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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, 2002

¨     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 

Commission File Number: 0-28316 

 
Trico Marine Services, Inc. 

 
(Exact name of registrant as specified in its charter)
 

       
        As of February 28, 2003, the average age of our vessels was 16 years. We believe that our upgrade and refurbishment program, completed in the first half of 1999, has significantly extended the service life of most of our Gulf supply boats.

        Vessel Maintenance. We incur routine dry-dock inspection, maintenance and repair costs under U.S. Coast Guard Regulations and to maintain American Bureau of Shipping certification for our vessels. In addition to complying with these requirements, we also have our own comprehensive vessel maintenance program that we believe helps us to continue to provide our customers with well maintained, reliable vessels. We paid approximately $9.5 million, $11.3 million and $7.7 million in dry-docking and marine inspection costs for the years ended December 31, 2002, 2001 and 2000, respectively.

Operations Bases

        We support our operations in the Gulf from a 62.5 acre docking, maintenance and office facility in Houma, Louisiana located on the intracoastal waterway that provides direct access to the Gulf. We also lease a 3,600 square foot office in Houston, Texas. Our North Sea operations are supported from leased offices in Fosnaväg, Norway, Kristiansand, Norway and Aberdeen, Scotland. Our Brazilian operations are supported from a maintenance and administrative facility in Macae, Brazil and a sales and administrative office in Rio de Janeiro.

Customers and Charter Terms

        We have entered into master service agreements with substantially all of the major and independent oil companies operating in the Gulf. Most of our charters in the Gulf are short-term contracts (60 to 90 days) or spot contracts (less than 30 days) and are cancelable upon short notice. Because of frequent renewals, the stated duration of charters frequently has little relationship to the actual time vessels are chartered to a particular customer.

        Our principal customers in the North Sea are major integrated oil companies and large independent oil and gas companies as well as foreign government owned or controlled companies that provide logistic, construction and other services to such oil companies and foreign government organizations. The charters with these customers are industry standard time charters. Current charters in the North Sea include periods ranging from spot contracts of just a few days or months to long-term contracts of several years.

        Charters are obtained through competitive bidding or, with certain customers, through negotiation. The percentage of revenues attributable to an individual customer varies from time to time, depending on the level of exploration and development activities undertaken by a particular customer, the availability and suitability of our vessels for the customer’s projects, and other factors, many of which are beyond our control. For the year ended December 31, 2000, approximately 10% of our total revenues were received from Statoil ASA. For 2001 and 2002, approximately 16% and 13%, respectively, of our total revenues were received from Exxon Mobil Corporation or its subsidiaries on a worldwide basis.

Competition

        Our business is highly competitive. Competition in the marine support services industry primarily involves factors such as price, service and reputation of vessel operators and crews, and availability and quality of vessels of the type and size needed by the customer. Although a few of our competitors are larger and have greater financial resources and international experience than us, we believe that our operating capabilities and reputation enable us to compete effectively with other fleets in the market areas in which we operate.

Regulation

        Our operations are significantly affected by federal, state and local regulation, as well as certain international conventions, private industry organizations and laws and regulations in jurisdictions where our vessels operate and are registered. These regulations govern worker health and safety and the manning, construction and operation of vessels. For example, we are subject to the jurisdiction of the U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs Service and the Maritime Administration of the U.S. Department of Transportation, as well as private industry organizations such as the American Bureau of Shipping. These organizations establish safety criteria and are authorized to investigate vessel accidents and recommend improved safety standards.

        The U.S. Coast Guard regulates and enforces various aspects of marine offshore vessel operations, such as classification, certification, routes, dry-docking intervals, manning requirements, tonnage requirements and restrictions, hull and shafting requirements and vessel documentation. Coast Guard regulations require that each of our vessels be dry-docked for inspection at least twice within a five-year period. We believe we are in compliance in all material respects with all Coast Guard regulations.

        Under U.S. law, the privilege of transporting merchandise or passengers in domestic waters extends only to vessels that are owned by U.S. citizens and are built in and registered under the laws of the U.S. A corporation is not considered a U.S. citizen unless, among other things, no more than 25% of any class of its voting securities are owned by non-U.S. citizens. If we should fail to comply with these requirements, during the period of such noncompliance we would not be permitted to continue operating our vessels in coastwise trade.

