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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
___________
Commission File Number 000-32855
___________
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 [ ]
Indicate by check mark whether the registrant is an accelerated
filer as defined in Rule 12b-2 of the Securities Exchange Act of
1934. Yes [ ] No [x]
The number of shares of the registrant's common stock outstanding
as of August 12, 2004 was 12,642,950, par value $0.01 per share.
TORCH OFFSHORE, INC.
TABLE OF CONTENTS
Page
Part I. Financial Information ----
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets as
of June 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of
Operations for the Three and Six Months
Ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 28
Item 4. Submission of Matters to a Vote of
Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
Exhibit Index 31
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31
2004 2003
-------- -----------
(Unaudited)(see Note 1)
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 41 $ 41
Accounts receivable --
Trade, less allowance for doubtful
accounts 13,961 20,479
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,474 --
Prepaid expenses and other 6,657 3,561
------- -------
Total current assets 23,133 24,081
PROPERTY AND EQUIPMENT, at cost,
less accumulated depreciation 166,314 143,266
DEFERRED DRYDOCKING CHARGES,
less accumulated amortization 2,516 807
SECURITY DEPOSIT (Note 7) 1,250 1,250
OTHER ASSETS 488 502
------- -------
Total assets $ 193,701 $ 169,906
======= =======
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable -- trade $ 17,019 $ 15,148
Accrued expenses 4,630 4,597
Accrued payroll and related taxes 759 819
Financed insurance premiums 4,286 1,832
Billings in excess of costs and
estimated earnings on
uncompleted contracts 2,812 459
Finance Facility (Note 7) 69,870 45,639
Current portion of long-term debt(Note 7) 3,922 3,396
Receivable line of credit (Note 7) 8,912 7,227
------- -------
Total current liabilities 112,210 79,117
LONG-TERM DEBT, less current portion
(Note 7) 18,341 20,057
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY 63,150 70,732
------- -------
Total liabilities and
stockholders' equity $ 193,701 $ 169,906
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------------------ ----------------
Revenues $ 19,020 $ 13,876 $ 30,862 $30,905
Cost of revenues:
Cost of sales 17,295 12,500 30,539 26,245
Depreciation and
amortization 2,640 1,822 4,749 3,649
General and administrative
expenses 1,441 1,348 3,056 2,703
Other operating expense -- -- 160 --
------ ------ ------ ------
Total cost of revenues 21,376 15,670 38,504 32,597
------ ------ ------ ------
Operating loss (2,356) (1,794) (7,642) (1,692)
Other income:
Interest income -- -- -- 1
------ ------ ------ ------
Total other income -- -- -- 1
------ ------ ------ ------
Loss before income taxes (2,356) (1,794) (7,642) (1,691)
Income tax benefit -- 628 -- 592
------ ------ ------ ------
Net loss $ (2,356)$ (1,166) $ (7,642)$(1,099)
====== ====== ====== ======
Net loss per common share:
Basic and Diluted $ (0.19)$ (0.09) $ (0.60)$ (0.09)
====== ====== ====== ======
Weighted average common stock
outstanding:
Basic and Diluted 12,640 12,636 12,639 12,636
====== ====== ====== ======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended
June 30,
------------------
2004 2003
---- ----
Cash flows provided by operating
activities:
Net loss $(7,642) $(1,099)
Depreciation and amortization 4,749 3,649
Deferred income tax benefit -- (592)
Deferred drydocking costs incurred (2,321) --
(Increase) decrease in working capital:
Accounts receivable 6,518 8,185
Costs and estimated earnings in excess
of billings on uncompleted contracts (121) 244
Prepaid expenses, net of financed
portion (642) (765)
Accounts payable - trade 1,871 1,479
Accrued payroll and related taxes (60) (128)
Accrued expenses and other 193 (1,996)
------- -------
Net cash provided by operating
activities 2,545 8,977
------- -------
Cash flows used in investing
activities:
Purchases of property and equipment (27,186) (36,931)
------- -------
Net cash used in investing activities (27,186) (36,931)
------- -------
Cash flows provided by financing
activities:
Net proceeds on receivable line of
credit 1,685 597
Net proceeds from Finance Facility 24,231 19,630
Net proceeds (payments) on long-term
debt (1,269) 7,419
Treasury stock purchases (6) (18)
------- -------
Net cash provided by financing
activities 24,641 27,628
------- -------
Net change in cash and cash equivalents -- (326)
Cash and cash equivalents at beginning
of period 41 327
------- -------
Cash and cash equivalents at end of
period $ 41 $ 1
======= =======
Interest paid (net of amounts
capitalized) $ -- $ --
======= =======
Income taxes paid $ -- $ --
======= =======
Supplementary non-cash investing
activities:
Purchase of Midnight Wrangler $ -- $(9,731)
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation:
The interim condensed 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, 2003, which has been prepared from the Company's
previously audited financial statements. The balance sheet at
December 31, 2003 has been derived from the audited financial
statements at that date but does not include all of the
information and footnotes required by U.S. generally accepted
accounting principles (U.S. GAAP) for complete financial
statements. The condensed consolidated financial statements of
Torch Offshore, Inc. include its wholly-owned subsidiaries Torch
Offshore, L.L.C., Torch Express, L.L.C., and Torch Venture,
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 U.S. GAAP have
been condensed or omitted pursuant to rules and regulations
governing interim period reporting. The results for the three and
six months ended June 30, 2004 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, 2003.
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 in order to enable it
to provide services analogous to those services it provides on
the Shelf in water depths up to 10,000 feet on a global basis.
The Company's financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. As further discussed in Note 2, the Company faces
significant financial liquidity issues as a result of adverse
business conditions in its operating sector and significant
current debt obligations due in 2004 associated with the
conversion of the Midnight Express, which has experienced certain
unbudgeted cost overruns and unexpected delays in the timing of
scheduled construction completion. In addition, as of December
31, 2003, the Company was not in compliance with certain
covenants of its loan agreements and had to obtain forbearance
waivers and amendments from its lenders for such matters of
noncompliance. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's
plans in regard to these matters, which involve inherent
uncertainties and conditions beyond the Company's control, are
also discussed in Note 2. The accompanying financial statements
have been prepared on the basis that the Company will continue as
a going concern and do not include any adjustments to reflect the
possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
2. Capital Resources and Liquidity:
As discussed in the Company's annual report on Form 10-K for the
year ended December 31, 2003, the Company has been significantly
and negatively affected by adverse business conditions in its
industry, and other events with a direct impact on the Company's
earnings. The Company has experienced recurring losses from
operations, negative operating cash flows and a working capital
deficiency. As a result, the Company's independent public
accountants advised the Company that they had reached a
conclusion that there is substantial doubt the Company's ability
to continue as a going concern and, as required by auditing
standards generally accepted in the United States, included in
their auditors' report on the Company's 2003 financial statements
an explanatory paragraph to reflect that conclusion.
The accompanying financial statements reflect a net loss of $7.6
million for the first six months of 2004 and a working capital
deficit of $89.1 million as of June 30, 2004, which includes the
$69.9 million amount due under the Company's Finance Facility to
build the Midnight Express. In addition, the Company generated a
net loss of $9.2 million for the year ended December 31, 2003,
$6.8 million of which was realized in the fourth fiscal quarter
of 2003. The Company faces significant liquidity and working
capital challenges, in addition to costs of expanding the
Company's operations into the deepwater market, and will need to
raise additional capital to continue to meet its debt obligations
and conduct its operations as currently conducted.
The Company's ability to continue in the normal course of
business is dependent upon its ability to raise additional
capital and the success of its future operations. Management of
the Company has developed a plan to address its liquidity
challenges. The components of this plan involve completing the
conversion of the Midnight Express within current financial
constraints, raising additional capital to fund working capital
and debt obligation requirements, and the possible sale of
certain vessels. The Company has retained Raymond James and
Energy Capital Solutions as its financial advisors to evaluate
financing alternatives. There can be no assurance that the
Company will be successful in significantly improving its
operating results, or that it will be able to raise capital or
sell vessels on acceptable terms, if at all. If the Company is
unable to successfully implement its plan and/or improve its
operating results, its financial condition will be materially and
adversely affected.
Conversion of the Midnight Express
In April 2004, the Company entered into an agreement with Regions
Bank and Export Development Canada (EDC) for an additional $19.0
million of funding under the Finance Facility (see Note 7) to
complete the conversion of the Midnight Express. In addition, the
Company's creditors agreed to extend the time frame of the
construction period of the Finance Facility from June 30, 2004 to
October 31, 2004 at which point the construction period financing
is expected to convert to term status. Regions Bank and EDC have
also amended certain covenant obligations that the Company must
meet in 2004. The consolidated current ratio covenant (as
defined) is now at 0.70 to 1 for all four quarters of 2004.
The Midnight Express arrived in Scheidam, The Netherlands in mid-
June 2004 and the installation of the patented pipelay system
began immediately at the manufacturer's operation. In addition,
the Company partially installed the special-built 500-ton crane.
The vessel departed for the Gulf of Mexico in late July 2004 and
is expected to arrive in the Gulf of Mexico in mid-August 2004.
Further outfitting and installation of the pipe handling system,
automatic welding system, and the gantry crane rails and racks
will occur in the Gulf of Mexico, as will the final pipelay
system sea trials for the vessel. The Company expects the vessel
to enter the active fleet at the beginning of the fourth quarter
of 2004.
Utilization of the Midnight Express
In August 2002, the Company developed a deepwater group to
initiate its entrance into the deepwater market using the
Midnight Hunter and Midnight Wrangler. The group has completed
various pipelay projects and subsea construction projects in the
deepwater. This group has also been dedicated to the marketing of
the Midnight Express. To date, the Company has submitted the
Midnight Express to multiple customers on various types of bids.
The Company is in discussions with several customers to perform
work in the last quarter of 2004 in the Gulf of Mexico as well as
international work in 2005 and beyond. There is no assurance that
such contracts will be awarded to the Company.
Additional Capital and Restructuring of Indebtedness
The Company is seeking to raise capital and or refinance its
existing debt through the private and public capital markets. The
Company's ability to raise capital will depend on factors outside
of the Company's control, including the condition of the capital
markets and the Company's industry. Additionally, pursuant to the
terms of the Company's financing agreement with Regions Bank and
EDC, the Company is required to raise the lesser of $10.0 million
or 20% of the market capitalization of the Company at the time of
the issuance by June 30, 2005 through an equity offering and
requires that the first $10.0 million of proceeds associated with
such an offering be used to reduce amounts outstanding under the
Finance Facility.
On July 22, 2004, the Company entered in an agreement with
Regions Bank for a $5.0 million non-revolving line of credit with
an initial term of 120 days to be used for working capital
purposes. Interest on this line of credit accrues at LIBOR plus
4.00%. The Company's obligation under this line of credit is
secured by the Midnight Rider, which also secures the Company's
obligations under the Finance Facility with Regions Bank and EDC.
In order to use this vessel as collateral in the line of credit,
EDC took a subordinated secured position on the vessel. In
addition, as part of the above transaction, Regions Bank agreed
to allow the usage of approximately $1.5 million of proceeds from
Industry Canada (see Note 11) to pay the interest on the Finance
Facility during the conversion period. The proceeds were
originally allocated to repay a portion of the $19.0 million
additional financing arranged in April 2004 to convert the
Midnight Express. The terms of the note call for the loan to be
repaid on November 19, 2004. The Company intends to repay the
$5.0 million note through a refinancing of its existing debt with
the prospect of converting this $5.0 million into long-term debt.
In the event the Company is successful in obtaining refinancing
of its existing debt, the agreement with Regions Bank and EDC
calls for the proceeds of the refinancing to: 1) repay this $5.0
million note, 2) repay $1.5 million of the additional $19.0
million of financing on the Midnight Express conversion, and 3)
use 50% of the refinance proceeds received in excess of $6.5
million to also repay a portion of the additional $19.0 million
of financing on the Midnight Express conversion.
Disposal of Vessels
In connection with the Company's efforts to raise funds, the
Company is also pursuing the sale of certain vessels into foreign
markets either through charters to operators in these foreign
markets or the outright sale of these vessels. The Company has
had discussions with various parties; however, no definitive
agreements have been entered into. There is no assurance that the
Company will reach such an agreement and/or complete a
transaction during 2004. The Finance Facility specifies that any
proceeds from the sale of a vessel that is pledged as collateral
be used to repay the amounts due under the Finance Facility.
________________________________
Management believes that these transactions would provide
sufficient funding for the Company's debt and working capital
requirements for 2004. Because these transactions are not
complete, they involve inherent uncertainties, including
uncertainties beyond the Company's control. As a result, the
Company's independent public accountants, after considering the
plans described above, advised the Company that they had reached
a conclusion that such uncertainties raise substantial doubt
regarding the Company's ability to continue as a going concern
and as required by standards of the Public Company Accounting
Oversight Board (United States), included in their auditors'
report on the Company's 2003 financial statements an explanatory
paragraph to reflect that conclusion.
Management believes that completion of the transactions described
above will provide sufficient financial resources to conduct the
Company's business plans during 2004. However, there are no
assurances that the Company will successfully accomplish the
objectives of such plans.
For more information regarding the Company's business plan, see
Note 14 to the Financial Statements located in Item 8 of the
Company's 2003 Form 10-K as filed with the Securities and
Exchange Commission.
3. 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 were 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. In August 2002,
the Company elected to suspend the repurchase program. Under
current conditions and to support our vessel expansion strategy,
the Company does not expect to repurchase shares in the near
future except for certain events related to the vesting of
employee's restricted shares. As of June 30, 2004, 715,074 shares
had been repurchased at a total cost of $4.3 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, 2004,
stock options covering 428,673 shares of common stock with a
weighted average exercise price of $9.85 per share, and 38,124
shares of restricted stock, both vesting generally over five
years, were outstanding.
4. Earnings Per Share:
The Company follows Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." Basic earnings per share is
calculated by dividing net income/loss 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 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 and restricted
stock) excluded from the calculation of diluted earnings per
share, because they were anti-dilutive, were approximately
467,000 shares and 348,000 shares for the second quarters of 2004
and 2003, respectively, and approximately 467,000 shares and
348,000 shares in the first six months of 2004 and 2003,
respectively.
5. Stock-Based Compensation:
The Company accounts for its stock-based compensation in relation
to the 2001 Long-Term Incentive Plan in accordance with
Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." However, SFAS No. 123, "Accounting
for Stock-Based Compensation," and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An
Amendment of SFAS No. 123," permits the intrinsic value-based
method proscribed by APB No. 25, but requires additional
disclosures, including pro forma calculations of earnings and net
earnings per share as if the fair-value method of accounting
prescribed by SFAS No. 123 had been applied. If compensation
expense had been determined using the fair-value method in SFAS
No. 123, the Company's net loss and loss per share would have
been as shown in the pro forma amounts below:
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
------ ------ ------ ------
Net loss, as reported $(2,356) $(1,166) $(7,642) $(1,099)
Add: Stock-based
compensation expense
included in net loss,
net of tax 33 15 66 62
Less: Stock-based
compensation expense
using fair value method,
net of tax (182) (107) (365) (242)
------- ------- ------- -------
Pro forma net loss $(2,505) $(1,258) $(7,941) $(1,279)
======= ======= ======= =======
Basic and diluted loss
per share $ (0.19) $ (0.09) $ (0.60) $ (0.09)
Pro forma basic and
diluted loss per share $ (0.20) $ (0.10) $ (0.63) $ (0.10)
6. Property and Equipment:
During the second quarter of 2004, management committed to a plan
to scrap the Midnight Runner and remove the vessel from the
Company's fleet. An asset impairment charge of $0.6 million was
recorded in relation to the Midnight Runner (included in
depreciation and amortization) for the three and six-months
ending June 30, 2004. The impairment charge was based upon the
Company's estimate of the vessel's scrap salvage value, the
impact of which reduced the Company's previous carrying value for
the vessel to approximately $50,000.
