TORCH OFFSHORE INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-23653

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TORCH OFFSHORE, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 74-2982117
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
401 WHITNEY AVENUE, SUITE 400
GRETNA, LOUISIANA 70056-2596
(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 367-7030

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 PER SHARE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 22, 2002 was approximately $38 million. The number
of shares of the Registrant's common stock, $0.01 par value per share,
outstanding as of March 22, 2002 was 12,737,446.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Registrant's 2002
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are
incorporated by reference into Part III of this Form 10-K.

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TORCH OFFSHORE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001

TABLE OF CONTENTS

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PART I

FORWARD-LOOKING STATEMENTS

This Form 10-K includes certain statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this Form 10-K, including
without limitation statements under "Item 1. Business," "Item 2. Properties" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" relating to future events or our future financial performance,
including our business strategy, involve risks and uncertainties that are beyond
our control. These factors may cause our Company's or our industry's actual
results, levels of activity, performance or achievements to be materially
different from those expressed or implied by the forward-looking statements.
These risks and other factors include those listed under "Item 1. Business -
Risk Factors" and elsewhere in this Form 10-K. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"could," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," or the negative of these terms or other
comparable terminology.

These statements are based upon certain assumptions and analyses made by our
management in light of its experiences and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. Many of these factors are beyond our
ability to control or predict. We caution investors not to place undue reliance
on forward-looking statements. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. We disclaim any
intent or obligation to update the forward-looking statements contained in this
report, whether as a result of receiving new information, the occurrence of
future events or otherwise. When considering these forward-looking statements,
you should keep in mind the factors described in "Item 1. Business - Risk
Factors" and other cautionary statements in this Form 10-K.

ITEM 1. BUSINESS

GENERAL

Torch Offshore, Inc. provides subsea construction services in connection with
the infield development of offshore oil and natural gas reservoirs. We are a
leading service provider in our market niche of installing small diameter
flowlines and related infrastructure associated with the development of offshore
oil and natural gas reserves on the Continental Shelf of the Gulf of Mexico (the
"Shelf"). Our customers are major energy companies as well as independent oil
and natural gas operators. The primary services we provide include:

o installation of flowlines and related infrastructure;

o pipeline tie-ins and tie-backs;

o riser installation;

o pipeline surveys and installation engineering; and

o integrated construction support.

Our vessels primarily install marine pipelines that transport oil and natural
gas to production platforms and subsea production systems. We also connect
production platforms to trunklines that transport oil and natural gas to shore.
In a typical offshore field, several development wells are drilled to produce
the field. The production from each of the wells is then transported through
relatively small diameter flowlines to a production platform where it is
aggregated and sometimes treated before being transported through a larger
trunkline to shore. The wells frequently are completed on the

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ocean floor with production systems that need to be connected by umbilicals to
the platform so that power can be supplied to the subsea systems and
communications and control can be maintained. Umbilicals are control lines
arranged in a bundle that can include power cables and injection lines. We
specialize in the installation and connection of these smaller flowlines and
umbilicals, including the simultaneous laying and burying of flowlines and the
laying of both flexible flowlines and coiled tubing. Combining our dive support
vessels and remotely operated vehicles with our pipelay vessels allows us to
install pipelines in a more coordinated fashion than is typical in our industry.

Historically, we have focused on performing projects involving pipelines of 12
inches or less in diameter in water depths of 200 feet or less on the Shelf.
Pipelines located in water depths of 200 feet or less are required to be buried
below the sea floor. We provide additional services in connection with the
infield development of offshore oil and natural gas fields, including inspection
and maintenance services, pipeline tie-ins and tie-backs, riser installation,
pipeline surveys and installation engineering and integrated construction
support. These services support offshore infrastructure construction projects
involving pipelines, production platforms and subsea production systems and are
frequently performed in conjunction with our pipelay or umbilical installations.
Our vessels provide a mobile above-water platform that functions as an
operational base for divers in water depths up to 1,000 feet and for remotely
operated vehicles at all practical water depths. In water depths up to 1,000
feet, we typically use our own divers and dive support personnel because we
believe it provides greater control over project costs and improves the quality
of work performed. We own and operate two saturation diving systems and provide
support services for hook-up and structure abandonment, including barge and
logistic support, minimal steel fabrication, call-out diving and the chartering
of vessels.

The following table sets forth our historical operating data for the periods
indicated:

(1) Other includes inspection and maintenance services, pipeline tie-ins
and tie-backs, riser installation, pipeline surveys and installation
engineering and integrated construction support. Prior to 1998, our
operations were limited to pipelaying.

Our business was started in 1978. Torch Offshore, Inc., a Delaware corporation,
was formed in January 2001 in connection with our initial public offering. Our
principal executive offices are located at 401 Whitney Avenue, Suite 400,
Gretna, Louisiana 70056-2596, and our telephone number at that address is (504)
367-7030.

As used herein, the terms "Company," "Torch Offshore," "we" and "us" refer to
Torch Offshore, Inc., unless the context requires otherwise. Certain terms
relating to the industry are defined in "Glossary of Certain Industry Terms,"
which begins on page G-1 of this Form 10-K.

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INDUSTRY

General. The subsea construction industry installs and maintains platforms,
pipelines and subsea production equipment for offshore oil and natural gas
producers. Demand for subsea construction services is driven by:

o worldwide demand for oil and natural gas;

o discoveries of new reserves;

o the amount of capital spending associated with developing new oil and natural
gas fields;

o the need to maintain and repair existing offshore production facilities
during their economic life; and

o regulatory requirements to remove production facilities after depletion of
the fields.

These factors are predominantly influenced by oil and natural gas prices. The
time required to drill an exploratory well and formulate a development plan
creates a time lag between the start of drilling activities and increased demand
for offshore construction services. Shelf fields may require from three to 12
months from successful drilling activities to development. Deepwater fields
typically require at least three years from exploratory drilling activities to
development.

In addition to the influence that oil and natural gas prices have on demand,
seasonality also plays a role in the timing of contracts received by the
Company. A larger portion of the contracts awarded for marine construction in
the Gulf of Mexico transpire in the spring and early summer and are usually
performed before the adverse weather conditions of the winter months commence,
as many of the projects are completed within a relatively short period of time.
Therefore, the second and third quarter earnings are usually influenced
positively by these seasonality factors.

Shelf Market Compared to Deepwater Market. There are a number of characteristics
about the deepwater market that differentiate it from the Shelf market.

On the Shelf, wells are generally drilled using conventionally moored
semisubmersible drillings rigs or jack-ups. Fixed platforms can be installed
using conventionally moored construction vessels. Afterwards, the pipeline and
riser infrastructure can be installed using conventionally moored S-lay vessels
and 4-point dive boats equipped with mixed gas or saturation diving equipment.
Collectively these technologies are mature, and while there have been
improvements, the basic processes have not fundamentally changed in the last 25
years.

In deepwater, exploration and development techniques are significantly
different. Deepwater drilling and construction vessels are larger and more
sophisticated than Shelf vessels and are typically equipped with dynamic
positioning, or DP, systems that allow them to move or hold position within
tight tolerances without using conventional moorings. This capability is a
requirement for holding position in deepwater and for umbilical and pipelay
installation operations. In addition, fixed structures are replaced by either
floating production systems or subsea facilities.

Several different physical configurations have been used for floating production
systems. In the Gulf of Mexico, tension leg platforms, spars, and floating
production units have been used. In other deepwater regions of the world,
floating production, storage and offloading vessels have also been used. Each of
these systems requires subsea field development hardware, including mooring
equipment, wellheads, manifolds, infield pipelines, risers and infield
umbilicals. We intend to focus our deepwater expansion efforts generally on the
installation of this equipment and particularly on the installation of infield
flowlines and related infrastructure, where we have analogous expertise
operating on the Shelf.

Because of the higher absolute cost of production, construction and drilling
equipment, the deepwater and ultra-deepwater markets are dominated by major oil
and natural gas companies and a few large independents and state-owned oil and

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natural gas companies. In the Gulf of Mexico, deepwater production has been much
more prolific and oil prone than existing production on the Shelf. Our
management believes that the net effect has been that, despite the high absolute
costs of deepwater production, the costs per barrel produced have been
relatively modest.

Industry Spending. The amount of capital expended by oil and natural gas
companies fluctuates from year to year based on the overall volatility of oil
and natural gas prices. The independent oil and natural gas operators tend to
demonstrate more sensitivity to the fluctuation of commodity prices. However,
the major energy companies are less affected by commodity prices and have
recently remained in an expansion mode, especially in areas such as the
deepwater Gulf of Mexico.

STRATEGY

We believe that we are well positioned to take advantage of activity in the Gulf
of Mexico and that our greatest long-term future growth opportunities lie in the
natural extension of our niche services into deepwater. Our strategy, therefore,
is to continue to take advantage of opportunities on the Shelf while expanding
our niche services into the deepwater markets of the Gulf of Mexico and of the
South Atlantic Basin. We intend to execute our deepwater expansion strategy by:

o focusing on projects involving small diameter infield flowlines and related
infrastructure where we have analogous expertise on the Shelf;

o providing cost effective services through an expanded fleet of specially
designed and equipped vessels; and

o leveraging our alliance and customer relationships.

Our expertise and experience in our market niche on the Shelf should provide us
with an advantage in the analogous deepwater market. Development projects in
deepwater require many of the same types of services we currently provide on the
Shelf. For example, deepwater production facilities such as tension leg
platforms, spars and floating production, storage and offloading vessels all
require the extensive use of small diameter pipelines and umbilicals. These
small diameter lines provide similar functions in deepwater that they provide on
the Shelf.

We believe that we have an advantage in our market niche on the Shelf because of
the cost efficiencies derived from the design and capabilities of our vessels,
as well as from our operating methodology which takes advantage of our dive
support vessels and divers, both of which are used to complete riser and
pipeline tie-ins without impeding the progress of our pipelay barges. The
vessels used to install trunklines are larger and require larger crews than the
vessels we operate, making it less cost effective for them to compete with us
for small diameter infield installation services. We believe that we can extend
this advantage to deepwater markets by employing purpose-built vessels that are
specially designed and equipped to provide our niche services in the most
efficient and cost effective manner. To that end, in 2000 we initiated our
deepwater capabilities by completing the construction of a fully redundant,
dynamically positioned ("DP-2") pipelay/bury barge and chartering a new DP-2
subsea construction vessel. In early 2002, we purchased a 520-foot vessel that
we will convert to a DP-2 offshore construction vessel with our patent-pending
pipelay system. The conversion of this vessel will make it a new generation,
specially designed and equipped deepwater pipelay and subsea construction vessel
capable of operating in water depths of up to 10,000 feet.

It has been our management's experience that major integrated oil companies
approach large development projects in deepwater regions by dividing them into
discrete functional work packets which are then bid and awarded to a series of
individual contractors who have been pre-qualified to perform a particular
function. Major integrated oil companies maintain a group of construction
experts on staff to divide up the work scope, to identify qualified contractors,
and to coordinate and supervise the work program using these multiple
contractors. This approach to contracting is frequently referred to as
"best-in-class" contracting.

It has been management's experience that the other major approach, termed "EPIC"
contracting (engineer, procure, install,

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and commission), is preferred by independent oil and natural gas operators as
well as by many foreign national oil companies. In EPIC contracting, a large
engineering firm undertakes to deliver the completed project for a lump sum
regardless of the functional requirements. That contractor then directly
performs those portions of the scope within its capabilities and subcontracts
out those where it does not have "in house" talent or capacity. The integration
functions are the responsibility of the EPIC contractor.

Because the major integrated oil companies are disproportionately present in
deepwater, we believe that best-in-class contracting will dominate for the
deepwater portions of our business activity. We are able to pre-qualify and to
bid directly to the major integrated oil companies without having to provide
other engineering/contracting services. At the same time, on the Shelf, where
independent oil and natural gas operators predominate, we can continue to bid
through the engineering firms who provide project management and other EPIC
services to these clients.

Many of our Shelf customers are also active in deepwater exploration and
development. We intend to leverage our customer relationships, including our
alliance with Unocal Corporation, to obtain deepwater projects. In addition to
our deepwater expansion strategy, we intend to maintain a flexible fleet in
order to take advantage of periods of increased activities on the Shelf. The
design and capabilities of our existing vessels allow us to be a low-cost
provider of pipeline installation and subsea construction services on the Shelf.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook."

OUR FLEET

We operate a diversified fleet of nine construction and service vessels.
Additionally, in January 2002 we purchased the Smit Express and deferred the
construction of the Midnight Warrior, which remains an economically viable
option. The Smit Express will be converted to a DP-2 deepwater offshore
construction vessel with our patent-pending pipelay system and renamed the
Midnight Express. The following table summarizes the capabilities of the nine
vessels in our current fleet and the Midnight Express.

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MIDNIGHT BRAVE - PIPELAY/BURY BARGE

The Midnight Brave was purchased in 1987 and presently has a pipelay ramp, five
workstations, a stinger and a digitally controlled 50 Kips tensioner. The vessel
is 275 feet long and 70 feet wide and has accommodations for 80 workers and is
controlled using a seven-point mooring system.

