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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-22853
GULFMARK OFFSHORE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0526032
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 POST OAK PARK, SUITE 1170,
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 963-9522
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
Statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
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 [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based upon the price at which the stock was sold as of March 17,
2000: $69,163,000.
Number of shares of common stock outstanding as of March 17, 2000:
8,136,830.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III Items 10,11,12 and 13 will be included
in a proxy statement to be filed pursuant to Regulation 14A, and is
incorporated herein by reference.
Exhibit Index Located on Page 44.
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TABLE OF CONTENTS
PAGE
----
PART I
Items 1.
and 2. Business and Properties..................................................................... 3
General Business....................................................................... 3
Offshore Marine Services Industry...................................................... 3
The Company............................................................................ 8
Properties............................................................................. 10
Item 3. Legal Proceedings........................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......................................... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 13
Item 6. Selected Consolidated Financial Data........................................................ 14
Item 7. Management's Discussion and Analysis of financial Condition and Results
of Operations......................................................................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................. 22
Item 8. Consolidated Financial Statements and Supplementary Data.................................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................................. 40
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 40
Item 11. Director and Executive Officer Compensation................................................. 40
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 40
Item 13. Certain Relationships and Related Transactions.............................................. 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 40
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL BUSINESS
GulfMark Offshore, Inc. (the "Company") was incorporated on December 4,
1996 under the name of "New GulfMark, Inc.," a wholly owned subsidiary of the
corporation then known as GulfMark International, Inc. (the "Predecessor"). The
Company was formed to facilitate the Predecessor's separation of its
international offshore marine services business from its only U.S. operations,
an erosion control business ("Ercon"), and its holding of common stock of Energy
Ventures, Inc. (now known as Weatherford International, Inc. ("WFT")). In order
to accomplish this separation, the Predecessor agreed to transfer the assets,
liabilities and operations of its offshore marine services business to the
Company (the "Contribution"). On April 30, 1997, the Contribution occurred and
the offshore marine services business was separated from the Predecessor through
the distribution of all of the then outstanding Common Stock of the Company to
the Predecessor's common stockholders (the "Distribution") in accordance with
the Agreement and Plan of Distribution dated December 5, 1996 (the "Distribution
Agreement") among the Company, the Predecessor and WFT. Following the
Distribution, on May 1, 1997, a subsidiary of WFT was merged (the "Merger") with
and into the Predecessor, whose assets then consisted primarily of Ercon and an
investment in WFT common stock. Immediately after the Merger, the Predecessor
ceased public trading of its common stock.
The Consolidated Financial Statements included herein present the
results of operations of Ercon and the common stock of WFT owned by the
Predecessor as discontinued operations of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 4 to the Consolidated Financial Statements of the Company.
The Company provides offshore marine services to companies involved in
offshore exploration and production of oil and natural gas. The Company's
vessels transport drilling materials, supplies and personnel to offshore
facilities, as well as move and position drilling structures. The majority of
the Company's operations is conducted in the North Sea and, with the exception
of three vessels operating offshore Brazil and one in West Africa, the balance
is conducted in Southeast Asia. Periodically, the Company will charter vessels
into other regions to meet the customers requirements. See Note 10 to the
consolidated financial statements for an analysis of these geographic regions.
The principal executive offices of the Company are located at 5 Post
Oak Park, Suite 1170, Houston, Texas 77027-3414, and its telephone number at
that address is (713) 963-9522.
THE OFFSHORE MARINE SERVICES INDUSTRY
OVERVIEW
The offshore marine services industry employs vessels to provide
services that support the construction, positioning and ongoing operation of
offshore oil and natural gas drilling rigs and platforms ("Offshore Marine
Services"). The industry employs various types of vessels, referred to broadly
as offshore support vessels, that are used to transport materials, supplies,
equipment and personnel. Offshore Marine Service providers are employed by oil
companies that are engaged in the offshore exploration and production of oil and
natural gas. Services provided by companies in this industry are performed in
numerous locations worldwide. In excess of 100 vessels are being employed in
each of the following major markets: the Gulf of Mexico, the North Sea, offshore
Southeast Asia, offshore West Africa and the Persian Gulf. Vessel usage is also
significant in other international areas, including offshore Brazil, India,
Australia and the Mediterranean Sea. The industry is relatively fragmented, with
more than 20 major participants and numerous small regional competitors.
Historically, few of these competitors have participated in all five of the
major markets. As of March 17, 2000, the Company operates a fleet of 51 offshore
support vessels, primarily in the North Sea (35 vessels) and Southeast Asia (12
vessels). Additionally, the Company operates 3 vessels offshore Brazil and one
vessel in West Africa. See Note 10 to the Consolidated Financial Statements for
further information regarding geographic regions.
The Offshore Marine Services industry is directly impacted by the level
of activity in worldwide offshore oil and natural gas exploration, development
and production, which, in turn, is impacted by changes in oil and natural gas
prices. Oil and natural gas prices are affected by a host of geopolitical and
economic forces, including the fundamental principles of supply and demand.
During the last four years, the Offshore Marine Services industry built a number
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of new vessels in anticipation of the delivery of new offshore drilling rigs.
The new drilling rigs have been delayed in their delivery while the new vessels
were delivered approximately on their original schedule, thus creating an excess
in capacity of service vessels. While there is some vessel interchangeability
between geographic regions, barriers such as mobilization costs and vessel
suitability restrict migration of excess capacity. This is most notably the case
in the North Sea, where vessel design requirements dictated by the harsh
operating environment restrict migration of vessels into that market and, to a
lesser degree, high operating costs restrict migration out of the market. The
effect of these restrictions on vessel migration is to segment various regions
into separate markets. These markets for Offshore Marine Services are affected
differently by the above-described forces because of each area's unique blend of
political, operating and economic factors.
Contract or charter durations vary from single-day to multi-year in
length, based upon many different factors that vary by market. Historically,
term charters in the Offshore Marine Services industry have generally extended
from six months to one year in length. Additionally, there have been "evergreen"
charters (also known as "life of field" or "forever" charters), and at the other
end of the spectrum, there have been "spot" charters, which can vary from single
voyage to short duration charters of less than six months. Longer duration
charters are more common where equipment is not as readily available or specific
equipment is required. In the North Sea, multi-year charters have been more
common, and the Company believes that term charters constitute the majority of
the market. Term charters in Southeast Asia are currently somewhat less common
than in the North Sea and generally are two years or shorter in length. In
addition, charters for vessels in support of floating production, storage and
offloading ("FPSO") are typically "life of field" or "full production horizon"
charters.
VESSEL CLASSIFICATIONS
Offshore support vessels generally fall into seven functional
classifications derived from their primary or predominant operating
characteristics or capabilities. However, these classifications are neither
precise nor rigid, and it is not unusual for a vessel to fit in more than one of
the categories. These functional classifications are: (i) platform supply
vessel, (ii) anchor handling, towing and supply vessel, (iii) construction
support vessel, (iv) standby rescue vessel, (v) crewboat, (vi) specialty vessel
and (vii) utility vessel.
o PLATFORM SUPPLY VESSELS ("PSVS") serve drilling and production facilities
and support offshore construction and maintenance work. They are
differentiated from other offshore support vessels by their cargo handling
capabilities, particularly their large capacity and versatility. Utilizing
space on deck and below deck, they are used to transport supplies such as
fuel, water, drilling fluids, equipment and provisions. PSVs range in size
from 150' to 200'. Large PSVs ("LgPSVs") range up to 275' and are
particularly suited for supporting large concentrations of offshore
production locations because of their large, clear after deck and below deck
capacities. The Company operates 25 LgPSVs (15 of which are owned by the
Company) that function primarily in this classification but are also capable
of service in construction support. In addition, the Company operates 1 PSVs
in the North Sea that operates exclusively in this function and 10 SmAHTS
vessels (as defined below) in Southeast Asia that often support production
operations as PSVs.
o ANCHOR HANDLING, TOWING AND SUPPLY VESSELS ("AHTS") are used to set anchors
for drilling rigs and tow mobile drilling rigs and equipment from one
location to another. In addition, these vessels typically can be used in
limited supply roles when they are not performing anchor handling and towing
services. They are characterized by large horsepower (up to 18,000 brake
horsepower ("BHP") for the most powerful North Sea Class AHTS vessels),
shorter after decks and special equipment such as towing winches. Vessels of
this type with less than 7,000 BHP are referred to as small AHTS vessels
("SmAHTS"), while AHTS vessels in excess of 10,000 BHP are referred to as
large AHTS vessels ("LgAHTS"). The Company owns 1 and operates 3 additional
AHTS vessels in the North Sea, 1 in Brazil and owns 10 SmAHTS's in Southeast
Asia. From time to time, all of the Company's AHTS vessels function as PSVs.
o CONSTRUCTION SUPPORT VESSELS are vessels such as pipelaying barges or
specially designed vessels, such as pipe carriers, used to transport the
large cargos of material and supplies required to support the construction
and installation of offshore platforms and pipelines. As indicated in the
PSV section above, the Company operates 25 vessels (15 of which are owned by
the Company) fitting the definition of pipe carriers (LgPSVs). The Company's
North Sea fleet has the distinction of being the only significant
concentration of pipe carrier capable vessels outside of Scandinavian
control.
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o STANDBY RESCUE VESSELS ("STBY") perform a safety patrol function for an area
and are required for all manned locations in the United Kingdom sector of
the North Sea. These vessels typically remain on station to provide a safety
backup to offshore rigs and production facilities and carry special
equipment to rescue personnel. They are equipped to provide first aid and
shelter and, in some cases, also function as supply vessels. The Company
owns one vessel of this type and manages 2 specialty vessels which operate
in this capacity.
o CREWBOATS ("CREW") transport personnel and cargo to and from production
platforms and rigs. Older crewboats (early 1980s build) are typically 100'
to 120' in length and are designed for speed and to transport personnel.
Newer crewboat designs are generally larger, 130' to 165' in length, and
have greater cargo carrying capacities. They are used primarily to transport
cargo on a time-sensitive basis. The Company owns one of these vessels
currently operating in Southeast Asia.
o SPECIALTY VESSELS ("SPV") generally have special features to meet the
requirements of specific jobs. The special features include large deck
spaces, high electrical generating capacities, slow controlled speed and
varied propulsion thruster configurations, extra berthing facilities and
long range capabilities. These vessels are primarily used to support FPSOs,
diving operations, ROVs, survey operations and seismic data gathering, as
well as oil recovery, oil spill response and well stimulation. Three of the
Company's owned vessels, the Highland Spirit, the Highland Sprite and the
Seapower, frequently provide specialty functions, and five managed vessels
are chartered for specialty functions (the Clwyd Supporter, the Sefton
Supporter, the Austral Horizon, the Labrador Horizon and the Aker Symphony).
o UTILITY VESSELS are typically 90' to 150' in length and are used to provide
limited crew transportation, some transportation of oilfield support
equipment and, in some locations, standby functions. The Company does not
operate any vessels in this category.
THE NORTH SEA MARKET
The Company defines the North Sea market as offshore Norway, Denmark,
the Netherlands, Germany, Great Britain and Ireland, the Norwegian Sea and the
area West of Shetlands. Historically, this has been the most demanding of all
exploration frontiers due to harsh weather, erratic sea conditions, significant
water depth and long sailing distances. Exploration and production operators in
the North Sea market are typically large and well capitalized entities (such as
major oil companies and state-owned oil companies), in large part because of the
significant financial commitment required in this market. Projects in the region
tend to be fewer in number, but larger in scope, with longer planning horizons,
than projects in regions with less demanding environments, such as the Gulf of
Mexico. Consequently, vessel demand in the North Sea has generally been steadier
and less susceptible to abrupt swings than vessel demand in other regions.
This market can be broadly divided into three areas: exploration,
production platform support and field development or construction. Support of
the volatile exploration segment of the market represents the primary demand for
AHTS vessels. While supply vessels also support the exploration segment, they
additionally support the production and field construction segments, which
generally are not affected by frequent short-term swings in demand. However,
since AHTS vessels are capable of performing in a supply role, the availability
of AHTS vessels during prolonged periods of weakness in the exploration segment,
as was experienced throughout 1999, can put downward pressure on PSV demand.
The Company's North Sea fleet is oriented toward supply vessels which
work in the more stable segments of production platform support and field
development or construction, and includes 19 owned and bareboat chartered
vessels (15 PSV's, 2 AHTS, and 2 SpV) and 16 managed vessels (8 PSV's, 3 AHTS
vessels and 5 SpVs). Onshore bases in Aberdeen, Scotland and Liverpool, England
support these vessels.
During the period of 1995-1998, the North Sea market experienced
consistently high vessel utilization rates and increasing day rates. Increased
drilling rig requirements during 1995 and 1996 led to a shortage of high
specification drilling rigs. A number of long-term drilling contracts were
signed during that period and, as demand increased in other regions, orders for
new drilling rigs were placed. Accelerated activity in construction and
development projects added to the demand for supply vessel services and by 1997
vessel demand was very strong. The positive market dynamics continued into the
first quarter of 1998. A drop in oil prices in the latter half of 1998 and into
the first quarter of 1999 resulted in significant reductions in spending plans
for 1999 and caused demand for vessel services in 1999 to fall well
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below that experienced in 1997 and 1998. The consolidation which occurred in the
upstream sector of the industry also had an adverse effect on the market for
support vessel services as both exploration and construction projects were
delayed or eliminated pending finalization of the merger activity.
The balance of supply and demand in the North Sea market will continue
to be influenced by the disposition of the new vessels brought into the market
over the last three years. Limited new construction occurred in 1990 and 1991,
and only a few vessels were delivered between 1990 and 1995. In 1995 and 1996,
the first significant construction activity since the early 1980s occurred, with
a number of orders placed for delivery in 1996 -1999. Demand for existing
vessels outside of the North Sea and the expanded role for deepwater projects in
worldwide locations left the regional fleet largely in balance through the end
of 1998; however, reduced demand and the increase in the supply of vessels from
new vessel deliveries created an imbalance which resulted in decreased
utilization and dayrates. During the first several months of 2000, there have
been as many as 10 vessels which have been mobilized from the region to other
markets as well as an increase in the demand for vessel services. As the
construction season nears in May, vessel demand should intensify which, when
coupled with a forecasted increase in the drilling rig count, will in turn place
upward pressure on vessel utilization and dayrates.
THE SOUTHEAST ASIA MARKET
The Company defines the Southeast Asia market as offshore Asia bounded
roughly on the west by the Indian subcontinent and on the north by China. This
market includes offshore Brunei, Cambodia, Indonesia, Malaysia, Myanmar, the
Philippines, Singapore, Thailand and Vietnam. The design requirements for
vessels in this market are generally similar to the requirements in the Gulf of
Mexico. However, advanced exploration technology and rapid growth in energy
demand among many Pacific Rim countries have led to more remote drilling
locations, which has increased both the overall demand in this market and the
technical requirements for vessels. The Company believes that several major
exploration and production projects, which are currently in the planning stages,
will significantly increase the future demand for Offshore Marine Services in
the Southeast Asia market.
The Southeast Asia market differs country by country, but the
competitive environment is broadly characterized by a large number of small
companies, in contrast to many of the other major offshore exploration and
production areas of the world, where a few large operators dominate the market.
Affiliations and joint ventures with local companies are generally necessary to
maintain a viable marketing presence. The Company's management has been involved
in the region since the mid-1970s, and the Company currently maintains
long-standing business relationships with a number of local companies.
