1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[MARK ONE]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ______ TO ______
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
- ---------------------------------------------- ----------------------------------------------
Common Stock, par value $.001 per share Nasdaq National Market
Indicate by check mark whether the registrant has (1) 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) 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. [X]
As of March 16, 1999, there were 10,448,441 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 $37,280,037, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 9
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 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 17
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 41
3
PART I
ITEM 1. BUSINESS.
GENERAL
TransCoastal Marine Services, Inc. ("TCMS") is a marine construction
company with worldwide operations onshore, in the transition zone and offshore
(up to 800 feet). The Company has two operating groups: the Pipeline and Marine
Group and the Fabrication and Offshore Group. The Pipeline and Marine Group
performs pipeline installation and repair worldwide utilizing a fleet of company
owned vessels. This group also provides construction support services, including
hydrostatic testing and commissioning of pipelines. The Fabrication and Offshore
Group fabricates, refurbishes and installs production platforms, offshore
drilling rigs, barges and performs other related fabrication services.
The Company currently conducts operations from port facilities and
fabrication yards strategically positioned along the U.S. Gulf Coast. In order
to conduct its international activities, the Company currently has offices in
West Africa, Venezuela and Mexico. 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.
PIPELINE AND MARINE GROUP
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 Pipeline and Marine Group performs
pipeline installation and repair onshore, in the transition zone and in water
depths up to 800 feet utilizing a fleet of company-owned vessels and equipment.
This group also conducts onshore and offshore hydrostatic testing and
commissioning of pipelines for oil and gas producers and pipeline construction
companies. 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 Pipeline
and Marine Group also performs pipeline cleaning, drying and dehydration
services. This group also manufactures amphibious undercarriages for marine
construction equipment used in transition zone waters.
Prior to 1998, the Pipeline and Marine Group's traditional market was the
water region along the U.S. Gulf Coast. During 1998, this group expanded its
activities into international offshore markets including West Africa, the
Caribbean and Mexico. The Company believes it is the only company providing
pipeline installation and repair services and hydrostatic testing and
commissioning services from water depths of 800 feet through the transition zone
and to onshore gathering and processing facilities in the markets it serves.
The Company's fleet includes: (i) four 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, and (ii) 15 spud barges and ancillary equipment, operated in water
depths of up to 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.
FABRICATION AND OFFSHORE GROUP
The Company's Fabrication and Offshore Group 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. These services
are contracted for by customers with worldwide exploration and production
operations.
1
4
INDUSTRY OVERVIEW
The market for offshore pipeline installation and related services and for
fabrication services is primarily dependent on the levels of oil and gas
exploration, development and production activities and pipeline capacity
utilization in the markets in which the Company is active.
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
The safety and health of the Company's employees is a high priority for the
Company's management. The Company maintains a stringent safety assurance program
to reduce the possibility of accidents. Additionally, the Company has
established guidelines to ensure compliance with all applicable state and
federal safety regulations, and provides ongoing training and safety education.
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 allocated 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 1998 (in alphabetical order) were Chevron, Mallard
Bay Drilling, Shell, Transcontinental Gas Pipeline Corporation, and Transocean
Offshore. The Company had only one customer that represented more than 10
percent of its revenues in fiscal 1998. 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 nine 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 items included in 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 completed cost is greater than the 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.
Revenue, costs, and gross profit realized on a contract will often vary from the
estimated amounts on which such contracts were originally based due to a variety
of reasons including: changes in the availability and cost of labor and
material;
2
5
variations in productivity from the original estimates; and errors in estimates
or bidding. These variations and the risks inherent in the marine construction
industry may result in revenue and gross profit that differ from those
originally estimated. This 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 over-capacity, which has resulted in
substantial pressure on pricing and operating margins. The Company expects the
over-capacity 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. In selecting a contractor the Company believes customers consider,
among other things, the availability and technical capabilities of equipment,
personnel, efficiency, condition of equipment, safety record and reputation.
However, price 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 financial and other resources that are greater
than those of the Company.
The Company generally focuses on projects from the transition zone to 800
feet of water. In the U.S. Gulf of Mexico waters, several companies with one or
more derrick or pipe laying barges compete with the Company for transition zone
and shallow water projects. The Company believes that it is the largest
transition zone marine construction services company with focus on the U.S. Gulf
Coast. Internationally, where the company competes for projects from the
transition zone to 800 feet of water, the Company believes that Global
Industries, Ltd., Horizon Offshore, Inc. and J. Ray McDermott, S.A., and several
other international contractors are its primary competitors.
In its Fabrication and Offshore Group, the Company has numerous
competitors. Some of these competitors are larger and have financial and other
resources that are greater than those of the Company.
BACKLOG
As of December 31, 1998, the Company's unfilled contracts and backlog
orders (including verbal orders) amounted to approximately $46.8 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 operating results may fluctuate significantly from quarter to
quarter or year to year because of a number of factors, including: the demand
for oil and gas, seasonal fluctuations in the demand for marine construction
services (particularly during the winter months), acquisitions, and competitive
factors. Accordingly, quarterly comparisons of the Company's revenue and
operating results should not be relied upon as an indication of future
performance. Additionally, 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. 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".
3
6
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 coverage, generally depending
on the type, size 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 governmental 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.
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. 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.
4
7
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.
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
5
8
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 to be economically
infeasible. There can be no assurance that insurance carried by the Company 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, 1999, the Company had approximately 950
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 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, four anchor
barges and 15 spud barges. During February 1998, the Company expanded its oil
and gas pipeline installation capabilities with the acquisition of the LB 207, a
Vanuatu flagged pipe laying barge (now renamed the Vermilion Bay). The Vermilion
Bay is currently working in the Bay of Campeche in the Gulf of Mexico. The
Company further expanded its oil and gas pipeline installation capabilities in
April 1998, with the acquisition of the BB 356 (now named the Atchafalaya Bay),
a United States flagged barge to be used as a dedicated pipe bury barge. The
Atchafalaya Bay is currently being refurbished at the Company's offshore support
facility in New Orleans and is expected to be available for service by April
1999.
6
9
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,
Construction Ship pipeline jetting,
(Panamanian flagged) diving support, coring
support; 8 point
mooring system; dynamic
positioning system;
accommodations for 54
persons
M/V Sea Level 21....... Multi-purpose 165 X 40 X 12 Hydrostatic testing,
Construction Ship (U.S. diving support, coring
flagged) support; 4 point
mooring system;
accommodations for 28
persons
M/V Sand Queen......... Multi-purpose Utility 96 X 24 X 7 Hydrostatic testing and
Vessel (U.S. flagged) diving support;
accommodations for 19
persons
Atchafalaya Bay........ Anchor Barge (U.S. 256.5 X 72 X 16 Pipe burying (2"-48"
flagged) diameter pipe) in 10'
to 300' water depths; 8
point mooring system;
accommodations for 80
persons
Vermilion Bay.......... Anchor Barge (Vanuatu 350 X 60 X 22.5 Pipe laying (2"-48"
flagged) 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"
flagged) diameter pipe) in 10'
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
7
10
DIMENSIONS
NAME TYPE (FEET) FUNCTION
---- ---- ---------- --------
BH-104................. Spud Barge 110 X 34 X 6 Pipe laying (2"-20"
diameter pipe);
dredging; pile driving
in 4' to 25' water
depths
BH 103................. Spud Barge 120 X 38 X 8 Pipe laying (2"-20"
diameter pipe);
dredging; pile driving
in 4' to 25' water
depths
BH 101................. Spud Barge 120 X 36 X 7 Pipe laying (2"-20"
diameter pipe);
dredging; pile driving
in 4' to 25' water
depths
BH 100................. Spud Barge 110 X 34 X 6.5 Pipe laying (2"-20"
diameter pipe);
dredging; pile driving
in 4' to 25' water
depths
Woodson Marsh Pipelay Three Interconnected 140 X 38 X 7 Pipe laying (2"-48"
Spread............... Spud Barges 140 X 36 X 7 diameter pipe) in 1' to
140 X 36 X 7 40' water depths
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.
