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EX-10.19 - EXHIBIT 10.19 - GULFMARK OFFSHORE INCex_109024.htm
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2017

OR

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

 

Commission file number 001-33607

 

GulfMark Offshore, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

76-0526032

(State or other jurisdiction of

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

incorporation or organization)

 
   

842 West Sam Houston Parkway North, Suite 400

 

Houston, Texas

77024

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 963-9522

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.01 par value per share

Equity Warrants to purchase Common Stock

NYSE American

NYSE American

(Title of each class) (Name of each exchange on which registered)

                                  

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

 

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 filings requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation in S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

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 Act). Yes No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was $4,471,867 calculated by reference to the closing price of $0.22 for the registrant’s Class A common stock on the New York Stock Exchange on that date.

 

Number of shares of common stock, $0.01 par value per share, outstanding as of March 30, 2018: 7,221,645

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 
 

 

 

TABLE OF CONTENTS

 

   

Page

     

PART I

   

Item 1.

Business

5

 

General Business

5

 

Worldwide Fleet

6

 

Operating Segments

11

 

Other

14

Item 1A.

Risk Factors

20

Item 1B.

Unresolved Staff Comments

34

Item 2.

Properties

34

Item 3.

Legal Proceedings

    34

Item 4.

Mine Safety Disclosures

 34

     

PART II

   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    35

Item 6.

Selected Financial Data

 37

Item 7.

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

    39

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

  56

Item 8.

Financial Statements and Supplementary Data

58

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

90

Item 9A.

Controls and Procedures

90

Item 9B.

Other Information

91

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance

 91

Item 11.

Executive Compensation

95

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

104

Item 13.

Certain Relationships and Related Transactions, and Director Independence

107

Item 14.

Principal Accountant Fees and Services

108

     

PART IV

   

Item 15.

Exhibits and Financial Statement Schedules

109

Item 16.

Form 10-K Summary

111

 

2

 
 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K, particularly in Part I, Item 1 “Business” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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,” “foresee,” “should,” “could,” “would,” “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:

 

 

the effects of our Chapter 11 Case 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 Chapter 11 Case on our company and on the interests of various constituents, including holders of our common stock, par value $0.01 per share, or Common Stock, and debt instruments;

 

our ability to access the public capital markets;

 

our ability to continue as a going concern in the long term;

 

the potential adverse effects of our Chapter 11 Case on our liquidity, results of operations, or business prospects;

 

our ability to execute our business plan;

 

the cost, availability and access to capital and financial markets;

 

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 a variety of assumptions, risks and uncertainties, many of which are beyond our control, that 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. Factors that could impact these areas and our overall business and financial performance and cause actual results to differ from these forward-looking statements include, but are not limited to, assumptions, risks and uncertainties associated with:

 

 

the risk factors discussed in Part I, Item 1A “Risk Factors”;

 

operational risk;

 

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

 

sustained weakening of demand for our services;

 

general economic and business conditions;

 

3

 

 

 

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 our compliance with the Jones Act with respect to the U.S. citizenship requirements, and risks relating to the repeal, amendment or administrative weakening of the Jones Act or changes in the interpretation of the Jones Act;

 

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;

 

risks of currency fluctuations; and

 

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

 

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. While we believe that each of these reports is reliable, we have not independently verified the information included in such reports. We specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.

 

4

 

 

PART I

 

ITEM 1. Business

GENERAL BUSINESS

Our Company

 

GulfMark Offshore, Inc., a Delaware corporation, was incorporated in 1996. Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer to GulfMark Offshore, Inc., its subsidiaries and its predecessors. 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, and also move and position drilling and production facilities. The majority of our operations are conducted in the North Sea, offshore Southeast Asia and offshore the Americas. As of March 30, 2018, we operate a fleet of 69 owned or managed offshore supply vessels, or OSVs, in the following regions: 30 vessels in the North Sea, 10 vessels offshore Southeast Asia, and 29 vessels offshore the Americas. Our fleet is one of the world’s youngest, largest and most geographically balanced, high specification OSV fleets. Our owned vessels have an average age of approximately 11 years.

 

We have three operating segments: the North Sea, Southeast Asia and the Americas. Our chief operating decision maker regularly reviews financial information about each of these operating segments in deciding how to allocate resources and evaluate our performance. Our operations within each of these geographic regions have similar economic characteristics, services, distribution methods and regulatory concerns. All of the operating segments are considered reportable segments under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, No. 280, “Segment Reporting,” or ASC 280. For financial information about our operating segments and geographic areas, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Segment Results” included in Part II, Item 7, and Note 12 to our Consolidated Financial Statements included in Part II, Item 8.