Vessels in this market are typically smaller than those operating in
certain other areas, such as the North Sea. Yet, the varying weather conditions,
annual monsoons and long distances between supply centers in Southeast Asia have
allowed for a variety of vessel designs to compete in this market, each suited
for a particular set of operating parameters. Vessels designed for the Gulf of
Mexico and other areas where moderate weather conditions prevail have
historically made up the bulk of the Southeast Asian fleet. In the middle part
of the 1990s there was pressure (most notably from Malaysia) to upgrade offshore
vessel capabilities by establishing limits on the age of vessels working in
certain countries' territorial waters and encouraging construction of new
vessels designed particularly to operate in this region. This is less likely to
be a factor in vessel selection during a period of reduced expenditures, as was
experienced in 1999.
Changes in supply and demand dynamics have led to an excess number of
vessels in markets such as the Gulf of Mexico. It is possible that vessels
currently located in the Arabian/Persian Gulf area, West Africa or the Gulf of
Mexico could relocate to Southeast Asia. Not all vessels currently located in
those regions would be able to operate in Southeast Asia. Furthermore,
transferring a vessel from the Gulf of Mexico to Southeast Asia would involve a
significant cash and opportunity cost. Historically there has been some movement
between operating areas, but vessel movements have not been a major factor in
the Southeast Asia vessel market.
Indonesia is the only member of the Organization of Petroleum Exporting
Countries ("OPEC") in the region. Oil and natural gas exploration activity in
Indonesia has historically focused on oil exploration. Several large projects
have now been identified that would exploit gas reserves. Indonesian-based
operations utilize the largest number of service vessels in the region. Demand
in Indonesia has seen a number of peaks and valleys during the decade. In 1992,
demand softened as exploration activities were reduced while some of the major
oil companies renegotiated their production royalty and tax structures with
local authorities. This reversed somewhat in 1993 and 1994, as some
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agreements were reached. However, in 1995, the oil companies pressed for further
modifications to their production royalty and tax structures and reduced their
exploration budgets, resulting in lower-than-expected activity in 1995 and only
marginal improvement in 1996 and 1997. The market improved in early 1998 as part
of a general improvement throughout Southeast Asia but turned lower in 1999 as a
result of an overall worldwide slowdown in exploration and development
expenditures.
The rapid economic growth of many countries in the Pacific Rim up to
the end of 1997 resulted in increased demand for energy and a related increase
in oil and natural gas exploration. Decisions by local governments to implement
policies that will reduce dependence on energy supplies from the Middle East
stimulated additional interest in exploration in Southeast Asia. Virtually every
country in the region has known or potential reserves for oil and natural gas.
However, exploration activity suffered during 1993 and 1994, when oil prices
declined, and has been slow to recover. Exploration budgets for the region were
higher in 1997, but there has been a reduction in available drilling rigs
because rigs have been redeployed to meet demand that has accelerated faster in
other areas of the world. Activity during 1998 was quite strong despite the
economic difficulties that spread through the region during the early months of
the year. Despite reduced oil demand in Asia, vessel activity was reasonably
firm throughout the year. As oil prices fell throughout the first quarter of
1999, activity levels declined in the vessel support services market as well.
Similar to the North Sea market, although oil prices escalated from a low of $12
per barrel in March 1999 to a high of over $24 per barrel at December 31,1999,
vessel demand did not respond as exploration and development expenditures
continued to lag behind product prices. In the first quarter of 2000, the
Company secured a two-year contract for one of the newbuild vessels completed in
1999 to work for a major oil company in Indonesia. This development was
important because it marked a shift from the historical demand of the commodity
type vessels which have dominated this market in the past to newer, more
technologically advanced service vessels. The deepwater exploration sector of
this market is also showing signs of increased activity which should also
increase the demand for the newer, technologically advanced vessels.
THE BRAZILIAN MARKET
The Seapower has been operating in Brazil since 1995 under a contract
which runs into October 2002 with Petroleo Brasiliero S.A. ("Petrobras"), the
Brazilian national oil company. The Leopard Bay, an AHTS built by Sanko
Steamship Co. Ltd., ("Sanko") and bareboat chartered by the Company for three
years, began a three-year contract with Petrobras in November 1998. A third
vessel, the Highland Scout, was contracted to Petrobras in January 2000. The
Brazilian government has undertaken a program that has opened the petroleum
industry to private investment. In June 1999, the government held its first
lease sale which offered 27 blocks to outside interests, including several
blocks that had been returned by Petrobras. Of those blocks offered in the sale,
12 blocks resulted in excess of $180.0 million in signing bonuses paid by 10
companies. This first round sale is estimated to generate 20 to 30 incremental
wells to be drilled in the period beginning in the second half of 2000 which
will in turn create additional demand for vessel support services. Additional
bid rounds are planned by the Brazilian government based on the notable success
of the first round results which should generate additional drilling activity
and resultant vessel demand.
The Offshore Marine Services market in Brazil requires highly sophisticated
vessels due to the harsh operating environment. The Company has experienced
success in meeting the market requirements through owned and bareboat chartered
vessels and will look to its existing fleet to meet the expanding demand for
vessels in this important market.
THE WEST AFRICAN MARKET
During January 2000, the Company mobilized a bareboat charted vessel
from the North Sea market to Equatorial Guinea under a two-year contract with a
major international oil company. This marks the entry of the Company into this
market and is viewed as an important step by the Company to meet the growing
demand for deepwater capable vessels in the emerging West African Offshore
Marine Services market. Capital expenditures by the international oil companies
exploring off the coast of West Africa are forecast by one analyst to increase
from $6.6 billion to $8.2 billion in 2000, $8.8 billion in 2001 and $9.4 billion
in 2002 based on the discoveries made in the 1998-1999 period. The heightened
level of offshore expenditures has created an increase in the demand for vessels
to support drilling operations in this region, as evidenced by the vessel
contract awarded the Company in late 1999. It is anticipated that further demand
will be created for both AHTS's and PSV's as expenditures to further delineate
and exploit the deepwater discoveries are initiated by the international oil
companies. The Company would look to its current fleet of vessels to meet the
requirements of this market.
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THE COMPANY
THE COMPANY'S FLEET
The fleet as of March 17, 2000 includes 51 vessels, 39 of which are
capable of operating in one or more areas of the North Sea (i.e. the "North Sea
Capable" vessels as distinguished from the standard vessels) which represent the
most technologically demanding of the five major offshore markets of the world.
In total, 31 of the vessels are owned by the Company, 4 are bareboat chartered
from other owners and 16 are under management for other owners. The following
table summarizes information with respect to each of these vessels:
TYPE LENGTH BHP DWT
LOCATION VESSEL (a) FLAG BUILT (FEET) (b) (c)
- --------------------- -------------------------- --------- ---------- --------- ---------- ---------- ---------
NORTH SEA CAPABLE VESSELS
OWNED (19)
North Sea Highland Spirit SpV UK 1998 202 6,000 1,800
North Sea Highland Rover LgPSV UK 1998 236 5,450 3,200
North Sea Highland Drummer LgPSV UK 1997 221 5,450 3,115
North Sea Highland Piper LgPSV UK 1996 221 5,450 3,115
North Sea Highland Pride LgPSV UK 1992 265 6,600 3,075
North Sea Highland Star LgPSV UK 1991 265 6,600 3,075
North Sea Highland Fortress LgPSV UK 1982 255 6,120 3,200
North Sea Highland Warrior LgPSV Bermuda 1981 265 5,300 4,049
North Sea Highland Champion LgPSV UK 1979 265 4,800 3,910
North Sea Highland Legend PSV UK 1986 194 3,590 1,442
North Sea Highland Sprite SpV UK 1986 194 3,590 1,442
North Sea North Prince LgPSV UK 1978 259 6,000 2,717
North Sea Skandi Hawk LgPSV Norway 1990 265 6,600 4,000
North Sea Skandi Fortune LgPSV Norway 1983 264 6,120 3,366
North Sea North Crusader AHTS Norway 1984 236 12,000 2,064
North Sea North Challenger LgPSV Norway 1997 221 5,450 3,115
North Sea Highland Pioneer LgPSV UK 1983 224 5,400 2,500
Southeast Asia Highland Guide LgPSV US 1999 218 4,640 2,800
Brazil Highland Scout LgPSV US 1999 218 4,640 2,800
CHARTERED (4)
North Sea Mercury Bay LgPSV Bermuda 1998 221 5,450 3,115
W. Africa Monarch Bay LgPSV Bermuda 1998 221 5,450 3,115
Brazil Leopard Bay AHTS Bermuda 1998 241 15,000 2,900
North Sea Torm Heron (d) AHTS Bermuda 1999 241 15,000 2,900
MANAGED (16)
Worldwide Austral Horizon SpV Panama 76/98 297 4,400 1,641
Worldwide Aker Symphony SpV Bahamas 88/99 394 7,390 6,700
Worldwide Labrador Horizon SpV Bahamas 1983 264 6,960 3,060
North Sea Clwyd Supporter SpV UK 1984 266 10,700 1,400
North Sea Sefton Supporter SpV UK 1971 250 1,620 1,233
North Sea Portosalvo AHTS UK 1982 227 12,720 2,075
North Sea Sea Truck LgPSV UK 1979 266 4,600 2,477
North Sea Safe Truck LgPSV UK 1996 221 5,450 3,115
North Sea Torm Kestrel LgPSV Bermuda 1998 221 5,450 3,115
North Sea Torm Osprey AHTS UK 1999 241 15,000 2,900
North Sea Torm Eagle AHTS UK 1999 241 15,000 2,900
North Sea Gargano LgPSV UK 1999 236 5,450 3,200
North Sea Waveny Castle LgPSV UK 1999 221 5,450 3,115
North Sea Waveny Fortress LgPSV UK 1999 221 5,450 3,115
North Sea Ace Nature LgPSV Bermuda 1999 276 9,600 5,425
North Sea Ace Navigator LgPSV Bermuda 1999 276 9,600 5,425
OTHER VESSELS
OWNED (12)
Southeast Asia Sem Courageous SmAHTS Malaysia 1981 191 4,000 1,000
Southeast Asia Sem Valiant SmAHTS Malaysia 1981 191 4,000 1,000
Southeast Asia Seawhip SmAHTS Panama 1983 192 3,900 1,200
Southeast Asia Seawitch SmAHTS Panama 1983 192 3,900 1,200
Southeast Asia Sea Explorer SmAHTS Panama 1981 192 5,750 1,420
Southeast Asia Sea Diligent SmAHTS Panama 1981 192 4,610 1,219
Southeast Asia Sea Endeavor SmAHTS Panama 1981 191 4,000 1,000
Southeast Asia Sea Conquest SmAHTS Panama 1977 185 3,850 1,142
Southeast Asia Sea Searcher SmAHTS Panama 1976 185 3,850 1,215
Southeast Asia Sea Eagle SmAHTS Panama 1976 185 3,850 1,215
Southeast Asia Searunner Crew Panama 1982 120 2,720 126
Brazil Seapower SpV Panama 1974 222 7,040 1,205
(a) Legend:
LgPSV - Large platform supply vessel
PSV - Platform supply vessel
AHTS - Anchor handling, towing and supply vessel
SmAHTS - Small anchor handling, towing and supply vessel
Crew - Crewboat
SpV - Specialty vessel, including towing and oil spill response
(b) Brake horsepower.
(c) Deadweight tons.
(d) Operated pursuant to 50/50 joint venture agreement with Torm U.K. Limited.
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CUSTOMERS, CHARTER TERMS AND COMPETITION
The Company's principal customers are major integrated oil companies
and large independent oil and natural gas exploration and production companies
working in international markets, as well as foreign government owned or
controlled organizations and companies that provide logistic, construction and
other services to such oil companies and foreign government organizations.
During 1999, under multiple charters in the ordinary course of business, two
customers each accounted for 10% or more of total consolidated revenues:
Aberdeen Services Company ( North Sea) ("ASCO") at 15.2% and Allseas Marine
Contractors S.A. ("Allseas") at 12.8%. ASCO is a logistics coordinator primarily
serving major international oil companies while Allseas is an international
marine construction company. The charters with both of these customers are
industry standard time charters involving several of the Company's vessels for
periods ranging from a few days or months to three years. The charters are
generally not cancelable except for unsatisfactory performance by the vessel.
The loss of a major customer could have a material adverse effect on the
Company's financial condition and results of operations until a replacement is
obtained.
Substantially all of the Company's charters are fixed in Sterling,
Norwegian Kroner and U.S. dollars. The Company reduces currency risk by matching
each vessel's operating expenses to the currency in which it generates revenue.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Currency Fluctuations and Inflation."
Offshore Marine Services companies compete principally on the basis of
suitability of equipment, price and service. Also, in certain foreign countries,
preferences are given to vessels owned by local companies. The Company has
attempted to mitigate some of the impact of such preferences through
affiliations and joint ventures with local companies.
The Company competes with approximately 15-20 similar companies in the
North Sea market and numerous small and large competitors in the Southeast Asia
market. Some of these competitors have significantly greater financial resources
than the Company.
FLEET AVAILABILITY
As of March 17, 2000, 8 of the Company's 35 owned and bareboat
chartered vessels were on term charters extending one year or longer, 9 were on
charters of less than one year but over 30 days, 11 were on charters of less
than 30 days, 5 were idle and 2 were in layup.
ENVIRONMENTAL AND GOVERNMENT REGULATION
All of the Company's vessels are subject to various international
conventions, including certain safety, environmental and construction standards.
Among the more significant of the conventions applicable to the fleet are: (i)
the International Convention for the Prevention of Pollution of the Sea, 1973,
1979 Protocol, (ii) the International Convention on the Safety of Life at Sea,
1974, 1978 and 1981/1983 Protocol, and (iii) the International Convention on
Standards of Training, Certification and Watchkeeping for Seafarers. These
regulations govern oil spills and other matters of environmental protection,
worker health and safety and the manning, construction and operation of vessels.
The Company believes that it presently is in substantial compliance with the
environmental laws and regulations to which the Company's operations are
subject. In addition, the countries under which the vessels are flagged require
certain periodic inspections and drydock examinations. Generally, surveys and
inspections are performed by internationally recognized classification
societies. Most of the owned vessels are flagged in Panama, Norway, the United
Kingdom or Malaysia. The Company is not a party to any pending environmental
litigation or other proceeding, and is unaware of any threatened environmental
litigation or proceeding which, if adversely determined, would have a material
adverse effect on the financial condition or results of operations of the
Company. However, the risks of incurring substantial compliance costs and
liabilities and penalties for noncompliance are inherent in Offshore Marine
Service operations. There can be no assurance that significant costs,
liabilities, and penalties will not be incurred by or imposed on the Company in
the future.
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OPERATIONAL RISKS AND INSURANCE
The operation of offshore support vessels is subject to various risks,
such as catastrophic marine disasters, adverse weather conditions, mechanical
failures, collisions, oil and hazardous substance spills and navigation errors,
all of which represent a threat to the safety of personnel and to the Company's
vessels, cargo, equipment and other property, as well as the environment. All of
the Company's operations are in foreign waters and, as such, are subject to the
usual risks inherent in doing business in foreign countries. Such risks include
political instability, possible vessel seizure, nationalization of assets,
currency restrictions, exchange rate fluctuations, import/export quotas and
other forms of public and governmental regulation, all of which are beyond the
control of the Company. The occurrence of any of these events could result in
loss of revenue, casualty loss, increased costs or significant liability to
third parties.
The Company maintains insurance coverage against the casualty and
liability risks listed. Management considers coverage to be adequate based on
industry standards and the value of the fleet, including hull and machinery
insurance for the vessels, protection and indemnity insurance against
liabilities to employees and third parties for injury, damage or pollution and
other customary insurance. The Company has not in the past experienced a loss in
excess of policy limits. There can be no assurance, however, that such insurance
coverage will be adequate to cover losses that the Company may incur or that
adequate insurance at rates that the Company considers commercially reasonable
will continue to be available.