Pipeline and Marine Group. This Group'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 New
Orleans and Delcambre, Louisiana are leased, with remaining lease terms ranging
from month-to-month to 15 years. The Company also has a leased office in Mexico
to support its operations there.
Fabrication and Offshore Group. The Company's fabrication operations are
primarily conducted from three locations in Louisiana, one in New Iberia and
three 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 that 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 has improved 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. Long-term lease
rights were secured to a shipyard in New Orleans capable of servicing deep-water
drilling rigs, jack-ups, semi-submersibles and drill ships in January 1998. 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. With
the acquisition of Dickson in the third quarter of 1998, the Company acquired a
10-acre fabrication yard with 900 feet of water
8
11
frontage on the Mississippi River Gulf Outlet. The Company can fabricate
structures as large as 6,500 tons at this location.
The Company also owns a 18,000 square foot fabrication facility situated on
approximately two acres of land in Lafayette, Louisiana, and a 20,000 square
foot fabrication facility with a 2,000 square foot warehouse on approximately
3.5 acres of land in Belle Chasse, Louisiana. The fabrication facility in Belle
Chasse, Louisiana also includes 8,000 square feet of office space.
Planned Restructuring of Facilities. In December 1998, the Company
finalized a consolidation plan to reduce its overall facilities to provide for
more efficient and lower cost operations. This plan provides for the sale of
owned properties in Lafayette and Belle Chasse, Louisiana, as well as subleasing
selected leased properties and cancelling certain leases which are on month to
month status.
ITEM 3. LEGAL PROCEEDINGS.
During 1998, the Company was 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. This lawsuit was settled during 1998. The Company's
contribution towards the settlement was approximately $50,000. The contribution
by the Company to the settlement was expensed in 1998. The second class action
lawsuit, 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. Subsequent to year-end, this
lawsuit was also settled. The Company's contribution towards the settlement was
approximately $600,000. The contribution by the Company to the settlement was
expensed in 1998.
The Company is involved in various lawsuits arising in the ordinary course
of business, some of which involve substantial claims for damages. While the
outcome of these lawsuits cannot be predicted with certainty, management
believes these 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
9
12
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......................................... $14 1/2 $ 8 13/16
Second quarter........................................ $13 $ 5 1/2
Third quarter......................................... $ 7 $ 4 1/4
Fourth quarter........................................ $ 5 7/8 $ 2 5/8
1999
First quarter (through March 25, 1999)................ $ 4 $ 2
At March 25, 1999, there were approximately 2,200 stockholders of record of
the Company's Common Stock. On March 16, 1999, the last reported sale price of
the Common Stock on the Nasdaq National Market was $3 9/16 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. The Company 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 other things: 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 Item 7 "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 two years 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, 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, and
(iii) 1,300,000 shares of Common Stock were issued to the stockholders
of Dickson on closing of the acquisition on September 1, 1998. The former
Dickson stockholders have certain registration rights with respect to
1,300,000 shares of Common Stock received by them in the acquisitions of
Dickson by TransCoastal.
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
10
13
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.
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, was 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 of the 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,
-----------------------------------------------------
1994 1995 1996 1997 1998(3)
------- ------- ------- -------- --------
(IN THOUSANDS)
HISTORICAL STATEMENT OF OPERATIONS:
Revenues............................. $ 7,786 $18,075 $17,933 $ 57,517 $188,878
Cost of revenues..................... 5,874 12,716 13,561 46,507 152,750
Selling, general and administrative
expenses.......................... 3,011 2,672 2,968 6,309(1) 14,528
Depreciation and amortization........ 728 574 562 2,102 9,828
Restructuring charges................ -- -- -- -- 2,418
------- ------- ------- -------- --------
Operating income (loss).............. (1,827) 2,113 842 2,599 9,354
Interest income (expense), net....... (81) (84) 51 (530) (4,376)
Other income (expense), net.......... 96 69 357 475 (662)
------- ------- ------- -------- --------
Income (loss) before income taxes.... (1,812) 2,098 1,250 2,544 4,316
Provision for income taxes........... -- 839(2) 500(2) 1,194(2) 1,511
------- ------- ------- -------- --------
Net income (loss)............ $(1,812) $ 1,259 $ 750 $ 1,350 $ 2,805
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Working capital...................... $ 1,402 $ 4,628 $ 3,803 $ 3,439 $ 15,516
Total assets......................... 6,997 9,007 9,157 171,817 236,597
Total debt, including current
portion........................... 755 19 679 15,991 61,114
Stockholders' equity................. $ 5,609 $ 7,616 $ 7,718 $115,145 $120,228
- ---------------
(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.
(3) 1998 Statement of Operations data includes the operating results of Dickson
from the date of acquisition, September 1, 1998, through December 31, 1998.
11
14
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.
The majority 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 consists of direct material,
labor and subcontracting costs and indirect costs related to contract
performance, such as indirect labor, supplies and tools. Selling, general and
administrative expenses consist primarily of compensation of sales and
administrative employees, fees for professional services and other general
office expenses.
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 Company has performed a substantial portion of its pipeline construction
support services during the period from March through November and, therefore, a
disproportionate portion of these 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 inherent under contracts that 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 changes in the
availability and cost of labor and material and variations in productivity from
the original estimates and errors in estimates or bidding. 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 was 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
Revenues, costs of revenues and selling, general and administrative expense
levels were significantly higher for the year ended December 31, 1998 as
compared to the year ended December 31, 1997. The operating results for 1997 are
the results of operations of Woodson for the entire year and the other Founding
12
15
Companies for the final two months of 1997. The Company's operating results for
1998 including all the Founding Companies' results for the entire year and the
Dickson operating results for the last four months during the period.
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,
---------------------------------------------------------
1996 1997 1998
---------------- --------------- ----------------
Revenues......................... $17,933 100.0% $57,517 100.0% $188,878 100.0%
Cost of revenues................. 13,561 75.6% 46,507 80.9% 152,750 80.9%
Selling, general and
administrative expenses........ 2,968 16.6% 6,309 11.0% 14,528 7.7%
Depreciation and amortization.... 562 3.1% 2,102 3.6% 9,828 5.2%
Restructuring charges............ -- -- -- -- 2,418 1.3%
Operating income................. 842 4.7% 2,599 4.5% 9,354 4.9%
Interest income (expense), net... 51 0.3% (530) (0.9)% (4,376) (2.3)%
Other income (expense), net...... 357 2.0% 475 0.8% (662) (0.3)%
------- ------ ------- ----- -------- -----
Income before income taxes....... 1,250 7.0% 2,544 4.4% 4,316 2.3%
Provision for income taxes(1).... 500 2.8% 1,194 2.1% 1,511 0.8%
------- ------ ------- ----- -------- -----
Net income............. $ 750 4.2% $ 1,350 2.3% $ 2,805 1.5%
======= ====== ======= ===== ======== =====
- ---------------
(1) The provision for income taxes for the years ended December 31, 1996 and
1997 represents pro forma provisions for income taxes. See Note 2 to the
consolidated financial statements.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues increased $131.4 million, or 228.4%, from $57.5 million
for the year ended December 31, 1997 to $188.9 million for the year ended
December 31, 1998. The Pipeline and Marine Group's revenues increased $58.2
million, or 109.4%, from $53.2 million for the year ended December 31, 1997 to
$111.4 million for the year ended December 31, 1998. The inclusion of the
Founding Companies' operations (other than Woodson) for the entire year of 1998
versus the last two months of 1997 accounted for $52.2 million of the increase
in revenues. The Fabrication and Offshore Group's revenues increased $73.1
million, or 1690.0%, from $4.3 million for the year ended December 31, 1997 to
$77.4 million for the year ended December 31, 1998. The acquisition of Dickson
in September 1998 accounted for $42.9 million of the increase in revenues for
the year. The inclusion of a Founding Company's operations for the entire year
of 1998 versus the last two months of 1997 accounted for an additional $9.5
million of the increase in revenues for 1998. The remaining increase in revenues
of $20.7 million was the result of the Fabrication and Offshore Group obtaining
larger projects than it had historically been able to obtain due to its expanded
resources and capabilities as a result of the TCMS merger and initial public
offering.
