1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-23225
TRANSCOASTAL MARINE SERVICES, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 72-1353528
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4900 WOODWAY, SUITE 500, HOUSTON, TEXAS 77056
(Address of principal executive offices)
(Zip Code)
(713) 626-8899
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock of the registrant, par value $.001 per
share, outstanding at August 11, 1999 was 11,248,441.
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2
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
June 30, 1999......................................... 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 1998 and 1999.... 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1999................... 5
Notes to Consolidated Financial Statements............. 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations... 9
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk..................................... 12
PART II -- OTHER INFORMATION
Item 2 -- Changes in Securities and Use of Proceeds....... 13
Item 4 -- Submission of Matters to a Vote of Security
Holders......................................... 14
Item 6 -- Exhibits and Reports on Form 8-K................ 14
SIGNATURE................................................... 15
2
3
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,020 $ 5,574
Contracts and accounts receivable, net of allowance of
$1,182 and $2,637, respectively......................... 31,470 41,696
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 6,629 3,777
Other current assets...................................... 7,941 6,434
-------- --------
Total current assets............................... 55,060 57,481
PROPERTY AND EQUIPMENT, net................................. 96,135 95,937
GOODWILL, net of amortization of $2,195 and $3,251,
respectively.............................................. 80,430 87,407
OTHER NONCURRENT ASSETS..................................... 4,972 5,796
-------- --------
Total assets....................................... $236,597 $246,621
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt.... $ 6,018 $ 5,455
Accounts payable.......................................... 16,949 20,254
Accrued expenses.......................................... 9,836 10,742
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 6,741 3,562
Deferred income taxes payable............................. -- 41
-------- --------
Total current liabilities.......................... 39,544 40,054
LONG-TERM DEBT, net of current maturities................... 35,096 41,835
SUBORDINATED DEBT........................................... 20,000 20,000
DEFERRED INCOME TAXES....................................... 21,729 21,091
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK, Series A 7% redeemable cumulative, $.001
par value, 140 shares authorized, 140 shares issued and
outstanding at June 30, 1999.............................. -- 140
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,999,860 authorized,
none issued and outstanding............................. -- --
Common stock, $.001 par value, 20,000,000 shares
authorized, 10,198,441 and 11,248,441 shares issued and
outstanding at December 31, 1998 and June 30, 1999,
respectively............................................ 10 11
Restricted common stock, $.001 par value, 3,000,000 shares
authorized, 250,000 and 0 shares issued and outstanding
at December 31, 1998 and June 30, 1999, respectively.... -- --
Additional paid-in capital................................ 133,899 137,230
Retained deficit.......................................... (13,699) (13,740)
Net unrealized gain on available-for-sale securities...... 18 --
-------- --------
Total stockholders' equity......................... 120,228 123,501
-------- --------
Total liabilities and stockholders' equity......... $236,597 $246,621
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
4
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1998 1999 1998 1999
-------- -------- ------- --------
REVENUES.............................................. $48,391 $55,031 $79,169 $100,068
COSTS AND EXPENSES:
Cost of revenues.................................... 36,904 47,826 61,285 86,288
Selling, general and administrative expenses........ 2,710 2,488 5,558 4,922
Depreciation and amortization....................... 2,426 3,549 4,682 6,750
------- ------- ------- --------
OPERATING INCOME...................................... 6,351 1,168 7,644 2,108
OTHER INCOME (EXPENSE), net:
Interest income (expense), net...................... (824) (1,303) (1,663) (2,527)
Other income (expense), net......................... (48) 255 (1) 352
------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES..................... 5,479 120 5,980 (67)
PROVISION (BENEFIT) FOR INCOME TAXES.................. 2,765 48 2,990 (27)
------- ------- ------- --------
NET INCOME (LOSS)..................................... $ 2,714 $ 72 $ 2,990 $ (40)
======= ======= ======= ========
PREFERRED STOCK DIVIDENDS............................. -- (1) -- (1)
------- ------- ------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS.... $ 2,714 $ 71 $ 2,990 $ (41)
======= ======= ======= ========
COMPREHENSIVE INCOME (LOSS), net of taxes:
NET INCOME (LOSS)..................................... $ 2,714 $ 72 $ 2,990 $ (40)
Reclassification adjustment for gains included in
net income (loss), net of tax of $8 at June 30,