SEASONALITY OF BUSINESS
The operations of the fleet are subject to seasonal factors. Operations
in the North Sea are generally at their highest level during the months from
April to August and at their lowest levels during November to February. Vessels
operating in Southeast Asia are generally at their lowest utilization rates
during the monsoon season, which moves across the Asian continent between
September and early March. The actual monsoon season for a specific Southeast
Asian location is about two months. In addition, operations in any market may be
affected by unusually long or short construction seasons due to, among other
things, abnormal weather conditions.
EMPLOYEES
At December 31, 1999, the Company had 912 employees located in the
United States, the United Kingdom, Norway, Southeast Asia and Brazil. Through
its contract with a crewing agency, the Company participates in collective
bargaining arrangements with 687 employees working on its North Sea vessels
under agreements covering one-to-two year periods. The Company has no other
collective bargaining agreements. Relations with the employees are considered
satisfactory. To date, the operations of neither the Company nor its Predecessor
have been interrupted by strikes or work stoppages.
PROPERTIES
The principal executive offices for the Company are located in Houston,
Texas, while operations are headquartered in Lafayette, Louisiana. For local
support, the Company has offices and warehouse facilities in Singapore and
Aberdeen, Scotland. All facilities except the one in Aberdeen, Scotland are
under lease. The Company's operations generally do not require highly
specialized facilities, and suitable facilities are generally available on a
lease basis as required.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
Various legal proceedings and claims that arise in the ordinary course
of business may be instituted or asserted against the Company relating to the
Offshore Marine Services operations. Additionally, the Company may be subject to
claims for indemnification by the Predecessor and WFT pursuant to the Company's
indemnity obligations under the indemnities described below under "Distribution
Agreement Obligation and Indemnities." Although the outcome of litigation cannot
be predicted with certainty, management believes, based on discussions with its
legal counsel and in consideration of reserves recorded, that the outcome of
these legal actions will not have a material adverse effect upon the
consolidated financial position and results of operations of the Company. The
Company cannot predict whether any such claims may be made in the future.
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DISTRIBUTION AGREEMENT OBLIGATIONS AND INDEMNITIES
Indemnification Obligations to WFT. The Company has agreed under the
Distribution Agreement to indemnify, defend and hold the Predecessor, WFT and
their respective officers, directors, employees, agents and assigns harmless
from and against any and all liabilities or environmental liabilities
(including, without limitation, reasonable fees and expenses of attorneys,
accountants, consultants and experts) that such parties incur, are subject to a
claim for, or are subject to, that are based upon, arising out of, relating to
or otherwise in respect of: (i) any breach of any covenant or agreement of the
Company contained in the Distribution Agreement or any other agreement
contemplated thereby; (ii) the acts or omissions of the Predecessor or any of
its current or past subsidiaries or affiliated companies ("Predecessor
Companies"), including Ercon, on or before the effective time of the
Distribution; (iii) the acts or omissions of any Predecessor Company (other than
Ercon), the Company or any of the Company's affiliates or the conduct of any
business by them on or after the effective time of the Distribution; (iv) the
Assumed Liabilities (as defined below) under the Distribution Agreement; (v) the
assets being contributed to the Company, regardless of the Predecessor's or any
Predecessor Company's prior use of any such asset; (vi) the conveyance,
assignment, sale, lease or making available of such assets; (vii) the
conveyance, assignment, sale, merger or contribution of the stock or share
capital or assets of Ercon to the Predecessor; (viii) any taxes as a result of
the Contribution, the Distribution or the Merger subsequently being determined
to be a taxable transaction for foreign, Federal, state or local law purposes,
regardless of the theory or reason for the transactions being subject to tax;
(ix) any and all amounts for which the Predecessor or WFT may be liable on
account of any claims, administrative charges, self-insured retentions,
deductibles, retrospective premiums or fronting provisions in insurance
policies, including as the result of any uninsured period, insolvent insurance
carriers or exhausted policies, arising from claims by the Predecessor's or any
Predecessor Company's affiliates, or the employees of any of the foregoing, or
claims by insurance carriers of the Predecessor or any Predecessor Company for
indemnity arising from or out of claims by or against the Predecessor or any
Predecessor Company for acts or omissions of the Predecessor or any Predecessor
Company, or related to any current or past business of the Predecessor or any
Predecessor Company or any product or service provided by the Predecessor or any
Predecessor Company in whole or part prior to the effective time of the
Distribution; (x) any liability under the Consolidated Omnibus Budget
Reconciliation Act of 1986 with respect to any employees of the Predecessor or
any Predecessor Company who become employees of the Company after the
Distribution; (xi) any settlements or judgments in any litigation commenced by
one or more insurance carriers against the Predecessor or WFT on account of
claims by the Company or any Predecessor Company or employees of the Company or
any Predecessor Company; (xii) any and all liabilities incurred by the
Predecessor or WFT pursuant to its obligations hereunder in seeking to obtain or
obtaining any consent or approval to assign, transfer or lease any interest in
any asset or instrument, contract, lease, permit or benefit arising thereunder
or resulting therefrom; (xiii) any liability relating to the failure to comply
with any bulk sales or transfer laws in connection herewith or with any of the
other agreements contemplated hereby; (xiv) the on-site or off-site handling,
storage, treatment or disposal of any Waste Materials (as defined below)
generated by the Predecessor or any Predecessor Company on or prior to the
effective time of the Distribution or any Predecessor Company (other than Ercon)
at any time; (xv) any and all Environmental Conditions (as defined below) on or
prior to the effective time of the Distribution, known or unknown, existing on,
at or underlying any of the properties owned, leased or operated by the
Predecessor or Ercon on or after the effective time of the Distribution; (xvi)
any and all Environmental Conditions, known or unknown, existing on, at or
underlying any of the properties currently or previously owned or operated by
the Predecessor or any Predecessor Company other than the properties owned,
leased or operated by the Predecessor or Ercon after the effective time of the
Distribution; (xvii) any acts or omissions on or prior to the effective time of
the Distribution of the Predecessor or any Predecessor Company relating to the
ownership or operation of the business of the Predecessor or any Predecessor
Company or the properties currently or previously owned or operated by the
Predecessor or any Predecessor Company; (xviii) any liability relating to any
claim or demand by any stockholder of the Predecessor or WFT with respect to the
Contribution, the Distribution, the Merger or the transactions relating thereto;
and (xix) any liability relating to the Predecessor's 401(k) Plan and the other
employee benefit or welfare plans of the Predecessor or any Predecessor Company
arising out of circumstances occurring on or prior to the effective time.
Covenants of the Company Relating to the WFT Indemnification. The
Company agreed in the Distribution Agreement that it will not, and will cause
its subsidiaries not to, merge, convert into another entity, engage in a share
exchange for a majority of its shares, liquidate or transfer, assign or
otherwise convey or allocate, directly or indirectly, in one or more
transactions, whether or not related, a majority of the Company's assets
(determined in good faith by a board resolution prior to the transaction on a
fair value and consolidated basis) to any person unless the acquiring person (i)
expressly assumes the obligations of the Company under the Distribution
Agreement, (ii) executes and delivers to the Predecessor and WFT an agreement
agreeing to be bound by each and every provision of the
11
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Distribution Agreement as if the acquiring person were the Company and (iii) has
a net worth on a pro forma basis after giving effect to the acquisition or
business combination equal to or greater than that of the Company (on a
consolidated basis).
Certain Definitions Under the Distribution Agreement. For purposes of
the Distribution Agreement, the following terms have the following meanings:
"Assumed Liabilities" means any and all liabilities and environmental
liabilities other than the Predecessor Retained Liabilities (as defined below)
to which the Predecessor or any of the assets being contributed to the
Predecessor may now or at any time in the future become subject (whether
directly or indirectly, including by reason of the Predecessor or any
Predecessor Company, excluding Ercon, owning, controlling or operating any
business or assets of any person (including any current or past affiliate)),
resulting from, arising out of or relating to (i) any Predecessor Company, (ii)
any taxes to which the Predecessor or any Predecessor Company may be obligated
for periods ending on or before the effective time of the Distribution, (iii)
any obligation, matter, fact, circumstance or action or omission by any person
in any way relating to or arising from the business, operations or assets of the
Predecessor or Ercon that existed on or prior to the effective time of the
Distribution, (iv) any product or service provided by the Predecessor or any
Predecessor Company prior to the effective time of the Distribution, (v) the
Contribution, the Distribution, the Merger or any of the other transactions
contemplated by the Distribution Agreement, (vi) previously conducted operations
of the Predecessor or any Predecessor Company or (vii) the assets contributed to
the Company.
"Environmental Conditions" means any pollution, contamination,
degradation, damage or injury caused by, related to, arising from or in
connection with the generation, handling, use, treatment, storage,
transportation, disposal, discharge, release or emission of any Waste Materials.
"Environmental Laws" means all laws, rules, regulations, statutes,
ordinances, decrees or orders of any governmental entity now or at any time in
the future in effect relating to (i) the control of any potential pollutant or
protection of the air, water or land, (ii) solid, gaseous or liquid waste
generation, handling, treatment, storage, disposal or transportation and (iii)
exposure to hazardous, toxic or other substances alleged to be harmful. The term
"Environmental Laws" includes, without limitation, (1) the terms and conditions
of any license, permit, approval or other authorization by any governmental
entity and (2) judicial, administrative or other regulatory decrees, judgments
and orders of any governmental entity. The term "Environmental Laws" includes,
but is not limited to the following statutes and the regulations promulgated
thereunder: the Clean Air Act, 42 U.S.C. sec. 7401 et seq., the Clean Water Act,
33 U.S.C. sec. 1251 et seq., the Resource Conservation Recovery Act, 42 U.S.C.
sec. 6901 et seq., the Superfund Amendments and Reauthorization Act, 42 U.S.C.
sec. 11011 et seq., the Toxic Substances Control Act, 15 U.S.C. sec. 2601 et
seq., the Water Pollution Control Act, 33 U.S.C. sec. 1251, et seq., the Safe
Drinking Water Act, 42 U.S.C. sec. 300f et seq., the Comprehensive Environmental
Response, Compensation, and Liability Act, 42 U.S.C. sec. 9601, et seq., and any
state, county or local regulations similar thereto.
The "Predecessor Retained Liabilities" means, and is limited solely to,
(i) accounts payable relating to the business of Ercon that are reflected on the
balance sheet of the Predecessor at the effective time of the Distribution, (ii)
accounts payable reflected on the balance sheet of the Predecessor at the
effective time of the Distribution and agreed to by WFT and (iii) the
obligations of the Predecessor and Ercon that arise after the effective time of
the Distribution (other than obligations relating to matters existing or
occurring on or prior to the effective time of the Distribution and
indemnification, warranty and product liability, wrongful death or property
claims associated with actions or omissions prior to the effective time of the
Distribution or any business conducted prior to the effective time of the
Distribution), including those obligations set forth under the express terms of
the contracts of the Predecessor relating to the operations of Ercon.
"Waste Materials" means any (i) toxic or hazardous materials or
substances, (ii) solid wastes, including asbestos, polychlorinated biphenyls,
mercury, buried contaminants, chemicals, flammable or explosive materials, (iii)
radioactive materials, (iv) petroleum wastes and spills or releases of petroleum
products and (v) any other chemical, pollutant, contaminant, substance or waste
that is regulated by any governmental entity under any Environmental Law (as
defined above).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "GMRK." The following table sets forth the range of high and
low sales prices for the Company's Common Stock for the periods indicated, as
reported on the Nasdaq National Market.
1999 1998
---------------------- ----------------------
High Low High Low
--------- --------- --------- --------
Quarter ended March 31.............. $ 19.88 $ 11.56 $ 33.50 $ 18.00
Quarter ended June 30............... $ 19.00 $ 12.00 $ 38.00 $ 22.63
Quarter ended September 30.......... $ 22.38 $ 16.00 $ 25.00 $ 11.75
Quarter ended December 31........... $ 18.38 $ 10.50 $ 19.25 $ 10.25
For the quarter ended March 31, 2000 (through March 17, 2000), the
range of high and low sales prices was $21.50 and $11.50, respectively. On March
17, 2000, the closing sale price of the Company's Common Stock as reported by
the Nasdaq National Market was $21.31 per share. As of March 17, 2000, there
were 982 shareholders of record.
The Company has not declared or paid dividends during the past five
years. Pursuant to the terms of the indenture under which the Notes (as
hereinafter defined) are issued, the Company may be restricted from declaring or
paying dividends; however, the Company currently anticipates that, for the
foreseeable future, any earnings will be retained for the development of the
Company's business. The declaration of dividends is at the discretion of the
Company's Board of Directors. The Company's dividend policy will be reviewed by
the Board of Directors at such time as may be appropriate in light of future
operating conditions, dividend restrictions of subsidiaries and investees,
financial requirements, general business conditions and other factors.
13
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The Consolidated Financial Statements included herein, as well as the
financial data presented in the table following, present the net assets and
results of operations of Ercon and the common stock of WFT owned by the
Predecessor as discontinued operations of the Company for all periods presented.
The data that follows should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included in Item 8 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenues ..................................... $ 72,258 $ 86,194 $ 46,019 $ 34,749 $ 27,233
Direct operating expenses .................... 41,216 34,102 18,231 16,178 15,386
General and administrative expenses .......... 6,087 5,718 5,364 4,523 3,483
Depreciation and amortization ................ 12,420 11,345 6,711 5,013 5,472
---------- ---------- ---------- ---------- ----------
Operating income ............................. 12,535 35,029 15,713 9,035 2,892
Gain on sale of assets ....................... -- 2,930 -- -- --
Interest expense, net ........................ (9,501) (8,208) (3,819) (3,467) (2,613)
Loss from unconsolidated venture ............. (865) -- -- -- --
Other income (expense), net .................. -- (146) (73) (86) 180
Income tax provision ......................... (308) (8,816) (3,626) (1,839) (91)
---------- ---------- ---------- ---------- ----------
Income from continuing operations ............ 1,861 20,789 8,195 3,643 368
Income (loss) from discontinued
operations, net of taxes ................ -- -- (648) 4,796 (2,270)
Loss on disposal of segment, net of taxes .... -- -- (1,426) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) ............................ $ 1,861 $ 20,789 $ 6,121 $ 8,439 $ (1,902)
========== ========== ========== ========== ==========
Earnings per share from continuing
operations (basic) ...................... $ 0.23 $ 2.58 $ 1.15 $ 0.55 $ 0.06
Weighted average common shares (basic) ....... 8,129 8,047 7,155 6,676 6,644
Earnings per share from continuing
operations (diluted) (a) ................ $ 0.22 $ 2.52 $ 1.11 $ 0.54 $ 0.06
Weighted average common shares
(diluted) (a) ........................... 8,271 8,255 7,413 6,782 6,703
STATEMENT OF CASH FLOWS DATA:
Cash provided by (used in) operating
activities of continuing operations ..... $ 16,376 $ 32,471 $ 19,112 $ 8,539 $ 6,389
Cash provided by (used in) investing
activities .............................. (19,739) (62,142) (37,218) (24,493) (15,093)
Cash provided by (used in) financing
activities .............................. 46 36,475 28,658 17,894 9,567
Effect of exchange rate changes on cash ...... (40) (682) (541) 924 (160)
OTHER DATA:
EBITDA (b) ................................... $ 24,955 $ 46,374 $ 22,424 $ 14,048 $ 8,364
Cash dividends per share ..................... -- -- -- -- --
Total vessels in fleet (c) ................... 51 38 30 28 22
Average number of owned or chartered
vessels(d) .............................. 31.8 28.7 23.0 18.3 15.0
AS OF DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ----------- ---------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 28,650 $ 32,007 $ 25,885 $ 17,234 $ 5,136
Vessels and equipment, net...................... 195,358 192,615 105,262 87,405 61,343
Net assets of discontinued operations (e)....... -- -- -- 14,837 19,275
Total assets including discontinued
operations................................. 270,582 271,369 154,661 131,307 94,179
Total assets excluding discontinued
operations................................. 270,582 271,369 154,661 116,470 74,904
Long-term debt (f).............................. 130,128 130,136 42,918 50,811 33,600
Total stockholders' equity excluding
discontinued operations (g)................ 104,678 108,490 85,272 47,179 31,653
- -------------------------
(a) Earnings per share is based on the weighted average number of shares of
Common Stock and common stock equivalents outstanding.