MIDNIGHT RIDER -- PIPELAY/BURY BARGE

Built in 1995, the vessel is equipped to lay and bury pipe using the
conventional S-lay method. Equipped with five workstations, the vessel features
a 50-foot stinger, a 110-foot stinger and a 50 Kips tensioner. The vessel is 260
feet long, 72 feet wide, has accommodations for up to 84 workers and is
controlled using an eight-point mooring system.

MIDNIGHT EXPRESS (SMIT EXPRESS) - PIPELAY/SUBSEA CONSTRUCTION VESSEL

The Smit Express was a LASH (Lighter Aboard Ship) barge transporter. We
purchased the vessel for $9.75 million in January 2002 and plan to place the
vessel into service in the third quarter of 2003 upon completion of the
conversion and sea trials. The ship is 520 feet long overall with a breadth of
100 feet. The conversion will equip the vessel with our patent-pending pipelay
system, a DP-2 system, a 2,500 square meter weather deck that will increase the
ship freeboard to nearly 14 feet, a 12 MW diesel electric generating plant,
stern azimuthing Z-drives and bow thrusters, ship services for project
requirements, a 300 Te (metric ton) pedestal crane, a 2 X 20 Te gantry crane,
two abandonment and recovery winches to approximately 7,000 feet, a helideck
for a S-61 and accommodations for 132 people and 5 offices.

MIDNIGHT RUNNER -- PIPELAY/BURY BARGE

The Midnight Runner was built in 1983 and presently has a seven-point mooring
system, two spuds, four workstations, a 30 Kips tensioner, generators and
ancillary equipment as well as accommodations for 30 workers. The vessel is 160
feet long and 54 feet wide.

MIDNIGHT DANCER--DIVING SUPPORT VESSEL

The Midnight Dancer was purchased in 1994 and presently has a 30-ton crane, a
four-point mooring system, an air diving system and accommodations for 46
workers. The vessel is 195 feet long and 40 feet wide.

MIDNIGHT STAR -- DIVING SUPPORT VESSEL

The Midnight Star was purchased in 1997 and presently has a four-point mooring
system, a moonpool, a 650-foot saturation diving system, an air diving control
room, a 40-ton crane, a 20-ton crane and accommodations for 42 workers. The
vessel is 197 feet long and 42 feet wide.

MIDNIGHT CARRIER -- DIVING SUPPORT VESSEL

The Midnight Carrier was a pipe carrier that we purchased in May 1998. We then
initiated a series of overhauls and upgrades to allow the vessel's use as a
large four-point diving support vessel. We added a 650-foot four-point mooring
system and additional accommodations in 2000. The vessel is 270 feet long and 58
feet wide and accommodates 36 workers.

MIDNIGHT FOX -- SUPPLY/DIVING SUPPORT VESSEL

Built in 1998, the Midnight Fox is equipped with a bow thruster, a four-point
mooring system and a joystick for live boat operations. While this vessel can
serve as a diving support vessel, its present primary role is as a personnel
transport and supply vessel supporting the rest of our fleet. The vessel is 130
feet long and 28 feet wide.

MIDNIGHT EAGLE - PIPELAY/BURY BARGE

The Midnight Eagle was purchased in 1997 and placed in service in 2000 after
adding a DP-2 system, a 20-foot hull mid section, two 10-foot wide sponsons,
four diesel driven azimuthing thrusters, a mooring/abandonment and recovery
winch, accommodations for 57 workers, generators and ancillary equipment. A
conventional firing line consisting of four workstations for S-lay, a reeled
pipelay system for J-lay and a simultaneous jetting system were also installed.
We have also added a 1,000 foot saturation diving system. The vessel is 190 feet
long and 76 feet wide.

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MIDNIGHT ARROW - SUBSEA CONSTRUCTION VESSEL

The Midnight Arrow was delivered to us in early 2000 on a five-year new-build
charter. Under the charter, we have an exclusive option to purchase the vessel
for $8.25 million and the ability to extend the charter for an additional two
years. The vessel has a DP-2 system, accommodations for 54 workers, ROV
capabilities to approximately 10,000 feet, a helideck and a 50-ton crane. The
vessel is 197 feet long and 44 feet wide.

SAFETY & QUALITY ASSURANCE

In this performance-based industry where all advantages and disadvantages are
exploited, a successful safety program can be an invaluable tool. We maintain an
award winning safety assurance program to reduce the possibility of accidents.
Our Health, Safety and Quality ("HSQ") system, known as the "Top to Bottom
Safety Program," establishes guidelines to ensure compliance with all applicable
state and federal safety regulations and provides training and safety education
through new employee orientations, which include first aid and CPR training. In
addition, prospective employees are required to submit to alcohol and drug
testing. After an accident or other health or safety occurrence, the HSQ system
representative will investigate the incident and further evaluate and, when
necessary, refine the safety procedures to prevent similar incidents from
occurring. Employees who do not adhere to our health, safety and environmental
guidelines could face immediate termination. We believe that the HSQ system has
been very effective in mitigating exposure and averting losses while helping to
attract and retain customers and employees.

Industry associations, government regulators and our peers have recognized our
commitment to safety. In 2001 and 2000, we received special recognition by the
National Ocean Industries Association, the main trade organization for the
offshore services industry, for our "highly innovative and meritorious" Top to
Bottom Safety Program. We have also received commendations in 2001 from the
United States Coast Guard (the "Coast Guard"), the Minerals Management Service
and the Marine Board of the National Research Council for our significant safety
achievements and continuing dedication to the safety of life at sea. The Coast
Guard has also honored us in 2000 with a Certificate of Appreciation in
recognition of notable services that have assisted greatly in furthering the
aims and functions of the Coast Guard and for outstanding and innovative efforts
in promoting offshore safety.

CUSTOMERS & CONTRACTING

Our customers are primarily major energy companies and independent oil and
natural gas companies operating in the Gulf of Mexico. During 2001 and 2000, we
provided subsea construction services to 40 and 33 customers, respectively. No
individual customer accounted for more than 10% of our revenues in the year
ended December 31, 2001, while Coastal Oil & Gas and Oceanografia accounted for
15.5% and 11.1%, respectively, of our revenues for the year ended December 31,
2000. The level of construction services required by any particular customer
depends on the size of that customer's capital expenditure budget devoted to
development in any particular year. Consequently, customers that account for a
significant portion of contract revenues in one fiscal year may represent an
immaterial portion of contract revenues in a subsequent fiscal year. With the
exception of the alliance agreement with Unocal Corporation, our Shelf
construction contracts are typically of short duration, ranging from several
days to two months.

We are normally awarded contracts from our customers by means of a highly
competitive bidding process whereby customers typically request bids a few
months prior to commencement of a project. We maintain a focused marketing
effort through market analysis and a dedicated sales force. We also maintain an
up-to-date database of market studies and statistical bidding analyses. We
further market ourselves to customers through localized efforts in Houston,
Texas and southeastern Louisiana. Most contracts are awarded on a fixed-price
basis, but we also perform work under "cost-plus" and "day rate" arrangements as
well as under hybrids of these arrangements. Under fixed-price contracts, we
provide specified services at a fixed price regardless of the amount of time and
materials actually required. As a result, we are responsible for all cost
overruns. Consequently, although fixed-price contracts may offer greater
potential profits, they also involve more risk than a cost-plus arrangement.
Under cost-plus arrangements, we receive a specified fee in excess of the direct
labor and material costs incurred. We are therefore protected against cost
overruns, but do not benefit directly from cost savings. For projects involving
day rate arrangements, our charges are based upon a rate schedule for the
services provided.

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As we expand our operations into deepwater, the typical contract profile is
likely to change so that lead time, duration and our backlog of awarded but
unexecuted projects will increase. We also expect that a larger portion of our
contracts will be with major oil companies as the deepwater market continues to
develop.

ALLIANCE AGREEMENT

Since May 1999, we have operated under an annual alliance agreement with Unocal
Corporation ("Unocal") under which we provide at least 80 percent of the
pipelay, burial and riser installation projects for Unocal's operations in the
Gulf of Mexico in water depths of up to 200 feet. Unocal conducts exploration,
development and production activities on the Shelf and deepwater areas of the
Gulf of Mexico. Under the alliance agreement, Unocal also considers us for
projects, on a non-exclusive basis, in water depths greater than 200 feet. We
are currently negotiating the specifications with Unocal in order to extend the
alliance for another year and expect the alliance agreement to be finalized in
the near future.

COMPETITION

The offshore marine construction industry is highly competitive. While we
believe that availability and the capability of equipment and personnel, the
reputation and experience of management and the efficiency and safety record of
the contractor are important factors in this industry, price is the primary
factor that determines which qualified contractor is awarded the contract.
Contracts for work on the Shelf are typically awarded on a competitive bid basis
one to three months prior to commencement of operations. Customers usually
request bids from all companies which they believe are technically qualified to
perform the project. In order to ensure that our Company has an opportunity to
bid for these projects, our marketing staff maintains contacts with offshore
operators as well as with the independent engineering firms that manage their
construction projects.

The lower degree of complexity and capital costs involved in Shelf marine
construction activities has allowed many entrants into that subsegment of the
market, most of whom are involved only in Shelf activities. There are relatively
few barriers to entry and older installation equipment is typical of these
flexible, low overhead companies. In addition, companies are differentiated by
their capabilities to perform "offshore" versus only "inshore," or in state
waters. For conventional offshore pipelay projects on the Shelf, we primarily
compete with Global Industries, Ltd. and Horizon Offshore, Inc., although Stolt
Offshore S.A. and Saipem S.p.A. maintain a presence in this market.

For deepwater pipelay projects, the barriers to entry are numerous as the
projects are engineering and capital intensive with project lives measured in
years rather than months. The vessels are capital intensive and the supporting
technology is not widely distributed. In the deepwater, the major pipelay
competitors are foreign companies that include Technip-Coflexip, Stolt Offshore
S.A., Saipem S.p.A. (including Saibos), Allseas Group S.A., and Heerema Group.
Some of the domestic deepwater contractors include Halliburton-Subsea, J. Ray
McDermott, Global Industries, Ltd. and Cal Dive International, Inc. The Company
believes it is able to differentiate itself from this competition by having the
lowest capital intensity, which is a function of maintaining focus on its
specialty of infield flowlines and tiebacks.

BACKLOG

We do not consider our backlog amounts to be a reliable indicator of future
revenue because most of our Shelf-based contracts are awarded and performed
within a relatively short period of time. Thus, our backlog can fluctuate
significantly based on the level of drilling activity on the Shelf, the timing
of contract awards and the seasonal operating activity level throughout the
year. As deepwater projects become more prevalent in our product mix, we expect
to see an increased backlog because these projects have longer lead times than
their Shelf-based counterparts.

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PATENT-PENDING PIPELAY SYSTEM

Lyle G. Stockstill, Chairman of the Board and Chief Executive Officer, has
designed a pipelay system that is currently in the patent-pending stage. The
patent-pending pipelay system will be installed in the conversion of the
Midnight Express and is designed to combine the advantages of several systems
already in use such as the ability to lay limited lengths of products at high
laying rates from a reel, the ability to lay unlimited lengths of rigid
pipelines without the need to come back to dock to reload with the capacity to
spool pipelines from an on-board firing line, and the ability to J-lay pipelines
or other products in order to minimize top tension. The pipelay system includes
a storage reel made of two drums operated independently, each capable of storing
up to 600 Te of product depending on product diameter and schedule; a stern
laying tilting tower (from 65(degree) to 90(degree)) supporting, from top to
bottom, two bend controllers, a straightener, a 160 Te tensioner, two
workstations, a hang-off clamp, a pipe monitoring system and a product departure
roller box and a six-station firing line.

EMPLOYEES

As of December 31, 2001, we had a total of 248 employees. Approximately 215 were
operating personnel and 33 were corporate, administrative and management
personnel. None of our employees belong to a union or are employed pursuant to
any collective bargaining agreement or any similar arrangement.

GOVERNMENT AND ENVIRONMENTAL REGULATION

General. Many aspects of our offshore marine construction industry are subject
to extensive governmental regulation by the Coast Guard, the National
Transportation Safety Board, the United States Customs Service (the "Customs
Service") and the Occupational Safety and Health Administration, as well as by
private industry organizations such as the American Bureau of Shipping. The
Coast Guard and the National Transportation Safety Board set safety standards
and are authorized to investigate vessel accidents and recommend improved safety
standards, and the Customs Service is authorized to inspect vessels at will. The
Occupational Safety and Health Administration performs similar functions with
respect to both offshore and onshore facilities.

We are required by various governmental and quasi-governmental agencies to
obtain various permits, licenses and certificates with respect to our
operations. We believe that we have obtained or will be able to obtain, when
required, all permits, licenses and certificates necessary to conduct our
business.

Maritime. Some of our employees are covered by provisions of the Jones Act, the
Death on the High Seas Act and general maritime law. Other non-maritime
employees are covered by the U.S. Longshoremen and Harbor Workers Compensation
Act. These laws typically operate to make liability limits established by state
workers' compensation laws inapplicable to these employees and to permit these
employees and their representatives to pursue actions against employers for job
related injuries in federal courts. Since we are not protected by the limits
imposed by state workers' compensation statutes, we may have greater exposure
for any claim made by these employees.

