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EX-32.2 - EXHIBIT 32.2 - GULFMARK OFFSHORE INCex_97830.htm
EX-32.1 - EXHIBIT 32.1 - GULFMARK OFFSHORE INCex_97829.htm
EX-31.2 - EXHIBIT 31.2 - GULFMARK OFFSHORE INCex_97828.htm
EX-31.1 - EXHIBIT 31.1 - GULFMARK OFFSHORE INCex_97827.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549

 

 FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2017

 

GULFMARK OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation)

 

001-33607

(Commission file number)

 

76-0526032

(I.R.S. Employer Identification No.)

 

 

842 West Sam Houston Parkway North, Suite 400, Houston, Texas

 

77024

 
 

(Address of principal executive offices)

 

(Zip Code)

 

 

(713) 963-9522

(Registrant's telephone number, including area code)

 

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 ☒

 

NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES

 

NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐        Accelerated Filer ☒

 

Non-accelerated filer (Do not check if a smaller reporting company)

 

Smaller reporting company Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐

 

NO ☒

 

Number of shares of Class A Common Stock, $0.01 par value, outstanding as of October 27, 2017: 28,372,180.

 

 

 

 

GulfMark Offshore, Inc.

Index

 

   

Page

Number

Part I.

Financial Information

   
 

Item 1

Financial Statements

7

   

Unaudited Condensed Consolidated Balance Sheets

7

   

Unaudited Condensed Consolidated Statements of Operations

8

   

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

9

   

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

10

   

Unaudited Condensed Consolidated Statements of Cash Flows

11

   

Notes to the Unaudited Condensed Consolidated Financial Statements

12

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

50

 

Item 4

Controls and Procedures

50

       

Part II.

Other Information

 

 

 

Item 1

Legal Proceedings

50

 

Item 1A

Risk Factors

51

 

Item 6

Exhibits

59

 

Signatures

 

59

 

2

 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain or be identified by the words “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “believe,” “should,” “could,” “may,” “might,” “will,” “project,” “forecast,” “budget” and similar expressions. In addition, any statement concerning future financial performance (including, without limitation, future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by or against us, which may be provided by management, are also forward-looking statements as so defined. Statements made by us in this report that contain forward-looking statements may include, but are not limited to, information concerning our possible or assumed future results of operations and statements about the following subjects:

 

 

our ability to consummate and successfully execute a plan of reorganization (including the Plan, as defined below);

 

the terms and sufficiency of the “exit” financing contemplated by the Plan and related risks and uncertainties including, without limitation, whether the exit financing will be completed pursuant to the terms of the Commitment Letter (as defined below), whether the Bankruptcy Court (as defined below) will enter an order permitting us as a debtor to become a party to the exit facilities’ documentation as contemplated by the Commitment Letter, and whether the final documentation in connection with the exit financing will be approved by the Consenting Noteholders (as defined below);

 

our ability to satisfy or renegotiate milestone dates, including those with respect to effectiveness of the Plan under our Restructuring Support Agreement, Backstop Commitment Agreement and Intercompany DIP Agreement referred to below, approval of the exit financing by the Consenting Noteholders and the forbearance deadlines under the RBS Forbearance Agreement referred to below;

 

the effects of our Bankruptcy Case (as defined below) on our operations, including our relationships with employees, regulatory authorities, customers, suppliers, banks, insurance companies and other third parties, and agreements;

 

the effects of our Bankruptcy Case on our company and on the interests of various constituents, including holders of our common stock and debt instruments;

 

Bankruptcy Court rulings in our Bankruptcy Case as well as the outcome of all other pending litigation and the outcome of the Bankruptcy Case in general;

 

the length of time that we will operate under chapter 11 protection and the continued availability of operating capital during the pendency of the proceedings;

 

risks associated with third-party motions in the Bankruptcy Case, which may interfere with our ability to consummate and successfully execute a plan of reorganization and restructuring generally;

 

increased advisory costs to execute a plan of reorganization;

 

the impact of the delisting of our common stock by the New York Stock Exchange on the liquidity and market price of our common stock and on our ability to access the public capital markets;

 

our ability to continue as a going concern in the long term, including our ability to emerge from our Bankruptcy Case;

 

3

 

 

 

our ability to access adequate debtor-in-possession financing or use cash collateral;

 

the potential adverse effects of our Bankruptcy Case on our liquidity, results of operations, or business prospects;

 

our ability to execute our business and restructuring plan;

 

increased administrative and legal costs related to our Bankruptcy Case and other litigation and the inherent risks involved in a bankruptcy process;

 

the cost, availability and access to capital and financial markets, including the ability to secure new financing after emerging from our Bankruptcy Case;

 

tax planning;

 

market conditions and the effect of such conditions on our future results of operations;

 

demand for marine supply and transportation services;

 

supply of vessels and companies providing services;

 

future capital expenditures and budgets for capital and other expenditures;

 

sources and uses of and requirements for financial resources;

 

market outlook;

 

operations outside the United States;

 

contractual obligations;

 

cash flows and contract backlog;

 

timing and cost of completion of vessel upgrades, construction projects and other capital projects;

 

asset impairments and impairment evaluations;

 

assets held for sale;

 

business strategy;

 

growth opportunities;

 

competitive position;

 

expected financial position;

 

interest rate and foreign exchange risk;

 

debt levels and the impact of changes in the credit markets and credit ratings for our debt;

 

timing and duration of required regulatory inspections for our vessels;

 

plans and objectives of management;

 

effective date and performance of contracts;

 

outcomes of legal proceedings;

 

compliance with applicable laws;

 

declaration and payment of dividends; and

 

availability, limits and adequacy of insurance or indemnification.

 

These types of statements are based on current expectations about future events and inherently are subject to certain risks, uncertainties and assumptions, many of which are beyond our control, which could cause actual results to differ materially from those expected, projected or expressed in forward-looking statements. It should be understood that it is not possible to predict or identify all risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, among others, the following:

 

 

the risk factors discussed in Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016 and in Part II, Item 1A of this report;

 

4

 

 

 

operational risk;

 

significant and sustained or additional declines in oil and natural gas prices;

 

sustained weakening of demand for our services;

 

general economic and business conditions;

 

the business opportunities that may be presented to and pursued or rejected by us;

 

insufficient access to sources of liquidity;

 

changes in law or regulations including, without limitation, changes in tax laws;

 

fewer than anticipated deepwater and ultra-deepwater drilling units operating in the Gulf of Mexico, the North Sea, offshore Southeast Asia or in other regions in which we operate;

 

unanticipated difficulty in effectively competing in or operating in international markets;

 

the level of fleet additions by us and our competitors that could result in overcapacity in the markets in which we compete;

 

advances in exploration and development technology;

 

dependence on the oil and natural gas industry;

 

drydocking delays or cost overruns on construction projects or insolvency of shipbuilders;

 

inability to accurately predict vessel utilization levels and day rates;

 

lack of shipyard or equipment availability;

 

unanticipated customer suspensions, cancellations, rate reductions or non-renewals;

 

uncertainty caused by the ability of customers to cancel some long-term contracts for convenience;

 

further reductions in capital expenditure budgets by customers;

 

ongoing capital expenditure requirements;

 

uncertainties surrounding deepwater permitting and exploration and development activities;

 

risks relating to compliance with the Jones Act, including the repeal or administrative weakening of the Jones Act or changes in the interpretation of the Jones Act related to the U.S. citizenship qualification;

 

uncertainties surrounding environmental and government regulations that could result in reduced exploration and production activities or that could increase our operations costs and operating requirements;

 

catastrophic or adverse sea or weather conditions;

 

risks of foreign operations, risk of war, sabotage, piracy, cyber-attack or terrorism;

 

public health threats;

 

disagreements with our joint venture partners;

 

assumptions concerning competition;

 

risks relating to leverage, including potential difficulty in maintaining compliance with covenants in our material debt or other obligations or in obtaining covenant relief from lenders or other contract parties;

 

risks of currency fluctuations; and

 

the shortage of or the inability to attract and retain qualified personnel.

 

5

 

 

These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. There can be no assurance that we have accurately identified and properly weighed all of the factors that affect market conditions and demand for our vessels, that the information upon which we have relied is accurate or complete, that our analysis of the market and demand for our vessels is correct or that the strategy based on such analysis will be successful.

 

The risks and uncertainties included here are not exhaustive. Other sections of this report and our other filings with the Securities and Exchange Commission, or SEC, include additional factors that could adversely affect our business, results of operations and financial performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements included in this report are based only on information currently available to us and speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or beliefs with regard to the statement or any change in events, conditions or circumstances on which any forward-looking statement is based. In addition, in certain places in this report, we may refer to reports published by third parties that purport to describe trends or developments in energy production and drilling and exploration activity. We do so for the convenience of our investors and potential investors and in an effort to provide information available in the market intended to lead to a better understanding of the market environment in which we operate. We specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.

 

6

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 
   

(In thousands, except par value amounts)

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 11,461     $ 8,822  

Trade accounts receivable, net of allowance for doubtful accounts of $3,380 and $2,482, respectively

    18,865       22,043  

Other accounts receivable

    7,646       7,650  

Inventory

    7,637       7,465  

Prepaid expenses

    5,518       3,799  

Restricted cash

    3,460       -  

Other current assets

    2,099       3,110  

Total current assets

    56,686       52,889  

Vessels, equipment, and other fixed assets at cost, net of accumulated depreciation of $516,399 and $468,817, respectively

    1,010,163       970,522  

Construction in progress

    1,176       24,698  

Deferred costs and other assets

    3,646       5,794  

Total assets

  $ 1,071,671     $ 1,053,903  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

               

Current maturities of long term debt

  $ 125,380     $ 483,326  

Debtor in possession financing

    18,000       -  

Accounts payable

    9,104       11,666  

Income and other taxes payable

    4,284       3,678  

Accrued personnel costs

    10,092       9,109  

Accrued interest expense

    1,041       8,163  

Other accrued liabilities

    5,901       9,305  

Total current liabilities

    173,802       525,247  

Long-term income taxes:

               

Deferred income tax liabilities

    118,858       58,094  

Other income taxes payable

    18,340       17,768  

Other liabilities

    3,256       3,173  

Total liabilities not subject to compromise

    314,256       604,282  

Liabilities subject to compromise

    448,124       -  

Stockholders' equity:

               

Preferred stock, $0.01 par value; 2,000 shares authorized; no shares issued

    -       -  

Class A Common Stock, $0.01 par value; 60,000 shares authorized; 29,629 and 29,104 shares issued and 28,372 and 27,122 outstanding, respectively; Class B Common Stock $0.01 per value; 60,000 shares authorized; no shares issued

    289       278  

Additional paid-in capital

    389,027       411,983  

Retained earnings

    57,133       241,207  

Accumulated other comprehensive loss

    (108,354 )     (148,402 )

Treasury stock, at cost

    (38,133 )     (64,580 )

Deferred compensation expense

    9,329       9,135  

Total stockholders' equity

    309,291       449,621  

Total liabilities and stockholders' equity

  $ 1,071,671     $ 1,053,903  

 

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

 

7

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(In thousands, except per share amounts)

 
                                 

Revenue

  $ 25,805     $ 27,821     $ 74,805     $ 97,102  

Costs and expenses:

                               

Direct operating expenses

    20,431       20,316       58,991       64,983  

Drydock expense

    1,138       3,297       5,694       4,187  

General and administrative expenses

    8,579       10,076       26,960       28,718  

Pre-petition restructuring charges

    50       -       17,837       -  

Depreciation and amortization

    13,843       13,835       40,990       44,785  

Impairment charges

    -       -       -       162,808  

(Gain) loss on sale of assets and other

    (34 )     63       5,207       5,982  

Total costs and expenses

    44,007       47,587       155,679       311,463  

Operating loss

    (18,202 )     (19,766 )     (80,874 )     (214,361 )

Other income (expense):

                               

Interest expense

    (3,192 )     (7,972 )     (27,344 )     (25,360 )

Interest income

    9       44       25       119  

Gain on extinguishment of debt

    -       -       -       35,912  

Reorganization items

    (8,882 )     -       (13,976 )     -  

Foreign currency transaction loss and other

    368       (1,735 )     (23 )     (2,861 )

Total other income (expense)

    (11,697 )     (9,663 )     (41,318 )     7,810  

Loss before income taxes

    (29,899 )     (29,429 )     (122,192 )     (206,551 )

Income tax benefit

    5,256       4,700       (67,813 )     43,060  

Net loss

  $ (24,643 )   $ (24,729 )   $ (190,005 )   $ (163,491 )

Loss per share:

                               

Basic

  $ (0.94 )   $ (0.98 )   $ (7.39 )   $ (6.53 )

Diluted

  $ (0.94 )   $ (0.98 )   $ (7.39 )   $ (6.53 )

Weighted average shares outstanding:

                               

Basic

    26,254       25,176       25,716       25,049  

Diluted

    26,254       25,176       25,716       25,049  

 

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

 

8

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(In thousands)

   

(In thousands)

 

Net loss

  $ (24,643 )   $ (24,729 )   $ (190,005 )   $ (163,491 )

Comprehensive income (loss):

                               

Foreign currency translation gain (loss)

    17,257       686       40,048       (21,513 )

Total comprehensive loss

  $ (7,386 )   $ (24,043 )   $ (149,957 )   $ (185,004 )

 

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

 

9

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2017

(In thousands)

 

   

Common

Stock

   

Additional Paid-

In Capital

   

Retained

Earnings

   

Accumulated Other Comprehensive

Income

   

Treasury Stock

   

Deferred

Compen-

sation

Expense

   

Total Stockholders' Equity

 
                                   

Shares

   

Share Value

                 
                                                                 

Balance at December 31, 2016

  $ 278     $ 411,983     $ 241,207     $ (148,402 )     (2,586 )   $ (64,580 )   $ 9,135     $ 449,621  

Net loss

    -       -       (190,005 )     -       -       -       -       (190,005 )

Issuance of common stock and other

    11       3,522       -       -       -       -       -       3,533  

Treasury stock

    -       -       -       -       725       26,641       -       26,641  

Deferred compensation plan

    -       (26,478 )     -       -       (830 )     (194 )     194       (26,478 )

Stock compensation tax adjustment

    -       -       5,931       -       -       -       -       5,931  

Translation adjustment

    -       -       -       40,048       -       -       -       40,048  

Balance at September 30, 2017

  $ 289     $ 389,027     $ 57,133     $ (108,354 )     (2,691 )   $ (38,133 )   $ 9,329     $ 309,291  

 

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

 

10

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Nine Months Ended

 
   

September 30,

 
   

2017

   

2016

 
   

(In thousands)

 

Cash flows from operating activities:

               

Net loss

  $ (190,005 )   $ (163,491 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    40,990       44,785  

Amortization of stock-based compensation

    2,538       4,023  

Amortization of deferred financing costs

    10,308       2,675  

Provision for doubtful accounts receivable, net of write-offs

    799       1,155  

Impairment charges

    -       162,808  

Loss on sale of assets

    5,207       5,982  

Gain on extinguishment of debt

    -       (35,912 )

Deferred income tax expense (benefit)

    67,272       (44,508 )

Foreign currency transaction (gain) loss

    (753 )     3,077  

Change in operating assets and liabilities:

               

Accounts receivable

    3,361       16,724  

Prepaids and other

    (3,892 )     725  

Accounts payable

    (2,932 )     (1,053 )

Other accrued liabilities and other

    14,859       (15,376 )

Net cash used in operating activities

    (52,248 )     (18,386 )

Cash flows from investing activities:

               

Purchases of vessels, equipment and other fixed assets

    (24,902 )     (15,076 )

Proceeds from disposition of vessels and equipment

    3,065       5,029  

Net cash used in investing activities

    (21,837 )     (10,047 )

Cash flows from financing activities:

               

Proceeds from borrowings under revolving loan facilities

    65,443       55,194  

Proceeds from borrowings under DIP financing facility

    18,000       -  

Repayment of borrowings under revolving loan facilities

    (2,000 )     (5,000 )

Repayment of secured credit facilities

    -       (33,448 )

Debt issuance costs

    (1,000 )     (831 )

Other financing costs

    (4,299 )     -  

Proceeds from issuance of stock

    -       305  

Net cash provided by financing activities

    76,144       16,220  

Effect of exchange rate changes on cash

    580       53  

Net (decrease) increase in cash and cash equivalents

    2,639       (12,160 )

Cash and cash equivalents at beginning of period

    8,822       21,939  

Cash and cash equivalents at end of period

  $ 11,461     $ 9,779  

Supplemental cash flow information:

               

Interest paid, net of interest capitalized

  $ 5,699     $ 3,026  

Income taxes paid, net

    1,202       2,291  

Restructuring costs paid

    13,976       -  

 

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

 

11

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

(1)

GENERAL INFORMATION

 

Organization and Nature of Operations

 

The condensed consolidated financial statements of GulfMark Offshore, Inc. and its subsidiaries included herein have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer collectively to GulfMark Offshore, Inc. and its subsidiaries. Certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, has been condensed or omitted in this Quarterly Report on Form 10-Q pursuant to such rules and regulations. However, we believe that the disclosures herein are adequate to make the information presented not misleading. The consolidated balance sheet as of December 31, 2016 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. GAAP for complete financial statements. It is recommended that these financial statements be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

In the opinion of management, all adjustments, which include reclassification and normal recurring adjustments, necessary to present fairly the unaudited condensed consolidated financial statements for the periods indicated, have been made. All significant intercompany accounts have been eliminated. Certain reclassifications of previously reported information may be made to conform to current year presentation.