(b) As used herein, EBITDA is operating income plus depreciation and
amortization. EBITDA may be used by management of the Company as a
supplemental financial measurement in the evaluation of its business and in
establishing its capital budget and should not be considered as an
alternative to net income, as an indicator of the operating performance of
the Company, as an alternative to cash flows or as a measure of liquidity.
Because EBITDA is not uniformly calculated among and across industry
groups, this measure may not be comparable to similarly titled measures
reported by other companies. EBITDA is presented here to provide additional
information about the Company.
(c) Includes managed vessels in addition to those that are owned and chartered.
See pages 4 and 9 for further information concerning the Company's fleet.
(d) Includes owned and chartered vessels only. Adjusted for additions and
dispositions occurring during each period. See pages 4 and 9 for further
information concerning the Company's fleet.
(e) Reflects the financial statement information for the non-marine businesses
of the Company's Predecessor.
(f) Excludes current portion of long-term debt.
(g) Discontinued operations were disposed of on May 1, 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information should be read in conjunction with the Company's
Consolidated Financial Statements, including the notes thereto, contained
herein. See also "Selected Consolidated Financial Data."
GENERAL
The Company was incorporated on December 4, 1996 under the name of "New
GulfMark, Inc.," a wholly owned subsidiary of the Predecessor. The Company was
formed to facilitate the Predecessor's separation of its international Offshore
Marine Services business from its only U.S. business operation, Ercon, and its
large holding of common stock of WFT. In order to accomplish this separation,
the Predecessor agreed to transfer the assets, liabilities and operations of its
Offshore Marine Services business to the Company. On April 30, 1997, the
Contribution occurred, and the Offshore Marine Services business was separated
from the Predecessor through the distribution of all of the then outstanding
common stock of the Company to the Predecessor's common stockholders in
accordance with the Distribution Agreement. Following the Distribution, on May
1, 1997, a subsidiary of WFT was merged with and into the Predecessor, whose
assets then consisted principally of Ercon and its investment in WFT common
stock. Immediately after the Merger, the Predecessor ceased public trading of
its common stock.
In connection with the Distribution, two shares of the Company's Common
Stock were issued for each share of the Predecessor common stock. Also, in
connection with the Merger, the Predecessor's stockholders received shares of
WFT common stock. See Note 4 to the Consolidated Financial Statements.
The Company's operations consist of the Offshore Marine Services
business, which represents over half of the assets, revenues and operating
income of the businesses, operations and companies previously constituting the
Predecessor. Consequently, the following Management's Discussion and Analysis of
Financial Condition and Results of Operations, and the Consolidated Financial
Statements included elsewhere herein, present the results of operations of Ercon
and the common stock of WFT owned by the Predecessor as discontinued operations
of the Company for all periods presented. See Note 4 to the Consolidated
Financial Statements.
Unless otherwise indicated, references to "GulfMark" or the "Company"
are (i) for all periods through April 30, 1997, the effective date of the
Contribution and Distribution, to the Predecessor and its consolidated
subsidiaries (treating Ercon and the investment in WFT as discontinued
operations for all periods), and (ii) for all periods subsequent to April 30,
1997, to GulfMark Offshore, Inc. and its consolidated subsidiaries.
The Company provides marine support and transportation services to
companies involved in the offshore exploration and production of oil and natural
gas. The Company's vessels transport drilling materials, supplies and personnel
to offshore facilities, as well as move and position drilling structures. The
majority of its operations is conducted in the North Sea and, with the exception
of three vessels operating in Brazil and one in West Africa, the balance of the
Company's operations conducted in Southeast Asia. The Company's fleet has grown
in size and capability from an original 11 vessels acquired in late 1990 to its
present level of 51 vessels through strategic acquisitions and new construction
of technologically advanced vessels, partially offset by dispositions of certain
older, less profitable vessels. Of the vessels in GulfMark's fleet, 31 are
owned, 4 are bareboat chartered from other owners and 16 are managed.
The Company's results of operations are affected primarily by day
rates, fleet utilization and the number and type of vessels in its fleet. These
factors are driven by trends within the oil and natural gas exploration and
production industry, which generally affect the demand for vessels, as well as
by trends impacting the broader economy and capital markets, which generally
affect the supply of vessels. While offshore support vessels service existing
oil and natural gas production platforms and exploration and development
activities, incremental demand depends primarily upon drilling activity, which,
in turn, is related to both short-term and long-term trends in oil and natural
gas prices. As a result, trends in oil and natural gas prices may significantly
affect fleet utilization and day rates. There were significant declines in oil
and gas prices during 1998 followed by equally significant increases subsequent
to the first quarter of 1999. Although commodity prices have increased further
in the first three months of 2000, exploration and development expenditures are
just beginning to rebound from the lower levels experienced in the 1989-1999
period.
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16
The volatility of prices will continue to affect the planning for future oil and
gas exploration and development expenditures and the consequent demand for the
Company's vessels.
An additional factor affecting operating earnings is the mix of vessels
owned versus bareboat chartered by the Company. Owned and bareboat chartered
vessels generate operating revenues and may incur expenses at similar rates.
However, chartered vessels also incur bareboat charter hire expense instead of
depreciation expense, which is generally less than charter hire expense.
In addition, the Company provides management services to other vessel
owners for a fee. Charter revenues and vessel expenses of such vessels are not
included in the Company's operating results, but management fees are included in
operating revenues. These vessels and a standby rescue vessel that was chartered
by the Company through December 31, 1996, have been excluded for purposes of
calculating fleet rates per day worked and utilization in the applicable years.
The Company's operating costs are primarily a function of fleet size
and utilization levels. The most significant direct operating costs are wages
paid to vessel crews, maintenance and repairs and marine insurance. Generally,
fluctuations in vessel utilization affect only that portion of the Company's
direct operating costs that is incurred when the vessels are active. As a
result, direct operating costs as a percentage of revenues may vary
substantially due to changes in day rates and utilization.
In addition to these variable costs, the Company incurs fixed charges
related to the depreciation of its fleet and costs for routine drydock
inspections and maintenance and repairs designed to ensure compliance with
applicable regulations and to maintain certifications for its vessels with
various international classification societies. Maintenance and repair expenses
and marine inspection amortization charges are generally determined by the
aggregate number of drydockings and other repairs undertaken in a given period.
Costs incurred for drydock inspection and regulatory compliance are capitalized
and amortized over the period between such drydockings, typically two to three
years.
Under applicable maritime regulations, vessels must be drydocked twice
in a five-year period for inspection and routine maintenance and repair. Should
the Company undertake a large number of drydockings in a particular fiscal
period, comparative results may be affected. For the year ended December 31,
1999, the Company completed the drydocking of 10 vessels at an aggregate cost of
$2.6 million, versus 6 vessels drydocked at an aggregate cost of $1.3 million in
1998 and 14 vessels at an aggregate cost of approximately $4.0 million in 1997.
Over the last several years, the Company has been actively expanding its
fleet by the construction of new vessels, by the acquisition of existing
equipment from the resale market and by bareboat chartering vessels owned by
others. Owned or chartered newbuilds added to the fleet during the past three
years as well as those currently under construction are as follows:
VESSEL DELIVERY DATE
o Highland Drummer (owned) January 1997
o Highland Rover (owned) March 1998
o Leopard Bay (chartered) June 1998
o Mercury Bay (chartered) July 1998
o Monarch Bay (chartered) October 1998
o Highland Spirit (owned) November 1998
o Torm Heron (chartered) May 1999
o Highland Guide (owned) August 1999
o Highland Scout (owned) September 1999
Total expenditures made for the construction of vessels during the years
ended December 31, 1999, 1998 and 1997 were $10.9 million, $37.4 million, and
$23.2 million, respectively. The Company has no new vessels under construction
at March 17, 2000.
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17
The following list indicates the owned or chartered vessels that were added
to the fleet from the resale market in the past three years:
VESSEL ACQUISITION DATE
o North Prince (owned) February 1998
o Skandi Hawk (owned) February 1998
o Skandi Fortune (owned) February 1998
o North Crusader (owned) February 1998
o North Challenger (owned) February 1998
o Highland Pioneer (owned) December 1999
The five vessels acquired in 1998 resulted from the Brovig acquisition for
a total cost of approximately $73 million, including debt assumed.
RESULTS OF OPERATIONS
COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998.
The year 1999 continued to be affected by the volatility of oil and gas
prices as oil prices, in particular, began to recover in the first several
months of the year, fell back in March and then exhibited a prolonged increase
through the end of the year and into the first three months of 2000. Exploration
and development expenditures, however, did not recover as consolidation within
the industry and a concern over the sustainability of higher pricing caused
companies to delay or cancel both construction and exploration programs. The
Company had a relatively strong level of contract cover for the fleet at the
beginning of the year, which resulted in utilization and dayrates at levels
providing net income during the first three quarters. It became evident,
however, that as the vessels completed their contracts, the market had
deteriorated thus resulting in lower dayrates and utilization for the fourth
quarter of 1999 which caused the Company to report a loss for this period. There
has been improvement in the markets for the Company's vessels during the first
three months of 2000; however, there can be no assurance that this improvement
will continue throughout the balance of the year.
The Company continued to increase the size of its fleet during 1999 as
three owned vessels and one bareboat chartered vessel were added during the
year. The Highland Guide and Highland Scout, newbuild vessels completed during
the third quarter of the year, were able to secure a two-year contract in
Southeast Asia and up to an eight-month contract in Brazil, respectively. The
Highland Pioneer, a vessel which had been previously managed by the Company, was
acquired in December 1999 and immediately entered into a five-year contract in
Liverpool Bay, U.K. for an international oil company. The Torm Heron, a newbuild
vessel built for Sanko Steamship Co. Ltd. ("Sanko") and operated by the Company
under a joint venture agreement with Sanko, entered the fleet in May 1999 and
has been operating in the North Sea spot market since inception.
The Company recognized net income of $1.9 million in 1999 compared to net
income of $20.8 million in 1998. Revenues decreased $13.9 million and operating
income decreased $22.5 million from 1998 to 1999. The decrease in revenue was
directly attributable to the lower average dayrate and decreased utilization
experienced in the Company's major markets during 1999 compared to 1998.
Partially offsetting the effects of these lower dayrates and utilization were
increased revenues derived from the full year impact of vessels added throughout
1998 and the Brovig acquisition. Operating expenses increased $7.1 million
compared to 1998 primarily due to the full year effect of bareboat charter
expense associated with the three bareboat chartered vessels and the increased
costs of operating the expanded fleet. Depreciation expense increased $1.1
million as a result of the full year impact of the increased fleet size. The
following summarizes dayrates, utilization and average vessels owned or
chartered for the Company's fleet of vessels:
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18
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
INCREASE
1999 1998 (DECREASE)
-------------- -------------- --------------
Rates Per Day Worked (a) (b):
North Sea Capable Fleet (c)............ $ 9,752 $12,068 $ (2,316)
Other (Primarily Southeast Asia)....... 4,203 4,859 (656)
Overall Utilization (a) (b):
North Sea Capable Fleet (c)............ 85.3% 97.8% (12.5)%
Other (Primarily Southeast Asia)....... 66.8% 84.6% (17.8)%
Average Owned or Chartered Vessels (a) (d):
North Sea Capable Fleet................ 19.8 15.7 4.1
Other (Primarily Southeast Asia)....... 12.0 13.0 (1.0)
------- ------- ----------
Total.............................. 31.8 28.7 3.1
======= ======= ==========
(a) Includes all owned or bareboat chartered vessels, except the joint venture
bareboat chartered vessel. Managed vessels are not included.
(b) Rates per day worked is defined as total charter revenues divided by number
of days worked. Utilization rate is defined as the total number of days
worked divided by the total number of days of availability in the period.
(c) Revenues for vessels in the North Sea fleet are primarily earned in
Sterling ((pound)) and have been converted to U.S. dollars ($) at the
average exchange rate ($/(pound)) for the periods indicated. The average
exchange rates for the years ended December 31, 1999, and 1998 were (pound)
= $1.62, and (pound) = $1.66, respectively.
(d) Adjusted for vessel additions and dispositions occurring during each
period.
The Company recognized $10.4 million of other expense in 1999 compared to $8.4
million of other expense in 1998, excluding a $2.9 million gain on the sale of a
joint venture interest included in 1998. The increase in other expense was due
to higher interest expense of $2.0 million reflecting interest on the Senior
Notes for the full year and an increased loss in all other expenses due
principally to losses sustained in an unconsolidated subsidiary in 1999.
Partially offsetting was an increase in interest income of $0.7 million
reflecting higher overall cash balances.
COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997.
In spite of the downturn in oil and gas prices during the year ended
December 31, 1998, the Company reported record results. These results were
achieved in part because of the Company's high level of forward contract cover
at the beginning of the year. Additionally, the Company's presence within
international markets, particularly the North Sea, further provided some
insulation to the industry conditions.
During 1998, the Company experienced considerable growth in the size of its
fleet. All of the expansion occurred in the fleet based in the North Sea. The
single largest addition was the acquisition of the Norwegian vessel owning
company, Brovig Supply ASA, in February 1998. This company owned a large AHTS
and four large PSVs including a newly constructed vessel delivered in December
1997. Combined, these vessels accounted for approximately half of the Company's
revenue and earnings increases when compared to 1997. Each of these vessels is
working in the North Sea. Additional revenue and earnings growth came from the
March 1998 delivery of the newbuild Highland Rover and the November 1998
delivery of the newbuild Highland Spirit. These vessels began three and five
year contracts, respectively, upon delivery. Combined they contributed 15% of
the earnings improvements during 1998. Three additional newbuild bareboat
chartered vessels built for Sanko Steamship Co. Ltd., were added to the fleet
during 1998: the Leopard Bay, the Mercury Bay and the Monarch Bay were added to
the fleet in June, July and October, respectively. While these vessels
contributed approximately $6 million to the revenue increases, their operating
margins are not as high as owned vessels because the bareboat fees are higher
than depreciation expense on similarly priced vessels. In addition to the vessel
additions in the North Sea, other vessels operating in the North Sea experienced
improvements in dayrates and utilization due in significant part to the expanded
1998 construction season. The Highland Fortress, one of the Company's vessels
particularly attractive to construction support charterers, accounted for almost
10% of the Company's increase in operating earnings for the year. Industry
conditions in the Company's other major market, Southeast Asia, were also
significantly better in 1998 than 1997 as utilization and dayrates improved
markedly. These conditions allowed the company to sell its 51% owned joint
venture, SeaMark Ltd. ("SeaMark"), which operated two bareboat chartered vessels
in Southeast Asia, and realize a pre-tax gain of approximately $2.9 million
($0.23 per diluted share, net of tax).
