from sale (purchase) of
investments, net........................ (957) (498) (963) 1,896 1,093 371
------- ------ ------- ------- ------- -------
Net cash provided by (used in)
investing activities............ (1,009) (906) (1,201) (191) 722 (3,817)
------- ------ ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable....... (417) (388) (184) (1,201) (58) (1,344)
Proceeds from issuance of notes payable... 121 530 40 2,467 1,657 5,016
Distribution to partner of Hargett
Investments LLC......................... -- -- -- (137) -- (84)
Purchase of treasury stock................ -- -- -- (2,300) (2,300) --
------- ------ ------- ------- ------- -------
Net cash provided by (used in)
financing activities............ (296) 142 (144) (1,171) (701) 3,588
------- ------ ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (104) (805) (947) (187) 227 301
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 2,614 2,510 1,705 758 758 571
------- ------ ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.... $ 2,510 $1,705 $ 758 $ 571 $ 985 $ 872
======= ====== ======= ======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest................................ $ 14 $ 5 $ 11 $ 138 $ 28 $ 214
Taxes................................... -- -- -- 102 -- --
Exchange of receivable from related party
for treasury stock...................... -- -- -- 264 -- --
The accompanying notes are an integral part of these combined financial
statements.
71
74
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Principles of Combination
The accompanying combined financial statements include the accounts of the
following companies, all headquartered in Lafayette, Louisiana, which are
related by the common ownership of a major shareholder and immediate family
members:
CSI Hydrostatic Testers, Inc. (CSI) and its wholly owned subsidiary,
Blue-Water Hydro Test
Corporation (Blue-Water)
Hargett Mooring and Marine, Inc. (HMMI)
Hargett Investments LLC (HI)
Financial statements for the aforementioned companies ("The CSI Companies"
or the "Companies") have been prepared on a combined basis due to the Companies'
common ownership.
Description of Operations
CSI is primarily engaged in testing offshore oil and gas pipelines and
providing sandblasting and painting services to companies in the oil and gas
industry. CSI's main operating area is in and around the Gulf of Mexico.
Blue-Water had no operations as of December 31, 1996. HMMI is a marine vessel
company, focused on chartering vessels for certain energy-related services. HI's
operations consist of leasing office space to CSI.
Although the Companies have experienced growth in revenue over the past few
years, there is an inherent concentration of credit risk associated with
contracts receivable from their major customers. At December 31, 1995 and 1996,
two customers comprised approximately 55 percent and three customers comprised
approximately 45 percent, respectively, of the total accounts receivable
balance. As the Companies have historically funded their operations with cash
flows from operations, the combined entity may be impacted by its dependence on
a limited number of customers. Management believes the risk is mitigated by the
long-standing business relationship with and reputation of the Companies' major
clients. Although there is no assurance with regard to the future business
associations between the Companies and their major customers, management
believes the Companies do not have a significant concentration of risk at
December 31, 1995 and 1996. See Note 12 for a summary of sales to major
customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
original maturities of three months or less.
Restricted Cash
Restricted cash represents cash equivalent investments to support letters
of credit established by the Companies in the normal course of business with
certain vendors.
72
75
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line and accelerated
methods based on the estimated useful lives of the assets, which range from
three to 30 years. Additions, improvements and renewals significantly adding to
the asset value or extending the life of the asset are capitalized. Ordinary
maintenance and repairs which do not extend the physical or economic lives of
the plant or equipment are charged to expense as incurred.
Revenue Recognition
The Companies follow the percentage-of-completion method of accounting for
construction contracts which are typically of short duration. Under this method,
the percentage of completion is determined by comparing contract costs incurred
to date with total estimated contract costs. Income is recognized by applying
the percentage complete to the projected total income for each contract in
progress. Contract costs include all direct material, labor and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, supplies and tools. Revisions in cost and income estimates are reflected
in the accounting period in which the facts requiring revision become known. In
addition, anticipated losses to be incurred on contracts in progress are charged
to income as soon as such losses can be determined. With regard to pipeline
testing services performed, the companies recognize revenues on an as-billed
basis, with an accrual made at each period end for unbilled revenue.
Fair Value of Financial Instruments
The CSI Companies consider the fair value of all financial instruments to
not be materially different from their carrying values at each year-end based on
management's estimate of the Companies' ability to borrow funds under terms and
conditions similar to those applicable to the Companies' existing debt.
Income Taxes
The Companies account for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the Companies recognize deferred tax liabilities and assets
for the expected future tax consequences of events that have been recognized
differently in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax basis of assets and
liabilities using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse. Deferred tax assets are evaluated for
realization based on a more-likely-than-not criteria in determining if a
valuation allowance should be provided. Income tax expense is the tax payable
for the year and the change during the year in deferred tax assets and
liabilities.
One of the combining entities, HI, is a limited liability corporation. Its
members are liable for individual federal and state income taxes on their
allocated portions of its taxable income. Accordingly, the historical financial
statements do not include provisions for income taxes relating to HI.
Pro forma net income (loss) consists of the historical net income (loss) of
the Companies', including HI, a limited liability corporation, adjusted for
income taxes that would have been recorded had each Company operated as a C
corporation.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may
73
76
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
not be recoverable. The Companies adopted SFAS No. 121 on January 1, 1996. The
impact of adopting this standard did not have a material impact on the combined
results of operations.
Interim Financial Information
The interim combined balance sheet as of June 30, 1997 and combined
statements of operations for the six months ended June 30, 1996 and 1997 are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim combined financial statements have been included. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of the dates shown (in
thousands):
DECEMBER 31
----------------
1995 1996
------ ------
Billed to customers......................................... $2,074 $1,206
Revenues earned not yet billed.............................. 460 162
------ ------
$2,534 $1,368
====== ======
Bad debt expense amounted to $41,000, $6,000, $6,000 and $24,000 for the
years ended May 31, 1994 and 1995, the seven months ended December 31, 1995 and
the year ended December 31, 1996, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the dates shown
(in thousands):
DECEMBER 31
------------------
1995 1996
------- -------
Land........................................................ $ 258 $ 258
Buildings and improvements.................................. 1,641 1,533
Machinery and equipment..................................... 2,983 3,370
Furniture and fixtures...................................... 464 26
Marine vessels.............................................. 635 2,217
------- -------
5,981 7,404
Less -- Accumulated depreciation and amortization........... (4,581) (4,295)
------- -------
$ 1,400 $ 3,109
======= =======
The CSI Companies lease certain equipment used in the normal course of
their operations under, typically month-to-month lease agreements. During the
years ended May 31, 1994 and 1995, the seven months ended December 31, 1995 and
the year ended December 31, 1996, the Companies expensed $236,000, $243,000,
$688,000 and $1,019,000, respectively, related to these leases.
5. AVAILABLE-FOR-SALE SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Companies' marketable equity securities are
included in an available-for-sale caption in the accompanying
74
77
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
combined balance sheets and are carried at market value. The difference between
cost and market value is not material.