Because we engage in certain activities that may constitute "coastwise trade"
within the meaning of federal maritime regulations, we are also subject to
regulation by the United States Department of Transportation Maritime
Administration ("MARAD"), in addition to the Coast Guard and the Customs
Service. Under these regulations, only vessels owned by United States citizens
which are built and registered under the laws of the United States may engage in
"coastwise trade." Furthermore, the foregoing citizenship requirements must be
met in order for us to qualify for financing guaranteed by MARAD. To enjoy the
benefits of United States registry, United States coastwise trade and
MARAD-guaranteed financing, we must maintain United States citizenship as
defined in the Shipping Act of 1916 and the regulations thereunder. Under these
regulations, to maintain United States citizenship, our president or chief
executive officer, the chairman of our board of directors and a majority of a
quorum of our board of directors must be

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United States citizens. Further, at least 75% of the ownership and voting power
of our capital stock must be held by United States citizens, as defined in the
Shipping Act and the regulations thereunder.

Environmental. Numerous federal, state and local laws and regulations relating
to protection of the environment affect our operations. The technical
requirements of these laws and regulations have become more complex and
stringent in recent years, and compliance is becoming increasingly difficult and
expensive. However, we do not believe that compliance with current environmental
laws and regulations is likely to have a material adverse affect on our business
or financial condition. Some environmental laws provide for strict liability for
remediation of spills and releases of hazardous substances, including oil, into
the environment, and some impose liability for damages to natural resources or
threats to public health and safety. Sanctions for noncompliance may include
revocation of permits, corrective action orders, administrative or civil
penalties, and criminal prosecution. It is possible that changes in the
environmental laws and enforcement policies under these laws, or claims for
damages to persons, property, natural resources or the environment, could result
in substantial costs and liabilities. Our insurance policies provide liability
coverage for sudden and accidental occurrences of pollution and/or cleanup and
containment of the foregoing in amounts that we believe are comparable to policy
limits carried by others in the offshore construction industry.

The Oil Pollution Act of 1990 (the "Oil Pollution Act") and regulations
promulgated thereunder impose a variety of regulations on "responsible parties"
related to the prevention of oil spills and liability for damages resulting from
such spills. A "responsible party" includes the owner or operator of an onshore
facility, pipeline, or vessel, or the lessee or permittee of the area in which
an offshore facility is located. The Oil Pollution Act assigns liability to each
responsible party for oil removal costs and a variety of public and private
damages. Vessels subject to the Oil Pollution Act, other than tank vessels, are
subject to liability limits of the greater of $500,000 or $600 per gross ton. A
party cannot take advantage of liability limits if the spill was caused by gross
negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. If the party fails to report a spill or to
cooperate fully in the cleanup, the liability limits likewise do not apply. Few
defenses exist to the liability imposed under the Oil Pollution Act. The Oil
Pollution Act also imposes ongoing requirements on a responsible party including
preparation of an oil spill contingency plan and proof of financial
responsibility (to cover at least some costs in a potential spill) for vessels
in excess of 300 gross tons. We believe that we currently have in place
appropriate spill contingency plans and have established adequate proof of
financial responsibility for our vessels.

The Clean Water Act and analogous state laws provide strict controls on the
discharge of pollutants into the navigable waters of the United States and
impose liability for the costs of remediating releases of petroleum and other
hazardous substances. These laws provide for administrative, civil and criminal
penalties for any unauthorized discharge of oil and other hazardous substances
in reportable quantities and impose substantial potential liability for the
costs of removal, remediation and damages. Our vessels routinely transport small
amounts of hazardous substances and also carry diesel fuel for their own use.
All vessels we operate have vessel response plans to deal with potential spills
of hazardous substances including oil or its derivatives.

The Outer Continental Shelf Lands Act provides the federal government with broad
discretion in regulating the release of oil and natural gas in connection with
offshore oil and natural gas production. Because our operations rely on offshore
oil and natural gas exploration and production, if the government were to
exercise its authority under the Outer Continental Shelf Lands Act to restrict
the availability of offshore oil and natural gas leases, such an action could
have a material adverse effect on our financial condition.

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The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) and similar laws impose liability for releases of hazardous substances
into the environment. CERCLA currently exempts crude oil from the definition of
hazardous substances for purposes of the statute, but our operations may involve
the use or handling of other materials that may be classified as hazardous
substances. CERCLA assigns strict liability to each responsible party for all
response and remediation costs, as well as natural resource damages. Few
defenses exist to the liability imposed by CERCLA. We are not currently aware of
any events that, if brought to the attention of regulatory authorities, would
lead to the imposition of CERCLA liability.

Exploration and Production Industry. We depend on the demand for our services
from the oil and natural gas industry. Therefore, changes to laws, regulations,
taxes and policies relating to the oil and natural gas industry can also affect
our business. For example, the exploration and development of oil and natural
gas properties located on the Outer Continental Shelf of the United States is
regulated primarily by the Minerals Management Service. The Minerals Management
Service has broad authority over such operations. It must approve and grant
permits in connection with drilling and development plans submitted by oil and
natural gas companies. Additionally, the Minerals Management Service has
promulgated regulations requiring offshore production facilities to meet
stringent engineering and construction specifications restricting the flaring or
venting of natural gas, governing the plugging and abandonment of wells and
controlling the removal of production facilities. Further, under some
circumstances, the Minerals Management Service has the authority to require the
suspension or termination of any operations on federal leases, and has proposed
regulations that would permit it to expel unsafe operators from offshore
operations. The Minerals Management Service also has established rules governing
the calculation of royalties and the valuation of crude oil produced from
federal offshore leases. The Minerals Management Service has issued regulations
regarding costs for natural gas transportation, which are deductible for royalty
valuation purposes when natural gas is sold off lease. Delays in the approval of
plans and issuance of permits by the Minerals Management Service because of
staffing, economic, environmental or other reasons could adversely affect our
operations by limiting demand for our services. We cannot predict how the
Minerals Management Service regulations may be amended in the future. However,
any change in Minerals Management Service regulations that adversely affects
offshore oil and natural gas operations has the potential to limit demand for
our services and adversely impact our future operations and earnings.

Other federal agencies like the Federal Energy Regulatory Commission and state
authorities continue to heavily regulate the natural gas transportation market.
These regulations affect the price and terms for access to pipeline
transportation and the economics of natural gas production, transportation and
sales. To a lesser degree, transportation of crude oil by pipeline is also
subject to regulation. Any changes in these regulations that adversely affect
the market for natural gas or crude oil may adversely affect our business by
limiting demand for our services.

INSURANCE

Our operations are subject to the risks inherent in offshore marine activity.
These risks include personal injury and loss of life or property, environmental
accidents, mechanical failures and collisions. Damages arising from an
occurrence may in the future result in the assertion of potentially large claims
against us.

We maintain comprehensive insurance covering our assets and operations,
including marine employers' liability insurance and workers' compensation, at
levels we believe are consistent with industry standards. Our workers'
compensation and marine employers' liability insurance includes U.S.
Longshoremen and Harbor Workers Compensation Act and maritime and outer
continental shelf endorsements. In addition to our primary liability insurance,
we maintain excess and umbrella policies for up to a $30 million limit. We also
maintain other coverage for water pollution, automobile, property, hull and
commercial crimes. We do not maintain insurance for the cost of replacing the
constructive total loss of vessels. However, we believe that some risks are not
insurable, or that insurance to cover such risks is available only at rates that
we do not consider to be commercially reasonable. We cannot assure you that our
insurance coverage will be adequate in all circumstances or against all hazards,
nor can we assure you that we will be able to maintain adequate insurance
coverage in the future at commercially reasonable rates or on acceptable terms.

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RISK FACTORS

A SUBSTANTIAL OR EXTENDED DECLINE IN OIL OR NATURAL GAS PRICES COULD RESULT IN
LOWER EXPENDITURES BY THE OIL AND NATURAL GAS INDUSTRY, THEREBY REDUCING OUR
REVENUE.

Demand for our services is greatly influenced by oil and natural gas prices.
Because of the volatility of these prices, demand for our services may vary
significantly. The capital expenditure programs of our customers, which include
major energy companies and independent oil and natural gas operators, are
primarily influenced by the level of oil and natural gas prices and the
availability of funds. We are unable to predict future oil and natural gas
prices or the level of offshore construction activity related to the industry.

Oil and natural gas prices and the level of offshore drilling and exploration
activity have varied substantially in recent years, resulting in significant
fluctuations in demand for our services. Significant downturns in the oil and
natural gas industry in the past have adversely impacted our financial
performance, resulting in operating losses. A significant or prolonged reduction
in oil or natural gas prices in the future would likely depress offshore
drilling and development activity. A substantial reduction in such activity
would reduce demand for our services and have a material adverse effect on our
financial condition and results of operations.

OUR PLANS TO EXPAND OUR SERVICES INTO THE DEEPWATER MAY NOT BE SUCCESSFUL.

An important part of our growth strategy is our ability to successfully expand
our current services into the deepwater market. We are devoting significant
resources to this strategy. Specifically, we recently expanded our deepwater
capabilities by upgrading an existing vessel and chartering a new vessel. We
also have purchased a vessel in 2002 to convert to a specially designed and
equipped, deepwater offshore construction vessel. We may not be successful in
obtaining or executing contracts to provide deepwater services.

WE MAY HAVE DIFFICULTY UPGRADING OUR EXISTING VESSELS AND ACQUIRING OR
CONSTRUCTING NEW VESSELS ON ACCEPTABLE TERMS, WHICH COULD ADVERSELY AFFECT OUR
STRATEGY TO GROW AND EXPAND OUR DEEPWATER SERVICES.

Upgrading our existing vessels and acquiring or constructing new vessels are key
elements of our strategy to initiate and expand our deepwater services. We have
acquired and plan to convert an existing vessel, and we may pursue the
acquisition of existing vessels for modification or the acquisition of other
companies with operations related to or complementary with our current
operations and our deepwater expansion strategy. We may not be able to identify
and acquire acceptable marine equipment or complementary companies on financial
or other terms acceptable to us. Additionally, we may not be able to obtain
financing for the acquisitions on acceptable terms. A significant or prolonged
reduction in oil or natural gas prices in the future would depress offshore
drilling and development activity and adversely affect our ability to obtain
financing for acquisitions. The construction and refurbishment of marine
equipment involves potential delays and increased costs due to unanticipated
delays in equipment deliveries, scheduling of service providers, equipment
condition problems and unforeseen difficulties with assembly or construction.
Any inability on our part to purchase additional marine equipment or other
complementary vessels on acceptable financial or other terms could have a
material adverse effect on our strategy to grow and expand our deepwater
services business.

DELAYS OR COST OVERRUNS IN THE CONVERSION OF THE MIDNIGHT EXPRESS COULD
ADVERSELY AFFECT OUR BUSINESS, AND EXPECTED CASH FLOWS FROM THE MIDNIGHT EXPRESS
UPON COMPLETION MAY NOT BE IMMEDIATE OR AS HIGH AS EXPECTED.

In the second quarter of 2002, we expect to begin the conversion of the Midnight
Express at an estimated total cost of $75 million. The Midnight Express is
currently scheduled to be placed into service in the third quarter of 2003
following sea trials. Any delay in finalizing the financing of the cost of
conversion of the Midnight Express could delay the conversion process.
Additionally, we may not be able to obtain the required construction financing
on acceptable terms. This project is subject to the risks of delays or cost
overruns inherent in vessel conversion projects. These risks include:

o unforeseen quality or engineering problems;

o work stoppages;

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o weather interference;

o unanticipated cost increases;

o delays in receipt of necessary equipment; and

o inability to obtain the requisite permits or approvals.

Significant delays could have a material adverse effect on expected contract
commitments for this vessel and our future revenues and cash flows. We will not
receive any revenues or cash flows from the Midnight Express until it is placed
in service and customers enter into binding arrangements with us, potentially
several months or more after the vessel is completed. Furthermore, customer
demand for the Midnight Express may not be as high as we currently anticipate,
and, as a result, our future cash flows may be adversely affected.

WE HAVE INCURRED LOSSES IN RECENT PERIODS AND MAY INCUR ADDITIONAL LOSSES IN THE
FUTURE.

We have, from time to time, incurred losses from operations, particularly during
periods of low industry-wide demand for marine construction services. We
incurred net losses of $0.7 million in 2001, $1.6 million in 2000 and $10.6
million in 1999. We may not be profitable in the future. If we do achieve
profitability in any period, we may not be able to sustain or increase such
profitability on a quarterly or annual basis. We have had little cash flows
during several recent periods. Insufficient cash flows may adversely affect our
ability to fund anticipated capital expenditures required to achieve
profitability.

THE SEASONAL NATURE OF THE OFFSHORE CONSTRUCTION INDUSTRY MAY CAUSE OUR
QUARTERLY RESULTS TO FLUCTUATE.

The offshore construction industry in the Gulf of Mexico is seasonal as a result
of weather conditions and the timing of capital expenditures by our customers.
Typically, the greatest demand for offshore construction services is during the
period from May through September. Because of the seasonal nature of the
business, our quarterly results may fluctuate. In addition, the results of any
particular quarter are not necessarily indicative of annual results or
continuing trends.

OUR ORIGINAL ESTIMATES OF COSTS ASSOCIATED WITH OUR LUMP-SUM FIXED-PRICE
CONTRACTS MAY BE INCORRECT AND RESULT IN LOSSES ON PROJECTS AND, THEREFORE,
ADVERSELY EFFECT OUR OPERATING RESULTS.