 

Our principal executive offices are located at 842 West Sam Houston Parkway North, Suite 400, Houston, Texas 77024, and our telephone number at that address is (713) 963-9522. We file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available free of charge to the public over the internet on our website at http://www.gulfmark.com and at the SEC’s website at http://www.sec.gov. Filings are available on our website as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. The preceding internet addresses and all other internet addresses referenced in this report are for information purposes only and are not intended to be a hyperlink. Accordingly, no information found or provided at such internet addresses or at our website in general (or at other websites linked to our website) is intended or deemed to be incorporated by reference in this report. You may also read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

Emergence from Bankruptcy Proceedings and Fresh Start Accounting

 

On May 17, 2017, GulfMark Offshore, Inc. filed a voluntary petition, or the Chapter 11 Case, under 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. On October 4, 2017, the Bankruptcy Court entered an order, or the Confirmation Order, approving the Amended Chapter 11 Plan of Reorganization, as confirmed, or the Plan. On November 14, 2017, or the Effective Date, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case. On the Effective Date, we adopted and applied the relevant guidance with respect to the accounting and financial reporting for entities that have emerged from bankruptcy proceedings, or Fresh Start Accounting. Under Fresh Start Accounting, our balance sheet on the Effective Date reflects all of our assets and liabilities at their fair values. Our emergence and the adoption of Fresh Start Accounting resulted in a new reporting entity, or the Successor, for financial reporting purposes. To facilitate our discussion and analysis of our vessels, financial condition and results of operations herein, we refer to the reorganized company as the Successor for periods subsequent to November 14, 2017 and the Predecessor for periods prior to November 15, 2017.

 

On the Effective Date, the Predecessor implemented the terms of the restructuring support agreement, or the RSA, that the Predecessor had entered into with certain holders, or the Noteholders, of the Predecessor’s senior notes, to support a restructuring on the terms of the Plan.  The RSA provided for, among other things, a $125 million cash rights offering for Successor equity, the exchange of the Predecessor’s senior notes plus unpaid interest for Successor equity, the cancellation of all of the Predecessor’s Class A common stock and the issuance of Successor equity to the Predecessor’s stockholders.  The Successor also obtained a term loan and revolving credit facility upon emergence.

 

For a more detailed discussion of our bankruptcy proceedings and disclosure of our final Predecessor balance sheet as of November 14, 2017 and our beginning Successor balance sheet as of November 15, 2017 see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7, and Note 2 to our Consolidated Financial Statements included in Part II, Item 8.

 

5

 

 

Offshore Marine Services Industry Overview

 

We utilize our vessels to provide services to our customers supporting the construction, positioning and ongoing operation of offshore oil and natural gas drilling rigs and platforms and related infrastructure, and substantially all of our revenue is derived from providing these services. The offshore marine services industry employs various types of OSVs that are used to transport materials, supplies and personnel, and to move and position drilling and production facilities. Offshore marine service providers are employed by companies that are engaged in the offshore exploration and production of oil and natural gas and related services. Services provided by companies in this industry are performed in numerous locations worldwide. The major markets that employ a large number of vessels include the North Sea, offshore Southeast Asia, offshore West Africa, offshore the Middle East, offshore Brazil and the Gulf of Mexico. Vessel usage is also significant in other international markets, including offshore India, offshore Australia, offshore Trinidad, the Persian Gulf, the Mediterranean Sea, offshore Russia and offshore East Africa. The industry is fragmented with many multi-national and regional competitors.

 

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 continues into 2018. Beginning in late 2014, oil prices declined significantly from early year levels of over $100 per barrel. 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 began to recover 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 by year end. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovering to over $60 per barrel in January 2018. 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. 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 our revenues, earnings and cash flows, and further sustained low oil and natural gas prices could have a material adverse effect on our liquidity.

 

The characteristics and current marketing environment in each operating segment are discussed below in greater detail. Each of the major geographic offshore oil and natural gas production regions has unique characteristics that influence the economics of exploration and production and, consequently, the market demand for vessels in support of these activities. While there is some vessel interchangeability between geographic regions, barriers such as mobilization costs, vessel suitability and cabotage restrict migration of some vessels between regions. This is most notable in the North Sea, where vessel design requirements dictated by the harsh operating environment may restrict relocation of vessels into that market, and in the U.S. Gulf of Mexico, where entry into the market is subject to Jones Act restrictions. Conversely, these same design characteristics make North Sea capable vessels unsuitable for other areas where draft restrictions and, to a lesser degree, higher operating costs, restrict migration.

 

WORLDWIDE FLEET

 

In addition to the vessels we own, we manage vessels for third-party owners, providing support services ranging from chartering assistance to full operational management. Although these managed vessels provide limited direct financial contribution, the added market presence can provide a competitive advantage for the manager. In addition, as a result of the industry downturn, we have removed some vessels from active service (also called stacking) to preserve cash flow. The following table summarizes our overall owned, managed and total fleet changes since December 31, 2016 and our stacked vessels as of March 30, 2018:

 

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2016 - Predecessor

    67       3       70  

New-Build Program

    1       -       1  

Vessel Additions

    -       -       -  

Vessel Dispositions

    (2 )     -       (2 )