Cost of revenues. Cost of revenues increased $106.2 million, or 228.4%,
from $46.5 million for the year ended December 31, 1997 to $152.7 million for
the year ended December 31, 1998. The Pipeline and Marine Group's cost of
revenues increased $42.4 million, or 97.4%, from $43.5 million for the year
ended December 31, 1997 to $85.9 million for the year ended December 31, 1998.
The inclusion of the Founding Companies' operations (other than Woodson) for the
entire year of 1998 versus the last two months of 1997 accounted for $35.3
million of the increase in costs of revenues. Costs of revenues as a percentage
of revenues decreased from 81.8% of revenues in 1997 to 77.1% of revenues in
1998. This improvement in gross profit percentage in 1998 as compared to 1997
was primarily due to three factors. In 1998, the Company experienced: (a) higher
utilization of equipment, (b) a higher percentage of work performed offshore
which were higher margin projects, and (c) a greater percentage of revenues
being generated from projects outside the United States which were also at
higher margins. The Fabrication and Offshore Group's cost of revenues increased
$63.8 million, or 2104.0%, from $3.0 million for the year ended December 31,
1997 to $66.8 million for the year ended December 31, 1998. The acquisition of
Dickson in September 1998 accounted for
13
16
$38.1 million of the increase in costs of revenues in 1998 as compared to 1997.
The inclusion of a Founding Company's operations for the entire year of 1998
versus the last two months of 1997 accounted for $7.4 million of the increase in
costs of revenues. The balance of the increase in costs of revenues was
consistent with the increase in revenues experienced by the Fabrication and
Offshore Group. Costs of revenues as a percentage of revenues for the
Fabrication and Offshore Group increased from 70.1% of revenues in 1997 to 86.3%
of revenues in 1998. This decrease in gross profit percentage in 1998 as
compared to 1997 was primarily due to a significant percentage of the Dickson
revenues being generated from time and material projects which have lower
margins as the Company assumes less financial risk in completing the projects.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.2 million, or 130.3%, for the year ended
December 31, 1998 compared to the 1997 period. As a percentage of revenues,
selling, general and administrative expenses (exclusive of the non-cash
compensation charge related to the issuance of shares of Common Stock to
management of the Company) were 7.1% during 1997, as compared to 7.7% during
1998. The percentage increase was primarily due to short-term expenses incurred
during the initial consolidation of the Founding Companies and the integration
of Dickson into the Company.
Depreciation and amortization. Depreciation and amortization expenses
increased $7.7 million, or 367.6%, from $2.1 million for the year ended December
31, 1997 to $9.8 million for the year ended December 31, 1998. The increase was
due to: (1) additional depreciation on $36.0 million of equipment placed in
service during 1998, (2) a full year's depreciation on the equipment owned by
the Founding Companies and amortization of goodwill recorded under the purchase
method of accounting as compared to two months of depreciation and amortization
in 1997, and (3) the additional depreciation and amortization of goodwill
associated with the acquisition of Dickson effective September 1, 1998.
Restructuring charges. During the fourth quarter of 1998 the Company
recorded a special charge in the amount of $2.4 million. The components of the
charge consisted of: (1) $1.8 million severance costs related to former officers
and employees terminated as a result of the Company's headcount reduction
initiative and (2) $0.6 million for the sale of facilities resulting from the
planned consolidation of certain operating facilities.
Interest income (expense), net. Interest expense, net of interest income
totaled $4.4 million during the year ended December 31, 1998, as compared to net
interest expense of $0.5 million during 1997. The significant increase was due
to higher average debt levels in 1998 compared to 1997. See "Liquidity and
Capital Resources -- The Company" below for discussion of credit agreement and
related financings.
Other income (expense), net. During 1998 other income (expense), net
consisted primarily of expenses incurred associated with the settlement of
outstanding litigation. During 1997 other income (expense), net consisted
primarily of gains recognized on the sale of available-for-sale securities.
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. The Pipeline and Marine Group's revenues increased $35.3
million, or 196.6%, from $17.9 million for the year ended December 31, 1996 to
$53.2 million for the year ended December 31, 1997. The inclusion of the
Founding Companies', other than Woodson, operations for the last two months of
1997 accounted for $9.8 million of the increase in revenues. The balance of the
increase in 1997 revenues was primarily attributable to higher pipeline
construction revenues resulting from improved market activity in 1997. The
inclusion of a Founding Company's operations for the last two months of 1997
accounted for the $4.3 million in revenues for the Fabrication and Offshore
Group for 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 $152.7 million for the
year ended December 31, 1997. The Pipeline and Marine Group's cost of revenues
increased $29.9 million, or 221.0%, from $13.6 million for the year ended
December 31, 1996 to $43.6 million for the year ended December 31, 1997. The
inclusion of the Founding Companies', other than Woodson, operations for the
last two months of 1997 accounted for $7.8 million of the increase in costs of
revenues. The balance of the increase in costs of revenues for the group was
consistent with
14
17
the increase in revenues. As a percentage of revenues, costs of revenues
increased from 75.6% of revenues in 1996 to 81.8% of revenues in 1997. This
increase was due primarily to lower margins achieved during 1997 on projects
that were considerably larger in size and scope than in 1996. The inclusion of a
Founding Company's operations for the last two months of 1997 accounts for the
$3.0 million in costs of revenues for the Fabrication and Offshore Group for
1997.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
The Company's working capital improved by $12.1 million during 1998;
increasing to $15.5 million at December 31, 1998 from $3.4 million at December
31, 1997. Net cash provided by operating activities during the year ended
December 31, 1998 was $5.9 million. Net cash used in investing activities during
the twelve months ended December 31, 1998 was $45.1 million. Capital
expenditures accounted for $36.1 million of the cash used in investing
activities during the period and included $23.1 million related to the purchases
and refurbishment of the LB-207 pipe lay barge and the BB-356 bury barge,
renamed the Vermilion Bay and Atchafalaya Bay, respectively. Other investing
activities which required the use of cash were the Dickson acquisition ($5.8
million) and the final distributions to the Woodson stockholders ($3.2 million).
Net cash consumed by investing activities were funded through additional
borrowings on the revolving credit facility. During 1998 the net revolver and
term loan borrowings were $46 million resulting in an outstanding revolver and
term loan balance of $56 million at December 31, 1998. Additional borrowing
capacity under the Company's revolver and term loan facility at December 31,
1998 totaled $4.0 million.
In January 1999, the Company entered into a "New Credit Facility" with
financial institutions, replacing the existing Credit Agreement with an
aggregate credit facility of $70 million. The New Credit Facility is a $10
million increase in borrowing capacity over the credit facility in place at
December 31, 1998. The New Credit Facility is divided into three credit
agreements: (a) a three-year revolving credit agreement ("New Revolving
Facility") for up to $15.0 million; (b) a seven-year term credit agreement ("New
Term Loan") for $35.0 million; and (c) a five-year subordinated debt agreement
("Subordinated Debt") of $20.0 million. See Note 6 to the Audited Financial
Statement.
At December 31, 1998, the Company had commitments of $2.0 million for the
purchase or construction of capital equipment. Under the terms of the Stock
Purchase and Merger Agreement for the Dickson acquisition, the Company is
contingently liable for a cash payment of $7.3 million and the issuance of
15
18
400,000 shares of its common stock in the fourth quarter of 1999 if Dickson were
to achieve certain financial goals by August 31, 1999. The Company is currently
negotiating the early settlement of the Dickson earn-out. The terms under
negotiation provide for a reduction in the cash payment and the issuance of
preferred stock and the issuance of additional common stock subject to the
approval of the Company's stockholders. The Company plans to fund these capital
expenditures and purchase commitments through cash flow from operations and
additional borrowings under the New Credit Facility.
