Exhibit 99.8

 

 

To the Board of Directors and Stockholders of Trico Marine Services, Inc.:

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Trico Marine Services, Inc. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting (not presented herein) appearing under Item 9A of the Company’s 2008 Annual Report on Form 10-K. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we consider necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2, the risk the Company may not successfully complete a refinancing of its debt, obtain amendments or waivers to financial covenants, and / or the risk the Company may not have adequate liquidity to fund its operations raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

As discussed in Note 11 to the consolidated financial statements, on January 1, 2007, the Company changed the manner in which it accounts for uncertain tax positions in connection with its adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” As discussed in Note 3 and Note 5 to the consolidated financial statements, the Company changed the manner in which it accounts for certain convertible debt instruments and the manner in which it accounts for noncontrolling interests effective January 1, 2009.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that

transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As described in Management’s Annual Report on Internal Control Over Financial Reporting (not presented herein) appearing under Item 9A of the Company’s 2008 Annual Report on Form 10-K, management has excluded DeepOcean ASA, and its wholly-owned subsidiary CTC Marine Projects Ltd., from its assessment of internal control over financial reporting as of December 31, 2008 because it was acquired by the Company in a purchase business combination during 2008. We have also excluded DeepOcean ASA and CTC Marine Projects Ltd. from our assessment of internal controls over financial reporting as of December 31, 2008. DeepOcean ASA and CTC Marine Projects Ltd are wholly-owned subsidiaries of the Company whose total assets and total revenues represent 72.1% and 55.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2008.

 

PricewaterhouseCoopers LLP

 

Houston, Texas

 

March 11, 2009, except with respect to our opinion on the consolidated financial statements insofar as it relates to the Company’s ability to continue as a going concern as discussed in Note 2, the retrospective effects of the change in accounting for certain convertible debt discussed in Note 3 and Note 5, the retrospective change in accounting for the noncontrolling interest discussed in Note 3 and the disclosure of condensed consolidating financial information discussed in Note 20, as to which the date is October 9, 2009.

TRICO MARINE SERVICES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

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

TRICO MARINE SERVICES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

 

 

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

TRICO MARINE SERVICES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

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

 

TRICO MARINE SERVICES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EQUITY

 

 

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

 

 

 

Trico Marine Services, Inc. (the “Company”) is an integrated provider of subsea and marine support vessels and services, including subsea trenching and protection services, that was formed as a Delaware holding company in 1993. The Company maintains a global presence with operations primarily in international markets including the North Sea, West Africa, Mexico, the Mediterranean, Brazil and Southeast Asia / China as well as its domestic presence in the U.S. Gulf of Mexico (“Gulf of Mexico”).

 

In May 2008, the Company expanded its presence in the subsea services market by acquiring DeepOcean ASA (“DeepOcean”). DeepOcean provides subsea services, including inspection, maintenance and repair (“IMR”), survey and light construction support, subsea intervention and decommissioning. CTC Marine Projects LTD (“CTC Marine”), a wholly-owned subsidiary of DeepOcean, provides marine trenching, sea floor cable laying and subsea installation services. DeepOcean and CTC Marine operate a well equipped combined fleet of 15 vessels utilizing modern remotely operated vehicles (“ROVs”) and subsea trenching and protection, survey and cable laying equipment.

 

The Company operates internationally through a number of foreign subsidiaries, including DeepOcean AS, through which it manages the Subsea Services segment, CTC Marine Projects LTD, through which it manages the Subsea Trenching and Protection segment, and Trico Shipping AS, which owns vessels based primarily in the North Sea. In addition to international operations, domestic subsidiaries include Trico Marine Assets, Inc., which owns the majority of our towing and supply vessels operating in the Gulf of Mexico and other international regions excluding the North Sea, and Trico Marine Operators, Inc., which operates all vessels in the Gulf of Mexico. The Company’s principal customers are major oil and natural gas exploration, development and production companies and foreign government-owned or controlled organizations and telecommunications companies. Due to the acquisition, the Company now operates utilizing three operating segments: (1) Subsea Services; (2) Subsea Trenching and Protection; and (3) Towing and Supply. Prior year amounts have been restated to reflect this change in the Company’s operating segments.

 

In November 2007, the Company acquired all of the outstanding equity interests of Active Subsea ASA, a Norwegian public limited liability company (“Active Subsea”). Active Subsea has eight multi-purpose service vessels (“MPSVs”) currently under construction and scheduled for delivery in 2009, 2010 and 2011. These vessels are designed to support subsea services, including performing inspection, maintenance and repair work using ROVs, dive and seismic support and light construction activities.

 

As of December 31, 2008, the Company’s fleet, together with vessels held in joint ventures, consisted of 77 vessels, including seven subsea platform supply vessels (“SPSVs”), 10 multi-purpose service vessels (“MSVs”), seven large-capacity platform supply vessels (“PSVs”), six large anchor handling towing and supply vessels (“AHTSs”), 38 offshore supply vessels (“OSVs”), three crew boats (“Crew / Line Handlers”), five trenching vessels and one line handling (utility) vessel. Additionally, the Company has nine vessels on order for delivery in 2009, 2010 and 2011, including the eight MPSVs from the Active Subsea acquisition.