 

We provide offshore marine support and transportation services primarily to companies involved in the offshore exploration and production of oil and natural gas. Our vessels transport materials, supplies and personnel to offshore facilities, as well as move and position drilling structures. The majority of our operations are conducted in the North Sea, offshore Southeast Asia and the Americas. We also operate our vessels in other regions to meet our customers’ requirements.

 

Bankruptcy Filing

 

On May 17, 2017, GulfMark Offshore, Inc., or the Debtor, filed a voluntary petition for relief, or the Petition, and commenced a case, or the Bankruptcy Case, under chapter 11, or Chapter 11, of title 11 of the United States Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court, to pursue a proposed plan of reorganization which, as amended, we refer to as the Plan. The Bankruptcy Case is being administered under the caption In re GulfMark Offshore, Inc. No trustee has been appointed and we will continue to operate as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. To assure ordinary course operations, we have obtained approval from the Bankruptcy Court for a variety of “first day” motions, including authority to maintain bank accounts and other customary relief. A summary of the key features of the Plan is included below in Note 2. On October 4, 2017, the Bankruptcy Court entered an order confirming the Plan.

 

12

 

 

Bankruptcy Accounting

 

The unaudited condensed consolidated financial statements included herein have been prepared as if we were a going concern and reflect the application of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 852 “Reorganizations,” or ASC 852. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in “reorganization items, net” on our consolidated statements of operations. In addition, prepetition unsecured and under-secured obligations that may be impacted by the bankruptcy reorganization process have been classified as “liabilities subject to compromise” on our consolidated balance sheet at September 30, 2017. These liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court.

 

The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 proceedings. In particular, the consolidated financial statements do not purport to show: (i) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the amount of prepetition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on stockholders’ equity accounts of any changes that may be made to our capitalization; or (iv) the effect on operations of any changes that may be made to our business.

 

Restricted cash

 

As a result of the bankruptcy, certain customers and financial institutions have required us to cash collateralize certain performance and transaction obligations. The accounts that hold this cash collateral are under our control but use of the cash is restricted until we have satisfied the respective obligations. These amounts are separated from “cash and cash equivalents” and included in “restricted cash” in our unaudited condensed consolidated balance sheets.

 

Earnings Per Share

 

Basic Earnings Per Share, or EPS, is computed by dividing net income (loss) by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted EPS is computed using the treasury stock method for Class A Common Stock equivalents.

 

(2)  Bankruptcy and Related Matters

 

As described in Note 1, on May 17, 2017, the Debtor filed for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court to pursue the Plan. The commencement of the Bankruptcy Case constituted an event of default that accelerated the Debtor’s obligations under the Indenture, dated as of March 12, 2012, by and between the Debtor, as issuer, and U.S. Bank National Association, as trustee, with respect to the Senior Notes referred to below. In addition, the commencement of the Bankruptcy Case constituted an event of default under the Multicurrency Facility Agreement and the Norwegian Facility Agreement referred to below.

 

13

 

 

Restructuring Support Agreement

 

On May 15, 2017, the Debtor entered into a restructuring support agreement, or the RSA, with holders, or the Noteholders, of approximately 50% of the aggregate outstanding principal amount of the Debtor’s unsecured 6.375% senior notes due 2022, or the Senior Notes, to support a restructuring on the terms of the Plan. The RSA provides for, among other things, the $125.0 million rights offering, or the Rights Offering, and that:

 

 

Pursuant to the $125.0 million Rights Offering (subject to limitations regarding the Jones Act described below), eligible Noteholders have the right to purchase on the effective date of the Plan, or the Effective Date, their pro rata share of 60% of the Debtor’s common stock, or as applicable, the Jones Act Warrants (as defined below), or the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issued or issuable under the proposed management incentive plan, or the MIP, and upon exercise of the Reorganization Warrants (as defined below). The Rights Offering was backstopped by certain of the Noteholders for a 6.0% commitment premium to be paid in the form of 3.6% of the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issued or issuable under the MIP and upon exercise of the Reorganization Warrants.

 

 

Each holder of the Senior Notes will receive (subject to limitations regarding the Jones Act described below) its pro rata share of the Reorganized GulfMark Equity representing in the aggregate 35.65% of Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP and the exercise of the Reorganization Warrants.

 

 

The Jones Act, which applies to companies that engage in coastwise trade, requires that, among other things, with respect to a publicly traded company, the aggregate ownership of common stock by non-U.S. citizens be not more than 25% of its outstanding common stock. Accordingly, the creditors who are recipients of common stock pursuant to the Plan or the Rights Offering who are non-U.S. holders may receive warrants to acquire common stock at an exercise price in a minimal amount in lieu of common stock, or the Jones Act Warrants.

 

 

All outstanding common stock of the Debtor will be cancelled and each holder of outstanding common stock of the Debtor will receive its pro rata share of (a) common stock representing in the aggregate 0.75% of the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP and the exercise of the Reorganization Warrants, and (b) warrants for 7.5% of the equity in the reorganized Debtor, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP, with a 7-year term and with an exercise price based on an equity value of $1 billion, or the Reorganization Warrants.

 

 

The Debtor would seek to obtain debtor-in-possession financing pursuant to terms and conditions that are reasonably acceptable to the Debtor and Requisite Noteholders (as defined in the RSA).

 

14

 

 

 

Holders of allowed claims arising under the Debtor’s debtor-in-possession financing facility, administrative expense claims, priority tax claims, other priority claims, and other secured claims of the Debtor will receive in exchange for their claims payment in full in cash or otherwise have their rights unimpaired under title 11 of the Bankruptcy Code. The Debtor will continue to pay any general unsecured claims in the ordinary course of business.

 

On September 21, 2017, the Debtor entered into the first amendment to the RSA to, among other things, extend the milestone dates relating to the confirmation of the Plan to October 10, 2017 (the Bankruptcy Court confirmed the Plan on October 4, 2017) and the Effective Date of the Plan to October 31, 2017. The milestone date relating to the Effective Date of the Plan was subsequently extended to November 10, 2017.

 

The Plan provides that the guaranty claims of the lender under our Secured Revolving Credit Facility Agreement, dated December 27, 2012, in the original aggregate principal amount of NOK 600.0 million, as amended, supplemented and/or restated from time to time, or the Norwegian Facility Agreement, among the Debtor, as guarantor, one of our indirect wholly-owned subsidiaries, GulfMark Rederi AS, or Rederi, as the borrower, our other subsidiaries party thereto and DNB Bank ASA, or the Norwegian Lender, will receive, on the Effective Date of the Plan, payment in cash in an amount equal to the allowed amount of guaranty claims , except to the extent that the lender agrees to a less favorable treatment. See “DNB Second Amendment and Restatement Agreement” below.

 

In addition, the Plan provides that, on the Effective Date of the Plan, or as soon as reasonably practicable thereafter, the Debtor (or its designee) or the reorganized Debtor (or its designee), as applicable, will pay in full in cash the allowed guaranty claims of the lenders under our secured Multicurrency Facility Agreement, dated as of September 26, 2014, as amended, supplemented and/or restated from time to time, or the Multicurrency Facility Agreement, among the Debtor, as guarantor, one of our indirect wholly-owned subsidiaries, GulfMark Americas, Inc., or GulfMark Americas, as the borrower, a group of financial institutions as the lenders and The Royal Bank of Scotland plc, as agent for the lenders, or the Agent, less any amounts that may have been paid to satisfy obligations under the Multicurrency Facility Agreement by any of the obligors under the Multicurrency Facility Agreement prior to the Effective Date, except as otherwise agreed by the Agent and the Debtor (with consent of the Required Consenting Noteholders (as defined in the Plan)).

 

Exit Facility

 

On September 29, 2017, the Debtor and Rederi entered into a commitment letter, or the Commitment Letter, with DNB Markets, Inc., or DNB Markets, DNB Capital LLC (or, together with DNB Markets, DNB) and Hayfin DLF II Luxco 2 S.à.r.l. (or, together with any related funds, collectively, Hayfin and, together with DNB, the Exit Facility Lenders) regarding the terms of the provision of certain credit facilities in connection with the confirmation of the Plan. Pursuant to the Commitment Letter, including the term sheet attached thereto, DNB would, subject to the terms and provisions thereof, provide a 5-year multi-currency senior secured revolving credit facility in an aggregate principal amount of $25.0 million and Hayfin would provide a 5-year senior secured term loan facility in an aggregate principal amount of $100.0 million. The Commitment Letter has been approved by certain consenting noteholders party to the RSA or the Consenting Noteholders, subject to final documentation.

 

15

 

 

Further, to the extent consummated, Rederi will be required to pay, on the effective date of such credit facilities, certain arrangement, upfront, ticking and other closing fees in an aggregate amount of approximately $5.0 million pursuant to the terms of the fee arrangements agreed to between Rederi and the Exit Facility Lenders, in addition to certain previously paid work fees. In the event that the Commitment Letter is terminated without the Debtor borrowing thereunder, the Exit Facility Lenders will be entitled to an aggregate termination fee equal to approximately $1.9 million (plus accrued ticking fees), payable on the date that the Debtor emerges from bankruptcy (in accordance with the terms set forth in the Commitment Letter). The Exit Facility Lenders’ obligations under the Commitment Letter are subject to certain customary conditions. There can be no assurances that the exit financing will be completed pursuant to the terms of the Commitment Letter, or that the final documentation in connection with the exit financing will be approved by the Consenting Noteholders.

 

Backstop Commitment Agreement

 

On May 15, 2017, the Debtor entered into a backstop commitment agreement, or the Backstop Commitment Agreement, pursuant to which certain of the Noteholders agreed to backstop the Rights Offering contemplated in the RSA, or the Backstop Commitments. Pursuant to the Backstop Commitment Agreement, each of the holders of a Backstop Commitment party to the Backstop Commitment Agreement, or the Commitment Parties, severally and not jointly, agree to fully participate in the Rights Offering and purchase the Reorganized GulfMark Equity in accordance with the percentages set forth in the Backstop Commitment Agreement to the extent unsubscribed under the Rights Offering. In addition, to compensate the Commitment Parties for the risk of their undertakings and as consideration for the Backstop Commitments, the Debtor will pay the Commitment Parties, in the aggregate, on the Effective Date, a backstop commitment premium in an amount equal to $7.5 million in the form of Reorganized GulfMark Equity.

 

The Backstop Commitment Agreement is terminable by the Debtor and/or the Requisite Commitment Parties (as defined in the Backstop Commitment Agreement) under several conditions, including failure to achieve certain milestones or the termination of the RSA. The Debtor is also required to pay a termination fee in the amount of $7.5 million in cash to the Commitment Parties if the Backstop Commitment Agreement is terminated for certain events.

 

 On September 21, 2017, the Debtor entered into the first amendment to the Backstop Commitment Agreement to, among other things, extend the milestone dates relating to the confirmation of the Plan to October 10, 2017 (the Bankruptcy Court confirmed the Plan on October 4, 2017) and the Effective Date of the Plan to October 31, 2017. The milestone date relating to the Effective Date of the Plan was subsequently extended to November 10, 2017.

 

Intercompany DIP Credit Agreement

 

On May 18, 2017, the Debtor entered into the Senior Secured Super-Priority Debtor In Possession Credit Agreement, or the Intercompany DIP Agreement, among the Debtor, as the borrower, Rederi, a wholly-owned subsidiary of the Debtor, as the lender, and the Norwegian Lender, as issuing bank.  Pursuant to the Intercompany DIP Agreement, Rederi has made available to the Debtor a senior secured super-priority term loan facility of up to $35.0 million to allow the Debtor to continue to operate its business and manage its properties as a debtor and a debtor-in-possession pursuant to the Debtor’s filing of the Petition.  The Debtor has requested that the Norwegian Lender issue letters of credit from time to time, to be cash collateralized using the proceeds of the term loans under the Intercompany DIP Agreement. As security for the loans under the Intercompany DIP Agreement, the Debtor has pledged 65% of its equity interests in GulfMark Capital, LLC, GulfMark Foreign Investments LLC and GM Offshore, Inc., each a wholly-owned domestic subsidiary of the Debtor. On September 21, 2017, the Debtor entered into the first amendment to the Intercompany DIP Agreement to extend the milestone dates relating to the confirmation of the Plan to October 10, 2017 (the Bankruptcy Court confirmed the Plan on October 4, 2017) and the Effective Date of the Plan to October 31, 2017. The milestone date relating to the Effective Date of the Plan was subsequently extended to November 10, 2017.

 

16

 

 

DNB Second Amendment and Restatement Agreement

 

In order to provide funds to Rederi for purposes of making loans to the Debtor under the Intercompany DIP Agreement, on May 18, 2017, Rederi entered into the Second Amendment and Restatement Agreement, or the DNB Second Amendment and Restatement Agreement, among Rederi, as borrower, the other loan parties party thereto, the financial institutions listed therein as lenders, and the Norwegian Lender, as arranger and agent. Pursuant to the DNB Second Amendment and Restatement Agreement, the parties amended and restated the Norwegian Facility Agreement. We refer to the Norwegian Facility Agreement, as amended and restated by the DNB Second Amendment and Restatement Agreement, as the Amended and Restated Norwegian Facility. Pursuant to the Amended and Restated Norwegian Facility, the Norwegian Lender agreed to make available to Rederi an additional $35 million senior secured term loan facility, or the Term Loan Facility.  To secure the Term Loan Facility, Rederi, a wholly-owned subsidiary of GulfMark Norge AS, or the Norwegian Parent, and GulfMark UK Ltd., or the UK Guarantor, a wholly-owned subsidiary of GulfMark North Sea Limited, or the UK Parent, agreed to place mortgages in favor of the Norwegian Lender on certain additional previously unencumbered vessels owned by Rederi and certain other subsidiaries of the Debtor. In addition, the UK Parent and the Norwegian Parent pledged their shares in the UK Guarantor and Rederi, respectively, to the Norwegian Lender.

 

Multicurrency Facility Agreement Forbearance Agreement

 

On June 26, 2017, GulfMark Americas and GulfMark Management, Inc., or GulfMark Management, each a subsidiary of the Debtor, entered into a forbearance agreement, or the RBS Forbearance Agreement, with the Agent relating to the Multicurrency Facility Agreement. Pursuant to the RBS Forbearance Agreement, the Agent agreed to waive the defaults and events of default specified in the RBS Forbearance Agreement and to forbear from exercising any rights or remedies under the Multicurrency Facility Agreement as a result of any such defaults and events of default specified in the RBS Forbearance Agreement until the earlier of (x) the occurrence of any of the early termination events specified in the RBS Forbearance Agreement, (y) the effectiveness of the Plan (including all exhibits and schedules thereto, and as amended, modified or supplemented solely in accordance with the RBS Forbearance Agreement) and (z) September 4, 2017. In addition, the Agent agreed in the RBS Forbearance Agreement that during such period the provision in the Multicurrency Facility Agreement that would result in an automatic acceleration of the outstanding obligations, termination of the lending commitments and a requirement to cash-collateralize letters of credit as specified in the RBS Forbearance Agreement shall not apply.

 

On September 21, 2017, GulfMark Americas and GulfMark Management entered into an extension agreement with the Agent that extended (i) the forbearance period until the earlier of (x) September 27, 2017, which was extended by Americas to October 31, 2017 upon satisfaction of certain milestones with respect to the exit financing and was subsequently extended to 12:01 a.m. on November 3, 2017, and (y) the occurrence of any of the specified early termination events and (ii) certain early termination events to be consistent with the first amendment to the RSA, the first amendment to the BCA and certain milestones dates relating to the exit financing.

 

17

 

 

Milestone Dates and Forbearance Period

 

Each of the RSA, the Backstop Commitment Agreement and the Intercompany DIP Agreement provides for a milestone date of November 10, 2017 relating to the Effective Date of the Plan. In addition, the milestone date relating to approval of the exit financing by the Consenting Noteholders is November 3, 2017 and the forbearance period under the RBS Forbearance Agreement was extended to 12:01 a.m. on November 3, 2017. As of the date of this report, however, we do not expect the Effective Date to occur by November 3, 2017. Although we anticipate restructuring in accordance with the RSA and the Plan, there can be no assurance that we will be successful in negotiating any extensions of the milestone dates and forbearance period.

 

Liabilities Subject to Compromise

 

As a result of the filing of the Petition, the payment of pre-petition indebtedness is subject to compromise or other treatment under the Plan. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims is generally not permitted, the Bankruptcy Court granted the Debtor authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtor’s businesses and assets. Among other things, the Bankruptcy Court authorized the Debtor to pay certain pre-petition claims in the ordinary course of business.

 

The Debtor has been paying and intends to continue to pay undisputed post-petition claims in the ordinary course of business.  The Debtor’s liabilities subject to compromise represent the Debtor’s current estimate of claims expected to be allowed under the Plan. Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. 