6. SUMMARY OF FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
DECEMBER 31
-----------------
1995 1996
------- ------
Note payable to a finance company in monthly installments of
$1,000, including interest at 8.50%, maturing June 1998,
secured by equipment and a personal guarantee by an
officer and shareholder of the Companies.................. $ 36 $ 25
Two notes payable to a financing company in monthly
installments of $27,000 and $26,000, including interest at
8.25% and 7.82%, maturing April 1996 and 1997,
respectively, secured by unearned insurance policy
premiums.................................................. 105 162
Note payable to a bank, due in monthly installments of
$24,000, including interest at 9.25%, maturing April 2003,
secured by equipment and a personal guarantee by an
officer and shareholder of the Companies.................. -- 1,398
Note payable to a trust company............................. 1,028 --
Note payable to a bank, due in monthly installments of
$5,000, including interest at 9.00%, maturing June 2001
with a balloon payment of $475,000, secured by real estate
and a personal guarantee by an officer and shareholder of
the Companies............................................. -- 508
------- ------
Total financing obligations....................... 1,169 2,093
Less -- Current portion of long-term debt................... (1,144) (355)
------- ------
Long-term debt.................................... $ 25 $1,738
======= ======
The note payable to a trust company for $1,028,000 was secured by a
mortgage on certain of the Companies' real estate. The Companies retired the
outstanding balance of that note in 1996 for $680,000. In connection with the
retirement, the Companies recognized an extraordinary gain of $342,000 for the
difference between the outstanding balance on the note at the time of retirement
and the amount paid.
Aggregate annual principal payments on financing obligations outstanding at
December 31, 1996 are as follows (in thousands):
1997........................................................ $ 355
1998........................................................ 211
1999........................................................ 217
2000........................................................ 238
2001........................................................ 703
Thereafter.................................................. 369
------
Total............................................. $2,093
======
Additionally, in October 1996, the Companies established a $500,000 line of
credit with a bank, bearing interest at 9.5 percent, due on demand or in monthly
payments. The line of credit matures in October 1997 and is secured by equipment
and accounts receivable of the Companies and by the personal guarantee of the
75
78
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
chief executive officer and principal shareholder. As of December 31, 1996, no
amounts had been drawn under the line of credit.
7. INCOME TAXES
Income taxes are as follows (in thousands):
YEAR ENDED SEVEN MONTHS
MAY 31 ENDED YEAR ENDED
------------ DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---- ---- ------------ ------------
Federal and state --
Current.................................. $(24) $(53) $293 $274
Deferred................................. 214 (97) 349 (69)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows (in thousands):
YEAR ENDED SEVEN MONTHS
MAY 31 ENDED YEAR ENDED
------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---- ----- ------------ ------------
Provision at the statutory rate........... $169 $(182) $556 $ 248
Increase resulting from --
Permanent differences --
Limited liability company nontaxable
income............................. (21) (25) (18) (136)
State income tax, net................ 17 (11) 57 28
Other................................ 25 68 47 65
---- ----- ---- -----
$190 $(150) $642 $ 205
==== ===== ==== =====
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
DECEMBER 31
--------------
1995 1996
----- -----
Utilization of operating losses............................. $ -- $ (84)
Bad debt expense............................................ (76) 58
Other accrued expenses not deductible for tax purposes...... 19 59
Basis differences on property, plant and equipment.......... (98) (114)
State taxes................................................. 45 40
Overseas operations......................................... (520) (520)
----- -----
Net deferred tax liability........................ $(630) $(561)
===== =====
76
79
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
DECEMBER 31
-------------
1995 1996
---- ----
Deferred tax assets --
Current................................................... $ 39 $147
Long-term................................................. 15 --
---- ----
Total............................................. 54 147
---- ----
Deferred tax liabilities --
Current................................................... 558 488
Long-term................................................. 126 220
---- ----
Total............................................. 684 708
---- ----
Net deferred income tax liability................. $630 $561
==== ====
8. RETIREMENT PLAN
The Companies maintain an Internal Revenue Code Section 401(k) plan which
covers all qualified employees meeting certain service and age requirements. The
Companies' contribution is discretionary. The Companies contributed $-- and
$18,000 for the seven-month period ended December 31, 1995 and the year ended
December 31, 1996, respectively. The 401(k) plan was discontinued in early 1997.
9. SHAREHOLDERS' EQUITY
The components of shareholders' equity as of December 31, 1995 and 1996,
are as follows (in thousands, except share and per share data) (see Note 1):
CLASS OF SHARES SHARES PAR VALUE STATED
COMPANY OWNERSHIP AUTHORIZED ISSUED PER SHARE VALUE
------- ------------ ---------- -------- --------- ------
CSI and subsidiary........ Common stock 700 166.67 $50.00 $ 9
HMMI...................... Common stock 999 999.00 No par 255
HI........................ Member units N/A N/A N/A N/A
-------- ----
1,165.67 $264
======== ====
Total capital related to HI is included in additional paid-in capital in
the accompanying balance sheets.
During 1996, CSI purchased 83 1/3 shares of common stock (one-half of its
outstanding shares) from an officer of CSI for $2,564,000. The purchase price
consisted of $2,300,000 in cash plus the forgiveness of a $264,000 receivable
from the officer. The purchased common stock has been recorded as treasury stock
in the accompanying financial statements.
10. COMMITMENTS AND CONTINGENCIES
Litigation
The CSI Companies are involved in various legal actions incidental to the
ordinary course of business. A former employee brought one such lawsuit against
HMMI in 1991. The former employee alleged personal injury while in the course
and scope of his employment and submitted an opening settlement demand of
$700,000. The case is currently pending trial in state district court. In the
opinion of the Companies' management, after consultation with outside legal
counsel, the ultimate disposition of such proceedings, including the case above,
will not have a material adverse effect on the Companies' financial position or
results of operations.
77
80
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
The Companies currently lease two vehicles under noncancelable operating
leases that provide for two-year terms. Future minimum lease payments under such
operating leases are as follows (in thousands):
YEAR ENDED
DECEMBER 31
- -----------
1997................................................................. $12
1998................................................................. 28
---
$40
===
Rental expense for the vehicle leases as described above and various other
leases for the years ended May 31, 1994 and 1995, the seven months ended
December 31, 1995 and the year ended December 31, 1996 was $--, $25,000, $17,000
and $17,000, respectively.
11. SALES TO MAJOR CUSTOMERS
The customer bases for the Companies are primarily concentrated in the oil
and gas industry. The revenue earned from each customer varies from year to year
based on the contracts awarded. Sales to customers comprising 10 percent or more
of the Companies' total revenue are summarized as follows:
SEVEN
YEAR ENDED MONTHS
MAY 31 ENDED YEAR ENDED
-------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---- ---- ------------ ------------
Customer A............................. 29% 26% --% --%
Customer B............................. 14 10 -- --
Customer C............................. 16 17 -- --
Customer D............................. 11 -- -- --
Customer E............................. -- -- 22 --
Customer F............................. -- -- -- 12
Customer G............................. -- -- -- 21
Customer H............................. -- -- -- 20
12. SUBSEQUENT EVENTS
Definitive Agreement
The CSI Companies and their shareholders expect to enter into a definitive
agreement with TransCoastal Marine Service, Inc. ("TCMS"), pursuant to which all
the outstanding shares of common stock and limited liability company interests
in the Companies will be acquired for cash and shares of TCMS common stock
concurrently with the consummation of the Offering of the common stock of TCMS.