 

 

Seasonality early in 2009, lower utilization due to planned vessel mobilizations for longer term projects commencing mid-year in the Company’s subsea services segments, deteriorating rates and utilization in the Company’s towing and supply segment and the further weakening of the U.S. dollar relative to the Norwegian kroner during the second quarter of 2009, which resulted in additional cash payments required to bring our $200 million revolving credit facility within its contractual credit limit resulted in lower than expected operating results. As a result, the Company’s liquidity outlook changed during 2009. The Company expects

increased activity in its subsea services segments and operating results in such segment to remain constant for the third quarter; however, it has revised its future operating results forecast for the remainder of 2009 to reflect the lower outlook for the Company’s towing and supply business.

 

As a result of these events, the Company believes that its forecasted cash and available credit capacity are not sufficient to meet its commitments as they come due over the next twelve months and that it will not be able to remain in compliance with its debt covenants unless it is able to successfully refinance certain debt. If the Company is unable to successfully refinance certain debt, it would not be able to remain in compliance with its debt covenants unless it could extend existing amortization requirements, sell assets, access cash in certain of its subsidiaries, obtain waivers or amendments from its lenders, and effectively manage our working capital. If the Company is unable to complete these actions, it will be in default under its credit agreements, which in turn, would constitute an event of default under all of its outstanding debt agreements. If this were to occur, all of the Company’s outstanding debt would become callable by its creditors and would be reclassified as a current liability on its balance sheet. The Company’s inability to repay the outstanding debt, if it were to become current or if it were called by its creditors would have a material adverse effect on the Company and raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustment related to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might result from this uncertainty.

 

Trico Shipping AS is pursing an offering of high-yield notes for purposes of refinancing all of the outstanding indebtedness of the Trico Supply Group (Trico Supply AS, and its subsidiaries, including Trico Shipping AS, DeepOcean AS and CTC Marine Projects, Ltd.), a substantial portion of which matures during the first half of 2010. In addition, the Company is continuing to pursue refinancing of DeepOcean’s NOK 350 million revolving credit facility, NOK 230 million revolving credit facility, NOK 150 million additional term loan and NOK 200 million overdraft facility. There can be no assurance that the Company will be able to consummate the offering of high-yield notes or otherwise refinance the debt of the Trico Supply Group, that lenders will be willing to waive or amend covenants, or that its other plans can be affected on a timely basis, on satisfactory terms or maintained once initiated. Even if the Company is able to refinance the debt of the Trico Supply Group and obtain waivers for any future covenant violations, its obligations and the obligations of the Trico Supply Group will still pose significant restrictions on the Company and The Trico Supply Group which may include a higher cost of debt, significant amortization payments, or liens on a substantial portion of assets, all of which could severely limit its ability to implement plans which would negatively impact future operations.

 

As an international integrated provider of subsea and marine support vessels and services to the energy and telecommunications industries, the Company’s revenue, profitability, cash flows and future rate of growth are substantially dependent on its ability to (1) secure profitable contracts through a balance of spot exposure and term contracts, (2) increase its vessel utilization and maximize its service spreads, (3) deploy its vessels to the most profitable markets, and (4) invest in a technologically advanced subsea fleet. Consistent with the Company’s strategy, it is in the process of constructing or converting several purpose-specific vessels for customers under long-term contracts. The Company’s inability to execute its plan or the failure to successfully complete construction or conversion of new vessels on schedule could adversely affect its financial position, results of operations and cash flows.

 

The Company’s revenues are primarily generated from entities operating in the oil and gas industry in the North Sea, the Gulf of Mexico, West Africa, Brazil, and Southeast Asia / China. The Company’s international operations are subject to a number of risks inherent to international operations including exchange rate fluctuations, unanticipated assessments from tax or regulatory authorities, and changes in laws or regulations. In addition, because of the Company’s structure, it may not be able to repatriate funds from its Norwegian subsidiaries without adverse tax or debt compliance

consequences. These factors could have a material adverse affect on the Company’s financial position, results of operations and cash flows.

 

Because the Company’s revenues are generated primarily from customers who have similar economic interests, its operations are also susceptible to market volatility resulting from economic, cyclical, weather related or other factors related to the energy industry. Changes in the level of operating and capital spending in the industry, decreases in oil and gas prices, or industry perceptions about future oil and gas prices could materially decrease the demand for the Company’s services, adversely affecting its financial position, results of operations and cash flows.

 

The Company’s operations, particularly in the North Sea, West Africa, Mexico, and Brazil, depend on the continuing business of a limited number of key customers and some of its long-term contracts contain early termination options in favor of its customers. If any of these customers terminate their contracts with the Company, fail to renew an existing contract, refuse to award new contracts to it or choose to exercise their termination rights, the Company’s financial position, results of operations and cash flows could be adversely affected.