Because of the nature of the offshore construction industry, the majority of our
projects are performed on a lump-sum fixed-price basis. Changes in offshore job
conditions and variations in labor and equipment productivity may adversely
affect the costs and gross profit realized on a lump-sum fixed-price contract
and may cause variations from the original estimates of those items. Since we
expect that our deepwater contracts may extend over several quarters, variations
from the original estimates of these items on our deepwater contracts may result
in a reduction or elimination of previously reported profits. In addition, we
typically bear the risk of delays caused by adverse weather conditions,
excluding hurricanes and named tropical storms. The risks inherent in the
offshore construction industry may result in the profits we realize on projects
differing from those originally estimated and may result in reduced
profitability or losses on our projects.

WE DEPEND ON SEVERAL SIGNIFICANT CUSTOMERS, AND A LOSS OF ONE OR MORE
SIGNIFICANT CUSTOMERS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

Our customers consist primarily of major energy companies and independent oil
and natural gas operators. In recent years, single customers have accounted for
10% or more of our revenues. In 2001, our two largest customers accounted for
9.7% and 9.4%, respectively, of our revenues. The loss of any one of our largest
customers or a sustained decrease in demand by our customers could result in a
substantial loss of revenues and could have a material adverse effect on our
operating performance.

THE LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.

Our success depends heavily on the continued services of our senior management.
Our senior management consists of a

-15-

small number of individuals relative to other comparable or larger companies.
These individuals are Lyle G. Stockstill, our Chief Executive Officer, Lana J.
Hingle Stockstill, our Senior Vice President - Administration, William J.
Blackwell, our Chief Financial Officer and Willie J. Bergeron, our Vice
President - Operations. If we lost or suffered an extended interruption in the
services of one or more of our senior officers, our results of operations could
be adversely affected. Moreover, we may not be able to attract and retain
qualified personnel to succeed members of our senior management.

WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN OUR INDUSTRY.

The industry in which we operate is highly competitive. Several of our
competitors are substantially larger than we are and have greater financial and
other resources. Price is the primary factor in determining which qualified
contractor is awarded the job. Customers also consider the availability and
capabilities of equipment and the reputation and experience of the contractor in
awarding jobs. Competitors with greater financial resources may be willing to
sustain losses on projects to prevent further market entry by competitors, to
cover the fixed costs of their fleets or to avoid the expense of temporarily
idling vessels. Marine construction vessels have few alternative uses and
relatively high fixed costs whether or not they are in operation. As we increase
the portion of our operations conducted in deepwater, we will face additional
competitors, many of which have more vessels and greater experience in deepwater
operations. As large international companies relocate vessels to the Gulf of
Mexico, levels of competition may increase and our business involving deepwater
projects could be adversely affected.

OFFSHORE CONSTRUCTION IS SUBJECT TO VARIOUS OPERATING RISKS, AND WE MAY LACK
ADEQUATE INSURANCE TO COVER THESE OPERATING RISKS.

Offshore construction involves a high degree of operational risk. Hazards, such
as vessels capsizing, sinking, grounding, colliding and sustaining damage from
severe weather conditions, are inherent in marine operations. In addition,
vessels engaged in pipeline operations can disrupt existing pipelines. These
hazards can cause personal injury or loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage and the
suspension of production operations. The failure of offshore pipelines and
structural components during and after installation can also result in similar
injuries and damages. Our insurance may not be sufficient or effective to
protect us from these operating risks. A successful claim for damages resulting
from a hazard for which we are not fully insured could have a material adverse
effect on us. Moreover, we may not be able to maintain adequate insurance in the
future at rates that we consider reasonable.

REGULATORY AND ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD ADVERSELY
AFFECT OUR BUSINESS.

Our operations are subject to and affected by various types of governmental
regulation, including numerous federal, state and local environmental protection
laws and regulations. Compliance with these laws and regulations may be
difficult and expensive. In addition, significant fines and penalties may be
imposed for noncompliance. Some environmental laws impose strict liability for
remediation of spills and releases of oil and hazardous substances, rendering a
party liable for environmental damages without regard to its negligence or
fault. Sanctions for noncompliance with these laws and regulations may include
revocation of permits, corrective action orders, administrative or civil
penalties and criminal prosecutions. These laws and regulations may expose us to
liability for the conduct of or conditions caused by others, including our
subcontractors, or for our acts that were in compliance with all applicable laws
at the time these acts were performed. The adoption of laws or regulations
curtailing exploration and development drilling for oil and natural gas for
economic, environmental or other policy reasons could adversely affect our
operations by limiting demand for our services. In addition, new legislation or
regulations or changes in existing regulations may adversely affect our future
operations and earnings.

IF WE ARE UNABLE TO ATTRACT AND RETAIN SKILLED WORKERS OUR BUSINESS WILL BE
ADVERSELY AFFECTED.

Our ability to remain productive and profitable depends substantially upon our
ability to continue to retain and attract project managers, project engineers
and skilled construction workers such as divers, welders, pipefitters and
equipment operators. Our ability to expand our operations is impacted by our
ability to increase our labor force. The demand for skilled workers is currently
high and the supply is limited. A significant increase in the wages paid or
benefits offered by competing employers could result in a reduction in our
skilled labor force, increases in our employee costs, or both. If either of
these events occur, our capacity and profitability could be diminished and our
growth potential could be impaired.

-16-

A TERRORIST ATTACK COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

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

THE OWNERSHIP OF OUR COMMON STOCK BY OUR PRINCIPAL STOCKHOLDERS WILL LIMIT THE
INFLUENCE OF PUBLIC STOCKHOLDERS.

Mr. and Mrs. Stockstill and their family trusts beneficially owned at December
31, 2001 approximately 57.9% of our outstanding shares of common stock.
Accordingly, these stockholders have the ability to control the election of our
directors and the outcome of all other matters submitted to a vote of our
stockholders.

ITEM 2. PROPERTIES

FLEET

For information regarding our vessels, please read "Item 1. Business - Our
Fleet," which information is incorporated herein by reference.

FACILITIES

Our corporate headquarters are located in Gretna, Louisiana, near New Orleans.
We also maintain a commercial office in Houston, Texas, a logistics support base
and fabrication yard in Dulac, Louisiana and a deepwater support facility in New
Orleans, Louisiana. The lease for the deepwater support facility is through a
month-to-month agreement whereby the Company simply pays a flat monthly fee plus
additional charges based on usage by the Company's vessels. The continuation of
the lease is purely at the discretion of the Company. All of our facilities are
leased. The following chart describes our facilities as of December 31, 2001:

ITEM 3. LEGAL PROCEEDINGS

We are involved in legal proceedings arising in the ordinary course of business.
Although we cannot give you any assurance with respect to the ultimate outcome
of such legal actions, in our opinion, these matters will not have a material
adverse effect on our financial position or results of operations.

We have been named as a defendant in a stockholder class action suit filed by
purported stockholders regarding our initial public offering. This suit, which
seeks unspecified monetary damages, was filed on March 1, 2002 in federal
district court for the Eastern District of Louisiana. We believe the allegations
in this suit are without merit, and we intend to vigorously defend this lawsuit.
Even so, an adverse outcome in this class action litigation could have an
adverse effect on our financial condition or results of operations.

-17-

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders of the Company during
the quarter ended December 31, 2001.

ITEM S-K 401(b). EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS

The following table provides information regarding our executive officers as of
March 22, 2002:

Lyle G. Stockstill is one of our co-founders and has served as our Chairman of
the Board and Chief Executive Officer since 1978. Mr. Stockstill has over 37
years of experience in all aspects of offshore pipelay and construction
operations. Mr. Stockstill has previously held positions at Brown & Root, Inc.
and Taylor Diving, Inc. and has worked both domestically and internationally.
Mr. Stockstill is the husband of Lana J. Hingle Stockstill.

Lana J. Hingle Stockstill is one of our co-founders and has served as a director
and Senior Vice President - Administration since 1978. Mrs. Stockstill has 29
years of experience handling our administrative duties and the administrative
duties of other oil service companies. Mrs. Stockstill holds a Bachelor of Arts
degree from Louisiana State University. Mrs. Stockstill is the wife of Lyle G.
Stockstill.

William J. Blackwell has served as our Chief Financial Officer since June 1998
and has been a director since June 2000. From September 1997 to May 1998, Mr.
Blackwell was self employed, working as a mergers and acquisitions consultant.
From July 1988 to August 1997, Mr. Blackwell was a financial officer of the
affiliated public companies Freeport-McMoRan Inc. and McMoRan Oil & Gas Co.,
each a company engaged in mineral extraction, and Stratus Properties Inc., a
real estate development company, most recently serving as controller of
Freeport-McMoRan Inc. From January 1981 to July 1988, he was employed by Arthur
Andersen LLP. Mr. Blackwell is a certified public accountant and holds a
Bachelor of Accountancy degree from the University of Mississippi.

Willie J. Bergeron joined our company in September 1995 as a Project Manager.
Mr. Bergeron was promoted to General Manager of Operations in December 1997 and
then to General Manager - Shallow Water Division in March 1999. In September
2000, Mr. Bergeron was promoted to Operations Manager for both shallow and
deepwater activities and in July 2001 was promoted to Vice President-Operations.
From 1988 to 1995, Mr. Bergeron was employed in the areas of operations
management and engineering by McDermott International, Inc., an international
offshore contractor. Prior to that, Mr. Bergeron co-owned a civil engineering
firm that conducted offshore, commercial and residential engineering. Mr.
Bergeron has 24 years of oilfield related experience and holds a degree in
Engineering Technology from Nicholls State University.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock, $0.01 par value, is traded on the NASDAQ National
Market System under the symbol "TORC". At March 22, 2002, there were
approximately 1,850 holders of record of the Common Stock.

-18-

The following table sets forth the high and low sales price per share of our
Common Stock, as reported by the NASDAQ National Market, for each fiscal quarter
since our initial public offering in June 2001:

The Company does not intend to pay cash dividends on its Common Stock for the
foreseeable future. The Company currently intends to retain earnings, if any,
for the future operation and development of its business. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial and operating data of Torch
Offshore, Inc. for the periods shown. You should read the following data with
the more detailed information appearing in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements, including the notes thereto, appearing elsewhere in this Form 10-K.

-19-

(1) Gross profit is revenues less cost of sales.

(2) EBITDA represents earnings before net interest, income taxes, depreciation
and amortization. EBITDA also includes the $950 nonrecurring charge
resulting from the write-off of certain deferred costs related to the
Midnight Warrior project in 2001. EBITDA is presented here to provide
additional information about our operations. EBITDA is not a calculation
based on generally accepted accounting principles and should not be
considered as an alternative to net income, as an indicator of our operating
performance or as an alternative to cash flow as a better measure of
liquidity. In addition, our EBITDA calculation may not be comparable to
similarly titled measures of other companies.

(3) Represents mandatorily redeemable convertible preferred membership units
that were exchanged for common stock as part of the contribution of
membership interests in Torch Offshore, L.L.C. to Torch Offshore, Inc.

(4) Represents total calendar days for each vessel less any days a vessel was
nonoperational.

(5) Number of days vessels are offshore performing services, in transit or
waiting on inclement weather, while under contract.

(6) Based on the monthly average closing current contract prices posted by the
NYMEX.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with our
financial statements and related notes included elsewhere in this Annual Report.
The discussion below contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those expressed
or implied in this Form 10-K. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed above under the
captions "Forward-Looking Statements" and "Item 1 Business - Risk Factors."

-20-

OVERVIEW

We provide subsea construction services in connection with the infield
development of offshore oil and natural gas reservoirs. We are a leading service
provider in our market niche of installing and maintaining small diameter
flowlines and related infrastructure associated with the development of offshore
oil and natural gas reserves on the Continental Shelf of the Gulf of Mexico (the
"Shelf"). Over the last few years, we have expanded our operations, fleet
capabilities and management expertise to enable us to provide deeper water
services analogous to the services we provide on the Shelf.

Since 1997, we have increased the size of our fleet from three to nine
construction and service vessels. In 1998, we added two diving support vessels
and one supply/diving support vessel. In 2000, we added one fully redundant
dynamically positioned, or DP-2, pipelay/bury barge and one DP-2 subsea
construction vessel. In June 2001, we purchased a pipelay/bury barge, the
Midnight Rider, which increased our capabilities on the Shelf and was placed
into service in late 2001. In January 2002, we purchased the Smit Express and
intend to convert the vessel to a DP-2 offshore construction vessel with our
patent-pending pipelay system and rename it the Midnight Express. We continue to
actively seek opportunities to expand our fleet either through construction or
acquisition of vessels.

FACTORS AFFECTING RESULTS OF OPERATIONS

The demand for subsea construction services primarily depends on the prices of
oil and natural gas. These prices reflect the general condition of the industry
and influence our customers' willingness to spend capital to develop oil and
natural gas reservoirs. We are unable to predict future oil and natural gas
prices or the level of offshore construction activity related to the industry.
In addition to the prices of oil and natural gas, we use the following leading
indicators, among others, to forecast the demand for our services:

o the offshore mobile rig count and jack-up rig count;

o forecasts of capital expenditures by major and independent oil and gas
companies;

o the recent lease sale activity levels; and

o the expiration dates of existing Gulf of Mexico leases.