Vessel Acquisition
In March 1997, the Companies purchased a marine vessel for $3.5 million
financed with a $3.5 million term note bearing interest at 10.7 percent. The
note is secured by a mortgage on the marine vessel and a personal guarantee of
an officer and shareholder of the Companies, is due in 59 monthly installments
of $59,000 and matures in 2002 with a $1,318,000 balloon payment on maturity.
The vessel was purchased for the purpose of expanding the capabilities of the
Companies' offshore pipeline testing operations.
78
81
INDEPENDENT AUDITORS' REPORT
Board of Directors
HBH, Inc.
Belle Chasse, Louisiana
We have audited the accompanying balance sheets of HBH, Inc. as of December
31, 1995 and 1996, and the related statements of operations, shareholder's
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HBH, Inc. as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New Orleans, Louisiana
March 27, 1997
(May 7, 1997 as to Note 6)
79
82
HBH, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31
------------------ JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash...................................................... $ 24 $ 44 $ 59
Accounts receivable, net.................................. 6,044 8,553 10,225
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. -- -- 1,539
Prepaid expenses.......................................... 180 405 519
Current portion of notes receivable from shareholder...... 218 -- 37
Other current assets...................................... 45 252 8
------- ------- -------
Total current assets.............................. 6,511 9,254 12,387
PROPERTY, PLANT AND EQUIPMENT, net.......................... 9,293 8,748 8,328
OTHER ASSETS:
Notes receivable from shareholder......................... 885 194 157
------- ------- -------
Total assets...................................... $16,689 $18,196 $20,872
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving line of credit.................................. $ 2,200 $ 1,476 $ 500
Current maturities of long-term debt...................... 812 940 977
Accounts payable.......................................... 7,215 7,986 8,942
Accrued expenses.......................................... 1,087 908 2,199
Billings in excess of costs and estimated losses on
uncompleted contracts.................................. 306 1,397 --
------- ------- -------
Total current liabilities......................... 11,620 12,707 12,618
LONG-TERM DEBT, less current maturities..................... 5,521 5,060 4,632
SUBORDINATED DEBT........................................... -- 635 635
DEFERRED GAIN ON SALE OF PROPERTY AND EQUIPMENT............. 508 -- --
------- ------- -------
Total liabilities................................. 17,649 18,402 17,885
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock, no par value, 3,000 shares authorized, 882
shares issued and outstanding at stated value.......... 66 66 66
Additional paid-in capital................................ 8 308 808
Retained earnings (accumulated deficit)................... (1,034) (580) 2,113
------- ------- -------
Total shareholder's equity (deficit).............. (960) (206) 2,987
------- ------- -------
Total liabilities and shareholder's equity
(deficit)....................................... $16,689 $18,196 $20,872
======= ======= =======
The accompanying notes are an integral part of these financial statements.
80
83
HBH, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
REVENUE.......................................... $15,261 $14,771 $36,873 $19,062 $23,850
COSTS AND EXPENSES:
Cost of revenue................................ 12,585 16,803 33,727 16,343 19,394
Selling, general and administrative expense.... 929 867 1,000 484 671
Depreciation................................... 503 871 1,482 719 750
------- ------- ------- ------- -------
14,017 18,541 36,209 17,546 20,815
------- ------- ------- ------- -------
Operating income (loss)..................... 1,244 (3,770) 664 1,516 3,035
OTHER INCOME (EXPENSE):
Interest income................................ 132 113 45 28 7
Interest expense............................... (85) (288) (853) (436) (368)
Gain on sale of property, plant and
equipment................................... 37 33 601 517 19
------- ------- ------- ------- -------
Total other income (expense)........... 84 (142) (207) 109 (342)
------- ------- ------- ------- -------
INCOME (LOSS).................................... $ 1,328 $(3,912) $ 457 $ 1,625 $ 2,693
======= ======= ======= ======= =======
PRO FORMA INFORMATION (UNAUDITED) (Note 2)
Historical net income (loss)................... $ 1,328 $(3,912) $ 457 $ 1,625 $ 2,693
Pro forma income tax provision (benefit)....... 500 (1,460) 170 600 1,000
------- ------- ------- ------- -------
Pro forma net income (loss).................... $ 828 $(2,452) $ 287 $ 1,025 $ 1,693
======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
81
84
HBH, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
BALANCE AT JANUARY 1, 1994................. 882 $66 $ 8 $ 2,430 $ 2,504
DIVIDENDS................................ -- -- -- (599) (599)
NET INCOME............................... -- -- -- 1,328 1,328
--- --- ---- ------- -------
BALANCE AT DECEMBER 31, 1994............... 882 66 8 3,159 3,233
DIVIDENDS................................ -- -- -- (281) (281)
NET LOSS................................. -- -- -- (3,912) (3,912)
--- --- ---- ------- -------
BALANCE AT DECEMBER 31, 1995............... 882 66 8 (1,034) (960)
CAPITAL CONTRIBUTIONS.................... -- -- 300 -- 300
DIVIDENDS................................ -- -- -- (3) (3)
NET INCOME............................... -- -- -- 457 457
--- --- ---- ------- -------
BALANCE AT DECEMBER 31, 1996............... 882 66 308 (580) (206)
CAPITAL CONTRIBUTIONS
(Unaudited)........................... -- -- 500 -- 500
NET INCOME (Unaudited)................... -- -- -- 2,693 2,693
--- --- ---- ------- -------
BALANCE AT JUNE 30, 1997 (Unaudited)....... 882 $66 $808 $ 2,113 $ 2,987
=== === ==== ======= =======
The accompanying notes are an integral part of these financial statements.