1999............................................. -- -- -- (18)
------- ------- ------- --------
COMPREHENSIVE INCOME (LOSS)........................... $ 2,714 $ 72 $ 2,990 $ (58)
======= ======= ======= ========
EARNINGS PER SHARE:
Basic............................................... $ 0.30 $ 0.01 $ 0.33 $ 0.00
======= ======= ======= ========
Diluted............................................. $ 0.30 $ 0.01 $ 0.33 $ 0.00
======= ======= ======= ========
NUMBER OF SHARES USED IN PER SHARE COMPUTATIONS:
Basic............................................... 9,148 10,791 9,148 10,621
======= ======= ======= ========
Diluted............................................. 9,157 11,152 9,162 10,621
======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
5
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 2,990 $ (40)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization........................... 4,682 6,750
Provision for doubtful accounts......................... -- 1,980
Gain on sale of investments............................. -- (29)
Deferred income taxes................................... (547) (597)
Other................................................... 782 102
Changes in operating assets and liabilities --
(Increase) decrease in --
Contracts and accounts receivable.................. (11,400) (12,206)
Cost and estimated earnings in excess of billings
on uncompleted contracts.......................... (2,102) 2,852
Other current assets............................... 639 1,507
Other noncurrent assets............................ (473) (824)
Increase (decrease) in --
Accounts payable and accrued expenses.............. 978 4,211
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 1,030 (3,179)
-------- --------
Net cash provided by (used in) operating
activities..................................... (3,421) 527
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of capital assets...................... 417 47
Capital expenditures...................................... (23,580) (5,496)
Cash paid for acquisitions and related cost............... -- (4,700)
-------- --------
Net cash used in investing activities............ (23,163) (10,149)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on Credit Agreement........................ 27,600 8,590
Principal payments on notes payable....................... -- (1,466)
Principal payments on long-term debt...................... (2,594) (948)
-------- --------
Net cash provided by financing activities........ 25,006 6,176
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (1,578) (3,446)
CASH AND CASH EQUIVALENTS, beginning of period.............. 2,416 9,020
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 838 $ 5,574
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest................................................ $ 784 $ 904
======== ========
Income taxes............................................ $ 458 $ 23
======== ========
Non-cash investing and financing activities:
Common stock issued for acquisition..................... $ -- $ 3,332
======== ========
Preferred stock issued for acquisition.................. $ -- $ 140
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
6
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
The consolidated financial statements herein have been prepared by
TransCoastal Marine Services, Inc. ("TransCoastal" or "the Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission that permit certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles to be condensed or omitted. The Company believes the
presentation and disclosures herein are adequate to make the information not
misleading. The consolidated financial statements reflect all elimination
entries and normal recurring adjustments that are necessary for a fair
presentation of the results for the three month and six month periods ended June
30, 1998 and 1999.
Operating results for interim periods are not necessarily indicative of the
results for a full year. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements of
the Company and the related notes thereto included in TransCoastal's Annual
Report on Form 10-K for the year ended December 31, 1998, as filed with the
Securities and Exchange Commission.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the accounting policies of the
Company during the periods presented. For a description of these policies, see
Note 2 of the Notes to Consolidated Financial Statements of the Company in
TransCoastal's Annual Report on Form 10-K for the year ended December 31, 1998.
Reclassifications
Certain amounts reported in 1998 have been reclassified to conform with the
1999 presentation.
3. EARNINGS PER SHARE
The weighted average number of common shares outstanding used to compute
basic income (loss) per share for the three and six month periods ended June 30,
1998 was 9,148,000 shares. The weighted average number of common shares
outstanding used to compute basic income (loss) per share for the three and six
month periods ended June 30, 1999 were 10,791,000 and 10,621,000 shares,
respectively. 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 9,157,000 and
11,152,000 for the three months ended June 30, 1998 and 1999, respectively and
9,162,000 and 10,621,000 for the six months ended June 30, 1998 and 1999,
respectively. Common stock equivalents are excluded from fully diluted
calculations in those periods in which a net loss is reported as they would be
anti-dilutive.