 

Liabilities subject to compromise are included in our unaudited condensed consolidated balance sheet in the amount of $448.1 million, consisting of the Senior Notes in the aggregate principal amount of $429.6 million and accrued interest through the date of the Petition on the Senior Notes in the amount of $18.5 million. See Note 5 for a description of the Senior Notes.

 

Reorganization Items

 

Reorganization items represent amounts incurred subsequent to the Bankruptcy Case filing directly resulting from such filing and consist primarily of professional fees for bankers, attorneys and accountants totaling $8.9 million during the three months ended September 30, 2017.

 

18

 

 

Financial Statements of the Debtor

 

In accordance with the requirements of ASC 852, the following are condensed financial statements of the Debtor:

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION)

 

UNAUDITED CONDENSED BALANCE SHEET

 
   

September 30,

 
   

2017

 
   

(In thousands)

 

ASSETS

 

Current assets:

       

Cash and cash equivalents

  $ 424  

Prepaid expenses

    966  

Total current assets

    1,390  
         

Intercompany notes and other receivables

    426,257  

Investments in subsidiaries

    286,163  
         

Total assets

  $ 713,810  

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

       

Debtor in possession financing

  $ 17,000  

Accounts payable

    1,839  

Accrued personnel costs

    5,126  

Other accrued liabilities

    1,438  

Total current liabilities

    25,403  

Deferred income tax liabilities

    111,586  

Liabilities subject to compromise

    448,124  

Stockholders' equity

    128,697  

Total liabilities and stockholders' equity

  $ 713,810  

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION)

 

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

 
                 
   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2017

   

2017

 
   

(In thousands)

 

Revenue

  $ -     $ -  

Costs and expenses:

               

General and administrative expenses

    1,347       4,736  

Pre-petition restructuring charges

    30       17,599  

Total costs and expenses

    1,377       22,335  

Operating loss

    (1,377 )     (22,335 )

Other income (expense):

               

Interest expense

    (76 )     (17,295 )

Interest income

    2,276       7,459  

Reorganization items

    (7,696 )     (9,598 )

Foreign currency transaction loss and other

    -       (9 )

Total other expense

    (5,496 )     (19,443 )

Loss before income taxes

    (6,873 )     (41,778 )

Income tax expense

    (248 )     (84,339 )

Net loss

  $ (7,121 )   $ (126,117 )

 

19

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION)

 

UNAUDITED CONDENSED STATEMENT OF CASH FLOWS

 
         
   

Nine Months Ended

 
   

September 30,

 
   

2017

 
   

(In thousands)

 

Cash flows from operating activities:

       

Net loss

  $ (126,117 )

Adjustments to reconcile net loss to net cash used in operating activities:

       

Amortization of stock-based compensation

    1,940  

Amortization of deferred financing costs

    6,471  

Deferred income tax expense

    84,347  
         

Change in operating assets and liabilities:

       

Accounts receivable

    25  

Prepaids and other

    (469 )

Accounts payable

    1,445  

Other accrued liabilities and other, including intercompany activity

    15,780  

Net cash used in operating activities

    (16,578 )

Cash flows from financing activities:

       

Proceeds from intercompany DIP financing

    17,000  

Net cash provided by financing activities

    17,000  
         

Net increase in cash and cash equivalents

    422  

Cash and cash equivalents at beginning of period

    2  

Cash and cash equivalents at end of period

  $ 424  

 

 

(3)  IMPAIRMENT CHARGES

 

Long-Lived Asset Impairment

 

Our tangible long-lived assets consist primarily of vessels and construction-in-progress. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess potential impairment by comparing the carrying values of the long-lived assets to the undiscounted cash flows expected to be received from those assets. If impairment is indicated, we determine the amount of impairment expense by comparing the carrying value of the long-lived assets with their fair market value. We base our undiscounted cash flow estimates on, among other things, historical results adjusted to reflect the best estimate of future operating performance. We obtain estimates of fair value of our vessels from independent appraisal firms. Management’s assumptions are an inherent part of our asset impairment evaluation, and the use of different assumptions could produce results that differ from those reported.

 

Beginning in late 2014, oil prices declined significantly. Prices continued to decline throughout 2015 and into 2016, reaching a low of less than $30 per barrel in the first quarter of 2016. Prices recovered over the remainder of 2016, stabilizing at over $40 per barrel for much of the second and third quarters of 2016 and further increasing to over $50 per barrel in the fourth quarter of 2016. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovery to over $50 per barrel. The lower price environment impacted the operational plans for oil companies beginning in late 2014 and consequently adversely affected the drilling and support service sector. The decrease in day rates and utilization for offshore vessels has been significant. In addition, the independent appraisal firms have lowered the fair value estimates related to our vessels in each quarter since the fourth quarter of 2014. As a result of these factors, we have performed a number of reviews for impairment since the fourth quarter of 2014.

 

20

 

 

Based on the triggering events discussed above, we performed an evaluation for impairment for the quarter ended March 31, 2016 and determined that the carrying values of certain of our long-lived asset groups in the Americas and in Southeast Asia were greater than the related undiscounted expected future cash flows. We compared the carrying values of the long-lived asset groups to the fair value provided by the independent appraisal firms and recorded $114.1 million of impairment charges in the first quarter of 2016. The impairment charge consisted of $94.5 million in connection with our long-lived assets in the U.S. Gulf of Mexico, which is part of our Americas segment and included vessels under construction, and $19.6 million in connection with our Southeast Asia segment. We performed an evaluation for impairment for each of our asset groups in the first and second quarters of 2017, but determined that the undiscounted expected future cash flows were greater than the carrying value in each group and concluded that no further impairment was indicated. We also evaluated our asset groups for impairment in the third quarter of 2017 and determined that no impairment trigger was indicated.

 

We will continue to monitor the industry for triggering events that could indicate additional impairment.

 

Vessel Component Impairment

 

We have vessel components in our North Sea and Southeast Asia segments that we intend to sell. Based on third party valuations, in the first quarter of 2016 we recorded impairment expense related to these assets totaling $2.6 million, consisting of $2.0 million in the North Sea and $0.6 million in Southeast Asia.

 

(4)

VESSEL ACQUISITIONS AND DISPOSITIONS

 

Interest is capitalized in connection with the construction of vessels. During the nine months ended September 30, 2017, we capitalized $0.1 million of interest, all in the first quarter. Since we took delivery of the last of the new-build vessels we had under construction during the first quarter of 2017, no further interest was capitalized during the third quarter of 2017. During the three and nine months ended September 30, 2016, we capitalized $0.4 million and $2.1 million of interest, respectively.

 

In the first quarter of 2016, we had two vessels under construction in the U.S. that were significantly delayed. In March 2016, we resolved certain matters under dispute with the shipbuilder and reset the contract schedules so that we would take delivery of the first vessel in mid-2016 and the second vessel in mid-2017, at which time a final payment of $26.0 million would be due.  We took delivery of the first of these vessels during the second quarter of 2016. Under the settlement, we had the right to elect not to take delivery of the second vessel and forego the final payment, in which case the shipbuilder would retain the vessel. On May 8, 2017, we advised the shipbuilder that we had elected not to take delivery. We have no other vessels under construction as of September 30, 2017.

 

During the first quarter of 2017 we took delivery of a vessel built in Norway and paid a final installment on delivery of 195.0 million NOK (approximately $23.3 million).

 

21

 

 

The following tables illustrate the details of vessels sold and vessels added:

 

Vessel Additions Since December 31, 2016

 

Vessel

  Region     Type(1)  

Year

Built

 

Length

(feet)

    BHP(3)     DWT(4)    

Month

Delivered

 
                                                   

North Barents

 

N. Sea

   

LgPSV

 

2017

    304       11,935       4,700    

Jan-17

 

 

 

Vessels Disposed of Since December 31, 2016

 

Vessel

  Region     Type(2)  

Year

Built

 

Length

(feet)

    BHP(3)     DWT(4)    

Month

Disposed

 
                                                   

Mako

 

Americas

   

FSV

 

2008

    181       7,200       552    

Mar-17

 

Tiger

 

Americas

   

FSV

 

2009

    181       7,200       552    

Mar-17

 

 

(1) LgPSV - Large Platform Supply Vessel

(2) FSV - Fast Supply Vessel

(3) BHP - Brake Horsepower

(4) DWT - Deadweight Tons

 

(5)

DEBT

 

Our debt at September 30, 2017 and December 31, 2016 consisted of the following:

 

   

September 30,

2017

   

December 31,

2016

 
   

(In thousands)

 

Senior Notes Due 2022

  $ -     $ 429,640  

Multicurrency Facility Agreement

    72,000       49,000  

Norwegian Facility Agreement

    53,380       11,157  

Debtor in possession financing component of Amended and Restated Norwegian Facility

    18,000       -  
      143,380       489,797  

Debt Premium

    -       423  

Debt Issuance Costs Associated with the Senior Notes

    -       (6,894 )

Total

  $ 143,380     $ 483,326  

 

As described further in this Note 5, the Senior Notes in the aggregate principal amount of $429.6 million have been reclassified as liabilities subject to compromise.

 

The following is a summary of scheduled debt maturities by year:

 

Year

 

Debt Maturity

 
     

(In thousands)

 
 

2017

    -  
 

2018

    -  
 

2019

    143,380  
 

2020

    -  
 

2021

    -  
 

Thereafter

    -  
 

Total

  $ 143,380  

 

22

 

 

Our consolidated financial statements as of and for the three and nine months ended September 30, 2017 have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of the consolidated financial statements. However, for the reasons described in Note 2, indebtedness with the stated maturities as summarized above is classified as a current liability at September 30, 2017 and at December 31, 2016.

 

Senior Notes Due 2022

 

In 2012, we issued $500.0 million aggregate principal amount of 6.375% Senior Notes due 2022. Interest on the Senior Notes is payable semi-annually on March 15 and September 15. On and after March 15, 2017, we may redeem some or all of the Senior Notes at the redemption prices (expressed as percentages of principal amount) equal to 103.188% for the twelve-month period beginning March 15, 2017, 102.125% for the twelve-month period beginning March 15, 2018, 101.063% for the twelve-month period beginning March 15, 2019 and 100.000% beginning March 15, 2020 and thereafter, plus accrued and unpaid interest to the redemption date.

 

In conjunction with the Senior Notes offering, we incurred a total of $12.7 million in debt issuance costs, of which $6.7 million remained unamortized at March 31, 2017. We also sold the Senior Notes at a premium, of which $0.4 million remained unamortized at March 31, 2017. As of March 31, 2017, based on negotiations that were underway with holders of our Senior Notes, it became evident that the restructuring of our capital structure would not include a restructuring of the Senior Notes, and that the Senior Notes, as demand obligations, would not be repaid under the terms of the Senior Note indentures in the ordinary course of business. As a result, on March 31, 2017, we accelerated the amortization of the debt premium and debt issuance costs, fully amortizing such amounts as of March 31, 2017.

 

In December 2015, we repurchased in the open market $1.0 million face value of the Senior Notes leaving $499.0 million aggregate principal amount of the Senior Notes outstanding at December 31, 2015. In the first quarter of 2016, we repurchased in the open market $20.0 million face value of Senior Notes leaving $479.0 million aggregate principal amount outstanding at March 31, 2016. We recorded a gain totaling approximately $10.1 million upon the repurchase of Senior Notes in the first quarter of 2016, which gain is included in other income and expense in our consolidated statements of operations. In the year ended December 31, 2016, we repurchased in the open market a total of $69.4 million face value of the Senior Notes and recorded gains totaling approximately $35.9 million. The open market repurchases reduced the aggregate principal amount of Senior Notes outstanding to $429.6 million.

 

We did not pay the $13.7 million interest payment due March 15, 2017 on our Senior Notes. Our failure to pay this amount on April 14, 2017 within the 30-day grace period to make such payment resulted in an event of default under the indenture governing the Senior Notes, resulting in a cross-default under the Multicurrency Facility Agreement and the Norwegian Facility Agreement. On April 14, 2017, we entered into a forbearance agreement with certain beneficial owners and/or investment advisors or managers of discretionary accounts for the holders or beneficial owners, or the Holders, of in excess of 50% of the aggregate principal amount of Senior Notes outstanding, pursuant to which each Holder agreed during the “Forbearance Period,” subject to certain conditions, not to enforce any of the rights and remedies available to the Holders or the trustee under the indenture or the Senior Notes, solely with respect to our failure to make the interest payment due on March 15, 2017 on the Senior Notes. The “Forbearance Period” was subsequently extended until the earlier of May 12, 2017 and the occurrence of any of the specified early termination events described therein.

 

23

 

 

Subsequently, on May 17, 2017, as described in more detail in Notes 1 and 2, we filed for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court to pursue the Plan. The commencement of the Bankruptcy Case constituted an event of default that accelerated the Debtor’s obligations under the Indenture, dated as of March 12, 2012, by and between the Debtor, as issuer, and U.S. Bank National Association, as trustee, with respect to the Senior Notes. Any efforts to enforce such payment obligations under the Senior Notes were automatically stayed as a result of the filing of the Petition and the holders’ rights of enforcement in respect of the Senior Notes are subject to the applicable provisions of the Bankruptcy Code. In conjunction with the filing of the Petition, we entered into the RSA with the Noteholders holding approximately 50% of the aggregate outstanding principal amount of the Senior Notes. The RSA contemplates that, among other things, we would commence the Rights Offering. We also entered into the Backstop Commitment Agreement with the Noteholders, pursuant to which the Commitment Parties backstopped the Rights Offering. The RSA and the Backstop Commitment Agreement are more fully described in Note 2. On September 21, 2017, the Debtor entered into the first amendment to the RSA to, among other things, extend the milestone dates relating to the confirmation of the Plan to October 10, 2017 (the Bankruptcy Court confirmed the Plan on October 4, 2017) and the Effective Date of the Plan to October 31, 2017. The milestone date relating to the Effective Date of the Plan was subsequently extended to November 10, 2017.

 

As a result of filing the Petition and entering into the RSA, as amended, we have reclassified the amounts outstanding under the Senior Notes, including all interest accrued through the date of the Petition, to liabilities subject to compromise. Liabilities subject to compromise are included in our unaudited condensed consolidated balance sheet in the amount of $448.1 million, consisting of the Senior Notes in the amount of $429.6 million and accrued interest through the date of the Bankruptcy Case filing in the amount of $18.5 million.

 

Multicurrency Facility Agreement

 

We are party to the Multicurrency Facility Agreement, which has a scheduled maturity date of September 26, 2019 and commits the lenders to provide revolving loans of up to $100.0 million at any one time outstanding, subject to certain terms and conditions set forth in the Multicurrency Facility Agreement, and contains a sublimit of $25.0 million for swingline loans and a sublimit of $5.0 million for the issuance of letters of credit. Revolving loans drawn under the Multicurrency Facility Agreement and denominated in U.S. Dollars accrue interest at the London Interbank Offered Rate, or LIBOR, plus an applicable margin which may range from 2.75% to 4.00%, while swingline loans drawn under the Multicurrency Facility Agreement accrue interest at the alternate base rate. The applicable margin is determined by reference to the capitalization ratio calculated as of the last day of the most recent fiscal quarter. The applicable interest rate for overdue amounts increases by an additional 2.00%. The fee for unused commitments is 1.25% per annum. We are subject to certain financial and other covenants and other obligations under the Multicurrency Facility Agreement. Please see Note 6 to our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information regarding the obligations under our Multicurrency Facility Agreement. On March 8, 2017, we entered into an agreement with the Agent under our Multicurrency Facility Agreement pursuant to which the lenders extended additional revolving loans in the aggregate principal amount of $10.0 million on March 8, 2017. The agreement prohibits us from requesting any additional loans under the Multicurrency Facility Agreement without the prior written consent of the Agent (acting upon the instruction of all the lenders following unanimous consent).

 

24

 

 

The report from our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2016 included an uncertainty paragraph arising from the substantial doubt about our ability to continue as a going concern. Our failure to deliver an unqualified audit opinion from our auditors that is not subject to a going concern or like qualification or exception constituted an event of default under the Multicurrency Facility Agreement, allowing the lenders thereunder to cancel their commitments, accelerate the indebtedness thereunder and exercise remedies with respect to the collateral securing the Multicurrency Facility Agreement, likewise causing a cross-default under the Norwegian Facility Agreement absent a waiver or forbearance from the lenders under the Multicurrency Facility Agreement. In addition, the commencement of the Bankruptcy Case constituted an event of default under the Multicurrency Facility Agreement.

 

On March 14, 2017, we entered into a support agreement with the Agent in which the lenders agreed to waive certain existing or anticipated defaults or events of default under the Multicurrency Facility Agreement and forbear from exercising rights or remedies under the related finance documents as a result therefrom for a limited support period. We subsequently entered into agreements with the Agent extending such support period as of April 14, 2017, April 28, 2017 and May 12, 2017. On May 19, 2017, GulfMark Americas and GulfMark Management entered into a forbearance agreement with the Agent pursuant to which the Agent agreed to waive the defaults and events of default specified therein and to forbear from exercising any rights or remedies under the Multicurrency Facility Agreement as a result of any such defaults and events of default for a limited period and to rescind, on a retrospective basis, during such period the provision in the Multicurrency Facility Agreement that results in an automatic acceleration of the outstanding obligations, termination of the lending commitments and a requirement to cash-collateralize letters of credit in connection with the event of default arising as a result of the Debtor’s filing of the Petition. Such forbearance agreement was subsequently extended as of May 31, 2017 and June 16, 2017.