November 14, 2017 - Predecessor

    66       3       69  

New-Build Program

    -       -       -  

Vessel Additions

    -       -       -  

Vessel Dispositions

    -       -       -  

December 31, 2017 - Successor

    66       3       69  

New-Build Program

    -       -       -  

Vessel Additions

    -       -       -  

Vessel Dispositions

    -       -       -  

March 30, 2018 - Successor

    66       3       69  
                         

Stacked vessels

    29       1       30  

 

6

 

 

Vessel Classifications

 

OSVs generally fall into one or more of seven functional classifications derived from their primary or predominant operating characteristics or capabilities. These classifications are not rigid, however, and it is not unusual for a vessel to fit into more than one of the categories. These functional classifications are:

 

 

Anchor Handling, Towing and Support Vessels, or AHTSs, are used to set anchors for drilling rigs and to tow mobile drilling rigs and equipment from one location to another. In addition, these vessels typically can be used in supply roles when they are not performing anchor handling and towing services. They are characterized by shorter aft decks and special equipment such as towing winches. Vessels of this type with less than 10,000 brake horsepower, or BHP, are referred to as small AHTSs, or SmAHTSs, while AHTSs in excess of 10,000 BHP are referred to as large AHTSs, or LgAHTSs. The most powerful North Sea class AHTSs have up to 25,000 BHP. All of our AHTSs can also function as platform supply vessels.

 

 

Platform Supply Vessels, or PSVs, serve drilling and production facilities and support offshore construction and maintenance work. They are differentiated from other OSVs by their cargo handling capabilities, particularly their large capacity and versatility. PSVs utilize space on deck and below deck and are used to transport supplies such as fuel, water, drilling fluids, equipment and provisions. PSVs typically range in size from 150 to 300 feet. Large PSVs, or LgPSVs, generally range from 210 to 300 feet in length, with a few vessels somewhat larger, and are particularly suited for supporting large concentrations of offshore production locations because of their large, clear after deck and below deck capacities. The majority of the LgPSVs we operate function primarily in this classification but are also capable of servicing construction support.

 

 

Fast Supply or Crew Vessels, or FSVs or crewboats, transport personnel and cargo to and from production platforms and rigs. Older crewboats (early 1980s build or earlier) are typically 100 to 120 feet in length and are designed for speed and to transport personnel. Newer crewboat designs are generally larger, 130 to 185 feet in length, and can be longer with greater cargo carrying capacities. Vessels in the larger category are also called fast supply vessels. They are used primarily to transport cargo on a time-sensitive basis.

 

 

Specialty Vessels, or SpVs, generally have special features to meet the requirements of specific jobs. The special features can include large deck spaces, high electrical generating capacities, slow controlled speed and varied propulsion thruster configurations, extra berthing facilities and long-range capabilities. These vessels are primarily used to support floating production storing and offloading; diving operations; remotely operated vehicles; survey operations and seismic data gathering; as well as oil recovery, oil spill response and well stimulation. Some of our owned vessels frequently provide specialty functions.

 

 

Standby Rescue Vessels perform a safety patrol function for a particular area and are required for all manned locations in the North Sea and in some other locations where oil and natural gas exploitation occurs. These vessels typically remain on station to provide a safety backup to offshore rigs and production facilities and carry special equipment to rescue personnel. They are equipped to provide first aid, shelter and, in some cases, function as support vessels.

 

 

Construction Support Vessels are vessels such as pipe-laying barges, diving support vessels or specially designed vessels, such as pipe carriers, used to transport the large cargos of material and supplies required to support the construction and installation of offshore platforms and pipelines. A large number of our LgPSVs also function as pipe carriers.

 

 

Utility Vessels are typically 90 to 150 feet in length and are used to provide limited crew transportation, some transportation of oilfield support equipment and, in some locations, standby functions.

 

The following table summarizes our owned vessel fleet by classification and by region as of March 30, 2018:

 

Owned Vessels by Classification

 
   

AHTS

   

PSV

                         

Region

 

LgAHTS

   

SmAHTS

   

LgPSV

   

PSV

   

FSV

   

SpV

   

Total

 
                                                         

North Sea

    3       -       24       -       -       -       27  

Southeast Asia

    8       2       -       -       -       -       10  

Americas

    -       2       21       4       1       1       29  
      11       4       45       4       1       1       66  

 

7

 

 

Vessel Construction, Acquisitions and Divestitures

 

During 2016, the Predecessor sold one older vessel from our North Sea region fleet and three vessels from our Southeast Asia fleet for combined proceeds of $6.5 million. The sales of these vessels generated a combined loss on sales of assets of $8.6 million. In March 2017, the Predecessor sold two fast supply vessels and recorded combined losses on sales of assets of $5.3 million.

 

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 could elect not to take delivery of the second vessel and forego the final payment, in which case the shipbuilder would retain the vessel. In May 2017, we elected not to take the vessel. We have no further purchase obligations under such contract.

 

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.