4. DICKSON ACQUISITION
On September 1, 1998, the Company acquired Dickson GMP International, Inc.
and four affiliated companies ("Dickson") which specialize in the fabrication of
production systems that incorporate sophisticated piping, electrical and
instrumentation components used in the oil and gas, refinery, petrochemical and
chemical industries. Under the terms of the acquisition agreement, TransCoastal
acquired all outstanding stock of Dickson for $10 million in cash and 1.3
million shares of TransCoastal common stock. The acquisition agreement provided
Dickson with the potential to receive an additional $7.3 million in cash and
approximately 0.4 million common shares if it achieved certain financial targets
by the third quarter of 1999. On May 18, 1999, the Company finalized the early
settlement of the Dickson earn-out. The earn-out was settled in advance due to
management's belief that the financial targets would be achieved by the third
quarter of 1999, if not before, and the Company's desire to reduce the overall
cash commitment required. The terms of the
6
7
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
early settlement included a reduction in the cash payment to $4.7 million and
the issuance of 800,000 shares of common stock and 140 shares of Series A
preferred stock with a redemption price equal to $1,000 per share. The Company
financed the cash portion of the acquisition with credit available under its
existing credit facilities. The Dickson acquisition has been accounted for as a
purchase, therefore, the accompanying statements of operations reflect the
results of operations of Dickson since the date of acquisition.
Set forth below are the unaudited pro forma consolidated results of
operations for the three month and six month periods ended June 30, 1998, and
are prepared as though Dickson had been acquired as of January 1, 1998. These
pro forma results are not necessarily indicative of the actual results which
would have occurred if the acquisition of Dickson had taken place at the
beginning of the periods presented, nor are they necessarily indicative of
future results (amounts in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------ ----------------
Revenues........................................... $59,699 $102,153
Net income available to common stockholders........ $ 2,781 $ 3,137
Basic and diluted earnings per share............... $ 0.25 $ 0.28
5. SEGMENT INFORMATION
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 water. 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 (see Annual Report
on Form 10-K) except that certain corporate expenses such as amortization of
goodwill as well as interest expense and interest income are not allocated
between the segments.
The following table shows segment information for the reportable segments
for the three month and six month periods ended June 30, 1998 and 1999,
respectively (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1999 1998 1999
--------- --------- --------- ----------
Revenues to unaffiliated
customers:
Pipeline & Marine.............. $38,219 $16,928 $58,618 $ 31,221
Fabrication & Offshore......... 10,172 38,103 20,490 68,825
Other.......................... -- -- 61 22
------- ------- ------- --------
$48,391 $55,031 $79,169 $100,068
======= ======= ======= ========
Net income (loss):
Pipeline & Marine.............. $ 2,888 $ (138) $ 3,635 $ (164)
Fabrication & Offshore......... 429 1,164 1,105 1,611
Other.......................... (603) (954) (1,750) (1,487)
------- ------- ------- --------
$ 2,714 $ 72 $ 2,990 $ (40)
======= ======= ======= ========
7
8
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company operated principally in four geographic segments during the
first six months of 1999: the United States, Venezuela, Mexico, and Nigeria. The
following table shows segment information for the geographic segments for the
three month and six month periods ended June 30, 1998 and 1999, respectively (in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1999 1998 1999
--------- --------- --------- ----------
Revenues to unaffiliated
customers:
United States.................. $45,453 $26,784 $74,011 $ 40,956
Venezuela...................... -- 17,583 -- 38,581
Mexico......................... -- 6,610 -- 13,966
Nigeria........................ -- 4,054 -- 6,565
Other Foreign.................. 2,938 -- 5,158 --
------- ------- ------- --------
$48,391 $55,031 $79,169 $100,068
======= ======= ======= ========
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 1 of this
Report and the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
TransCoastal 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 its 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 4900 Woodway, Suite 500, Houston, Texas 77056, and its telephone
is (713)626-8899.
This discussion includes certain forward-looking statements, which are
identified by the use of the words "believes," "expects," "anticipates" and
similar expressions that contemplate future events. Numerous important factors,
risks and uncertainties affect the Company's operating results and could cause
the Company's actual results to differ materially from the results implied by
these or any other forward-looking statements made by, or on behalf of the
Company. These factors, risks and uncertainties are set forth in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. There can be no
assurance that future results will meet expectations.