        Our operations are also subject to a variety of federal and state statutes and regulations regarding the discharge of materials into the environment or otherwise relating to environmental protection. Included among these statutes are the Clean Water Act, the Resource Conservation and Recovery Act (‘‘RCRA’’), the Comprehensive Environmental Response, Compensation and Liability Act (‘‘CERCLA’’), the Outer Continental Shelf Lands Act (‘‘OCSLA’’) and the Oil Pollution Act of 1990 (‘‘OPA’’).

        The Clean Water Act imposes strict controls on the discharge of pollutants into the navigable waters of the U.S., and imposes potential liability for the costs of remediating releases of petroleum and other substances. The Clean Water Act provides for civil, criminal and administrative penalties for any unauthorized discharge of oil and other hazardous substances in reportable quantities and imposes substantial potential liability for the costs of removal and remediation. Many states have laws that are analogous to the Clean Water Act and also require remediation of accidental releases of petroleum in reportable quantities. Our vessels routinely transport diesel fuel to offshore rigs and platforms, and also carry diesel fuel for their own use. Our supply boats transport bulk chemical materials used in drilling activities, and also transport liquid mud which contains oil and oil by-products. All offshore companies operating in the U.S. are required to have vessel response plans to deal with potential oil spills.

        RCRA regulates the generation, transportation, storage, treatment and disposal of onshore hazardous and non-hazardous wastes, and requires states to develop programs to ensure the safe disposal of wastes. We generate non-hazardous wastes and small quantities of hazardous wastes in connection with routine operations. We believe that all of the wastes that we generate are handled in compliance with RCRA and analogous state statutes.

        CERCLA contains provisions dealing with remediation of releases of hazardous substances into the environment and imposes strict, joint and several liability for the costs of remediating environmental contamination upon owners and operators of contaminated sites where the release occurred and those companies who transport, dispose of or who arrange for disposal of hazardous substances released at the sites. Although we handle hazardous substances in the ordinary course of business, we are not aware of any hazardous substance contamination for which we may be liable.

        OCSLA provides the federal government with broad discretion in regulating the release of offshore resources of oil and gas production. If the government were to exercise its authority under OCSLA to restrict the availability of offshore oil and gas leases, this could reduce demand for our Gulf vessels and adversely affect utilization and day rates.

        OPA contains provisions specifying responsibility for removal costs and damages resulting from discharges of oil into navigable waters or onto the adjoining shorelines. Among other requirements, OPA requires owners and operators of vessels over 300 gross tons to provide the U.S. Coast Guard with evidence of financial responsibility to cover the costs of cleaning up oil spills from such vessels. We have provided satisfactory evidence of financial responsibility to the U.S. Coast Guard for all of our Gulf vessels over 300 tons.

        We believe we are in compliance in all material respects with all applicable environmental laws and regulations to which we are subject. Our vessels operating in foreign market areas are subject to regulatory controls concerning environmental protection similar to those in force in the Gulf. We believe that compliance with any existing environmental requirements will not materially affect our operations or competitive position.

Insurance

        The operation of our vessels is subject to various risks, such as catastrophic marine disaster, adverse weather conditions, mechanical failure, collision and navigation errors, all of which represent a threat to personnel safety and to our vessels and cargo. We maintain insurance coverage against certain of these risks, which management considers to be customary in the industry. We believe that our insurance coverage is adequate and we have not experienced a loss in excess of our policy limits. However, there can be no assurance that we will be able to maintain adequate insurance at rates which we consider commercially reasonable, nor can there be any assurance that such coverage will be adequate to cover all claims that may arise. Insurance rates have been subject to wide fluctuation and, in the future, could lead to increases in costs and higher deductibles and retentions.

Employees

        As of February 28, 2003, we had 1,076 employees worldwide, including 968 operating personnel and 108 corporate, administrative and management personnel. We believe our relationship with our employees is satisfactory. To date, strikes, work stoppages, boycotts, or slowdowns have not interrupted our operations.

        Our U.S. employees have not chosen to be represented by a labor union and are not covered by a collective bargaining agreement. We, together with other providers of marine support vessels, have been a target of Offshore Mariners United's, a coalition of four maritime labor unions, efforts to organize our Gulf employees since May 2000. If our Gulf employees were to become union represented, we believe that our flexibility in dealing with changing circumstances in our industry, or in our own operations, could be limited and we could be adversely affected.