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 under the New Credit Facility.
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. There can be no assurance that
these 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 currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive data by the Company's computerized
information systems and equipment. The Year 2000 may be critical to these
systems as many computer programs were written and equipment manufactured using
two digits rather than four to define the applicable year. As a result, any of
the Company's computer applications or equipment that have date-sensitive
programs may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in system failures in the fabrication area that could
cause serious production-related issues. In addition, miscalculations or system
failures could result in a temporary inability to process transactions, issue
invoices, remit payments, communicate with financial institutions and other
entities electronically and update internal accounting systems. If not corrected
in a timely manner, such business disruptions could be detrimental to the
continuing operations of the Company.
The Company has initiated a program to prepare its computer systems and
applications for the Year 2000. Based on present information, management
believes that while many of the systems are already Year 2000 compliant, other
systems will require modification or replacement with new programs. The Company
will utilize both internal and external resources to reprogram, replace and test
software for Year 2000 compliance.
Beyond the computer hardware and software systems, the Company has a
variety of operating equipment that may be impacted by the Year 2000 issue. This
equipment may have embedded microchips that use time and dates. The time and
date functions may control the equipment, provide time and date stamps of
records or data generated by the equipment, or may schedule events or actions.
The Company is currently inventorying its equipment, and with the manufacturer's
assistance, a plan is being developed to modify and test every date-related
function.
The Company plans to complete the Year 2000 conversion tasks in advance of
the end of 1999. The total project costs are presently estimated not to exceed
$750,000, to be funded through working capital, and will be expensed as incurred
unless new software and computer hardware is purchased in which case certain
costs will be capitalized.
The Company is taking steps to identify Year 2000 compliance issues that
may be created by key customers, suppliers, other service providers, and
financial institutions with which the Company does business. The loss of any key
customer or the inability of any of the Company's key vendors to provide its
goods or services to the Company would have a negative impact on the Company's
operations until those entities return to normal operations.
16
19
The anticipated future costs of the Year 2000 conversion project and the
date on which the Company anticipates project completion are based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could vary significantly from
current estimates.
The Company will be developing a written contingency plan by early 1999 to
address the issues that could arise should the Company or any of its significant
suppliers, customers, service providers or financial institutions not be
prepared to accommodate Year 2000 issues timely. The Company believes that in an
emergency situation it could revert to the use of manual systems that do not
rely on computers. Through these manual systems, the Company could perform the
minimum functions required to maintain the flow of goods and services and
provide a minimum level of information reporting to maintain a level of control
over the business cycle. Should the Company have to utilize manual systems, it
is uncertain that it could maintain current levels of operations and this could
have a material adverse impact on the business. The Company intends to maintain
constant surveillance on Year 2000 issues and will adapt its plans as required.
INFLATION
Inflation has not had a material impact on the Company's results of
operations for the last three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
Accordingly, the Company may enter into certain derivative financial instruments
such as interest rate swap agreements. The Company does not use derivative
financial instruments for trading or to speculate on changes in interest rates.
Interest Rate Exposure
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt. At December 31, 1998, $56.0 million
of the Company's indebtedness was subject to variable interest rates with a
weighted average effective interest rate of 8.7% for the year then ended. The
detrimental effect of a hypothetical 100 basis point increase in interest rates
would be to reduce income before taxes by $0.6 million. At December 31, 1998,
the fair value of the Company's fixed rate debt is approximately $56.0 million
based upon discounted future cash flows using current market prices.
Foreign Currency Exposure
The Company believes its exposure to foreign currency fluctuations is
minimal in that contracts for work performed in or to be delivered to countries
outside the United States ("Foreign Contracts") are primarily denominated in
U.S. dollars. It is Company policy to limit the portion of any Foreign Contracts
denominated in local currency to that portion of the total revenue required to
be spent in country to complete the project. The Company's operations outside
the United States currently are in Latin America and West Africa and all current
Foreign Contracts are denominated in U.S. dollars.
17
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... 19
Consolidated Balance Sheets................................. 20
Consolidated Statements of Operations and Comprehensive
Income.................................................... 21
Consolidated Statements of Stockholders' Equity............. 22
Consolidated Statements of Cash Flows....................... 23
Notes to Consolidated Financial Statements.................. 24
18
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TransCoastal Marine Services, Inc.:
We have audited the accompanying consolidated balance sheets of
TransCoastal Marine Services, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 1997 and 1998, and the related consolidated statements of
operations and comprehensive income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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 consolidated financial position of TransCoastal
Marine Services, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 26, 1999
19
22
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
1997 1998
-------- --------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,416 $ 9,020
Contracts and accounts receivable, net of allowance of $0
and $1,182, respectively............................... 19,214 31,470
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 3,272 6,629
Other current assets...................................... 2,964 7,941
-------- --------
Total current assets.............................. 27,866 55,060
PROPERTY AND EQUIPMENT, net................................. 66,907 96,135
GOODWILL, net of amortization of $275 and $2,195
respectively.............................................. 70,757 80,430
OTHER NONCURRENT ASSETS..................................... 6,287 4,972
-------- --------
Total assets...................................... $171,817 $236,597
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 2,520 $ 6,018
Accounts payable.......................................... 12,105 16,949
Accrued expenses.......................................... 7,860 9,836
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 1,651 6,741
Deferred income taxes payable............................. 291 --
-------- --------
Total current liabilities......................... 24,427 39,544
LONG-TERM DEBT, net of current maturities................... 13,471 35,096
SUBORDINATED DEBT........................................... -- 20,000
DEFERRED INCOME TAXES....................................... 18,774 21,729
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, 8,898,441 and 10,198,441 shares issued and
outstanding at December 31, 1997 and 1998,
respectively........................................... 9 10
Restricted common stock, $.001 par value, 3,000,000 shares
authorized, 250,000 shares issued and outstanding at
December 31, 1997 and 1998............................. -- --
Additional paid-in capital................................ 128,375 133,899
Accumulated deficit....................................... (13,277) (13,699)
Accumulated other comprehensive income.................... 38 18
-------- --------
Total stockholders' equity........................ 115,145 120,228
-------- --------
Total liabilities and stockholders' equity........ $171,817 $236,597
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
20
23
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
REVENUES.................................................... $17,933 $57,517 $188,878
COSTS AND EXPENSES:
Cost of revenues.......................................... 13,561 46,507 152,750
Selling, general and administrative....................... 2,968 6,309 14,528
Depreciation and amortization............................. 562 2,102 9,828
Restructuring charges..................................... -- -- 2,418
------- ------- --------
Operating income.................................. 842 2,599 9,354
OTHER INCOME(EXPENSE), net:
Interest income(expense), net............................. 51 (530) (4,376)
Other income(expense), net................................ 357 475 (662)
------- ------- --------
INCOME BEFORE INCOME TAXES.................................. 1,250 2,544 4,316
PROVISION FOR INCOME TAXES.................................. 91 527 1,511
------- ------- --------
NET INCOME.................................................. $ 1,159 $ 2,017 $ 2,805
======= ======= ========
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the
period net of tax (benefit) of $138, $187 and
$(11)................................................ $ 208 $ 281 $ (20)
Less: reclassification adjustments for (gains) loss
included in net income, net of tax (benefit) of $0,
$187 and ($15)....................................... -- (28) 26
------- ------- --------
COMPREHENSIVE INCOME...................................... $ 1,367 $ 2,298 $ 2,811
======= ======= ========
EARNINGS PER SHARE:
Basic..................................................... $ -- $ -- $ 0.29
Diluted................................................... $ -- $ -- $ 0.29
PRO FORMA INFORMATION(UNAUDITED)(Note 2):
Income before income taxes................................ $ 1,250 $ 2,544 $ --
Pro forma income taxes.................................... 500 1,194 --
------- ------- --------
Pro forma net income...................................... $ 750 $ 1,350 $ --
======= ======= ========
PRO FORMA EARNINGS PER SHARE(UNAUDITED):
Basic..................................................... $ 0.44 $ 0.40 $ --
Diluted................................................... $ 0.44 $ 0.40 $ --
NUMBER OF SHARES USED IN PER SHARE COMPUTATIONS:
Basic..................................................... 1,722 3,363 9,583
Diluted................................................... 1,722 3,393 9,583
The accompanying notes are an integral part of these consolidated financial
statements.