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):
THREE MONTHS ENDED JUNE 30,
----------------------------------
1998 1999
--------------- ----------------
Revenues.................................................. $48,391 100.0% $ 55,031 100.0%
Cost of revenues.......................................... 36,904 76.3% 47,826 86.9%
Selling, general and administrative expenses.............. 2,710 5.6% 2,488 4.5%
Depreciation and amortization............................. 2,426 5.0% 3,549 6.4%
------- ----- -------- -----
Operating income.......................................... 6,351 13.1% 1,168 2.1%
Interest income (expense), net............................ (824) -1.7% (1,303) -2.4%
Other income (expense), net............................... (48) -0.1% 255 0.5%
------- ----- -------- -----
Income before income taxes................................ 5,479 11.3% 120 0.2%
Provision for income taxes................................ 2,765 5.7% 48 0.1%
------- ----- -------- -----
Net income................................................ $ 2,714 5.6% $ 72 0.1%
======= ===== ======== =====
9
10
SIX MONTHS ENDED JUNE 30,
----------------------------------
1998 1999
--------------- ----------------
Revenues.................................................. $79,169 100.0% $100,068 100.0%
Cost of revenues.......................................... 61,285 77.4% 86,288 86.2%
Selling, general and administrative expenses.............. 5,558 7.0% 4,922 4.9%
Depreciation and amortization............................. 4,682 5.9% 6,750 6.7%
------- ----- -------- -----
Operating income.......................................... 7,644 9.7% 2,108 2.1%
Interest income (expense), net............................ (1,663) -2.1% (2,527) -2.5%
Other income (expense), net............................... (1) 0.0% 352 0.4%
------- ----- -------- -----
Income (loss) before income taxes......................... 5,980 7.6% (67) -0.1%
Provision (benefit) for income taxes...................... 2,990 3.8% (27) 0.0%
------- ----- -------- -----
Net income (loss)......................................... $ 2,990 3.8% $ (40) 0.0%
======= ===== ======== =====
Results for the three months ended June 30, 1998 compared to the three months
ended June 30, 1999
Revenues. Revenues increased $6.6 million, or 13.7%, from $48.4 million for
the three months ended June 30, 1998 to $55.0 million for the three months ended
June 30, 1999. The Fabrication and Offshore Group's revenues increased $27.9
million, or 274.6%, from $10.1 million for the three months ended June 30, 1998
to $38.1 million for the three months ended June 30, 1999. Dickson, which was
acquired in September 1998, accounted for $30.0 million of the Fabrication and
Offshore Group's revenues in the second quarter of 1999. The Pipeline and Marine
Group's revenues decreased $21.3 million, or 55.7% from $38.2 million for the
second quarter of 1998 to $16.9 million for the same period in 1999. The decline
in revenues for the Pipeline and Marine Group was the result of delays in
pipeline construction projects due to the fall of oil and gas prices during
1998. With recent increases in oil and gas prices, the Company anticipates
increased levels of pipeline activity in the first half of 2000.
Cost of revenues. Cost of revenues increased $10.9 million, or 29.6%, from
$36.9 million for the three months ended June 30, 1998 to $47.8 million for the
same period in 1999. Overall cost of revenues increased as a percentage of
revenues from 76.3% in the second quarter of 1998 to 86.9% in the second quarter
of 1999. This decrease in gross profit percentage in the second quarter of 1999
as compared to the second quarter of 1998 was primarily due to two factors.
First, in 1999 a higher percentage of the Company's revenues were generated by
the Fabrication and Offshore Group whose gross profit is lower than the typical
gross profit on revenues generated by the Pipeline and Marine Group. Secondly,
the Pipeline and Marine Group's gross margin decreased as the competition
intensified for fewer pipeline installation projects in the first half of 1999.
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses decreased $0.2 million, or 8.2%, for the three
months ended June 30, 1999 as compared to the same period in 1998. As a
percentage of revenues, SG&A expenses were 4.5% during the second quarter of
1999, compared to 5.6% during the second quarter of 1998. The reduction in
selling, general and administrative expenses in the second quarter of 1999 as
compared to the second quarter of 1998 was accomplished primarily through
reductions in the headcount of the administrative staff and in the use of third
party services. This reduction in SG&A expenses in both gross dollars and as a
percentage of revenues is significant as it was accomplished while supporting a
revenue increase of 13.7% and the addition of Dickson's SG&A expenses.
Depreciation and amortization. Depreciation and amortization expenses
increased $1.1 million from $2.4 million in 1998 to $3.5 million in 1999. The
increase was primarily due to two factors. First, in 1998 the Company had $36.1
million dollars in capital expenditures, the majority of which were not placed
in service until after to June 30, 1998. Secondly, and to a lesser extent, the
depreciation and amortization recorded in connection with the acquisition of
Dickson during the third quarter of 1998 also contributed to the increase.