        Our Norwegian seamen are covered by three union contracts with three separate Norwegian unions. Our United Kingdom seamen are covered by two union contracts with two separate unions. We believe our relationships with our employees in Norway and the United Kingdom is satisfactory. We filed an unfair labor practice charge with the National Labor Relations Board against two unions in relation to a secondary boycott by a Norwegian union that does not represent our employees. These charges were dismissed as moot following our satisfactory resolution of the boycott issue in Norway, which included an agreement by the Norwegian union not to engage in or threaten boycotts based on our labor practices in the United States. The litigation we filed in the United Kingdom against the International Transport Federation Union, alleging that it illegally interfered with certain of our business relationships and that it is attempting to force us to engage in unfair labor practic es, has also been satisfactorily resolved and dismissed.

        Although all domestic and international labor litigation has been resolved in the past year, future union activity in our international and domestic markets could adversely affect our business operations.

Cautionary Statements

        Certain statements made in this Annual Report that are not historical facts are ‘‘forward-looking statements.’’Such forward-looking statements may include statements that relate to:
 

• our objectives, business plans or strategies, and projected or anticipated benefits or other consequences of such plans or strategies;

• projected or anticipated benefits from future or past acquisitions; and

• projections involving revenues, operating results or cash provided from operations, or our anticipated capital expenditures or other capital projects.

• price, service and reputation of vessel operators and crews; and

• the quality and availability of vessels of the type and size needed by the customer.

Operating hazards may increase our operating costs; our insurance coverage is limited.

        Marine support vessels are subject to operating risks such as catastrophic marine disaster, adverse weather conditions, mechanical failure, collisions, oil and hazardous substance spills and navigation errors. The occurrence of any of these events may result in damage to or loss of our vessels and our vessels’ tow or cargo or other property and in injury to passengers and personnel. Such occurrences may also result in a significant increase in operating costs or liability to third parties. We maintain insurance coverage against certain of these risks, which our management considers to be customary in the industry. We cannot assure you, however, that we can renew our existing insurance coverage at commercially reasonable rates or that such coverage will be adequate to cover future claims that may arise. In addition, the recent terrorist attacks that occurred in the U.S., as well as other factors, have caused significant increases in the cost of our insur ance coverage. More restrictive coverages could adversely impact our operating results.

Compliance with governmental regulations may impose additional costs.

        We must comply with federal, state and local regulations, as well as certain international conventions, private industry organizations and agencies and laws and regulations in jurisdictions where our vessels operate and are registered. These regulations govern worker health and safety and the manning, construction and operation of vessels. These organizations establish safety criteria and are authorized to investigate vessel accidents and recommend approved safety standards. If we fail to comply with the requirements of any of these laws or the rules or regulations of these agencies and organizations, we could be subject to substantial fines, penalties or other restrictions.

        Our operations also are subject to federal, state and local laws and regulations that control the discharge of pollutants into the environment and that otherwise relate to environmental protection. While our insurance policies provide coverage for accidental occurrence of seepage and pollution or clean up and containment of the foregoing, pollution and similar environmental risks generally are not fully insurable. We may incur substantial costs in complying with such laws and regulations, and noncompliance can subject us to substantial liabilities. The laws and regulations applicable to us and our operations may change. If we violate any of such laws or regulations, this could result in significant liability to us. In addition, any amendment to such laws or regulations that mandates more stringent compliance standards would likely cause an increase in our vessel operating expenses.

        In 2003, the U.S. Coast Guard will put in place a major new vessel and marine facility security regulatory regime that will impact all providers of marine transportation services in the United States. The rules will require extensive planning, documentation and crew training as well as some additional equipment on all our vessels. The rules implement both new U.S. law as well as international maritime treaty initiatives. The latter will also impact our fleets operating under U.K., Norwegian and other non-U.S. flags. The Coast Guard has indicated that it expects to publish an interim maritime security rule in June 2003, with a final rule in November 2003. The related international treaty security initiatives enter into force July 1, 2004.

Our marine operations are seasonal and depend, in part, on weather conditions.

        In the Gulf, we have historically enjoyed our highest utilization rates during the second and third quarters, as mild weather provides favorable conditions for offshore exploration, development and construction. Adverse weather conditions during the winter months generally curtail offshore development operations. Activity in the North Sea is also subject to delays during periods of adverse weather. Accordingly, the results of any one quarter are not necessarily indicative of annual results or continuing trends.

Age of fleet.

        The average age of our vessels is approximately 16 years. Expenditures required for the repair, certification and maintenance of a vessel typically increase with vessel age. These expenditures may increase to a level at which they are no longer economically justifiable. We cannot assure you that we will be able to maintain our fleet by extending the economic life of existing vessels through major refurbishment or by acquiring new or used vessels.