 

On June 26, 2017, GulfMark Americas and GulfMark Management, each a subsidiary of the Debtor, entered into the RBS Forbearance Agreement with the Agent. Pursuant to the RBS Forbearance Agreement, the Agent agreed to waive the defaults and events of default specified in the RBS Forbearance Agreement and to forbear from exercising any rights or remedies under the Multicurrency Facility Agreement as a result of any such defaults and events of default specified in the RBS Forbearance Agreement until the earlier of (x) the occurrence of any of the early termination events specified in the RBS Forbearance Agreement, (y) the effectiveness of the Plan (including all exhibits and schedules thereto, and as amended, modified or supplemented solely in accordance with the RBS Forbearance Agreement) and (z) September 4, 2017. In addition, the Agent agreed in the RBS Forbearance Agreement that during such period the provision in the Multicurrency Facility Agreement that would result in an automatic acceleration of the outstanding obligations, termination of the lending commitments and a requirement to cash-collateralize letters of credit as specified in the RBS Forbearance Agreement shall not apply.

 

On September 21, 2017, GulfMark Americas and GulfMark Management entered into an extension agreement with the Agent that extended (i) the forbearance period until the earlier of (x) September 27, 2017, which was extended by Americas to October 31, 2017 upon satisfaction of certain milestones with respect to the exit financing and was subsequently extended to 12:01 a.m. on November 3, 2017, and (y) the occurrence of any of the specified early termination events and (ii) certain early termination events to be consistent with the first amendment to the RSA, the first amendment to the BCA and certain milestones dates relating to the exit financing.

 

25

 

 

We had unamortized fees paid to the arrangers, the Agent and the security trustee totaling $2.3 million at March 31, 2017, which fees were amortized into interest cost on a straight-line basis over the life of the Multicurrency Facility Agreement. As of March 31, 2017, based on negotiations that were underway with the lenders, it became evident that the restructuring of our capital structure would not include a restructuring of the Multicurrency Facility Agreement, and that the Multicurrency Facility Agreement, as a demand obligation, would not be repaid under the terms of the Multicurrency Facility Agreement in the ordinary course of business. As a result, on March 31, 2017, we accelerated the amortization of debt issuance costs, fully amortizing such amounts as of March 31, 2017.

 

The Multicurrency Facility Agreement is secured by 24 vessels owned by GulfMark Americas. The collateral that secures the loans under the Multicurrency Facility Agreement may also secure all of GulfMark Americas’ obligations under any hedging agreements between GulfMark Americas and any lender or other hedge counterparty to the Multicurrency Facility Agreement.

 

The Debtor unconditionally guaranteed all existing and future indebtedness and liabilities of GulfMark Americas arising under the Multicurrency Facility Agreement and other related loan documents. Such guarantee may also cover obligations of GulfMark Americas arising under any hedging arrangements. At September 30, 2017, we had $72.0 million borrowed and outstanding under the Multicurrency Facility Agreement and the weighted average interest rate on our outstanding borrowings under the Multicurrency Facility Agreement was 5.24%.

 

Norwegian Facility Agreement

 

Under the Amended and Restated Norwegian Facility, the Norwegian Lender has agreed to provide certain loans up to an aggregate principal amount equal to the sum of $55.0 million and NOK 210.0 million (or approximately $25.6 million at September 30, 2017) at any one time outstanding, subject to certain terms and conditions. The Amended and Restated Norwegian Facility has a scheduled maturity date on the earlier of November 18, 2017 and the occurrence of any of the specified early maturity events, including the Effective Date of the Plan. Loans under the Amended and Restated Norwegian Facility accrue interest at the Norwegian Interbank Offered Rate, or NIBOR, or, if the loan is denominated in U.S. Dollars, LIBOR plus 8.00%. During the continuance of an event of default, upon notice by the agent under the Amended and Restated Norwegian Facility, the applicable interest rate increases by an additional 2.00%. The fee for unused commitments is 5.00% per annum. We are subject to certain financial and other covenants and other obligations under the Amended and Restated Norwegian Facility.

 

The Amended and Restated Norwegian Facility is secured by 16 vessels owned by the UK Guarantor and by six vessels owned by Rederi. The collateral that secures the loans under the Amended and Restated Norwegian Facility may also secure all of Rederi’s obligations under any hedging agreements between Rederi and the Norwegian Lender or other hedge counterparty to the Amended and Restated Norwegian Facility.

 

We unconditionally guaranteed all existing and future indebtedness and liabilities of Rederi arising under the Amended and Restated Norwegian Facility and other related loan documents. Such guarantee may also cover obligations of Rederi arising under any hedging arrangements described above. At September 30, 2017, we had $71.4 million borrowed and outstanding under the Amended and Restated Norwegian Facility and the weighted average interest rate on our outstanding borrowings was 9.12%.

 

26

 

 

We had unamortized fees paid to the arrangers, the agent and the security trustee totaling $1.1 million at March 31, 2017, which fees were being amortized into interest cost on a straight-line basis over the life of the Norwegian Facility Agreement. As of March 31, 2017, based on negotiations that were underway with the lenders, it became evident that the restructuring of our capital structure would not include a restructuring of the Norwegian Facility Agreement, and that the Norwegian Facility Agreement, as a demand obligation, would not be repaid under the terms of the Norwegian Facility Agreement in the ordinary course of business. As a result, on March 31, 2017, we accelerated the amortization of debt issuance costs, fully amortizing such amounts as of March 31, 2017.

 

On April 14, 2017, we entered into a support agreement with the Norwegian Lender relating to the Norwegian Facility Agreement pursuant to which the Norwegian Lender agreed to abstain from exercising any rights or remedies under the Norwegian Facility Agreement as a result of certain specified defaults or events of default for a limited support period. We subsequently entered into agreements with the Norwegian Lender extending such support period as of April 28, 2017 and May 12, 2017. The commencement of the Bankruptcy Case constituted an event of default under the Norwegian Facility Agreement.

 

In order to provide funds to Rederi for purposes of making loans to the Debtor under the Intercompany DIP Agreement, on May 18, 2017, Rederi entered into the DNB Second Amendment and Restatement Agreement. Pursuant to the DNB Second Amendment and Restatement Agreement, the parties amended and restated the Norwegian Facility Agreement. Pursuant to the Amended and Restated Norwegian Facility, the Norwegian Lender agreed to make the $35.0 million Term Loan Facility available to Rederi.  To secure the Term Loan Facility, the Norwegian Lender, the UK Guarantor and the UK Parent agreed to place mortgages in favor of the Norwegian Lender on certain additional, previously unencumbered vessels owned by Rederi and certain other subsidiaries of the Debtor. In addition, the UK Parent and the Norwegian Parent pledged their shares in the UK Guarantor and Rederi, respectively, to the Norwegian Lender. On September 21, 2017, we entered into the first amendment to the Intercompany DIP Agreement to extend the milestone dates relating to the confirmation of the Plan to October 10, 2017 (the Bankruptcy Court confirmed the Plan on October 4, 2017) and the Effective Date of the Plan to October 31, 2017. The milestone date relating to the Effective Date of the Plan was subsequently extended to November 10, 2017.

 

(6)

INCOME TAXES

 

Our estimated annual effective tax rate, adjusted for discrete tax items, is applied to interim periods’ pretax income (loss). Our estimated annual effective tax rate includes the recognition of a valuation allowance on our deferred tax assets. The tax effect of this recognition is a discrete item for the third quarter of 2017 of $1.1 million.

 

In previous years, we determined to repatriate all future foreign earnings and $240.0 million of prior earnings of certain of our non-U.S. subsidiaries, thereby reducing our total permanently reinvested earnings. The change in our foreign repatriation strategy resulted in a non-cash tax charge of approximately $84.0 million. We have not provided for U.S. deferred taxes on the permanently reinvested earnings of approximately $549.3 million at September 30, 2017. The projected cash flows of our foreign operations is not sufficient to cover the permanently reinvested earnings without selling assets. We do not intend to liquidate any foreign assets to generate cash to remit to the U.S. parent.

 

27

 

 

If remaining permanently reinvested earnings were repatriated, the incremental U.S. tax would be approximately 35% based on current tax law. In addition, as of September 30, 2017, we had approximately $10.0 million of cash held by our foreign subsidiaries which would be subject to U.S. tax upon repatriation.

 

(7)

COMMITMENTS AND CONTINGENCIES

 

We execute letters of credit, performance bonds and other guarantees in the normal course of business that ensure our performance or payments to third parties. The aggregate notional value of these instruments was $1.6 million at September 30, 2017 and $1.2 million at December 31, 2016. In the past, no significant claims have been made against these financial instruments. We believe the likelihood of demand for payment under these instruments is remote and expect no material cash outlays to occur from these instruments.

 

We have contingent liabilities and future claims and we have made estimates of the amount of the eventual cost to liquidate these liabilities or claims. These liabilities and claims may involve threatened or actual litigation where damages have not been specifically quantified but we have made an assessment of our exposure and recorded a provision in our accounts for the expected loss. We intend to defend these matters vigorously; however, litigation is inherently unpredictable, and the ultimate outcome or effect of such lawsuits and actions cannot be predicted with certainty. As a result, there can be no assurance as to the ultimate outcome of these lawsuits. Any claims against us, whether meritorious or not, could cause us to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operations resources. Other claims or liabilities, including those related to taxes in foreign jurisdictions, may be estimated based on our experience in these matters and, where appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution of the uncertainties surrounding our estimates of contingent liabilities and future claims, our future reported financial results will be impacted by the difference, if any, between our estimates and the actual amounts paid to settle the liabilities. In addition to estimates related to litigation and tax liabilities, other examples of liabilities requiring estimates of future exposure include contingencies arising out of acquisitions and divestitures. Our contingent liabilities are based on the most recent information available to us regarding the nature of the exposure. Such exposures may change from period to period based upon updated relevant facts and circumstances, which can cause the estimates to change. In the recent past, our estimates for contingent liabilities have been sufficient to cover the actual amount of our exposure. We do not believe that the outcome of these matters will have a material adverse effect on our business, financial condition, or results of operations.

 

(8)

NEW ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued Accounting Standards Update, or ASU, 2014-09, “Revenue from Contracts with Customers.” The ASU will replace most existing revenue recognition guidance in U.S. GAAP. The FASB subsequently issued ASU 2015-14 which delayed the effective date from January 1, 2017 until January 1, 2018. Early application is permitted only to the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating this standard in conjunction with the new lease standard (ASU 2016-02) discussed in the next paragraph.

 

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In February 2016, the FASB issued ASU 2016-02, “Leases” to increase transparency and comparability among organizations by recognizing all leases on the balance sheet and disclosing key information about leasing arrangements. The main difference between current accounting standards and ASU 2016-02 is the recognition of assets and liabilities by lessees for those leases classified as operating leases under current accounting standards. The new standard is effective for fiscal years beginning after December 15, 2018. We are evaluating this standard in conjunction with the new revenue standard discussed in the previous paragraph.

 

We intend to adopt the new revenue and lease standards on January 1, 2018. While we continue to assess all potential impacts of these standards, we expect our overall revenues to remain substantially unchanged. However, the actual revenue recognition treatment required under the new standards may depend on contract-specific terms and may vary in some instances. In addition, we anticipate that our revenues will be classified into two general categories – lease revenue and service revenue. The lease revenue will reflect the consideration earned while our vessels are being chartered to our customers while the service revenue component will be primarily composed of the services rendered by our crews that operate the vessels.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments.” The objective of the new standard is to eliminate diversity in practice related to the classification of certain cash receipts and payments by adding or clarifying guidance on eight cash flow classification issues: debt prepayment or extinguishment costs; settlement of zero-coupon bonds; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted. The standard should be applied retrospectively to all periods presented. We do not expect the adoption of this standard to have a material effect on our financial condition or results of operations.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory.” This standard requires recognition of tax consequences in the period in which a transfer takes place, with the exception of inventory transfers. There will be an immediate effect on earnings if the tax rates in the tax jurisdictions of the selling entity and buying entity are different. The new standard is effective for fiscal years beginning after December 15, 2017. We do not expect the adoption of this standard to have a material effect on our financial condition or results of operations.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a Business” to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective in annual periods beginning after December 15, 2017. We do not expect the adoption of this standard to have a material effect on our financial condition or results of operations.

 

29

 

 

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (ASC 718) - Scope of Modification Accounting.” The objective of this standard is to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in ASC 718 to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons, and the nature and effect of the change can vary significantly. The new standard is effective for fiscal years beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the potential effect this standard may have on our financial condition and results of operations.

 

(9)

OPERATING SEGMENT INFORMATION

 

We operate three segments: the North Sea, Southeast Asia and the Americas, each of which is considered a reportable segment under FASB ASC 280, “Segment Reporting”. Our management evaluates segment performance primarily based on operating income. Cash and debt are managed centrally. Because the regions do not manage those items, the gains and losses on foreign currency remeasurements associated with these items are excluded from operating income. Our management considers segment operating income to be a good indicator of each segment’s operating performance from its continuing operations, as it represents the results of the ownership interest in operations without regard to financing methods or capital structures. Each operating segment’s operating loss is summarized in the following table.

 

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Operating Income (Loss) by Operating Segment

 

   

North Sea

   

Southeast

Asia

   

Americas

   

Other

   

Total

 
   

(In thousands)

 

Quarter Ended September 30, 2017

                                       

Revenue

  $ 16,134     $ 1,973     $ 7,698     $ -     $ 25,805  

Direct operating expenses

    10,447       2,195       7,789               20,431  

Drydock expense

    56       1,075       7               1,138  

General and administrative expenses

    1,872       848       1,369       4,490       8,579  

Pre-petition restructuring charges

    25       (6 )     31               50  

Depreciation and amortization expense

    5,945       1,784       5,496       618       13,843  

(Gain) loss on sale of assets

    -       (19 )     (15 )     -       (34 )

Operating income (loss)

  $ (2,211 )   $ (3,904 )   $ (6,979 )   $ (5,108 )   $ (18,202 )
                                         

Quarter Ended September 30, 2016

                                       

Revenue

  $ 17,491     $ 4,045     $ 6,285     $ -     $ 27,821  

Direct operating expenses

    10,587       2,616       7,113       -       20,316  

Drydock expense

    1,231       580       1,486       -       3,297  

General and administrative expenses

    1,505       2,076       1,470       5,025       10,076  

Depreciation and amortization expense

    5,833       1,896       5,286       820       13,835  

Impairment charges

    -       -       -       -       -  

(Gain) loss on sale of assets

    (3 )     66       -       -       63  

Operating income (loss)

  $ (1,662 )   $ (3,189 )   $ (9,070 )   $ (5,845 )   $ (19,766 )

 

   

North Sea

   

Southeast

Asia

   

Americas

   

Other

   

Total

 
   

(In thousands)

 

Nine Months Ended September 30, 2017

                                       

Revenue

  $ 45,068     $ 7,282     $ 22,455     $ -     $ 74,805  

Direct operating expenses

    30,733       6,663       21,595       -       58,991  

Drydock expense

    4,470       1,067       157       -       5,694  

General and administrative expenses

    5,545       2,622       4,996       13,797       26,960  

Pre-petition restructuring charges

    193       -       46       17,598       17,837  

Depreciation and amortization expense

    17,269       5,349       16,549       1,823       40,990  

(Gain) loss on sale of assets

    -       (51 )     5,258               5,207  

Operating income (loss)

  $ (13,142 )   $ (8,368 )   $ (26,146 )   $ (33,218 )   $ (80,874 )
                                         

Nine Months Ended September 30, 2016

                                       

Revenue

  $ 61,500     $ 10,914     $ 24,688     $ -     $ 97,102  

Direct operating expenses

    36,606       8,868       19,509       -       64,983  

Drydock expense

    2,104       597       1,486       -       4,187  

General and administrative expenses

    5,466       3,783       5,168       14,301       28,718  

Depreciation and amortization expense

    18,922       6,843       16,404       2,616       44,785  

Impairment charges

    1,986       50,437       110,385       -       162,808  

(Gain) loss on sale of assets

    5,920       66       (4 )     -       5,982  

Operating income (loss)

  $ (9,504 )   $ (59,680 )   $ (128,260 )   $ (16,917 )   $ (214,361 )
                                         
                                         

Total Assets

                                       

September 30, 2017

  $ 512,376     $ 149,789     $ 404,886     $ 4,620     $ 1,071,671  

December 31, 2016

    465,908       158,671       424,398       4,926       1,053,903  

 

At December 31, 2016, we had $371.6 million and at Septembr 30, 2017, we had $350.6 million in long-lived assets attributable to the United States, our country of domicile.  

 

 

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements (including the notes thereto) included elsewhere in this report, Part II, Item 1A, “Risk Factors” in this report and our audited consolidated financial statements and the notes thereto, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016. Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer collectively to GulfMark Offshore, Inc., a Delaware corporation, and its subsidiaries.