7. Long-Term Debt:
In July 2002, the Company entered into a $35.0 million bank
facility (the "Bank Facility") consisting of a $25.0 million
asset-based five-year revolving credit facility and a $10.0
million accounts receivable-based working capital facility with
Regions Bank. The Company's ability to use the asset-based five-
year revolving credit facility was suspended in connection with
our financing of the Midnight Express and later terminated in
April 2004 as part of the $19.0 million increase to the
construction finance facility discussed below. The Company
continues to have available the accounts receivable-based working
capital facility from Regions Bank. In December 2003, the
accounts receivable-based working capital facility was increased
to $15.0 million. Amounts outstanding under the accounts
receivable-based working capital facility may not exceed 85% of
eligible trade accounts receivable. The Company had $8.9 million
outstanding under the $15.0 million accounts receivable-based
working capital facility as of June 30, 2004. In addition, the
Company issued a $1.5 million standby letter of credit as
security for the charter payments due under the charter agreement
for the Midnight Hunter against the accounts receivable-based
working capital facility. In July 2003, this letter of credit was
drawn by Cable Shipping, Inc., the owners of the Midnight Hunter.
The Company recorded the $1.5 million as a liability in full on
the balance sheet during the second quarter of 2003. The Company
had an available borrowing capacity of up to $2.1 million under
the $15.0 million accounts receivable-based working capital
facility based upon eligible receivables at June 30, 2004. The
$15.0 million accounts receivable-based working capital facility
was extended and now has a maturity date of July 2, 2005.
In April 2003, the Company finalized a credit line maturing June
30, 2004 to finance the conversion of the Midnight Express (the
"Finance Facility"). Amounts outstanding under the credit line
will convert into a three-year term loan facility upon completion
of the conversion of the Midnight Express. The Finance Facility
commitment is equally provided by Regions Bank and EDC ($30.0
million participation by each).
In April 2004, the Company increased the Finance Facility by
$19.0 million to $79.0 million and amended the maturity to
October 31, 2004. The amounts outstanding under the Finance
Facility will convert into two separate loans at the earlier of
the facility's maturity date or completion of the conversion of
the Midnight Express. The first loan represents the original
$60.0 million borrowing and will convert to a three-year term
loan facility. The second loan is for the additional $19.0
million and will convert to a twenty-month term loan facility
maturing on June 30, 2006. In addition, as part of the increase
to the credit facility, the $25.0 million asset-based five-year
revolving credit facility was cancelled as discussed above.
Regions Bank and EDC also have the right to the first $10.0
million of any equity offering, to the proceeds from the sale of
any of the mortgaged vessels (see discussion below) and to the
interest rate buy-down expected from Industry Canada during the
third quarter of 2004.
The interest rate for the $60.0 million portion of the
construction financing was LIBOR plus a spread of 3.25% to 3.50%
based upon the consolidated leverage ratio of the Company before
it was amended as part of the $19.0 million increase to the
credit line. The interest rate for the $19.0 million portion of
the construction financing is LIBOR plus 4.00%. In addition, the
Company was charged a 1% origination fee ($190,000) by Regions
Bank and EDC for the addition to the credit line and the interest
rate on the original $60.0 million financing increased to LIBOR
plus 4.00%. The Company is providing collateral in the form of
the Midnight Express as well as a first preferred ship mortgage
on the Midnight Fox, Midnight Star, Midnight Dancer, Midnight
Carrier, Midnight Brave and Midnight Rider. The Company must
adhere to various conditions including maintaining 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 (defined
below) of 1.30 to 1 (see below for details of amendments). The
Company is not allowed to incur additional debt over $8.0 million
without consent from Regions Bank. The Company had $69.9 million
outstanding under the $79.0 million Finance Facility as of June
30, 2004 and capitalized $1.7 million of 2004 interest costs in
the six months ended June 30, 2004 in relation to the conversion
of the Midnight Express as compared to $0.4 million capitalized
in the first two quarters of 2003.
Upon achievement of certain construction completion milestones,
but no later than October 31, 2004, the $79.0 million Finance
Facility will convert to term status. The $60.0 million term loan
facility would then have a three-year term with a 10-year
amortization payment schedule consisting of semi-annual payments
(beginning in the first half of 2005) with a balloon payment at
the end of the three-year term. The interest rate for this
facility is now at 4.00% over LIBOR. The $19.0 million term loan
facility would then have a twenty-month term with a $6.0 million
principal payment due on June 30, 2005, a $6.0 million principal
payment due on December 30, 2005 and the remaining $7.0 million
principal payment due on June 30, 2006. Interest would be payable
on a monthly basis based on a rate of LIBOR plus 4.00%. Regions
Bank and EDC will require the Company to maintain the same
collateral and covenants as included in the construction
financing depicted above.
See Note 2 regarding the additional $5.0 million of non-revolving
debt negotiated with the Company's lenders in July 2004.
In December 2002, the Company entered into a purchase agreement
with Global Marine Systems Limited (Global Marine) for the
Midnight Wrangler at a cost of approximately $10.8 million. The
Company took delivery of the vessel in March 2003. The purchase
of the vessel was financed by Global Marine over a five-year
period with monthly payments, including 7% per annum interest, of
approximately $0.2 million per month plus a $1.0 million payment
at the purchase date in March 2003 and another $1.0 million
payment at the end of the five-year period.
In March 2003, the Company finalized a $9.25 million, seven-year
term loan with General Electric Commercial Equipment Financing
(GE Commercial). The loan was structured so that the Company
received $8.0 million immediately and GE Commercial retained
$1.25 million as a security deposit. The interest rate on the
term loan is the 30-day commercial paper rate plus 2.03% and
includes prepayment penalties of 2% for the first twelve months,
1% for the second twelve months and 0% thereafter. The term loan
is structured to have monthly payments over seven years. The loan
agreement contains the same financial covenants as the Bank
Facility and Finance Facility, as amended, discussed above. The
collateral for the loan is the Midnight Eagle and the security
deposit described above. The Company utilized the proceeds from
the loan to fund the improvements to the Midnight Wrangler and a
portion of the Midnight Express conversion costs.
In December 2003, the Company refinanced the debt used to acquire
the Midnight Wrangler with General Electric Capital Corporation
(GE Capital) by entering into a secured term loan in the
principal amount of $15.0 million. The secured term loan is
structured to have quarterly payments over seven years. The
interest rate on the term loan is 4.25% over LIBOR and the terms
contained an origination discount of 1.50%. The loan agreement
contains various covenants beginning on March 31, 2005, including
a minimum EBITDA (as defined) of $18.5 million, a minimum fixed
charge ratio (as defined) of 1.05 to 1, and a maximum leverage
ratio (as defined) of 5.25 to 1 for the financial quarters ended
in the period from October 1, 2004 through September 30, 2005.
These maximum leverage ratios decline by 0.50 to 1 for each of
the following four years before reaching 3.25 to 1 that applies
for the financial quarters ended from October 1, 2008 and
thereafter. The collateral for the loan is the Midnight Wrangler,
Midnight Runner and Midnight Gator. A final payment was made to
Global Marine in December 2003. This early termination of debt
resulted in a gain to the Company of $0.9 million that is
recorded in the December 31, 2003 financial statements.
Earlier in 2004 the Company was not in compliance with the
current ratio or the debt service coverage ratio requirements
under the Finance Facility (with respect to the December 31, 2003
testing period). As a result, in early April 2004 the Company
obtained forbearance waivers from its lenders and effected
amendments to its loan agreements to provide certain levels of
relief with respect to the required level of minimum coverage as
well as changes related to certain components of the computation
of the minimum current ratio, as defined, and the minimum debt
service coverage ratio, as defined, for the quarterly testing
periods of 2004. As of June 30, 2004, the Company was in
compliance with the financial covenants (as amended in early
April 2004) of the Bank Facility, the Finance Facility and the GE
Commercial term loan. The Company must comply with the amended
consolidated current ratio covenant (as defined) of 0.70 to 1 for
the four quarters of 2004 and then the consolidated current ratio
covenant (as defined) returns to 1.00 to 1 as of March 31, 2005.
There can be no assurance that compliance will be maintained. If
compliance is not maintained, all credit agreements could be
declared to be in default and all amounts outstanding, including
the $18.3 million of debt associated with the Midnight Eagle and
Midnight Wrangler facilities, currently classified as long-term
could be demanded for payment and creditors would have the right
to seize the applicable collateral. The Company's obligations
under its credit agreements are secured by substantially all of
the Company's assets. Any defaults under the credit agreements
would adversely impact the Company's ability to sustain its
operations in the normal course and have a material effect on its
financial condition and results of operations.
8. Income Taxes:
Income Taxes - SFAS 109, "Accounting for Income Taxes," provides
for the weighing of positive and negative evidence in determining
whether it is more likely than not that a deferred tax asset is
recoverable. The Company has incurred losses in 2001 and 2003 and
has losses on an aggregate basis for the three-year period ended
December 31, 2003. In addition, the Company has incurred losses
in the six months ended June 30, 2004. Deferred income tax assets
are reduced by a valuation allowance when it is more likely than
not that some portion or all of the deferred income tax assets
will not be realized. Relevant accounting guidance suggests that
a recent history of cumulative losses constitutes significant
negative evidence, and that future expectations about income are
overshadowed by such recent losses. The Company recognized no
income tax benefit in the first half of 2004 for this reason.
9. Commitments and Contingencies:
Contingencies - The Company has been named as a defendant in a
stockholder class action suit filed by purported stockholders
regarding the Public Offering. This lawsuit, Karl L. Kapps, et.
al. v. Torch Offshore, Inc. et. al., No. 02-00582, which seeks
unspecified monetary damages, was filed on March 1, 2002 in the
United States District Court for the Eastern District of
Louisiana. The lawsuit was dismissed on December 19, 2002 for
failure to state a claim upon which relief could be granted. The
plaintiffs appealed to the United States Court of Appeals for the
Fifth Circuit. On July 26, 2004 the Court of Appeals for the
Fifth Circuit dismissed the case.
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 at a rate of $18,500 per day. The time
charter commenced in the third quarter of 2002 and the vessel was
renamed the Midnight Hunter. However, on January 24, 2003, the
Company terminated the time charter because of the vessel's
failure to meet certain specifications outlined in the charter
agreement. In November 2003, a London arbitrator issued a ruling
against the Company's recission claim, finding that the Company
was not entitled to terminate the charter, but did rule in favor
of the Company on the warranty claim for breach of contract. An
interim award of $2.2 million was made in favor of Cable
Shipping, Inc. The Company has recorded the full amount of the
interim award in its financial statements. The Company attempted
to appeal the ruling, but on April 7, 2004 the appeal was denied.
The escrowed award has been released to Cable Shipping, Inc. Each
party will now make submissions as to quantum of damages for the
claim upon which it was successful and a further hearing will be
held. Additional amounts awarded to the parties will likely be
netted in favor of Cable Shipping, Inc. While an estimate of the
net impact of the damages to be awarded with respect to this
matter is not currently quantifiable, it is possible that future
damages that could potentially be awarded to Cable Shipping, Inc.
in this matter could have a material adverse effect on the
Company's financial condition and/or results of operations.
In March 2003, the Company filed a lawsuit (Torch Offshore, Inc.
v. Newfield Exploration Company, No. 03-0735, filed in the United
States District Court, Eastern District of Louisiana on March 13,
2003) against Newfield Exploration Company (Newfield) claiming
damages of approximately $2.1 million related to work completed
for Newfield in the Gulf of Mexico at Grand Isle Block 103-A. The
lawsuit alleges that the Company did not receive all compensation
to which it was entitled pursuant to the contract. The Company
has recorded a provision for the full amount of this claim;
however, the Company intends to continue to pursue the claim.
In July 2003, the Company filed a lawsuit (Torch Offshore, Inc.
et al v. Stolt Offshore, Inc., Algonquin Gas Transmission Company
and Duke Energy, No. 03-1915, in the United States District
Court, Eastern District of Louisiana on July 3, 2003) against
Stolt Offshore, Inc. (Stolt), and its customer, seeking recovery
of approximately $7.6 million related to work completed for Stolt
in Boston, Massachusetts. The Company worked as a subcontractor
to Stolt, who was engaged by Algonquin Gas Transmission Company
to complete the Boston Hubline project, an underwater pipeline
crossing the Boston Harbor. The lawsuit alleged that the Company
did not receive all compensation to which the Company was
entitled pursuant to the subcontract the Company had with Stolt.
Two other subcontractors to Stolt joined with the Company and
filed as plaintiffs in the lawsuit. Additionally, the Company,
along with two other subcontractors, filed a lawsuit in
Massachusetts (Civil Action No. 03-01585), which included a claim
for breach of contract as well as a claim to assert mechanics'
liens against Algonquin's easement located in Weymouth, Norfolk
County, Massachusetts. In March 2004, the Company reached a
settlement with Stolt in the amount of $6.2 million and the full
amount of the difference between the claim and the final
settlement (a loss of approximately $1.4 million) was recorded in
the Company's financial statements as of December 31, 2003. The
lawsuits have been dismissed, and the lien claims have been
released.
Because of the nature of its business, the Company is, from time
to time, involved in routine litigation or subject to various
other disputes or claims related to its business operations
(other miscellaneous legal matters). The Company has engaged
legal counsel to assist in defending all such 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 other miscellaneous legal matters will have a
material effect on its financial position or results of
operations.
Lease Commitments - In early 2000, the Company commenced a five-
year new-build charter for the Midnight Arrow, a DP-2 deepwater
subsea construction vessel. The long-term charter was scheduled
to expire in March 2005, but the Company and Adams Offshore Ltd.
(the "Lessor") reached an agreement to early terminate the
charter effective May 31, 2004. As part of the termination
agreement, the Lessor waived the early termination fee and it was
agreed that the Company is to pay the Lessor $250,000 per month
until the outstanding balance of $1.8 million due to the Lessor
(all of which has been accrued) is eliminated. The charter was
accounted for as an operating lease.
In January 2004, the Company entered into a time charter for the
Midnight Hunter, a 340-foot DP-2 deepwater capable vessel. The
time charter for the Midnight Hunter is at a day rate of $14,500
per day and ends September 2, 2005, with provisions for extension
or outright purchase. The charter amount includes the marine
crew, maintenance and repairs, drydock costs and certain
insurance coverages. The vessel was previously under charter by
the Company, but the Company cancelled the charter in January
2003 because the vessel did not meet certain specifications as
outlined in the charter agreement which prevented the Company
from performing certain types of work, particularly deepwater
pipelay (see further discussion above). However, the Company has
re-chartered the vessel at a lower day rate and has altered how
it utilizes the vessel. The Company is utilizing the DP-2 vessel
in a diving support capacity, which allows it to perform
deepwater tie-ins with the Company's 1,000-foot saturation system
that has been installed on the vessel.
Other Commitments - The Company has executed contracts with
several critical equipment suppliers related to the conversion of
the Midnight Express. In December 2002, the Company entered into
a contract with Davie Maritime, Inc. of Quebec, Canada to
complete the conversion of the Midnight Express at a contract
value of $25.3 million ($37.1 million inclusive of assigned
critical equipment supplier contracts) that became effective in
April 2003. Due to the recent settlement with Davie Maritime,
Inc., the shipyard contract, inclusive of assigned critical
equipment supplier contracts, had a final value of $53.2 million
of which $7.8 million came from approved change orders and $8.3
million from an agreed increase in contract price. The shipyard
contract was completed with the delivery of the Midnight Express
on June 4, 2004. The remaining outstanding contracts for the
conversion of the Midnight Express aggregate $29.7 million, of
which $26.2 million had been paid as of June 30, 2004. In the
event the Company terminates these contracts, the Company is
required to pay certain of these suppliers' costs incurred to
date while other suppliers are entitled to the full value of the
contract, depending upon the terms of the relevant agreement. The
Company believes its present termination cost exposure on these
contracts totals approximately $3.5 million.