 

The Company’s certificate of incorporation effectively requires that it remain Jones Act eligible, and it must comply with the Jones Act to engage in coastwise trade in the Gulf of Mexico. The Jones Act provides, among other things, that non-U.S. citizens may neither exercise control over more than 25% of the voting power in the corporation nor occupy seats that constitute more than a minority of a Board quorum. The Company expects decommissioning and deep water projects in the Gulf of Mexico to comprise an important part of its subsea strategy, which will require continued compliance with the Jones Act. Any action that risks its status under the Jones Act could have a material adverse effect on its business, financial position, results of operations and cash flows.

 

The Company is highly leveraged and its debt imposes significant restrictions on it and increases its vulnerability to adverse economic and industry conditions, and could limit its ability to obtain the additional financing required to successfully operate its business. The Company’s inability to satisfy any of the obligations under its debt agreements would constitute an event of default. Under certain of the Company’s debt agreements, an event of default will be deemed to have occurred if there is a change of control of the Company or certain of its subsidiaries or if a material adverse change or a fundamental change occurs in regards to the financial position of the applicable borrowing entity within the Company. Also, certain of the Company’s debt agreements contain a material adverse change/effect provision that is determined in the reasonable opinion of the respective lender, which is outside of the control of the Company. Under cross-default provisions in several agreements governing its indebtedness, a default or acceleration of one debt agreement will result in the default and acceleration of its other debt agreements and under its Master Charter lease agreement (See Operating Leases in Note 17 Commitments and Contingencies). A default, whether by the Company or any of its subsidiaries, could result in all or a portion of its outstanding debt becoming immediately due and payable and would provide certain other remedies to the counterparty to the Master Charter. If this were to occur, the Company might not be able to obtain waivers or secure alternative financing to satisfy all of its obligations simultaneously. Given current market conditions, the Company’s ability to access the capital markets or to consummate planned asset sales may be restricted at a time when it would like or need to raise additional capital. In addition, the current economic conditions could also impact its lenders, customers and vendors and may cause them to fail to meet their obligations to it with little or no warning. These events could have a material adverse effect on the Company’s business, financial position, results of operations, cash flows and ability to satisfy the obligations under its debt agreements. (Also see Note 5 Long Term Debt.)

 

Although it is not currently economical to do so, the holders of the Company’s 6.5% Convertible Debentures have the right to convert their debentures into its common stock and receive a make whole interest payment from it. In addition, these Debentures also provide the holders with the right to require

it to repurchase the Debentures on specified dates or upon the occurrence of a fundamental change in the Company’s business, which is defined as the occurrence of any of the following:

 

(a) the consummation of any transaction that is disclosed in a Schedule 13D (or successor form) by any “person” and the result of which is that such “person” has become the “beneficial owner” (as these terms are defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the Company’s Capital Stock that is at the time entitled to vote by the holder thereof in the election of the Board of Directors (or comparable body); or

 

(b) the first day on which a majority of the members of the Board of Directors are not Continuing Directors; or

 

(c) the adoption of a plan relating to the liquidation or dissolution of the Company; or

 

(d) the consolidation or merger of the Company with or into any other Person, or the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the Company’s assets and those of its subsidiaries taken as a whole to any “person” (as this term is used in Section 13(d)(3) of the Exchange Act), other than:

 

(i) any transaction pursuant to which the holders of 50% or more of the total voting power of all shares of the Company’s Capital Stock entitled to vote generally in elections of directors of the Company immediately prior to such transaction have the right to exercise, directly or indirectly, 50% or more of the total voting power of all shares of the Company’s Capital Stock entitled to vote generally in elections of directors of the continuing or surviving Person (or any parent thereof) immediately after giving effect to such transaction; or

 

(ii) any merger primarily for the purpose of changing the Company’s jurisdiction of incorporation and resulting in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of common stock of the surviving entity.

 

(e) the termination of trading of the Common Stock, which will be deemed to have occurred if the Common Stock or other common equity interests into which the Debentures are convertible is neither listed for trading on a United States national securities exchange nor approved for listing on any United States system of automated dissemination of quotations of securities prices, and no American Depositary Shares or similar instruments for such common equity interests are so listed or approved for listing in the United States.

 

However, a Fundamental Change will be deemed not to have occurred if more than 90% of the consideration in the transaction or transactions (other than cash payments for fractional shares and cash payments made in respect of dissenters’ appraisal rights) which otherwise would constitute a Fundamental Change under clauses (a) or (d) above consists of shares of common stock, depositary receipts or other certificates representing common equity interests traded or to be traded immediately following such transaction on a U.S. national securities exchange or approved for listing on any United States system on automated dissemination of quotations of securities prices, and, as a result of the transaction or transactions, the Debentures become convertible into such common stock, depositary receipts or other certificates representing common equity interests. Such conversions could significantly impact liquidity, and it may not have sufficient funds to make the required cash payments should a majority of the holders convert. The Company’s failure to convert or pay the make whole interest payment under the terms of the Debentures would constitute an event of default, which in turn, could constitute an event of default under all of its outstanding debt agreements.