Currency fluctuations could adversely affect our results of operations.

        Due to the size of our international operations, a significant percentage or our business is conducted in currencies other than the U.S. dollar. We are primarily exposed to fluctuations in the foreign currency exchange rates of the Norwegian Kroner, the British Pound and the Brazilian Reais. Changes in the value of these currencies relative to the United States dollar could result in translation adjustments reflected as comprehensive income or losses on our balance sheet. In addition, translation gains and losses could contribute to fluctuations in our results of operations. Due to the fluctuation of these currencies, primarily the Norwegian Kroner, we incurred a favorable accumulated foreign currency translation adjustment of $71.5 million in 2002, and unfavorable accumulated foreign currency translation adjustments of $1.0 million and $30.1 million for the years ended December 31, 2001 and 2000, respectively. We incurred foreign exc hange losses of $1.4 million, 1.0 million and $0.4 million for 2002, 2001 and 2000, respectively. Future fluctuations in these and other foreign currencies may result in additional foreign exchange gains or losses.

Operating internationally poses uncertain hazards.

Our international operations are subject to a number of risks inherent to any business operating in foreign countries. These risks include, among others:

• Political instability;
   

• Potential vessel seizure or nationalization of assets;

• Currency restrictions and exchange rate fluctuations; and

• Import and export quotas and other forms of public and governmental regulation.

        All of these risks are beyond our control. We cannot predict the nature and the likelihood of any such events. However, if such an event should occur, it could have a material adverse effect on our financial condition and results of operations.

We depend on key personnel.

        We depend on the continued services of our executive officers and other key management personnel, particularly our Chairman and our Chief Executive Officer. If we were to lose any of these officers or other management personnel, such a loss could result in inefficiencies in our operations, lost business opportunities or the loss of one or more customers.

A terrorist attack could have a material adverse effect on our business.

        The terrorist attacks that took place on September 11, 2001 in the U.S. were unprecedented events that have created many economic and political uncertainties, some of which may materially impact our business. The long-term effects of those attacks on our business are unknown. The potential for future terrorist attacks, the national and international response to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could adversely affect our business for the short or long-term in ways that cannot presently be predicted.

Item 3.     Legal Proceedings

        We are involved in various legal and other proceedings that are incidental to the conduct of our business. We do not believe that any of these proceedings, if adversely determined, would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 4.     Submission of Matters To a Vote Of Security Holders

                 None.

Item 4A.     Executive Officers of the Registrant

        The name, age and offices held by each of the executive officers of the Company as of February 28, 2003, are as follows:
 

	High		Low
2001
First quarter	$17.81		$14.00
Second quarter	15.00		10.64
Third quarter	10.39		5.10
Fourth quarter	7.67		5.70
2002
First quarter	$ 9.45		$ 5.84
Second quarter	9.18		6.79
Third quarter	6.80		2.27
Fourth quarter	3.76		2.45
2003
First quarter (through February 28, 2003)	$ 3.35		$ 2.16

Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001

        Our revenues for 2002 were $133.9 million, a decrease of 26.7%, compared to $182.6 million for 2001. The decrease was due primarily to a decrease in day rates and utilization for our Gulf class supply boats and crew boats.  The decrease in utilization and day rates of our Gulf class fleet is attributable to decreased Gulf drilling activity.

        Our average Gulf class supply boat day rates decreased 20.8% to $5,575 for 2002, compared to $7,043 for 2001. The average day rates for our fleet of crew boats and line handling vessels decreased 2.2% to $2,654, compared to $2,714 for 2001.

        Utilization for our Gulf class supply boat fleet decreased to 53% in 2002 from 69% in 2001 due to the decrease in offshore drilling activity in the Gulf. Utilization for our crew boats and line handling vessels decreased to 67% in 2002, compared to 78% in 2001, due to the decrease in activity in the Gulf.

        Average day rates for our North Sea vessels in 2002 decreased 2.0% to $11,641 compared to $11,884 for 2001. Vessel utilization was 89% for 2002, compared to 93% for 2001. Two large PSVs were added to our North Sea fleet during 2002.

        During 2002, direct vessel operating expenses increased to $84.1 million (62.8% of revenues), compared to $82.1 million (45.0% of revenues) for 2001. The direct vessel operating expenses increased as a result of higher North Sea labor costs, higher insurance costs and the addition of two new PSVs during 2002. The higher North Sea labor costs were primarily attributable to the addition of two new PSVs during 2002, required union related pay increases and the strengthening of the Norwegian Kroner against the dollar. The above rate increases were offset in part by reduced U.S. vessel labor and U.S. maintenance costs.