 

 

Vessel Additions Since December 31, 2016

 

 

 

Year

 

Length

   

 

   

 

 

Month

Vessel Region Type(1)

Built

 

(feet)

     BHP(2)      DWT(3)  

Delivered

                           

North Barents

N. Sea

LgPSV

2017

  304     11,935     4,700  

Jan-17

 

 

Vessels Disposed of Since December 31, 2016

     

Year

 

Length

             

Month

Vessel Region Type(1)

Built

 

(feet)

    BHP(2)     DWT(3)  

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, FSV - Fast Supply Vessel

(2)BHP - Brake Horsepower

(3)DWT - Deadweight Tons

 

 

Maintenance of Our Vessels and Drydocking Obligations

 

We are required to make expenditures for the certification and maintenance of our actively marketed vessels, and those expenditures typically increase with the age of the vessels. We have determined that generally we will not maintain stacked vessels in class until they are likely to achieve positive cash flow in a return to market. However, we will determine the need to perform drydocks in some circumstances such as the ability to easily maintain class or a potential sale. The deferred drydocks will eventually be required prior to returning the vessels to active service and, depending on numerous factors such as length of time a vessel has been idle or stacked, the cost for such a drydock could be materially more than a normal drydock. The demands of the market, management judgment as to which vessels to market and which vessels to stack, the expiration of existing contracts, the commencement of new contracts, and customer preferences influence the timing of drydocks. Future drydock costs will depend on vessel activity and vessel class requirements. For accounting purposes, prior to the Effective Date the Predecessor expensed the cost of drydocks as the costs were incurred. Under Fresh Start Accounting, the Successor has elected to capitalize the cost of drydocks and amortize the costs to expense over 30 months.

 

8

 

 

Vessel Listing

 

As of March 30, 2018, we operate a fleet of 69 vessels. The 66 vessels that we own are listed in the table below (which excludes the three vessels we manage for other owners):

 

Owned Vessel Fleet

 

 

 

Year

Length

 

 

 

Vessel Region Type (1)

Built

(feet)

BHP(2) DWT (3)

Flag

 

 

 

 

 

 

 

 

Highland Challenger

N. Sea

LgPSV

1997

220

5,450

3,115

UK

Highland Rover

N. Sea

LgPSV

1998

236

5,450

3,200

Malta

North Stream

N. Sea

LgPSV

1998

276

9,600

4,585

Norway

Highland Fortress

N. Sea

LgPSV

2001

236

5,450

3,200

Malta

Highland Bugler

N. Sea

LgPSV

2002

220

5,450

2,986

UK

Highland Navigator

N. Sea

LgPSV

2002

276

9,600

4,510

Malta

North Mariner

N. Sea

LgPSV

2002

276

9,600

4,400

Norway

Highland Courage

N. Sea

LgAHTS

2002

262

16,320

2,750

Malta

Highland Citadel

N. Sea

LgPSV

2003

236

5,450

3,280

UK

Highland Eagle

N. Sea

LgPSV

2003

236

5,450

3,200

UK

Highland Monarch

N. Sea

LgPSV

2003

220

5,450

3,000

UK

Highland Valour

N. Sea

LgAHTS

2003

262

16,320

2,750

Malta

Highland Endurance

N. Sea

LgAHTS

2003

262

16,320

2,750

UK

Highland Laird

N. Sea

LgPSV

2006

236

7,482

3,102

UK

Highland Prestige

N. Sea

LgPSV

2007

284

10,767

4,993

UK

North Promise

N. Sea

LgPSV

2007

284

10,767

4,993

Norway

Highland Prince

N. Sea

LgPSV

2009

284

10,738

4,826

UK

North Purpose

N. Sea

LgPSV

2010

284

10,738

4,836

Norway

Highland Duke

N. Sea

LgPSV

2012

246

7,482

3,121

UK

North Pomor

N. Sea

LgPSV

2013

304

11,465

5,000

Norway

Highland Defender

N. Sea

LgPSV

2013

286

9,598

5,100

UK

Highland Chieftain

N. Sea

LgPSV

2013

260

9,598

4,000

UK

Highland Guardian

N. Sea

LgPSV

2013

286

9,598

5,100

UK

Highland Knight

N. Sea

LgPSV

2013

246

7,482

3,116

UK

North Cruys

N. Sea

LgPSV

2014

304

11,465

5,000

Norway

Highland Princess

N. Sea

LgPSV

2014

246

7,482

3,081

UK

North Barents

N. Sea

LgPSV

2017

304

11,935

4,700

Norway

 

 

 

 

 

 

 

 

Sea Sovereign

SEA

SmAHTS

2006

230

5,500

1,875

Panama

Sea Cheyenne

SEA

LgAHTS

2007

250

10,760

2,700

Malaysia

Sea Supporter

SEA

SmAHTS

2007

230

7,954

2,605

Panama

Sea Apache

SEA

LgAHTS

2008

250

10,760

2,700

Panama

Sea Choctaw

SEA

LgAHTS

2008

250

10,760

2,700

Malaysia

Sea Kiowa

SEA

LgAHTS

2008

250

10,760

2,700

Panama

Sea Cherokee

SEA

LgAHTS

2009

250

10,700

2,700

Panama

Sea Comanche

SEA

LgAHTS

2009

250

10,760

2,700

Panama

Sea Valiant

SEA

LgAHTS

2010

230

10,000

2,058

Malaysia

Sea Victor

SEA

LgAHTS

2010

230

10,000

2,058

Malaysia

 

