TORCH OFFSHORE INC - 10-Q Quarterly Report

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

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FORM 10-Q

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

For the Quarterly Period Ended June 30, 2002

Commission File Number 000-32855

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

DELAWARE 74-2982117
(State or Other Jurisdiction of (IRS 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

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

The number of shares of the Registrant's Common Stock outstanding as of August
12, 2002 was 12,664,140.

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TORCH OFFSHORE, INC.

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

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

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

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

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

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

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TORCH OFFSHORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION:

The interim consolidated financial statements included herein have been prepared
by Torch Offshore, Inc. (a Delaware corporation) and are unaudited, except for
the balance sheet at December 31, 2001, which has been prepared from the
Company's previously audited financial statements. The consolidated financial
statements of Torch Offshore, Inc. include its wholly owned subsidiary Torch
Offshore, L.L.C., (collectively, the "Company"). Management believes that the
unaudited interim financial statements include all adjustments (such adjustments
consisting only of a normal recurring nature) necessary for fair presentation.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations. The results for the three and six months ended June 30, 2002 are
not necessarily indicative of the results to be expected for the entire year.
The interim financial statements included herein should be read in conjunction
with the audited financial statements and notes thereto together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.

The Company provides 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.

In June 2001, the Company completed its initial public offering of 5.0 million
shares of its common stock at $16.00 per share, raising gross proceeds of $80.0
million; net proceeds were $72.6 million after underwriting commission and
discounts and expenses totaling $7.4 million (the "Public Offering").

2. STOCKHOLDERS' EQUITY:

In connection with the Public Offering, predecessor interests of the Company
(including preferred unit interests) were exchanged for common shares of the
Company. For financial reporting purposes, the transactions were considered a
recapitalization of the Company, and as such, all historical share data included
in the accompanying financial statements has been restated.

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 June 30, 2002, 675,768
shares had been repurchased at a total cost of $4.0 million.

Stock Option Plan - The Company has a long-term incentive plan under which 3.0
million shares of the Company's common stock are authorized to be granted to
employees and affiliates. The awards can be in the form of options, stock,
phantom stock, performance based stock or stock appreciation rights. As of June
30, 2002, stock options covering 359,692 shares of common stock with a weighted
average price of $12.18 per share, and 40,675 shares of restricted stock, both
vesting generally over five years, were outstanding.

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3. EXTRAORDINARY LOSS:

In June 2001, the Company repaid all debt, incurring an extraordinary loss on
the early retirement of debt of $0.8 million ($0.5 million after tax).

4. INCOME TAXES:

Prior to the Public Offering, 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. Therefore, the Company recognized no federal or state income tax for the
period from 1997 until the Public Offering.

In connection with the Public Offering, the Company became subject to corporate
level taxation and adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." The Company 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 recorded a $0.3 million
provision (a 35% effective tax rate) attributable to operating earnings after
the Public Offering through June 30, 2001.

The Company recorded a $0.2 million benefit (a 35% effective tax rate)
attributable to operating losses for the three months ended June 30, 2002 and a
provision of $0.1 million (a 35% effective tax rate) attributable to operating
earnings for the six months ended June 30, 2002.

5. 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
calculation of diluted earnings per share, the number of common shares
outstanding are increased (if deemed dilutive) by the weighted-average 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 diluted earnings per share were approximately 264,000 shares and
68,000 shares for the second quarters of 2002 and 2001, respectively, and
approximately 217,000 shares and 34,000 shares in the first six months of 2002
and 2001, respectively, because they were anti-dilutive. None of the predecessor
convertible preferred units were considered in the calculation of diluted
earnings per share because of their anti-dilutive effect.

6. DEBT:

In July 2002, the Company entered into a $35.0 million bank facility consisting
of a $25.0 million asset-based five-year revolving credit facility and a $10.0
million receivables-based working capital facility. The interest on the bank
facility is LIBOR plus a range of 1.75% to 2.25% depending on the level of the
consolidated leverage ratio measured on a quarterly basis. Borrowings under the
bank facility are secured by first preferred ship mortgage liens on a portion of
the Company's fleet and a pledge of the Company's accounts receivables. Amounts
outstanding under the working capital facility may not exceed 85% of eligible
trade accounts receivable. Under the terms of the bank facility, the Company
must maintain a tangible net worth of at least $60.0 million, a minimum debt
service coverage ratio of at least 1.20 to 1, a consolidated leverage ratio of
no more than 2.00 to 1 and a consolidated current ratio of at least 1.30 to 1.
The Company intends to utilize the bank facility to provide a portion of the
financing for the conversion of the Midnight Express.