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The Company recognized net income of $20.8 million in 1998 compared to $6.1
million in 1997. Revenues increased $40.2 million and operating income increased
$19.3 million from 1997 to 1998. The increase in revenue was a direct result of
improved utilization and dayrates in all of the Company's markets coupled with
an increase in the size of the fleet when compared to 1997. Operating costs
increased $15.9 million in 1998 versus1997 due to the greater number of vessels
operated in 1998 and the addition of three bareboat chartered vessels where the
charter expense is included in operating costs. Depreciation expense also
increased $4.6 million in 1998 from the 1997 as a result of the vessel
acquisitions in 1998 . The following summarizes dayrates, utilization and
average vessels owned or chartered for the Company's fleet of vessels:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
INCREASE
1998 1997 (DECREASE)
-------------- -------------- --------------
Rates Per Day Worked (a) (b):
North Sea Capable Fleet (c)............ $ 12,068 $ 9,930 $ 2,138
Other (Primarily Southeast Asia)....... 4,859 3,830 1,029
Overall Utilization (a) (b):
North Sea Capable Fleet (c)............ 97.8% 96.5% 1.3%
Other (Primarily Southeast Asia)....... 84.6% 75.4% 9.2%
Average Owned or Chartered Vessels (a) (d):
North Sea Capable Fleet................ 15.7 9.0 6.7
Other (Primarily Southeast Asia)....... 13.0 14.0 (1.0)
-------- ------- --------
Total.............................. 28.7 23.0 5.7
======== ======= ========
(a) Includes all owned or bareboat chartered vessels. Managed vessels are not
included.
(b) Rates per day worked is defined as total charter revenues divided by number
of days worked. Utilization rate is defined as the total number of days
worked divided by the total number of days of availability in the period.
(c) Revenues for vessels in the North Sea fleet are primarily earned in
Sterling ((pound)) and have been converted to U.S. dollars ($) at the
average exchange rate ($/(pound)) for the periods indicated. The average
exchange rates for the years ended December 31, 1998 and 1997 were (pound)
= $1.66, and (pound) = $1.64, respectively.
(d) Adjusted for vessel additions and dispositions occurring during each
period.
Other expense recognized by the Company in 1998 increased $4.5 million over
1997, excluding the gain on the sale of the joint venture interest of $2.9
million in 1998. The increase was the result of increased interest expense
resulting from the Senior Notes Offering completed by the Company in June 1998
partially offset by increased interest income from higher average cash balances
available for investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing liquidity requirements arise primarily from its
need to service debt, fund working capital, acquire or improve equipment and
make other investments. Since its inception, the Company has been active in the
acquisition of additional vessels through both the resale market and new
construction. Historically, bank financing and internally generated funds have
provided funding for these activities.
In June 1998, the Company sold $130 million of 8.75% Senior Notes (the
"Notes"). Net proceeds from the sale totaled $124.7 million after a discount of
$0.4 million and offering costs of $4.9 million. The net proceeds were used to
repay substantially all the outstanding indebtedness of the Company under
various bank credit facilities which were secured by mortgages on many of the
Company's vessels.
Interest on the Notes is payable semi-annually each June 1 and December 1.
The Notes do not require payments of principal prior to their stated maturity of
June 1, 2008, but pursuant to the indenture under which the Notes are issued,
the Company is required to make offers to purchase the Notes upon the occurrence
of certain events, such as asset sales or a change in control of the Company.
The Notes are not redeemable at the option of the Company prior to June 1, 2001.
The Notes are general unsecured obligations of the Company and rank
equally in right of payment with all existing and future unsecured senior
indebtedness of the Company, which may include borrowings under the Credit
Facility defined below, and senior to all future subordinated indebtedness of
the Company. The Notes will be
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effectively subordinated to (i) all future secured obligations of the Company to
the extent of the assets securing such obligations and (ii) all existing and
future indebtedness and other obligations of the Company's subsidiaries and
trade payables incurred in the ordinary course of business. Under certain
circumstances, the Company's payment obligations under the Notes may be jointly
and severally guaranteed on a senior unsecured basis by one or more of the
Company's subsidiaries.
The indenture under which the Notes are issued imposes operating and
financial restrictions on the Company. Such restrictions affect, and in many
cases limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness, make capital expenditures, create liens, sell assets
and make dividend or other payments.
Simultaneous with the issuance of the Notes in June 1998, the Company also
entered into the a credit facility (the "Credit Facility") with two banks for a
total of $50 million. On December 8, 1998, an additional lender was added which
increased the facility to $75 million. The Credit Facility has two tranches.
Tranche 1 is unsecured and is available for general corporate purposes. The
maximum commitment amount is limited to $30 million. Interest on outstanding
balances under Tranche 1 accrues at LIBOR plus a margin ranging from 1.0% to
1.375% as determined by the Company's ratio of funded debt to total
capitalization ("Leverage Ratio").
Tranche 2 is available to finance the acquisition of (i) up to 50% of the
acquisition costs of shares in another company (a "Share Acquisition") or (ii)
up to 65% of the purchase price of a vessel (a "Vessel Acquisition"). Drawings
under Tranche 2 will be secured, in the case of a Share Acquisition, by the
capital stock of the acquired company or, in the case of a Vessel Acquisition,
(i) by a first priority mortgage, (ii) by an assignment of earnings and
insurance and (iii) by an assignment of charters over one year. The maximum
committed amount is $45 million. The interest on outstanding balances under
Tranche 2 is LIBOR plus 0.80% to 1.25% depending on the Company's Leverage
Ratio. Both tranches shall begin to reduce beginning on September 8, 2001, and
shall be fully reduced by June 8, 2003.
The Credit Facility also requires the Company, on a consolidated basis,
to not exceed a maximum Leverage Ratio and to maintain a specified interest
coverage ratio and a minimum net worth. The Company was in compliance with all
of the covenants of this agreement except for the interest coverage ratio which
was not met as a result of operations for the fourth quarter of 1999. The
Company has received a waiver of this requirement for 1999. There can be no
assurance that the Company will meet the interest coverage requirement in future
periods as compliance is dependent on the results of operations, nor can there
be any assurance that future waivers will be granted under the agreement.
As of December 31, 1999, the Company had cash on hand of $28.7 million.
Cash flows from operations for the year ended December 31, 1999, were $16.4
million compared to $32.5 million in the previous year. The decrease in
operating cash flow was attributable to the significant decrease in the results
of operations for the Company's fleet during 1999, resulting from lower dayrates
and utilization.
Cash flows used for investing activities for the years ended December 31,
1999 and 1998 were $19.8 and $62.1 million, respectively. The Company's primary
capital expenditure requirements are for the construction of new vessels, the
acquisition of vessels from the resale market, as well as the funds required for
the drydocking of its vessels every two to three years. The year ended December
31, 1998 included $25.5 million for the purchase of shares of Brovig Supply ASA,
a Norwegian publicly traded shipowner with five vessels. Additionally, during
1998, payments for the newbuilds owned by the Company were made with respect to
the Highland Rover, delivered in March 1998, the Highland Spirit, delivered in
November 1998, as well as progress payments for the Highland Guide and the
Highland Scout delivered in 1999. Investing activities are also impacted by the
number of vessels required to be drydocked. In 1999, there were 10 vessels
drydocked at an aggregate cost of $2.6 million compared to six vessels drydocked
in 1998 at an aggregate cost of $1.3 million.
Cash flows provided by financing activities was $0.1 million for the year
ended December 31, 1999 and $36.5 million for the 1998 period. The 1998 period
included the sale of the Notes in June 1998. Additionally, in August 1997, the
Company sold 1,125,000 shares of its common stock for net proceeds of $33.4
million.
Substantially all of the Company's tax provision is for deferred taxes.
The net operating loss available in the United Kingdom is primarily the result
of accelerated depreciation allowances under United Kingdom tax law.
The Company believes that the current reserves of cash and short term
investments, cash flows from operations and access to various credit
arrangements will provide sufficient resources to finance its operating
requirements.
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However, the ability of the Company to fund working capital, capital
expenditures and debt service in excess of cash on hand will be dependent upon
the success of the Company's operations. To the extent that internal sources are
insufficient to meet those cash requirements, the Company intends to seek other
debt or equity financing; however, the Company can give no assurances that such
debt or equity financing would be available on terms acceptable to the Company.
CURRENCY FLUCTUATIONS AND INFLATION
Substantially all of the operations of the Company are conducted
overseas, therefore the Company is exposed to currency fluctuations and exchange
rate risks. Charters for vessels in the North Sea fleet are primarily
denominated in Sterling and substantially all operating costs are in Sterling.
The North Sea fleet generated $55.6 million in revenues, $11.0 million in
operating income and $14.0 million of cash flows from operations for the year
ended December 31, 1999. In 1999, the Sterling/U.S. dollar exchange rate ranged
from a high of (pound) = U.S.$1.68 to a low of (pound) = U.S. $1.55 with an
average of (pound) = $1.62 for the year. As of March 17, 2000, the Sterling/U.S.
Dollar exchange rate was (pound) = U.S.$1.57.
Prior to the issuance of the Notes, the Company reduced its exposure to
currency fluctuations by arranging for the debt financing associated with a
vessel and its operating costs to be denominated in the same currency in which
it earned revenue. Under these conditions the effect on cash flows of a
fluctuation in the exchange rate is largely offset by the effect on same
currency denominated borrowings.
With the completion of the Senior Notes Offering in June 1998, the
Company's debt is primarily denominated in U.S. dollars, while a substantial
portion of the Company's revenue continues to be generated in Sterling. The
Company has evaluated these conditions and has determined that it is in the best
interest of the Company not to use any financial instruments to hedge this
exposure under present conditions. The Company's strategy is based on a number
of factors including among others, (i) the cost of using such instruments in
relation to the risks of currency fluctuations, (ii) the propensity for
adjustments in Sterling denominated vessel day rates over time to compensate for
changes in the purchasing power of Sterling as measured in U.S. dollars, (iii)
the Company's strong cash position substantially held in U.S. dollars, (iv) the
level of dollar denominated borrowings available to the Company and (v) the
conditions in the Company's dollar generating regional markets. One or more of
these factors may change and the Company, in response, may begin to use
financial instruments to hedge risks of currency fluctuations.
The Company will from time to time hedge known liabilities denominated in
foreign currencies to reduce the effects of exchange rate fluctuations on the
Company's financial results. At December 31, 1999, the Company did not have any
foreign currency exchange contracts outstanding.
Reflected in the accompanying balance sheet at December 31, 1999, is a
$7.2 million cumulative translation adjustment primarily relating to the lower
Sterling exchange rate as of December 31, 1999 in comparison to the exchange
rate when the Company invested capital in its United Kingdom subsidiaries.
Changes in the cumulative translation adjustment are non-cash items that are
primarily attributable to investments in vessels and dollar denominated loans
between companies in the North Sea.
To date, general inflationary trends have not had a material effect on
the operating revenues or expenses of the Company. One of the major consumables
for the fleet is diesel fuel, the price of which has escalated significantly
over the last year. Except for one contract on which the Company has a cost
flow-through provision, fuel is provided by the customer of the Company;
therefore, escalating fuel prices have not and will not adversely affect the
Company's operating cost structure.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. SFAS No. 133 was to be effective beginning in
2000; however, in June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date"
which delayed the effective date to fiscal years beginning after June 15, 2000.
The Company does not expect the adoption of this statement to have a material
effect on its financial position or results of operations.
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In November 1999, SEC Staff Accounting Bullentin: No. 100 -
Restructuring and Impairment Charges ("SAB 100") was issued. SAB 100 expresses
views of the staff regarding the accounting for and disclosure of certain
expenses commonly reported in connection with exit activities and business
combinations. The Company's accounting practices are consistent with this rule.
In December 1999, SEC Staff Accounting Bulletin: No. 101 - Revenue
Recognition in Financial Statements ("SAB 101") was issued. SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company believes
its accounting practices are consistent with this rule but will complete its
evaluation in the first quarter of 2000.
YEAR 2000 UPDATE
Prior to January 1, 2000, the Company performed an assessment of its
critical information technology ("IT") and non-IT systems. During the assessment
phase, the Company noted no significant deficiencies in its core systems. Most
areas with potential issues were addressed through normal maintenance agreements
with the vendors. Excluding any internal labor costs for employees who spent
some portion of their time working on the Company's Year 2000 project, the total
cost to make the Company's systems and equipment Year 2000 compliant was not
significantly more than the cost of normal and routine software and systems
upgrades.
FORWARD-LOOKING STATEMENTS
This Form 10-K, particularly the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," contains certain forward-looking statements and other statements
that are not historical facts concerning, among other things, market conditions,
the demand for marine support services and future capital expenditures. Such
statements are subject to certain risks, uncertainties and assumptions,
including, without limitation, dependence on the oil and natural gas industry,
ongoing capital expenditure requirements, uncertainties surrounding
environmental and government regulation, risks relating to leverage, risks of
foreign operations, assumptions concerning competition and risks of currency
fluctuations and other matters. There can be no assurance that the Company has
accurately identified and properly weighed all of the factors which affect
market conditions and demand for the Company's vessels, that the information
upon which the Company has relied is accurate or complete, that the Company's
analysis of the market and demand for its vessels is correct or that the
strategy based on such analysis will be successful. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed within the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Business" and elsewhere in this
Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company's financial instruments that are potentially sensitive to
changes in interest rates include the Company's Senior Notes which were issued
on June 8, 1998. These notes, which are due June 1, 2008, have a stated interest
rate of 8.75% and an effective interest rate of 8.8%. At December 31, 1999, the
fair value of these notes, based on quoted market prices, was approximately
$119.6 million, as compared to a carrying amount of $129.6 million.