As of June 30, 2004, two trade creditors had outstanding maritime
liens on various vessels in the Company's fleet. In July 2004,
the Company cured the maritime liens from one of its trade
creditors. The Company is in the process of reaching a final
settlement with the second trade creditor. All applicable
liabilities have been recorded in full on the Company's balance
sheet as of June 30, 2004.
10. New Accounting Standards:
In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, which provides alternative methods of
transition for a voluntary change to the fair-value based method
of accounting for stock-based employee compensation, and the new
standard, which is now effective, amends certain disclosure
requirements. The Company continues to apply APB No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation;
therefore, the alternative methods of transition do not apply.
The Company has adopted the disclosure requirements of SFAS No.
148 (see "Stock-Based Compensation" above).
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 proposed SOP was
presented to the FASB for clearance, however on April 14, 2004,
the FASB did not approve the draft SOP and decided to consider
the relevant concepts within the SOP in connection with the
FASB's short-term convergence project on property, plant and
equipment, including depreciation currently scheduled to take
place in the 2005-2006 timeframe.
In January 2003, the FASB issued Financial Interpretation 46,
"Consolidation of Variable Interest Entities - An Interpretation
of Accounting Research Bulletin (ARB) 51" ("FIN 46" or the
"Interpretation"). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIEs). The primary
objective of the Interpretation is to provide guidance on the
identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights;
such entities are known as VIEs. The provisions of FIN 46 apply
immediately to VIEs created after January 31, 2003. Application
is required for interests in special-purpose entities in the
period ending after December 15, 2003 and is required for all
other types of VIE's in the period ending after March 15, 2004.
The Company has no VIEs and there was no material impact on the
Company's financial position or results of operations from the
adoption of FIN 46.
11. Subsequent Events:
On July 6, 2004, the Company signed a forbearance agreement with
GE Capital to defer the quarterly principal installment payment
of $0.5 million due on the Midnight Wrangler term loan. The
quarterly installment payment which was originally due on June
17, 2004 is now payable on September 17, 2004.
On July 22, 2004, the Company entered into an agreement with
Regions Bank for a $5.0 million non-revolving line of credit. See
the discussion in Note 2 above.
In July 2004, the Company applied under its structured Finance
Facility for the 10% of the accepted Canadian content interest
rate subsidy available from Industry Canada. The process has been
initiated by Industry Canada to pay the U.S. dollar equivalent of
approximately $5.6 million. Of this total, approximately $1.5
million will be paid directly to the Company and will be used by
the Company to pay future interest due on the Finance Facility
(see Note 2). The remaining amount of approximately $4.1 million
will be paid by Industry Canada to Regions Bank and EDC to reduce
or "buy down" the interest rate on the $79.0 million Finance
Facility when it converts to the three-year term loan.
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, 2003, and the unaudited
interim condensed 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. Accordingly, we caution
investors not to place undue reliance on forward-looking
statements. 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, 2003 under the captions "Forward-Looking Statements" and
"Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors."
GENERAL
We provide subsea construction services in connection with the in-
field 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 on the Continental Shelf of the Gulf of Mexico.
Over the last few years, we have expanded our operations, fleet
capabilities and management expertise to enable us to provide
analogous services in water depths up to 10,000 feet. In
addition, we have begun to enter the international markets of the
world, including Mexico and West Africa, as we believe these
areas present opportunities for utilization of our fleet.
In the first half of 2004, we reported revenues of $30.9 million,
which equaled the revenues for the six months ended June 30, 2003
of $30.9 million. The operating loss for the first six months of
2004 was $7.6 million, compared with an operating loss of $1.7
million in the first six months of 2003. During the first half of
2004, based upon management's experience, demand for subsea
construction services in the Gulf of Mexico remained relatively
weak as the levels of offshore drilling activity in the markets
where we operate continue to be depressed. In addition, our
operations are cyclical and fleet-wide utilization is generally
lower during the first half of the year because of winter weather
conditions in the Gulf of Mexico. These forces have kept market
prices and fleet utilization at low levels while our operating
costs have increased, and as a result, an adverse impact has been
seen on our gross margin (defined as revenues less cost of
sales).
We have a working capital deficit of $89.1 million. This deficit
is primarily attributable to the classification of the
outstanding indebtedness under the Midnight Express construction
finance facility, which matures on October 31, 2004, as a current
liability. This position places a high degree of pressure on our
liquidity management and could ultimately impact our operations
and future business plans. Management believes that our plan, as
outlined below, if successful, will provide us with sufficient
financial resources to conduct our operations for the next six
months and beyond should the Midnight Express be successfully
deployed and profitably employed. As of June 30, 2004, we had
$15.2 million of borrowing capacity under our credit facilities.
However, if we continue to incur significant losses or if our
ability to access our credit facilities is curtailed, our ability
to continue to manage our liquidity needs and meet our operating
and other financial commitments may be jeopardized in the future.
We believe that certain factors are critical to our success,
including having sufficient capital resources to complete the
conversion of the Midnight Express in 2004; deployment of the
Midnight Express as soon as possible upon completion of its sea
trials, which is expected in the second half of 2004; raising
additional capital with a public or private placement of equity
or through the sale of certain vessels; refinancing our existing
indebtedness; reducing certain fixed costs; managing the
utilization of our existing fleet of vessels by strategically
positioning our DP-2 vessels on jobs to promote efficiency and
greater margins; and continuing to expand our presence
internationally and move into the intermediate water depths and
the deepwater markets.
In order to implement our business plan and meet our financial
obligations, we must:
- Complete the conversion of the Midnight Express in a timely
manner and within the financial constraints of the $19.0
million increase in the conversion financing.
- Raise additional capital to fund working capital
requirements, including the payment of monthly lease amounts
for the Midnight Hunter, which is approximately $0.4 million
per month for the remaining two quarters of the year ended
December 31, 2004, and to make monthly and quarterly interest
and principal payments to General Electric Commercial
Equipment Financing (GE Commercial) as part of the Midnight
Eagle term loan and General Electric Capital Corporation (GE
Capital) as part of the Midnight Wrangler term loan (together
$2.1 million for the remainder of 2004 as of June 30, 2004).
- Enter into an agreement(s) for utilization of the Midnight
Express near the time of the completion of its final sea
trials in the second half of 2004.
We have been actively attempting to implement our plan, the
ultimate success of which is beyond our control. If we are not
able to successfully implement our plan our financial condition
and liquidity will be materially and adversely affected and there
is significant doubt about our ability to continue as a going
concern. For more information regarding our plan, see Note 2 to
the Financial Statements located in Item 1 of this Form 10-Q, and
for the related risks, see "Risk Factors" in "Item 7 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors" in our annual report on
Form 10-K filing for the fiscal year ended December 31, 2003.
We remain focused on our business strategy of moving into the
deepwater markets of the world through the establishment of our
fleet of DP-2 vessels. Since 1997, we have increased the size of
our total fleet of construction and service vessels from three to
ten construction and service vessels (excludes Midnight Runner).
In 2002, we acquired a 520-foot vessel from Smit International,
renamed the Midnight Express, which is being converted to a DP-2
offshore construction vessel with our patented pipelay system at
an estimated cost of approximately $109.0 million. In December
2002, we committed to purchase a cable-lay vessel, renamed the
Midnight Wrangler, for the purpose of deepwater pipelay and
subsea construction. We took possession of this vessel in March
2003 and the vessel entered our active fleet in August 2003 after
various modifications and upgrades were made to it. In January
2004, we entered into a new charter for the Midnight Hunter, a
deepwater capable diving support vessel. These additions to our
fleet over the past few years have positioned us to grow our
business while achieving better margins as we move into the
intermediate depths and the deepwater. These DP-2 vessels are the
core of our fleet and the key to our future success.
Business Environment
The demand for subsea construction services has historically
depended upon the prices of oil and natural gas. However, this
relationship has deteriorated over the past 18 months as the
price of oil has greatly increased without a reciprocal increase
in the activity in the Gulf of Mexico. There has been an increase
in activity in Mexico and West Africa as equipment has moved from
the Gulf of Mexico to these areas. These prices do reflect the
general condition of the industry and influence the willingness
of our customers to spend capital to develop oil and natural gas
reservoirs on a global basis. 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:
- - the offshore mobile and jack-up rig counts;
- - forecasts of capital expenditures by major, independent, and
state oil and natural gas companies; and
- - recent lease sale activity levels.
Even when demand for subsea construction services is strong,
several factors may affect our profitability, including the
following:
- - competition;
- - availability of qualified personnel;
- - equipment and labor productivity;
- - cost of third party services such as catering and labor
services;
- - fuel cost;
- - weather conditions;
- - contract estimating uncertainties;
- - global economic and political circumstances;
- - other risks inherent in marine construction; and
- - availability and cost of insurance.
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.
In the life of an offshore field, capital is allocated for field
development 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 drilling activities by three to twelve months.
We have noticed that demand for pipeline installation for
projects exceeding 1,000 feet of water depth generally follows
drilling activities by at least eighteen months to three years as
deepwater installations typically require much more engineering
design work than Shelf installations.
RESULTS OF OPERATIONS
Comparison of the Quarter Ended June 30, 2004 to the Quarter
Ended June 30, 2003
The following table highlights revenue days (days of vessel
utilization), revenue and gross profit for the quarters ended
June 30, 2004 and June 30, 2003.
(dollars in thousands, except
per revenue day, unaudited) Quarter Ended June 30,
----------------------
2004 2003
---------- ---------
Revenue Days 574 504
Revenue $ 19,020 $ 13,876
Gross Profit $ 1,725 $ 1,376
Average per Revenue Day:
Revenue $ 33,136 $ 27,532
Gross Profit $ 3,005 $ 2,730
Revenues. Revenues were $19.0 million for the three months ended
June 30, 2004 compared to $13.9 million for the three months
ended June 30, 2003, an increase of 37.1%. The increase in second
quarter 2004 revenues was caused by the overall increase in the
utilization of our fleet during the period and the increase in
average pricing realizations (revenues divided by revenue days)
when compared to the comparable second quarter 2003 statistics.
The number of revenue days worked increased 13.9% between
periods. In addition, average pricing realizations in the second
quarter of 2004 were 20.4% higher than the average pricing
realizations in the second quarter of 2003. Our fleet worked 574
revenue days in the second quarter of 2004 resulting in a
utilization rate of 64.3%, compared to 504 revenue days worked in
the three months ended June 30, 2003, or a 62.6% utilization
rate. The increase in fleet utilization is primarily due to the
addition of the Midnight Wrangler (91 revenue days) and the
Midnight Hunter (82 revenue days) to our fleet as they were not a
part of the operating fleet in the second quarter of 2003. In
addition, the Midnight Dancer contributed 35 more revenue days in
the second quarter of 2004 than in the comparable period of 2003.
However, these increases in utilization was partially offset by
the decrease in the number of revenue days on a quarter versus
quarter basis for the Midnight Runner, Midnight Rider, Midnight
Brave and Midnight Arrow (charter terminated on May 31, 2004).
Gross Profit. Gross profit (defined as revenues less cost of
sales) was $1.7 million (9.1% of revenues) for the three months
ended June 30, 2004, compared to $1.4 million (9.9% of revenues)
for the three months ended June 30, 2003. Cost of sales consists
of job related costs such as vessel wages, insurance and repairs
and maintenance. The gross profit margin in the quarter ended
June 30, 2004 remained relatively comparable to the gross profit
margin in the quarter ended June 30, 2003. The overall increase
in cost of sales in the second quarter of 2004 was primarily due
to increases in the fixed cost structure, subcontract costs, job
consumables, vessel consumables, communication costs and marine
crew. In addition, included in cost of sales were $0.7 million of
additional costs related to the termination of the Midnight
Hunter charter for the three months ended June 30, 2003.
Depreciation and Amortization. Depreciation and amortization
expense was $2.6 million for the three months ended June 30, 2004
compared to $1.8 million for the three months ended June 30,
2003, an increase of 44.9%. The major portion of the increase
relates to the $0.6 million impairment charge for the Midnight
Runner. In addition, the increase consisted of depreciation
expense for the Midnight Wrangler and the Midnight Gator in the
second quarter of 2004 as compared to none in the second quarter
of 2003. This was partially offset by the decrease in the
amortization of drydock costs for the Midnight Brave and Midnight
Carrier in the second quarter of 2004 as compared to the second
quarter of 2003.
General and Administrative Expenses. General and administrative
expenses totaled $1.4 million (7.2% of revenues) for the three
months ended June 30, 2004 compared to $1.3 million (9.7% of
revenues) for the three months ended June 30, 2003. The second
quarter 2004 general and administrative expenses were higher than
the second quarter of 2003 due to increases in financing fees,
personnel costs, professional fees and insurance costs. These
increase were offset partially by declines in consulting and
legal costs.
Other Income. Other income was zero for the three months ended
June 30, 2004 and 2003. We capitalized all of our second quarter
2004 and 2003 interest costs, totaling $0.8 million and $0.3
million, respectively, in relation to the conversion of the
Midnight Express.
Income Taxes. For the quarter ended June 30, 2004, we increased
our deferred tax asset valuation allowance by $0.5 million,
recognizing no net income tax benefit associated with our
operating loss due to the uncertainty of future taxable income.
We recorded a $0.6 million benefit (a 35% effective tax rate)
during the three months ended June 30, 2003.
Net Loss. Net loss for the three months ended June 30, 2004 was
$2.4 million, compared with a net loss of $1.2 million for the
three months ended June 30, 2003.
Comparison of the Six Months Ended June 30, 2004 to the Six
Months Ended June 30, 2003
The following table highlights revenue days (days of vessel
utilization), revenue and gross profit for the six-month periods
ended June 30, 2004 and June 30, 2003.
(dollars in thousands, except
per revenue day, unaudited) Six Months Ended June 30,
-------------------------
2004 2003
----------- ---------
Revenue Days 952 994
Revenue $ 30,862 $ 30,905
Gross Profit $ 323 $ 4,660
Average per Revenue Day:
Revenue $ 32,418 $ 31,092
Gross Profit $ 339 $ 4,688
Revenues. Revenues were $30.9 million for the six months ended
June 30, 2004 compared to $30.9 million for the six months ended
June 30, 2003, a decrease of 0.1%. The minimal decrease in
revenues for the six-month period ended June 30, 2004 as compared
to the year-ago period is the result of a decline in the number
of revenue days worked in the first six months of 2004. The
amount of the decrease was lessened by an increase in the average
revenue per revenue day of 4.3%. Our fleet worked 952 revenue
days in the first six months of 2004 resulting in a utilization
rate of 52.0%, compared to 994 revenue days worked in the six
months ended June 30, 2003, or a 61.7% utilization rate. Average
revenue per revenue day was $32,418 in the first six months of
2004 as compared to $31,092 in the first six months of 2003. The
Midnight Wrangler (140 revenue days) and the Midnight Hunter (90
revenue days) were new contributors to the fleet in the first
half of 2004. The Midnight Dancer had an increase of 44 revenue
days during the first six months of 2004 as compared to the same
period of 2003. The increases were offset by declines in
utilization from the Midnight Arrow, Midnight Rider, Midnight
Brave and Midnight Runner.