Even when demand for subsea construction services is strong, several factors may
affect our profitability, including the following:

o competition;

o equipment and labor productivity;

o weather conditions;

o contract estimating uncertainties; and

o other risks inherent in marine construction.

Although greatly influenced by overall market conditions, our fleet-wide
utilization is generally lower during the first half of the year because of
winter weather conditions in the Gulf of Mexico. Accordingly, we endeavor to
schedule our drydock inspections and routine and preventative maintenance during
this period. Additionally, during the first quarter, a substantial number of our
customers finalize capital budgets and solicit bids for construction projects.
For this reason, individual quarterly/interim results are not necessarily
indicative of the expected results for any given year.

-21-

In the life of an offshore field, capital is allocated to the development of a
well following successful drilling activities. The time that elapses between a
successfully drilled well and the development phase in which we participate,
varies depending on the water depth of the field. On the Shelf, demand for our
services generally follows successful drilling activities by three to 12 months.
We have noticed that demand for pipeline installation for deepwater projects
exceeding 1,000 feet of water depth generally follows initial exploration
drilling activities by at least three years. These deepwater installations
typically require much more engineering design work than Shelf installations.

OUTLOOK

We experienced a loss in 2001 and expect a loss in the first half of 2002.
Although we believe the first half of 2002 will be a period of lower activity,
we do not anticipate a downturn comparable in severity to 1999. The relatively
flat 2002 exploration and production spending budgets of the oil and natural gas
companies should lead to increased opportunities for the offshore construction
industry beginning in the second half 2002. We believe that our future financial
and operating results will continue to be highly dependent on overall market
conditions in the oil and natural gas industry. We are unable to predict future
oil and natural gas prices or the level of offshore construction activity
related to the industry.

We anticipate that the Gulf of Mexico offshore construction industry will
benefit from improved long-term industry fundamentals. We believe that a
combination of factors such as the expected increase in worldwide energy demand,
positive Shelf and deepwater trends and our strong market presence positions us
well for the future. The extensive transportation infrastructure present on the
Gulf of Mexico Shelf facilitates the development of incremental fields that can
be tied into existing trunklines originally constructed to service fields that
are now in the process of decline, favoring our Shelf market niche strategy. The
addition of the Midnight Express to our fleet in early 2002 also positions us to
take on the challenges and opportunities of the deepwater market as early as the
third quarter of 2003.

Natural gas consumption in the United States should increase over the next
decade. A large portion of this expansion is expected to come from the growth in
electric power requirements. Environmental and economic considerations dictate
that a large percentage of this increased electric power will come from newly
constructed gas-fired power generation facilities. Oil consumption should also
remain relatively stable in the near-term. Management believes that significant
new capital must be continually invested in field exploration and development in
order to maintain, much less grow, existing oil and natural gas energy
production levels to meet these demands.

These increased demands for natural gas and the dominant role of independent oil
and natural gas companies on the Shelf should allow the Gulf of Mexico to
maintain and even increase its position as a major source of North American
natural gas supplies for the intermediate term. According to the Minerals
Management Service ("MMS"), approximately 80% of the natural gas production in
2000 in the Gulf of Mexico came from shallow water fields. In addition,
technological advances have enabled oil and natural gas companies to improve
exploration success rates. Management believes that the higher demand, improved
technologies, and higher natural gas prices will permit the exploration for and
the development of additional marginal prospects, resulting in increased
activity on the natural gas-rich Shelf where we already have a strong market
position.

While the economic fundamentals of the Shelf are strong, major energy companies
and large independent oil and natural gas operators are increasingly focusing
their exploration and development efforts on frontier areas, particularly the
deepwater regions of the Gulf of Mexico and off the coasts of South America and
West Africa. These regions offer greater oil and natural gas reserve and
production growth potential relative to the existing Shelf regions. Focusing on
the Gulf of Mexico, deepwater production has been much more prolific and oil
prone than on the Shelf as approximately 52% of the oil production from the Gulf
of Mexico was from deepwater fields in 2000 according to the MMS. These
worldwide deepwater basins are one of the few non-OPEC areas to have major
reserve potential with numerous individual discoveries expected to produce more
than one billion barrels each. There have already been several deepwater fields
identified for development and various other projects under contemplation. The
completion of these deepwater projects will require expenditures reaching far
into the billions of dollars range and will mean additional wells, subsea trees,
templates and manifolds, subsea control lines, flowlines, risers and fixed and
floating platforms.

-22-

RESULTS OF OPERATIONS

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31,
2000

Revenues. Revenues were $59.1 million for the year ended December 31, 2001
compared to $46.2 million for the year ended December 31, 2000, an increase of
28%. This increase resulted from the generally stronger Shelf natural gas market
for the first half of 2001 and an increase in the number of revenue days worked.
The overall fleet-wide improvement for the number of revenue days worked was 9%
as the fleet worked 1,979 days in 2001 as compared to 1,820 days in 2000. The
average vessel utilization of the fleet remained steady at 70.3% versus 70.4% in
2000. In addition, average pricing levels for our services in 2001 were 16%
higher than 2000 levels.

Gross Profit. Gross profit was $15.9 million (26.9% of revenues) for the year
ended December 31, 2001 compared to $12.2 million (26.4% of revenues) for the
year ended December 31, 2000, an increase of 30%. This increase resulted
directly from the increase in revenues, with the gross profit as a percentage of
revenues remaining steady.

Depreciation and Amortization. Depreciation and amortization expense was $6.4
million for the year ended December 31, 2001 compared to $4.9 million for the
year ended December 31, 2000, an increase of 29%. This increase primarily
reflects a partial year of depreciation in 2001 on the Midnight Rider and a full
year of amortization on the drydocking of the Midnight Carrier, which occurred
in late 2000.

General and Administrative Expenses. General and administrative expenses were
$4.0 million (6.7% of revenues) for the year ended December 31, 2001 compared to
$3.8 million (8.1% of revenues) for the year ended December 31, 2000, an
increase of 6%. The increase was caused by the introduction of new costs as the
Company went through its initial public offering and continued the expansion of
its sales efforts and promotions. We anticipate that total general and
administrative expenses will continue to be impacted by costs related to our
fleet expansion, our efforts to strengthen our deepwater activity levels and the
additional costs associated with being a public entity.

Other Operating Expense. Other operating expense was $1.0 million for the year
ended December 31, 2001 which equaled the $1.0 million of other operating
expense for the year ended December 31, 2000. The other operating expense in
2001 relates to the nonrecurring write-off of certain costs related to the
Midnight Warrior that could not be carried over to the conversion of the
Midnight Express. Other operating expense for the year ended December 31, 2000
primarily related to severance costs associated with a former employee and the
provision for doubtful trade receivables.

Interest Expense, Net. Net interest expense was $1.2 million for the year ended
December 31, 2001 compared to $3.8 million for the year ended December 31, 2000,
an decrease of 69%. This decrease was achieved because we retired all
outstanding debt in June 2001 with the proceeds of our initial public offering.
In addition, the remaining proceeds of our initial public offering led to $0.5
million in interest income.

Income Taxes. In connection with our initial public offering, we became subject
to corporate level taxation. As such, we recorded a one-time $2.6 million tax
charge based upon the cumulative book and tax basis differences at that time.
Additionally, we recorded an $0.8 million income tax provision, at a 35%
effective rate, on pretax earnings subsequent to our initial public offering. If
we had been subject to payment of income taxes for the entire periods, we would
have recorded an additional charge of $0.3 million for the year ended December
31, 2001 and a credit of $0.6 million for the year ended December 31, 2000.

Extraordinary Loss. In June 2001, we completed our initial public offering
resulting in the retirement of all outstanding debt balances. In connection with
this extinguishment of debt, we recognized a $0.5 million (net of taxes of $0.3
million) charge on the early extinguishment of debt (see Note 7 to the financial
statements).

Net Loss Attributable to Common Stockholders. Net loss to common stockholders
for the year ended December 31, 2001 was $0.7 million, compared with a net loss
of $1.6 million in 2000, including a $0.2 million and $0.3 million charge for
preferred dividends in 2001 and 2000, respectively.

-23-

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31,
1999

Revenues. Revenues were $46.2 million for the year ended December 31, 2000
compared to $21.3 million for the year ended December 31, 1999, an increase of
117%. This increase was primarily caused by an 86% improvement in our fleet-wide
working days (1,820 working days in 2000 versus 981 working days in 1999)
resulting from strengthening in the overall offshore construction market
activity levels and the introduction into service of the Midnight Eagle
pipelay/bury barge and the Midnight Arrow subsea construction vessel in early
2000. Additionally, we benefited from incurring fewer scheduled drydock days in
2000, as the Midnight Brave and Midnight Dancer underwent longer required
"5-year" surveys in 1999, while the Midnight Runner and the Midnight Carrier
underwent shorter drydock inspections in 2000. These combined factors allowed us
to achieve an average vessel utilization of 70.4%, up from 52.5% achieved in
1999. In addition, although market conditions remained extremely price sensitive
throughout 2000, the improved offshore construction activity level allowed
average pricing levels for our services to strengthen 11% over 1999 average
levels, with the improvement coming during the second half of 2000.

Gross Profit. Gross profit was $12.2 million (26.4% of revenues) for the year
ended December 31, 2000 compared to $0.1 million for the year ended December 31,
1999. This increase resulted from the expanded revenue base and the improving
pricing levels received for our services.

Depreciation and Amortization. Depreciation and amortization expense was $4.9
million for the year ended December 31, 2000 compared to $3.5 million for the
year ended December 31, 1999, an increase of 42%. This increase reflects the
amortization of the two drydockings during the year ended December 31, 1999 and
the Midnight Eagle being introduced into service in 2000.

General and Administrative Expenses. General and administrative expenses were
$3.8 million (8.1% of revenues) for the year ended December 31, 2000 compared to
$3.3 million (15.7% of revenues) for the year ended December 31, 1999, an
increase of 13%. This increase was primarily caused by expanded sales efforts
and related promotional costs. The competitive market situation experienced
during the year ended December 31, 2000 and the introduction of two additional
vessels during this year contributed to these costs.

Other Operating Expense. Other operating expense was $1.0 million for the year
ended December 31, 2000 compared to $1.7 million for the year ended December 31,
1999, a decrease of 45%. Other operating expense for the year ended December 31,
2000 primarily related to severance costs associated with a former employee and
the provision for doubtful trade receivables. During the year ended December 31,
1999, in an effort to facilitate certain improvements to our overall operating
capabilities and to eliminate the duplicate costs of operating two separate
offices, we consolidated our corporate and operations offices. As part of this
process, we incurred certain one-time employee severance, office closure and
relocation costs totaling approximately $0.2 million. In addition, because of
this consolidation process, we recognized a charge of approximately $1.5 million
for the termination agreement associated with one employee (see Notes 11 and 12
to the financial statements).

Interest Expense, Net. Net interest expense was $3.8 million for the year ended
December 31, 2000 compared to $1.4 million for the year ended December 31, 1999,
an increase of 170%. This increase was attributable to higher overall debt
levels incurred in connection with our August 1999 refinancing of our fleet.
During the year ended December 31, 1999, we capitalized $1.4 million of interest
costs associated with construction of the Midnight Eagle, which we placed into
service in 2000.

Extraordinary Loss. In August 1999, we refinanced our fleet, resulting in a
longer repayment schedule and additional borrowings. In connection with this
debt refinancing, we recognized a $0.7 million charge on the early
extinguishment of debt (see Note 7 to the financial statements).

-24-

Net Loss Attributable to Common Stockholders. Net loss to common stockholders
for the year ended December 31, 2000 was $1.6 million, including a $0.3 million
charge for preferred dividends compared with a net loss of $10.6 million for the
year ended December 31, 1999.

If we had been subject to payment of income taxes, we would have recorded a
credit of $0.6 million for the year ended December 31, 2000 and a credit of $3.9
million for the year ended December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

In June 2001, we completed an initial public offering of 5.0 million shares of
our common stock for gross proceeds of $80.0 million; net proceeds were $72.6
million after underwriting commission and discounts and expenses. We
subsequently retired all debt, purchased the Midnight Rider and initiated the
detailed engineering for the construction of the Midnight Warrior, discussed
below. As of December 31, 2001, $24.5 million was invested in short-term
securities, pending its targeted use for our deepwater expansion program
(discussed below) and general corporate purposes. Concurrent with our initial
public offering, the predecessor company's $5.3 million of preferred membership
units were exchanged for 828,333 shares of our common stock.

In addition to the proceeds from the initial public offering, our operations
generated cash flows of $2.4 million during 2001 as compared to $1.7 million
during 2000. The proceeds from the initial public offering and cash flow from
operations funded the $13.7 million used in investing activities related to the
purchase of equipment in 2001. The majority of the equipment purchases relate to
the purchase and drydock of the Midnight Rider (see Note 6 to the financial
statements). Financing activities provided net cash of $34.9 million during
2001. In addition to the net proceeds from our initial public offering, we
retired all outstanding debt and purchased $2.2 million of our own common stock.
Working capital increased from a deficit of $10.1 million as of December 31,
2000 to a positive working capital of $30.6 million as of December 31, 2001.