 

Overview

 

We provide marine support and transportation services to companies involved in the offshore exploration and production of oil and natural gas. Our vessels transport drilling materials, supplies and personnel to offshore facilities, and also move and position drilling structures. A substantial portion of our operations is international. Our fleet has grown in both size and capability, from 11 vessels in 1990 to our present number of 69 vessels, through strategic acquisitions and the new construction of technologically advanced vessels, partially offset by dispositions of certain older, less profitable vessels. As of October 30, 2017, our fleet included 66 owned vessels, 32 of which are stacked, and three managed vessels.

 

Our results of operations are affected primarily by day rates, fleet utilization and the number and type of vessels in our fleet. Utilization and day rates, in turn, are influenced principally by the demand for vessel services from the offshore exploration and production sectors of the oil and natural gas industry. The supply of vessels to meet this fluctuating demand is related directly to the perception of future activity in both the drilling and production phases of the oil and natural gas industry as well as the availability of capital to build new vessels to meet the changing market requirements. As discussed below, the ongoing and sustained decline in the price of oil has materially and negatively impacted our results of operations.

 

We also provide management services to other vessel owners for a fee. We do not include charter revenue and vessel expenses of these vessels in our operating results; however, management fees are included in revenue. These vessels are excluded for purposes of calculating fleet rates per day worked and utilization in the applicable periods. All three of our managed vessels are currently stacked.

 

The operations of our fleet may be subject to seasonal factors. Operations in the North Sea are often at their highest levels from April to August and at their lowest levels from December through February. Operations in our other areas, although involving some seasonal factors, tend to remain more consistent throughout the year. Activity in the U.S. Gulf of Mexico may be slower during the hurricane season from June through November, although following a hurricane, activity may increase as there may be a greater demand for vessel services as repair and remediation activities take place.

 

Our operating costs are primarily a function of fleet configuration. The most significant direct operating cost is wages paid to vessel crews, followed by repairs and maintenance. Generally, fluctuations in vessel utilization have little effect on direct operating costs in the short term and, as a result, direct operating costs as a percentage of revenue may vary substantially due to changes in day rates and utilization.

 

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In addition to direct operating costs, we incur fixed charges related to (i) the depreciation of our fleet, (ii) costs for routine drydock inspections, (iii) modifications designed to ensure compliance with applicable regulations, and (iv) maintaining certifications for our vessels with various international classification societies. The number of drydockings and other repairs undertaken in a given period generally determines our repair and maintenance expenses. The demands of the market, the expiration of existing contracts, the commencement of new contracts, seasonal factors and customer preferences influence the timing of drydocks. As a result of the current market downturn, we have taken some vessels out of service (also referred to as stacking) and deferred a number of drydocks as part of our cost cutting initiatives. The deferred drydocks will eventually be required to be performed prior to returning the vessels to active service.

 

Oil Price Impact

 

Our business is directly impacted by the level of activity in worldwide offshore oil and natural gas exploration, development and production, which in turn is influenced by trends in oil and natural gas prices. In addition, oil and natural gas prices are affected by a host of geopolitical and economic forces, including the fundamental principles of supply and demand. In particular, the oil price is significantly influenced by actions of the Organization of Petroleum Exporting Countries, or OPEC. Beginning in late 2014, the oil and gas industry experienced a significant decline in the price of oil causing an industry-wide downturn that continued into 2017. The decline was in part a result of an OPEC decision to increase production. The price of oil declined significantly from over $100 per barrel in July 2014 to below $30 per barrel in February 2016. The downturn of the last few years has significantly impacted the operational plans for oil companies, resulting in reduced expenditures for exploration and production activities, and consequently has adversely affected the drilling and support service sector. These changes in industry dynamics decreased demand for offshore supply vessel, or OSV, services and led to an excess number of vessels in all of our operating regions.

 

Bankruptcy Filing

 

On May 17, 2017, GulfMark Offshore, Inc., or the Debtor, filed a voluntary petition for relief, or the Petition, and commenced a case, or the Bankruptcy Case, under chapter 11, or Chapter 11, of title 11 of the United States Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court, to pursue a proposed plan of reorganization which, as amended, we refer to as the Plan. The Bankruptcy Case is being administered under the caption In re GulfMark Offshore, Inc. No trustee has been appointed and we will continue to operate as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. To assure ordinary course operations, we have obtained approval from the Bankruptcy Court for a variety of “first day” motions, including authority to maintain bank accounts and other customary relief. A summary of the key features of the Plan is included below under “– Liquidity, Capital Resources and Financial Condition.” On October 4, 2017, the Bankruptcy Court entered an order confirming the Plan.

 

Critical Accounting Policies

 

There have been no changes to the critical accounting policies used in our reporting of results of operations and financial position. For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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Long-Lived Asset Impairment

 

Our tangible long-lived assets consist primarily of vessels and construction-in-progress. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess potential impairment by comparing the carrying values of the long-lived assets to the undiscounted cash flows expected to be received from those assets. If impairment is indicated, we determine the amount of impairment expense by comparing the carrying value of the long-lived assets with their fair market value. We base our undiscounted cash flow estimates on, among other things, historical results adjusted to reflect the best estimate of future operating performance. We obtain estimates of fair value of our vessels from independent appraisal firms. Management’s assumptions are an inherent part of our asset impairment evaluation, and the use of different assumptions could produce results that differ from those reported.

 

Beginning in late 2014, oil prices declined significantly. Prices continued to decline throughout 2015 and into 2016, reaching a low of less than $30 per barrel in the first quarter of 2016. Prices recovered over the remainder of 2016, stabilizing at over $40 per barrel for much of the second and third quarters of 2016 and further increasing to over $50 per barrel in the fourth quarter of 2016. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovering to over $50 per barrel. The lower price environment impacted the operational plans for oil companies beginning in late 2014 and consequently adversely affected the drilling and support service sector. The decrease in day rates and utilization for offshore vessels has been significant. In addition, the independent appraisal firms have lowered the fair value estimates related to our vessels in each quarter since the fourth quarter of 2014. As a result of these factors, we have performed a number of reviews for impairment since the fourth quarter of 2014.

 

Based on the triggering events discussed above, we performed an evaluation for impairment for the quarter ended March 31, 2016 and determined that the carrying values of certain of our long-lived asset groups in the Americas and in Southeast Asia were greater than the related undiscounted expected future cash flows. We compared the carrying values of the long-lived asset groups to the fair value provided by the independent appraisal firms and recorded $114.1 million of impairment charges in the first quarter of 2016. The impairment charge consisted of $94.5 million in connection with our long-lived assets in the U.S. Gulf of Mexico, which is part of our Americas segment and included vessels under construction, and $19.6 million in connection with our Southeast Asia segment. We performed an evaluation for impairment for each of our asset groups in the first and second quarters of 2017, but determined that the undiscounted expected future cash flows were greater than the carrying value in each group and concluded that no further impairment was indicated. We also evaluated our asset groups for impairment in the third quarter of 2017 and determined that no impairment trigger was indicated.

 

We will continue to monitor the industry for triggering events that could indicate additional impairment.

 

Vessel Component Impairment

 

We have vessel components in our North Sea and Southeast Asia segments that we intend to sell. Based on third party valuations, in the first quarter of 2016 we recorded impairment expense related to these assets totaling $2.6 million, consisting of $2.0 million in the North Sea and $0.6 million in Southeast Asia.

 

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Bankruptcy Accounting

 

The unaudited condensed consolidated financial statements included herein have been prepared as if we were a going concern and reflect the application of Financial Accounting Standards Board Accounting Standards Codification 852 “Reorganizations,” or ASC 852. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in “reorganization items, net” on our consolidated statements of operations. In addition, prepetition unsecured and under-secured obligations that may be impacted by the bankruptcy reorganization process have been classified as “liabilities subject to compromise” on our consolidated balance sheet at September 30, 2017. These liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court.

 

The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 proceedings. In particular, the consolidated financial statements do not purport to show: (i) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the amount of prepetition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on stockholders’ equity accounts of any changes that may be made to our capitalization; or (iv) the effect on operations of any changes that may be made to our business.

 

In connection with the Debtor’s emergence from the Bankruptcy Case, the Debtor will be required to adopt fresh-start accounting as of the date the Debtor emerges from bankruptcy. When the reorganized Debtor adopts fresh-start accounting, our assets and liabilities will be recorded at their fair value as of the fresh-start reporting date. The fair values of our assets and liabilities as of that date may differ materially from the recorded values of our assets and liabilities as reflected in our historical consolidated financial statements. In addition, our adoption of fresh-start accounting may materially affect our results of operations following the fresh-start reporting dates, as we will have a new basis in our assets and liabilities. Consequently, our historical financial statements are not reliable indicators of our financial condition and results of operations for any period after we adopt fresh-start accounting. We are in the process of evaluating the impact of fresh-start accounting on our consolidated financial statements.

 

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Results of Operations

 

The table below sets forth, by region, the average day rates and utilization for our vessels and the average number of vessels owned or chartered during the periods indicated. This fleet generates substantially all of our revenues and operating income or loss. We use the information that follows to evaluate the performance of our business.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Revenues by Region (000's) (a):

                               

North Sea Based Fleet (c)

  $ 16,134     $ 17,491     $ 45,068     $ 61,500  

Southeast Asia Based Fleet

    1,973       4,045       7,282       10,914  

Americas Based Fleet

    7,698       6,285       22,455       24,688  
                                 

Rates Per Day Worked (b):

                               

North Sea Based Fleet (c)

  $ 10,653     $ 10,758     $ 10,381     $ 12,528  

Southeast Asia Based Fleet

    5,525       7,656       5,465       7,715  

Americas Based Fleet

    8,419       9,830       8,347       10,360  
                                 

Overall Utilization (b):

                               

North Sea Based Fleet

    65.2 %     70.6 %     62.9 %     67.2 %

Southeast Asia Based Fleet

    37.6 %     50.0 %     45.8 %     40.1 %

Americas Based Fleet

    31.9 %     19.6 %     30.7 %     19.1 %
                                 

Average Owned Vessels (d):

                               

North Sea Based Fleet

    25.0       25.4       24.9       26.3  

Southeast Asia Based Fleet

    10.0       11.5       10.0       12.5  

Americas Based Fleet

    31.0       31.7       31.5       30.7  

Total

    66.0       68.6       66.4       69.5  

 

 

(a)

Includes owned and managed vessels.

(b)

Average rate per day worked is defined as total charter revenues divided by number of days worked. Overall utilization rate is defined as the total number of days worked divided by total number of days of availability in the period.

(c)

Revenues for vessels in the North Sea based fleet are primarily earned in British Pounds Sterling (GBP), Norwegian Kroner (NOK) and Euros, and have been converted to U.S. Dollars (US$) at the average exchange rate for the period. See “- Currency Fluctuations and Inflation” below for exchange rates.

(d)

Average number of vessels is calculated based on the aggregate number of vessel days available during each period divided by the number of calendar days in such period. Includes owned vessels only, and is adjusted for vessel additions and dispositions occurring during each period.

 

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Comparison of the Three Months Ended September 30, 2017 with the Three Months Ended September 30, 2016

 

For the three months ended September 30, 2017, we had a net loss of $24.6 million, or $0.94 per diluted share, on revenues of $25.8 million. During the three months ended September 30, 2016, our net loss was $24.7 million, or $0.98 per diluted share, on revenues of $27.8 million.

 

Our revenues for the quarter ended September 30, 2017 decreased $2.0 million, or 7.2%, compared to the quarter ended September 30, 2016. Average day rates decreased from $9,966 during the third quarter of 2016 to $9,272 during the third quarter of 2017, resulting in a $3.7 million decline in revenue. Partially offsetting this decrease was an increase in overall utilization of 1.8 percentage points, increasing revenue by $0.9 million between the periods. In addition, revenue increased $0.7 million as a result of the delivery of one new-build vessel during the first quarter of 2017. The slight decrease in the U.S. Dollar exchange rate was responsible for a further revenue increase of $0.1 million. Our average fleet size decreased from 68.5 in the 2016 quarter to 66.0 in the 2017 quarter due to the sale of four vessels during the second half of 2016 and the sale of two additional vessels during the first quarter of 2017. The sold vessels had been stacked in the third quarter of 2016, resulting in no revenue effect related to the sale.

 

We had an operating loss of $18.2 million for the three months ended September 30, 2017, compared to a $19.8 million operating loss during the same period of 2016. Decreases in drydock expense of $2.2 million and general and administrative expenses of $1.5 million were the primary reasons for the reduction in operating loss. The general and administrative expense decrease was mainly due to a bad debt expense recognized during the 2016 period and a retention bonus accrual during 2017. Partially offsetting these decreases was the decrease in revenue during the third quarter of 2017. Pre-petition restructuring charges were $0.1 million and are largely related to legal and professional fees from our restructuring and bankruptcy advisors, prior to the bankruptcy filing on May 17, 2017. Gain on sale of assets increased by $0.1 million during the third quarter of 2017.

 

North Sea

 

North Sea revenue decreased $1.4 million, or 7.8%, for the quarter ended September 30, 2017, compared to the same period in 2016. Utilization decreased from 70.6% in the 2016 period to 65.2% in the 2017 period, reducing revenue by $1.3 million. Day rates decreased from $10,758 in the third quarter of 2016 to $10,653 in the current quarter, reducing revenue by $0.9 million. Partially offsetting these decreases was an increase in capacity of $0.7 million mainly related to the addition of one new-build vessel in early 2017. In addition, the slight decrease in the U.S. Dollar exchange rate during the quarter caused an increase in revenue of $0.1 million. Operating loss increased from $1.7 million during the quarter ended September 30, 2016 to $2.2 million for the same period in 2017. The primary reason for this increase was the decrease in revenue, combined with an increase in general and administrative expenses of $0.4 million mainly due to an increase in salaries and benefits. In addition, depreciation and amortization increased by $0.1 million due to the addition of the new-build vessel in early 2017. Partially offsetting these increases was a decrease of $1.2 million in drydock expense.

 

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Southeast Asia

 

Revenue in Southeast Asia decreased $2.1 million, or 51.2%, for the quarter ended September 30, 2017 compared to the quarter ended September 30, 2016. The main factor for the decline was a decrease in utilization amounting to $1.7 million in revenue, from 50.0% during the 2016 quarter to 37.6% during the current quarter. Day rates also decreased, from $7,656 in the third quarter of 2016 to $5,525 in the third quarter of 2017, causing a further decrease in revenue of $0.4 million. Operating loss increased by $0.7 million, from $3.2 million in the third quarter of 2016 to $3.9 million in the same period of 2017. The main factor for the increase in operating loss was decreased revenue. In addition, in the third quarter of 2017 we had an increase of $0.5 million in drydock expense. Partially offsetting these factors was a decrease in direct operating expenses of $0.4 million as more vessels were stacked, and a decrease in depreciation and amortization of $0.1 million due to the sale of older vessels. General and administrative expenses decreased $1.2 million due to a bad debt expense recognized during the 2016 quarter. Gain on sale of assets increased slightly during the 2017 quarter.

 

Americas

 

Revenue in the Americas increased $1.4 million, or 22.5%, in the third quarter of 2017 compared to the third quarter of 2016. Utilization increased from 19.6% in the 2016 period to 31.9% in the third quarter of 2017, increasing revenue by $3.8 million. Partially offsetting this increase was a decrease in day rates, from $9,830 during the third quarter of 2016 to $8,419 during the third quarter of 2017, causing a decrease in revenue of $2.4 million. We had a decrease in operating loss of $2.1 million, from $9.1 million during the third quarter of 2016 to $7.0 million during the third quarter of 2017. The decrease in operating loss was primarily due to the increase in revenue, a decrease in drydock expense of $1.5 million and a slight decrease in general and administrative expenses. Partially offsetting these factors was an increase in direct operating expenses of $0.7 million due to the higher utilization and an increase in depreciation and amortization of $0.2 million.

 

Other

 

Other expense increased by $2.0 million, from $9.7 million in the third quarter of 2016 to $11.7 million during the third quarter of 2017. The increase is mainly due to $8.9 million of reorganization items related to our Bankruptcy Case that were recognized during the third quarter of 2017. Partially offsetting this charge was a decrease in interest expense of $4.8 million during the 2017 period due to the discontinuance of interest accruals on the Debtor’s unsecured 6.375% senior notes due 2022, or the Senior Notes, subsequent to the filing of the Petition. In addition, we had a $0.4 million gain in foreign currency transaction for the quarter.

 

Tax Rate

 

Our effective tax rate for the third quarter of 2017 was a benefit of 17.6%. This compares to a benefit of 16.0% for the same period in 2016. The change in the effective tax rate from the prior year period was primarily attributable to a change in the taxable mix of earnings between our higher and lower tax jurisdictions.

 

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Comparison of the Nine Months Ended September 30, 2017 with the Nine Months Ended September 30, 2016

 

For the nine months ended September 30, 2017, we had a net loss of $190.0 million, or $7.39 per diluted share, on revenues of $74.8 million. During the nine months ended September 30, 2016, our net loss was $163.5 million, or $6.53 per diluted share, on revenues of $97.1 million.