Gross Profit. Gross profit (defined as revenues less cost of
sales) was $0.3 million (1.0% of revenues) for the six months
ended June 30, 2004, compared to $4.7 million (15.1% of revenues)
for the six months ended June 30, 2003. Cost of sales consists of
job related costs such as vessel wages, insurance and repairs and
maintenance. The decrease in the gross profit margin was
primarily caused by a higher fixed cost structure and higher
direct job costs, including increases in subcontract costs,
vessel consumables and job consumables. In addition, there was an
increase in indirect costs as well. These increases were offset
somewhat by lower direct job labor when compared to the first six
months of 2003. In addition, included in cost of sales were $1.3
million of additional costs related to the termination of the
Midnight Hunter charter in the six months ended June 30, 2003.
Depreciation and Amortization. Depreciation and amortization
expense was $4.7 million for the six months ended June 30, 2004,
compared to $3.6 million for the six months ended June 30, 2003,
an increase of 30.1%. The major portion of the increase is due to
the impairment charge of $0.6 million on the Midnight Runner
during the second quarter of 2004. In addition, the increase was
a result of more depreciation of vessels in the first six months
of 2004, as compared to the same period of 2003 offset by a
decrease in amortization of drydock costs. The increases in
depreciation expense during the first six months of 2004 came
mostly from the addition of the Midnight Wrangler to the fleet as
well as from the Midnight Gator. The amortization of drydock
expense for the Midnight Brave and Midnight Carrier decreased
during the 2004 period when compared to the first six months of
2003.
General and Administrative Expenses. General and administrative
expenses totaled $3.1 million (9.6% of revenues) for the six
months ended June 30, 2004, compared to $2.7 million (8.7% of
revenues) for the six months ended June 30, 2003. The general and
administrative expenses were higher in the first six months of
2004 as compared to the six months ended June 30, 2003, due to
increases in financing fees, personnel costs, professional fees
and insurance costs offset by a decline in consulting costs and
business promotion expenses.
Other Income. Other income was zero for the six months ended June
30, 2004 compared to other income of $1,000 for the six months
ended June 30, 2003. We capitalized all of our year-to-date 2004
and 2003 interest costs, totaling $1.7 million and $0.4 million,
respectively, in relation to the conversion of the Midnight
Express.
Income Taxes. For the six months ended June 30, 2004, we
increased our deferred tax asset valuation allowance by $2.4
million, recognizing no net income tax benefit associated with
our operating loss due to the uncertainty of future taxable
income. We recorded a $0.6 million benefit (a 35% effective tax
rate) during the six months ended June 30, 2003.
Net Loss. Net loss for the six months ended June 30, 2004 was
$7.6 million, compared with a net loss of $1.1 million for the
six months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Needs and Our Financial Plan
As discussed in our annual report on Form 10-K for the year ended
December 31, 2003, we have been significantly and negatively
affected by adverse business conditions in our industry, and
other events with a direct impact on our earnings. We have
experienced recurring losses from operations, negative operating
cash flows and a working capital deficiency. As a result, our
independent public accountants advised us that they had reached a
conclusion that there is substantial doubt our ability to
continue as a going concern and, as required by auditing
standards generally accepted in the United States, included in
their auditors' report on our 2003 financial statements an
explanatory paragraph to reflect that conclusion. Our ability to
continue in business is dependent on our ability to raise
additional capital and improve our operating results. Our
financial condition has been significantly and negatively
impacted by adverse conditions in the markets where we operate.
As a result, we have been required to delay payments to vendors
and other creditors to the extent possible. Accordingly, a
portion of our accounts payable are past due compared to stated
terms and certain of vendors have placed liens on our vessels.
We face significant liquidity and working capital challenges, in
addition to costs of expanding our operations into the deepwater
market, and will need to raise additional capital to continue to
meet our debt obligations and conduct our operations as currently
conducted. In connection with our efforts to raise capital, we
have a developed a plan, the components of which include the sale
of certain of our vessels and raising capital, including
refinancing or debt, through the public or private capital
markets. Our ability to raise additional capital will depend upon
the status of capital markets and industry conditions. If we are
not able to raise additional capital through the public or
private equity markets or the sale of vessels, then the amount of
cash generated from our operations may not be sufficient to meet
our debt service obligations and working capital requirements,
which have risen significantly in part due to our entry into the
deepwater market. We believe that our plan, if successful, will
provide us with sufficient financial resources to continue to
conduct our operations for the next six months and beyond should
the Midnight Express be successfully deployed and profitably
employed. Please refer to Note 2 to the Financial Statements
located in Item 1 of this Form 10-Q for more details on our plan.
However, no assurances can be given that we will successfully
implement our plan.
As part of our plan, in April 2004 we executed an amendment with
Regions Bank and EDC for a $19.0 million increase to our existing
credit facility (the "Finance Facility") to complete the
conversion of the Midnight Express. In addition, these lenders
have agreed to extend the time frame of the construction period
of the Finance Facility from June 30, 2004 to October 31, 2004,
at which point the construction period financing is expected to
convert to term status. Regions Bank and EDC have also amended
certain covenant obligations that we must meet as discussed
below. We also executed amendments in April 2004 with GE
Commercial and GE Capital relating to our Midnight Eagle and
Midnight Wrangler term loans, respectively.
In May 2004, we reached a settlement with Davie Maritime, Inc.,
the shipyard that completed the conversion of the Midnight
Express in Quebec, Canada, through an increase in the contract
price of $8.3 million. This settlement covered all of the claims
made by Davie Maritime, Inc. against us. Since the initial
contract signing, the contract price increased from $37.1 million
to $53.2 million of which $7.8 million resulted from approved
change orders and $8.3 million from an agreed increase in
contract price. The settlement was paid from March 1, 2004
through the delivery date (June 4, 2004) from the additional
$19.0 million from the Finance Facility. Also as part of our
plan, we reached a settlement with Stolt Offshore, Inc. (Stolt)
in the amount of $6.2 million for work we completed for Stolt on
the Boston Hubline project in the first half of 2003. We
collected these funds in March 2004 and have used them for
general operating purposes and for reducing amounts due under the
Company's receivable line of credit.
On July 6, 2004, we signed a forbearance agreement with GE
Capital to defer the quarterly principal installment payment of
$0.5 million due on the Midnight Wrangler term loan. The
quarterly installment payment which was originally due on June
17, 2004 is now payable on September 17, 2004. On July 22, 2004,
we entered in an agreement with Regions Bank for a $5.0 million
non-revolving line of credit with an initial term of 120 days to
be used for working capital purposes. The rate on the borrowing
is LIBOR plus 4.00%. The collateral on the non-revolving line is
the Midnight Rider, which is also collateral under the Finance
Facility with Regions Bank and EDC. In order to use this vessel
as collateral in this deal, EDC took a subordinated secured
position on the vessel. In addition, as part of the above
transaction, Regions Bank agreed to allow the usage of
approximately $1.5 million of proceeds from Industry Canada to
pay the interest on the Finance Facility during the conversion
period. The proceeds were originally allocated to repay a portion
of the $19.0 million additional financing arranged in April 2004
to convert the Midnight Express. The terms of the note call for
the loan to be repaid on November 19, 2004. We intend to repay
the $5.0 million note through a refinancing of our existing debt
with the prospect of converting this $5.0 million into long-term
debt. In the event we are successful in obtaining refinancing of
our existing debt, the agreement with Regions Bank and EDC calls
for the proceeds of the refinancing to: 1) repay this $5.0
million note, 2) repay $1.5 million of the additional $19.0
million of financing on the Midnight Express conversion, and 3)
use 50% of the refinance proceeds received in excess of $6.5
million to also repay a portion of the additional $19.0 million
of financing on the Midnight Express conversion.
In July 2004, we applied under our structured Finance Facility
for the 10% interest rate subsidy available from Industry Canada.
The process has been initiated by Industry Canada to pay the U.S.
dollar equivalent of approximately $5.6 million. Of this total,
approximately $1.5 million will be paid directly to us and will
be used to pay future interest due on the Finance Facility as
discussed above. The remaining amount of approximately $4.1
million will be paid by Industry Canada to Regions Bank and EDC
to reduce or "buy down" the interest rate on the Finance Facility
when it converts to the three-year term loan.
Our Finance Facility specifies we must raise the lesser of $10.0
million or 20% of our market capitalization at the time of the
issuance by June 30, 2005 and requires that the first $10.0
million of proceeds associated with such an offering be used to
reduce amounts outstanding under the Finance Facility.
Current Liquidity and Capital Resources
The net cash provided by or used in our operating, investing and
financing activities is summarized below:
(in thousands, unaudited) Six Months Ended June 30,
-------------------------
2004 2003
---------- ----------
Cash flows provided by (used in):
Operating activities $ 2,545 $ 8,977
Investing activities (27,186) (36,931)
Financing activities 24,641 27,628
-------- --------
Net change in cash and cash
equivalents $ -- $ (326)
======== ========
Our cash flow from operating activities is affected by a number
of factors, including our net results, depreciation and
amortization, drydocking expenditures and changes in our working
capital. In the six months ended June 30, 2004, our operating
activities provided net cash of $2.5 million as compared to $9.0
million in the six months ended June 30, 2003.
Cash flow used in investing activities in the six months ended
June 30, 2004 was related to the purchase of equipment, primarily
related to the conversion of the Midnight Express. Cash
expenditures totaled $27.2 million for the six months ended June
30, 2004 compared to $36.9 million for the six months ended June
30, 2003. The cash expenditures in the first six months of 2003
do not include the $9.7 million expended for the purchase of the
Midnight Wrangler, as this amount was fully financed by the
seller (see discussion below).
Cash flow provided by financing activities was $24.6 million in
the six months ended June 30, 2004 and related primarily to the
borrowings under our various credit agreements, principally the
construction finance facility. Cash flow provided by financing
activities for the six months ended June 30, 2003 was $27.6
million and was also related mostly to the borrowings under our
various credit agreements, primarily the construction finance
facility.
We had negative working capital (current assets less current
liabilities) of $89.1 million at June 30, 2004. This is primarily
the result of the inclusion in current liabilities of $69.9
million of borrowings to finance the Midnight Express. As this
debt is associated with the conversion work on the Midnight
Express, it is classified as current as of June 30, 2004.
However, once the conversion of the Midnight Express is completed
and the vessel meets certain requirements as specified by the
finance agreement, the amounts borrowed to finance the conversion
of the Midnight Express are expected to convert to term loan
status. There are other things that could affect classification,
such as compliance with covenants.
The significant changes in our financial position from December
31, 2003 to June 30, 2004 are the increase in debt, the increase
in property and equipment, and the decrease in the accounts
receivable balance. Total debt has increased to $101.0 million as
of June 30, 2004 and consists primarily of the borrowings to
finance the conversion of the Midnight Express, the GE Capital
Midnight Wrangler term loan, the GE Commercial Midnight Eagle
term loan, and the receivable line of credit, which are discussed
below. Property and equipment has increased by $23.0 million due
to the capital expenditures primarily related to the conversion
of the Midnight Express and our accounts receivable balance has
decreased by $6.5 million.
Historically, our capital requirements have been primarily for
the acquisition and improvement of our vessels and related
equipment. We expect that as we continue our entrance into the
deepwater market our capital requirements will continue to be
primarily for the conversion and improvement of our vessels.
Capital expenditures totaled $27.2 million for the six months
ended June 30, 2004, compared to $46.7 million for the six months
ended June 30, 2003. Capital expenditures in 2004 and 2003
primarily relate to the conversion of the Midnight Express. We
currently estimate capital expenditures for the remainder of 2004
to be approximately $10.9 million, primarily representing the
conversion of, and the equipment associated with, the Midnight
Express. We expect to fund these capital requirements by
utilizing our bank and debt facilities in addition to cash flow
from operations. Included in this estimate are approximately $2.2
million for routine capital and drydock inspections of our
vessels to be incurred during the remainder of 2004.
Available Credit Facilities and Debt
Regions Bank Facility. In July 2002, we entered into a $35.0
million bank facility (the "Bank Facility") with Regions Bank,
consisting of a $25.0 million asset-based five-year revolving
credit facility and a $10.0 million accounts receivable-based
working capital facility. Our ability to use the asset-based five-
year revolving credit facility was suspended in connection with
our financing of the conversion of the Midnight Express and later
terminated in April 2004 as part of the $19.0 million increase to
the construction finance facility as mentioned above and
discussed below. We continue to have available to us the accounts
receivable-based working capital facility from Regions Bank. In
December 2003, the accounts receivable-based working capital
facility was increased to a limit of $15.0 million. Amounts
outstanding under the accounts receivable-based working capital
facility may not exceed 85% of eligible trade accounts
receivable. We had $8.9 million outstanding under the $15.0
million accounts receivable-based working capital facility as of
June 30, 2004. In addition, we issued a $1.5 million standby
letter of credit as security for the charter payments due under
the charter agreement for the Midnight Hunter against the
accounts receivable-based working capital facility. In July 2003,
this letter of credit was drawn by Cable Shipping, Inc., the
owners of the Midnight Hunter. We have recorded the $1.5 million
as a liability on our balance sheet as of December 31, 2003 as
part of the receivable line of credit. We had available borrowing
capacity of up to an additional $2.1 million under the $15.0
million accounts receivable-based working capital facility based
upon eligible receivables at June 30, 2004. The $15.0 million
accounts receivable-based working capital facility was extended
and now has a maturity date of July 2, 2005.
Midnight Express $79.0 Million Finance Facility. In April 2003,
we finalized a credit line that matures on June 30, 2004 to
finance the conversion of the Midnight Express (the "Finance
Facility"). Amounts outstanding under the credit line will
convert into a three-year term loan facility upon completion of
the conversion of the Midnight Express. The Finance Facility
commitment is equally provided by Regions Bank and Export
Development Canada (EDC) ($30.0 million participation by each).
In April 2004, we increased the credit line from Regions Bank and
EDC by $19.0 million to $79.0 million ($39.5 million
participation by each) and amended the maturity to October 31,
2004. The amounts outstanding under the credit line will convert
into two separate loans at the earlier of the facility's maturity
date or completion of the conversion of the Midnight Express. The
first loan represents the original facility of $60.0 million
borrowing and will convert to a three-year term loan facility.
The second loan is for the additional $19.0 million and will
convert to a twenty-month term loan facility maturing on June 30,
2006. In addition, as part of the increase to the credit
facility, the $25.0 million asset-based five-year revolving
credit facility was cancelled as discussed above. Regions Bank
and EDC also have the right to the first $10.0 million of any
equity offering, to the proceeds from the sale of any of the
mortgaged vessels (see discussion below), and to the interest
rate buy-down expected from Industry Canada during the third
quarter of 2004.
The interest rate for the $60.0 million portion of the
construction financing was LIBOR plus a spread of 3.25% to 3.50%
based upon our consolidated leverage ratio before it was amended
as part of the $19.0 million increase to the credit line. The
interest rate for the $19.0 million portion of the construction
financing is LIBOR plus 4.00%. In addition, a 1% origination fee
($190,000) was charged by Regions Bank and EDC for the addition
to the credit line and the interest rate on the original $60.0
million financing increased to LIBOR plus 4.00%. We are providing
collateral in the form of the Midnight Express as well as a first
preferred ship mortgage on the Midnight Fox, Midnight Star,
Midnight Dancer, Midnight Carrier, Midnight Brave and Midnight
Rider. We must adhere to various conditions including maintaining
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 (defined below) of 1.30 to 1 (see below for details
of amendments). We are not allowed to incur additional debt over
$8.0 million without consent from Regions Bank. We have drawn
approximately $69.9 million as of June 30, 2004 under the $79.0
million facility.