9

 

 

Owned Vessel Fleet

 

 

 

Year

Length

 

 

 

Vessel Region Type (1)

Built

(feet)

BHP (2) DWT (3)

Flag

 

 

 

 

 

 

 

 

Highland Scout

Americas

LgPSV

1999

218

4,640

2,800

Panama

Austral Abrolhos

Americas

SpV

2004

215

7,100

2,000

Brazil

Orleans

Americas

LgPSV

2004

252

6,342

2,929

USA

Bourbon

Americas

LgPSV

2004

252

6,342

2,929

USA

Royal

Americas

LgPSV

2004

252

6,342

2,929

USA

Chartres

Americas

LgPSV

2004

252

6,342

2,929

Mexico

Iberville

Americas

LgPSV

2005

252

6,342

2,929

USA

Coloso

Americas

SmAHTS

2005

199

5,916

1,645

Mexico

Titan

Americas

SmAHTS

2005

199

5,916

1,645

Mexico

Bienville

Americas

LgPSV

2005

210

6,342

2,374

USA

Conti

Americas

LgPSV

2005

210

6,342

2,374

USA

St. Louis

Americas

LgPSV

2005

252

6,342

2,929

USA

Toulouse

Americas

LgPSV

2004

252

6,342

2,929

USA

Esplanade

Americas

LgPSV

2005

252

6,342

2,929

USA

First and Ten

Americas

PSV

2007

190

3,894

1,686

USA

Double Eagle

Americas

PSV

2007

190

3,894

1,686

USA

Triple Play

Americas

PSV

2007

190

3,894

1,686

USA

Grand Slam

Americas

LgPSV

2008

224

3,894

2,129

USA

Slam Dunk

Americas

LgPSV

2008

224

3,894

2,129

USA

Touchdown

Americas

LgPSV

2008

224

3,894

2,129

USA

Hat Trick

Americas

PSV

2008

190

3,894

1,686

USA

Jermaine Gibson

Americas

LgPSV

2008

224

3,894

2,129

USA

Homerun

Americas

LgPSV

2008

224

3,894

2,129

USA

Knockout

Americas

LgPSV

2008

224

3,894

2,129

USA

Hammerhead

Americas

FSV

2008

181

7,200

552

USA

Thomas Wainwright

Americas

LgPSV

2010

242

4,200

2,448

USA

Polaris

Americas

LgPSV

2014

272

9,849

3,523

USA

Regulus

Americas

LgPSV

2015

272

9,849

3,523

USA

Hercules

Americas

LgPSV

2016

286

10,960

5,300

USA

 

 

 

(1)

Legend:

LgPSV — Large platform supply vessel

PSV — Platform supply vessel

LgAHTS — Large anchor handling, towing and supply vessel

SmAHTS — Small anchor handling, towing and supply vessel

SpV — Specialty vessel, including towing and oil spill response

FSV – Fast Supply Vessel

(2)

Brake horsepower

(3)

Deadweight tons

 

10

 

 

OPERATING SEGMENTS

 

The North Sea Operating Segment

 

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2016 - Predecessor

  24     3     27  

New-Build Program

  1     -     1  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

November 14, 2017 - Predecessor

  25     3     28  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

December 31, 2017 - Successor

  25     3     28  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

Intercompany Transfers

  2     -     2  

March 30, 2018 - Successor

  27     3     30  
                   

Stacked Vessels

  8     1     9  

 

 

Market and Segment Overview

 

We define the North Sea market as offshore Norway, Great Britain, the Netherlands, Denmark, Germany, Ireland, the Faeroe Islands, Greenland and the Barents Sea. Historically, this market has been the most demanding of all exploration frontiers due to harsh weather, erratic sea conditions, significant water depth and some long sailing distances. Exploration and production operators in the North Sea market have typically been large and well-capitalized entities (major and state-owned oil and natural gas companies and large independents) in large part because of the significant financial commitment required. Projects in the North Sea tend to be large in scope with long planning horizons. As a result, vessel demand in the North Sea has historically been more stable and less susceptible to abrupt swings than in other regions.

 

The North Sea market can be broadly divided into three service segments: exploration support; production platform support; and field development and construction (which includes subsea services). The exploration support services market represents the primary demand for AHTSs and has historically been the most volatile segment of the North Sea market. While PSVs support the exploration segment, they also support the production platform and field development and construction segments, which generally are not affected significantly by the volatility in demand for the AHTSs. Our North Sea-based fleet is oriented toward supply vessels that work production platform support and field development and construction, which are the more stable segments of the market.

 

Unless deployed to one of our other operating segments under long-term contract, vessels based in the North Sea but operating temporarily out of the region are included in our North Sea operating segment statistics, and all vessels based out of the region are supported through our onshore bases in Aberdeen, Scotland and Sandnes, Norway. The region typically has weaker periods of demand for vessels in the winter months of October through February primarily due to lower construction activity and harsh weather conditions affecting the movement of drilling rigs.