Historically, our capital requirements have been primarily for the acquisition
and improvement of our vessels and other related equipment. Capital expenditures
totaled $13.7 million for 2001, $2.5 million for 2000 and $11.7 million for
1999. These capital expenditures represent the significant expansion of our
fleet since 1997 and were funded with cash flow from operations, additional
indebtedness and most recently proceeds from the initial public offering. In
addition, in 1999 we withdrew the remaining $5.2 million from our Merchant
Marine Capital Construction Fund account (see Note 2 to the financial
statements) to use for payment of the Midnight Eagle construction expenditures.
We expect to fund our equity requirements for any future qualified investments
in the same manner. We currently estimate capital expenditures for 2002-2003 to
be approximately $82 million, primarily representing the construction of, and
the equipment and support facilities associated with, the Midnight Express. This
estimate includes approximately $7 million for routine capital and drydock
inspections of our vessels to be incurred over this period.

The following table presents our long-term contractual obligations and the
related amounts due, in total and by period as of December 31, 2001 (in
thousands):

-25-

Included in the operating leases are the monthly payments for certain facilities
used in the normal course of operations. However, the majority of the operating
leases obligation relates to our taking delivery of a deepwater technology
vessel under a five-year charter agreement (the Midnight Arrow). The
unconditional purchase obligation relates to the purchase price of the Midnight
Express.

We had an $8.0 million revolving line of credit with a bank that we recently let
expire. Amounts outstanding under this revolving line of credit could not exceed
80% of eligible trade accounts receivable. We did not renew this revolving line
of credit because we had no need for this facility in the near future and we
believe that this facility can likely be replaced, at similar terms, in a
relatively short period of time.

In August 2001, the Board of Directors approved the repurchase of up to $5.0
million of our outstanding common stock. Purchases will be made on a
discretionary basis in the open market or otherwise over a period of time as
determined by management subject to market conditions, applicable legal
requirements and other factors. As of March 22, 2002, 628,700 shares had been
repurchased at a total cost of $3.7 million.

Consistent with the focus towards investing in newer technology, including
deepwater capable assets such as the Midnight Express, two of the last three
vessels added to our fleet have been DP-2 deepwater capable. Through December
31, 2001 we have expended approximately $25.3 million (in combined capital
expenditures and operating lease payments) for these vessels, with an additional
estimated $11.2 million to be incurred in associated operating lease payments
through early 2005 (see Note 12 to the financial statements).

We are currently working with several parties to determine the best option to
finance the conversion of the Midnight Express, currently estimated at a total
cost of approximately $75 million. The vessel is scheduled for delivery in April
2002 at which time the detailed engineering will be completed and the final
process to select a shipyard will commence. This is a critical factor in the
determination of the financing arrangements because if the shipyard selected is
in a foreign country there may be different financing options available. Some of
the options being reviewed include guaranteed financing through MARAD or a
similar agency of another country. In addition, non-guaranteed financing options
are being considered as well. These could be at a higher interest cost to us
than the guaranteed financing. We cannot assure you that we will be able to
obtain any financing, either guaranteed or non-guaranteed. If we are unable to
obtain any financing, it would have a negative impact on our ability to
implement our business strategy. However, we believe that we will have several
financing sources available to us.

The Midnight Express was purchased in lieu of constructing the Midnight Warrior.
There were several advantages to purchasing and converting the Midnight Express
rather than following through on the new-build plans for the Midnight Warrior.
First, the Midnight Express should complete sea trials and be ready for work
beginning as soon as the third quarter of 2003, whereas, the Midnight Warrior
would have taken at least one additional year. Secondly, the Midnight Express
provides a better platform for the installation of our patent-pending pipelay
system as the vessel is over 500 feet in length and has more deck space than the
Midnight Warrior would have had. The Midnight Warrior remains a viable option to
us as MARAD has issued a commitment, subject to customary conditions, to
guarantee the 20-year financing covering 87.5% of the cost of constructing the
initial design of the vessel. MARAD's commitment expires on May 6, 2002. After
that date, MARAD has the option to terminate the commitment if we have not
placed a portion of the permanent long-term financing. We currently have no
intent to complete the construction of the Midnight Warrior.

We believe that our cash on hand and cash flow from operations will be
sufficient to meet our existing liquidity needs for the next year. We also
believe that the anticipated proceeds from the conversion financing, in addition
to our cash flow from operations, will be sufficient to complete our identified
growth plans. We intend to continue to expand our operating capabilities. Such
an expansion may include the acquisition of existing vessels or of other
businesses consistent with our deepwater expansion strategy, although we are
engaged in no definitive discussions related to such acquisitions at the present
time. If our plans or assumptions change or prove to be inaccurate, if we cannot
obtain the conversion financing on satisfactory terms or if we make any
additional acquisitions of existing vessels or other businesses, we may need to
raise additional capital. We may not be able to raise these additional funds, or
we may not be able to raise such funds on favorable terms.

-26-

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. This statement will require us to record the fair value of liabilities
related to future asset retirement obligations in the period the obligation is
incurred. We expect to adopt SFAS No. 143 on January 1, 2003. Due to the nature
of our assets, management believes that the adoption of this statement will not
materially impact our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The provisions of this statement are required to be applied for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. Given current conditions, this statement, which revises current
guidance with respect to the process for measuring impairment of long-lived
assets, is not expected to have a significant impact on our financial position
or results of operations.

In June 2001, the American Institute of Certified Public Accountants ("AICPA")
issued an exposure draft of a proposed Statement of Position ("SOP"),
"Accounting for Certain Costs and Activities Related to Property, Plant, and
Equipment." This proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic repairs and
maintenance costs related to "in service" fixed assets. It would require that
these types of expenses be recognized when incurred rather than recognizing
expense for these costs while the asset is productive. We are assessing the
impact of the change should this SOP be adopted. If adopted, we would be
required to expense regulatory maintenance cost on our vessels as incurred.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of our financial statements requires us 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. There can be no assurance that actual results will not differ
from those estimates. We believe the following accounting policies, which are
described in Note 2 of the notes to our financial statements, represent our
critical accounting policies:

Revenue Recognition - We account for our contracts in-progress using the
percentage-of-completion method, as our contracts contain multiple phases of
work whereby title to and ownership of the work-in-process inures to our
customers as each phase is completed. Additionally, we believe that we have
demonstrated the ability to produce reasonably dependable estimates of the costs
under such contracts, and that our business has not been subject to the types of
inherent risks that would raise questions about the ability of either us or the
customer to perform their obligations under the contract or would make otherwise
reasonably dependable contract estimates doubtful.

Under this method, recognition of earnings on contracts in-progress is
calculated based on the ratio of costs incurred as of the reporting date to
total expected costs to be incurred on each contract. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, insurance and benefits. General
and administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period during which
such losses are first forecast.

Property and Equipment - Property and equipment are stated at cost less
applicable depreciation. Depreciation is calculated principally using the
straight-line method over the estimated useful lives of the various classes of
depreciable assets. Expenditures for maintenance and repairs are expensed as
incurred. Major expenditures for renewals and improvements that extend the
useful lives of existing assets, interest incurred during vessel construction,
and, when material, vessel construction related overhead are capitalized.

-27-

We assess the realizability of our long-term assets for impairment when events
or certain changes indicate the possibility that the carrying value of any such
asset may not be recoverable. We record impairment losses on long-term assets
used in operations when the carrying value of those assets is less than the
undiscounted cash flows estimated to be generated by those assets. The net
carrying value of assets that are considered to not be fully recoverable are
reduced to fair value. Our estimate of fair value represents our best estimate
based on industry trends and reference to market transactions and is subject to
variability. There have been no impairments during any years presented in the
accompanying financial statements pursuant to SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to certain market risks that are inherent in the financial
instruments arising from transactions that we enter into in the normal course of
our business. In the past, it has not been our practice to enter into derivative
financial instrument transactions to manage or reduce market risks or for
speculative purposes, but our business has been subject to interest rate risk on
our debt obligations in periods when such debt was outstanding. The fair value
of debt with a fixed interest rate generally will increase as interest rates
fall, given consistency in all other factors. Conversely, the fair value of
fixed rate debt will generally decrease as interest rates rise.

-28-

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TORCH OFFSHORE, INC.
INDEX TO FINANCIAL STATEMENTS

-29-

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Torch Offshore, Inc.:

We have audited the accompanying consolidated balance sheets of Torch Offshore,
Inc. (a Delaware corporation) and subsidiary as of December 31, 2001 and 2000,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with 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 financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Torch Offshore,
Inc. and subsidiary as of December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

New Orleans, Louisiana,
January 25, 2002 (except with
respect to Note 16, as to which
the date is March 1, 2002)

-30-

TORCH OFFSHORE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

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

-31-

TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

-32-

TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

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

-33-

TORCH OFFSHORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

-34-

TORCH OFFSHORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS:

Torch Offshore, Inc., a Delaware corporation, and its wholly owned subsidiary
Torch Offshore, L.L.C. (collectively, the "Company") provide integrated pipeline
installation, subsea construction and support services to the offshore oil and
natural gas industry primarily in the United States Gulf of Mexico (the "Gulf of
Mexico"). The Company's focus has been providing services primarily for oil and
natural gas production in water depths of 20 to 300 feet in the Gulf of Mexico
(the "Shelf"). Over the past few years, the Company has expanded its operations,
fleet capabilities and management expertise to enable it to provide deeper water
services analogous to those services it provides on the Shelf.

Torch, Inc. ("Torch"), the predecessor in interest to Torch Offshore, L.L.C.,
was incorporated in Louisiana in 1978. Torch is owned by Lyle G. Stockstill and
Lana J. Hingle Stockstill ("Mr. and Mrs. Stockstill"), the founders of the
Company. In May 2000, Torch Offshore, L.L.C. was formed to hold substantially
all of the assets and liabilities of Torch. In January 2001, the Board of
Directors of Torch formed Torch Offshore, Inc., which filed a registration
statement on Form S-1 with the Securities and Exchange Commission (the "SEC") to
register and sell common stock of the Company. In June 2001, the Company
completed its initial public offering of 5.0 million shares of its common stock,
raising gross proceeds of $80.0 million (the "Public Offering").

In connection with the Public Offering, all membership interests in Torch
Offshore, L.L.C. were contributed to the Company in exchange for common shares
of the Company. In the aggregate, Mr. and Mrs. Stockstill presently own a
majority of the Company through their ownership of Torch. For reporting
purposes, these transactions were considered a recapitalization, and as such,
all historical share data included in the accompanying financial statements has
been restated (see Note 3).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States. A summary of significant
accounting policies follows:

Principles of Consolidation - The consolidated financial statements include the
accounts of Torch Offshore, Inc. and its wholly owned subsidiary, Torch
Offshore, L.L.C. All significant intercompany balances and transactions have
been eliminated.

Use of Estimates - The presentation of financial statements in conformity with
accounting principles generally accepted in the United States 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 those
estimates.

Cash and Cash Equivalents - The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. The
carrying amount of these instruments approximates fair value because of their
short maturity.

Allowance for Doubtful Accounts - The Company provides allowances for doubtful
accounts based on historical experience and a review of the current status of
existing accounts receivable balances at the end of each reporting period.
Provisions for doubtful accounts are recorded as charges to other operating
expense. Activity within the allowance for doubtful accounts follows (in
thousands):

-35-

Property and Equipment - Property and equipment are stated at cost less
applicable depreciation. Depreciation is calculated principally using the
straight-line method over the estimated useful lives of the various classes of
depreciable assets. Expenditures for maintenance and repairs are expensed as
incurred. Major expenditures for renewals and improvements that extend the
useful lives of existing assets, interest incurred during vessel construction,
and, when material, vessel construction related overhead are capitalized.

The Company periodically assesses the realizability of its long-term assets
pursuant to Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Any impairment of the asset is recognized when it is probable
that such future undiscounted cash flows will be less than the carrying value of
the asset. No write-downs were recorded for the years ending December 31, 2001,
2000 and 1999.

Investments - Long-term investments represent net remaining deposits made by the
Company under the U.S. Government sponsored Merchant Marine Capital Construction
Fund ("CCF") program. The CCF program allows the Company to set aside and use
its own funds for the purpose of funding current or future construction of
"qualified" marine vessels to be used in the Company's operations, while
allowing the Company to receive accelerated tax deductions equal to the amount
originally deposited.

These investments are comprised of deposits in an interest bearing, money-market
account, with interest income recorded as earned. Although these investments are
short-term in nature, similar to "cash and cash equivalents," because of the
purpose of the deposits the Company has reflected these as a long-term asset.
There are no restrictions on these investments. However, "unqualified"
withdrawals from this program would result in that amount being included as
additional taxable income to the Company for that period. The fair value of
investments approximated carrying value as of December 31, 2001 and 2000.

Deferred Drydocking Charges - The Company is obligated by regulation to
periodically incur refurbishment costs (known as "drydocking" costs) related to
the maintenance and operation of its marine vessels. The Company capitalizes
periodic scheduled drydocking charges when incurred and amortizes such costs on
a straight-line basis over a term that approximates the amount of time until the
next required drydocking refurbishment, generally two to three years.
Amortization expense for deferred drydocking charges totaled $2,562,000 in 2001,
$1,485,000 in 2000 and $1,206,000 in 1999.