 

Our revenues for the nine months ended September 30, 2017 decreased $22.3 million, or 23.0%, compared to the nine months ended September 30, 2016. Average day rates decreased from $10,360 during the nine months ended September 30, 2016 to $8,347 during the nine months ended September 30, 2017, resulting in a $21.0 million decline in revenue, while the strong U.S. Dollar was responsible for a further decrease in revenue of $3.1 million. In addition, during the first quarter of 2016 we received a $6.6 million payment from a customer to cancel a contract. Partially offsetting these decreases was an increase in utilization of 4.0 percentage points causing an increase in revenue of $5.3 million. Capacity increased by $3.1 million mainly due to the delivery of one new-build vessel during the first quarter of 2017 and the full year-to-date effect of a vessel delivered mid-2016. Our average fleet size decreased by 3.0 vessels due to the sale of four vessels during the second half of 2016 and the sale of two vessels during the first quarter of 2017, partially offset by the vessel deliveries.

 

We had an operating loss of $80.9 million for the nine months ended September 30, 2017, compared to an operating loss of $214.4 million during the same period of 2016. During the nine months ended September 30, 2016 we recognized impairment charges of $162.8 million. Excluding these charges, the operating loss in the first nine months of 2017 increased $29.3 million compared to the first nine months of 2016. The decrease in revenue was the primary reason for the lower operating results. During the first nine months of 2017, drydock expense increased $1.5 million. In addition, during the 2017 period we recognized $17.8 million of pre-petition restructuring charges related to payments to our restructuring and bankruptcy advisors, prior to the bankruptcy filing on May 17, 2017. Partially offsetting these increases were decreases in direct operating expenses of $6.0 million, general and administrative expenses of $1.8 million and depreciation and amortization expense of $3.8 million. These decreases were related to the continued downturn in the industry coupled with the decrease in the size of our fleet in 2017 due to vessel sales and impairment charges recognized during 2016. During the first nine months of 2017 we recognized a lower loss on sale of asset than in the same period in 2016.

 

North Sea

 

North Sea revenue decreased $16.4 million, or 26.7%, for the nine months ended September 30, 2017, compared to the same period in 2016. Utilization decreased from 67.2% in the 2016 period to 62.9% in the 2017 period, reducing revenue by $9.5 million. Day rates decreased from $12,528 in the first nine months of 2016 to $10,381 in the current year period, reducing revenue by $5.5 million. The strength of the U.S. Dollar caused a decrease in revenue of $3.1 million. Partially offsetting these decreases was an increase in capacity of $1.7 million mainly related to the addition of one new-build vessel in early 2017. Operating loss increased $3.7 million, from $9.5 million during the nine months ended September 30, 2016 to $13.2 million for the same period in 2017. During the 2016 period we recognized an impairment charge of $2.0 million. Excluding this charge, the increase in operating loss was $5.6 million. This increase was primarily due to the decrease in revenue. In addition, for the nine months ended September 30, 2017, drydock expense increased $2.4 million, pre-petition restructuring charges increased $0.2 million and general and administrative expenses increased slightly. Offsetting these increases were decreases in direct operating expenses of $5.9 million, as we continued to cut costs during the downturn, and depreciation and amortization expense of $1.7 million. During the 2016 period we recognized a loss on sale of asset of $5.9 million.

 

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Southeast Asia

 

Revenue in Southeast Asia decreased $3.6 million, or 33.3%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Day rates declined from $7,715 in the first nine months of 2016 to $5,465 in the same period in 2017, causing a decrease in revenue of $2.5 million. Utilization increased from 40.1% for the first nine months of 2016 to 45.8% for the first nine months of 2017. However, as a result of the sale of three vessels that were stacked during 2016 and the stacking of two additional vessels during 2017, the impact of utilization on revenue was a decrease of $1.0 million. In addition, capacity reduced revenue by $0.1 million, largely due to a decrease in average fleet size from 12.5 vessels during the 2016 period to 10.0 vessels during the 2017 period resulting from these sales. Operating loss decreased by $51.3 million, from $59.7 million in the first nine months of 2016 to $8.4 million in the same period of 2017. During the first nine months of 2016, we recognized an impairment charge of $50.4 million. Excluding this charge, the operating loss decreased by $0.9 million. Partially offsetting the decrease in revenue and increase in drydock expense of $0.5 million were decreases in direct operating expenses of $2.2 million and depreciation and amortization of $1.5 million. These decreases can be attributed to the smaller fleet size and continued cost cutting efforts during 2017. General and administrative expenses decreased $1.2 million largely due to a bad debt expense recognized during 2016. Gain on sale of assets increased $0.1 million.

 

Americas

 

Revenue in the Americas decreased $2.2 million, or 9.0%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Day rates decreased from $10,360 during the first nine months of 2016 to $8,347 during the first nine months of 2017, causing a decrease in revenue of $10.7 million. In addition, during the first quarter of 2016 we received a $6.6 million payment from a customer cancelling a long term contract. Utilization increased 11.6% between the periods, increasing revenue by $15.8 million. In addition, capacity increased by $1.5 million due to the delivery of a new vessel during 2016. We recorded an operating loss of $128.3 million during the first nine months of 2016 compared to an operating loss of $26.1 million during the first nine months of 2017. During the 2016 period we recognized impairment charges of $110.4 million. Excluding these charges, the increase in operating loss period over period was $8.3 million. In addition to the decrease in revenue, direct operating expenses increased $2.1 million and depreciation and amortization increased $0.1 million largely due to the increase in average fleet size. General and administrative expenses increased $0.2 million. Also during the 2017 period we recognized a loss on sale of assets of $5.3 million due to the sale of two older vessels. Partially offsetting these increases was a decrease in drydock expense of $1.3 million.

 

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Other

 

Other expense in the first nine months of 2017 was $41.3 million compared to income of $7.8 million in the first nine months of 2016. The change was due mainly to a $35.9 million gain related to the purchase in the open market of $69.4 million in face value of our Senior Notes during the 2016 period. Interest expense was higher during the nine months ended 2017 as we wrote off all debt issuance costs associated with our revolving credit facilities and Senior Notes in the first quarter of 2017, which was partially offset by the discontinuance of interest accruals on the Senior Notes subsequent to the filing of the Petition. During the 2017 period we also recognized reorganization expenses of $14.0 million.

 

Tax Rate

 

Our effective tax rate for the nine months ended September 30, 2017 was an expense of 55.5%. This compares to a benefit of 20.8% for the same period in 2016. The change in the effective tax rate from the prior year period was primarily attributable to a change in the taxable mix of earnings between our higher and lower tax jurisdictions. In addition, in the first nine months of 2017 we recognized a valuation allowance on certain of our deferred tax assets.

 

Liquidity, Capital Resources and Financial Condition

 

Our ongoing liquidity requirements are generally associated with our need to service debt, fund working capital, maintain our fleet, and, when market conditions are favorable, finance the construction of new vessels and acquire or improve equipment or vessels. Bank financing, proceeds from the issuance of debt and equity, and internally generated funds have historically provided funding for these activities. Internally generated funds are directly related to fleet activity and vessel day rates, which are generally dependent upon the demand for our vessels which is ultimately determined primarily by the supply and demand for offshore drilling for crude oil and natural gas.

 

Industry Conditions

 

The ongoing and sustained decline in the price of oil that began in 2014 has materially and adversely affected our results of operations. These lower commodity prices have negatively impacted revenues, earnings and cash flows, and further sustained low oil and natural gas prices could have a material adverse effect on our liquidity position. This downturn has also impacted the operational plans for the major oil companies, resulting in reduced expenditures for exploration and production activities, and consequently has adversely affected the drilling and support service sector.  As a result, we experienced a significant negative impact on day rates and utilization starting in 2015 that is continuing into 2017. In response to the downturn and the lower day rates, we have made changes to our cost structure, particularly to our onshore and offshore compensation and staffing.  We are continuing to adjust staffing and compensation levels and more closely control maintenance and outside services costs. We have stacked some vessels, significantly reducing variable costs associated with such vessels.  We are required to make expenditures for the certification and maintenance of our vessels. We expect to make $6.6 million in drydocking expenditures during 2017. As a result of the current market downturn we have taken some vessels out of service and deferred a number of drydocks as part of our cost cutting initiatives. The deferred drydocks will eventually be required prior to returning the vessels to active service.

 

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During 2015, as a result of the reduction in our revenues, we determined to repatriate all future foreign earnings and $200.0 million of prior earnings of certain of our non-U.S. subsidiaries, thereby reducing our total permanently reinvested earnings.  During 2016, we determined to repatriate an additional $40.0 million of prior earnings of certain of our non-U.S. subsidiaries. This resulted in a non-cash tax charge in 2016 of approximately $14.0 million. We have not provided for U.S. deferred taxes on the remaining permanently reinvested earnings of approximately $549.3 million at September 30, 2017. The projected cash flows of our foreign operations is not sufficient to cover the permanently reinvested earnings without selling assets. We do not intend to liquidate any foreign assets to generate cash to remit to the U.S. parent. If these amounts were repatriated we would owe U.S. income taxes at the U.S. statutory tax rate minus applicable foreign tax credits.  As of September 30, 2017 we had approximately $10.0 million of cash held by our foreign subsidiaries which would be subject to U.S. tax upon repatriation. 

 

Construction of New Vessels

 

At December 31, 2015, we had two vessels under construction in the U.S. that were significantly delayed. In March 2016, we resolved certain matters under dispute with the shipbuilder and reset the contract schedules so that we would take delivery of the first vessel in mid-2016 and the second vessel in mid-2017, at which time a final payment of $26.0 million would be due.  We took delivery of the first of these vessels during the second quarter of 2016. Under the settlement, we had the right to elect not to take delivery of the second vessel and forego the final payment, in which case the shipbuilder would retain the vessel. On May 8, 2017, we advised the shipbuilder that we had elected not to take delivery.

 

We had a vessel under construction in Norway that was scheduled to be completed and delivered during the first quarter of 2016; however, in the fourth quarter of 2015, we amended our contract with the shipbuilder to delay delivery of the vessel until January 2017. Concurrently, in order to delay the payment of a substantial portion of the construction costs, we agreed to pay monthly installments through May 2016 totaling 92.2 million NOK (or approximately $11.0 million) and to pay a final installment on delivery in January 2017 of 195.0 million NOK (or approximately $23.3 million at delivery). We paid such final installment and took delivery of this vessel in January 2017.

 

Cash and Working Capital

 

At September 30, 2017, our cash on hand totaled $11.5 million and net working capital was a deficit of $117.1 million.

 

Operating Activities

 

Net cash used in operating activities for the nine months ended September 30, 2017 was $52.2 million compared to $18.4 million for the nine months ended September 30, 2016. The increase in cash used in operating activities was due primarily to lower revenue and higher professional fees related to the bankruptcy.

 

Investing Activities

 

Net cash used in investing activities for the nine months ended September 30, 2017 was $21.8 million compared to $10.0 million used in investing activities for the nine months ended September 30, 2016. Investing activities consisted of progress payments on vessels under construction offset by proceeds from vessel sales.

 

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Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2017 was $76.1 million compared to $16.2 million for the nine months ended September 30, 2016. The cash provided in the nine months ended September 30, 2017 was primarily from borrowings under our revolving credit facilities and DIP financing related to the bankruptcy. In addition, in the first quarter 2016, we repurchased in the open market $20.0 million face value of Senior Notes.

 

Resources and Liquidity

 

On May 17, 2017, the Debtor filed for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court to pursue the Plan. The commencement of the Bankruptcy Case constituted an event of default that accelerated the Debtor’s obligations under the Indenture, dated as of March 12, 2012, by and between the Debtor, as issuer, and U.S. Bank National Association, as trustee, with respect to the Senior Notes. In addition, the commencement of the Bankruptcy Case constituted an event of default under the Multicurrency Facility Agreement and the Norwegian Facility Agreement referred to below. On October 4, 2017, the Bankruptcy Court entered an order confirming the Plan.

 

Restructuring Support Agreement

 

On May 15, 2017, the Debtor entered into a restructuring support agreement, or the RSA, with holders, or the Noteholders, of approximately 50% of the aggregate outstanding principal amount of the Senior Notes, to support a restructuring on the terms of the Plan. The RSA provides for, among other things, the $125.0 million rights offering, or the Rights Offering, and that:

 

 

Pursuant to the $125.0 million Rights Offering (subject to limitations regarding the Jones Act described below), eligible Noteholders have the right to purchase on the effective date of the Plan, or the Effective Date, their pro rata share of 60% of the Debtor’s common stock, or as applicable, the Jones Act Warrants (as defined below), or the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issued or issuable under the proposed management incentive plan, or the MIP, and upon exercise of the Reorganization Warrants (as defined below). The Rights Offering was backstopped by certain of the Noteholders for a 6.0% commitment premium to be paid in the form of 3.6% of the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issued or issuable under the MIP and upon exercise of the Reorganization Warrants.

 

 

Each holder of the Senior Notes will receive (subject to limitations regarding the Jones Act described below) its pro rata share of the Reorganized GulfMark Equity representing in the aggregate 35.65% of Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP and the exercise of the Reorganization Warrants.

 

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The Jones Act, which applies to companies that engage in coastwise trade, requires that, among other things, with respect to a publicly traded company, the aggregate ownership of common stock by non-U.S. citizens be not more than 25% of its outstanding common stock. Accordingly, the creditors who are recipients of common stock pursuant to the Plan or the Rights Offering who are non-U.S. holders may receive warrants to acquire common stock at an exercise price in a minimal amount in lieu of common stock, or the Jones Act Warrants.

 

 

All outstanding common stock of the Debtor will be cancelled and each holder of outstanding common stock of the Debtor will receive its pro rata share of (a) common stock representing in the aggregate 0.75% of the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP and the exercise of the Reorganization Warrants, and (b) warrants for 7.5% of the equity in the reorganized Debtor, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP, with a 7-year term and with an exercise price based on an equity value of $1 billion, or the Reorganization Warrants.

 

 

The Debtor would seek to obtain debtor-in-possession financing pursuant to terms and conditions that are reasonably acceptable to the Debtor and Requisite Noteholders (as defined in the RSA).

 

 

Holders of allowed claims arising under the Debtor’s debtor-in-possession financing facility, administrative expense claims, priority tax claims, other priority claims, and other secured claims of the Debtor will receive in exchange for their claims payment in full in cash or otherwise have their rights unimpaired under title 11 of the Bankruptcy Code. The Debtor will continue to pay any general unsecured claims in the ordinary course of business.

 

On September 21, 2017, the Debtor entered into the first amendment to the RSA to, among other things, extend the milestone dates relating to the confirmation of the Plan to October 10, 2017 (the Bankruptcy Court confirmed the Plan on October 4, 2017) and the Effective Date of the Plan to October 31, 2017. The milestone date relating to the Effective Date of the Plan was subsequently extended to November 10, 2017.

 

The RSA includes covenants on the part of the Debtor and the Noteholders, including that the Noteholders vote in favor of the Plan and otherwise facilitate the restructuring contemplated by the RSA. The RSA also includes rights of termination by each party upon the occurrence of certain events, including without limitation our failure to achieve certain milestones.

 

The Plan provides that the guaranty claims of the lender under our Secured Revolving Credit Facility Agreement, dated December 27, 2012, in the original aggregate principal amount of NOK 600.0 million, as amended, supplemented and/or restated from time to time, or the Norwegian Facility Agreement, among the Debtor, as guarantor, one of our indirect wholly-owned subsidiaries, GulfMark Rederi AS, or Rederi, as the borrower, our other subsidiaries party thereto and DNB Bank ASA, or the Norwegian Lender, will receive, on the Effective Date of the Plan, payment in cash in an amount equal to the allowed amount of guaranty claims except to the extent that the lender agrees to a less favorable treatment. See “DNB Second Amendment and Restatement Agreement” below.

 

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In addition, the Plan provides that, on the Effective Date of the Plan, or as soon as reasonably practicable thereafter, the Debtor (or its designee) or the reorganized Debtor (or its designee), as applicable, will pay in full in cash the allowed guaranty claims of the lenders under our secured Multicurrency Facility Agreement, dated as of September 26, 2014, as amended, supplemented and/or restated from time to time, or the Multicurrency Facility Agreement, among the Debtor, as guarantor, one of our indirect wholly-owned subsidiaries, GulfMark Americas, Inc., or GulfMark Americas, as the borrower, a group of financial institutions as the lenders and The Royal Bank of Scotland plc, as agent for the lenders, or the Agent, less any amounts that may have been paid to satisfy obligations under the Multicurrency Facility Agreement by any of the obligors under the Multicurrency Facility Agreement prior to the Effective Date, except as otherwise agreed by the Agent and the Debtor (with consent of the Required Consenting Noteholders (as defined in the Plan)).

Exit Facility

 

On September 29, 2017, the Debtor and Rederi entered into a commitment letter, or the Commitment Letter, with DNB Markets, Inc., or DNB Markets, DNB Capital LLC (or, together with DNB Markets, DNB) and Hayfin DLF II Luxco 2 S.à.r.l. (or, together with any related funds, collectively, Hayfin and, together with DNB, the Exit Facility Lenders) regarding the terms of the provision of certain credit facilities in connection with the confirmation of the Plan. Pursuant to the Commitment Letter, including the term sheet attached thereto, DNB would, subject to the terms and provisions thereof, provide a 5-year multi-currency senior secured revolving credit facility in an aggregate principal amount of $25.0 million and Hayfin would provide a 5-year senior secured term loan facility in an aggregate principal amount of $100.0 million. The Commitment Letter has been approved by certain consenting noteholders party to the RSA, or the Consenting Noteholders, subject to final documentation.