82
85
HBH, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------ --------------------
1994 1995 1996 1996 1997
------- ------- -------- -------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 1,328 $(3,912) $ 457 $ 1,625 $ 2,693
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization............... 503 871 1,482 719 750
(Gain) on sale of property, plant and
equipment................................. (37) (33) (601) (517) (19)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.................... (3,797) (1,401) (2,509) (178) (1,672)
Costs and estimated earnings (losses)
in excess of billings on uncompleted
contracts............................ 155 -- -- (169) (1,539)
Other current assets................... (20) (52) (432) 64 130
Increase (decrease) in:
Accounts payable and accrued
expenses............................. 2,130 4,872 594 (147) 2,247
Billings in excess of costs and
estimated earnings (losses) on
uncompleted contracts................ -- 306 1,090 (306) (1,397)
------- ------- -------- -------- --------
Net cash provided by (used in)
operating activities............... 262 651 81 1,091 1,193
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and
equipment................................... 8 11 221 49 34
Additions of property, plant and equipment.... (971) (7,859) (1,066) (575) (345)
Collection of notes receivable from
shareholder................................. 181 201 909 657 --
------- ------- -------- -------- --------
Net cash provided by (used in)
investing activities............... (782) (7,647) 64 131 (311)
------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit.................. 875 2,900 28,958 10,707 20,175
Payments on line of credit.................... (725) (850) (29,682) (10,626) (21,151)
Proceeds from subordinated debt............... -- -- 635 635 --
Proceeds from notes payable to others......... 219 5,534 532 500 82
Principal payments on notes payable to
others...................................... (267) (371) (865) (429) (473)
Capital contributions......................... -- -- 300 300 500
Payment of dividends to shareholder........... (599) (281) (3) (3) --
------- ------- -------- -------- --------
Net cash provided by (used in)
financing activities............... (497) 6,932 (125) 1,084 (867)
------- ------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH................. (1,017) (64) 20 2,306 15
CASH, beginning of period....................... 1,105 88 24 24 44
------- ------- -------- -------- --------
CASH, end of period............................. $ 88 $ 24 $ 44 $ 2,330 $ 59
======= ======= ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest.................................... $ 84 $ 286 $ 842 $ 429 $ 378
======= ======= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
83
86
HBH, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
HBH, Inc. (the "Company"), is wholly owned by the Estate of H.D. Hughes.
The Company is engaged in the marine pipeline and oilfield construction business
in the central area of the Gulf of Mexico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
original maturities of three months or less.
Accounts Receivable
The Company provides its services to a limited number of customers. At
December 31, 1996, five customers accounted for approximately 19%, 18%, 14%, 14%
and 13% of accounts receivable, respectively.
Accounts receivable are reduced by any allowance for doubtful accounts as
considered necessary. The need for an allowance is determined by management
based on an evaluation of individual accounts. Historical chargeoffs have not
been significant.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method based on
the estimated useful lives of the assets, which range from 3 to 10 years for
machinery and equipment and other assets. Additions, improvements and renewals
significantly adding to the asset value or extending the life of the asset are
capitalized. Ordinary maintenance and repairs not extending the physical or
economic lives of the plant or equipment are charged to expense as incurred.
Revenue Recognition
The Company follows the percentage-of-completion method of accounting for
major (generally over $100,000) construction contracts which are typically of
short duration. Under this method, the percentage of completion is determined by
comparing contract costs incurred to date with total estimated contract costs.
Income is recognized by applying the percentage complete to the projected total
income for each contract in progress. Contract costs include all direct
material, labor and subcontract costs and those indirect costs related to
contract performance, such as indirect labor, supplies and tools. Revisions in
cost and income estimates are reflected in the accounting period in which the
facts requiring the revision become known. In addition, anticipated losses to be
incurred on contracts in progress are charged to income as soon as losses can be
determined.
Revenue is recognized on minor construction contracts using the
completed-contract method whereby billings and costs are accumulated during the
period of construction but profits are not recorded until completion of the
contracts. This method approximates the percentage of completion method because
of the short-term nature of the minor contracts.
84
87
HBH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from day-rate contracts are recognized currently as the work is
performed.
Fair Value of Financial Instruments
The Company considers the fair value of all financial instruments to be a
reasonable approximation of their carrying values since financial instruments
such as cash, accounts receivable, accounts payable and accrued expenses have a
short duration and interest on debt is generally either at a floating rate or at
a rate which approximates current market.
Income Taxes
The Company has elected to be taxed for federal and state income tax
purposes under Subchapter S of the Internal Revenue Code. Any current taxable
income or loss of the Company is allocated to the shareholder who is responsible
for the taxes thereon.
The Company generally has paid dividends to its shareholder at the same
time that he was required to make income tax payments based on his taxable
income which included the results of the Company's operations.
Pro forma net income (loss) consists of the Company's historical income
(loss) as an S Corporation, adjusted for income taxes that would have been
recorded had the Company operated as a C Corporation.
Impairment of Long-Lived Assets
In March 1995, the Financing Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company adopted SFAS No. 121 on January 1, 1996. The impact of
adopting this standard did not have a material impact on the Company's results
of operations.
Interim Financial Information
The interim financial statements as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 are unaudited, and certain information and footnote
disclosures, normally included in annual financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
85
88
HBH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS AND CONTRACTS RECEIVABLE
Amounts due on contracts as of the dates shown are as follows (in
thousands):
DECEMBER 31
----------------
1995 1996
------ ------
Completed contracts......................................... $1,430 $5,366
Contracts in progress:
Current................................................... 4,045 2,929
Retainage due within one year............................. 569 258
Less -- allowance for doubtful accounts..................... -- --
------ ------
$6,044 $8,553
====== ======
The portion of the retainage due in excess of one year is not significant.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of the date shown is
as follows (in thousands):
DECEMBER 31
------------------
1995 1996
------- -------
Costs incurred on uncompleted contracts..................... $ 8,848 $ 2,688
Estimated losses on uncompleted contracts................... (3,548) (898)
------- -------
5,300 1,790
Less -- Billings to date.................................... (5,606) (3,187)
------- -------
$ (306) $(1,397)
======= =======
The above amounts are included in the accompanying balance sheets under the
caption of billings in excess of costs and estimated losses on uncompleted
contracts.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the dates shown
(in thousands):
DECEMBER 31
------------------
1995 1996
------- -------
Buildings................................................... $ 32 $ 32
Machinery and equipment..................................... 15,396 16,129
Furniture and fixtures...................................... 80 93
Transportation equipment.................................... 736 710
------- -------
16,244 16,964
Less -- Accumulated depreciation and amortization........... (6,951) (8,216)
------- -------
$ 9,293 $ 8,748
======= =======
6. SUMMARY OF FINANCING ARRANGEMENTS
The Company's revolving line of credit is payable to a bank and bears
interest at prime plus 0.75% (9% at December 31, 1996) and is due April 17,
1997. The agreement provides for maximum borrowings of $3,000,000. The Company's
agreement in connection with the line of credit payable to a bank contains
certain covenants with respect to the minimum amount of tangible net worth, the
maximum ratio of debt to equity
86
89
HBH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and a minimum quarterly amount of net earnings. The Company was not in
compliance with these covenants at December 31, 1996. These requirements were
waived through the new maturity date of the note which has been extended until
June 16, 1997 (see Note 9).