Upon achievement of certain construction completion milestones,
but no later than October 31, 2004, the $79.0 million Finance
Facility will convert to term status. The $60.0 million term loan
facility would then have a three-year term with a 10-year
amortization payment schedule consisting of semi-annual payments
with a balloon payment at the end of the three-year term. The
interest rate for this facility is now at 4.00% over LIBOR. The
$19.0 million term loan facility would then have a twenty-month
term with a $6.0 million principal payment due on June 30, 2005,
a $6.0 million principal payment due on December 30, 2005 and the
remaining $7.0 million principal payment due on June 30, 2006.
Interest would be payable on a monthly basis based on a rate of
LIBOR plus 4.00%. Regions Bank and EDC will require us to
maintain the same collateral and covenants as included in the
construction financing depicted above.
Earlier in 2004 we were not in compliance with the current ratio
or the debt service coverage ratio requirements under the Finance
Facility (with respect to the December 31, 2003 testing period).
As a result, in early April 2004 we obtained forbearance waivers
from our lenders and effected amendments to our loan agreements
to provide certain levels of relief with respect to the required
level of minimum coverage as well as changes related to certain
components of the computation of the minimum current ratio, as
defined, and the minimum debt service coverage ratio, as defined,
for the quarterly testing periods of 2004. As of June 30, 2004,
we were in compliance with the financial covenants (as amended in
early April 2004) of the Bank Facility, the Finance Facility and
the GE Commercial term loan. We must comply with the amended
consolidated current ratio covenant (as defined) of 0.70 to 1 for
the four quarters of 2004 and then the consolidated current ratio
covenant (as defined) returns to 1.00 to 1 as of March 31, 2005.
There can be no assurance that compliance will be maintained. If
compliance is not maintained, all credit agreements could be
declared to be in default and all amounts outstanding, including
the $18.3 million of debt associated with the Midnight Eagle and
Midnight Wrangler facilities, currently classified as long-term,
could be demanded for payment and our creditors would have the
right to seize the applicable collateral. Our obligations under
these credit agreements are secured by substantially all of our
assets. Any defaults under the credit agreements would adversely
impact our ability to sustain our operations in the normal course
and have a material effect on our financial condition and results
of operations.
Purchase of the Midnight Wrangler. In December 2002, we entered
into a purchase agreement with Global Marine Systems Limited
(Global Marine) for the purchase of the Wave Alert, to be renamed
the Midnight Wrangler, at a cost of approximately $10.8 million.
We took possession of the vessel in March 2003. The purchase of
the vessel was financed by Global Marine over a five-year period
with monthly payments, including 7% per annum interest, of
approximately $0.2 million plus a $1.0 million payment at the
purchase in March 2003 and another $1.0 million payment at the
end of the five-year period.
GE Commercial Midnight Eagle Term Loan. In March 2003, we
finalized a seven-year term loan with GE Commercial. Although the
principal amount of the term loan is $9.25 million, we received
$8.0 million and GE Commercial retained $1.25 million as a
security deposit. The interest rate on the term loan is the 30-
day commercial paper rate plus 2.03% and includes prepayment
penalties of 2% for the first twelve months, 1% for the second
twelve months and 0% thereafter. The term loan is structured to
have monthly payments over seven years. The loan agreement
contains the same financial covenants as the Bank Facility and
Finance Facility discussed above. The collateral for the loan is
the Midnight Eagle and the security deposit described above. We
used the proceeds from the loan to fund the improvements to the
Midnight Wrangler and a portion for the Midnight Express
conversion costs.
GE Capital Midnight Wrangler Term Loan. In December 2003, we
refinanced the debt used to acquire the Midnight Wrangler (as
discussed above) by entering into a secured term loan with GE
Capital in the principal amount of $15.0 million. The secured
term loan is structured to have quarterly payments over seven
years. The interest rate on the term loan is 4.25% over LIBOR and
the terms contained an origination discount of 1.50%. The loan
agreement contains various covenants beginning on March 31, 2005,
including a minimum EBITDA (as defined) of $18.5 million, a
minimum fixed charge ratio (as defined) of 1.05 to 1, and a
maximum leverage ratio (as defined) of 5.25 to 1 for the
financial quarters ended in the period from October 1, 2004
through September 30, 2005. These maximum leverage ratios decline
by 0.50 to 1 for each of the following four years (on an annual
basis at October 1st) before reaching 3.25 to 1, which applies
for the financial quarters ended from October 1, 2008 and
thereafter. The collateral for the loan is the Midnight Wrangler,
Midnight Runner and Midnight Gator. A final payment was made to
Global Marine in December 2003. This early retirement of debt
resulted in a gain $0.9 million that we recorded in our income
statement for the year ended December 31, 2003.
Cash Requirements
The following table presents our long-term contractual
obligations and the related amounts due, in total and by period,
as of June 30, 2004 (in thousands):
Payments Due by Period
----------------------------------------
Less After
Than 1 1-3 4-5 5
Total Year Years Years Years
----- ----- ----- ----- -----
Finance Facility $69,870 $69,870 $ -- $ -- $ --
Long-Term Debt 22,263 3,922 6,896 7,045 4,400
Receivable Line of
Credit 8,912 8,912 -- -- --
Capital Lease
Obligations 171 171 -- -- --
Operating Leases 7,636 5,763 1,530 271 72
Unconditional Purchase
Obligations 3,272 3,272 -- -- --
Other Long-Term
Obligations 250 250 -- -- --
----- ----- ----- ----- -----
Total Contractual Cash
Obligations $112,374 $92,160 $8,426 $7,316 $4,472
======= ====== ===== ===== =====
As discussed above, we expect the Midnight Express construction
loan (Finance Facility) to convert to two different term loans
with varying amortization payment schedules. The majority of the
long-term debt obligation consists of the Midnight Eagle term
loan with GE Commercial and the Midnight Wrangler term loan with
GE Capital, both of which are discussed above.
Included in long-term debt is a note assumed by us as part of the
purchase of a leisure fishing vessel from an investment holding
company wholly-owned by Mr. Stockstill to be used for customer
entertainment purposes. The total cost of the vessel was
approximately $0.1 million, of which $41,000 was paid during
2002. The debt assumed will be paid in monthly installments over
a five-year period.
During the quarter ended June 30, 2004, we made payments of
approximately $0.1 million for the operating lease obligation
relating to our deepwater technology vessel, the Midnight Arrow.
The long-term charter was scheduled to expire in March 2005, but
we reached an agreement with Adams Offshore Ltd. (the "Lessor")
to early terminate the charter effective May 31, 2004. As part of
the termination agreement, the Lessor waived the early
termination fee and we agreed to pay the Lessor $250,000 per
month beginning on July 24, 2004 until the outstanding balance of
$1.8 million due to the Lessor (all of which has been accrued) is
eliminated. We also paid $1.3 million in the quarter ended June
30, 2004 for the charter of the Midnight Hunter, a DP-2 diving
support vessel. We paid approximately $10.2 million during the
quarter ended June 30, 2004 in relation to the purchase price and
conversion of the Midnight Express bringing our total
expenditures as of June 30, 2004 to $100.8 million.
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 charter agreement of the Midnight Hunter. Included in
unconditional purchase obligations and other long-term
obligations are the contracts with equipment suppliers related to
the conversion of the Midnight Express. We expect to finance the
Midnight Express contracts with proceeds from the $79.0 million
Finance Facility discussed above.
As of June 30, 2004, two trade creditors had outstanding maritime
liens on various vessels in our fleet. In July 2004, we cured the
maritime liens from one of our trade creditors. We are in the
process of reaching a final settlement with the second trade
creditor. All applicable liabilities have been recorded in full
on the balance sheet as of June 30, 2004.
In August 2001, our Board of Directors approved the repurchase of
up to $5.0 million of our outstanding common stock. Purchases
were 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. In August 2002, we elected to suspend our
repurchase program. Under current conditions and to support our
vessel expansion strategy, we do not expect to repurchase shares
in the near future except for certain events related to the
vesting of employee's restricted shares. As of August 12, 2004,
715,074 shares had been repurchased at a total cost of $4.3
million.
Consistent with the focus toward investing in new technology,
including deepwater capable assets such as the Midnight Express
and the Midnight Wrangler, five of the last six vessels added to
our fleet have been DP-2 deepwater capable (Midnight Eagle,
Midnight Arrow, Midnight Express, Midnight Wrangler and Midnight
Hunter). Through June 30, 2004, we have expended approximately
$163.7 million (in combined capital expenditures, operating lease
payments and purchase payments) for these vessels, with an
additional estimated $16.7 million to be incurred in associated
construction costs, operating lease payments and drydock expenses
through 2005.
We believe that our cash flow from operations and the Bank
Facility will not be sufficient to meet our existing liquidity
needs for the operation of the business in 2004. We also believe
that the options offered by the Finance Facility, the GE
Commercial Midnight Eagle term loan, and the GE Capital Midnight
Wrangler term loan, in addition to our cash flow from operations,
will not be sufficient to complete our identified growth plans.
Raising additional capital during 2004 is a requirement for us to
continue to conduct our operations and meet our debt obligations.
We may not be able to raise these additional funds, or we may not
be able to raise such funds on favorable terms.
NEW ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of SFAS No. 123," which
provides alternative methods of transition for a voluntary change
to the fair-value based method of accounting for stock-based
employee compensation, and the new standard, which is now
effective, amends certain disclosure requirements. We continue to
apply APB No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for our stock-based
compensation; therefore, the alternative methods of transition do
not apply. We have adopted the disclosure requirements of SFAS
No. 148 (see Note 2 to the financial statements).
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 proposed SOP was
presented to the FASB for clearance, however on April 14, 2004,
the FASB did not approve the draft SOP and decided to consider
the relevant concepts within the SOP in connection with the
FASB's short-term convergence project on property, plant and
equipment, including depreciation currently scheduled to take
place in the 2005-2006 timeframe.
In January 2003, the FASB issued Financial Interpretation 46,
"Consolidation of Variable Interest Entities - An Interpretation
of Accounting Research Bulletin (ARB) 51" ("FIN 46" or the
"Interpretation"). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIEs). The primary
objective of the Interpretation is to provide guidance on the
identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights;
such entities are known as VIEs. The provisions of FIN 46 apply
immediately to VIEs created after January 31, 2003. Application
is required for interests in special-purpose entities in the
period ending after December 15, 2003 and is required for all
other types of VIE's in the period ending after March 15, 2004.
We have no VIEs and there was no material impact on our financial
position or results of operations from the adoption of FIN 46.
Significant Accounting Policies and Estimates.
For a discussion of significant accounting policies and
estimates, see our Annual Report on Form 10-K for the fiscal year
ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Interest Rate Risk. We are subject to market risk exposure
related to changes in interest rates on our Bank Facility (when
drawn upon), Midnight Eagle term loan with GE Commercial,
Midnight Wrangler term loan with GE Capital, our Finance Facility
and our $5.0 million non-revolving line with Regions Bank.
Interest on borrowings under the Bank Facility accrue at a
variable rate, using LIBOR plus a range of 1.75% to 2.25%,
depending upon the level of our consolidated leverage ratio (as
defined) measured on a quarterly basis. Our Midnight Eagle term
loan with GE Commercial includes an interest rate consisting of
the 30-day commercial paper rate plus 2.03%. Our Midnight
Wrangler term loan with GE Capital includes an interest rate
consisting of LIBOR plus 4.25%. Under the Finance Facility, the
interest rate during the construction financing phase is based
upon our consolidated leverage ratio at LIBOR plus 4.00%. The
$60.0 million term facility of the Finance Facility is priced at
4.00% over LIBOR and the $19.0 million term facility of the
Finance Facility is priced at LIBOR plus 4.00%. Finally, the $5.0
million non-revolving line with Regions Bank is priced at LIBOR
plus 4.00%.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. As of the end
of the period covered by this report, our Chief Executive Officer
and Chief Financial Officer, with the participation of
management, have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. Based on
their evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures have been designed and are functioning effectively in
alerting them in a timely manner to material information relating
to Torch Offshore, Inc. required to be disclosed in our periodic
Securities and Exchange Commission filings under the Securities
Exchange Act of 1934.
Changes in Internal Controls. There were no significant changes
in our internal controls or in other factors that could
significantly affect these internal controls subsequent to the
date of their most recent evaluation, including any corrective
actions taken with regard to significant deficiencies and
material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We have been named as a defendant in a stockholder class action
suit filed by purported stockholders regarding our initial public
offering. This lawsuit, Karl L. Kapps, et. al. v. Torch Offshore,
Inc. et. al., No. 02-00582, which seeks unspecified monetary
damages, was filed on March 1, 2002 in the United States District
Court for the Eastern District of Louisiana. The lawsuit was
dismissed on December 19, 2002 for failure to state a claim upon
which relief could be granted. The plaintiffs appealed to the
United States Court of Appeals for the Fifth Circuit. On July 26,
2004, the Court of Appeals for the Fifth Circuit dismissed the
case.
We terminated our charter of the Midnight Hunter on January 24,
2003, as, among other things, the vessel did not meet certain
specifications as outlined in the charter agreement and this
prevented us from performing some types of work. In November
2003, a London arbitrator issued a ruling against our recission
claim, finding that we were not entitled to terminate the
charter, but did rule in favor of us on the warranty claim for
breach of contract. An interim award of $2.2 million was made in
favor of Cable Shipping, Inc. and such amount was placed in
escrow pending further proceedings. We have recorded the full
amount of the interim award in the financial statements. We
attempted to appeal the ruling, but on April 7, 2004 the appeal
was denied. The escrowed award has been released to Cable
Shipping, Inc. Each party will now make submissions as to quantum
of damages for the claim upon which it was successful and a
further hearing will be held. Additional amounts awarded to the
parties will likely be netted in favor of Cable Shipping, Inc.
While an estimate of the net impact of the damages to be awarded
with respect to this matter is not currently quantifiable, it is
possible that future damages to be awarded to Cable Shipping,
Inc. in this matter could have a material adverse effect on our
financial condition and/or results of operations.
We filed a lawsuit (Torch Offshore, Inc. v. Newfield Exploration
Company, No. 03-0735, filed in the United States District Court,
Eastern District of Louisiana on March 13, 2003) against Newfield
Exploration Company (Newfield) claiming damages of approximately
$2.1 million related to work completed for Newfield in the Gulf
of Mexico at Grand Isle Block 103-A. Our lawsuit alleges that we
did not receive all compensation to which we were entitled
pursuant to the contract. We have recorded a provision for the
full amount of this claim; however, we intend to continue to
pursue the claim.
In July 2003, we filed a lawsuit (Torch Offshore, Inc. et al v.
Stolt Offshore, Inc., et al, No. 03-1915, in the United States
District Court, Eastern District of Louisiana on July 3, 2003)
against Stolt Offshore, Inc. (Stolt), and its customer, seeking
approximately $7.6 million related to work completed for Stolt in
Boston, Massachusetts. We worked as a subcontractor to Stolt, who
was engaged by Algonquin Gas Transmission Company to complete the
Boston Hubline project, an underwater pipeline crossing the
Boston Harbor. The lawsuit alleged that we did not receive all
compensation to which we were entitled pursuant to the
subcontract we had with Stolt. Two other subcontractors to Stolt
joined with us and filed as plaintiffs in the lawsuit.
Additionally, we, along with two other subcontractors, filed a
lawsuit in Massachusetts (Civil Action No. 03-01585), which
included a claim for breach of contract as well as a claim to
assert mechanics' liens against Algonquin's easement located in
Weymouth, Norfolk County, Massachusetts. In March 2004, we
reached a settlement with Stolt in the amount of $6.2 million and
we recorded the full amount of the difference between our
original claim and the final settlement (a loss of approximately
$1.4 million) in our financial statements as of December 31,
2003. The lawsuits have been dismissed, and the lien claims have
been released
Additionally, due to the nature of our business, we are, from
time to time, involved in routine litigation or subject to
disputes or claims related to our business activities (other
miscellaneous litigation). In our management's opinion, none of
this other miscellaneous litigation will have a material 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 20, 2004.