 

Further, to the extent consummated, Rederi will be required to pay, on the effective date of such credit facilities, certain arrangement, upfront, ticking and other closing fees in an aggregate amount of approximately $5.0 million pursuant to the terms of the fee arrangements agreed to between Rederi and the Exit Facility Lenders, in addition to certain previously paid work fees. In the event that the Commitment Letter is terminated without the Debtor borrowing thereunder, the Exit Facility Lenders will be entitled to an aggregate termination fee equal to approximately $1.9 million (plus accrued ticking fees), payable on the date that the Debtor emerges from bankruptcy (in accordance with the terms set forth in the Commitment Letter). The Exit Facility Lenders’ obligations under the Commitment Letter are subject to certain customary conditions. There can be no assurances that the exit financing will be completed pursuant to the terms of the Commitment Letter or that the final documentation in connection with the exit financing will be approved by the Consenting Noteholders.

 

Backstop Commitment Agreement

 

On May 15, 2017, the Debtor entered into a backstop commitment agreement, or the Backstop Commitment Agreement, pursuant to which certain of the Noteholders agreed to backstop the Rights Offering contemplated in the RSA, or the Backstop Commitments. Pursuant to the Backstop Commitment Agreement, each of the holders of a Backstop Commitment party to the Backstop Commitment Agreement, or the Commitment Parties, severally and not jointly, agree to fully participate in the Rights Offering and purchase the Reorganized GulfMark Equity in accordance with the percentages set forth in the Backstop Commitment Agreement to the extent unsubscribed under the Rights Offering. In addition, to compensate the Commitment Parties for the risk of their undertakings and as consideration for the Backstop Commitments, the Debtor will pay the Commitment Parties in the aggregate, on the Effective Date, a backstop commitment premium in the form of 3.6% of the Reorganized GulfMark Equity.

 

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The Backstop Commitment Agreement is terminable by the Debtor and/or the Requisite Commitment Parties (as defined in the Backstop Commitment Agreement) under several conditions, including failure to achieve certain milestones or the termination of the RSA. The Debtor is also required to pay a termination fee in the amount of $7.5 million in cash to the Commitment Parties if the Backstop Commitment Agreement is terminated for certain events.

 

On September 21, 2017, the Debtor entered into the first amendment to the Backstop Commitment Agreement to, among other things, extend the milestone dates relating to the confirmation of the Plan to October 10, 2017 (the Bankruptcy Court confirmed the Plan on October 4, 2017) and the Effective Date of the Plan to October 31, 2017. The milestone date relating to the Effective Date of the Plan was subsequently extended to November 10, 2017.

 

Intercompany DIP Credit Agreement

 

On May 18, 2017, the Debtor entered into the Senior Secured Super-Priority Debtor In Possession Credit Agreement, or the Intercompany DIP Agreement, among the Debtor, as the borrower, Rederi, a wholly-owned subsidiary of the Debtor, as the lender, and the Norwegian Lender, as issuing bank.  Pursuant to the Intercompany DIP Agreement, Rederi has made available to the Debtor a senior secured super-priority term loan facility of up to $35 million to allow the Debtor to continue to operate its business and manage its properties as a debtor and a debtor-in-possession pursuant to the Debtor’s filing of the Petition.  The Debtor has requested that the Norwegian Lender issue letters of credit from time to time, to be cash collateralized using the proceeds of the term loans under the Intercompany DIP Agreement. As security for the loans under the Intercompany DIP Agreement, the Debtor has pledged 65% of its equity interests in GulfMark Capital, LLC, GulfMark Foreign Investments LLC and GM Offshore, Inc., each a wholly-owned domestic subsidiary of the Debtor. On September 21, 2017, the Debtor entered into the first amendment to the Intercompany DIP Agreement to extend the milestone dates relating to the confirmation of the Plan to October 10, 2017 (the Bankruptcy Court confirmed the Plan on October 4, 2017) and the Effective Date of the Plan to October 31, 2017. The milestone date relating to the Effective Date of the Plan was subsequently extended to November 10, 2017.

 

DNB Second Amendment and Restatement Agreement

 

In order to provide funds to Rederi for purposes of making loans to the Debtor under the Intercompany DIP Agreement, on May 18, 2017, Rederi entered into the Second Amendment and Restatement Agreement, or the DNB Second Amendment and Restatement Agreement, among Rederi, as borrower, the other loan parties party thereto, the financial institutions listed therein as lenders, and the Norwegian Lender, as arranger and agent. Pursuant to the DNB Second Amendment and Restatement Agreement, the parties amended and restated the Norwegian Facility Agreement. We refer to the Norwegian Facility Agreement, as amended and restated by the DNB Second Amendment and Restatement Agreement, as the Amended and Restated Norwegian Facility. Pursuant to the Amended and Restated Norwegian Facility, the Norwegian Lender agreed to make available to Rederi an additional $35 million senior secured term loan facility, or the Term Loan Facility.  To secure the Term Loan Facility, Rederi, a wholly-owned subsidiary of GulfMark Norge AS, or the Norwegian Parent, and GulfMark UK Ltd., or the UK Guarantor, a wholly-owned subsidiary of GulfMark North Sea Limited, or the UK Parent, agreed to place mortgages in favor of the Norwegian Lender on certain additional previously unencumbered vessels owned by Rederi and certain other subsidiaries of the Debtor. In addition, the UK Parent and the Norwegian Parent pledged their shares in the UK Guarantor and Rederi, respectively, to the Norwegian Lender.

 

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Multicurrency Facility Agreement Forbearance Agreement

 

On June 26, 2017, GulfMark Americas and GulfMark Management, Inc., or GulfMark Management, each a subsidiary of the Debtor, entered into a forbearance agreement, or the RBS Forbearance Agreement, with the Agent relating to the Multicurrency Facility Agreement. Pursuant to the RBS Forbearance Agreement, the Agent agreed to waive the defaults and events of default specified in the RBS Forbearance Agreement and to forbear from exercising any rights or remedies under the Multicurrency Facility Agreement as a result of any such defaults and events of default specified in the RBS Forbearance Agreement until the earlier of (x) the occurrence of any of the early termination events specified in the RBS Forbearance Agreement, (y) the effectiveness of the Plan (including all exhibits and schedules thereto, and as amended, modified or supplemented solely in accordance with the RBS Forbearance Agreement) and (z) September 4, 2017. In addition, the Agent agreed in the RBS Forbearance Agreement that during such period the provision in the Multicurrency Facility Agreement that would result in an automatic acceleration of the outstanding obligations, termination of the lending commitments and a requirement to cash-collateralize letters of credit as specified in the RBS Forbearance Agreement shall not apply.

 

On September 21, 2017, GulfMark Americas and GulfMark Management entered into an extension agreement with the Agent that extended (i) the forbearance period until the earlier of (x) September 27, 2017, which was extended by Americas to October 31, 2017 upon satisfaction of certain milestones with respect to the exit financing and was subsequently extended to 12:01 a.m. on November 3, 2017, and (y) the occurrence of any of the specified early termination events and (ii) certain early termination events to be consistent with the first amendment to the RSA, the first amendment to the BCA and certain milestones dates relating to the exit financing.

 

Milestone Dates and Forbearance Period

 

Each of the RSA, the Backstop Commitment Agreement and the Intercompany DIP Agreement provides for a milestone date of November 10, 2017 relating to the Effective Date of the Plan. In addition, the milestone date relating to approval of the exit financing by the Consenting Noteholders is November 3, 2017 and the forbearance period under the RBS Forbearance Agreement was extended to 12:01 a.m. on November 3, 2017. As of the date of this report, however, we do not expect the Effective Date to occur by November 3, 2017. Although we anticipate restructuring in accordance with the RSA and the Plan, there can be no assurance that we will be successful in negotiating any extensions of the milestone dates and forbearance period.

 

Liabilities Subject to Compromise

 

As a result of the filing of the Petition, the payment of pre-petition indebtedness is subject to compromise or other treatment under the Plan. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims is generally not permitted, the Bankruptcy Court granted the Debtor authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtor’s businesses and assets. Among other things, the Bankruptcy Court authorized the Debtor to pay certain pre-petition claims in the ordinary course of business.

 

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The Debtor has been paying and intends to continue to pay undisputed post-petition claims in the ordinary course of business. The Debtor’s liabilities subject to compromise represent the Debtor’s current estimate of claims expected to be allowed under the Plan. Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. 

 

Liabilities subject to compromise are included in our unaudited condensed consolidated balance sheet in the amount of $448.1 million, consisting of the Senior Notes in the aggregate principal amount of $429.6 million and accrued interest through the date of the Petition on the Senior Notes in the amount of $18.5 million. For a description of the Senior Notes, see Note 5 “Debt” to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Reorganization Items

 

Reorganization items represent amounts incurred subsequent to the Bankruptcy Case filing directly resulting from such filing and consist primarily of professional fees for bankers, attorneys and accountants totaling $8.9 million during the three months ended September 30, 2017.

 

Delisting of Class A Common Stock

 

On April 10, 2017, we were notified by the New York Stock Exchange, or NYSE, that the NYSE had determined to commence proceedings to delist our Class A common stock from the NYSE because the average closing price per share of the Class A common stock over a period of 30 consecutive trading days was below $1.00 per share, which is the minimum average closing price required to maintain listing on the NYSE. Trading in the Class A common stock on the NYSE was suspended after the close of trading on April 10, 2017. The NYSE filed a Form 25 with the SEC to remove the Class A common stock from listing and registration on the NYSE, which became effective on May 9, 2017.

 

Effective April 11, 2017, our Class A common stock commenced trading in the “Pink Sheets” of the OTC Markets Group, Inc., or OTC Pink, under the symbol “GLFM.” The OTC Pink is a significantly more limited market than the NYSE, and quotation on the OTC Pink may result in a less liquid market available for existing and potential stockholders to trade the Class A common stock and could further depress the trading price of the Class A common stock. The NYSE’s suspension and delisting of our Class A common stock could impair our ability to raise additional capital through equity or debt financing.

 

The RSA and the Plan provide that the shares of our existing common stock will be cancelled in the Bankruptcy Case and will be entitled to a limited recovery as specified therein.

 

Off-Balance Sheet Arrangements

 

      At September 30, 2017 and December 31, 2016, we had no off-balance sheet debt or other arrangements required to be disclosed in this report.

 

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Currency Fluctuations and Inflation

 

A majority of our operations are international. Therefore, we are exposed to currency fluctuations and exchange rate risks. In areas where currency risks are potentially high, we normally accept only a small percentage of charter hire in local currency, with the remainder paid in U.S. Dollars. Operating costs are substantially denominated in the same currency as charter hire in order to reduce the risk of currency fluctuations. Charters for vessels in our North Sea fleet are denominated in British Pounds Sterling (GBP), Norwegian Kroner (NOK) or Euros (EUR). The North Sea fleet generated 62.5% and 60.2% of our total consolidated revenue for the quarter and nine months ended September 30, 2017, respectively. Charters in our Americas fleet can be denominated in Brazilian Reais (BRL) and charters in our Southeast Asia fleet can be denominated in Singapore Dollars (SGD).

 

For the three and nine months ended September 30, 2017 and 2016, the exchange rates of GBP, NOK, EUR, BRL and SGD against the U.S. Dollar averaged as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2017

2016

 

2017

2016

 

1 US$=

 

1 US$=

GBP

0.764

0.761

 

0.784

0.718

NOK

7.954

8.326

 

8.294

8.399

Euro

0.851

0.896

 

0.898

0.896

BRL

3.162

3.244

 

3.172

3.527

SGD

1.361

1.353

 

1.389

1.371

 

A substantial portion of our outstanding debt is denominated in U.S. Dollars, but a substantial portion of our revenue is generated in currencies other than the U.S. Dollar. We have evaluated these conditions and have determined that it is not in our best interest to use any financial instruments to hedge this exposure under present conditions. Our strategy is in part based on a number of factors including the following:

 

 

the cost of using hedging instruments in relation to the risks of currency fluctuations;

 

the propensity for adjustments in these foreign currency denominated vessel day rates over time to compensate for changes in the purchasing power of these currencies as measured in U.S. Dollars;

 

the level of U.S. Dollar-denominated borrowings available to us, if any; and

 

the conditions in our U.S. Dollar-generating regional markets.

 

One or more of these factors may change and, in response, we may use financial instruments to hedge risks of currency fluctuations. We will from time to time hedge known liabilities denominated in foreign currencies to reduce the effects of exchange rate fluctuations on our financial results. We do not use foreign currency forward contracts for trading or speculative purposes.

 

In June 2016, the United Kingdom voted in favor of exiting the European Union, which had an immediate negative impact on the GBP. Our consolidated results will be negatively impacted should the GBP further weaken against the U.S. Dollar.

 

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Reflected in the accompanying consolidated balance sheet at September 30, 2017, is a loss of $108.4 million in accumulated other comprehensive income, or accumulated OCI, primarily relating to the change in exchange rates at September 30, 2017 in comparison with the exchange rates when we invested capital in these markets. Changes in accumulated OCI are non-cash items that are primarily attributable to investments in vessels and U.S. Dollar-based capitalization between our parent company and our foreign subsidiaries. The current year activity reflects the changes in the U.S. Dollar compared to the functional currencies of our major operating subsidiaries, particularly in the U.K. and Norway.

 

To date, general inflationary trends have not had a material effect on our operating revenues or expenses.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There were no material changes in the three months ended September 30, 2017 to the market risk disclosures contained in Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There were no changes in our internal control over financial reporting identified in connection with such evaluation that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

On May 17, 2017, GulfMark Offshore, Inc. filed a voluntary petition for relief and commenced the Bankruptcy Case under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware which entered an order to approve the Plan on October 4, 2017. The Bankruptcy Case is being administered under the caption In re GulfMark Offshore, Inc. A more detailed discussion of current bankruptcy proceedings is set forth in Part I, Item 1 in Note 1 “General Information” and Note 2 “Bankruptcy and Related Matters” to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

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ITEM 1A.

RISK FACTORS

 

The risk factors set forth below are updates to certain risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

The RSA and the Plan provide that the shares of our existing common stock will be cancelled pursuant to the Plan and receive limited recovery.

 

We have a significant amount of indebtedness that is senior to our existing common stock in our capital structure. The RSA and the Plan provide that the shares of our existing common stock will be cancelled in the Bankruptcy Case and will be entitled to a limited recovery as specified therein. Any trading in shares of our common stock during the pendency of the Bankruptcy Case is highly speculative and poses substantial risks to purchasers of shares of our common stock.

 

The NYSE has delisted our Class A common stock, which is currently traded in the over-the-counter market. This could negatively affect our stock price and liquidity.

 

The NYSE delisted our Class A common stock from the NYSE because the average closing price per share over a period of 30 consecutive trading days was below $1.00 per share, which is the minimum average closing price required to maintain listing on the NYSE under Section 802.01C of the NYSE Listed Company Manual. Effective April 11, 2017, our Class A common stock commenced trading in the “Pink Sheets” of OTC Pink, under the symbol “GLFM.” The OTC Pink is a significantly more limited market than the NYSE, and quotation on the OTC Pink may result in a less liquid market available for existing and potential stockholders to trade the Class A common stock and could further depress the trading price of the Class A common stock. The delisting of our Class A common stock from the NYSE could also result in other adverse consequences, including lower demand for our shares, adverse publicity and a reduced interest in our Company from investors, analysts and other market participants. In addition, the delisting could impair our ability to raise additional capital through equity or debt financing and our ability to attract and retain employees by means of equity compensation. There can be no assurance that our Class A common stock will continue to trade on OTC Pink or that any public market for the Class A common stock will exist in the future, whether broker-dealers will continue to provide public quotes of the Class A common stock on this market, whether the trading volume of the Class A common stock will be sufficient to provide for an efficient trading market, whether quotes for the Class A common stock may be blocked by in the future, or that we will be able to relist the Class A common stock on a national securities exchange.

 

The Restructuring Support Agreement is subject to significant conditions and milestones that may be beyond our control and may be difficult for us to satisfy. If the RSA is terminated, our ability to consummate the Plan could be materially and adversely affected.

 

The RSA contains certain covenants on our part and on the part of certain Noteholders of our Senior Notes, who are signatories to the RSA, including that the Noteholders will vote in favor of the Plan, and otherwise facilitate the restructuring transaction, in each case subject to certain terms and conditions in the RSA. The RSA also contains certain conditions we must satisfy, including the timely satisfaction of certain milestones in the Bankruptcy Case such as effectiveness of the Plan.

 

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The consummation of the Plan is subject to customary conditions and other requirements. Our ability to timely complete such milestones is subject to risks and uncertainties that may be beyond our control.

 

The RSA also provides for the termination by each party upon the occurrence of certain events, including without limitation the failure by us to achieve certain milestones. If such an event occurs and the RSA is terminated, all obligations of the parties to the RSA shall terminate (except as specifically provided in the RSA) and the parties shall have the rights and remedies that they would have had been entitled to take if they had not entered into the RSA. Any such termination may result in the loss of support for the Plan by the parties to the RSA, which could adversely affect our ability to consummate the Plan. If the Plan is not consummated, there can be no assurance that any new plan of reorganization would be as favorable to holders of claims and stock. Any plan of reorganization and Chapter 11 proceedings in connection therewith could become protracted, which could significantly and detrimentally impact our relationships with vendors, suppliers, services providers, employees, customers and other third parties.