 

Consolidation Policy.  The consolidated financial statements of the Company include the accounts of those subsidiaries where the Company directly or indirectly has more than 50% of the ownership rights and/or for which the right to participate in significant management decisions is not shared with the other shareholders. At December 31, 2008, the Company held a 49% equity interest in Eastern Marine Services Limited (“EMSL”), a Hong Kong limited liability company that develops and provides international marine support services for the oil and gas industry in China, other countries within Southeast Asia and Australia. Prior to 2008, the Company consolidated a 49% variable interest in a Mexican subsidiary, Naviera Mexicana de Servicios, S. de R.L de CV (“NAMESE”) and effective January 1, 2008 the Company owned 100%. See Note 16 for further discussion. The noncontrolling interests of the above mentioned subsidiaries are included in the Consolidated Balance Sheets and Statements of Income as “Noncontrolling interest”.

 

All significant intercompany balances and transactions have been eliminated in consolidation. For comparative purposes, certain prior year amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on net income, stockholders’ equity or operating cash flows.

 

Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and those differences could be material.

 

Revenue Recognition.  The Company earns and recognizes revenues primarily from the time and bareboat chartering of vessels to customers based upon daily rates of hire and by providing other subsea services. A time charter is a lease arrangement under which the Company provides a vessel to a customer and the Company is responsible for all crewing, insurance and other operating expenses. In a bareboat charter, the Company provides only the vessel to the customer, and the customer assumes responsibility to provide for all of the vessel’s operating expenses and generally assumes all risk of operation. Vessel charters may range from several days to several years. Other vessel income is generally related to billings for fuel, bunks, meals and other services provided to customers.

 

Other subsea service revenue, primarily derived from the hiring of equipment and operators to provide subsea services to its customers, consists primarily of revenue from billings that provide for a specific time for operators, material and equipment charges, which accrue daily and are billed periodically for the delivery of Subsea Services over a contractual term. Service revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the service has been provided, the fee is fixed or determinable and collection of resulting receivables is reasonably assured.

 

In addition, revenue for certain subsea contracts related to trenching of subsea pipelines, flowlines and cables and installation of subsea cables (umbilicals, ISUs, power and telecommunications) and flexible flowlines is recognized based on the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”, measured by the percentage of costs incurred to date to estimated total costs for each contract. Cost estimates are reviewed monthly as the work progresses and adjustments proportionate to the percentage-of-completion are reflected in revenue for the period when such estimates are revised. Claims for extra work or changes in scope of work are included in revenue when the amount can be reliably estimated and collection is probable. Losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined.

Cash and Cash Equivalents.  All investments with original maturity dates of three months or less are considered to be cash equivalents.

 

Restricted Cash.  The Company segregates restricted cash due to legal or other restrictions regarding its use. At December 31, 2008 and 2007, the total restricted cash balance of $3.6 million and $8.6 million, respectively, is primarily related to the following:

 

 

Accounts Receivable.  In the normal course of business, the Company extends credit to its customers on a short-term basis, generally 60 days or less. The Company’s principal customers are major integrated oil companies and large independent oil and gas companies as well as foreign government-owned or controlled companies that provide logistics, construction and other services to such oil companies and foreign government organizations. Although credit risks associated with the Company’s customers are considered minimal, the Company routinely reviews its accounts receivable balances and makes provisions for doubtful accounts as necessary. The Company estimates its allowance for doubtful accounts based on historical collection trends, type of customer, the age of outstanding receivables and any specific customer collection issues that it has identified. At December 31, 2008 and 2007, allowance for doubtful accounts totaled $2.3 million and $1.3 million, respectively.

 

The Company is exposed to risks related to the Company’s insurance and reinsurance contracts with various insurance entities. The reinsurance recoverable amount can vary depending on the size of a loss. The exact amount of the reinsurance recoverable is not known until all losses are settled. The Company records the reinsurance recoverable amount when the claim has been communicated to the insurance provider, accepted in writing by the insurance provider as a valid claim and the Company believes it is probable amounts will be received. The Company monitors its reinsurance recoverable balances regularly for possible reinsurance exposure and makes adequate provisions as necessary for doubtful reinsurance receivables.

 

Goodwill and Intangible Assets.

 

Goodwill

 

The Company’s goodwill represents the purchase price in excess of the net amounts assigned to assets acquired and liabilities assumed by the Company in connection with the May 16, 2008 acquisition of DeepOcean (see Note 4 for further discussion). The Company’s reporting units follow its operating segments under SFAS 131 and goodwill has been recorded related to the acquisition in two reporting units — (1) Subsea Services and (2) Subsea Trenching and Protection.

 

SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The goodwill impairment test is a two-step test. Under the first step, the fair

value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 141, “Business Combinations.” The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

 

At December 31, 2008, the measurement date, the Company performed the first step of the two-step impairment test proscribed by SFAS No. 142, and compared the fair value of the reporting units to its carrying value. In assessing the fair value of the reporting unit, the Company used a market approach that incorporated the Company Specific Stock Price method and the Guideline Public Company method, each receiving a 50% weighting. Due to current market conditions, the Company concluded that the market approach would be most appropriate in arriving at the fair value of the reporting units. Key assumptions included the Company’s publicly traded stock price, using a 30-day average price of $3.98 per share, an implied control premium of 9%, and a fair value of debt based primarily on the price for the Company’s publicly traded debentures. In step one of the impairment test, the fair value of both the Subsea Services and Subsea Trenching and Protection reporting units were less than the carrying value of the net assets of the respective reporting units, and thus the Company performed step two of the impairment test.