(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.
Votes For Votes Withheld
--------- --------------
Lyle G. Stockstill 13,197,398 47,000
Lana J. Hingle Stockstill 13,197,398 47,000
Curtis Lemons 13,197,398 47,000
Andrew L. Michel 13,197,398 47,000
R. Jere Shopf 13,197,398 47,000
Ken Wallace 13,197,398 47,000
(b) At such meeting, the stockholders also approved the
appointment of Ernst & Young LLP as the Company's
independent public accountants for 2004.
Votes For Votes Against Abstained
---------- ------------- ---------
13,207,348 37,050 --
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed as part of this report are listed below.
Exhibit 10.1 Sixth Amendment to Credit Agreement
among Torch Offshore, Inc., Regions Bank and
Export Development Canada
Exhibit 10.2 Sixth Amendment to Amended and Restated
Loan Agreement among Torch Offshore, Inc. and
Regions Bank
Exhibit 10.3 Amended and Restated Subordination
Agreement among Torch Offshore, Inc., Regions
Bank and Export Development Canada
Exhibit 10.4 Seventh Amendment to Credit Agreement
among Torch Offshore, Inc., Regions Bank and
Export Development Canada
Exhibit 10.5 Seventh Amendment to Amended and
Restated Loan Agreement among Torch Offshore,
Inc. and Regions Bank
Exhibit 10.6 Second Amendment to the Lease Agreement
dated 12 August 2003 between Thrustmaster of
Texas, Inc. and Torch Offshore, Inc.
Exhibit 31.1 Certification by Lyle G. Stockstill
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification by Robert E. Fulton
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification by Lyle G. Stockstill
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification by Robert E. Fulton
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, 2004, we filed a report on Form 8-K,
reporting under Item 12, announcing the release of the
operating results for the quarter ended December 31,
2003.
On May 13, 2004, we filed a report on Form 8-K,
reporting under Item 5, announcing a contract valued
at over $12.0 million with Marathon E.G. Production
Limited to perform work in Malabo, Bioko Island,
Equatorial Guinea.
On May 13, 2004, we filed a report on Form 8-K,
reporting under Item 12, announcing the release of the
operating results for the quarter ended March 31, 2004.
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TORCH OFFSHORE, INC.
Date: August 12, 2004 By: /s/ ROBERT E. FULTON
---------------------
Robert E. Fulton
Chief Financial Officer
(Principal Accounting and
Financial Officer)
EXHIBIT INDEX
10.1 -- Sixth Amendment to Credit Agreement among Torch
Offshore, Inc., Regions Bank and Export Development
Canada
10.2 -- Sixth Amendment to Amended and Restated Loan
Agreement among Torch Offshore, Inc. and Regions
Bank
10.3 -- Amended and Restated Subordination Agreement
among Torch Offshore, Inc., Regions Bank and Export
Development Canada
10.4 -- Seventh Amendment to Credit Agreement among
Torch Offshore, Inc., Regions Bank and Export
Development Canada
10.5 -- Seventh Amendment to Amended and Restated Loan
Agreement among Torch Offshore, Inc. and Regions
Bank
10.6 -- Second Amendment to the Lease Agreement dated
12 August 2003 between Thrustmaster of Texas, Inc.
and Torch Offshore, Inc.
31.1 -- Certification by Lyle G. Stockstill Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 -- Certification by Robert E. Fulton Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 -- Certification by Lyle G. Stockstill Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 -- Certification by Robert E. Fulton Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 10.1
SIXTH AMENDMENT TO CREDIT AGREEMENT
This Sixth Amendment to Credit Agreement is entered into as
of the 22nd day of July, 2004, and is executed in connection with
that certain Credit Agreement effective as of April 23, 2003 (as
the same has been and may further be amended, restated, modified
or supplemented from time to time, the "Credit Agreement") among
Torch Offshore, Inc. ("Borrower") and the Lenders, including
Regions Bank in its capacity as a Lender and as Agent for the
Lenders.
WHEREAS, Borrower and the Lenders desire to further amend
the Credit Agreement.
NOW THEREFORE, for good and adequate consideration the
receipt of which is hereby acknowledged, the parties hereto do
hereby agree as follows:
1. As used herein, capitalized terms not defined herein
shall have the meanings attributed to them in the Credit
Agreement. Section 1.1 of the Credit Agreement is hereby amended
to add the following definitions of "Minimum Refinancing
Proceeds" and "Refinancing Proceeds":
Minimum Refinancing Proceeds shall mean fifty
(50%) percent of all Refinancing Proceeds.
Refinancing Proceeds shall mean the funds owed to
or received by or on behalf of Borrower or any
Subsidiary, after July 22, 2004, from the issuance or
incurrence of any Indebtedness of Borrower or any
Subsidiary of the nature referred to in clause (i) or
(ii) of the definition of "Indebtedness", but excluding
any Indebtedness representing the deferred purchase
price of Property.
2. Section 3.4 of the Credit Agreement is hereby amended
and restated to read as follows:
3.4 Tranche 2 Term Loan Commitments. Subject to
the terms and conditions set forth in this Agreement
and so long as no Default or Event of Default has
occurred and is continuing, on the last day of the Line
of Credit Period, each Lender with a Tranche 2 Term
Loan Commitment severally (and not jointly) agrees to
lend to Borrower (individually, a "Tranche 2 Term Loan"
and collectively, the "Tranche 2 Term Loans") an amount
not to exceed the lesser of (a) such Lender's Tranche 2
Term Loan Commitment or (b) the aggregate outstanding
principal amount of the Tranche 2 Line of Credit Loans
due and payable to such Lender as of such date. Loans
under this Section 3.4 shall be made from the several
Lenders ratably in proportion to their respective Pro
Rata Shares. The failure of any Lender to make any
Tranche 2 Term Loan under this Agreement shall not
release any other Lender from its obligation to make a
Tranche 2 Term Loan as provided herein. Each Tranche 2
Term Loan shall be payable as follows: each Tranche 2
Term Loan shall bear interest on the outstanding
principal balance thereof at a rate per annum equal to
the applicable LIBOR Base Rate plus 400 basis points
(4.00%); provided that any overdue principal of and, to
the extent permitted by law, overdue interest on, any
Tranche 2 Term Loan shall bear interest, payable on
demand, for each day until paid at a rate per annum
equal to the sum of three percent (3%) plus the rate
otherwise in effect for such day; interest shall be
payable monthly in arrears on the last day of each
month (or the immediate subsequent Business Day if any
such last day is not a Business Day) and at maturity;
principal shall be payable on each Tranche 2 Term Loan
as follows: a principal payment on June 30, 2005, equal
to one third (1/3) of the original principal balance
due on such Tranche 2 Term Loan, a principal payment on
December 30, 2005, equal to one third (1/3) of the
original principal balance due on such Tranche 2 Term
Loan, with the entire unpaid balance of principal being
payable on June 30, 2006; provided that, (a) if any
Recapture Proceeds are delivered to Agent prior to June
30, 2005, the amount of the mandatory principal
payments due on each Tranche 2 Term Loan on June 30,
2005 and December 30, 2005 will be reduced by one sixth
(1/6) of the amount of such Recapture Proceeds and (b)
if any Recapture Proceeds are delivered to Agent after
June 30, 2005, but prior to December 30, 2005, the
amount of the mandatory principal payments due on each
Tranche 2 Term Loan on December 30, 2005 will be
reduced by one fourth (1/4) of the amount of such
Recapture Proceeds; and interest on the outstanding
principal owed on such Tranche 2 Term Loan shall be
computed and assessed on the basis of the actual number
of days elapsed over a year composed of 360 days.
3. Section 5.12 of the Credit Agreement is hereby amended and
restated to read as follows:
5.12 Subordination. The security documents
executed pursuant to Section 3.09 of the Existing
Regions Loan Agreement shall remain in force and
effect. Regions and the other Lender(s) shall execute
a Subordination Agreement in the form of Exhibit L
annexed hereto (the "Subordination Agreement").
4. The Credit Agreement is hereby amended to add the
following as Section 8.1(z) thereof:
(z) Borrower shall arrange for the Minimum
Refinancing Proceeds to be delivered directly to Agent,
which Minimum Refinancing Proceeds shall be used to pay
Indebtedness of Borrower in the following order of
priority: (i) First, for the payment of principal and
interest due on the loans (including all principal,
interest, attorneys' fees and costs owed thereon) made
by Regions to Borrower pursuant to the $5,000,000.00
non-revolving line of credit set forth in Section
2.03(a) of the Existing Regions Loan Agreement; and
(ii) Second, for the payment of principal on the Loans
(with any excess amounts to be applied to interest,
fees or other amounts due hereunder or under any of the
other Transaction Documents).
5. The Credit Agreement is hereby amended to add the
following as Section 8.1(aa) thereof:
(aa) Minimum Refinancing Proceeds. Borrower
shall use its best efforts to obtain Minimum
Refinancing Proceeds by November 18, 2004.
6. Regions will not extend the maturity of the following
described loans, beyond the initial 120 day term, without the
consent of Export Development Canada: the loans made by Regions
to Borrower pursuant to the $5,000,000.00 non-revolving line of
credit set forth in Section 2.03(a) of the Existing Regions Loan
Agreement.
7. Nothing contained in the Credit Agreement will be
construed to required Agent or Lenders to release any Collateral.
8. As clarification, subject to the provisions of Section
3.4, no prepayment, whether pursuant to Section 8.1(x) or (z), or
otherwise, will eliminate the requirement to make regularly
scheduled payments.
9. In connection with the foregoing and only in connection
with the foregoing, the Credit Agreement is hereby amended, but
in all other respects all of the terms, conditions and provisions
of the Credit Agreement remain unaffected. All security
agreements, financing statements, mortgages, pledges, deeds,
continuing guaranties and other security documents in favor of
Agent, for the benefit of the Secured Parties, shall remain in
full force and effect.
10. Except as may be specifically set forth herein, this
Sixth Amendment to Credit Agreement shall not constitute a waiver
of any Default(s) under the Credit Agreement or any documents
executed in connection therewith, all rights and remedies of the
Lenders being preserved and maintained.
11. This Sixth Amendment to Credit Agreement may be
executed in two or more counterparts, and it shall not be
necessary that the signatures of all parties hereto be contained
on any one counterpart hereof; each counterpart shall be deemed
an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have caused this instrument
to be duly executed.
TORCH OFFSHORE, INC.
By:_________________________________
Robert E. Fulton
Its Chief Financial Officer
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056
Telecopy number: (504)367-7075
REGIONS BANK
By:______________________________
Jorge E. Goris
Its Senior Vice President
301 St. Charles Avenue
New Orleans, LA 70130
Telecopier: (504) 584-2165
EXPORT DEVELOPMENT CANADA
By:______________________________
Bruce Millar
Loan Asset Manager
By:______________________________
Bruce Dunlop
Loan Portfolio Manager
151 O'Connor
Ottawa, Canada K1A1K3
(Telecopier: (613) 598-2504
Exhibit 10.2
SIXTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
This Sixth Amendment to Amended and Restated Loan Agreement
is entered into effective July 22, 2004, and is executed in
connection with that certain Amended and Restated Loan Agreement
effective as of December 20, 2002 (as the same has been and may
be further amended, restated, modified or supplemented from time
to time, the "Loan Agreement") among Torch Offshore, Inc.
("Borrower") and Regions Bank ("Bank").
WHEREAS, Borrower and Bank desire to further amend the Loan
Agreement.
NOW THEREFORE, for good and adequate consideration the
receipt of which is hereby acknowledged, the parties hereto do
hereby agree as follows:
1. Unless otherwise defined or indicated herein,
capitalized terms used herein shall have the meanings attributed
to them in the Loan Agreement. As used herein, "Credit
Agreement" shall mean that certain Credit Agreement by and among
Torch Offshore, Inc., Regions Bank, as Agent, and Regions Bank
and Export Development Canada, as Lenders, dated April 23, 2003,
as it has been and may further be amended, restated, supplemented
or replaced from time to time.
2. (a) The Acquisition Line of Credit has been terminated,
(b) Bank shall not have any obligation to make any Acquisition
Line of Credit Loan or to issue any Acquisition Line of Credit
Letter of Credit, and (c) Bank shall not be obligated to extend
credit to Borrower or to issue any letter of credit for the
account of Borrower or any Subsidiary under the Loan Agreement,
except as may be expressly set forth in Sections 2.01(a), 2.03(a)
and 4.01(a) of the Loan Agreement.
3. Section 1.01 of the Loan Agreement is hereby amended to
add the following definitions of
"Non-Revolving Line of Credit", "Non-Revolving Line of Credit
Note", "Non-Revolving Line of Credit Loan" and "Non-Revolving
Line of Credit Period" to Section 1.01 of the Loan Agreement and
the definitions of "Loans", "Notes" and "Receivables Line of
Credit Period" in Section 1.01 of the Loan Agreement are hereby
amended and restated to read as follows:
"Loans" shall mean the Receivables Line of Credit
Loans, the Acquisition Line of Credit Loans, the Term
Loans, and the Non-Revolving Line of Credit Loans, with
each being a Loan, and shall include all principal,
interest, attorney's fees and costs owed thereon.
"Non-Revolving Line of Credit" shall mean the
credit facility made available by Bank to Borrower
pursuant to Section 2.03(a).
"Non-Revolving Line of Credit Note" shall have the
meaning ascribed thereto in Section 2.03(a).
"Non-Revolving Line of Credit Loan" shall mean a
Loan made by the Bank to Borrower pursuant to the Non-
Revolving Line of Credit.
"Non-Revolving Line of Credit Period" shall mean
the period commencing on July 22, 2004 and ending 120
days thereafter.
"Notes" shall mean the Receivables Line of Credit
Note, the Acquisition Line of Credit Note, the Term
Notes, and the Non-Revolving Line of Credit Note.
"Receivables Line of Credit Period" shall mean the
period commencing on the date hereof and ending on July
2, 2005.
4. The following is hereby added as Section 2.03 of the
Loan Agreement:
(a) Non-Revolving Line of Credit Loans.
Subject to the due and faithful performance of the
terms and conditions of this Agreement and in any
instrument or agreement executed contemporaneous
herewith or as a consequence hereof and in accordance
with the terms and conditions of this Agreement, Bank
shall make loans to Borrower on a non-revolving basis
during the Non-Revolving Line of Credit Period in
amounts not to exceed the total aggregate principal
amount of Five Million ($5,000,000.00) Dollars. The
amount available to Borrower under the Non-Revolving
Line of Credit shall be reduced by the aggregate amount
of principal payments made on the Non-Revolving Line of
Credit Loans. The loans will bear interest on the
outstanding principal balance from time to time at a
rate per annum equal to the LIBOR Base Rate plus four
hundred basis points (4.00%), and shall be payable
interest only monthly in arrears on the last day of
each month (or the immediate subsequent Business Day if
any such last day is not a Business Day), with the
balance of all outstanding principal and interest being
due and payable upon the expiration of the Non-
Revolving Line of Credit Period. Interest on the
outstanding principal owed on the loans will be
computed and assessed on the basis of the actual number
of days elapsed over a year composed of 360 days. The
obligation of Borrower to repay the loans shall be
evidenced by and payable in accordance with the
promissory note executed by Borrower a copy of which is
attached hereto as Exhibit H (the "Non-Revolving Line
of Credit Note"). In addition to the other rights of
Bank under the Loan Documents, Bank shall have the
right to refuse to fund that portion of the Non-
Revolving Line of Credit equal to the aggregate amount
of any Liens against the MIDNIGHT EXPRESS (Official No.