Interest income (expense), net. Interest expense, net of interest income,
totaled $1.3 million during the second quarter of 1999 as compared to $0.8
million of interest expense during the same period in 1998. This increase was
primarily due to higher average debt levels resulting from increases in the
corporate revolver to fund capital expenditures, the acquisition of Dickson and
working capital requirements.
10
11
Results for the six months ended June 30, 1998 compared to the six months ended
June 30, 1999
Revenues. Revenues increased $20.9 million, or 26.4%, from $79.2 million
for the six months ended June 30, 1998 to $100.0 million for the six months
ended June 30, 1999. The Fabrication and Offshore Group's revenues increased
$48.3 million, or 235.6%, from $20.5 million for the six months ended June 30,
1998 to $68.8 million for the six months ended June 30, 1999. Dickson, which was
acquired in September 1998, accounted for $53.6 million of the Fabrication and
Offshore Group's revenues in the first half of 1999. The Pipeline and Marine
Group's revenues decreased $27.4 million, or 46.7% from $58.6 million for the
first half of 1998 to $31.2 million for the same period in 1999. The decline in
revenues for the Pipeline and Marine Group was the result of delays in pipeline
construction projects due to the fall of oil and gas prices during 1998. With
recent increases in oil and gas prices, the Company anticipates increased levels
of pipeline activity in the first half of 2000.
Cost of revenues. Cost of revenues increased $25.0 million, or 40.8%, from
$61.3 million for the six months ended June 30, 1998 to $86.3 million for the
same period in 1999. Overall cost of revenues increased as a percentage or
revenues from 77.4% in the first half of 1998 to 86.2% in the first half of
1999. The resulting decrease in gross profit percentage in the first half of
1999 as compared to the first half of 1998 was primarily due to two factors.
First, in 1999 a higher percentage of the Company's revenues were generated by
the Fabrication and Offshore Group whose gross profit is lower than the typical
gross profit on revenues generated by the Pipeline and Marine Group. Secondly,
the Pipeline and Marine Group's gross margin decreased as the competition
intensified for fewer pipeline installation projects in the first six months of
1999.
Selling, general and administrative expenses. SG&A expenses decreased $0.6
million, or 11.4%, for the six months ended June 30, 1999 as compared to the
same period in 1998. As a percentage of revenues, SG&A expenses were 4.9% during
the first half of 1999, compared to 7.0% during the first half of 1998. The
reduction in SG&A was accomplished primarily through reductions in the headcount
of the administrative staff and in the use of third party services. This
reduction in SG&A expenses in both gross dollars and as a percentage of revenues
is notable as it was accomplished while supporting a revenue increase of 26.4%
and the addition of Dickson's SG&A expenses.
Depreciation and amortization. Depreciation and amortization expenses
increased $2.1 million from $4.7 million in 1998 to $6.8 million in 1999. The
increase was primarily due to two factors. First, in 1998 the Company had $36.1
million dollars in capital expenditures, the majority of which were not placed
in service until after to June 30, 1998. Secondly, and to a lesser extent, the
depreciation and amortization recorded in connection with the acquisition of
Dickson during the third quarter of 1998 also contributed to the increase.
Interest income (expense), net. Interest expense, net of interest income,
totaled $2.5 million during the first half of 1999 as compared to $1.7 million
of interest expense during the same period in 1998. This increase was primarily
due to higher average debt levels resulting from increases in the corporate
revolver to fund capital expenditures, the acquisition of Dickson and working
capital requirements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital improved by $1.9 million during the first
half of 1999, increasing to $17.4 million at June 30, 1999 from $15.5 million at
December 31, 1998. Net cash provided by operating activities during the six
months ended June 30, 1999 was $0.5 million. Accounts receivable increased $10.2
million in the first six months of 1999 primarily due to two foreign receivables
of $15.5 million and $7.1 million. Based upon information available at this time
management expects to receive payment on these accounts within the normal
operating cycle.
Net cash used in investing activities during the six months ended June 30,
1999 was $10.1 million. Capital expenditures accounted for $5.5 million of the
cash used in investing activities during the period and primarily related to the
refurbishment of two vessels (the Atchafalaya Bay and the BH-400) which were
completed in the second quarter of 1999. The $4.7 million cash payment in
connection with the early settlement of the Dickson acquisition earn-out
accounted for the balance of the cash used in investing activities. Net cash
consumed by operating and investing activities was funded through additional
borrowings under the revolving credit facility. During the first half of 1999,
net long-term debt borrowings were $6.2 million, resulting in an outstanding
long-term debt balance of $45.8 million at June 30, 1999. Additional
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borrowing availability under the Company's long-term credit facility at the end
of June 30, 1999 totaled $5.6 million.