21
24
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
RESTRICTED ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED OTHER
------------------- ---------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
---------- ------ ------- ------ ---------- --------- ------------- --------
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 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 7)............ (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 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
Acquisition of Dickson............. 1,300,000 1 -- -- 5,524 -- -- 5,525
Distributions to Woodson
stockholders..................... -- -- -- -- -- (3,227) -- (3,227)
Net income......................... -- -- -- -- -- 2,805 -- --
Change in valuation allowance for
net unrealized loss on
available-for-sale securities.... -- -- -- -- -- -- (20) (20)
---------- --- ------- --- -------- -------- ----- --------
Balance at December 31, 1998......... 10,198,441 $10 250,000 $-- $133,899 $(13,699) $ 18 $120,228
========== === ======= === ======== ======== ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
22
25
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,159 $ 2,017 $ 2,805
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization........................... 562 2,102 9,828
Gain on sale of property and equipment.................. (340) -- --
Gain on sale of investments............................. -- (281) (26)
Allowance for doubtful accounts......................... -- -- 1,182
Compensation expense on stock issuance to senior
management............................................. -- 2,200 --
Deferred income taxes................................... 91 (139) 1,219
Amortization of debt issuance cost...................... -- -- 1,553
Other................................................... (36) 448 560
Changes in operating assets and liabilities --
(Increase) decrease in --
Contracts and accounts receivable, net................ 1,796 (17,796) (9,187)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 45 (3,272) (1,301)
Other current assets.................................. 7 (1,729) (1,223)
Other noncurrent assets............................... (15) (446) (1,206)
Increase (decrease) in --
Accounts payable and accrued expenses................. 388 19,205 (1,107)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ (1,000) 1,651 2,186
Other current liabilities............................. -- 291 --
Deferred income taxes................................. -- 1,510 596
------- -------- --------
Net cash provided by operating activities........... 2,657 5,761 5,879
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 427 -- 677
Capital expenditures...................................... (1,801) (6,759) (36,084)
Purchase of investments and annuity contract.............. (93) (3,000) --
Proceeds from sale of investments......................... 113 1,472 76
Cash paid for acquisitions including related costs, net of
cash acquired of $1,726 and $4,676 in 1997 and 1998,
respectively............................................ -- (67,341) (5,840)
Distribution to Woodson stockholders...................... -- (19,836) (3,227)
Other..................................................... (392) (696) --
------- -------- --------
Net cash used in investing activities............... (1,746) (96,160) (45,123)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Credit Agreement............................ -- 10,000 46,000
Proceeds from notes payable............................... 615 -- 2,464
Principal payments on notes payable....................... (445) (229) (1,682)
Proceeds from issuance of notes payable to stockholders... 450 -- --
Principal payments on notes payable to stockholders....... -- (450) --
Borrowings on long-term debt.............................. -- 3,432 --
Principal payments on long-term debt...................... -- (441) (1,659)
Payment of dividends to stockholders...................... (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.......................................... (646) 91,698 45,123
------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 265 1,299 6,604
CASH AND CASH EQUIVALENTS, beginning of year................ 852 1,117 2,416
------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 1,117 $ 2,416 $ 9,020
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
23
26
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, was
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 was assigned and recorded based on fair value of the
assets acquired and liabilities assumed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company 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 to be cash equivalents excluding certain
restricted amounts.
Property and Equipment
Property 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 shorter 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.
24
27
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 was 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 $0.3 million and $2.2 million as of
December 31, 1997 and 1998, respectively.
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-docking 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 and 1998, debt issuance costs, net of accumulated
amortization, were $3.1 million and $1.5 million, respectively.
Revenue Recognition
Revenues from construction contracts, which are typically less than twelve
months in 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.
25
28
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 differences
between the financial statement carrying amounts and tax bases 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 for 1996 and 1997 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, 1998.
Earnings Per Share
Basic earnings per share (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.
26
29
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,
------------------------
1996 1997 1998
------ ------ ------
Shares issued in the acquisition of Woodson........... 1,031 1,031 1,031
Shares issued in the formation of TCMS................ 691 975 975
Shares issued to Founding Companies' stockholders..... -- 185 1,111
Shares sold to certain employees...................... -- 209 275
Shares issued to consultants.......................... -- 4 6
Shares issued in acquisition of Dickson............... -- -- 435
Shares sold in the Offering........................... -- 959 5,750
----- ----- -----
Weighted average shares outstanding for basic earnings
per share calculation............................... 1,722 3,363 9,583
===== ===== =====
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 1,722,000, 3,393,000, and
9,583,000 for 1996, 1997 and 1998, 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 3).
Reclassifications
The accompanying consolidated financial statements for prior years contain
certain reclassifications to conform with current year presentation.
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 purchase price allocations resulted in goodwill recognized of
$71.5 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.
On September 1, 1998, TCMS consummated the acquisition of Dickson GMP
International, Inc. and four affiliated companies ("Dickson") for $10 million in
cash and 1,300,000 shares of Common Stock of the Company. Under the terms of the
agreement, the Company is obligated to pay to the former Dickson shareholders up
to an additional $7.3 million in cash and 400,000 shares of Common Stock if
certain financial targets are achieved by the Dickson entities by September 1,
1999. The accompanying consolidated balance sheet at December 31, 1998 includes
allocations of the respective purchase prices and is subject to final
adjustment. The purchase price allocations resulted in goodwill recognized of
$11.5 million representing the excess of purchase price over fair value of the
net assets acquired. The purchase price allocation is preliminary in nature,
pending the ultimate resolution of contingencies related to the achievement of
financial targets by the Dickson entities and the contemplated sale by the
Company of certain assets acquired in the acquisition of
27
30
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dickson. Estimates have been made, and included in the purchase price
allocation, regarding the difference between the expected proceeds from the
sales and the fair market values of the related assets. To the extent the actual
amounts differ from these estimates, the net assets and goodwill amounts
recorded will be adjusted accordingly.
Set forth below are unaudited pro forma combined revenues and income data
reflecting the pro forma effect of the acquisitions of the Founding Companies
and Dickson on the Company's results from operations for the years ended
December 31, 1997 and 1998. 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 ten months
ended October 31, 1997 and Dickson income statement data from operations for the
year ended December 31, 1997 and the eight months ended August 31, 1998 (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 of the Founding Companies and Dickson had taken place at the
beginning of the periods presented, nor are they necessarily indicative of
future results.
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---------- ----------
(UNAUDITED)
Revenues................................................ $164,229 $218,698
Net income.............................................. $ 6,245 $ 3,233
Diluted earnings per share.............................. $ 0.60 $ 0.31
4. RESTRUCTURING OF OPERATIONS
In December 1998, under direction of the Company's new chief executive
officer appointed in November 1998, the Company's management undertook a
comprehensive review of its operations, properties and lease commitments and
personnel. As a result of this review, the Company recorded a special charge in
the amount of $2.4 million. The components of the charge consist of: (a) $1.8
million severance costs related to former officers and employees terminated as a
result of the Company's headcount reduction initiative and (b) $0.6 million for
the sale of facilities resulting from the planned consolidation of certain
operating facilities. These actions will be completed in 1999. This charge
reduced net income by $1.6 million, net of tax, or $0.16 per share.