 

In step two of the impairment test, the Company determined the implied fair value of goodwill and compared it to the carrying value of the goodwill for each reporting unit. The Company allocated the fair value of the reporting units to all of the assets and liabilities of the respective units as if the reporting unit had been acquired in a business combination. The Company’s step two analysis resulted in no implied fair value of goodwill for either reporting unit, and therefore, the Company recognized an impairment charge of $169.7 million in the fourth quarter of 2008, representing a write-off of the entire amount of the Company’s previously recorded goodwill. This impairment is based on a combination of factors including the current global economic environment, higher costs of equity and debt capital and the decline in market capitalization of the Company and comparable subsea services companies.

 

 

Intangible Assets

 

Intangible assets consist primarily of trade names and customer relationships, all of which was acquired in connection with the DeepOcean acquisition.

 

The Company classified trade names as indefinite lived assets. Under SFAS No. 142, indefinite lived assets are not amortized but instead are reviewed for impairment annually and more frequently if events or circumstances indicate that the asset may be impaired. At December 31, 2008, the Company performed an impairment analysis of its trade name assets utilizing a form of the income approach known as the relief-from-royalty method. As a result of this assessment, the Company recognized an impairment during 2008 of $3.1 million on trade name assets. As of December 31, 2008, the Company

had $26.4 million of trade names on its Consolidated Balance Sheet, which is included in “Intangible assets.”

 

SFAS No. 142 requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairments in accordance with SFAS No. 144. The following table provides information relating to the Company’s intangible assets subject to amortization as of December 31, 2008 (in thousands):

 

 

The intangible assets subject to amortization are amortized using the straight-line method over estimated useful lives of 11 to 13 years for the customer relationships. Amortization expense was $7.6 million for the year ended December 31, 2008 and the estimated amortization expense for each of the next five years beginning 2009 is $6.8 million per year.

 

In connection with completing step two of the Company’s goodwill impairment analysis in the fourth quarter of 2008, the Company assessed the fair values of its customer relationships in accordance with SFAS No. 144 and concluded there was no impairment.

 

Accounting for Long-Lived Assets.  Long-lived assets are recorded at the original cost and reduced by the amount of depreciation and impairments, if any. In addition to the original cost of the asset, the recorded value is impacted by a number of policy elections, including the estimation of useful lives and residual values.

 

Depreciation for equipment commences once the asset is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for their intended use. Depreciable lives and salvage values are determined through economic analysis, reviewing existing fleet plans and comparison to similar vessels. Depreciation for financial statement purposes is provided on the straight-line method depending on the type of vessel. Residual values are estimated based on our historical experience with regards to the sale of both vessels and spare parts and are established in conjunction with the estimated useful lives of the vessel. Marine vessels are depreciated over useful lives ranging from 15 to 35 years from the date of original acquisition, based on historical experience for the particular vessel type. Major modifications, which extend the useful life of marine vessels, are capitalized and amortized over the adjusted remaining useful life of the vessel. Transportation and other equipment are depreciated over a useful life of five to 15 years. Depreciation expense was $53.9 million, $24.4 million and $25.0 million for the years ended December 31, 2008, 2007 and 2006.

 

When assets are retired or disposed, the cost and accumulated depreciation thereon are removed, and any resultant gains or losses are recognized in current operations. The Company utilizes judgment in (i) determining whether an expenditure is a maintenance expense or a capital asset; (ii) determining the estimated useful lives of assets; (iii) determining the residual values to be assigned to assets; and (iv) determining if or when an asset has been impaired.

 

Interest is capitalized in connection with the construction or major modification of vessels. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life, once it is placed into operation. The Company capitalized interest of $18.8 million and $1.4 million at December 31, 2008 and 2007, respectively.

Impairment of Long-Lived Assets.  The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired as defined by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

 

In connection with completing step two of the Company’s goodwill impairment analysis in the fourth quarter of 2008, as further discussed in Goodwill and Other Intangible Assets above, the Company also assessed the current fair values of its other significant assets including marine vessels and other marine equipment, concluding that no impairment existed at December 31, 2008. If market conditions were to decline in market areas in which the Company operates, it could require the Company to evaluate the recoverability of its long-lived assets in future periods, which may result in write-offs or write-downs on its vessels that may be material individually or in the aggregate. The Company recognized a $0.1 million and $2.6 million impairment for the year ended December 31, 2007 and 2006, respectively, related to vessels.

 

Marine Vessel Spare Parts.  Marine vessel spare parts are stated at the lower of average cost or market and are included in “Other assets” in the Consolidated Balance Sheet.

 

Marine Inspection Costs.  Marine inspection costs are expensed in the period incurred. Non-regulatory drydocking expenditures are either capitalized as major modifications or expensed, depending on the work being performed. Total marine inspection and drydocking cost totaled $17.6 million, $16.9 million and $20.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Deferred Financing Costs.  Deferred financing costs include costs associated with the issuance of debt and are amortized using the effective-interest rate method of amortization over the expected life of the related debt agreement or on a straight-line basis over the expected life of the related debt agreement if the straight-line method approximates the effective-interest rate method of amortization.