Long-term debt consisted of the following (in thousands):
DECEMBER 31
----------------
1995 1996
------ ------
Note payable to a bank, bearing interest at 9.25%, payable
in monthly installments of principal and interest of
approximately $74,000 with the unpaid balance due October
31, 2000.................................................. $5,358 $4,952
Note payable to a finance company, bearing interest at 6.79%
to 8.55%, due at various dates through 1998 and 2001...... 691 847
Various installment notes payable, bearing interest rates
ranging from 9.0% to 11.2%, due at various dates through
1998...................................................... 130 104
Note payable to a finance company, bearing interest at
6.63%, payable in monthly installments through July
1998...................................................... 153 97
------ ------
6,332 6,000
Less current portion........................................ (811) (940)
------ ------
$5,521 $5,060
====== ======
Substantially all of the Company's assets are pledged as collateral on the
long-term debt. The notes payable to the banks are guaranteed by the Company's
shareholder.
As of December 31, 1996, aggregate annual principal payments on the
revolving line of credit and long-term debt are payable as follows (in
thousands):
YEAR ENDING DECEMBER 31
- -----------------------
1997...................................................................... $2,416
1998...................................................................... 788
1999...................................................................... 659
2000...................................................................... 3,583
2001...................................................................... 30
------
$7,476
======
7. RELATED-PARTY TRANSACTIONS
Amounts due from the Company's sole shareholder in the form of notes
receivable amounted to $194,000 at December 31, 1996 and $1,103,000 at December
31, 1995, at various interest rates ranging up to 9%. Interest income on these
notes was approximately $44,000 for the year ended December 31, 1996, $101,000
for the year ended December 31, 1995 and $117,000 for the year ended December
31, 1994.
Land and buildings were sold to the Company's sole shareholder in October
1983. The excess of the sales price over the carrying value of the property was
deferred and was being recognized as payments were received on the note. During
1996, the remaining balance of the note was collected and the remaining gain of
$508,000 was recognized as income. The Company is leasing this property from the
shareholder on a month-to-month basis. Rent expense amounted to $167,000 for
each of 1996, 1995 and 1994.
The subordinated debt is due to the shareholder and is subordinate to the
revolving line of credit. The note bears interest at 9.45 percent, and interest
only is due in monthly installments through June 11, 2001, at which time the
terms of repayment of interest and principal are to be renegotiated.
87
90
HBH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has guaranteed a note payable to a bank by the Company's sole
shareholder with a balance of $1,104,000 at December 31, 1996.
The Company paid consulting, debt guarantee and other fees to the Company's
sole shareholder through December 31, 1996. These fees aggregated $233,000 for
each of 1996, 1995 and 1994.
8. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings arising in the ordinary
course of business and is not aware of any litigation threatened against it that
could have a material effect on the financial statements.
9. SUBSEQUENT EVENTS (UNAUDITED)
In June 1997, the maturity date of the revolving line of credit was
extended until June 16, 1998.
The Company and its shareholder have entered into a definitive agreement
(being held in escrow subject to the satisfaction of certain conditions) with
TransCoastal Marine Services, Inc. ("TCMS"), pursuant to which all the
outstanding shares of the Company's common stock will be sold to TCMS for cash
and shares of TCMS common stock concurrently with the consummation of the
Offering (the "Offering") of the common stock of TCMS.
A sale of the stock as described above would automatically terminate the
Company's status as an S corporation. Under the terms of the definitive
agreement, the Company has agreed to restrictions upon dividends or S
corporation distributions.
10. SALES TO MAJOR CUSTOMERS
The customer base for the Company is primarily concentrated in the oil and
gas industry. The revenue earned from each customer varies from year to year
based on the contracts awarded. Sales to customers comprising 10 percent or more
of the Company's total revenue are summarized as follows (in thousands):
YEAR ENDED DECEMBER 31
--------------------------
1994 1995 1996
------ ------ ------
Customer A............................................... $ -- $2,155 $7,862
Customer B............................................... 6,440 3,434 5,533
Customer C............................................... -- 3,194 --
Customer D............................................... -- 1,981 --
Customer E............................................... 3,030 -- --
******
88
91
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Red Fox Companies of New Iberia, Inc.:
We have audited the accompanying balance sheets of The Red Fox Companies of
New Iberia, Inc., as of December 31, 1995 and 1996, and the related statements
of operations, shareholder's equity and cash flows for the three years in the
period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Red Fox Companies of New
Iberia, Inc., as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
DARNALL, SIKES & FREDERICK
Lafayette, Louisiana
June 6, 1997
89
92
THE RED FOX COMPANIES OF NEW IBERIA, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31
---------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
CURRENT ASSETS:
Cash...................................................... $ 752 $ 89 $ 707
Contracts receivable...................................... 511 910 1,242
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 345 243 358
Deferred tax asset........................................ -- -- 22
Other current assets...................................... 37 82 106
------ ------ ------
Total current assets.............................. 1,645 1,324 2,435
PROPERTY, PLANT AND EQUIPMENT, net.......................... 59 38 44
AMOUNTS DUE FROM OFFICERS................................... 78 -- 34
------ ------ ------
Total assets...................................... $1,782 $1,362 $2,513
====== ====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $1,040 $ 570 $ 302
Accrued expenses.......................................... 216 130 1,206
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. -- 5 422
Deferred income taxes..................................... 66 81 --
------ ------ ------
Total current liabilities......................... 1,322 786 1,930
LOANS PAYABLE TO RELATED PARTIES............................ 43 -- --
DEFERRED INCOME TAXES....................................... 3 8 8
------ ------ ------
Total liabilities................................. 1,368 794 1,938
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 1 1 1
Retained earnings......................................... 413 567 574
------ ------ ------
Total shareholder's equity........................ 414 568 575
------ ------ ------
Total liabilities and shareholder's equity........ $1,782 $1,362 $2,513
====== ====== ======
The accompanying notes are an integral part of these financial statements.
90
93
THE RED FOX COMPANIES OF NEW IBERIA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------- -----------------
1994 1995 1996 1996 1997
------ ------- ------ ------- -------
(UNAUDITED)
REVENUE.......................................... $5,611 $10,497 $9,730 $3,159 $4,536
COSTS AND EXPENSES:
Cost of revenue................................ 4,715 9,426 8,260 2,708 3,825
Selling, general and administrative expenses... 650 698 885 363 674
Depreciation and amortization.................. 16 15 12 8 8
------ ------- ------ ------ ------
Operating income (loss)................ 230 358 573 80 29
OTHER INCOME (EXPENSE):
Interest expense............................... (70) (8) (30) (20) (7)
Other.......................................... (32) (80) (60) (21) (13)
------ ------- ------ ------ ------
Total other expense.................... (102) (88) (90) (41) (20)
------ ------- ------ ------ ------
INCOME BEFORE INCOME TAXES....................... 128 270 483 39 9
PROVISION FOR INCOME TAXES....................... 50 117 197 9 2
------ ------- ------ ------ ------
NET INCOME....................................... $ 78 $ 153 $ 286 $ 30 $ 7
====== ======= ====== ====== ======
The accompanying notes are an integral part of these financial statements.