 

Market Development

 

Vessel demand in the North Sea is directly related to drilling and development activities in the region and construction work required in support of these activities. Geopolitical events, the demand for oil and natural gas in both mature and emerging countries, commodity prices and a host of other factors influence the expenditures of both independent and major oil and gas companies.

 

Exploration and development spending in the North Sea has declined in each year since the beginning of the market downturn that began in late 2014, as operators continue to be cautious in the lower oil price environment. Future commodity price uncertainty has put long-term planning and significant commitments to future spending on hold as operators focus on cost savings, efficiencies and cash preservation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Markets – North Sea” included in Part II, Item 7.  

 

11

 

 

The Southeast Asia Operating Segment

 

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2016 - Predecessor

  10     -     10  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

November 14, 2017 - Predecessor

  10     -     10  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

December 31, 2017 - Successor

  10     -     10  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

March 30, 2018 - Successor

  10     -     10  
                   

Stacked Vessels

  5     -     5  

 

 

Market and Segment Overview

 

The Southeast Asia market is defined as offshore Asia bounded roughly on the west by the Indian subcontinent and on the north by China, then south to Australia and east to the Pacific Islands. This market includes offshore Brunei, Indonesia, Malaysia, Myanmar, the Philippines, Thailand, Australia, New Zealand, Bangladesh, Timor-Leste, Papua New Guinea and Vietnam. Traditionally, the design requirements for vessels in this market were generally similar to the requirements of the shallow water U.S. Gulf of Mexico. However, advanced exploration technology and rapid growth in energy demand among many Pacific Rim countries have led to more remote drilling locations, which has increased both the overall demand and the technical requirements for vessels. All vessels based out of the region are supported through our primary onshore base in Singapore.

 

Southeast Asia’s customer environment is broadly characterized by national oil companies of smaller nations and a large number of mid-sized companies, in contrast to many of the other major offshore exploration and production areas of the world, where a few large operators dominate the market. Affiliations with local companies are generally necessary to maintain a viable marketing presence. Our management has been involved in the region for many years and we continue to maintain long-standing business relationships with a number of local companies.

 

Market Development

 

Vessels in this market are often smaller than those operating in areas such as the North Sea. However, the varying weather conditions, annual monsoons, severe typhoons and long distances between supply centers in Southeast Asia have allowed for a variety of vessel designs to compete, each suited for a particular set of operating parameters. Vessels designed for the U.S. Gulf of Mexico and other areas, where moderate weather conditions prevail, historically made up the bulk of the vessels in the Southeast Asia market. However, over the last several years Southeast Asian and Chinese shipyards have been focusing on larger, newer and higher specification vessels for deepwater projects and inclusion in the larger vessel fleet.

 

Changes in supply and demand dynamics have led to an excess number of vessels. It is possible that vessels currently located in the Arabian/Persian Gulf area, offshore Africa or the U.S. Gulf of Mexico could relocate to the Southeast Asia market; however, not all vessels currently located in those regions would be able to operate in Southeast Asia and oil and natural gas operators in this region continue to demand newer, higher specification vessels. Some countries have specified age limitations for vessels to operate in territorial waters, which limitations could adversely affect our ability to work in those markets. In addition, speculative building at Southeast Asian and Chinese yards as described above has led to a significant overhang of new build vessels, particularly in the mid-size PSV class and smaller AHTSs. Southeast Asia is a dynamic market and from time to time certain types of vessels may be subject to more intense competition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Markets – Southeast Asia” included in Part II, Item 7.  

 

12

 

 

The Americas Operating Segment

 

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2016 - Predecessor

  33     -     33  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  (2 )   -     (2 )

November 14, 2017 - Predecessor

  31     -     31  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

December 31, 2017 - Successor

  31     -     31  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

Intercompany Transfers

  (2 )   -     (2 )

March 30, 2018 - Successor

  29     -     29  
                   

Stacked Vessels

  16     -     16  

 

 

Market and Segment Overview

 

We define the Americas market as offshore North, Central and South America, specifically including the United States, Mexico, Trinidad and Brazil. All vessels based in the Americas are supported from our onshore bases in the United States, Mexico, Trinidad and Brazil. During 2017, due to the continued lower crude oil price environment and the resulting negative impact on demand for OSVs, we experienced further significant downward pressure on our utilization and day rates in all areas in which we operate. In response, we have kept a number of vessels stacked to reduce operating expenses, preserve cash through deferred drydockings and improve the supply/demand balance in the market. We had 18 vessels of our 31 vessels stacked in the Americas at the end of 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Markets – Americas” included in Part II, Item 7.