EXCHANGE RATE SENSITIVITY
Other than trade accounts receivable and trade accounts payable, the
Company does not currently have financial instruments that are sensitive to
foreign currency exchange rates. Other information required under Item 7A has
been incorporated into Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GulfMark Offshore, Inc.:
We have audited the accompanying consolidated balance sheets of
GulfMark Offshore, Inc., a Delaware corporation (successor to GulfMark
International, Inc., see Note 1 to the consolidated financial statements), and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, comprehensive income, and cash flows
for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GulfMark
Offshore, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Houston, Texas
March 8, 2000
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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 28,650 $ 32,007
Accounts receivable, net.............................................................. 19,639 19,612
Prepaids and other.................................................................... 1,365 2,210
----------- -----------
Total current assets................................................................ 49,654 53,829
----------- -----------
VESSELS AND EQUIPMENT, at cost, net of accumulated depreciation of
$40,087,000 in 1999 and $31,839,000 in 1998........................................... 195,358 192,615
INVESTMENT IN UNCONSOLIDATED VENTURE..................................................... 566 --
GOODWILL, net of accumulated amortization................................................ 18,062 17,689
OTHER ASSETS............................................................................. 6,942 7,236
----------- -----------
$ 270,582 $ 271,369
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt........................... $ 55 $ 60
Accounts payable...................................................................... 8,638 7,030
Accrued personnel costs............................................................... 1,185 1,314
Accrued interest expense.............................................................. 947 955
Other accrued liabilities............................................................. 3,057 2,930
----------- -----------
Total current liabilities........................................................... 13,882 12,289
----------- -----------
LONG-TERM DEBT........................................................................... 130,128 130,136
DEFERRED TAXES AND OTHER................................................................. 21,894 20,454
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 2,000,000 shares authorized; no shares issued.......... -- --
Common stock, $0.01 par value; 15,000,000 shares authorized; 8,136,830 and
8,123,365 shares issued and outstanding, respectively............................... 81 81
Additional paid-in capital............................................................ 62,913 62,812
Retained earnings..................................................................... 48,921 47,060
Cumulative translation adjustment..................................................... (7,237) (1,463)
----------- -----------
Total stockholders' equity.......................................................... 104,678 108,490
----------- -----------
$ 270,582 $ 271,369
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES.......................................................... $ 72,258 $ 86,194 $ 46,019
----------- ----------- ----------
COST AND EXPENSES:
Direct operating expenses...................................... 41,216 34,102 18,231
General and administrative expenses............................ 6,087 5,718 5,364
Depreciation and amortization.................................. 12,420 11,345 6,711
----------- ----------- ----------
59,723 51,165 30,306
----------- ----------- ----------
OPERATING INCOME................................................. 12,535 35,029 15,713
----------- ----------- ----------
OTHER INCOME (EXPENSES):
Interest expense............................................... (11,388) (9,425) (4,803)
Interest income................................................ 1,887 1,217 984
Loss from unconsolidated venture.............................. (865) -- --
Minority interest.............................................. -- (152) (109)
Gain on sale of joint venture interest (Note 5)................ -- 2,930 --
Other.......................................................... -- 6 36
----------- ----------- ----------
(10,366) (5,424) (3,892)
----------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES............................................ 2,169 29,605 11,821
INCOME TAX PROVISION.............................................. 308 8,816 3,626
----------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS................................. 1,861 20,789 8,195
LOSS FROM DISCONTINUED
OPERATIONS, net of taxes....................................... -- -- (648)
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS, net of taxes....................................... -- -- (1,426)
----------- ----------- ----------
NET INCOME ....................................................... $ 1,861 $ 20,789 $ 6,121
=========== =========== ==========
BASIC EARNINGS PER SHARE:
Income from continuing operations.............................. $ 0.23 $ 2.58 $ 1.15
Loss from discontinued operations, net of taxes................ -- -- (0.09)
Loss on disposal of discontinued operations, net of taxes...... -- -- (0.20)
----------- ----------- ----------
Net income..................................................... $ 0.23 $ 2.58 $ 0.86
=========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (basic)....................... 8,129 8,047 7,155
=========== =========== ==========
DILUTED EARNINGS PER SHARE:
Income from continuing operations.............................. $ 0.22 $ 2.52 $ 1.11
Loss from discontinued operations, net of taxes................ -- -- (0.09)
Loss on disposal of discontinued operations, net of taxes...... -- -- (0.19)
----------- ----------- ----------
Net income..................................................... $ 0.22 $ 2.52 $ 0.83
=========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (diluted)..................... 8,271 8,255 7,413
=========== =========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
25
26
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
COMMON
STOCK AT ADDITIONAL CUMULATIVE TOTAL
$0.01 PAR PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
----------- ----------- ---------- ----------- -------------
(IN THOUSANDS)
Balance at December 31, 1996.............. $ 67 $ 26,793 $ 36,676 $ (1,520) $ 62,016
Net income............................. -- -- 6,121 -- 6,121
Issuance of common stock............... 12 33,694 -- -- 33,706
Disposition of discontinued
operations (Note 4)................. -- -- (16,526) 1,086 (15,440)
Translation adjustment................. -- -- -- (1,131) (1,131)
----------- ----------- ---------- ----------- -------------
Balance at December 31, 1997.............. 79 60,487 26,271 (1,565) 85,272
Net income............................. -- -- 20,789 -- 20,789
Issuance of common stock............... 2 2,325 -- -- 2,327
Translation adjustment................. -- -- -- 102 102
----------- ----------- ---------- ----------- -------------
Balance at December 31, 1998.............. 81 62,812 47,060 (1,463) 108,490
Net income............................. -- -- 1,861 -- 1,861
Issuance of common stock............... -- 101 -- -- 101
Translation adjustment................. -- -- -- (5,774) (5,774)
----------- ----------- ---------- ----------- -------------
Balance at December 31, 1999.............. $ 81 $ 62,913 $ 48,921 $ (7,237) $ 104,678
=========== =========== ========== =========== =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
---------- ----------- ----------
(IN THOUSANDS)
Net income............................................................... $ 1,861 $ 20,789 $ 6,121
Comprehensive income (loss):
Foreign currency gain (loss), net of tax of $(2,475), $44, and $(485).. (5,774) 102 (1,131)
---------- ----------- ----------
Total comprehensive income (loss)........................................ $ (3,913) $ 20,891 $ 4,990
========== =========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
26
27
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 1,861 $ 20,789 $ 6,121
Loss from discontinued operations, net of taxes ................ -- -- 648
Loss on disposal of discontinued operations, net of taxes ...... -- -- 1,426
--------- --------- ---------
Income from continuing operations .............................. 1,861 20,789 8,195
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations--
Depreciation and amortization ............................. 12,420 11,345 6,711
Amortization of deferred financing costs .................. 551 887 410
Deferred and other income tax provision ................... 159 8,523 3,445
Gain on sale of joint venture interest .................... -- (2,930) --
Minority interest ......................................... -- 152 109
Change in operating assets and liabilities--
Accounts receivable ....................................... (404) (6,610) (1,781)
Prepaids and other ........................................ 812 (1,801) 36
Accounts payable .......................................... 1,750 2,493 2,102
Other accrued liabilities ................................. (104) 380 258
Other, net ................................................ (669) (757) (373)
--------- --------- ---------
Net cash provided by continuing operations ................ 16,376 32,471 19,112
Cash flows from discontinued operations ................... -- -- (1,360)
--------- --------- ---------
Net cash provided by operating activities ............. 16,376 32,471 17,752
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of vessels and equipment .................................. (17,107) (38,345) (24,863)
Expenditures for drydocking and main engine overhaul ............... (2,632) (1,344) (3,967)
Investment in Brovig ............................................... -- (25,543) (8,388)
Proceeds from sale of joint venture interest ....................... -- 3,090 --
--------- --------- ---------
Net cash used in investing activities ................. (19,739) (62,142) (37,218)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt, net of direct financing costs .................. -- 156,162 7,690
Repayments of debt ................................................. (55) (120,366) (12,738)
Proceeds from issuance of stock, net of offering costs ............. 101 679 33,706
--------- --------- ---------
Net cash provided by financing activities ............. 46 36,475 28,658
Effect of exchange rate changes on cash ............................ (40) (682) (541)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (3,357) 6,122 8,651
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ......................... 32,007 25,885 17,234
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................... $ 28,650 $ 32,007 $ 25,885
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of interest capitalized ......................... $ 10,793 $ 7,832 $ 4,682
========= ========= =========
Income taxes paid .................................................. $ 146 $ 947 $ 101
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
27
28
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
GulfMark Offshore, Inc., ("GulfMark" or the "Company") was formerly a part
of GulfMark International, Inc. (the "Predecessor") until it was spun-off in
1997. See Note 4 for additional information regarding the spin-off.
Nature of Operations
The Company operates offshore support vessels, principally in the North Sea
and Southeast Asia. The vessels provide transportation of materials, supplies
and personnel to and from offshore platforms and drilling rigs. Some of these
vessels also perform anchor handling and towing services.
Principles of Consolidation
The consolidated financial statements include the accounts of GulfMark and
its majority owned subsidiaries. Investments in unconsolidated ventures are
accounted for on the equity method. All significant intercompany accounts and
transactions between GulfMark and its subsidiaries have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
U.S. Government securities and commercial paper with original maturities of
up to three months are included in cash and cash equivalents in the accompanying
consolidated balance sheets and consolidated statements of cash flows.
Liquidity
The Company's management currently expects that its cash flow from
operations in combination with cash on hand and other sources will be sufficient
to satisfy the Company's short-term and long-term working capital needs, planned
investments, capital expenditures, debt and other payment obligations.
Vessels and Equipment
Vessels and equipment are stated at cost, net of accumulated depreciation,
which is provided by the straight-line method over the estimated useful life of
25 years. Interest is capitalized in connection with the construction of
vessels. The capitalized interest is included as part of the asset to which it
relates and is amortized over the asset's estimated useful life. In 1999, 1998
and 1997, interest of $1.0 million, $1.6 million and $0.2 million was
capitalized, respectively. Office equipment, furniture and fixtures are
depreciated over two to five years. Maintenance and repairs that do not extend
the useful life of the asset and are not attributable to drydockings of vessels
are charged to operations as incurred. Major renovation costs and modifications
are capitalized and amortized over the estimated remaining useful life. Included
in the consolidated statements of income for 1999, 1998 and 1997 are $3.7
million, $4.7 million and $2.6 million, respectively, of costs for maintenance
and repairs.
Investments
In 1999 the Company entered into a joint venture with another operator
which has bareboat chartered the Torm Heron from Sanko Steamship Co., Ltd of
Japan ("Sanko") for a three-year period commencing in 1999. The Company records
its 50% interest in the joint venture using the equity method of accounting.
28
29
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other Assets
Other assets consist primarily of deferred drydocking costs and deferred
financing costs. Costs incurred in connection with drydocking are capitalized
and amortized over approximately a two to three year period, which approximates
the period between required drydockings. Deferred financing costs are amortized
over the expected term of the related debt.
Goodwill
Goodwill primarily relates to the Brovig acquisition made during 1998 and
is being amortized over 40 years. Accumulated amortization at December 31, 1999
and 1998 totaled $0.8 million and $0.3 million, respectively. Management
periodically reviews goodwill to access recoverability, and impairments would be
recognized in operating results if a permanent diminution in value were to
occur.
Earnings Per Share
Basic EPS is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year. Diluted EPS is computed
using the treasury stock method for common stock equivalents. The detail of the
earnings per share calculations for continuing operations for the years ended
December 31, 1999, 1998 and 1997 is as follows (in thousands except per share
data):
YEAR ENDED DECEMBER 31, 1999
------------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- ---------- ----------
Income from continuing operations per share, basic ...... $ 1,861 8,129 $ 0.23
==========
Dilutive effect of common stock options ................. -- 142
---------- ----------
Income from continuing operations per share, diluted .... $ 1,861 8,271 $ 0.22
========== ========== ==========
YEAR ENDED DECEMBER 31, 1998
------------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- ---------- ----------
Income from continuing operations per share, basic ...... $ 20,789 8,047 $ 2.58
==========
Dilutive effect of common stock options ................. -- 208
---------- ----------
Income from continuing operations per share, diluted .... $ 20,789 8,255 $ 2.52
========== ========== ==========
YEAR ENDED DECEMBER 31, 1997
------------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- ---------- ----------
Income from continuing operations per share, basic ...... $ 8,195 7,155 $ 1.15
==========
Dilutive effect of common stock options ................. -- 258
---------- ----------
Income from continuing operations per share, diluted .... $ 8,195 7,413 $ 1.11
========== ========== ==========
Revenue Recognition
Revenues from charters for offshore marine services are recognized as
earned based on contractual charter rates. Currently, charter terms range from
several days to as long as five years in duration. Management services revenue
is recognized in the period in which the services are performed.
29
30
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. The likelihood and amount of future taxable income is included in
the criteria used to determine the timing and amount of tax benefits recognized
for net operating losses and tax credit carryforwards in the financial
statements. The Company has been included in consolidated federal income tax
returns filed by the Predecessor through April 30, 1997. However, the tax
expense reflected in the consolidated statements of income and the tax
liabilities reflected in the consolidated balance sheets prior to April 30, 1997
have been prepared on a separate return basis as though the Company had filed
stand-alone income tax returns, except for the utilization of net operating loss
(NOL) carryforward benefits. These benefits were allocated by the Predecessor to
the Company based on the Company's pro rata share of the Predecessor's actual
pre-tax financial statement earnings for each year.
Foreign Currency Translation
Assets and liabilities of the Company's foreign affiliates, other than
those located in highly inflationary countries, are translated at year-end
exchange rates, while income and expenses are translated at average rates for
the period. For entities in highly inflationary countries, a combination of
current and historical rates is used to determine currency gains and losses
resulting from financial statement translation and those resulting from
transactions. Translation gains and losses are reported as a component of
stockholders' equity, except for those associated with highly inflationary
countries that are reported directly in the consolidated statements of income.
Transaction gains and losses are reported directly in the consolidated
statements of income.
Concentration of Credit Risk
The Company extends credit to various companies in the energy industry that
may be affected by changes in economic or other external conditions. The
Company's policy is to manage its exposure to credit risk through credit
approvals and limits. Historically, write-offs for doubtful accounts have been
insignificant. At December 31, 1999 and 1998, the Company's allowance for
doubtful accounts amounted to $65,000 and $50,000 , respectively.
Recent and Pending Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. SFAS No. 133 was to be effective beginning in
2000; however, in June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date"
which delayed the effective date to fiscal years beginning after June 15, 2000.
The Company does not expect the adoption of this statement to have a material
effect on its financial position or results of operations.
In November 1999, SEC Staff Accounting Bullentin: No. 100 - Restructuring
and Impairment Charges ("SAB 100") was issued. SAB 100 expresses views of the
staff regarding the accounting for and disclosure of certain expenses commonly
reported in connection with exit activities and business combinations. The
Company's accounting practices are consistent with this rule.
In December 1999, SEC Staff Accounting Bulletin: No. 101 - Revenue
Recognition in Financial Statements ("SAB 101") was issued. SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company believes
its accounting practices are consistent with this rule but will complete its
evaluation in the first quarter of 2000.
Reclassifications
Certain reclassifications of prior year information have been made to
conform with current year presentation.
30
31
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) VESSEL ACQUISITIONS
Over the last several years, the Company has been actively expanding
the fleet through the construction of new vessels, as well as the acquisition of
existing equipment from the resale market. In December 1999, the Company
acquired the 1983-built Highland Pioneer from a shipyard. Owned newbuilds added
to the fleet during the past three years are as follows:
VESSEL DELIVERY DATE
o Highland Drummer January 1997
o Highland Rover March 1998
o Highland Spirit November 1998
o Highland Guide August 1999
o Highland Scout September 1999
(3) BROVIG SUPPLY ACQUISITION
Beginning in the fourth quarter of 1997, the Company began acquiring shares
of common stock in Brovig Supply, ASA, ("Brovig") a publicly traded ship-owning
company in Norway which owned five vessels operating in the North Sea. As of
December 31, 1997, the Company had acquired approximately 25% of the outstanding
stock at a cost of approximately $8.4 million. For the year ended December 31,
1997, the Company's share of Brovig's earnings using the equity method of
accounting was not material to the Company's consolidated results of operations.
On February 10, 1998, the Company acquired additional shares of Brovig such that
its total ownership was approximately 96.1%. The balance of the shares was
acquired on March 26, 1998. The purchase consideration of $73.0 million
consisted of cash provided from funds on hand, (pound)10 million ($16.7 million)
provided by a bank facility and the assumption of approximately NOK 277 million
($37.4 million) of debt.
The consolidated financial statements included herein reflect the results
of Brovig from February 10, 1998. The following unaudited pro forma results of
operations have been prepared assuming that the acquisition had occurred at the
beginning of each period. This unaudited pro forma information is not
necessarily indicative of the results of operations that would have occurred had
the acquisition been made on those dates or of results which may occur in the
future.
Year Ended December 31,
(In thousands, except per share
amounts)
-----------------------------------
1998 1997
--------------- --------------
Revenues............................................... $88,048 $60,360
Operating income....................................... 35,449 18,872
Income from continuing operations...................... 20,761 7,638
Per share data:
Income from continuing operations (basic).............. $ 2.58 $ 1.07
Income from continuing operations (diluted)............ 2.51 1.03
(4) DISCONTINUED OPERATIONS AND DISPOSITION OF ASSETS
On April 30, 1997, the stockholders of the Predecessor approved a
transaction (the "Contribution") to transfer the assets, liabilities and
operations of its offshore marine services business (the "Marine Business") to
GulfMark Offshore, Inc., a wholly owned subsidiary of the Predecessor.
Immediately after the transfer of the Marine Business, the Predecessor completed
a spin-off of GulfMark by distributing all of the common stock of GulfMark to
the Predecessor's stockholders (the "Distribution"). Following the Distribution,
on May 1, 1997, a subsidiary of Energy Ventures, Inc. (now known as Weatherford
International, Inc. ("WFT")) was merged (the "Merger") with and into the
Predecessor, whose assets then consisted solely of the Predecessor's remaining
active business, the erosion control business ("Ercon"), and the Predecessor's
investment in WFT common stock.