1450) (other than Liens in favor of Regions, whether as
agent or its individual capacity).
(b) Default Interest Rate. Notwithstanding
any provisions of this Agreement to the contrary, any
overdue principal of and, to the extent permitted by
law, overdue interest on, any Non-Revolving Line of
Credit Loan shall bear interest, payable on demand, for
each day until paid at a rate per annum equal to twelve
percent (12%).
(c) Use of Proceeds. The Borrower shall use
the proceeds of the Non-Revolving Line of Credit for
working capital.
5. Section 3.01 of the Loan Agreement is amended and
restated to read as follows:
3.01 Advance Request. Upon the terms and subject
to the conditions hereof, Borrower may request an
Advance during a Business Day between the hours of 9:00
a.m. and 2:00 p.m. (New Orleans time). If Bank
receives the Borrower's proper request for an Advance
by no later than 2:00 p.m. (New Orleans time), then
Bank shall make the Advance in accordance herewith on
the same Business Day. If Bank receives the Borrower's
proper request for an Advance later than 2:00 p.m. (New
Orleans time), then Bank shall make the Advance in
accordance herewith on the next Business Day. Each
request for an Advance shall be made either by
telephone calls to Bank or in writing, by delivering to
Bank by mail, hand-delivery, or facsimile a request (i)
specifying the amount to be borrowed, (ii) specifying
the date the funds will be advanced and (iii) complying
with the requirements of this Section. Bank shall have
the right to verify the telephone requests by calling
the person who made the request at the telephone number
identified by the Borrower. If the Advance request is
by telephone, the Borrower will confirm said request in
writing within two (2) Business Days. All such Advance
requests shall be made by the Borrower's Agent.
Borrower agrees that only its duly authorized
Borrower's Agent shall make an Advance request.
6. The Loan Agreement is hereby amended by deleting the
term "LIBOR Rate" in clauses (b) and (c) of Section 3.06 of the
Loan Agreement and inserting the term "LIBOR Base Rate" in lieu
thereof.
7. In addition to the origination fees set forth in
Section 3.08 of the Loan Agreement, on the effective date hereof,
Borrower shall pay Bank an origination fee in connection with the
Non-Revolving Line of Credit in the amount of $70,000.00.
8. In connection with the foregoing and only in connection
with the foregoing, the Loan Agreement is hereby amended, but in
all other respects all of the terms, conditions and provisions of
the Loan Agreement remain unaffected. All security agreements,
financing statements, mortgages, pledges, continuing guaranties
and other security documents in favor of Bank shall remain in
full force and effect.
9. Except as may be specifically set forth herein, this
Sixth Amendment to Amended and Restated Loan Agreement shall not
constitute a waiver of any Default(s) under the Loan Agreement or
any documents executed in connection therewith, all rights and
remedies of Bank being preserved and maintained.
10. This Sixth Amendment to Amended and Restated Loan
Agreement may be executed in two or more counterparts, and it
shall not be necessary that the signatures of all parties hereto
be contained on any one counterpart hereof; each counterpart
shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this instrument
to be duly executed.
TORCH OFFSHORE, INC.
By:______________________________
Robert E. Fulton
Its: Chief Financial Officer
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056
Telecopier: (504) 367-7075
REGIONS BANK
By:______________________________
Jorge E. Goris
Its: Senior Vice President
301 St. Charles Avenue
New Orleans, LA 70130
Telecopier: (504) 584-2165
Exhibit 10.3
AMENDED AND RESTATED SUBORDINATION AGREEMENT
This Amended and Restated Subordination Agreement (this
Agreement") is entered into effective as of July 22, 2004, by and
among (i) Regions Bank ("Regions"), (ii) Regions Bank and Export
Development Canada (collectively, the "Lenders"), and (iii)
Regions Bank, as agent for the Lenders (the "Agent") pursuant to
that certain Credit Agreement, dated April 23, 2003 (as the same
has been and may further be amended, restated, modified or
supplemented from time to time, the "Credit Agreement") by and
among Torch Offshore, Inc. ("Borrower"), the Agent and the
Lenders. The Agent and the Lenders are hereinafter collectively
referred to as the "Creditors." Capitalized terms used in this
Agreement and not otherwise defined herein shall have the
meanings ascribed to them in the Credit Agreement.
WHEREAS, pursuant to the Existing Regions Loan Agreement,
Borrower and its subsidiaries, Torch Offshore, L.L.C. ("Torch
Offshore") and Torch Express, L.L.C. ("Torch Express"), each
have granted Liens in favor of Regions on certain property;
WHEREAS, pursuant to the Credit Agreement, Borrower, Torch
Offshore and Torch Express each have granted Liens in favor of
the Agent for the benefit of the Creditors on certain property;
WHEREAS, on July 22, 2004, the Existing Regions Loan
Agreement was amended to provide for the Non-Revolving Line of
Credit Loans (as hereinafter defined); and
WHEREAS, Regions and the Creditors desire to provide for the
priority of certain Liens on certain property of Borrower, Torch
Offshore and Torch Express.
NOW THEREFORE, in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by each of the parties hereto, the
parties hereto agree as follows:
1. For all purposes of this Agreement, unless expressly
provided, the following terms shall have the following meanings
(such meanings shall be equally applicable to the singular and
plural forms of the terms used, as the context requires):
"Creditors Superior Collateral" shall mean:
(a) the following property owned by Borrower, whether now
or hereafter existing, owned, issued, acquired or
arising, and wherever located: (i) all of Borrower's
right, title and interest in, to, and under Torch
Offshore and Torch Express, including, but not limited
to, all of Borrower's membership interest in Torch
Offshore and Torch Express; and (ii) (1) all of the
fruits, profits, revenues, returns, distributions and
interest produced by, derived from or attributable to
Borrower's interest in Torch Offshore and Torch
Express; (2) all rights of Borrower as a member of
Torch Offshore and Torch Express, including, but not
limited to, the right to receive all distributions of
capital, profits, returns and revenues from the sale,
lease, improvement, operation or disposal of any and
all property owned by Torch Offshore or Torch Express;
and (3) all accessions to, substitutions and
replacements for, and all rents, fruits, issues,
increases, profits, revenues, returns, dividends,
distributions, payments, proceeds, goods acquired with
cash proceeds and products of or from any of the
property described in subparagraph (i) above; and
(b) the following property owned by Torch Offshore,
whether now or hereafter existing, owned, issued,
acquired or arising, and wherever located: (i) the
Torch Offshore U.S. Vessels, other than the MIDNIGHT
RIDER Collateral; and (ii) the following vessels
registered under the laws of the Republic of Vanuatu:
MIDNIGHT STAR (Official No. 398) and MIDNIGHT CARRIER
(Official No. 1208), together with all masts, boilers,
cables, engines, machinery, bowsprits, sails, rigging,
boats, anchors, chains, tackle, apparel, furniture,
fittings, tools, pumps, equipment, fuel, supplies,
spare parts and all other attachments, appurtenances,
accessories, additions, fixtures, equipment,
appliances, improvements and replacements now or
hereafter belonging thereto, affixed thereto, or used
in connection therewith, whether because of repairs or
otherwise, and whether or not removed therefrom
(collectively, the "Torch Offshore Vanuatu Vessels").
"Non-Revolving Line of Credit Loans" shall mean the loans
made by Regions to Borrower pursuant to the $5,000,000.00
non-revolving line of credit set forth in Section 2.03(a) of
the Existing Regions Loan Agreement, and shall include all
principal, interest, attorney's fees and costs owed thereon.
"MIDNIGHT EXPRESS Earnings" shall mean (i) all accounts,
inventory, chattel paper and general intangibles relating to
the vessel MIDNIGHT EXPRESS (Official No. 1450) registered
under the laws of the Republic of Vanuatu; (ii) all charter
hire, freights, leases, rents, earnings, revenues, proceeds,
money, payments, claims, accounts, contract rights, chattel
paper, documents and general intangibles affecting the
vessel MIDNIGHT EXPRESS (Official No. 1450), relating to the
vessel MIDNIGHT EXPRESS (Official No. 1450), or arising out
of or from the sale, charter, lease, use or operation of the
vessel MIDNIGHT EXPRESS (Official No. 1450); and (iii) all
proceeds of any of the foregoing.
"MIDNIGHT RIDER Collateral" shall mean the MIDNIGHT RIDER
(Official No. 1035377), together with all masts, boilers,
cables, engines, machinery, bowsprits, sails, rigging,
boats, anchors, chains, tackle, apparel, furniture,
fittings, tools, pumps, equipment, fuel, supplies, spare
parts and all other attachments, appurtenances, accessories,
additions, fixtures, equipment, appliances, improvements and
replacements now or hereafter belonging thereto, affixed
thereto, or used in connection therewith, whether because of
repairs or otherwise, and whether or not removed therefrom.
"Receivables Line of Credit Loans" shall mean the loans made
by Regions to Borrower pursuant to the $15,000,000.00 line
of credit set forth in Section 2.01(a) of the Existing
Regions Loan Agreement, and shall include all principal,
interest, attorney's fees and costs owed thereon.
"Regions Superior Collateral" shall mean:
(a) the following property owned by Torch Express, whether
now or hereafter existing, owned, issued, acquired or
arising, and wherever located: all accounts,
inventory, chattel paper and general intangibles, other
than the MIDNIGHT EXPRESS Earnings, together with all
proceeds thereof; and
(b) the following property owned by Torch Offshore, whether
now or hereafter existing, owned, issued, acquired or
arising, and wherever located: (i) all accounts,
inventory, chattel paper and general intangibles,
together with all proceeds thereof; (ii) all charter
hire, freights, leases, rents, earnings, revenues,
proceeds, money, payments, claims, accounts, contract
rights, chattel paper, documents and general
intangibles affecting any of the Torch Offshore U.S.
Vessels, relating to any of the Torch Offshore U.S.
Vessels, or arising out of or from the sale, charter,
lease, use or operation of any of the Torch Offshore
U.S. Vessels; and (iii) all charter hire, freights,
leases, rents, earnings, revenues, proceeds, money,
payments, claims, accounts, contract rights, chattel
paper, documents and general intangibles affecting any
of the Torch Offshore Vanuatu Vessels, relating to any
of the Torch Offshore Vanuatu Vessels, or arising out
of or from the sale, charter, lease, use or operation
of any of the Torch Offshore Vanuatu Vessels.
"Torch Offshore U.S. Vessels" shall mean the MIDNIGHT RIDER
Collateral and the following vessels registered under the
laws of the United States of America: MIDNIGHT BRAVE
(Official No. 529263), MIDNIGHT FOX (Official No. 1065954)
and MIDNIGHT DANCER (Official No. 586595), together with all
masts, boilers, cables, engines, machinery, bowsprits,
sails, rigging, boats, anchors, chains, tackle, apparel,
furniture, fittings, tools, pumps, equipment, fuel,
supplies, spare parts and all other attachments,
appurtenances, accessories, additions, fixtures, equipment,
appliances, improvements and replacements now or hereafter
belonging thereto, affixed thereto, or used in connection
therewith, whether because of repairs or otherwise, and
whether or not removed therefrom.
2. Regions agrees that any Liens of Creditors in or on the
Creditors Superior Collateral are and shall be first, senior and
prior to any Liens now or hereafter claimed by Regions in or on
the Creditors Superior Collateral. Regions further agrees that
in the event of any foreclosure sale or other execution upon any
Liens of Creditors in or on the Creditors Superior Collateral or
in the event of any other disposition or liquidation of any of
the Creditors Superior Collateral, now or in the future, the
rights of Creditors to the Creditors Superior Collateral and the
proceeds thereof shall in all respects prime those of Regions and
Creditors shall be paid by preference and priority to and over
any claim of Regions.
3. Creditors agree that any Liens of Regions in or on the
Regions Superior Collateral shall be first, senior and prior to
any Liens now or hereafter claimed by Creditors in or on the
Regions Superior Collateral. Creditors further agree that in the
event of any foreclosure sale or other execution upon any Liens
of Regions in or on the Regions Superior Collateral or in the
event of any other disposition or liquidation of any of the
Regions Superior Collateral, now or in the future, the rights of
Regions to the Regions Superior Collateral and the proceeds
thereof shall in all respects prime those of Creditors and
Regions shall be paid by preference and priority to and over any
claim of Creditors.
4. Regions and Creditors agree that any Liens of Creditors
in or on the MIDNIGHT RIDER Collateral are and shall be first,
senior and prior to any Liens now or hereafter claimed by Regions
in or on the MIDNIGHT RIDER Collateral and that in the event of
any foreclosure sale or other execution upon any Liens of
Creditors in or on the MIDNIGHT RIDER Collateral or in the event
of any other disposition or liquidation of any of the MIDNIGHT
RIDER Collateral, now or in the future, the rights of Creditors
to the MIDNIGHT RIDER Collateral and the proceeds thereof shall
in all respects prime those of Regions and Creditors shall be
paid by preference and priority to and over any claim of Regions;
provided that, notwithstanding anything to the contrary in this
Agreement, to the extent (and only to the extent) that any Liens
of Regions in or on the MIDNIGHT RIDER Collateral secure the Non-
Revolving Line of Credit Loans, such Liens of Regions will be
first, senior and prior to any Liens now or hereafter claimed by
Creditors in or on the MIDNIGHT RIDER Collateral and in the event
of any foreclosure sale or other execution upon any Liens of
Regions in or on the MIDNIGHT RIDER Collateral or in the event of
any other disposition or liquidation of any of the MIDNIGHT RIDER
Collateral, now or in the future, the rights of Regions to the
MIDNIGHT RIDER Collateral and the proceeds thereof shall in all
respects prime those of Creditors, up to the amount of the Non-
Revolving Line of Credit Loans, and Regions shall be paid by
preference and priority to and over any claim of Creditors, up to
the amount of the Non-Revolving Line of Credit Loans.
4. Regions and Creditors agree that any Liens of Creditors
in or on the MIDNIGHT EXPRESS Earnings are and shall be first,
senior and prior to any Liens now or hereafter claimed by Regions
in or on the MIDNIGHT EXPRESS Earnings and that in the event of
any foreclosure sale or other execution upon any Liens of
Creditors in or on the MIDNIGHT EXPRESS Earnings or in the event
of any other disposition or liquidation of any of the MIDNIGHT
EXPRESS Earnings, now or in the future, the rights of Creditors
to the MIDNIGHT EXPRESS Earnings and the proceeds thereof shall
in all respects prime those of Regions and Creditors shall be
paid by preference and priority to and over any claim of Regions;
provided that, notwithstanding anything to the contrary in this
Agreement, to the extent (and only to the extent) that any Liens
of Regions in or on the MIDNIGHT EXPRESS Earnings secure the
Receivables Line of Credit Loans, such Liens of Regions will be
first, senior and prior to any Liens now or hereafter claimed by
Creditors in or on the MIDNIGHT EXPRESS Earnings and in the event
of any foreclosure sale or other execution upon any Liens of
Regions in or on the MIDNIGHT EXPRESS Earnings or in the event of
any other disposition or liquidation of any of the MIDNIGHT
EXPRESS Earnings, now or in the future, the rights of Regions to
the MIDNIGHT EXPRESS Earnings and the proceeds thereof shall in
all respects prime those of Creditors, up to the amount of the
Receivables Line of Credit Loans, and Regions shall be paid by
preference and priority to and over any claim of Creditors, up to
the amount of the Receivables Line of Credit Loans.