At December 31, 1998, the net realizable value of the land, buildings, and
improvements held for sale totaled $3.4 million, and has been included in other
current assets in the accompanying 1998 balance sheet. Additionally, accrued
liabilities totaling approximately $1.3 million as of December 31, 1998, have
been recorded for severance and other costs related to the change in the
Company's operating plan. These amounts are preliminary in nature pending the
ultimate sale of identified facilities.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Contracts and accounts receivable consisted of the following (in
thousands):
DECEMBER 31,
-----------------
1997 1998
------- -------
Completed contracts, net of allowance..................... $ 3,141 $14,720
Contracts in progress -- Current.......................... 7,941 13,531
Retainage due within one year............................. 4,569 2,889
Accounts receivable....................................... 3,563 330
------- -------
$19,214 $31,470
======= =======
28
31
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,
-------------------
1997 1998
-------- --------
Costs incurred on uncompleted fixed costs contracts..... $ 46,506 $ 19,209
Estimated profit earned to date......................... 11,831 7,842
-------- --------
58,337 27,051
Less -- Billings to date................................ (56,716) (25,915)
-------- --------
1,621 1,136
Unbilled costs and earnings on time and materials
contracts............................................. -- 4,078
Billings in excess of costs and earnings on time and
materials contracts................................... -- (5,326)
-------- --------
$ 1,621 $ (112)
======== ========
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
DECEMBER 31,
-----------------
1997 1998
------- -------
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... $ 3,272 $ 6,629
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... (1,651) (6,741)
------- -------
$ 1,621 $ (112)
======= =======
Other current assets consisted of the following (in thousands):
DECEMBER 31,
---------------
1997 1998
------ ------
Land and buildings held for sale............................ $ -- $3,401
Prepaid insurance........................................... 2,366 2,487
Other....................................................... 598 2,053
------ ------
$2,964 $7,941
====== ======
Property and equipment consisted of the following (in thousands):
DECEMBER 31,
------------------
1997 1998
------- --------
Land..................................................... $ 1,098 $ 202
Marine vessels and transportation equipment.............. 39,404 63,021
Buildings and improvements............................... 4,269 5,985
Furniture and fixtures................................... 637 1,351
Machinery and equipment.................................. 28,974 38,940
Construction in progress................................. -- 439
------- --------
74,382 109,938
Less: Accumulated depreciation and amortization.......... (7,475) (13,803)
------- --------
$66,907 $ 96,135
======= ========
29
32
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other noncurrent assets consisted of the following (in thousands):
DECEMBER 31,
---------------
1997 1998
------ ------
Restricted annuity investment collateralizing note
payable................................................... $2,950 $2,650
Debt issuance costs, net.................................... 3,032 1,513
Other....................................................... 305 809
------ ------
$6,287 $4,972
====== ======
Accrued expenses consisted of the following (in thousands):
DECEMBER 31,
---------------
1997 1998
------ ------
Purchase price obligations.................................. $2,887 $ --
Accrued accounts payable.................................... 1,623 4,052
Federal and state income tax payable........................ 1,138 701
Payroll, payroll taxes and employee benefits................ 990 1,454
Restructuring accrual....................................... -- 1,295
Retainage payable........................................... 653 844
Litigation.................................................. -- 900
State sales tax............................................. 311 390
Other....................................................... 258 200
------ ------
$7,860 $9,836
====== ======
6. SUMMARY OF FINANCING ARRANGEMENTS
Long-term debt at December 31, 1997 and 1998 consisted of the following (in
thousands):
DECEMBER 31,
-----------------
1997 1998
------- -------
Credit Agreement (see below)................................ $10,000 $56,000
Note payable to a Founding Company, interest at 8%, due over
ten-year term ending in 2007, secured by insurance
annuity................................................... 2,950 2,650
Various notes to finance companies payable in aggregate
monthly installments of $402,000, including interest at
6.98% to 9%, maturing through April, 2002, secured by
equipment, land and buildings............................. 1,682 2,165
Note payable to a bank, including interest at 10.1%, paid in
1998...................................................... 632 --
Capital lease payable, paid in 1998......................... 616 --
Other notes, varying interest rates, paid in 1998........... 111 --
------- -------
15,991 61,114
Less -- Current maturities.................................. (2,520) (6,018)
------- -------
$13,471 $55,096
======= =======
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. In August 1998, the availability
under the Credit Agreement was increased to
30
33
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$60.0 million with the remaining $15.0 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 facilities: (a) a $60.0 million senior
secured revolving credit facility (the "Revolving Credit Facility"), of which
$40.0 million comprises part of the current availability, and (b) $15.0 million
of senior subordinated term loan facility (the "Term Loan Facility"), of which
$10.0 million comprises the remainder of the current available borrowing
capacity.
Borrowings under the Credit Agreement incurred interest at an average
interest rate of 8.75% and 8.79% during 1997 and 1998, respectively. 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. During 1998, borrowings were made under both the Revolving Credit
Facility and the Term Loan 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. Borrowings under the Term
Loan Facility and the Revolving Credit Facility at December 31, 1998 were $16.0
million and $40.0 million, respectively.
The Credit Agreement, as amended, matures in January 2000, with all
outstanding principal and accrued and unpaid interest under the Credit Agreement
due and payable on that date. 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.
Refinancing Subsequent to Year End
In January 1999, the Company entered into a "New Credit Facility" with
financial institutions, replacing the existing Credit Agreement with an
aggregate credit facility of $70 million. The New Credit Facility is divided
into three credit agreements: (a) a three year revolving credit agreement ("New
Revolving Facility") for up to $15.0 million; (b) a seven year term credit
agreement ("New Term Loan") for $35.0 million, and (c) a five year subordinated
debt agreement ("Subordinated Debt") of $20.0 million.
Borrowings under the New Revolving Facility bear interest on a sliding
scale of 175 to 275 basis points over either the Base Rate or LIBOR, depending
upon the ratio of senior funded debt to the Company's earnings before interest,
taxes, depreciation, and amortization (EBITDA). The choice of using the Base
Rate or the LIBOR rate is at the option of the Company. The Base Rate is defined
as the higher of the federal funds rate plus 50 basis points or the prime rate.
Interest is payable monthly. The borrowing capacity under the New Revolving
Facility is calculated using a borrowing base that includes accounts receivable
and inventory. Borrowings under the New Term Loan Facility bear interest at
LIBOR plus 250 basis points. Principal and interest is due quarterly beginning
April 1, 1999. The first four quarterly principal payments are $875,000 with
remaining quarterly principal payments to maturity of $1,312,500. Accordingly,
$3.5 million of the borrowings under the Credit Agreement at December 31, 1998
have been classified as current maturities of long-term debt in the accompanying
balance sheet. Borrowings under the Subordinated Debt bear interest on a sliding
scale of 275 to 575 basis points over the Prime Rate depending upon the ratio of
senior funded debt to the Company's earnings before EBITDA. The Prime Rate is
defined as the higher of the federal funds
31
34
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate plus 50 basis points or the prime rate. Interest is payable quarterly
beginning March 31, 1999 with principal due upon maturity on the fifth
anniversary of the subordinated debt agreement.
Commitment fees on the daily average unused commitment under the New
Revolving Facility are payable monthly at an annual rate ranging from 0.25% to
.375%. Borrowings under the New Credit Facility 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 New Credit
Facility 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.
In connection with the Subordinated Debt, the Company issued to the Lender a
warrant to acquire 233,000 shares of Common Stock at an exercise price of $3.12
per share and cancelled the warrant to acquire 175,000 shares of Common Stock
issued in conjunction with the original Credit Agreement. The warrant is
exercisable for five years from its date of issuance. Upon issuance, the warrant
was valued at $382,000 based on fair market value as determined by management.