 

Income Taxes.  Deferred income taxes are provided at the currently enacted income tax rates for the difference between the financial statement and income tax bases of assets and liabilities and carryforward items. The Company provides valuation allowances against net deferred tax assets for amounts which are not considered “more likely than not” to be realized.

 

On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

 

Direct Operating Expenses.  Direct operating expenses (or direct operating costs) principally include crew costs, marine inspection costs, insurance, repairs and maintenance, supplies and casualty losses. Direct operating costs are charged to expense as incurred. Direct operating costs are reduced by the amount of partial reimbursements of labor costs received from the Norwegian government. The labor reimbursements totaled $7.8 million, $7.7 million and $6.0 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Losses on Insured Claims.  The Company limits its exposure to casualty losses by maintaining stop-loss and aggregate liability deductibles. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon the Company’s historical loss experience. To the extent that

estimated self-insurance losses differ from actual losses realized, the Company’s insurance reserves could differ significantly and may result in either higher or lower insurance expense in future periods.

 

Foreign Currency Translation.  The functional currency for the majority of the Company’s international operations is the local currency. Adjustments resulting from the translation of the local functional currency financial statements into the U.S. Dollar, which is primarily based on current exchange rates, are included in the Consolidated Statements of Stockholders’ Equity as a separate component of “Accumulated other comprehensive income (loss)” in the current period. The functional currency of certain foreign locations is the U.S. Dollar, which includes Mexico and certain Norwegian subsidiaries. Adjustments resulting from the remeasurement of the local currency financial statements into the U.S. Dollar functional currency, which uses a combination of current and historical exchange rates, are included in the Consolidated Statements of Income in “Other expense, net” in the current period. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign currency receivables or payables, are also included in “Other expense, net”.

 

Stock-based Compensation.  The Company accounts for stock-based employee compensation plans using the fair-value based method of accounting in accordance with Statement of Accounting Standards No. 123R, Share-Based Payment (Revised 2004) (“SFAS 123R”). The Company’s results of operations reflect compensation expense for all employee stock-based compensation, which is included in “General and Administrative”.

 

Accumulated Other Comprehensive Income (Loss).  Accumulated other comprehensive income (loss), which is included as a component of stockholders’ equity, is comprised of currency translation adjustments in foreign subsidiaries and unrecognized pension gain (loss). The balance at December 31, 2008 primarily reflects currency translation related to translating Norwegian Kroner books into U.S. Dollar, the Company’s reporting currency.

 

Recent Accounting Standards.  On May 9, 2008, the FASB issued Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (the “FSP” or “ABP 14-1”). The FASB also decided to add further disclosures for instruments subject to this guidance. The new rules changed the accounting for convertible debt instruments that permitted cash settlement upon conversion and were applied to the Company’s 3% senior convertible debentures. Effective January 1, 2009, the Company adopted the provisions of this FSP and applied them, on a retrospective basis, to the Company’s consolidated financial statements, including those presented herein for the periods in which the debt was outstanding. The impact of the FSP is reflected in Notes 3, 5, 8, 10, 11, 13, 18, and 19. The FSP required the Company to separately account for the liability and equity components of its senior convertible notes in a manner intended to reflect its nonconvertible debt borrowing rate. The Company determined the carrying amount of the senior convertible note liability by measuring the fair value as of the issuance date of a similar note without a conversion feature. The difference between the proceeds from the sale of the senior convertible notes and the amount reflected as the senior convertible note liability was recorded as additional paid-in capital. Effectively, the convertible debt was recorded at a discount to reflect its below market coupon interest rate. The excess of the principal amount of the senior convertible notes over their initial fair value (the “discount”) is accreted to interest expense over the expected life of the senior convertible notes. Interest expense is recorded for the coupon interest payments on the senior convertible notes as well as the accretion of the discount. The adoption did not have an impact on the Company’s cash flows.

 

On February 12, 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, deferring the effective date of SFAS No. 157 for one year for nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements at least annually. The Company is evaluating the impact, if any, the adoption would have on the Company’s consolidated financial position or its results of operations.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)), which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) retains the

underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) changes the method of applying the acquisition method in a number of significant aspects. In addition to expanding the types of transactions that will now qualify as business combinations, SFAS No. 141(R) also provides that acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with an exception related to the accounting for valuation allowances on deferred taxes and acquired contingencies related to acquisitions completed before the effective date. SFAS No. 141(R) amends SFAS No. 109 to require adjustments, made after the effective date of this statement, to valuation allowances for acquired deferred tax assets and income tax positions to be recognized as income tax expense. SFAS No. 141(R) is required to be adopted concurrently with SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51”, and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited.

 

Issued in December 2007, SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51” (“FAS 160”) states that accounting and reporting for noncontrolling interests (previously referred to as minority interests) will be recharacterized as noncontrolling interests and classified as a component of equity. FAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The provisions of the standard were applied to all noncontrolling interests prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented and have been disclosed as such in the Company’s consolidated financial statements contained herein.