6. Currently, the Liens of Regions on the Torch Offshore
U.S. Vessels are evidenced by that certain Preferred Ship
Mortgage by Torch Offshore, L.L.C. dated December 20, 2002
recorded by the United States Coast Guard at the National
Documentation Center on December 23, 2002, in Book 03-34, Page
196 and by that certain Preferred Ship Mortgage by Torch
Offshore, L.L.C. dated July ___, 2004, recorded by the United
States Coast Guard at the National Documentation Center on
____________, 2004, in Book ______, Page ______. Currently, the
Lien of Creditors on the Torch Offshore U.S. Vessels is evidenced
by that certain Preferred Fleet Mortgage by Torch Offshore,
L.L.C. dated April 23, 2003, recorded by the United States Coast
Guard at the National Vessel Documentation Center on April 24,
2003 at Book No. 03-36, Page 650. Currently, the Lien of
Creditors on the Torch Offshore Vanuatu Vessels is evidenced by
that certain Preferred Fleet Mortgage by Torch Offshore, L.L.C.
dated April 23, 2003, recorded in the Office of the Commissioner
of Maritime Affairs of the Republic of Vanuatu at the Port of New
York, New York on April 24, 2003 in Book PM 24 at Page 18.
7. The priorities specified in this Agreement are
applicable irrespective of the validity or the time or order of
attachment or perfection of the Liens referred to herein, the
time or order of filing, or the nonfiling, of financing
statements or preferred ship mortgages, the acquisition of
purchase money or other security interests, or the time of giving
or failure to give notice with respect to any purchase money or
other security interests.
8. This Agreement is an irrevocable and continuing
agreement, and Regions and Creditors may each continue to rely
upon same in lending money, extending credit, and making other
financial accommodations to or for the account of Borrower,
without notice to the other.
9. No waiver shall be deemed to have been made by Regions
or Creditors of any of their respective rights hereunder unless
such waiver is in writing and signed by Regions or Creditors, as
appropriate, and any such written waiver shall be limited to the
specific instance specified therein.
10. If any provision of this Agreement is for any reason
held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability will not affect any
other provision of this Agreement.
11. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective assignees,
transferees, and successors. This Agreement shall be governed and
construed in accordance with the laws of the State of Louisiana
without regard to its conflicts of laws principles.
12. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which, taken together,
shall constitute one and the same instrument. A telecopy of any
such executed counterpart shall be deemed valid as an original.
EXECUTED as of the date first written above.
REGIONS BANK
(in the capacities set forth above)
By:_____________________________
Jorge E. Goris
Its: Senior Vice President
EXPORT DEVELOPMENT CANADA
By:______________________________
Bruce Dunlop
Loan Portfolio Manager
By:______________________________
Bruce Millar
Loan Asset Manager
STATE OF LOUISIANA
PARISH OF ORLEANS
BEFORE ME, the undersigned Notary Public duly commissioned
and qualified in and for the aforesaid State and Parish,
personally came and appeared Jorge E. Goris, who being first duly
sworn, declared and acknowledged unto me, Notary, and the
undersigned witnesses, that he a Senior Vice President of Regions
Bank, and that as such officer on behalf of said Bank, he signed
and executed the above and foregoing Amended and Restated
Subordination Agreement, by authority of the Board of Directors
of the Bank, and said appearer acknowledged said instrument to be
the free act and deed of the Bank, for the purposes and
considerations therein expressed.
IN WITNESS WHEREOF, this instrument is executed in the
presence of the undersigned witnesses and me, Notary, on this
22nd day of July, 2004.
WITNESSES:
_____________________________ ________________________________
Jorge E. Goris
_____________________________
________________________________
NOTARY PUBLIC
My Commission expires at death.
____________________________
____________________________
BEFORE ME, the undersigned Notary Public duly commissioned
and qualified, personally came and appeared Bruce Dunlop, who
being first duly sworn, declared and acknowledged unto me,
Notary, and the undersigned witnesses, that he is a Loan
Portfolio Manager of Export Development Canada, and that as such
manager and on behalf of Export Development Canada, he signed
and executed the above and foregoing Amended and Restated
Subordination Agreement, by authority of the governing body of
Export Development Canada, and said appearer acknowledged said
instrument to be the free act and deed of Export Development
Canada, for the purposes and considerations therein expressed.
IN WITNESS WHEREOF, this instrument is executed in the
presence of the undersigned witnesses and me, Notary, on this
___ day of July, 2004.
WITNESSES:
_____________________________ _____________________________
Bruce Dunlop
_____________________________
________________________________
NOTARY PUBLIC
My commission expires on ____________________.
____________________________
____________________________
BEFORE ME, the undersigned Notary Public duly commissioned
and qualified, personally came and appeared Bruce Millar, who
being first duly sworn, declared and acknowledged unto me,
Notary, and the undersigned witnesses, that he is a Loan Asset
Manager of Export Development Canada, and that as such manager
and on behalf of Export Development Canada, he signed and
executed the above and foregoing Amended and Restated
Subordination Agreement, by authority of the governing body of
Export Development Canada, and said appearer acknowledged said
instrument to be the free act and deed of Export Development
Canada, for the purposes and considerations therein expressed.
IN WITNESS WHEREOF, this instrument is executed in the
presence of the undersigned witnesses and me, Notary, on this
___ day of July, 2004.
WITNESSES:
_____________________________ ______________________________
Bruce Millar
_____________________________
________________________________
NOTARY PUBLIC
My commission expires on ____________________.
Exhibit 10.4
SEVENTH AMENDMENT TO CREDIT AGREEMENT
This Seventh Amendment to Credit Agreement is entered into
as of the 13th day of August, 2004, and is executed in connection
with that certain Credit Agreement effective as of April 23, 2003
(as the same has been and may further be amended, restated,
modified or supplemented from time to time, the "Credit
Agreement") among Torch Offshore, Inc. ("Borrower") and the
Lenders, including Regions Bank in its capacity as a Lender and
as Agent for the Lenders.
WHEREAS, Borrower and the Lenders desire to further amend
the Credit Agreement.
NOW THEREFORE, for good and adequate consideration the
receipt of which is hereby acknowledged, the parties hereto do
hereby agree as follows:
1. As used herein, capitalized terms not defined herein
shall have the meanings attributed to them in the Credit
Agreement. The definitions of "Minimum Refinancing Proceeds" and
"Refinancing Proceeds" in Section 1.1 of the Credit Agreement are
hereby amended and restated to read as follows:
Minimum Refinancing Proceeds shall mean, as of the date
of any determination thereof, all Refinancing Proceeds
up to the amount equal to the sum of the following,
without duplication: (a) principal and interest due on
the loans (including all principal, interest,
attorneys' fees and costs owed thereon) made by Regions
to Borrower pursuant to the $5,000,000.00 non-revolving
line of credit set forth in Section 2.03(a) of the
Existing Regions Loan Agreement, as of such date plus
(b) the aggregate amount of the proceeds received by
Borrower and its Subsidiaries from the Contribution
Agreement as of such date plus (c) fifty (50%) percent
of the balance of all Refinancing Proceeds after
subtracting the amounts set forth in clauses (a) and
(b) of this defined term "Minimum Refinancing Proceeds"
therefrom.
Refinancing Proceeds shall mean the funds owed to or
received by or on behalf of Borrower or any Subsidiary,
net of any Indebtedness secured by preferred ship
mortgage(s) (other than the Obligations) which Borrower
or any Subsidiary is obligated to pay in connection
therewith, from the issuance or incurrence of any
Indebtedness by Borrower or any Subsidiary, after July
22, 2004, of the nature referred to in clause (i) or
(ii) of the definition of "Indebtedness", but excluding
any Indebtedness representing the deferred purchase
price of Property.
2. In connection with the foregoing and only in connection
with the foregoing, the Credit Agreement is hereby amended, but
in all other respects all of the terms, conditions and provisions
of the Credit Agreement remain unaffected. All security
agreements, financing statements, mortgages, pledges, deeds,
continuing guaranties and other security documents in favor of
Agent, for the benefit of the Secured Parties, shall remain in
full force and effect.
3. Except as may be specifically set forth herein, this
Seventh Amendment to Credit Agreement shall not constitute a
waiver of any Default(s) under the Credit Agreement or any
documents executed in connection therewith, all rights and
remedies of the Lenders being preserved and maintained.
4. This Seventh Amendment to Credit Agreement may be
executed in two or more counterparts, and it shall not be
necessary that the signatures of all parties hereto be contained
on any one counterpart hereof; each counterpart shall be deemed
an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have caused this instrument
to be duly executed.
TORCH OFFSHORE, INC.
By:______________________________
Robert E. Fulton
Its Chief Financial Officer
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056
Telecopy number: (504)367-7075
REGIONS BANK
By:______________________________
Jorge E. Goris
Its Senior Vice President
301 St. Charles Avenue
New Orleans, LA 70130
Telecopier: (504) 584-2165
EXPORT DEVELOPMENT CANADA
By:______________________________
Bruce Millar
Loan Asset Manager
By:______________________________
Peter G. Johnston
Financial Services Manager
151 O'Connor
Ottawa, Canada K1A1K3
(Telecopier: (613)598-2504
Exhibit 10.5
SEVENTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
This Seventh Amendment to Amended and Restated Loan
Agreement is entered into effective August 13, 2004, and is
executed in connection with that certain Amended and Restated
Loan Agreement effective as of December 20, 2002 (as the same has
been and may be further amended, restated, modified or
supplemented from time to time, the "Loan Agreement") among Torch
Offshore, Inc. ("Borrower") and Regions Bank ("Bank").
WHEREAS, Borrower and Bank desire to further amend the Loan
Agreement.
NOW THEREFORE, for good and adequate consideration the
receipt of which is hereby acknowledged, the parties hereto do
hereby agree as follows:
1. Unless otherwise defined or indicated herein,
capitalized terms used herein shall have the meanings attributed
to them in the Loan Agreement.
2. The last sentence of Section 2.03(a) of the Loan
Agreement is hereby amended and restated to read as follows:
In addition to the other rights of Bank under the Loan
Documents, Bank shall have the right to refuse to fund
that portion of the Non-Revolving Line of Credit equal
to the aggregate amount of any Liens against the
MIDNIGHT RIDER (Official Number 1035377) (other than
Liens in favor of Bank, whether as agent or its
individual capacity).
3. The following shall be additional Permitted Liens:
Liens incurred prior to the date hereof in favor of Tersoro
Marine Services, Inc. against the MIDNIGHT RIDER (Official Number
1035377) which do not exceed $54,673.81 in the aggregate;
provided that, Borrower shall satisfy such Liens within ten (10)
days of receiving Bank's written demand to satisfy such Liens.
4. In connection with the foregoing and only in connection
with the foregoing, the Loan Agreement is hereby amended, but in
all other respects all of the terms, conditions and provisions of
the Loan Agreement remain unaffected. All security agreements,
financing statements, mortgages, pledges, continuing guaranties
and other security documents in favor of Bank shall remain in
full force and effect.
5. Except as may be specifically set forth herein, this
Seventh Amendment to Amended and Restated Loan Agreement shall
not constitute a waiver of any Default(s) under the Loan
Agreement or any documents executed in connection therewith, all
rights and remedies of Bank being preserved and maintained.
6. This Seventh Amendment to Amended and Restated Loan
Agreement may be executed in two or more counterparts, and it
shall not be necessary that the signatures of all parties hereto
be contained on any one counterpart hereof; each counterpart
shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this instrument
to be duly executed.
TORCH OFFSHORE, INC.
By:______________________________
Robert E. Fulton
Its: Chief Financial Officer
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056
Telecopier: (504) 367-7075
REGIONS BANK
By:______________________________
Jorge E. Goris
Its: Senior Vice President
301 St. Charles Avenue
New Orleans, LA 70130
Telecopier: (504)584-2165
Exhibit 10.6
SECOND AMENDMENT TO LEASE AGREEMENT
This Amendment is made this 16th day of July, 2004 and is an
amendment to the Lease Agreement dated 12 August 2003 between
Thrustmaster of Texas, Inc. (Lessor) and Torch Offshore, Inc.
(Lessee) covering the lease of two modular thruster units, Serial
Nos. Y030137-1 and Y030137-2 with accessories as further
described in said Lease Agreement.
1. Commencement Date. It is agreed that the Commencement Date,
defined in the original Lease Agreement under Section 2, Term and
Extensions, is August 12, 2003. Accordingly, the Termination
Date of the original Lease Agreement was February 11, 2004. The
Lease Agreement has subsequently been extended by a second 6
months term through the Amendment to Lease Agreement dated 14
January, 2004. The Termination Date of the extended Lease is
August 12, 2004.
2.Second Extension of Lease. By mutual agreement, the Lease
Agreement is hereby extended again, this time for an 8 month
term ("Second Extended Term") following the Termination Date
of the Extended Term. Accordingly, the Second Extended Lease
Term runs from August 12, 2004 through April 12, 2005. Lease
payments for the Second Extended Term are $25,000 per month
payable monthly on or before the 12th day of each calendar
month of the Second Extended Term, the first payment being due
on or before August 12, 2004.
3.Purchase Option. The Purchase Option as described in Section
5 of the original Lease Agreement is hereby extended as
follows:
The equipment being leased may be purchased by Lessee at and as
of the conclusion of the Second Extended Term for the Purchase
Price specified in the Rental Schedule, less a credit in the
amount equal to 75% of the Initial Term Rent and Extended Term
Rent and Second Extended Term Rent, to the extent theretofore
paid by Lessee hereunder. Such option may be exercised by
providing at least 30 days advance written notice to Lessor and
by paying the balance of the Purchase Price to Lessor in
immediately available U.S. funds as set forth in Schedule A on or
before the end of the Second Extended Term, time being of
essence. If such option is exercised, title to the Equipment
shall transfer as of the later of the date of payment or the date
of expiration of the Initial Term. For purposes of Schedule C,
Warranty Provisions, title to the Equipment shall be deemed to
have transferred to the Lessee as of the Commencement Date.
With respect to the alternate option as described in the second
paragraph of Section 5 of the original Lease Agreement, this
alternate option is not extended and has expired as of July 16,
2004.
4. Miscellaneous. Except as expressly amended hereby, the
terms and provisions of the original Lease Agreement of 12 August
2003 remain in full force and effect.
In witness whereof, Lessor and Lessee, each pursuant to due
authority, have so agreed as of the date first set forth above.
LESSOR:
Thrustmaster of Texas, Inc.
ATTEST:
By:________________________________
By: ___________________________ Joe R. Bekker, President
Secretary
LESSEE:
Torch Offshore, Inc.
ATTEST:
By:_________________________________
By: ___________________________
Witness
Exhibit 31.1
CERTIFICATION BY LYLE G. STOCKSTILL PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Lyle G. Stockstill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Torch
Offshore, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
(c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
controls over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 12, 2004 /s/ LYLE G. STOCKSTILL
----------------------
Lyle G. Stockstill
Chairman of the Board and Chief
Executive Officer
Exhibit 31.2
CERTIFICATION BY ROBERT E. FULTON PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Robert E. Fulton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Torch
Offshore, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
(c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
controls over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 12, 2004 /s/ ROBERT E. FULTON
--------------------
Robert E. Fulton
Chief Financial Officer
Exhibit 32.1
CERTIFICATION BY LYLE G. STOCKSTILL PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report of Torch Offshore, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2004
as filed with the Securities and Exchange Commission of the date
hereof (the "Report"), I, Lyle G. Stockstill, Chairman of the
Board and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ LYLE G. STOCKSTILL
- -----------------------
Lyle G. Stockstill
Chairman of the Board and Chief Executive Officer
Exhibit 32.2
CERTIFICATION BY ROBERT E. FULTON PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report of Torch Offshore, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2004
as filed with the Securities and Exchange Commission of the date
hereof (the "Report"), I, Robert E. Fulton, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ ROBERT E. FULTON
- ---------------------
Robert E. Fulton
Chief Financial Officer