Annual maturities of long-term debt at December 31, 1998 after giving
consideration to the repayment terms of the New Credit Facility are as follows
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1999.............................................. $ 6,018
2000.............................................. 5,724
2001.............................................. 5,607
2002.............................................. 6,565
2003.............................................. 5,550
Thereafter........................................ 31,650
-------
$61,114
=======
7. STOCKHOLDERS' EQUITY
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.
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
32
35
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred offering costs in the third quarter of 1997. Such costs were charged to
additional paid in capital upon consummation of the Offering.
In September 1998, the Company issued 1,300,000 shares of Common Stock to
the former stockholders of Dickson as partial consideration for all the
outstanding stock of Dickson. The Company valued the shares at $5.5 million or
$4.25 per share, which was the quoted closing price of the day preceding the
closing of the acquisition.
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.
Dividends and Distributions to Woodson Stockholders
Dividends recorded in the consolidated statements of stockholders' equity
and cash flows represent amounts paid to Woodson stockholders prior to the
Offering.
Distributions to Woodson stockholders recorded in the consolidated
statements of stockholders' equity and cash flows represent the cash portion of
the purchase price paid to the Woodson stockholders for the acquisition of
Woodson.
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
was amended during 1998 to permit up to 950,000 shares of Common Stock to be
issued, terminates in August 2007. In general, the terms of the option awards
(including vesting schedules) are established by the Compensation Committee of
the Company's Board of Directors.
In December 1998, the Board of Directors approved the Transcoastal Marine
Services, Inc. 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan provides
for granting of stock options to the Chairman and CEO and the Executive Vice
President necessary to fulfill the Company's obligations under their respective
employment agreements. The 1998 Plan terminates in November 2001. In general,
the 1998 Plan provides that the terms of the option awards (including vesting
schedules) are established by the Compensation Committee of the Company's Board
of Directors.
33
36
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under the Plan for the years ended
December 31, 1997 and 1998:
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
Granted................................................... 1,262,500 $ 4.02
Exercised................................................. -- --
Canceled/expired.......................................... (128,753) $16.09
---------
Outstanding at December 31, 1998............................ 1,561,905 $ 5.82
=========
Weighted average fair market value of options granted during
1998...................................................... -- $ 2.30
The following table summarizes the information about stock options
outstanding at December 31, 1998:
WEIGHTED
NUMBER AVERAGE WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------------- ---------------- --------------
$3.25............................ 1,240,267 9.8 $ 3.25
$9.75 & $11.00................... 101,500 9.3 $10.78
$18.00........................... 220,138 8.7 $10.00
---------
1,561,905 9.6 $ 5.82
=========
At December 31, 1997 and 1998, exercisable option shares were 0 and
458,908, respectively. Unexercised options expire during the years 2007 and
2008.
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 1998
-------- --------
Net income, as adjusted for pro forma income taxes in
1997 (see Note 2)..................................... $1,350 $1,127
Pro forma net income attributable to common
stockholders.......................................... $1,192 $1,127
Earnings per Share ("EPS"):.............................
Diluted EPS as reported............................... $ 0.40 $ 0.12
Diluted EPS pro forma................................. $ 0.35 $ 0.12
34
37
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and 1998.
YEAR ENDED
DECEMBER 31,
---------------
1997 1998
---- ----
Risk-free interest rate..................................... 5.9% 5.0%
Dividend yield.............................................. -- --
Volatility factor........................................... 47.0% 44.0%
Weighted average expected life.............................. 9.5years 7.7 year
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 10).
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 (See Note 6 for cancellation of warrant in 1999). As of
December 31, 1997 and 1998, 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.
8. 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,
------------------------
1999............................................... $ 668
2000............................................... 527
2001............................................... 344
2002............................................... 245
2003............................................... 88
Thereafter......................................... 77
------
$1,949
======
Rental expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $142,000, $163,000 and $1,173,000, respectively. Included in these
amounts are rent expenses and commissions paid to related parties of
approximately $142,000, $90,000, and $8,000, respectively.
9. INCOME TAXES
Federal and state income tax provisions (benefits) are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
----- ------ -------
Federal
Current............................................. $-- $ 583 $ 59
Deferred............................................ 91 (164) 1,219
State
Current............................................. -- 83 233
Deferred............................................ -- 25 --
--- ----- ------
$91 $ 527 $1,511
=== ===== ======
35
38
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-------------------------
1996 1997 1998
------ ------ -------
Income tax expense at the statutory rate............ $ 425 $ 865 $1,467
Increase (decrease) resulting from:
State income taxes, net of related federal tax
effect......................................... 7 71 43
Woodson S Corp. income............................ (346) (667) --
Nondeductible goodwill............................ -- 94 256
Other............................................. 5 164 (255)
----- ----- ------
$ 91 $ 527 $1,511
===== ===== ======
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,
--------------------
1997 1998
-------- --------
Deferred tax assets:
Current.............................................. $ 197 $ --
Long-term............................................ -- 57
-------- --------
Total........................................ 197 57
-------- --------
Deferred tax liabilities:
Current.............................................. 488 --
Long-term............................................ 18,774 21,786
-------- --------
Total........................................ 19,262 21,786
-------- --------
Net deferred income tax liabilities.......... $(19,065) $(21,729)
======== ========
10. COMMITMENTS AND CONTINGENCIES
Litigation
During 1998, the Company was 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. This lawsuit was settled during 1998. The Company's
contribution towards the settlement was approximately $50,000. The contribution
by the Company to the settlement was expensed in 1998. The second class action
lawsuit, 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. Subsequent to year-end, this
lawsuit was also settled. The Company's contribution towards the settlement was
approximately $600,000. The contribution by the Company to the settlement was
expensed in 1998.
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
36
39
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. The term of the agreements extends three years following the
closing of the Offering. The three officers have terminated their employment
with the Company and severance due them under their employment and severance
agreements has been accrued at year-end. 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. New members of the management team have executed employment
agreements that extend through November 2001. Certain officers of the Company
were granted options to acquire an aggregate of 1,050,000 shares of the
Company's common stock at the fair market value on the date of grant in lieu of
cash compensation. Options for 183,000 shares were exercisable immediately, with
options to acquire 500,000 shares vesting over a twelve-month period and options
to acquire 367,000 shares vesting over two years.
37
40
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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 non-vested 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 $26,000 and $59,000 for
the years ended December 31, 1996 and 1997, respectively.
Subsequent to December 31, 1997, the Plan was merged into the TCMS 401(K)
Plan, which was established effective January 1, 1998, for the benefit of its
employees. The Company has agreed to fund 50% per dollar of contribution by an
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 401(K) Plan at either January 1 or March 1, 1998,
dependent upon the termination date of their specific benefit plan. The Company
has requested but not yet received a determination letter. The Company made
contributions to the TCMS 401(K) Plan of $359,000 in 1998.
12. SALES TO MAJOR CUSTOMERS
The customer base for the Company is 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,
------------------
1996 1997 1998
---- ---- ----
Customer A....................................... 10.1% -- --
Customer B....................................... 55.0% -- --
Customer C....................................... -- 34.5% --
Customer D....................................... -- 32.2% --
Customer E....................................... -- -- 21.2%
13. SEGMENTS INFORMATION
Operating Segments
The Company has two primary operating segments the Pipeline & Marine Group
and the Fabrication & Offshore Group. The Pipeline & Marine Group's operations
focus on the construction, burial and testing of pipelines on land, through the
transition zone out to 800 feet of waters. The Fabrication & Offshore Group's
primary operations focus on the fabrication of shallow water barges, drilling
rigs and oil and gas production platforms. The two segments are managed
separately because each business requires different technology and marketing
strategies. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies except that certain
corporate expenses such as amortization of goodwill as well as interest expense,
interest income and income taxes are not allocated between the segments in the
Company's evaluation of segment profit or loss.