        During the fourth quarter of 2002 we recorded a non-cash vessel book value write-down in the amount of $5.2 million. The write-down was taken against the book value of two special purpose towing vessels that have limited capabilities as conventional supply vessels. In response to changes in current and projected market conditions, we will review our long-lived assets for impairment as required.

        Depreciation and amortization expense was $31.9 million in 2002, down from $32.9 million for 2001. The 2001 depreciation and amortization included $2.6 million of amortization expense associated with goodwill. Pursuant to the provisions of SFAS No. 142 no goodwill amortization expense was recorded in 2002. Amortization of marine inspection costs decreased to $10.2 million for 2002, from $13.4 million for 2001 due to a reduction in dry docking and marine inspection costs.

        Our general and administrative expenses increased to $15.1 million (11.2% of revenues) in 2002, from $13.6 million (7.4% of revenues) for 2001, principally due to increases in insurance, professional fees and the strengthening of the Norwegian Kroner against the dollar. General and administrative expenses, as a percentage of revenues, increased in 2002 due primarily to the decrease in average day rates and utilization for our Gulf class supply boats and crew boats.

        Interest expense increased to $28.4 million during 2002, compared to $26.2 million during 2001, due to additional borrowings associated with the construction of the two North Sea PSVs completed in 2002 and additional borrowings and interest costs associated with the refinancing of our senior notes.

        The 2002 tax expense of $14.5 million is comprised of $1.7 million in tax expense associated with our North Sea operations and $12.8 in income tax expense associated with our third quarter 2002 recordation of a U.S. deferred tax valuation allowance made pursuant to the provisions under SFAS No. 109, "Accounting for Income Taxes." In 2001, we had an income tax benefit of $3.3 million and an effective tax rate of 32%. The variance from our statutory rate is due to income that was contributed by our Norwegian operations for which taxes were provided at the Norwegian statutory rate of 28%. We intend to reinvest the unremitted Norwegian earnings and postpone their repatriation indefinitely.

        We incurred an $11.0 million extraordinary loss in 2002. Of this amount $10.9 million resulted from the early retirement of the Company's previously issued 8½% senior notes, and approximately $102,000 was attributable to the fourth quarter 2002 refinancing of our revolving credit facility

Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000
 

        We do not have any other planned capital expenditures other than between approximately $8.0 to $11.0 million to fund the dry docking of vessels and related repairs. As of March 18, 2003, we had approximately $50.0 million of financing available under our two revolving credit facilities. Our cash provided from operations for 2003 will be determined by the level of day rates and utilization for our vessels, which in turn are affected by expenditures for oil and gas exploration, development and production and industry perceptions of future oil and gas prices in the market areas in which we operate. Also, the level of expenditures on our vessels for dry docking may vary based on the level of day rates and utilization for our vessels and the general outlook for our business. We believe that cash on hand together with cash provided by operations and available borrowings under our revolving credit facilities will be sufficient to fund our debt service requirements, wo rking capital and capital expenditures for at least the next year barring any unforeseen circumstances. If current activity levels continue in the Gulf of Mexico or if we are unsuccessful in obtaining financing for the Brazilian AHTS, it would require us to depend more heavily on our existing revolving credit facilities and make it difficult to meet the required financial covenants in our revolving credit facility payable in dollars. If we are unable to comply with our financial covenants and cannot amend them, we would be in default under our existing revolving credit agreements and, if our bank lenders took actions to accelerate our indebtedness to them, the indenture for our 8 7/8% senior notes.

        We cannot make any assurances, however, that the factors beyond our control affecting demand for our vessels will not impact our ability to generate sufficient cash flow from operations, or obtain borrowings under our credit facilities, in an amount sufficient to enable us to pay our indebtedness and fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including our credit facilities, on commercially reasonable terms or at all.

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, fixed assets, deferred expenses, inventories, goodwill, income taxes, pension liabilities, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual re sults may differ from these estimates under different assumptions or conditions.

        We consider certain accounting policies to be critical policies due to the significant judgement, estimation processes and uncertainty involved for each in the preparation of our consolidated financial statements. We believe the following represent our critical accounting policies.