The Company intends to continue to pursue attractive asset and corporate
acquisition opportunities; however, the timing, size or success of any
acquisitions and the resulting additional capital commitments are unknown at
this time. The Company expects to fund future acquisitions primarily through a
combination of issuance of additional equity, working capital, cash flow from
operations and borrowings, including the unused portion of the credit facility.
YEAR 2000 ISSUES
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.
The Company plans to complete the Year 2000 conversion tasks well 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 developing a written contingency plan 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 which 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.
ITEM 3 -- 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.
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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 June 30, 1999, $63.1 million of
the Company's indebtedness was subject to variable interest rates with a
weighted average effective interest rate of 9.45% for the six months then ended.
The detrimental effect of a hypothetical 100 basis point increase in interest
rates would be to reduce income before taxes by $0.3 million for the six month
period. At June 30, 1999, the fair value of the Company's fixed rate debt is
approximately $4.2 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.
PART II -- OTHER INFORMATION
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 19, 1999, the Company issued 400,000 shares of common stock; 1,680
shares of Series B 5% cumulative convertible preferred stock; and 140 shares of
Series A 7% redeemable cumulative preferred stock to the former stockholders of
Dickson. The above shares were issued in partial consideration of the earn-out
portion of the acquisition price of all the outstanding stock of Dickson. No
underwriting commissions or discounts were paid with respect to the issuance of
the unregistered securities described above.
The above securities were issued in reliance on Section 4(2) of the
Securities Act of 1933 for transactions not involving a public offering. With
regard to the reliance by the Company upon such exemption for registration,
certain inquiries were made by the Company to establish that such issuance
qualified for such exemption from the registration requirements. In particular,
the Company confirmed that (i) the certificates for the shares issued bear the
restrictive legends and (ii) the shares were issued to a limited number of
persons.
The 1,680 shares of Series B 5% cumulative convertible preferred stock were
automatically convertible into 400,000 shares of the Company's common stock
immediately upon the approval by the stockholders of the Company. The approval
of the issuance of the common stock (as part of the acquisition of Dickson) by
the stockholders was required in accordance with the rules and regulations of
Nasdaq National Market. The stockholders voted to approve the issuance of the
400,000 shares of common stock at the Annual Meeting of the Stockholders on May
26, 1999.
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ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 26, 1999 the Company held the 1999 Annual Meeting of Stockholders in
Houston, Texas. At the meeting, the following three matters were put to a vote
of the stockholders:
1. The election of six directors of the Company to serve until the
next Annual Meeting or until his respective successor has been duly elected
and qualified;
2. The approval of the issuance of 400,000 shares of common stock of
the Company to the former shareholders of Dickson GMP International, Inc.
as a component of the settlement of the earn-out agreement entered into in
connection with the acquisition of Dickson; and
3. The ratification of the Board of Directors' appointment of Arthur
Andersen LLP as independent auditors of the Company for the fiscal year
ending December 31, 1999.
The following table sets forth the directors elected and the tabulation
with respect to the voting on each:
VOTES
------------------------------------------
DIRECTOR FOR AGAINST/WITHHELD ABSTENTIONS
- -------- --------- ---------------- -----------
Nathan M. Avery................................ 7,827,090 21,654 0
Patrick B. Collins............................. 7,827,090 21,654 0
Beldon D. Fox, Jr. ............................ 7,827,090 21,654 0
Fred E. Gallander, Jr. ........................ 7,827,090 21,654 0
D. Glenn Richardson............................ 7,827,090 21,654 0
Jean Savoy..................................... 7,827,090 21,654 0
The voting stockholders approved the issuance of the 400,000 shares of
common stock described above by the vote of 4,852,417 for; 63,478 against or
withheld, and 11,248 abstentions.
The voting stockholders also ratified the appointment of Arthur Andersen
LLP as independent auditors by the vote of 7,830,030 for; 5,734 against or
withheld, and 10,980 abstentions.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. -- Financial Data Schedule
(b) Reports on Form 8-K
NONE
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSCOASTAL MARINE SERVICES, INC.
By: /s/ WARREN L. WILLIAMS
----------------------------------
Warren L. Williams
Director of Finance and Treasurer
Dated: August 13, 1999
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
27. -- Financial Data Schedule