 

Although we anticipate restructuring in accordance with the RSA, there can be no assurance that we will be successful in completing a restructuring or any other similar transaction on such terms, on different terms or at all.

 

We are subject to the risks and uncertainties associated with our Chapter 11 proceedings.

 

As a consequence of our filing the Petition, our operations and our ability to develop and execute our business plan, and our continuation as a going concern, will be subject to the risks and uncertainties associated with bankruptcy. These risks include the following:

 

 

our ability to consummate the Plan or to confirm and consummate another plan of reorganization with respect to the Chapter 11 proceedings;

 

the high costs of bankruptcy proceedings and related fees;

 

our ability to consummate the exit financing pursuant to the Commitment Letter to allow us to emerge from bankruptcy and execute our business plan post-emergence, and our ability to comply with terms and conditions of that financing;

 

our ability to satisfy or renegotiate milestone dates, including those with respect to effectiveness of the Plan under our Restructuring Support Agreement, Backstop Commitment Agreement and Intercompany DIP Agreement, approval of the exit financing by the Consenting Noteholders and the forbearance deadlines under the RBS Forbearance Agreement;

 

our ability to maintain our relationships with our vendors, suppliers, service providers, customers, employees and other third parties;

 

our ability to maintain contracts that are critical to our operations on reasonably acceptable terms and conditions;

 

our ability to execute our business plan in the current depressed commodity price environment;

 

the ability to attract, motivate and retain key employees;

 

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the ability of third parties to seek and obtain court approval to terminate contracts and other agreements with us;

 

the possibility that the Chapter 11 proceedings will disrupt or impede our international operations;

 

the ability of third parties to seek and obtain court approval to convert the Chapter 11 proceedings to chapter 7 proceedings; and

 

the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 proceedings that may be inconsistent with our plans.

 

Delays in any Chapter 11 proceedings increase the risks of our inability to reorganize our business and emerge from bankruptcy and may increase our costs associated with the bankruptcy process.

 

These risks and uncertainties could affect our business and operations in various ways. For example, negative publicity associated with any Chapter 11 proceedings could adversely affect our relationships with our vendors, suppliers, service providers, customers, employees and other third parties, which in turn could adversely affect our operations and financial condition. In particular, critical suppliers, vendors and customers may determine not to do business with us due to any Chapter 11 proceedings. In addition, certain transactions may also require the consent of lenders under a debtor-in-possession financing. Also, during the pendency of any Chapter 11 proceedings, we will need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Additionally, losses of key personnel or erosion of employee morale could have a material adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract and maintain members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations. Because of the risks and uncertainties associated with a voluntary filing for relief under Chapter 11 of the Bankruptcy Code and the related proceedings, we cannot accurately predict or quantify the ultimate impact that events that occur during our Chapter 11 proceedings may have on our business, financial condition and results of operations, and there is no certainty as to our ability to continue as a going concern.

 

The Effective Date of the Plan may be delayed or may not occur.

 

Although the milestones in the RSA require that the Effective Date of the Plan occur by November 10, 2017, there can be no assurance as to the timing of the Effective Date of the Plan, that we would be successful in negotiating any extension of the milestone date or that the conditions to the Effective Date contained in the Plan will ever occur. The impact that a prolonging of the Bankruptcy Case may have on our operations cannot be accurately predicted or quantified. The continuation of the Bankruptcy Case, particularly if the Plan is not implemented within the time frame currently contemplated, could adversely affect operations and relationships between us and our vendors, suppliers, service providers, customers, employees and other third parties and result in increased professional fees and similar expenses. Failure to implement the Plan could further weaken our liquidity position, which could jeopardize our exit from Chapter 11.

 

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Upon emergence from a filing of voluntary relief under Chapter 11 of the Bankruptcy Code, our historical financial information may not be indicative of our future financial performance.

 

Our capital structure will be significantly altered under the Plan (or any alternative plan of reorganization). Under fresh-start reporting rules that we expect to apply to us upon the effective date of the Plan (or any alternative plan of reorganization), our assets and liabilities would be adjusted to fair values and our accumulated deficit would be restated to zero. Accordingly, assuming fresh-start reporting rules apply, our financial condition and results of operations following our emergence from Chapter 11 would not be comparable to the financial condition and results of operations reflected in our historical financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

 

The pursuit of the RSA and the Bankruptcy Case have consumed, and will continue to consume, a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.

 

Although the Plan is designed to minimize the length of our Chapter 11 proceedings, it is impossible to predict with certainty the amount of time that we could spend in bankruptcy. Any Chapter 11 proceedings may involve additional expense and our management will be required to spend a significant amount of time and effort focusing on the proceedings. This diversion of attention may materially adversely affect the conduct of our business and, as a result, our financial condition and results of operations, particularly if the Chapter 11 proceedings are protracted.

 

During the pendency of any Chapter 11 proceedings, our employees will face considerable distraction and uncertainty, and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a material adverse effect on our ability to effectively, efficiently and safely conduct our business, and could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our business and on our financial condition and results of operations.

 

Trading in our securities is highly speculative and poses substantial risks. Pursuant to the Plan, the holders of our existing common stock will receive their pro rata share of common stock representing in the aggregate 0.75% of the Reorganized GulfMark Equity and warrants for up to 7.5% of the Reorganized GulfMark Equity, which interests could be further diluted by equity in the reorganized Company issuable under the proposed management incentive plan, and upon exercise of the Reorganization Warrants contemplated by the Plan.

 

The RSA and Plan provide for, among other things, (i) the Rights Offering, pursuant to which, subject to certain limitations, eligible Noteholders will have the right to purchase, on the Effective Date of the Plan, their pro rata share of 60% of the Reorganized GulfMark Equity, or as applicable, the Jones Act Warrants, or the Reorganized GulfMark Equity, subject to dilution by Reorganized GulfMark Equity issued or issuable under the MIP and upon exercise of the Reorganization Warrants, (ii) each holder of the Senior Notes will receive (subject to limitations regarding the Jones Act described below) its pro rata share of Reorganized GulfMark Equity representing in the aggregate 35.65% of Reorganized GulfMark Equity, subject to dilution by Reorganized GulfMark Equity issued or issuable under the MIP and the exercise of the Reorganization Warrants, and (iii) all outstanding common stock of the Debtor will be cancelled and each holder of outstanding common stock of the Debtor will receive its pro rata share of (a) common stock representing in the aggregate 0.75% of the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP and the exercise of the Reorganization Warrants, and (b) warrants for 7.5% of the equity in the reorganized company, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP, with a 7-year term and with an exercise price based on an equity value of $1 billion, or the Reorganization Warrants. The Jones Act, which applies to companies that engage in coastwise trade, requires that, among other things, with respect to a publicly traded company, the aggregate ownership of common stock by non-U.S. citizens be not more than 25% of its outstanding common stock. Accordingly, the creditors who are recipients of common stock pursuant to the Plan or the Rights Offering who are non-U.S. holders may receive warrants to acquire common stock at an exercise price in a minimal amount in lieu of common stock, or the Jones Act Warrants.

 

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Pursuant to the Plan, up to 7.5% of the Reorganized GulfMark Equity will be reserved for issuance as awards under a post-restructuring MIP. Issuances of Reorganized GulfMark Equity under the MIP and any exercises of the Reorganization Warrants for shares of Reorganized GulfMark Equity will dilute the voting power of the outstanding common stock of the reorganized company and may adversely affect the trading price of such common stock.

 

Upon emergence from the Bankruptcy Case, the composition of our board of directors will change significantly.

 

Under the Plan, the composition of our board of directors will change significantly. Upon emergence, the board will be made up of seven directors selected by the Required Consenting Noteholders (as defined in the Plan), including the Company’s Chief Executive Officer, which will include six board members that are new to the Company. The new directors have different backgrounds, experiences and perspectives from those individuals who previously served on the board and, thus, may have different views on the issues that will determine the future of the Company. As a result, the future strategy and plans of the Company may differ materially from those of the past.

 

There may be circumstances in which the interests of our significant stockholders could be in conflict with the interests of our other stockholders.

 

Assuming the Plan were effective as of the date hereof, it is estimated that a limited number of Noteholders who currently hold approximately 50% of the Senior Notes would own over 50% or more of the Reorganized GulfMark Equity. Circumstances may arise in which these stockholders may have an interest in pursuing or preventing acquisitions, divestitures or other transactions, including the issuance of additional shares or debt, that, in their judgment, could enhance their investment in us or another company in which they invest. Such transactions might adversely affect us or other holders of Reorganized GulfMark Equity. In addition, our significant concentration of share ownership may adversely affect the trading price of the Reorganized GulfMark Equity because investors may perceive disadvantages in owning shares in companies with significant stockholders.

 

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We have substantial liquidity needs and may not be able to obtain sufficient liquidity to exit bankruptcy.

 

Although we have lowered our capital budget and reduced the scale of our operations significantly, our business remains capital intensive. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with the restructuring and expect that we will continue to incur significant professional fees and costs throughout any Chapter 11 proceedings. There are no assurances that our current liquidity is sufficient to allow us to satisfy our obligations related to any Chapter 11 proceedings, allow us to consummate any Chapter 11 plan of reorganization and allow us to emerge from bankruptcy. We can provide no assurance that we will be able to secure additional interim financing or exit financing sufficient to meet our liquidity needs. The Exit Facility Lenders’ obligations under the Commitment Letter are subject to certain customary conditions, and there can be no assurances that the proposed exit financing will be completed pursuant to the terms of the Commitment Letter, or that the final documentation in connection with the proposed exit financing will be approved by the Consenting Noteholders.

 

Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of the cash collateral order entered by the Bankruptcy Court in connection with our Chapter 11 proceedings, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, (iv) our ability to consummate the Plan or to confirm and consummate any other Chapter 11 plan of reorganization and (v) the cost, duration and outcome of the Chapter 11 proceedings.

 

The Plan and any other plan of reorganization that we may implement is and must be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, our Plan may be unsuccessful in its execution.

 

The Plan and any other plan of reorganization that we may implement could affect both our capital structure and the ownership, structure and operation of our businesses and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to change substantially our capital structure, (ii) our ability to obtain adequate liquidity and access financing sources, (iii) our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them, (iv) our ability to retain key employees and (v) the overall strength and stability of general economic conditions of the financial and oil and gas industries, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses.

 

In addition, the Plan and any other plan of reorganization relies or will rely upon financial projections, including with respect to revenues, EBITDA, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our capital structure. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of any plan of reorganization.

 

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We may be subject to claims that will not be discharged in any Chapter 11 proceedings, which could have a material adverse effect on our financial condition and results of operations.

 

The Bankruptcy Code provides that the confirmation of a Chapter 11 plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. Any claims not ultimately discharged through a Chapter 11 plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our business and our financial condition and results of operations on a post-reorganization basis.

 

There can be no guarantee that our Chapter 11 plan of reorganization will be successful, and we may not be able to achieve our stated goals and continue as a going concern.

 

Upon consummation of the Plan or any other Chapter 11 plan of reorganization, we will continue to face a number of risks, including further deterioration in commodity prices or other changes in economic conditions, changes in our industry, changes in demand for oil and gas and increasing expenses. Accordingly, we cannot guarantee that the Plan or any other Chapter 11 plan of reorganization will achieve our stated goals.

 

Furthermore, even if our debts are reduced or discharged through the Plan, we may need to raise additional funds through public or private debt or equity financing or other various means to fund our business after the completion of our Chapter 11 proceedings. Our access to additional financing is, and for the foreseeable future will likely continue to be, extremely limited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms, if they are available at all.

 

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Transfers or issuances of our equity before or in connection with Chapter 11 proceedings may impair our ability to utilize our tax loss and credit carryforwards in future years.

 

Under U.S. federal income tax law, a corporation is generally permitted to deduct from taxable income net operating losses carried forward from prior years and reduce any resulting tax liability by tax credits carried forward from prior years. We had net operating loss carryforwards of approximately $160 million and certain other beneficial tax attributes, including foreign tax credits, as of December 31, 2016. We believe that our consolidated group will generate additional tax losses and credits for the 2017 tax year.  Our ability to utilize our tax loss and credit carryforwards to offset future taxable income and to reduce our U.S. federal income tax liability is subject to certain requirements and restrictions. If we experience an “ownership change”, as defined in section 382 of the Internal Revenue Code, then our ability to use our tax losses and credits may be substantially limited, which could have a negative impact on our financial position and results of operations. Generally, an “ownership change” of a corporation occurs if one or more stockholders owning 5% or more of the corporation’s common stock have aggregate increases in their ownership of such stock of more than 50 percentage points over the prior three-year period. Under section 382 of the Internal Revenue Code, absent an applicable exception, if a corporation undergoes an “ownership change”, the amount of its tax losses and credits that may be utilized to offset future taxable income or to reduce its tax liability generally is subject to an annual limitation. The Bankruptcy Court approved restrictions on certain transfers of our stock to limit the risk of an “ownership change” prior to our restructuring in any Chapter 11 proceedings.  Upon the implementation of a plan of reorganization, it is likely that the amount of our tax losses and tax credits will be reduced due to the discharge of indebtedness and that an “ownership change” will occur such that any remaining tax loss and credit carryforwards that may be utilized to offset future taxable income or to reduce any tax liability will be subject to an annual limitation.

 

There can be no assurance that we will be able to meet the requirements under the Backstop Commitment Agreement.

 

We entered into the Backstop Commitment Agreement pursuant to which the Commitment Parties, among other things, agreed to backstop the Rights Offering, which we refer to as the Backstop Commitments. The Backstop Commitment Agreement is subject to certain conditions. In particular, the Backstop Commitment Agreement contemplates that if a Commitment Party fails to fund such Commitment Party’s Backstop Commitment in accordance with the Backstop Commitment Agreement, there can be no assurance that the Rights Offering will be consummated. In addition, as of the date of this report, the Backstop Commitment Agreement provides for a milestone date of November 10, 2017 relating to the Effective Date of the Plan. There can be no assurance as to the timing of the Effective Date of the Plan or that we would be successful in negotiating any extension of the milestone date. Consummation of the transactions contemplated under the Backstop Commitment Agreement is a condition precedent to effectiveness of the Plan. If the Backstop Commitment Agreement is terminated prior to the Plan becoming effective, we may not be able to consummate the Plan.

 

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ITEM 6.

EXHIBITS

 

Exhibits

 

Description

 

 Filed or Furnished Herewith or

Incorporated by Reference

from the

Following Documents

         

2.1

 

Order of the Bankruptcy Court, dated October 4, 2017, confirming the Chapter 11 Plan of Reorganization of GulfMark, including a copy of the Plan

 

Exhibit 2.1 to our current report on Form 8-K filed on October 5, 2017

         

3.1

 

Certificate of Incorporation, as amended

 

Exhibit 3.1 to our current report on Form 8-K filed on February 24, 2010 (SEC File No. 001-33607)

         

3.2

 

Bylaws, as amended

 

Exhibit 3.1 to our current report on Form 8-K filed on March 22, 2017

         

10.1

 

Amendment to Restructuring Support Agreement dated September 21, 2017 among GulfMark and certain holders of GulfMark’s Senior Notes party thereto

 

Exhibit 10.1 to our current report on Form 8-K filed on September 22, 2017

         

10.2

 

Amendment to Backstop Commitment Agreement dated September 21, 2017 among GulfMark and certain holders of GulfMark’s Senior Notes party thereto

 

Exhibit 10.2 to our current report on Form 8-K filed on September 22, 2017

         

10.3

 

Intercompany DIP Amendment, dated September 21, 2017 among GulfMark, Rederi and DNB

 

Exhibit 10.3 to our current report on Form 8-K filed on September 22, 2017

         

10.4

 

Amendment to RBS Forbearance Agreement, dated September 21, 2017 among Americas, Management and the Agent

 

Exhibit 10.4 to our current report on Form 8-K filed on September 22, 2017

         

10.5

 

Commitment Letter, dated September 29, 2017, by and among GulfMark, Rederi and the Exit Facility Lenders

 

Exhibit 10.1 to our current report on Form 8-K filed on October 2, 2017

         

31.1

 

Section 302 Certification for Q.V. Kneen

 

Filed herewith

         

31.2

 

Section 302 Certification for J.M. Mitchell

 

Filed herewith

         

32.1

 

Section 906 Certification furnished for Q.V. Kneen

 

Furnished herewith

         

32.2

 

Section 906 Certification furnished for J.M. Mitchell

 

Furnished herewith

         

101

 

The following materials from GulfMark Offshore, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Stockholders’ Equity, (iv) Unaudited Condensed Consolidated Statement of Cash Flows and (v) Notes to Unaudited Consolidated Condensed Financial Statements, tagged as blocks of text.

   

 

 

SIGNATURES

 

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

 

 

 

 

GulfMark Offshore, Inc.

 

       

 

 

 

 

 

By:

/s/ Samuel R. Rubio

 

 

 

Samuel R. Rubio

 

 

 

Senior Vice President -

Controller and Chief

Accounting Officer

 

       

Date: October 30, 2017

     

 

 

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