 

 

DeepOcean and CTC Marine

 

On May 15, 2008, the Company initiated a series of transactions that resulted in the acquisition of all the equity ownership of DeepOcean ASA, a Norwegian public limited liability company (“DeepOcean”). The Company began consolidating DeepOcean’s results on May 16, 2008, the date it obtained constructive control of DeepOcean. The Company’s ownership of DeepOcean ranged from 54% on May 16, 2008 to in excess of 99% by June 30, 2008. At December 31, 2008, the Company has a 100% interest in DeepOcean.

 

The Company, through its subsidiary, Trico Shipping AS (Trico Shipping), acquired all of the outstanding common stock of DeepOcean for Norwegian Kroner (NOK) 32 per share. Trico Shipping acquired the DeepOcean shares as follows:

 

On May 16, 2008, Trico Shipping acquired an aggregate 55,728,955 shares of DeepOcean’s common stock, representing 51.5% of the fully diluted capital stock of DeepOcean, pursuant to the following agreements and arrangements:

 

 

 

Subsequent to May 16, 2008, Trico Shipping purchased an additional 2,700,000 DeepOcean shares in the open market at a price of NOK 32 per share (approximately $17.2 million), representing approximately 2.5% of the fully diluted capital stock of DeepOcean. As a result of the transactions described above, and in accordance with the Norwegian Securities Trading Act, on May 30, 2008 Trico Shipping initiated a mandatory cash offer for all the remaining DeepOcean shares it did not own. The aggregate value of the mandatory offer price was NOK 32 per share, including a previously announced NOK 0.50 per share dividend amount. On June 13, 2008, Trico Shipping acquired an aggregate of 39,270,000 DeepOcean shares, consisting of all the shares owned by DOF ASA (DOF), a significant DeepOcean shareholder, as well as an additional 4,050,000 shares purchased in the open market for NOK 32 per share (approximately $246.7 million). These acquisitions represent approximately 36.3% of DeepOcean’s fully diluted shares of capital stock, with the DOF shares representing approximately 32.6% of the fully diluted capital stock of DeepOcean. Following these transactions the Company owned 90.4% of DeepOcean’s fully diluted capital stock. The mandatory cash offer period ended on June 30, 2008, at which time the Company’s ownership of DeepOcean’s fully diluted capital stock increased to 99.7%. On August 29, 2008, DeepOcean delisted from the Oslo Bors exchange. The Company acquired the remaining 284,965 shares of DeepOcean outstanding at a purchase price of 32 NOK per share.

 

The acquisition has been accounted for under the purchase method as required by Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations.” To fund the acquisition, the Company used a combination of its available cash, borrowings under its existing, new and/or amended revolving credit facilities (Note 5), the proceeds from the issuance of $300 million of 6.5% convertible debentures (Note 5) and the issuance of the Company’s equity instruments in the form of phantom stock units (Note 7).

 

Below is a summary of the acquisition costs as of December 31, 2008 (in thousands):

 

 

 

 

In accordance with SFAS No. 141, the purchase price is allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition dates. In valuing acquired assets and assumed liabilities, fair values are based on, but are not limited to: quoted market prices, where available; expected cash flows; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; and appropriate discount and growth rates. The excess of purchase price over the estimated fair value of the net assets acquired at the date of acquisition was recorded as goodwill.

The operations of DeepOcean will be reflected in the Company’s Subsea Services segment and the operations of CTC Marine will be reflected in the Company’s Subsea Trenching and Protection segment.

 

Below is a summary of the allocation of the purchase price valued on the dates of acquisition and updated through December 31, 2008 (in thousands):

 

 

 

 

Active Subsea

 

On November 23, 2007, the Company acquired all of the outstanding equity interests of Active Subsea ASA, a Norwegian public limited liability company (“Active Subsea”), for approximately $247.6 million, and changed its name to Trico Subsea. The Company used available cash to fund this acquisition. Active Subsea has eight MPSVs, currently under construction and scheduled for delivery in 2009, 2010 and 2011 that are designed to support subsea services, including performing inspection, maintenance and repair work using ROVs, dive and seismic support and light construction activities. The Company assumed Active Subsea’s construction commitments for these vessels in the acquisition. The acquisition included long-term contracts for three of these MPSVs with contract periods ranging from two to four years. Two of these contracts also provide for multi-year extensions. At the time, this acquisition more than doubled the number of vessels in the Company’s fleet with subsea capabilities and allowed the Company to further leverage its global footprint and broaden its customer base to include subsea services and subsea construction companies.

The following table summarizes the allocation of the purchase price (in thousands):

 

 

Pro forma Information

 

The following unaudited pro forma information assumes that the Company acquired DeepOcean and CTC Marine effective January 1, 2008 and January 1, 2007. The pro forma information also assumes that the Company acquired Active Subsea January 1, 2007 (amounts in thousands, except per share data).

 

 

 

 

At December 31, 2008, the purchase price and purchase price allocation were finalized.