 

Market Development  

 

U.S. Gulf of Mexico

 

Drilling in the U.S. Gulf of Mexico can be divided into three sectors: the shallow waters of the continental shelf, the deepwater and the ultra-deepwater areas. The continental shelf has been explored since the late 1940s and the existing infrastructure and knowledge of this sector allows for incremental drilling costs to be on the lower end of the range of worldwide offshore drilling costs. A surge of deepwater drilling in this sector began in the 1990s as advances in technology made this type of drilling economically feasible. Deepwater and ultra-deepwater drilling is on the higher end of the cost range, and the substantial costs and long lead times required in these types of drilling historically have made it less susceptible to short-term fluctuations in the price of crude oil and natural gas, although all offshore drilling sectors have been dramatically impacted by the current market downturn. We do not expect significant recovery in deepwater or ultra-deepwater drilling until there is some stability in oil prices for several consecutive quarters. Most of our active vessels operate in the deepwater and ultra-deepwater areas of the U.S. Gulf of Mexico.

 

At the end of 2017, industry reports indicated that there were 33 “floater” rigs (semi-submersibles and drillships) supporting deepwater drilling in the U.S. Gulf of Mexico with 23 in working locations. According to the U.S. Energy Information Administration, Gulf of Mexico federal offshore oil production accounts for 17% of total U.S. crude oil production. We expect there to be a marginal recovery in the number of active floaters in the U.S. Gulf of Mexico in the next 12 to 18 months. Since there is a significant oversupply of vessels in the market it will be up to the OSV operators to practice market discipline on vessel stackings, scrappings and reducing spot vessel availability. Vessels that have been stacked for several years now will require over $1.0 million in costs per vessel to complete a special survey and go through a reactivation process. Assuming continuation of current market conditions, we anticipate a few more quarters of low utilization and cash breakeven levels with gradual recovery into 2019 as older tonnage is removed permanently from the market and demand increases over time. Marine transportation companies that operate in the U.S. Gulf of Mexico continue to manage challenging operational and financial issues, some more severe than others. If market conditions do not stabilize as indicated above or instead deteriorate, we expect any eventual recovery to be further delayed.

 

13

 

 

In general, the U.S. Gulf of Mexico remains a protected market that is subject to U.S. cabotage laws that impose certain restrictions on the ownership and operation of vessels in the U.S. coastwise trade, which we refer to as Coastwise Trade. These laws are principally contained in 46 U.S.C. Chapters 121, 505 and 551 and the related regulations, which are commonly referred to collectively as the “Jones Act.” Under the Jones Act, Coastwise Trade is the transportation of merchandise and passengers for hire between points in the United States. Subject to limited exceptions, the Jones Act requires that vessels engaged in Coastwise Trade be owned and operated by U.S. citizens within the meaning of the Jones Act, which we refer to as U.S. Citizens, be built in and registered under the laws of the United States, and manned by predominantly U.S. Citizen crews.

 

As of the date of this report, we are actively marketing 11 DP-2 class OSVs in the U.S. Gulf of Mexico. These vessels support the shelf, deepwater and ultra-deepwater activities of the oil and gas industry including, but not limited to, seismic operations, oil and gas exploration, field development, production, offshore pipeline inspection and survey, subsea installation and oil recovery activities. We believe that drilling operators in the Gulf of Mexico generally prefer DP-2 class vessels. All of our U.S. flagged OSVs that are in the U.S. Gulf of Mexico are DP-2 class vessels.

 

Mexico 

 

Since 2005, we have operated Small AHTSs and other OSVs offshore Mexico. During the past several years, we have from time to time moved various vessels into and out of the area from the U.S. Gulf of Mexico. In December 2013, Mexico’s Congress approved a constitutional reform to allow private investment in Mexico’s energy sector which effectively ended the state controlled (Petróleos Mexicanos) 75-year monopoly on oil and natural gas extraction and production. Mexico’s recent shelf and deepwater oil auctions were reported to have surpassed expectations with awards by the National Hydrocarbons Commission to some of the world’s top oil and gas companies. We regularly operate two vessels offshore Mexico.

 

Trinidad

 

Over the past five years we mobilized several vessels between Trinidad and the U.S. Gulf of Mexico and the North Sea. Given recent licensing and exploration activity in nearby locations, including Suriname and Guyana, we anticipate having OSVs operating offshore Trinidad for the foreseeable future. We operated four vessels offshore Trinidad at the end of 2017, although two of those vessels completed their contracts and were mobilized back to the North Sea in January 2018.

 

Brazil

 

Brazil, which was once considered a key market for stable, long term PSV charters, continues to feel the effects of low oil prices which have resulted in the cancellation or renegotiation of numerous PSV charters as Petróleo Brasileiro S.A., or Petrobras, defers capital expenditures.  Also, many Brazilian PSV owners have asserted their rights to challenge foreign flagged vessels on their charters. We have mobilized all but one vessel out of the region.

 

Refer to Note 12 to our Consolidated Financial Statements in Part II, Item 8 for segment and geographical revenue, profit or loss and total assets data during our last three fiscal years.