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7. COMMITMENTS AND CONTINGENCIES:

The Company has been named as a defendant in a stockholder class action suit
filed by purported stockholders regarding the 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 the
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.

Because of the nature of its business, the Company is subject to various other
claims. 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.

In early 2000, the Company commenced a five-year new-build charter for the
Midnight Arrow, a fully redundant DP-2 deepwater subsea construction vessel. The
long-term charter is with Adams Offshore Ltd. and expires in March 2005. Under
the terms of the charter, the Company has the exclusive option to purchase the
vessel for $8.25 million and the ability to extend the charter for an additional
two years.

In May 2002, the Company entered into an agreement with Cable Shipping Inc. to
time charter a vessel, the G. Murray, under a three-year contract for $18,500
per day. The 340-foot, DP-2 class vessel, which will be renamed the Midnight
Hunter, will be used by the Company as a deepwater vessel after various
modifications to the vessel giving it the capability of laying pipe (utilizing
up to four reels) in water depths of approximately 3,000 to 4,000 feet and
providing diving and remotely operated vessel (ROV) support work. The Company
has the option of purchasing the vessel for a fixed price after two years and at
the end of the contract period.

The Company has executed contracts with several critical equipment suppliers
related to the conversion of the Midnight Express. Those contracts aggregate
$34.2 million and generally become effective upon the arrangement of financing
for the Midnight Express. In the event we terminate these contracts we will pay
these suppliers costs incurred to date plus 10%. We believe our present
termination cost exposure on these contracts totals approximately $4.5 million.

8. 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 SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The provisions of this statement revise current guidelines with respect to
the process for measuring impairment of long-lived assets. The Company adopted
this statement effective January 1, 2002, which did not have a material impact
on the Company's financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which revises current guidance with

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respect to gains and losses on early extinguishment of debt. Under SFAS No.
145, gains and losses on early extinguishment of debt will no longer be treated
as extraordinary items unless they meet the criteria for extraordinary treatment
in Accounting Principles Board (APB) Opinion No. 30. The Company will be
required to adopt SFAS No. 145 effective January 1, 2003. Upon adoption, the
Company will be required to reclassify the extraordinary losses on early
extinguishment of debt from prior periods as these amounts will no longer
qualify for extraordinary treatment under SFAS No. 145.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which supersedes Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires the recognition of liabilities for costs
associated with an exit or disposal activity when those liabilities are incurred
rather than at the date of an entity's commitment to an exit or disposal
activity. This statement is effective for exit and disposal activities that are
initiated after December 31, 2002. The Company does not expect that SFAS No. 146
will have a material 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 (currently capitalized and recognized as "drydocking cost
amortization").

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2001, and the unaudited interim
consolidated financial statements and related notes contained in "Item 1.
Financial Statements" above.

This Quarterly Report on Form 10-Q contains statements that are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended,
concerning, among other things, our prospects, expected revenues, expenses and
profits, developments and business strategies for our operations all of which
are subject to certain risks, uncertainties and assumptions. Our actual results
may differ materially from those expressed or implied in this Form 10-Q. Many of
these factors are beyond our ability to control or predict. We caution investors
not to place undue reliance on forward-looking statements. Accordingly, there is
no assurance that our expectations will be realized. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001
under the captions "Forward-Looking Statements" and "Item 1. Business - Risk
Factors."

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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 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.

From 1997 to 2001, we had increased the size of our fleet from three to nine
construction and service vessels. In April 2002, we also completed the
acquisition of a 520-foot vessel from Smit International for $9.75 million. This
vessel will be converted to a DP-2 offshore construction vessel with our
patent-pending pipelay system and renamed the Midnight Express. Additionally, in
May 2002, we entered into an agreement to time charter the Midnight Hunter for a
three-year period. This DP-2 vessel will be used as a deepwater pipelay vessel
in water depths of approximately 3,000 to 4,000 feet. In addition, we are
actively seeking 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
natural gas companies;

o 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

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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.