Revenue Recognition - The Company accounts for its contracts in-progress using
the percentage-of-completion method, as its contracts contain multiple phases of
work whereby title to and ownership of the work-in-process inures to its
customers as each phase is completed. Additionally, the Company believes that it
has demonstrated the ability to produce reasonably dependable estimates of the
costs under such contracts, and that its business has not been subject to the
types of inherent risks that would raise questions about the ability of either
the Company or the customer to perform their obligations under the contract or
would make otherwise reasonably dependable contract estimates doubtful.

Under this method, recognition of earnings on contracts in-progress is
calculated based on the ratio of costs incurred as of the reporting date to
total expected costs to be incurred on each contract. The SEC has issued Staff
Accounting Bulletin ("SAB") 101 which presents the SEC staff's views on and
guidance in applying accounting principles generally accepted in the United
States to revenue recognition in financial statements. The Company has adopted
the provisions of SAB 101, which had no impact with respect to the Company's
previously existing revenue recognition practices.

Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies,
insurance and benefits. General and administrative costs are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period during which such losses are first forecast.

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The asset caption "Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts" represents revenues recognized in excess of amounts
billed.

Income Taxes - In connection with the Public Offering, the Company became
subject to corporate level taxation and recorded a $2.6 million charge based
upon cumulative book and tax basis differences at the date of change in taxpayer
status. In addition, the Company has recorded an $0.8 million provision (a 35%
effective tax rate) attributable to operating earnings after the Public
Offering. From 1997 until the Public Offering the Company had not been subject
to income taxes.

Segments - The Company's business is considered a single operation with no
separately reportable segments in accordance with SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." The Company has
domestic operations in one industry segment, the marine construction service
industry.

Earnings Per Share - The Company follows SFAS No. 128, "Earnings per Share."
Basic earnings per share is calculated by dividing income attributable to common
stockholders by the weighted-average number of common shares outstanding for the
applicable period, without adjustment for potential common shares outstanding in
the form of options, warrants, convertible securities or contingent stock
agreements. For the calculation of diluted earnings per share, the number of
common shares outstanding are increased (if deemed dilutive) by the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued, determined using the treasury stock
method where appropriate.

Common stock equivalents (related to stock options) excluded from the
calculation of the diluted loss per share were 224,000 shares for 2001, 363,500
shares for 2000 and 594,000 shares for 1999. None of the outstanding shares of
convertible preferred stock were considered in the calculation of the diluted
loss per share for 2000 because of their anti-dilutive effect.

Derivative Financial Instruments - Effective January 1, 1999, the Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which established accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for

-37-

qualifying hedges allows a derivative's gains and losses to be recorded through
equity via other comprehensive income, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The Company has not historically entered into these derivative
instruments, nor were there any contracts existing as of December 31, 2001;
thus, the adoption of SFAS No. 133 did not have an impact on its financial
position or results of operations.

New Accounting Standards - In July 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for fiscal years beginning after June 15, 2002. This
statement will require the Company to record the fair value of liabilities
related to future asset retirement obligations in the period the obligation is
incurred. The Company expects to adopt SFAS No. 143 on January 1, 2003. Due to
the nature of the Company's assets, management believes that the adoption of
this statement will not materially impact the Company's financial position or
results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The provisions of this statement are required to be applied for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. Given current conditions, this statement, which revises current
guidance with respect to the process for measuring impairment of long-lived
assets, is not expected to have a significant impact on the Company's financial
position or results of operations.

In June 2001, the American Institute of Certified Public Accountants ("AICPA")
issued an exposure draft of a proposed Statement of Position ("SOP"),
"Accounting for Certain Costs and Activities Related to Property, Plant, and
Equipment." This proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic repairs and
maintenance costs related to "in service" fixed assets. It would require that
these types of expenses be recognized when incurred rather than recognizing
expense for these costs while the asset is productive. The Company is assessing
the impact of the change should this SOP be adopted. If adopted, the Company
would be required to expense regulatory maintenance cost on its vessels as
incurred.

3. RECAPITALIZATION:

In May 2000, Torch transferred, at historical cost, substantially all assets,
liabilities and operations to a newly formed subsidiary, Torch Offshore, L.L.C.
in exchange for common membership units of Torch Offshore, L.L.C. Immediately
following the transfer, Torch Offshore, L.L.C. issued 7% Convertible Preferred
Membership Units ("Preferred Units") to an outside investor for $5.3 million.
The Preferred Units were converted to 828,333 shares of common stock of the
Company just prior to the Public Offering.

4. CONCENTRATIONS OF CREDIT RISK:

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits and trade accounts receivable.
The Company at times has cash on deposit at financial institutions that is in
excess of federally insured limits. Also, the Company's trade receivables are
generally unsecured except for lien rights, and are due from customers,
substantially all of whom are engaged in the production and development of oil
and natural gas located in the Gulf of Mexico.

5. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS:

Costs and estimated earnings in excess of billings on uncompleted contracts
consisted of the following (in thousands):

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6. PROPERTY AND EQUIPMENT:

The major classifications and estimated useful lives of property and equipment
follow (in thousands, except useful life data):

Depreciation expense totaled $3,814,000 for 2001, $3,456,000 for 2000 and
$2,263,000 for 1999. During the year ended December 31, 1999, $1,354,000 of
interest related to vessel construction was capitalized.

Included in "Vessels Under Construction" at December 31, 2001 and 2000 are the
engineering design, legal and other costs associated with the Company's efforts
to pursue construction of the Midnight Warrior. However, the Company tabled the
construction of this vessel with the acquisition of the Smit Express in 2002,
which it plans to convert to the Midnight Express (see Note 16). The Midnight
Express will be similar to the proposed Midnight Warrior in various aspects,
therefore, many of the costs included above can be utilized in the conversion of
the Midnight Express. The Company reviewed the costs included in "Vessels Under
Construction" at December 31, 2001 and recorded a charge of $950,000 in 2001 for
certain identifiable costs that were deemed to have no value to the conversion
of the Midnight Express.

In June 2001, the Company purchased an existing pipelay/bury barge, the BH-400
(renamed the Midnight Rider), for $9.5 million. This barge completed a required
drydocking and was placed into service in late 2001.

7. LONG-TERM DEBT:

In 1999, the Company refinanced its fleet-related borrowings with a six-year,
$33 million, 10.56% fixed interest rate installment loan. In connection with
this debt refinancing, the Company recognized a $676,000 extraordinary loss on
the early extinguishment of debt, consisting of $565,000 for prepayment fees and
associated refinancing costs and $111,000 for the write-off of previously
deferred financing costs related to prior borrowings. Borrowings under the loan
were secured by first preferred ship mortgage liens on the Company's entire
fleet and were guaranteed Mr. and Mrs. Stockstill.

In June 2001, the Company repaid all debt as described above with proceeds from
the Public Offering. This resulted in the Company incurring an extraordinary
loss on the early retirement of debt of $498,000 (net of taxes of $268,000).

As of December 31, 2000, the fair value of the Company's debt obligations
approximated carrying value.

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Long-term debt consists of the following (in thousands):

8. INCOME TAXES:

Prior to the Public Offering in June 2001, the Company had elected to be taxed
as a flow-through entity under the Internal Revenue Code. Income taxes related
to the operations of the Company were recognized directly at the individual
taxpayer level. The Company recognized no federal or state income tax.

In connection with the Public Offering in 2001, the Company adopted SFAS No.
109, "Accounting for Income Taxes." This statement requires the use of the
liability method of computing deferred income taxes. Under this method, deferred
income taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.

The provision for income taxes reflected in the statement of operations
consisted of the following for the years ended December 31, 2001, 2000 and 1999
(in thousands):

Reconciliations of the differences between income taxes from operations computed
at the federal statutory tax rate and income taxes recorded follow (in
thousands):

-40-

The components of the Company's deferred taxes at December 31, 2001 follow (in
thousands):

9. RELATED PARTY TRANSACTIONS:

The Company purchases catering services for the galleys of some of its boats and
barges from a company partially owned by Mrs. Stockstill. Purchases for 2001,
2000 and 1999 totaled $33,000, zero and $8,000, respectively. The Company also
purchased fuel from a company partially owned by Mrs. Stockstill. Purchases for
2001, 2000 and 1999 totaled $53,000, $282,000 and zero, respectively.

10. SIGNIFICANT CUSTOMERS:

No individual customer made up more than 10% of the revenues for the year ended
December 31, 2001. Approximately 27% and 24% of the Company's revenues were
derived from two customers during 2000 and 1999, respectively.

11. SEVERANCE AND REORGANIZATIONAL COSTS:

During 1999, the Company consolidated its corporate and operations offices. As
part of this process, the Company incurred certain one-time employee severance,
office closure and relocation costs totaling approximately $0.2 million. In
addition, because of this consolidation process, the Company recognized a charge
of approximately $1.5 million during 1999 for the termination agreement
associated with one employee (Note 12). The Company also recorded a $0.5 million
charge in 2000 primarily associated with the termination of another employee
(Note 12). These severance and reorganization costs have been reflected in the
caption "Other Operating Expense" in the Statements of Operations.

12. COMMITMENTS AND CONTINGENCIES:

Employment Agreements - The Company had an employment agreement with an employee
and also granted in 1996 a ten-year option to this employee to purchase 395,000
shares of the Company's common stock with an exercise price of $0.51 per share.
In 1999, the Company entered into a termination agreement with this employee,
canceling the employment agreement and the options. The termination agreement
called for payments totaling $1.5 million. This amount has been paid in full.

In 1998, the Company entered into an employment agreement with an employee and
also granted a ten-year option to this employee to purchase 77,900 shares of the
Company's common stock with an exercise price of $4.62 per share. An additional
"fair market value" grant of options to purchase 319,200 shares of the Company's
common stock was made to this employee in 1998, with an exercise price of $9.99
per share. The exercise prices of the respective options equaled or exceeded
management's estimate of the fair value of the Company's stock at the dates of
grant. In 2000, the Company entered into a termination agreement with this
employee, canceling the employment agreement and the options. The termination
agreement called for payments totaling approximately $380,000. The entire
balance has been paid.

The Company presently has employment agreements with four employees expiring on
December 31, 2002, which include severance benefits equal to six months salary
for those individuals.

Lease Commitments - The Company's obligations under non-cancellable operating
lease commitments as of December 31, 2001 totaled $3.6 million for 2002, $3.7
million for 2003, $3.7 million for 2004, $0.8 million for 2005, zero for 2006
and zero thereafter. The majority of the obligation relates to the Company
taking delivery of a deepwater technology vessel under a charter agreement (the
charter amount includes the marine crew, maintenance and repairs, drydock costs,
and certain insurance coverages), with certain early termination options. At the
end of the initial term, the Company has the option of returning the vessel,
exercising an additional two-year leasing option, or purchasing the vessel for a
fixed price, which approximated the Company's estimate of fair value upon
executing the lease.

-41-

The Company also leases real property in the normal course of business under
varying operating leases that generally provide for fixed monthly rentals. Rent
expense for the years ending December 31, 2001, 2000 and 1999 was $420,000,
$306,000 and $240,000, respectively.

Contingencies - Because of the nature of its business, the Company is subject to
various claims (see Note 16). The Company has engaged legal counsel to assist in
defending all legal matters, and management intends to vigorously defend all
claims. The Company does not believe, based on all available information, that
the outcome of these matters will have a material effect on its financial
position or results of operations.

13. STOCKHOLDERS' EQUITY:

Treasury Stock - In August 2001, the Company's Board of Directors approved the
repurchase of up to $5.0 million of the Company's outstanding common stock.
Purchases will be made on a discretionary basis in the open market or otherwise
over a period of time as determined by management subject to market conditions,
applicable legal requirements and other factors. As of December 31, 2001,
409,700 shares had been repurchased at a total cost of approximately $2.2
million.

Stock Option Plan - The Company's 2001 Long-Term Incentive Plan authorizes 3.0
million shares of the Company's common stock to be granted to employees,
directors and affiliates in the form of options, stock, phantom stock,
performance based stock or stock appreciation rights. Concurrent with the Public
Offering, the Company granted stock options covering 255,943 shares of common
stock at $16.00 per share, and 32,813 shares of restricted stock, both vesting
generally over five years. Prior to this grant, only stock option grants
associated with the Company's predecessor were outstanding (see Note 12).

The Company has adopted the disclosure only provisions of SFAS No. 123 and
continues to apply Accounting Principles Board Opinion ("APB") No. 25 and
related interpretations in accounting for its stock-based compensation plan.
Under SFAS No. 123 compensation methods, the Company's stock based compensation
cost would have increased by $183,000 ($0.02 per share), $145,000 ($0.02 per
share) and $158,000 ($0.02 per share) for 2001, 2000 and 1999, respectively. For
the pro forma computation, the fair value of the stock options granted was
estimated using the Black-Scholes option-pricing model. The weighted-average
fair value of the 2001 stock option grants was $10.98 per share, calculated
using a risk-free interest rate of 4.88%, expected volatility of 76.40%, an
expected life of five years and no annual dividend.