        Impairment of long-lived assets other than goodwill. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets," we review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. We record impairment losses on long-lived assets used in operations when the net discounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based upon, among other things, historical results adjusted to reflect our best estimate of future market rates, utilization, operating performance and other factors. Our estimates of cash flows may differ from actual cash flows due to, among other things, changes in economic conditions or changes in an asset's operating performance. If the discounted value of the cash flows is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the net discounted cash flow. During the year ended December 31, 2002 we recognized $5.2 million of fixed asset impairments.

        Impairment of goodwill. The majority of our goodwill, approximately $109.7  million at December 31, 2002, relates to the 1997 acquisition of our North Sea operations that are conducted under our Norwegian subsidiary Trico Supply ASA. The Company has determined that our North Sea managed operations constitute a reporting unit pursuant to the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." The Company tests for the possible impairment of goodwill at the reporting unit level in accordance with the requirements of SFAS No. 142. In assessing reporting unit fair value, we must make assumptions regarding estimated future cash flows and other factors used to determine fair value. If these estimates or their related assumptions adversely change in the future, we may be required to record material impairment charges for these assets. Our initial SFAS No. 142 impairment test was performed in the second quarter of 2002. Reported unit fair value was calculated based on estimated cash flows, comparable industry financial ratios and other analysis. Reporting unit fair value was compared to carrying value and no impairment charge was required as of January 1, 2002.

        Deferred Tax Valuation Allowance. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to enable their value to be fully realized. If these estimates and related assumptions change in the future, we may be required to record valuation allowances against deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our consolidated statement of operations. Under the provisions of SFAS No. 109, "Accounting for Income Taxes," we recorded a U.S. deferred tax valuation allowance in the third quarter of 2002 and an associated U.S. income tax expense of $22.7 million. No tax benefit was recorded on the financial statement third and fourth quarter 2002 U.S. net operating losses.

        Deferred marine inspection costs. We record the cost of major scheduled drydocking inspection costs for our vessels as deferred charges. We amortize these deferred charges over the expected periods of benefit, typically ranging from two to five years. The American Institute of Certified Public Accountants has issued an Exposure Draft for a Proposed Statement of Position, "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment," which would require major scheduled inspection costs to be expensed as costs are incurred. If this proposed Statement of Position is adopted in its current form, we will be required to write off the balance of our deferred marine inspection costs, which totaled $20.4 million at December 31, 2002, and expense future costs as incurred.

New Accounting Standards

        Effective January 1, 2002 the Company adopted SFAS No. 141, "Business Combinations." SFAS No. 141 supercedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and prohibits the use of the pooling-of-interest (pooling) method of accounting for business combinations initiated after the issuance date of SFAS No. 141. The adoption of SFAS No. 141 did not have a material impact on the Company’s net income, cash flows or financial position.

        Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets," by stating that goodwill will no longer be amortized, but will be tested for impairment in a manner different from how other assets are tested for impairment. SFAS No. 142 establishes a new method of testing goodwill for impairment by requiring that goodwill be separately tested for impairment using a fair value approach rather than an undiscounted cash flow approach. Goodwill is now tested for impairment at a level referred to as a reporting unit, generally a level lower than that of the total entity. SFAS No. 142 requires entities to perform the first goodwill impairment test by comparing the fair value with the book value of a reporting unit on all reporting units within six months of adopting the Statement. The Company determined fair value of its reporting segments, and performed initial impairment testing as prescribed in SFAS No. 142, based on commonly used financial ratios and analysis. The Company completed its initial SFAS No. 142 impairment test in the second quarter 2002 and the analysis determined that there was no goodwill impairment. The Company's fair value analysis is based on estimated reporting unit cash flows, comparable industry financial ratios and other assumptions. While the Company believes its analysis is reasonable, changes in industry conditions, geographic vessel demand, and other variables possibly affecting reporting unit cash flows, comparable financial ratios, and anticipated future performance could materially impact future SFAS No. 142 impairment analysis. Goodwill of a reporting unit shall be tested for impairment after the initial adoption of the Statement on an annual basis and b etween annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

        Since SFAS No. 142 was adopted at January 1, 2002, the Company no longer amortizes goodwill. Amortization of goodwill for the twelve months of 2001 was $2,613,163. Had the Company not amortized goodwill for the twelve months ended December 31, 2001, net loss would have been $(4.3) million. Had we not amortized goodwill for the twelve-month period ended December 31, 2001, basic and diluted earnings per share would have been $(0.12). The Company's goodwill balance as of December 31, 2002 represented approximately 15% of total Company assets and primarily relates to the December 1997 acquisition of its Norwegian subsidiary.