91
94
THE RED FOX COMPANIES OF NEW IBERIA, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- -----
BALANCE AT DECEMBER 31, 1993............................. 100 $1 $ 182 $ 183
NET INCOME............................................. -- -- 78 78
--- -- ----- -----
BALANCE AT DECEMBER 31, 1994............................. 100 1 260 261
NET INCOME............................................. -- -- 153 153
--- -- ----- -----
BALANCE AT DECEMBER 31, 1995............................. 100 1 413 414
DIVIDENDS.............................................. -- -- (132) (132)
NET INCOME............................................. -- -- 286 286
--- -- ----- -----
BALANCE AT DECEMBER 31, 1996............................. 100 1 567 568
NET INCOME (Unaudited)................................. -- -- 7 7
--- -- ----- -----
BALANCE AT June 30, 1997 (Unaudited)..................... 100 $1 $ 574 $ 575
=== == ===== =====
The accompanying notes are an integral part of these financial statements.
92
95
THE RED FOX COMPANIES OF NEW IBERIA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------ -------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 78 $ 153 $ 286 $ 30 $ 7
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation.................................... 16 15 12 8 6
Loss on sale of property, plant and equipment... 4 -- -- -- --
Changes in operating assets and liabilities --
(Increase) decrease in --
Contracts receivable....................... 18 24 (399) (25) (332)
Costs and estimated earnings in excess of
billings on uncompleted contracts........ (169) (137) 102 162 (115)
Other current assets....................... -- (34) (45) (45) (24)
Increase (decrease) in --
Accounts payable and accrued expenses...... 211 852 (557) (816) 808
Billings in excess of costs and estimated
earnings on uncompleted contracts........ -- -- 5 -- 417
Deferred income taxes...................... 50 3 20 (3) (103)
----- ----- ----- ----- -----
Net cash provided by (used in) operating
activities............................ 208 876 (576) (689) 664
----- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and
equipment....................................... 2 -- -- -- --
Capital expenditures............................... (9) (35) (28) (4) (12)
Payments from shareholder and related parties...... -- -- 115 -- --
(Payments to) advances from shareholder and related
parties......................................... (57) (21) -- (14) (34)
----- ----- ----- ----- -----
Net cash provided by (used in) investing
activities............................ (64) (56) 87 (18) (46)
----- ----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to shareholder and
related parties................................. 221 -- -- -- --
Principal payments on notes payable to others...... (197) (28) -- -- --
Principal payments on notes payable to shareholder
and related parties............................. -- (208) (42) (4) --
Payment of dividends to shareholder................ -- -- (132) -- --
----- ----- ----- ----- -----
Net cash provided by (used in) financing
activities............................ 24 (236) (174) (4) --
----- ----- ----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 168 584 (663) (711) 618
CASH AND CASH EQUIVALENTS, beginning of period....... -- 168 752 752 89
----- ----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of period............. $ 168 $ 752 $ 89 $ 41 $ 707
===== ===== ===== ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used for --
Interest........................................ $ 70 $ 8 $ 30 $ 20 $ 7
Income taxes.................................... -- 98 140 -- --
The accompanying notes are an integral part of these financial statements.
93
96
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
The Red Fox Companies of New Iberia, Inc. (the "Company") is primarily
engaged in the fabrication and refurbishment of (i) structural components of
fixed platforms for use in the development of oil and gas, and (ii) structural
components, primarily deck structures, for offshore drilling rigs and barge
drilling rigs. RFCNI also fabricates marine sewage treatment units that are
installed on offshore platforms and drilling rigs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
original maturities of three months or less.
Contracts Receivable
The Company provides for doubtful accounts using the direct write-off
method. In the Company's case, use of this method does not result in a material
difference from the valuation method required by generally accepted accounting
principles.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation expense is
computed using the straight-line method based on the estimated useful lives of
the assets, which range from five to seven years. Additions, improvements and
renewals significantly adding to the asset value or extending the life of the
asset are capitalized. Ordinary maintenance and repairs not extending the
physical or economic lives of the plant or equipment are charged to expense as
incurred.
Revenue Recognition
Revenue from construction contracts, which are typically of short duration,
are recognized on the percentage-of-completion method. Under this method, the
percentage of completion is determined by comparing contract costs incurred to
date with total estimated contract costs. Income is recognized by applying the
percentage complete to the projected total income for each contract in progress.
Contract costs include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as indirect labor,
supplies and tools. Revisions in cost and income estimates are reflected in the
accounting period in which the facts that require revision become known. In
addition, anticipated losses to be incurred on contracts in progress are charged
to income as soon as such losses can be determined.
The asset caption entitled "Costs and estimated earnings in excess of
billings on uncompleted contracts" represents revenue recognized in excess of
amounts billed. The liability caption entitled "Billings in excess of costs and
estimated earnings on uncompleted contracts" represents billings in excess of
revenue recognized.
Fair Value of Financial Instruments
The Company considers the fair value of all financial instruments to not be
materially different from their carrying values at December 31, 1995 and 1996.
94
97
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the Company recognized deferred tax liabilities and assets
for the expected future tax consequences of events that have been recognized
differently in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax basis of assets and
liabilities using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse. Deferred tax assets are evaluated for
realization based on a more-likely-than-not criteria in determining if a
valuation allowance should be provided. Income tax expense is the tax payable
for the year and the change during the year in deferred tax assets and
liabilities.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted SFAS No.
121 on January 1, 1996. The impact of adopting this standard did not have a
material impact on the results of operations.
Interim Financial Information
The interim balance sheet as of June 30, 1997 and statements of operations
for the six months ended June 30, 1996 and 1997 are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
3. ACCOUNTS AND CONTRACTS RECEIVABLE
Amounts due on contracts as of the dates shown are as follows (in
thousands):
DECEMBER 31,
------------
1995 1996
---- ----
Completed contracts......................................... $487 $616
Contracts in progress....................................... 24 294
---- ----
$511 $910
==== ====
95
98
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of the dates shown is
as follows (in thousands):
DECEMBER 31,
---------------
1995 1996
----- ------
Costs incurred on uncompleted contracts..................... $ 654 $3,508
Estimated profit earned to date............................. 114 266
Accrued loss on uncompleted contracts....................... (152) --
----- ------
616 3,774
Less -- Billings to date.................................... 271 3,536
----- ------
$ 345 $ 238
===== ======
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
DECEMBER 31
------------
1995 1996
---- ----
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $345 $243
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... -- (5)
---- ----
$345 $238
==== ====
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the dates shown
(in thousands):
DECEMBER 31
------------
1995 1996
---- ----
Buildings................................................... $ -- $ 4
Machinery and equipment..................................... 15 29
Transportation equipment.................................... 75 28
---- ----
90 61
Less -- Accumulated depreciation............................ (31) (23)
---- ----
$ 59 $ 38
==== ====
6. INCOME TAXES
Federal income taxes are as follows:
YEAR ENDED
DECEMBER 31
--------------------
1994 1995 1996
---- ---- ----
Federal --
Current................................................... $-- $101 $155
Deferred.................................................. 50 3 20
96
99
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows:
YEAR ENDED
DECEMBER 31
--------------------
1994 1995 1996
---- ---- ----
Provision at the statutory rate............................. $44 $92 $164
Increase resulting from state income tax, net............... 5 11 22
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
DECEMBER 31
-------------
1995 1996
----- ----
Accrued losses on uncompleted contracts..................... $ 51 $ --
Uncompleted contracts....................................... (117) (81)
Basis differences on property, plant and equipment.......... (3) (8)
----- ----
Net deferred tax liabilities...................... $ (69) $(89)
===== ====
The net deferred tax assets and liabilities are comprised of the following:
1995 1996
---- ----
Deferred tax assets, current................................ $ 51 $ --
---- ----
Deferred tax liabilities --
Current................................................... 117 81
Long-term................................................. 3 8
---- ----
Total............................................. 120 89
---- ----
Net deferred income tax liabilities............... $(69) $(89)
==== ====
7. RELATED-PARTY TRANSACTIONS
The following transactions occurred between the Company and certain related
parties:
a. Loans receivable from Company officers at December 31, 1995 and
1996 were $78,000 and $--, respectively. These loans were unsecured and
provided no set repayment terms.