In the life of an offshore field, capital is allocated for field development of
a well following a commercial discovery. 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.

RESULTS OF OPERATIONS

COMPARISON OF THE QUARTER ENDED JUNE 30, 2002 TO THE QUARTER ENDED JUNE 30, 2001

Revenues. Revenues were $12.9 million for the three months ended June 30, 2002
compared to $14.3 million for the three months ended June 30, 2001, a decrease
of 10%. The decrease in second quarter 2002 revenues was caused primarily by the
overall decline in the utilization of our fleet during the period. For the three
months ended June 30, 2002, our fleet worked 411 revenue days resulting in a
utilization rate of 54%, compared to 464 revenue days worked in the three months
ended June 30, 2001, or a 70% utilization rate. The number of revenue days
worked declined 11% between periods. The Midnight Rider, which was added to our
fleet in September 2001, added 48 revenue days in the second quarter of 2002,
but was offset by a decline in the utilization of the Midnight Carrier and the
Midnight Runner. Average pricing realizations for the three months ended June
30, 2002 remained relatively steady as compared to the second quarter of 2001,
decreasing only approximately 4%. In addition, pricing realizations for the
three months ended June 30, 2002 decreased only approximately 1% from the first
quarter of 2002.

One of the key indicators to forecast the demand for our services is the jack-up
rig count in the Gulf of Mexico. The number of jack-up rigs operating in the
Gulf of Mexico has increased from 79 at the end of December 2001 to 95 jack-up
rigs working at the end of the second quarter of 2002. Despite the increase,
this is a much slower pace than was originally expected and the number of
jack-up rigs is well below the 141 jack-up rigs working in the year-ago period.
Therefore, from an activity standpoint, our expectations of a resumption of
stronger growth for the Gulf of Mexico market have been delayed towards the end
of 2002 and onward into 2003. Additionally, we expect the offshore construction
market to remain extremely price competitive until such time as growth in demand
for our services occurs. We believe that our future financial and operating
results will continue to be highly dependent on the 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.

Gross Profit. Gross profit, which is revenues less cost of sales, was $2.2
million (17.1% of revenues) for the three months ended June 30, 2002 compared to
$4.1 million (28.7% of revenues) for the three months ended June 30, 2001. The
decrease in the gross profit margin is primarily caused by an increase in the
repair and maintenance expenses incurred by the Company in the second quarter of
2002 mostly related to the Midnight Eagle and the Midnight Star. The Company
took advantage of this period of decreased utilization to make various repairs
to these vessels in preparation for future utilization.

Depreciation and Amortization. Depreciation and amortization expense was $1.9
million for the three months ended June 30, 2002 compared to $1.5 million for
the three months ended June 30, 2001, an increase of 25%. This increase
primarily reflects the addition of the Midnight Rider, which was put into
service in September 2001, and the amortization of more drydocking costs in the
second quarter of 2002 versus the second quarter of 2001.

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General and Administrative Expenses. General and administrative expenses totaled
$1.0 million (7.9% of revenues) for the three months ended June 30, 2002
compared to $1.1 million (7.5% of revenues) for the three months ended June 30,
2001. The second quarter 2002 general and administrative expenses were slightly
lower due to modest reductions in incentive compensation which are primarily
driven by the Company's operating performance. We anticipate that future general
and administrative expenses will be impacted by costs related to our fleet
expansion, our efforts to strengthen our deepwater activity levels and the costs
associated with being a public entity.

Interest Income (Expense), Net. Net interest income was $42 thousand for the
three months ended June 30, 2002 compared to net interest expense of $0.6
million for the three months ended June 30, 2001. The decline in interest
expense reflects the repayment of debt in mid-June of 2001 following our initial
public offering and our current debt-free status.