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 will not have a material impact on the Company’s net income, cash flows or financial position.

        Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company recorded a $5.2 impairment charge in 2002 pursuant to the provisions of SFAS No. 144.

        In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment to that Statement, FASB Statement No. 64 "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for financial statements issued for fiscal years beginning after May 15, 2002. SFAS No. 145 is not expected to affect our results of operations, liquidity or financial position except for the reclassification of extraordinary items for debt extinguishment.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this guidance include termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract, costs to terminate a contract that is not a capital lease, and costs to consolidate facilities or relocate employees. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company is currently evaluating SFAS No. 146 but does not expect it to have a material impa ct on operations, liquidity or financial position at this time.

        In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions – An Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9." The provision of this statement related to the application of the purchase method of accounting is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets are effective on October 1, 2002, with earlier application permitted. The adoption of SFAS No. 147 did not have an impact on the Company's financial position or results of operations.

        In December 2002, the FASB issued SFAS No. 148,  "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123,"  to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement also requires that those effects be disclosed more prominently by specifying the form, content and location of those disclosures. SFAS No. 148 improves the prominence and clarity of the pro forma disclosures required by SFAS No. 123 by prescribing a specific tabular format and by requiring disclosure in the Summary of Significant Accounting Policies or its equivalent. In addition, this statement improves the timeliness of those disclosures by requiring their inclusion in financial reports for interim periods. This statement is effective for financial statements for fiscal years ending after December 15, 2002 and is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002 with earlier application permitted. The Company adopted the disclosure provisions of SFAS No. 148 and presented the pro forma effects of SFAS No. 123 for fiscal years 2002, 2001 and 2000 in Note 2 to the consolidated financial statements in Item 8.

        On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies" ("FAS 5"), relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year-end. The adoption of FIN 45 for the year ended December 31, 2002 did not have an impact on the Company's financial p osition or results of operations.

        On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim o r annual period. The Company believes that the adoption of the provisions of FIN 46 will have no impact upon its financial position or results of operations.

        In June 2001, the Accounting Standards Executive Committee of the AICPA, ("AcSEC"), issued an exposure draft of a proposed Statement of Position (SOP), "Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment." This SOP provides guidance on accounting for certain costs and activities relating to property, plant, and equipment ("PP&E"). For purposes of this SOP, a project stage or timeline framework is used and PP&E assets are accounted for at a component level. Costs incurred for PP&E are classified into four stages: preliminary, preacquisition, acquisition-or-construction and in-service. The SOP requires, among other things, that preliminary, preacquisition and acquisition-or-construction stage costs, except for payments to obtain an option to acquire PP&E, should be charged to expense as incurred. Costs related to PP&E that are incurred during the in-service stage, including costs of normal, recurrin g, or periodic repairs and maintenance activities, should be charged to expense as incurred unless the costs are incurred for acquisition of additional PP&E or components of PP&E or the replacement of existing PP&E or components of PP&E. Costs of planned major maintenance activities are not a separate PP&E asset or component. Those costs should be charged to expense, except for acquisitions or replacements of components that are capitalizable under the in-service stage guidance of this SOP. The AcSEC is currently reviewing comment letters on the subject SOP and is expected to present the SOP to the Financial Accounting Standards Board by mid-year 2003. The proposed SOP is subject to change. However, if the proposed SOP is adopted in its current form, the Company will have to write-off its net capitalized deferred marine inspection costs, which totaled $20.4 million at December 31, 2002. This write-off would be accounted for as a cumulative effect of a change in accounting principle as of the beginning of the year of adoption. Further evaluation is required by the Company to fully quantify the impact of this proposed pronouncement, if adopted.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

        Our market risk exposures primarily include interest rate and exchange rate fluctuations on derivative and financial instruments as detailed below. Our market risk sensitive instruments are classified as ‘‘other than trading.’’The following sections address the significant market risks associated with our financial activities during 2002. Trico’s exposure to market risk as discussed below includes ‘‘forward-looking statements’’and represents estimates of possible changes in fair values, future earnings or cash flows that would occur assuming hypothetical future movements in foreign currency exchange rates or interest rates. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based upon actual fluctuations in foreign currency exchange rates, interest rates and the timing of transactions.