31
32
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Although the separation of the Marine Business from the remainder of the
operations of the Predecessor was structured as a "spin-off" of GulfMark for
legal, tax and other reasons, GulfMark succeeded to certain important aspects of
the Predecessor's business, organization and affairs, namely: (i) the Marine
Business conducted by GulfMark, which consisted of over half of the assets,
revenues and operating income of the businesses, operations and companies
previously constituting the Predecessor; (ii) each member of the Board of
Directors of the Predecessor became a Director of GulfMark; (iii) GulfMark's
management is substantially the same as the management of the Predecessor; and
(iv) GulfMark retained as its headquarters the former headquarters of the
Predecessor. Consequently, the consolidated financial statements present the net
assets, results of operations and cash flows of Ercon and the WFT investment as
discontinued operations.
In connection with the Distribution, two shares of GulfMark common stock
($0.01 par value) were issued for each share of the Predecessor common stock
($1.00 par value). Also in connection with the Merger, the Predecessor
stockholders received shares of WFT common stock. The total value of the WFT
stock received by the Predecessor's stockholders was approximately $148 million
in the aggregate. Subsequent to the Distribution and Merger, the stockholders'
equity of GulfMark Offshore, Inc. relates solely to the shares of GulfMark
common stock issued in the Distribution and represents the historical retained
earnings of the Marine Business. Numbers of shares and per share information
have been adjusted to reflect the Distribution.
Immediately following the Distribution, the Predecessor, whose remaining
assets consisted solely of Ercon and an investment of approximately 4.5 million
shares of WFT common stock (the "Merged Assets"), merged with a subsidiary of
WFT. Accordingly, for the year ended December 31, 1997, the results of
operations and cash flows of the Merged Assets are reflected as discontinued
operations. Summarized financial information of the discontinued operations is
presented in the following table:
YEAR ENDED
LOSS FROM DISCONTINUED OPERATIONS (IN THOUSANDS): DECEMBER 31,
-----------------
1997
-----------------
(through
Operating Data: April 30, 1997)
Revenues........................................................ $ 1,066
Direct operating expenses....................................... 811
Selling, general and administrative expenses.................... 932
---------
Operating loss.................................................. (677)
Income tax benefit.............................................. 29
---------
Loss from discontinued operations, net of taxes................. $ (648)
=========
In addition to the loss from discontinued operations, the Company's
operating results for the year ended December 31, 1997 include a charge of $1.4
million, net of taxes, for expenses incurred in connection with the Merger.
Certain liabilities associated with the Merged Assets of approximately $0.6
million were retained by the Company.
(5) SALE OF JOINT VENTURE INTEREST
During July 1998, the Company sold, for approximately $3.1 million
cash, its interest in a 51% owned joint venture, SeaMark Ltd., which operated
two bareboat chartered vessels in Southeast Asia. The after tax gain from the
transaction of approximately $1.9 million ($0.23 per diluted share) is included
in the Company's results for the year ended December 31, 1998.
32
33
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) LONG-TERM DEBT
The Company's long-term debt at December 31, 1999 and 1998, consisted of
the following:
1999 1998
--------- ---------
(IN THOUSANDS)
8.75% Senior Notes due 2008, interest payable semi-annually ........................ $ 130,000 $ 130,000
Loan facility payable in British Pound Sterling; maximum of (pound)380,000
($614,000) for purchase and completion of Aberdeen office building; facility to
be repaid in 120 equal monthly payments beginning June 1998; interest at
2.25% over lending bank's LIBOR rate (9.23% as of December 31, 1999) ............... 546 602
--------- ---------
130,546 130,602
Less: Current maturities of long-term debt ......................................... (55) (60)
Debt discount, 8.75% Senior Notes due 2008, net ........................... (363) (406)
--------- ---------
$ 130,128 $ 130,136
========= =========
The following is a summary of scheduled debt maturities by year (in
thousands):
2000.............................................. $ 55
2001.............................................. 55
2002.............................................. 55
2003.............................................. 55
2004.............................................. 55
Thereafter........................................ 130,271
---------
Total.................................... $ 130,546
=========
8.75% SENIOR NOTES DUE 2008
On June 8, 1998, the Company completed the sale of $130 million aggregate
principal amount of 8.75% Senior Unsecured Notes Due 2008 (the "Initial Notes")
which mature on June 1, 2008. The offering was made pursuant to Rule 144A of the
Securities Act of 1933 as amended. The Initial Notes were issued at a discount
to yield 8.8%. The net proceeds were used to repay substantially all the
outstanding indebtedness of the Company under various credit facilities which
were secured by mortgages on many of the Company's vessels. The market value of
the Notes is potentially sensitive to changes in interest rates. At December 31,
1999, the fair value of the Notes, based on quoted market prices, was
approximately $119.6 million, as compared to a carrying amount of $129.6
million, net of discount.
On July 24, 1998, the Company commenced an exchange offer (the "Exchange
Offer") through which it offered to exchange all of the Initial Notes for a
series of 8.75% Senior Notes (the "Exchange Notes" and, together with the
Initial Notes, the "Notes") which are identical in all material respects to the
Initial Notes, except that they are registered under the Securities Act of 1933,
as amended. The Exchange Offer was completed on August 24, 1998.
Interest on the Notes is payable semi-annually on June 1 and December 1 of each
year commencing December 1, 1998. Up to 35% of the Notes may be redeemed prior
to June 1, 2001, at the option of the Company at a price of 108.75% with
proceeds from a public equity offering. Otherwise, the Notes are not redeemable
until June 1, 2003. Thereafter, at the Company's option, the Notes are subject
to redemption in whole or in part, at redemption prices expressed as a
percentage of principal amounts plus accrued and unpaid interest, if any, to the
redemption date. If redeemed during the twelve month period beginning on June 1
of the years indicated below, the redemption amount is as follows:
Year Percentage
---- ----------
2003....................... 104.375%
2004....................... 102.917%
2005....................... 101.458%
2006 and thereafter........ 100.000%
33
34
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company incurred approximately $4.8 million of costs associated with
the sale of the Notes. These debt issuance costs are included in other assets in
the consolidated balance sheets and are being amortized over the term of the
Notes. The Notes were issued under an indenture (the "Indenture") between the
Company and State Street Bank and Trust Company, N.A., as Trustee. The Indenture
contains covenants including, among other provisions, limitations on the ability
of the Company to incur additional indebtedness, make capital expenditures,
create liens, sell assets and make dividend and other payments.
BANK CREDIT FACILITY
Simultaneous with the sale of the Notes, on June 8, 1998, the Company
entered into an agreement for a multicurrency reducing revolving credit facility
(the "Credit Facility") with certain banks (the "Lenders") for a total of $50
million. On December 8, 1998, an additional lender was added which increased the
Credit Facility to $75 million. The Credit Facility contains two tranches. As of
December 31, 1999, none of the Credit Facility has been drawn.
Tranche 1 is available for general corporate purposes and is unsecured. The
maximum committed amount is $30 million. Interest accrues under Tranche 1 at
LIBOR plus a margin ranging from 1.0% to 1.375% per annum based upon the
Company's ratio of funded debt to total capitalization ("Leverage Ratio").
Tranche 2 is available to finance the acquisition of (i) up to 50% of the
acquisition costs of shares in another company (a "Share Acquisition") or (ii)
up to 65% of the purchase price of a vessel (a "Vessel Acquisition"). Drawings
under Tranche 2 will be secured, in the case of a Share Acquisition, by the
capital stock of the acquired company or, in the case of Vessel Acquisition, (i)
by a first priority mortgage, (ii) by an assignment of earnings and insurance
and (iii) by an assignment of charters over one year. The maximum committed
amount under Tranche 2 is $45 million. The interest rate on Tranche 2 is LIBOR
plus a margin ranging from 0.80% to 1.25% per annum as determined by the
Company's Leverage Ratio. Both tranches begin to reduce September 8, 2001. Each
quarter thereafter, the Credit Facility will further reduce such that the Credit
Facility is fully reduced by June 8, 2003.
Until termination of the Credit Facility, a commitment fee is payable on a
quarterly basis, at a rate of 0.5% per annum on the average unfunded portion of
the Credit Facility.
The Credit Facility also requires the Company, on a consolidated basis, to
not exceed a maximum Leverage Ratio and to maintain a specified interest
coverage ratio and a minimum net worth. The Company was in compliance with all
of the covenants of this agreement except for the interest coverage ratio which
was not met as a result of operations for the fourth quarter of 1999. The
Company has received a waiver of this requirement for 1999. There can be no
assurance that the Company will meet the interest coverage requirement in future
periods as compliance is dependent on the results of operations, nor can there
be any assurance that future waivers will be granted under the agreement.
(7) INCOME TAXES
Income from continuing operations before income taxes attributable to
domestic and foreign operations was (in thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1999 1998 1997
-------- -------- --------
U.S................................. $ (3,281) $ (2,741) $ (528)
Foreign............................. 5,450 32,346 12,349
-------- -------- --------
$ 2,169 $ 29,605 $ 11,821
======== ======== ========
The components of the Company's tax provisions attributable to income from
continuing operations are as follows as of December 31, (in thousands):
34
35
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1999 1998 1997
------------------------------ ------------------------------ -----------------------------
DEFERRED DEFERRED DEFERRED
CURRENT AND OTHER TOTAL CURRENT AND OTHER TOTAL CURRENT AND OTHER TOTAL
------- --------- ------- ------- --------- ------- ------- --------- -------
U.S............. $ -- $ 19 $ 19 $ 37 $ 2,856 $ 2,893 $ -- $ 691 $ 691
Foreign......... 149 140 289 256 5,667 5,923 181 2,754 2,935
------- --------- ------- ------- --------- ------- ------- --------- -------
$ 149 $ 159 $ 308 $ 293 $ 8,523 $ 8,816 $ 181 $ 3,445 $ 3,626
======= ========= ======= ======= ========= ======= ======= ========= =======
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The components of the net
deferred tax liability as of December 31, 1999 and 1998 are as follows:
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Deferred tax assets--
Net operating loss carryforwards..................... $ 6,678 $ 7,381
Non-deductible accruals.............................. 4,574 1,764
---------- ----------
11,252 9,145
---------- ----------
Deferred tax liabilities--
Depreciation......................................... (20,422) (18,281)
Foreign income not currently recognizable............ (10,898) (9,611)
Other (735) (897)
---------- ----------
(32,055) (28,789)
---------- ----------
Net deferred tax liability...................... $ (20,803) $ (19,644)
========== ==========
The difference between the provision at the statutory U.S. federal
income tax rate and the tax provision attributable to income from continuing
operations in the accompanying Consolidated Financial Statements is analyzed
below.
1999 1998 1997
-------- -------- --------
U.S. federal statutory income tax rate......... 34.0% 34.0% 34.0%
Effect of international operations............. (25.3) (4.2) (3.3)
Impact of permanent differences................ 5.5 -- --
-------- -------- --------
14.2% 29.8% 30.7%
======== ======== ========
As of December 31, 1999, the Company had the following carryforward
losses and credits for income tax purposes that are, subject to certain
limitations, available to offset future taxable income (in thousands):
AMOUNT EXPIRATION
---------- ----------
U.S. tax purposes--
Net operating losses .................... $ 1,298 2019
Foreign tax purposes--
Net operating losses..................... $ 20,788 Indefinite
(8) COMMITMENTS AND CONTINGENCIES
During 1997, the Company entered into agreements to bareboat charter two
anchor handling, towing, supply vessels from Sanko for a three-year period. The
first vessel, the Leopard Bay, was delivered during the second quarter of 1998
and the second vessel, the Torm Heron, was delivered in second quarter of 1999.
The Torm Heron is operated pursuant to a 50/50 joint venture between the Company
and Torm U.K Limited. Additionally, the Company has entered into agreements to
bareboat charter two platform supply vessels, the Mercury Bay (July 1998) and
the Monarch Bay (October 1998), from Sanko for similar three-year terms. The
latter two vessels are similar to the Company's Highland Piper and Highland
Drummer.
35
36
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On February 1, 1999, the Company agreed to an arrangement between a bank
and the owner of the Clwyd Supporter and the Sefton Supporter, (the "Vessels")
whereby under certain circumstances, the bank would have the right to put the
Vessels to the Company. The Vessels are currently under contract in the North
Sea through July 2001. In the event the contracts are not extended for a
three-year period, the bank shall have the right to put the Vessels to the
Company in July 2001 at a maximum total cost of (pound)6 million ($9.9 million).
All cash flow generated from the operations of the Vessels is under the control
of the Company and is considered to be restricted as long as the debt is
outstanding. The put price would be reduced to the extent the owner's
outstanding mortgage on the Vessels, less restricted cash on hand, is less than
(pound)6 million. Additionally, in connection with this agreement, in July 2001,
the Company has the right to call the Vessels for a like amount without regard
to the status of the contract extension. In the event that neither the put nor
the call are exercised, in July 2001, the Company will be entitled to a fee of
(pound)0.5 million ($0.8 million).
At December 31, 1999, the Company had long-term operating leases for office
space, automobiles, and office equipment. Aggregate operating lease expense for
the years ended December 31, 1999, 1998 and 1997 was $368,000, $376,000, and
$423,000, respectively. Future minimum rental commitments under these leases are
as follows (in thousands):
2000......................................... $ 182
2001......................................... 132
2002......................................... 26
2003......................................... 10
2004......................................... --
Thereafter................................... --
--------
Total............................... $ 350
========
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. Management believes, based on discussions with
its legal counsel and in consideration of reserves recorded, that the outcome of
these legal actions will not have a material adverse effect upon the
consolidated financial position or results of operations of the Company.
In connection with the transactions described in Note 4, the Company has
agreed to indemnify WFT and certain of its affiliates against liabilities for
claims and litigation relating to periods prior to May 1, 1997. The Company has
established accruals which it believes to be adequate to cover such claims.
Management believes that claims, if any, will not have a material adverse effect
on the consolidated financial position and results of operations of the Company.
(9) STOCKHOLDERS' EQUITY
Issuance of Stock
In August 1997, the Company sold 1,125,000 shares of common stock
(including the underwriters' overallotment). Total proceeds to the Company were
$33.4 million net of offering costs of $0.6 million.
Stock Options and Stock Option Plans
As part of the Contribution and Distribution, the Company assumed the
obligations of the Predecessor under its various stock option plans. In
connection with these transactions, optionees were entitled to an adjustment in
the number of shares under their agreements in order to preserve the intrinsic
value of the options prior to these transactions. After the adjustment, the
ratio of the exercise to fair market value of the shares and the total intrinsic
value was the same as before these transactions. Accordingly, no compensation
expense was recognized. The table which follows reflects the adjustment as a
cancellation of the existing options and a reissue of adjusted options.
Under the terms of the Company's Amended and Restated 1993 Non-Employee
Director Stock Option Plan (the "Director Plan"), options to purchase 10,000
shares of the Company's Common Stock were granted to each of the Company's five
non-employee directors in 1993, 1996 and 1999. Additionally, options to purchase
10,000 shares of Common Stock are to be granted to each new non-employee
director upon his or her election. The exercise price
36
37
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of options granted under the Director Plan is fixed at the market price at the
date of grant. In May 1996, the number of shares reserved for issuance under
this Plan was increased from 100,000 to 400,000. The options are for a term of
ten years.
Under the terms of the Company's 1987 Employee Stock Option Plan (the "1987
Employee Plan"), options were granted to employees to purchase the Company's
Common Stock at specified prices. The Employee Plan also provides for stock
appreciation rights ("SARS") that give the optionee the right, subject to
certain conditions, to surrender an option and receive cash and/or shares of
Common Stock having a value equal to the appreciation from date of grant of such
option. On May 20, 1997, the 1987 Employee Plan expired and, therefore, as of
December 31, 1998, no additional shares were reserved for granting of options
under this plan.