b. Loans due from or payable to a party related to the Company's
president at December 31, 1995 and 1996 were as follows (in thousands):
LOANS LOANS
RECEIVABLE PAYABLE
---------- -------
December 31, 1995........................................... $43
December 31, 1996........................................... 17 --
These loans were unsecured and noninterest-bearing. There were also no
set repayment terms.
c. Lease agreements between the Company and related parties as of
December 31, 1994, 1995 and 1996 consisted of the following:
(1) The Company leases real estate from a party related to the
Company's president. The annual rent paid by the Company for 1994, 1995
and 1996 was $30,000, $30,000 and $30,000,
97
100
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
respectively. In addition, rent for the year ending December 31, 1997 in
the amount of $27,000 was prepaid.
(2) The Company leases vehicles from a party related to the
Company's president. Rental amounts paid for vehicles in 1994, 1995 and
1996 were $--, $7,000 and $25,000, respectively.
(3) The Company leases a vehicle from its president. The associated
rental amounts paid by the Company for 1994, 1995 and 1996 were $20,000,
$44,000 and $38,000, respectively.
d. The Company had sales to a company owned by a party related to the
Company's president during the year ended December 31, 1996 totaling
$162,000.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain equipment used in the normal course of its
operations under month-to-month lease agreements cancelable only by the Company.
The Company leases automobiles under operating leases which are
noncancelable for the first 24 months and, in certain cases, the first 48
months. Thereafter, the leases are on a month-to-month basis.
The Company leases office space under an operating lease which is
noncancelable for the first 120 months.
Approximate annual minimum lease payments under operating leases as of
December 31, 1996 are as follows (in thousands):
1997.................................................. $ 45
1998.................................................. 45
1999.................................................. 38
2000.................................................. 31
2001.................................................. 30
Thereafter............................................ 135
----
$324
====
The Company expensed amounts related to these leases as follows (in
thousands):
YEAR ENDED
DECEMBER 31
--------------------
1994 1995 1996
---- ---- ----
Building.............................................. $ 34 $ 38 $ 48
Vehicles.............................................. 12 28 49
Equipment............................................. 205 291 273
98
101
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
9. SALES TO MAJOR CUSTOMERS
The customer base for the Company is primarily concentrated in the oil and
gas industry. The revenue earned from each customer varies from year to year
based on the contracts awarded. Sales to customers comprising 10 percent or more
of the Company's total revenue are summarized as follows:
YEAR ENDED DECEMBER 31
-----------------------
1994 1995 1996
----- ----- -----
Customer A.................................................. 25.0% 76.3% --%
Customer B.................................................. 11.8 -- 10.9
Customer C.................................................. 11.5 -- --
Customer D.................................................. -- -- 49.4
10. SUBSEQUENT EVENTS
The Company expects to enter into a definitive agreement with TransCoastal
Marine Services, Inc. ("TCMS"), pursuant to which all the outstanding shares of
the Company's common stock will be acquired for notes and shares of TCMS common
stock concurrently with the closing of the Offering of the common stock of TCMS.
99
102
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the information called for by Items 10, 11, 12, and 13, reference is
made to the Company's definitive proxy statement for its 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
(the "Commission") within 120 days after December 31, 1997, and which is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 -- Amended and Restated Certificate of Incorporation of
TCMS. (Incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
3.2 -- Bylaws of TCMS. (Incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-1)
(File #333-34603).
4.1 -- Form of Certificate representing Common Stock.
(Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
4.2 -- Form of Share Exchange Agreement among TCMS, J&D Capital
Investments, L.C., James B. Thompson and Beldon E. Fox,
Jr. (Incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
4.3 -- Form of Secured Promissory Note to be issued in the
acquisition of RFCNI. (Incorporated by reference to
Exhibit 4.3 of the Company's Registration Statement on
Form S-1) (File #333-34603).
10.1 -- TCMS 1997 Stock Option Plan. (Incorporated by reference
to Exhibit 10.1 of the Company's Registration Statement
on Form S-1) (File #333-34603).
10.2 -- Employment Agreement dated as of August 6, 1997, between
TCMS and Bill E. Stallworth. (Incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement
on Form S-1) (File #333-34603).
10.3 -- Employment Agreement dated as of August 6, 1997, between
TCMS and Thad Smith. (Incorporated by reference to
Exhibit 10.3 of the Company's Registration Statement on
Form S-1) (File #333-34603).
10.4 -- Employment Agreement dated as of August 6, 1997, between
TCMS and Johnnie W. Domingue. (Incorporated by reference
to Exhibit 10.4 of the Company's Registration Statement
on Form S-1) (File #333-34603).
100
103
10.5 -- Stock Repurchase Agreement dated as of March 24, 1997,
between TCMS and Bill E. Stallworth. (Incorporated by
reference to Exhibit 10.5 of the Company's Registration
Statement on Form S-1) (File #333-34603).
10.6 -- Stock Repurchase Agreement dated as of April 25, 1997,
between TCMS and Thad Smith. (Incorporated by reference
to Exhibit 10.6 of the Company's Registration Statement
on Form S-1) (File #333-34603).
10.7 -- Stock Repurchase Agreement dated as of March 24, 1997,
between TCMS and Johnnie W. Domingue. (Incorporated by
reference to Exhibit 10.7 of the Company's Registration
Statement on Form S-1) (File #333-34603).
10.8 -- Form of Employment Agreement between HBH, Inc. and H.
Daniel Hughes II. (Incorporated by reference to Exhibit
10.8 of the Company's Registration Statement on Form S-1)
(File #333-34603).
10.9 -- Form of Employment Agreement between CSI Hydrostatic
Testers, Inc. and Daniel N. Hargett, Sr. (Incorporated by
reference to Exhibit 10.9 of the Company's Registration
Statement on Form S-1) (File #333-34603).