Interest Rate Sensitivity

        We have entered into a number of variable and fixed rate debt obligations, denominated in both the U.S. Dollar and the Norwegian Kroner (Norwegian debt payable in Norwegian Kroner), as detailed in Note 7 to our consolidated financial statements in Item 8. These instruments are subject to interest rate risk.

        We manage this risk by monitoring our ratio of fixed and variable rate debt obligations in view of changing market conditions and from time to time altering that ratio by, for example, refinancing balances outstanding under our variable rate bank credit facilities with fixed-rate debt or by entering into interest rate swap agreements, when deemed appropriate. As of December 31, 2002 and 2001 we had no outstanding interest rate swap contracts.

        As of December 31, 2002 and 2001, we had $116.6 million and $35.3 million, respectively, in variable rate debt. As of December 31, 2002 and 2001, the carrying value of our long-term variable rate debt, including accrued interest, was approximately $117.5 million and $35.3 million, respectively, which included our U.S. and Norwegian bank credit facilities. The fair value of this debt approximates the carrying value because the interest rates are based on floating rates identified by reference to market rates. A hypothetical 1% increase in the applicable interest rates as of December 31, 2002 and 2001 would increase annual interest expense by approximately $1.17 million and $353,000, respectively.

        As of December 31, 2002, the carrying value of our long-term fixed rate debt, including accrued interest, was $272.6 million, which included our 8.875% senior notes ($252.8 million), 6.08% MARAD bonds ($5.2 million), and 6.11% MARAD bonds ($14.6 million). As of December 31, 2001, the carrying value of our long-term fixed rate debt, including accrued interest, was $278.9 million. The fair value of our long-term fixed rate debt as of December 31, 2002 and 2001 was approximately $255.2 million and $248.7 million, respectively. Fair value was determined using discounted future cash flows based on quoted market prices, where available, on our current incremental borrowing rates for similar types of borrowing arrangements as of the balance sheet dates. A hypothetical 1% increase in the applicable interest rates would decrease the fair value of our long-term fixed rate debt as of December 31, 2002 and 2001 by approximately $17.9 million and $9.0 million, respectivel y. The hypothetical fair values are based on the same assumptions utilized in computing fair values.

Foreign Currency Exchange Rate Sensitivity

        The Company has substantial operations located outside the United States (principally the North Sea and Brazil) for which the functional currency is not the U.S. Dollar. As a result, the reported amount of the Company's assets and liabilities related to its non-U.S. operations and, therefore, the Company's consolidated net assets, will fluctuate based upon changes in currency exchange rates.

We manage foreign currency risk by attempting to contract as much foreign revenue as possible in U.S. Dollars. To the extent that our revenues in foreign countries are denominated in U.S. Dollars, changes in foreign currency exchange rates impact our earnings to the extent that costs associated with those U.S. Dollar revenues are denominated in the local currency.

        The effects of foreign currency fluctuations that we are exposed to as a result of those operations whose functional currencies are not in U.S. Dollars are partly mitigated because local expenses of our foreign operations are also generally denominated in the same currency. In order to further mitigate this risk, we may utilize foreign currency forward contracts to better match the currency of our revenues and associated costs. We do not use foreign currency forward contracts for trading or speculative purposes. The counterparties to these contracts are major financial institutions, which minimizes counterparty credit risk.

        In accordance with SFAS No. 52, "Foreign Currency Translation," all assets and liabilities of the Company's foreign subsidiaries are translated into U.S. Dollars at the exchange rate in effect at the end of the period, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of stockholders' equity. Approximately 66% of our net assets are impacted by changes in foreign currencies in relation to the U.S. dollar. We recorded a $71.5 million adjustment to our stockholders' equity account for the year ended December 31, 2002 as a result of the net increase in the value of the Norwegian Kroner and other currencies against the U.S. dollar. In 2001 we recorded a $(1.0) million adjustment to our stockholders' equity account as a result of the net decrease in the value of foreign currencies against the U.S. dollar.

        As described above, at December 31, 2002, the Company had the equivalent of $94.1 million of outstanding Norwegian Kroner-denominated indebtedness (2001- the equivalent of $35.3 million of Norwegian Kroner-denominated indebtedness). The potential increase in the U.S. Dollar equivalent of the principal amount outstanding resulting from a hypothetical 10% adverse change in exchange rates at such date would be approximately $10.5 million at December 31, 2002 (2001 - $3.9 million).







Item 8.     Financial Statements and Supplementary Data
 

The accompanying notes are an integral part of these consolidated financial statements.