38
41
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following shows segment information for the reportable segments for the
three years in the period ended December 31, 1998 (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- -------- --------
Sales to unaffiliated customers:
Pipeline & Marine........................... $17,933 $ 53,193 $110,880
Fabrication & Offshore...................... -- 4,324 77,401
Other....................................... -- -- 597
------- -------- --------
$17,933 $ 57,517 $188,878
======= ======== ========
Net income:
Pipeline & Marine........................... $ 750 $ 4,867 $ 4,961
Fabrication & Offshore...................... -- 831 2,875
Other....................................... -- (4,348) (5,031)
------- -------- --------
$ 750 $ 1,350 $ 2,805
======= ======== ========
Identifiable assets:
Pipeline & Marine........................... $ 9,157 $ 87,181 $113,551
Fabrication & Offshore...................... -- 7,946 40,747
Other....................................... -- 76,690 82,299
------- -------- --------
$ 9,157 $171,817 $236,597
======= ======== ========
Depreciation and amortization:
Pipeline & Marine........................... $ 562 $ 1,979 $ 7,715
Fabrication & Offshore...................... -- 57 1,755
Other....................................... -- 66 358
------- -------- --------
$ 562 $ 2,102 $ 9,828
======= ======== ========
Capital expenditures:
Pipeline & Marine........................... $ 1,801 $ 6,759 $ 28,598
Fabrication & Offshore...................... -- -- 6,784
Other....................................... -- -- 702
------- -------- --------
$ 1,801 $ 6,759 $ 36,084
======= ======== ========
Export sales -- United States:
To Venezuela................................ $ -- $ -- $ 24,234
To all other................................ -- -- 2,127
------- -------- --------
$ -- $ -- $ 26,361
======= ======== ========
The Company operates principally in two geographic segments: the United
States and Venezuela. Revenues derived from sales generated in Venezuela and
export sales to Venezuela represent approximately 12.8% of total revenues for
the year ended December 31, 1998. Prior to 1998, export sales or revenue
generated in foreign countries was not significant to the Company's operations.
In 1996, the Company had no foreign source revenues and approximately 4.3% of
its revenues in 1997 were generated outside the United States. Other foreign
revenue is derived from contracts performed for customers primarily in Mexico
and Trinidad.
The Company's foreign operations and sales to foreign locations are subject
to local government regulations and to uncertainties of economics and political
conditions of those areas. In addition, because of the impact of local laws, the
Company also conducts some of its foreign projects pursuant to arrangements in
39
42
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which local entities participate in the project. Revisions to project revenues
or costs, including those arising from changes or revisions to foreign
regulatory requirements and revisions to arrangements with local entities, are
recognized in the period in which the revisions are determined.
The following shows geographic segment information for the three years in
the period ended December 31, 1998 (in thousands):
YEAR ENDED DECEMBER 31
----------------------------
1996 1997 1998
------- ------- --------
Sales to unaffiliated customers:
United States................................ $17,933 $55,017 $139,212
Venezuela.................................... -- -- 24,234
Other Foreign................................ -- 2,500 25,432
------- ------- --------
$17,933 $57,517 $188,878
======= ======= ========
Identifiable long-lived assets:
United States................................ $ 2,956 $66,907 $ 99,536
Venezuela.................................... -- -- --
Other Foreign................................ -- -- --
------- ------- --------
$ 2,956 $66,907 $ 99,536
======= ======= ========
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental cash flow information for each of the three years in the
period ended December 31, 1998 are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ------- ------
Cash Paid For:
Interest.......................................... $109 $ 370 $3,620
Income taxes...................................... -- 420 629
Non-cash Investing and Financing Activities:
Assumption of long-term debt in connection with
acquisitions................................... $ -- $10,612 $ 617
40
43
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 1999 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
(the "Commission") within 120 days after December 31, 1998, and which is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
41
44
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
42
45
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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. (Incorporated
by reference to Exhibit 10.27 of the Company's Annual
Report for fiscal year ended December 31, 1997 filed on
Form 10-K)
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.
(Incorporated by reference to Exhibit 10.27 of the
Company's Annual Report for fiscal year ended December
31, 1997 filed on Form 10-K)
43
46
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.29 -- Form of Subordinated Credit Agreement by and among the
Company and Joint Energy Development Investments II
Limited Partnership, and the Lender's Signatory thereto.
10.30 -- Form of Credit Agreement by and among the Company and
Heller Financial Leasing, Inc. and the Lender's Signatory
thereto.
10.31 -- Form of Senior Revolving Credit Agreement by and among
the Company and Bank One Texas, National Association, and
the Lender's Signatory thereto.
10.32 -- Employment Agreement dated December 14, 1998 between the
Company and Nathan M. Avery
10.33 -- Employment Agreement dated December 14, 1998 between the
Company and Pamela L. Reiland
10.34 -- Stock Purchase and Merger Agreement between the Company
and Dickson GMP International, Inc. and affiliates
(Incorporated by reference to Exhibit 10.3 of the
Company's 8-K filed on September 15, 1998).
10.35 -- First Amendment to Stock Purchase and Merger Agreement
between the Company and Dickson GMP International, Inc.
and affiliates (Incorporated by reference to Exhibit 10.4
of the Company's 8-K filed on September 15, 1998).
10.36 -- Transcoastal Marine Services, Inc. 1998 Stock Option Plan
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.
(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.
Filed on September 15, 1998 in connection with the acquisition of Dickson
GMP International, Inc. and affiliates.
44
47
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/ PAMELA L. REILAND
----------------------------------
Pamela L. Reiland
Executive Vice President
March 31, 1999
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/ NATHAN M. AVERY Chairman of the Board of Directors and Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
Nathan M. Avery Officer)
/s/ PAMELA L. REILAND Principal Financial Officer
- -----------------------------------------------------
Pamela L. Reiland
/s/ WARREN L. WILLIAMS Principal Accounting Officer
- -----------------------------------------------------
Warren L. Williams
/s/ JEAN SAVOY Director
- -----------------------------------------------------
Jean Savoy
/s/ PATRICK B. COLLINS Director
- -----------------------------------------------------
Patrick B. Collins
/s/ BELDON E. FOX, JR. Director
- -----------------------------------------------------
Beldon E. Fox, Jr.
/s/ FRED E. GALLANDER Director
- -----------------------------------------------------
Fred E. Gallander
/s/ D. GLENN RICHARDSON Director
- -----------------------------------------------------
D. Glenn Richardson
45
48
INDEX TO EXHIBITS
DESCRIPTION
-----------
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).
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).
49
DESCRIPTION
-----------
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).
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).
50
DESCRIPTION
-----------
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. (Incorporated
by reference to Exhibit 10.27 of the Company's Annual
Report for fiscal year ended December 31, 1997 filed on
Form 10-K)
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.
(Incorporated by reference to Exhibit 10.27 of the
Company's Annual Report for fiscal year ended December
31, 1997 filed on Form 10-K)
10.29 -- Form of Subordinated Credit Agreement by and among the
Company and Joint Energy Development Investments II
Limited Partnership, and the Lender's Signatory thereto.
10.30 -- Form of Credit Agreement by and among the Company and
Heller Financial Leasing, Inc. and the Lender's Signatory
thereto.
10.31 -- Form of Senior Revolving Credit Agreement by and among
the Company and Bank One Texas, National Association, and
the Lender's Signatory thereto.
10.32 -- Employment Agreement dated December 14, 1998 between the
Company and Nathan M. Avery
10.33 -- Employment Agreement dated December 14, 1998 between the
Company and Pamela L. Reiland
10.34 -- Stock Purchase and Merger Agreement between the Company
and Dickson GMP International, Inc. and affiliates
(Incorporated by reference to Exhibit 10.3 of the
Company's 8-K filed on September 15, 1998).
10.35 -- First Amendment to Stock Purchase and Merger Agreement
between the Company and Dickson GMP International, Inc.
and affiliates (Incorporated by reference to Exhibit 10.4
of the Company's 8-K filed on September 15, 1998).
10.36 -- Transcoastal Marine Services, Inc. 1998 Stock Option Plan
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.