Income Taxes. In connection with our initial public offering, we became subject
to corporate level taxation. We recorded a $0.2 million benefit (a 35% effective
tax rate) during the three months ended June 30, 2002. For the three months
ended June 30, 2001, the period in which we became subject to corporate level
taxation, we recorded a $2.6 million charge based upon cumulative book and tax
basis differences at the date of our initial public offering. In addition, we
recorded a $0.3 million provision (a 35% effective tax rate) attributable to
operating earnings after our initial public offering. From 1997 until our
initial public offering we had not been subject to income taxes.

Extraordinary Loss. In June 2001, we repaid our debt and recognized a $0.5
million after-tax charge resulting from related prepayment penalties.

Net Income (Loss) Attributable to Common Stockholders. Net loss to common
stockholders for the three months ended June 30, 2002 was $0.4 million, compared
with a net loss to common stockholders of $2.5 million for the three months
ended June 30, 2001.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 TO THE SIX MONTHS ENDED JUNE
30, 2001

Revenues. Revenues were $29.6 million for the six months ended June 30, 2002
compared to $28.8 million for the six months ended June 30, 2001, an increase of
3%. We were able to increase our fleet-wide working days to 953 revenue days for
the six months ended June 30, 2002 as compared to 923 revenue days in the
year-ago period, an increase of 3%. The increase resulted from a stronger than
usual number of revenue working days in the first quarter of 2002 offset by a
decline in the second quarter of 2002. The Company achieved 542 revenue days in
the first quarter of 2002 as compared to only 459 revenue days in the first
quarter of 2001, an increase of 18%. The overall utilization for the first six
months of 2002 was 65% as compared to a 70% fleet-wide utilization for the first
six months of 2001. Average pricing realizations for the six months ended June
30, 2002 remained relatively steady as compared to the six-month period ended
June 30, 2001, decreasing only approximately 2%.

Gross Profit. Gross profit was $6.2 million (20.9% of revenues) for the six
months ended June 30, 2002 compared to $8.2 million (28.5% of revenues) for the
six months ended June 30, 2001. The decrease in the gross profit margin for the
six month period ended June 30, 2002 is primarily caused by slightly lower price
realizations, as discussed above, a lower day rate on the charter of the
Midnight Arrow in Mexico and the increase in repairs and maintenance costs
incurred in the second quarter of 2002.

Depreciation and Amortization. Depreciation and amortization expense was $3.8
million for the six months ended June 30, 2002 compared to $3.0 million for the
six months ended June 30, 2001, an increase of 28%. This increase primarily
reflects the addition of the Midnight Rider, which was put into service in
September 2001, and the amortization of more drydocking costs in the first half
of 2002 versus the first half of 2001.

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General and Administrative Expenses. General and administrative expenses totaled
$2.3 million (7.7% of revenues) for the six months ended June 30, 2002 compared
to $2.0 million (7.0% of revenues) for the six months ended June 30, 2001. The
increase in general and administrative expenses for the first half of 2002 is
due to certain personnel additions and costs associated with being a public
entity.

Interest Income (Expense), Net. Net interest income was $0.1 million for the six
months ended June 30, 2002 compared to net interest expense of $1.5 million for
the six months ended June 30, 2001. This reflects the repayment of debt in
mid-June of 2001 following our initial public offering and our current debt-free
status.

Income Taxes. We recorded a $0.1 million provision (a 35% effective tax rate)
during the six months ended June 30, 2002. In 2001, we recorded a $2.6 million
charge based upon cumulative book and tax basis differences at the date of our
initial public offering. In addition, we recorded a $0.3 million provision (a
35% effective tax rate) attributable to operating earnings after our initial
public offering.

Extraordinary Loss. See discussion above.

Net Income (Loss) Attributable to Common Stockholders. Net income to common
stockholders for the three months ended June 30, 2002 was $0.1 million, compared
with a net loss to common stockholders of $1.8 million for the six months ended
June 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

In June 2001, pursuant to our Registration Statement on Form S-1 (Registration
No. 333-54120) which was declared effective on June 6, 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 (the "Public Offering"). 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 June 30, 2002, the remaining proceeds of $10.5 million were invested in
short-term securities, pending its targeted use for our deepwater expansion
program (discussed below) and general corporate purposes.