The following table shows the changes in options outstanding under the 2001
Long-Term Incentive Plan for the year ended December 31, 2001:

The following table summarizes information on stock options outstanding and
exercisable as of December 31, 2001, pursuant to the 2001 Incentive Plan:

-42-

14. EMPLOYEE BENEFIT PLAN:

The Company has a 401(k) defined contribution plan whereby eligible employees
are allowed to contribute on a tax deferred basis up to 15% of their
compensation (subject to certain limitations) for investment within the plan.
Earnings from the plan accumulate to the benefit of the employees on a
tax-deferred basis. The Company matches employee contributions up to 6% of the
respective employees' compensation. Plan participants vest in the Company's
matching contributions over a five-year period. The amount contributed to the
plan by the Company totaled $318,000 for 2001, $341,000 for 2000 and $298,000
for 1999.

15. QUARTERLY FINANCIAL DATA (UNAUDITED):

Following is a summary of consolidated interim financial results:

16. SUBSEQUENT EVENTS:

In early 2002, the Company entered into an agreement for the purchase of the
Smit Express, a 520-foot vessel, from Smit International for $9.75 million. The
vessel will be converted to a DP-2 offshore construction vessel and renamed the
Midnight Express at an estimated total cost of $75 million. Full integration of
the equipment, the pipelay system and the vessel, followed by sea trials, is
scheduled for the third quarter of 2003. Concurrent with the decision to
purchase the Midnight Express, the construction of the Midnight Warrior was
deferred.

The Company has been named as a defendant in a stockholder class action suit
filed by purported stockholders regarding its initial public offering. This
suit, which seeks unspecified monetary damages, has been filed in federal
district court for the Eastern District of Louisiana. Management believes the
allegations in this suit are without merit, and the Company intends to
vigorously defend this lawsuit. Even so, an adverse outcome in this class action
litigation could have an adverse effect on the Company's financial condition or
results of operations.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is set forth under the captions "Election
of Directors" and "- Compliance with Section 16(a) of the Exchange Act" in the
Company's definitive Proxy Statement (the "2002 Proxy Statement") for its annual
meeting of stockholders to be held on May 16, 2002, which sections are
incorporated herein by reference.

Pursuant to Item 401(b) of Regulation S-K, the information required by this item
with respect to executive officers of the Company is set forth in Part I of this
report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is set forth in the sections entitled
"Election of Directors - Director Compensation" and "Executive Compensation" in
the 2002 Proxy Statement, which sections are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the 2002
Proxy Statement, which section is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is set forth in the section entitled
"Election of Directors - Certain Transactions" in the 2002 Proxy Statement,
which section is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS:

Report of Independent Public Accountants.......................................................... 30
Consolidated Balance Sheets as of December 31, 2001 and 2000...................................... 31
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999........ 32
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31,
2001, 2000 and 1999............................................................................. 33
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999........ 34
Notes to Consolidated Financial Statements........................................................ 35

2. FINANCIAL STATEMENT SCHEDULES:

All other financial statement schedules are omitted because the
information is not required or because the information required is in the
financial statements or notes thereto.

4(a). EXHIBITS:

The following exhibits are filed herewith unless otherwise indicated:

*3.1 -- Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-54120)).

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*3.2 -- Bylaws (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-54120)).
*3.3 -- Certificate of Amendment to Certificate of Incorporation
(Incorporated by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-54120)).
*4.1 -- Form of specimen common stock certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-54120)).
*4.2 -- Registration Rights Agreement, dated June 6, 2001, among the
Company, Friends of Lime Rock LP and Riverside Investments
LLC (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed June 12, 2001
(SEC File No. 000-32855)).
*10.1 -- Contribution Agreement dated January 15, 2001 among Torch,
Inc., Friends of Lime Rock LP, Riverside Investments LLC and
Torch Offshore, Inc. (Incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-54120)).
*10.2 -- Torch Offshore, Inc. 2001 Long-Term Incentive Plan
(Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (Registration No.
333-54120)).
*10.3 -- Employment Agreement between Torch Offshore, Inc. and Willie
J. Bergeron, Jr., dated January 15, 2001 (Incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-54120)).
*10.4 -- Employment Agreement between Torch Offshore, Inc. and
William J. Blackwell dated January 15, 2001 (Incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (Registration No. 333-54120)).
*10.5 -- Employment Agreement between Torch Offshore, Inc. and
Vincent Lecarme dated January 15, 2001 (Incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-54120)).
*10.6 -- Employment Agreement between Torch Offshore, Inc. and James
J. Mermis dated January 15, 2001 (Incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form S-1 (Registration No. 333-54120)).
*10.8 -- Form of Indemnification Agreement (Incorporated by reference
to Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (Registration No. 333-54120)).
*10.9 -- Vessel Construction Contract by and between Bender
Shipbuilding & Repair Co., Inc. and Torch Deepwater Inc.,
dated March 30, 2000, as amended (Incorporated by reference
to Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (Registration No. 333-54120)).
*10.10 -- Pipelay Services Contract between Union Oil Company of
California and Torch, Inc., a Louisiana corporation, dated
January 4, 2001 (Incorporated by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1
(Registration No. 333-54120)).
*10.11 -- Co-operation Agreement between Sonsub Inc., a Delaware
corporation, and Torch, Inc., a Louisiana corporation, dated
March 17, 2000 (Incorporated by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1
(Registration No. 333-54120)).
*10.12 -- Agreement between Torch, Inc. and SAS Gouda B.V., dated
March 18, 1998 (Incorporated by reference to Exhibit 10.14
to the Company's Registration Statement on Form S-1
(Registration No. 333-54120)).
10.13 -- Memorandum of Agreement between Torch Offshore, Inc. and
Smit International Eminent Carrier N.V. of Grote Werf Noord
(Scharloo) dated December 28, 2001
*21.1 -- List of subsidiaries of the Company (Incorporated by
reference to Exhibit 21.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-54120)).
23.1 -- Consent of Arthur Andersen LLP
99.1 -- Required Letter to Securities and Exchange Commission under
Temporary Note 3T
---------------------------
* Incorporated by reference as indicated.

4(b). REPORTS ON FORM 8-K:

None.

-45-

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 our
behalf by the undersigned, thereunto duly authorized on March 27, 2002.

TORCH OFFSHORE, INC.

Date: March 27, 2002 By: /s/ WILLIAM J. BLACKWELL
-----------------------------------------
William J. Blackwell
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

-46-

TORCH OFFSHORE, INC.
GLOSSARY OF CERTAIN INDUSTRY TERMS

BOE: Barrels of oil equivalent. A measure of
aggregate production which includes oil,
condensate and natural gas.

Coiled tubing: A prefabricated single length of reeled pipe
(2" to 4 1/2" in diameter) used for
delivering tools "down hole" for maintenance
purposes, as a flowline, and occasionally for
drilling small diameter wells.

Conventional pipelay: Process of offshore pipe installation whereby
40-foot segments, or multiples thereof, of up
to 60" diameter pipe are welded together,
coated, and tested on the deck of the pipelay
barge. Each segment is then connected to the
prior segment and is submerged in the water
as the barge is moved by its anchor winches
or thrusters.

Conventional mooring: One of three methods of positioning a
floating drilling, installation or production
unit over a position on the sea floor. A
vessel is conventionally moored when from one
to 12 anchor lines extend from the vessel to
the sea floor where they are attached to
embedded anchors of various types.

While adequate for positioning permanent or
transient vessels in shallow to intermediate
depths, conventional moorings are impractical
in deeper waters as the combined weight of
the anchors and lines can exceed the variable
deck load of the vessel being moored.

Deepwater: Generally considered to be water depths
between 1,000 and 5,000 feet (also see
"ultra-deepwater").

DP: Dynamic positioning. A positioning system
effected by thrusters on the bow and stern of
a vessel that holds the vessel in place
without a mooring system. Computers, which
use satellite, acoustic and taut wire
reference systems, and which take into
account wind and current effects on the
vessel, direct the thrusters. A fully
redundant DP-2 system is capable of using
more than one reference system in case its
primary system is not operational and can
maintain position even with the loss of an
engine, computer or a thruster (either at the
bow or at the stern).

Drydock: A submersible floating barge, equipped with
wing walls, which can be submerged in order
to allow a normal vessel to float into
position between the wing walls. The
submerged barge is then de- ballasted in
order to lift the normal vessel completely
out of the water. Major maintenance and
required inspections can then be performed.
Upon successful completion of these
activities, the submersible barge is again
submerged. The normal vessel is re- floated
and then removed from between the wing walls.

Periodic "drydockings" are required on a
three to five year cycle in order for vessels
to be maintained in class and hence to be
eligible for insurance and for commercial use
on offshore projects. The cost

G-1

of any given drydocking is initially
capitalized and then amortized over the
period until the next scheduled drydocking.

Flowline: Small diameter (3" to 12") pipelines that
carry fluids. Flowlines are used to collect
produced fluids from wells and transport them
to treating and storage facilities, as well
as to deliver other fluids for injection into
the wellbore.

J-lay: Describes one of two basic profiles used when
installing subsea pipelines, the other being
S-lay. The "J" in the term describes the
curve in the pipe maintained by the dynamic
positioning system and the tensioners onboard
the lay vessel.

The J-lay technique is only used on vessels
equipped with dynamic positioning and is
favored for use in deepwater. The J-lay
methodology has intrinsic cost disadvantages
that result from the use of a single welding
station as opposed to S-lay methodology where
multiple welding stations can be used,
accelerating the lay rate of the vessel and
thereby reducing the installed cost of the
pipeline. However, the advantages inherent in
reducing the number of times the pipe is
bent, as well as in the need for less
tensioning capacity as water depths increase,
make this the favored method in deepwater.

Kips: 1,000 pounds. Unit used for measuring the
tension which can be applied to a pipeline.
Tension capability is one determinant of the
depth capability of a pipelay vessel.

MARAD: U.S. Department of Transportation Maritime
Administration.

Moonpool: A protected opening in the center of a vessel
through which a saturation diving system,
remotely operated vehicle or other
specialized equipment may be deployed,
allowing deployment in adverse weather
conditions.

Mooring: A means of anchoring a vessel to the seabed.

Reeled pipe: A prefabricated flowline or pipeline reeled
onboard a lay vessel for transportation,
followed by offshore installation. Pipe up to
18" in diameter can be installed using reels
operating in either the S-lay or J-lay mode.

Reel lay: Process of offshore pipe installation whereby
pipe segments are welded, tested and coated
onshore and then wound onto a pipe reel in
one continuous length. Once the reel vessel
is in position, the pipe is unspooled onto
the ocean floor as the vessel moves forward.

Riser: Typically a rigid or flexible section of pipe
that connects a subsea pipeline or well head
to either a fixed or floating surface
processing facility.

Remotely operated vehicle: Robotic vehicle that is manipulated from a
mother ship, via an umbilical, in order to
perform tasks and increase the efficiency of
subsea operations at depths where the use of
divers is either unsafe, uneconomical or
technically impossible.

G-2

S-lay: Describes one of two basic profiles used when
installing subsea pipelines, the other being
J-lay. The "S" in the term describes the
curve in the pipe maintained by the
positioning system and the tensioners onboard
the lay vessel.

The S-lay technique can be used on either a
conventionally moored vessel or on one
equipped with dynamic positioning. While more
than adequate in shallow and intermediate
depths, S-lay installation is impractical in
ultra-deepwater because of ever increasing
mooring and tensioning loads.

Saturation diving: A type of diving normally required at water
depths greater than 200 feet. Divers are kept
under pressure for an extended period of
time, often many days, in a specially
designed habitat and lowered to the seabed by
way of a "diving bell" to perform subsea
construction tasks. At the end of a work
shift, they return to the surface but remain
under pressure until they descend for their
next work shift. At the end of the project,
they are slowly decompressed over several
days until they return to surface conditions.

Shelf: Continental shelf of the Gulf of Mexico with
waters from 50 feet to 1,500 feet in depth.

Spar: A type of floating production hull,
resembling a large annular cylinder, with air
chambers at the top, to provide buoyancy, and
ballast at the bottom, to provide stability.

Sponson: A structure projecting from the side of a
vessel, designed to increase lateral
stability.

Stinger: A structural member extending from the stern
of a laybarge which is designed to support
the pipeline as it enters the water. The
member may be either rigid or articulated.
Its purpose is to maintain the minimum
bending radius of the pipe.

Surface supply diving: Also called "mixed gas diving" or "bounce
diving," it is a diving technique performed
in water depths of less than 200 feet. Divers
are linked to the surface by an umbilical
containing compressed gas, communication and
safety lines. Such diving may be done for
only a limited duration and requires
subsequent decompression to avoid serious
injury to the diver.

Tension leg platform: A form of floating production system
characterized by the use of rigid tendons
that extend vertically from the sea floor to
the hull. These tendons are in "tension" as a
result of the hull's buoyancy.

Tie-in: The process of connecting a pipeline to
another pipeline, or a pipeline to a riser,
by means of flanges, mechanical connectors or
hyperbaric welding.

Trunkline: Also called a "transmission line" or an
"export line," it is a pipeline of 14" to 42"
in diameter and lengths of up to hundreds of

G-3

miles that transports hydrocarbons from
multiple production facilities to an onshore
pipeline network or to a process facility.

Ultra-Deepwater: Water depths in excess of 5,000 feet.

Umbilical: Control lines arranged in a bundle that
sometimes also include power cables and
injection lines.

G-4

INDEX TO EXHIBIT

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* Incorporated by reference as indicated.