 

Unless otherwise specified, amounts in these footnotes disclosing U.S. Dollar equivalents for foreign denominated debt amounts are translated at currency rates in effect at December 31, 2008. The Company’s debt at December 31, 2008 and 2007 consisted of the following (in thousands):

 

 

 

Maturities of debt during the next five years and thereafter based on debt amounts outstanding as of December 31, 2008 are as follows (in thousands):

 

 

 

 

6.5% Convertible Debentures.  On May 14, 2008, the Company entered into a securities purchase agreement under which the Company agreed to sell $300 million aggregate principal amount of its 6.5% Senior Convertible Debentures (the 6.5% Debentures) due 2028 to certain institutional investors. On May 16, 2008, the Company issued $300 million of the 6.5% Debentures in a private placement transaction. The 6.5% Debentures are governed by an indenture, dated as of May 16, 2008, between the Company and Wells Fargo Bank, National Association, as trustee. The Company received net proceeds of approximately $287 million, after deducting offering costs of approximately $13 million, which were capitalized as debt issuance costs and are being amortized over the life of the 6.5% Debentures. Net proceeds of the offering were used to partially fund the acquisition of DeepOcean (Note 4).

 

The 6.5% Debentures are senior unsecured obligations of the Company and rank equally in right of payment to all of the Company’s other existing and future senior unsecured indebtedness. The 6.5% Debentures are effectively subordinated to all of the Company’s existing and future secured indebtedness to the extent of the value of the Company’s assets collateralizing this indebtedness and any liabilities of the Company’s subsidiaries.

Interest on the 6.5% Debentures is payable semiannually in arrears on May 15 and November 15 of each year beginning November 15, 2008. The debentures mature on May 15, 2028, unless earlier converted, redeemed or repurchased. The indenture governing the 6.5% Debentures contains negative covenants with respect to, among other things, the Company incurring any indebtedness that is senior to or equal to the 6.5% Debentures other than the permitted indebtedness, or any liens or encumbrances other than the permitted liens.

 

The 6.5% Debentures are convertible, based on an initial conversion rate of 24.74023 shares of common stock per $1,000 principal amount of debentures, subject to adjustment. The conversion rate will be adjusted upon certain events including (i) stock dividends; (ii) certain subdivisions, combinations or reclassifications of the Company’s common stock; (iii) certain issuances or distributions to all or substantially all holders of the Company’s common stock; and (iv) certain other events. In addition, in the event of certain types of fundamental changes (as defined in Note 2), holders of the debentures may elect either to receive an interest make-whole payment or to cause the Company to increase the conversion rate by a number of additional shares of the Company’s common stock (which reflect the approximate value of interest that would have accrued under the 6.5% Debentures at the applicable interest rate for the period from the applicable conversion date through May 15, 2013). Any of these adjustments to the conversion rate could mean that the number of shares of the Company’s common stock that are actually issuable upon conversion of all debentures may increase above the 7,422,069 shares that would be issuable if holders elected to convert their debentures and the Company decided to settle the conversion in shares of its common stock (and no cash) at the initial conversion rate. There is both a maximum and minimum number of shares that may ultimately be issued under any adjustment of the conversion rate pursuant to these specific situations that allow for the modification of the initial conversion rate. None of these conditions have occurred as of December 31, 2008. The conversion feature associated with the debentures is considered an embedded derivative as defined is SFAS No. 133. See Note 6 for further discussion.

 

Payment Options:  For the 6.5% Debentures (which were retired as of May 2009), upon any conversion, the Company has the option to pay the holders of the 6.5% Debentures in cash, stock, or a combination thereof. If the holders exercise their voluntary right to convert, the Company can issue either $1,000 in cash per each $1,000 of principal value of notes redeemed or the requisite number of shares (24.74023) per each $1,000 of principal value of notes redeemed. For other redemptions, the Company can either (i) pay cash in the amount equal to the minimum of (a) $1,000 per each $1,000 of principal value of notes redeemed or (b) the cash equivalent value of 24.74023 shares based on recent trading prices, (ii) 24.7023 shares per each $1,000 of principal value of notes redeemed, or (iii) a combination of (i) and (ii).

 

Investor Options to Convert, Redeem, or Repurchase  In the 6.5% Debentures, the holders have the right to convert the notes at any time into the requisite number of shares or the principal amount of the notes, at the Company’s election, and if redeemed prior to May 2013, the present value of the remaining interest payments.

 

Company’s Ability to Repurchase or Redeem Notes  In the 6.5% Debentures, the Company has the right to redeem the notes if they trade at 175% of the then relevant conversion price for a minimum period of time within the first five years. After five years, the Company can redeem the notes regardless of the stock trading price. This redemption price can be paid in cash and/or stock at the Company’s election.

 

In December 2008, two holders of the Company’s 6.5% senior convertible debentures converted $22 million principal amount of the debentures, collectively, for a combination of $6.3 million in cash related to the interest make-whole provision and 544,284 shares of the Company’s common stock based on an initial conversion rate of 24.74023 shares of common stock per $1,000 principal amount of debentures. The Company recognized a gain on conversion of $9.0 million. Subsequent to the end of 2008, seven holders of the Company’s 6.5% senior convertible debentures converted $13.1 million principal amount of the debentures, collectively, for a combination of