In the six months ended June 30, 2002, our operations provided net cash of $0.6
million as compared to $41 thousand in the six months ended June 30, 2001. This
improvement between periods was caused primarily by an increase in net earnings
and a decrease in costs and estimated earnings in excess of billings on
uncompleted contracts partially offset by a decrease in accounts payable - trade
and an increase in deferred drydocking costs incurred. Investing activities
resulted in cash used for the purchase of equipment as discussed below. Cash
flow used in financing activities was $1.8 million in the first six months of
2002 and related entirely to stock repurchases. The first six months of 2001
resulted in cash flows from financing activities of $38.4 million mostly due to
the gross proceeds from the Public Offering net of payments on various debt
instruments.

Historically, our capital requirements have been primarily for the acquisition
and improvement of our vessels and other related equipment. Capital expenditures
totaled $12.7 million for the six months ended June 30, 2002, compared to $9.9
million for the six months ended June 30, 2001. Capital expenditures in the
first six months of 2002 primarily relate to the deepwater expansion of our
fleet. We expect to fund our cash requirement for any future capital investments
from cash-on-hand, cash flow from operations, by utilizing our bank facility
and by obtaining additional debt facilities. We currently estimate capital
expenditures for the remainder of 2002 and 2003 to be approximately $79.0
million, primarily representing the construction of, and the equipment and
support facilities associated with, the Midnight Express. Included in this
estimate is

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approximately $1.7 million of improvements expected on the Midnight Hunter and a
total of approximately $3.6 million for routine capital and drydock inspections
of our vessels to be incurred over this period.

We have entered into a $35.0 million bank facility consisting of a $25.0 million
asset-based five-year revolving credit facility and a $10.0 million
receivables-based working capital facility. The interest on the bank facility is
LIBOR plus a range of 1.75% to 2.25% depending on the level of the consolidated
leverage ratio measured on a quarterly basis. Borrowings under the bank facility
are secured by first preferred ship mortgage liens on a portion of the Company's
fleet and a pledge of the Company's accounts receivables. Amounts outstanding
under the working capital facility may not exceed 85% of eligible trade accounts
receivable. Under the terms of the bank facility, the Company must maintain a
tangible net worth of at least $60.0 million, a minimum debt service coverage
ratio of at least 1.20 to 1, a consolidated leverage ratio of no more that 2.00
to 1 and a consolidated current ratio of at least 1.30 to 1. The Company intends
to utilize the bank facility to provide a portion of the financing for the
conversion of the Midnight Express. At June 30, 2002, no borrowings were
outstanding under the bank facility.

The following table presents our long-term contractual obligations and the
related amounts due, in total and by period as of June 30, 2002 (in thousands):

During the first six months of 2002, we made payments of approximately $1.6
million for the operating lease obligation relating to our deepwater technology
vessel, the Midnight Arrow, under a five-year charter agreement. In addition, we
paid $9.8 million during the first six months of 2002 in relation to the
purchase price of the Midnight Express.

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
lease obligation relates to our Midnight Arrow charter agreement and our
three-year time charter contract of the Midnight Hunter. Included in other
long-term obligations are the contracts with equipment suppliers related to the
conversion of the Midnight Express.

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 August 12, 2002, 709,868 shares had been
repurchased at a total cost of $4.2 million.

Consistent with the focus towards investing in new technology, including
deepwater capable assets such as the Midnight Express and the Midnight Hunter,
four of the last five vessels added to our operations have been DP-2 deepwater
capable. Through June 30, 2002 we have expended approximately $38.6 million (in
combined capital expenditures and operating lease payments) for these DP-2
vessels, with an

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additional estimated $105.9 million to be incurred in associated construction,
operating lease payments and drydock expenses through early 2005.

Although we have put into place the $35.0 million bank facility discussed above,
we are continuing to work with several parties to determine the best option for
permanent financing of approximately $60.0 million to $70.0 million related to
the conversion of the Midnight Express, which 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 Express was delivered in April 2002 to assist in the detailed
engineering related to the conversion. The detailed engineering was completed in
the second quarter of 2002 and bids have been received from several shipyards to
complete the conversion of the vessel. The Company is currently carefully
reviewing these bids and expects to announce the selection of a shipyard in
August 2002. The selection of the shipyard 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 evaluated include guaranteed financing through the United
States Department of Transportation Maritime Administration ("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 permanent financing, either guaranteed or non-guaranteed. If we are
unable to obtain any permanent financing, it would have a negative impact on our
ability to implement our business strategy. However, we believe that we will
have several permanent financing sources available to us.