In May 1998, the stockholders approved the GulfMark Offshore, Inc. 1997
Incentive Equity Plan (the "1997 Plan") which replaced the 1987 Employee Plan. A
maximum of 200,000 shares are reserved for issuance of options or awards of
restricted stock under this plan. Stock options generally become exercisable in
1/3 increments over a three year period and to the extent not exercised, expire
on the tenth anniversary of the date of grant.
1999 1998 1997
--------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- ---------- ----------- ---------- ---------
Outstanding at beginning of
Year ....................... 314,674 $ 10.54 472,577 $ 5.05 217,200 $ 9.48
Cancelled ...................... -- -- -- -- (217,200) 9.48
Option Adjustment .............. -- -- -- -- 533,635 3.86
Granted ........................ 130,750 15.19 49,500 32.63 50,000 13.75
Exercised ...................... (13,465) 7.55 (207,403) 3.30 (111,058) 3.23
Forfeitures .................... (11,751) 20.71 -- -- -- --
-------- --------- ---------- ----------
Outstanding at end of year ..... 420,208 $ 11.80 314,674 $ 10.54 472,577 $ 5.05
======== ========== ==========
Weighted average fair value of options granted
during the year........................... $ 7.34 $ 11.75 $ 4.32
Exercisable shares and weighted average exercise price as of December 31, 1999...... 249,374 $ 7.43
Shares available for future grants as of December 31, 1999.......................... 183,810
The following table summarizes information about stock options outstanding at
December 31, 1999:
WEIGHTED
NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE
--------------- ----------------
$3.00 to $7.94.................................................. 203,708 $ 4.62
$13.16 to $17.00................................................ 171,500 $ 14.87
$32.63.......................................................... 45,000 $ 32.63
---------
420,208 $ 11.80
=========
Historically, the Company has used stock options as a long-term incentive
for its employees, officers and directors under the above-mentioned stock option
plans. The exercise price of options granted is equal to or greater than the
market price of the underlying stock on the date of the grant. Accordingly,
consistent with the provisions of Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), no compensation
expense has been recognized in the accompanying financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". SFAS No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation. The pronouncement defines a fair-value based method of accounting
for an employee stock option or similar equity instrument. SFAS No. 123 also
allows an entity to continue to measure compensation cost for those
37
38
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
instruments using the intrinsic value-based method of accounting prescribed by
APB No. 25. The Company has elected to follow APB No. 25 and related
interpretations in accounting for employee stock options because the valuation
models prescribed for use by SFAS No. 123 to determine the fair value of options
were not developed for use in valuing employee stock options. In accordance with
APB No. 25, because the exercise price of the Company's employee stock options
equaled the market price of the underlying stock on the date of the grant, no
compensation expense has been recognized in the accompanying financial
statements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its employee stock options under the fair-value method described above. The
fair value for the 1999, 1998 and 1997 options was estimated at the date of the
grant using the Black-Scholes option pricing model with the following weighted
average assumptions, respectively: risk-free interest rates of 5.5%, 5.0% and
5.25%; a weighted average volatility factor of the expected market price of the
Company's stock of .56, .30 and .23; no expected dividends; and weighted average
expected option lives of 4, 5 and 5 years.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. Set forth
below is a summary of the Company's net income and earnings per share as
reported and pro forma as if the fair-value based method of accounting defined
in SFAS No. 123 had been applied. The pro forma information is not meant to be
representative of the effects on reported net income for future years, because,
as provided by SFAS No. 123, only the effects of awards granted after 1994 are
required to be considered in the pro forma calculations.
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
------------ ------------ ------------ ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income from continuing
Operations ............... $ 1,861 $ 1,413 $ 20,789 $ 20,635 $ 8,195 $ 8,118
Net income ................... 1,861 1,413 20,789 20,635 6,121 6,044
Earnings per common
Share from continuing
Operations (basic) ....... $ 0.23 $ 0.17 $ 2.58 $ 2.56 $ 1.15 $ 1.13
Earnings per common
Share (basic) ............ 0.23 0.17 2.58 2.56 0.86 0.84
Earnings per common
Share from continuing
Operations (diluted) .... $ 0.22 $ 0.17 $ 2.52 $ 2.50 $ 1.11 $ 1.10
Earnings per common
Share (diluted) .......... 0.22 0.17 2.52 2.50 0.83 0.82
Preferred Stock
The Company is authorized by its Certificate of Incorporation to issue up
to 2,000,000 shares of no par value preferred stock. No shares have been issued.
(10) OPERATING SEGMENT INFORMATION
Business Segments
The operations of GulfMark Offshore, Inc. are contained in a single
business segment -- offshore marine services. The business operates offshore
support vessels, principally in the North Sea and Southeast Asia. The vessels
provide transportation of materials, supplies and personnel to and from offshore
platforms and drilling rigs. Some of the vessels also perform anchor handling
and towing services.
38
39
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Geographic Regions
Information by geographical area is based on the location where services
were performed. General corporate expenses incurred in the United States have
not been allocated to foreign operations for purposes of this disclosure.
UNITED EUROPE BRAZIL
STATES (PRIMARILY UK) FAR EAST CANADA AND OTHER TOTAL
------------ -------------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
1999 --
Revenues ........... $ -- $ 49,919 $ 11,602 $ 4,674 $ 6,063 $ 72,258
Long-lived assets... 80 155,267 27,428 -- 12,583 195,358
1998 --
Revenues ........... $ -- $ 61,936 $ 21,246 $ -- $ 3,012 $ 86,194
Long-lived assets... 13,624 161,691 16,838 -- 462 192,615
1997 --
Revenues ........... $ -- $ 29,132 $ 15,365 $ -- $ 1,522 $ 46,019
Long-lived assets... 2,288 84,502 17,892 -- 580 105,262
Major Customers
For the years ended December 31, 1999, 1998 and 1997, the Company had major
customers who comprised more than 10% of revenues. The loss of a major customer
could have an adverse effect on the Company's financial condition and results of
operations until new charters are obtained.
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Customer A............................... 15.2% <10% 16.5%
Customer B............................... 12.8% <10% <10%
Customer C............................... <10% 14.6% 13.2%
Customer D............................... <10% <10% 15.4%
(11) UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the two years ended December 31,
1999, are as follows (in thousands except for per share amounts). Certain
unaudited quarterly information for the year ended December 31, 1999, has been
reclassified to conform with audited annual presentation.
QUARTER
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ---------
1999
Revenues................................. $ 21,127 $ 19,622 $ 18,502 $ 13,007
Operating Income (loss).................. 6,418 4,469 3,385 (1,737)
Net Income (loss)
Income (loss)........................ 2,908 1,803 564 (3,414)
Per share (basic).................... 0.36 0.22 0.07 (0.42)
Per share (diluted).................. 0.35 0.22 0.07 (0.42)
1998
Revenues................................. $ 16,046 $ 22,447 $ 24,334 $ 23,367
Operating Income......................... 6,524 10,216 10,521 7,768
Net Income
Income............................... 3,467 5,330 8,199 3,793
Per share (basic).................... 0.43 0.67 1.01 0.47
Per share (diluted).................. 0.42 0.65 0.99 0.46
39
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(1)
ITEM 11. EXECUTIVE OFFICER COMPENSATION(1)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(1)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(1)
(1)The information required by ITEMS 10, 11, 12 and 13 will be included in the
Company's definitive proxy statements to be filed with the Securities and
Exchange Commission within 120 days of the close of its fiscal year and is
hereby incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
Consolidated Financial Statements of the Company are included in Item 8
(Consolidated Financial Statements and Supplementary Data). All other schedules
for the Company have been omitted since the required information is not present
or not present in an amount sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements or the notes thereto.
(3) EXHIBITS
INCORPORATED BY REFERENCE FROM THE
EXHIBITS DESCRIPTION FOLLOWING DOCUMENTS
- ------------ ---------------------------------------------------------- -----------------------------------------
3.1 Certificate of Incorporation.............................. Form S-4, Registration No. 333-24141
March 28, 1997
3.2 Certificate of Amendment to Certificate of Incorporation.. Form S-4, Registration No. 333-24141
March 28, 1997
3.3 Bylaws.................................................... Form S-4, Registration No. 333-24141
March 28, 1997
4.1 See Exhibit Nos. 3.1 and 3.2 for provisions of the
Certificate of Incorporation and Exhibit 3.3 for
provisions of the By-laws of the Company defining the Form S-4, Registration No. 333-24141
rights of the holders of Common Stock..................... March 28, 1997
4.2 Specimen Certificate for the Company's Common Stock, Form S-1, Registration No. 333-31139
$0.01 par value........................................... July 11, 1997
4.3 Indenture dated June 8, 1998, among the Company as Issuer
and State Street Bank and Trust Company as Trustee
including a form of the Company's 8.75% Senior Notes
due 2008.................................................. Form S-4, Registration No. 333-59415
4.4 Registration Rights Agreement dated as of June 8, 1998
among the Company, Lehman Brothers, Chase Securities,
Inc., Jefferies & Company, Inc. and the
Robinson-Humphrey Company................................. Form S-4, Registration No. 333-59415
40
41
INCORPORATED BY REFERENCE FROM THE
EXHIBITS DESCRIPTION FOLLOWING DOCUMENTS
- ------------ -------------------------------------------------------- --------------------------------------------
10.1 GulfMark International, Inc. 1987 Stock Option Plan*...... Form.S-4,.Registration No. 333-24141
10.2 Amendment to the GulfMark International, Inc. 1987
Stock Option Plan*........................................ Form S-1, Registration No. 333-31139
July 11, 1997
10.3 GulfMark Offshore, Inc. Instrument of Assumption and
Adjustment (GulfMark International, Inc. 1987 Stock Form S-1, Registration No. 333-31139
Option Plan)*............................................. July 11, 1997
10.4 Form of Incentive Stock Option Agreement (GulfMark Form S-1, Registration No. 333-31139
International, Inc. 1987 Stock Option Plan)*.............. July 11, 1997
10.5 Form of Amendment No. 1 to Incentive Stock Option
Agreement (GulfMark International, Inc. 1987 Stock Form S-1, Registration No. 333-31139
Option Plan, as amended)*................................. July 11, 1997
10.6 Form of Incentive Stock Option Agreement (GulfMark Form S-1, Registration No. 333-31139
Offshore, Inc. 1987 Stock Option Plan)*................... July 11, 1997
10.7 GulfMark International, Inc., Amended and Restated Form S-1, Registration No. 333-31139
1993 Non-Employee Director Stock Option Plan*............. July 11, 1997
10.8 Amendment No. 1 to the GulfMark International, Inc.
Amended and Restated 1993 Non-Employee Director Stock Form S-1, Registration No. 333-31139
Option Plan*.............................................. July 11, 1997
10.9 GulfMark Offshore, Inc. Instrument of Assumption and
Adjustment (GulfMark International, Inc. Amended and Form S-1, Registration No. 333-31139
Restated 1993 Non-Employee Director Stock Option Plan)*... July 11, 1997
10.10 Form of Stock Option Agreement (GulfMark International,
Inc. Amended and Restated 1993 Non-Employee Director Form S-1, Registration No. 333-31139
Stock Option Plan)*....................................... July 11, 1997
10.11 Form of Amendment No. 1 to Stock Option Agreement
(GulfMark International, Inc. Amended and Restated Form S-1, Registration No. 333-31139
1993 Non-Employee Director Stock Option Plan)*............ July 11, 1997
10.12 Form of Stock Option Agreement (GulfMark Offshore, Form S-1, Registration No. 333-31139
Inc. 1993 Non-Employee Director Stock Option Plan)*....... July 11, 1997
10.13 GulfMark Offshore, Inc. Instrument of Assumption and
Adjustment (GulfMark International Inc. Director Stock Form S-1, Registration No. 333-31139
Option Agreements)* July 11, 1997
10.14 Form of Stock Option Agreement (GulfMark Form S-1, Registration No. 333-31139
International, Inc. Director Stock Options)*.............. July 11, 1997
10.15 Form of Amendment No. 1 to Stock Option Agreement Form S-1, Registration No. 333-31139
(GulfMark International, Inc. Director Stock Options)*.... July 11, 1997
10.16 GulfMark Offshore, Inc. 1997 Incentive Equity Plan*....... Form 10_K, March 25, 1999
10.17 Form of Incentive Stock Option Agreement (GulfMark
Offshore, Inc. 1997 Incentive Equity Plan *............... Form 10_K, March 25, 1999
41
42
INCORPORATED BY REFERENCE FROM THE
EXHIBITS DESCRIPTION FOLLOWING DOCUMENTS
- ------------ -------------------------------------------------------- --------------------------------------------
10.18 Tax Allocation and Indemnification Agreement dated
April 30, 1997 made by and among GulfMark International,
Inc., GulfMark Offshore, Inc. and Energy Form S-1, Registration No. 333-31139
Ventures, Inc............................................. July 11, 1997
10.19 Multicurrency Revolving Loan Agreement dated June 8,
1998 among the Company, Christiania og Creditkasse ASA,
The Chase Manhattan Bank, London Branch and others named
therein .................................................. Form 10-Q, August 12, 1998
10.20 Employment Agreement dated July 6, 1999, made by and
between GM Offshore, Inc. and Edward A. Guthrie, Jr * .... Form 10-Q, August 13, 1999
10.21 Employment Agreement dated July 1, 1999, made by and
between GM Offshore, Inc. and John E. Leech * ............ Form 10-Q, November 9, 1999
21.1 Subsidiaries of GulfMark Offshore, Inc.................... Filed herewith
23.1 Consent of Arthur Andersen LLP............................ Filed herewith
27.1 Financial Data Schedule................................... Filed herewith
*This contract is a management contract or compensatory plan.
(b) REPORTS ON FORM 8-K
On November 8, 1999, the Company filed a report on Form 8-K announcing
the release of its results of operations for the quarter ended September 30,
1999.
On December 20, 1999 the Company filed a report on Form 8-K announcing
the acquisition of the Highland Pioneer and new contracts.
On March 8, 2000, the Company filed a report on Form 8-K announcing the
release of its results of operations for the quarter and year ended December 31,
1999.
42
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
GULFMARK OFFSHORE, INC.
(Registrant)
By: /s/ BRUCE A. STREETER
-------------------------------------------
Bruce A. Streeter
President and Director
(Principal Executive Officer)
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report had been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ BRUCE A. STREETER President and Director March 24, 2000
- ---------------------------------------- (Principal Executive Officer)
Bruce A. Streeter
/s/ EDWARD A. GUTHRIE, JR. Executive Vice President, Finance March 24, 2000
- ---------------------------------------- (Principal Financial Officer)
Edward A. Guthrie, Jr.
/s/ KEVIN D. MITCHELL Controller March 24, 2000
- ---------------------------------------- (Principal Accounting Officer)
Kevin D. Mitchell
/s/ DAVID J. BUTTERS Director March 24, 2000
- ----------------------------------------
David J. Butters
/s/ NORMAN G. COHEN Director March 24, 2000
- ----------------------------------------
Norman G. Cohen
/s/ MARSHALL A. CROWE Director March 24, 2000
- ----------------------------------------
Marshall A. Crowe
/s/ LOUIS S. GIMBEL, 3RD Director March 24, 2000
- ----------------------------------------
Louis S. Gimbel, 3rd
/s/ ROBERT B. MILLARD Director March 24, 2000
- ----------------------------------------
Robert B. Millard
43
44
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------
21.1 Subsidiaries of GulfMark Offshore, Inc.
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule
44