10.10 -- Agreement for Consulting Services dated April 14, 1997,
between TCMS and Stallworth, Frankhouser & Associates, as
amended August 6, 1997. (Incorporated by reference to
Exhibit 10.10 of the Company's Registration Statement on
Form S-1) (File #333-34603).
10.11 -- Employment Letter dated April 21, 1997, between TCMS and
Johnnie W. Domingue, as amended August 6, 1997.
(Incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
10.12 -- Form of warrant issued to McFarland, Grossman & Company,
Inc. (Incorporated by reference to Exhibit 10.12 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
10.13 -- Purchase and Sale Agreement dated as of August 28, 1997,
by and among TCMS, Laine Construction Company, Inc.,
Paula Woodson, Linda Woodson and Cheryl Woodson.
(Incorporated by reference to Exhibit 10.13 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
10.14 -- Agreement and Plan of Merger dated as of August 28, 1997,
by and among TCMS, Woodson Acquisition Corp., Woodson
Construction Company, Inc. and Louis Woodson.
(Incorporated by reference to Exhibit 10.14 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
10.15 -- Agreement and Plan of Merger dated August 28, 1997, by
and among TCMS, Kori Acquisition Corp., Kori Corporation,
Paula Woodson, Linda Woodson and Cheryl Woodson.
(Incorporated by reference to Exhibit 10.15 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
10.16 -- Agreement and Plan of Merger dated as of August 28, 1997,
by and among TCMS, Enviro Acquisition Corp.,
Envirosystems, Inc., Paula Woodson, Linda Woodson and
Cheryl Woodson. (Incorporated by reference to Exhibit
10.16 of the Company's Registration Statement on Form
S-1) (File #333-34603).
10.17 -- Purchase and Sale Agreement dated as of August 28, 1997,
among TCMS, CSI Hydrostatic Testers, Inc., Hargett
Mooring and Marine, Inc., Daniel N. Hargett, Sr., Yvette
Hargett and Richard Hargett. (Incorporated by reference
to Exhibit 10.17 of the Company's Registration Statement
on Form S-1) (File #333-34603).
101
104
10.18 -- Purchase and Sale Agreement dated as of August 20, 1997,
by and among TCMS, HBH, Inc. and the Succession of
Herbert D. Hughes. (Incorporated by reference to Exhibit
10.18 of the Company's Registration Statement on Form
S-1) (File #333-34603).
10.19 -- Agreement and Plan of Merger dated as of August 27, 1997,
by and among TCMS, RNI Acquisition Corp., The Red Fox
Companies of New Iberia, Inc. and The Beldon E. Fox, Sr.
Grandchildren's Trust No. 1. (Incorporated by reference
to Exhibit 10.19 of the Company's Registration Statement
on Form S-1) (File #333-34603).
10.20 -- Form of Agreement to Purchase and Sell dated as of August
28, 1997, by and among TCMS and Linda Woodson, Cheryl
Woodson and Paula Woodson. (Incorporated by reference to
Exhibit 10.20 of the Company's Registration Statement on
Form S-1) (File #333-34603).
10.21 -- Agreement to Purchase and Sell dated as of August 20,
1997, by and between TCMS and the Succession of Herbert
D. Hughes. (Incorporated by reference to Exhibit 10.21 of
the Company's Registration Statement on Form S-1) (File
#333-34603).
10.22 -- Leasehold Purchase Agreement dated as of August 11, 1997,
by and between TCMS and The Beldon E. Fox, Sr.
Grandchildren's Trust No. 1. (Incorporated by reference
to Exhibit 10.22 of the Company's Registration Statement
on Form S-1) (File #333-34603).
10.23 -- Amendment and Restated Consulting and Financial Advisory
Services Agreement dated September 24, 1997, between TCMS
and J&D Capital Investments, L.C. (Incorporated by
reference to Exhibit 10.23 of the Company's Registration
Statement on Form S-1) (File #333-34603).
10.24 -- Form of Senior Revolving Credit Agreement by and among
TCMS and Joint Energy Development Investments, Limited
Partnership, and the Lenders Signatory thereto.
(Incorporated by reference to Exhibit 10.24 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
10.25 -- Form of Subordinated Credit Agreement by and among TCMS
and Joint Energy Development Investments, Limited
Partnership, and the Lenders Signatory thereto.
(Incorporated by reference to Exhibit 10.25 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
10.26 -- Form of Warrant Agreement by and between TCMS and Joint
Energy Development Investments, Limited Partnership.
(Incorporated by reference to Exhibit 10.26 of the
Company's Registration Statement on Form S-1) (File
#333-34603).
10.27 -- Lease Agreement by and between Red Fox Companies of New
Iberia, Inc., a division of TransCoastal Marine Services,
Inc., and Delta Terminal, Inc. for approximately 29.311
acres of land for a fabrication facility.
10.28 -- Lease Agreement by and between Red Fox Companies of New
Iberia, Inc., a division of TransCoastal Marine Services,
Inc., and the Board of Commissioners of the Port of New
Orleans for approximately 15.7 acres of land including
approximately 68,000 square feet of fabricating building
space and 2,600 square feet of office space.
21.1 -- List of Subsidiaries of the Company. (Incorporated by
reference to Exhibit 21.1 of the Company's Registration
Statement on Form S-1) (File #333-34603).
27.1 -- Financial Data Schedule.
102
105
(b) Financial Statement Schedules
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
(c) Reports on Form 8-K.
None.
103
106
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
TRANSCOASTAL MARINE SERVICES, INC.
By: /s/ JOHNNIE W. DOMINGUE
----------------------------------
Johnnie W. Domingue,
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
March 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE
--------- -----
/s/ BILL E. STALLWORTH Chairman of the Board of Directors and Chief
- ----------------------------------------------------- Executive Officer (Principal Executive Officer)
Bill E. Stallworth
/s/ THAD "BO" SMITH President, Chief Operating Officer and Director
- -----------------------------------------------------
Thad "Bo" Smith
/s/ JOHNNIE W. DOMINGUE Senior Vice President, Chief Financial Officer,
- ----------------------------------------------------- Treasurer and Assistant Secretary (Principal
Johnnie W. Domingue Financial and Accounting Officer)
/s/ JEAN SAVOY Director
- -----------------------------------------------------
Jean Savoy
/s/ NATHAN M. AVERY Director
- -----------------------------------------------------
Nathan M. Avery
/s/ PATRICK B. COLLINS Director
- -----------------------------------------------------
Patrick B. Collins
/s/ BELDON E. FOX, JR. Director
- -----------------------------------------------------
Beldon E. Fox, Jr.
/s/ DANIEL N. HARGETT SR. Director
- -----------------------------------------------------
Daniel N. Hargett Sr.
/s/ H. DANIEL HUGHES II Director
- -----------------------------------------------------
H. Daniel Hughes II
/s/ CLIFFORD E. MCFARLAND Director
- -----------------------------------------------------
Clifford E. McFarland
/s/ D. GLENN RICHARDSON Director
- -----------------------------------------------------
D. Glenn Richardson
March 24, 1998
104