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 Midnight Warrior. MARAD's commitment officially expired on May 6, 2002,
which gives MARAD the option to terminate the commitment as 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 and have indefinitely
postponed the project.

In May 2002, we entered into an agreement with Cable Shipping Inc. to time
charter a vessel, the G. Murray, under a three-year contract for $18,500 per
day. The 340-foot, DP-2 class vessel, which will be renamed the Midnight Hunter,
will be used as a deepwater vessel having the capability of laying pipe
(utilizing up to four reels) in water depths of approximately 3,000 to 4,000
feet and providing diving and remotely operated vessel (ROV) support work. We
have the option of purchasing the vessel for a fixed price after two years and
at the end of the contract period.

We believe that our existing cash and short-term investments and cash flow from
operations will be sufficient to meet our existing liquidity needs for the near
term. We also believe that our existing cash and short-term investments, the
bank facility we have put into place and the permanent construction financing we
are seeking, in addition to our cash flow from operations, will be sufficient to
complete our identified growth plans. If our plans or assumptions change or
prove to be inaccurate, if we cannot obtain permanent construction 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 additional funds, or we may not be able to raise such funds on
favorable terms.

NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations," effective for

15

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 SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The provisions of this statement revise current guidelines with respect to
the process for measuring impairment of long-lived assets. We adopted this
statement effective January 1, 2002 which did not have a material impact on our
financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which revises current guidance with respect to gains and losses on early
extinguishment of debt. Under SFAS No. 145, gains and losses on early
extinguishment of debt will no longer be treated as extraordinary items unless
they meet the criteria for extraordinary treatment in Accounting Principles
Board (APB) Opinion No. 30. The Company will be required to adopt SFAS No. 145
effective January 1, 2003. Upon adoption, the Company will be required to
reclassify the extraordinary losses on early extinguishment of debt from prior
periods as these amounts will no longer qualify for extraordinary treatment
under SFAS No. 145.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which supersedes Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires the recognition of liabilities for costs
associated with an exit or disposal activity when those liabilities are incurred
rather than at the date of an entity's commitment to an exit or disposal
activity. This statement is effective for exit and disposal activities that are
initiated after December 31, 2002. The Company does not expect that SFAS No. 146
will have a material 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. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.

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PART II. OTHER INFORMATION

ITEM 1. 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 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.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

The information on the use of proceeds from our Public Offering required by this
item is set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" in Part I
of this report, which section is incorporated herein by reference.

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

Our annual meeting of stockholders was held on May 16, 2002.

(a) At such meeting, each of the following persons listed below was
elected as a director of the Company to serve during the ensuing
year.

(b) At such meeting, the stockholders also approved the appointment of
Arthur Andersen LLP as the Company's independent public
accountants for 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits filed as part of this report are listed below.

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Exhibit 10.1 "Supplytime 89" - dated 31 May 2002 with respect
to "G. Murray" TBN "Midnight Hunter"

Exhibit 10.2 Ammendment No. 1 Dated 25 June 2002 to "Supplytime
89" - dated 31 May 2002 with respect to "G.
Murray" TBN "Midnight Hunter"

Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K.

On April 16, 2002, we filed a report on Form 8-K, reporting under
Item 2, announcing that we had completed the purchase of the Smit
Express, to be renamed the Midnight Express, from Smit
International for $9.75 million.

On July 3, 2002, we filed a report on Form 8-K, reporting under
Item 4, announcing that we had dismissed Arthur Andersen LLP and
appointed Ernst & Young LLP to serve as the Company's independent
auditors for fiscal year 2002. The appointment of Ernst & Young
LLP was effective immediately commencing with the review of the
Company's consolidated financial statements as of and for the
three and six months ended June 30, 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Torch Offshore, Inc.

Date: August 12, 2002 By: /s/ ROBERT E. FULTON
---------------------------------
Robert E. Fulton
Chief Financial Officer
(Principal Accounting and Financial Officer)

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EXHIBIT INDEX