 

OTHER

 

Seasonality

 

Operations in the North Sea are generally at their highest levels from April through August and at their lowest levels from December through February primarily due to lower construction activity and harsh weather conditions during the winter months, which reduces the demand for movement of drilling rigs and deliveries to offshore platforms. Vessels operating offshore Southeast Asia are generally at their lowest utilization rates during the monsoon season, which moves across the Asian continent between September and early March. The monsoon season for a specific Southeast Asian location generally lasts about two months. Activity in the U.S. Gulf of Mexico is often lower during the North Atlantic hurricane season of 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. Operations in any market may, however, be affected by seasonality often related to unusually long or short construction seasons due to, among other things, abnormal weather conditions, as well as market demand associated with increased or decreased drilling and development activities.

 

Other Markets

 

From time to time, we have contracted our vessels outside of our operating segment regions principally on short-term charters offshore Africa and in the Mediterranean region. We look to our core markets for the bulk of our term contracts; however, when the economics of a contract are attractive, or we believe it is strategically advantageous, we may operate our vessels in markets outside of our core regions. The operations of vessels in those markets are generally managed through our offices in the North Sea region.

 

14

 

 

Customers, Contract Terms and Competition

 

Our principal customers are major integrated oil and natural gas companies, large independent oil and natural gas exploration and production companies working in international markets, and foreign government-owned or controlled oil and natural gas companies. Additionally, our customers also include companies that provide logistic, construction and other services to such oil and natural gas companies and foreign government organizations. Generally, our contracts are industry standard time charters for periods ranging from a few days or months up to five years. Contract terms vary and often are similar within geographic regions with certain contracts containing cancellation provisions (in some cases permitting cancellation for any reason) and others containing non-cancellable provisions except in the case of unsatisfactory performance by the vessel. For the Successor period ended December 31, 2017, no customer accounted for 10% or more of the Successor’s total consolidated revenue. For the Predecessor period ended November 14, 2017, we recognized revenue from EOG Resources in the amount of $9.0 million in our Americas region, accounting for more than 10% of our total consolidated revenue. For the Predecessor year ended December 31, 2016, no customer accounted for 10% or more of the Predecessor’s total consolidated revenue. For the Predecessor year ended December 31, 2015, the Predecessor had revenue from BG Group and Anadarko Petroleum Corporation in our North Sea and Americas regions totaling $32.4 million and $31.9 million, respectively, each accounting for 10% or more of our total consolidated revenue.

 

Contract or charter durations vary from single-day to multi-year in length, based upon many different factors that vary by market. Additionally, there are “evergreen” charters (also known as “life of field” or “forever” charters), and at the other end of the spectrum, there are “spot” charters and “short duration” charters, which can vary from a single voyage to charters of less than six months. Longer duration charters are more common where equipment is not as readily available or specific equipment is required. In the North Sea region, multi-year charters are more common and historically have constituted a significant portion of that market. In the Southeast Asia region, term charters have historically been less common than in the North Sea and generally have terms of less than two years. In the Americas, particularly in the U.S. Gulf of Mexico, charters vary in length from short-term to multi-year periods, many with short-term cancellation clauses. In Brazil, Mexico and Trinidad contracts vary from spot contracts to multi-year term contracts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fleet Commitments and Backlog” included in Part II, Item 7.

 

Managed vessels add to the market presence of the manager but provide limited direct financial contribution. Management fees consist of a fixed annual fee. The manager is typically responsible for disbursement of funds for operating the vessel on behalf of the owner. Currently, we have three vessels under management.

 

Substantially all of our charters are fixed in British Pounds, or GBP; Norwegian Kroner, or NOK; Euros; or U.S. Dollars. We attempt to reduce currency risk by matching each vessel’s contract revenue to the currency in which its operating expenses are incurred.

 

We have numerous mid-size and large competitors in the North Sea, Southeast Asia and Americas markets, some of which have significantly greater financial resources than we have. We compete principally on the basis of suitability of equipment, price and service. In the Americas region, we benefit from the provisions of the Jones Act which limits vessels that can operate in the U.S. Gulf of Mexico to those with U.S. ownership. Also, in certain foreign countries, preferences given to vessels owned by local companies may be mandated by local law or by national oil companies. We have attempted to mitigate some of the impact of such preferences through affiliations with local companies.

 

Government and Environmental Regulation

 

We must comply with extensive government regulation in the form of international conventions, federal, state, and local laws and regulations in jurisdictions where our vessels operate and/or are registered. These conventions, laws and regulations govern matters of environmental protection, worker health and safety, vessel and port security, and the manning, construction, ownership and operation of vessels, including cabotage requirements. Our operations are subject to extensive governmental regulation by the United States Coast Guard and the United States Customs and Border Protection, or CBP, as well as their foreign equivalents. The Coast Guard sets safety standards and is authorized to inspect vessels at will to enforce those standards and various laws, and the Coast Guard and National Transportation Safety Board are authorized to investigate vessel accidents and recommend improved safety standards. The CBP is authorized to inspect vessels at will to enforce compliance with immigration and trade laws and regulations. Further, with regard to environmental regulations, we are subject to the Environmental Protection Agency, or EPA, as well as analogous state and local environmental agencies. Our operations in the U.S. Gulf of Mexico may, from time to time, fall under the jurisdiction of the U.S. Bureau of Safety and Environmental Enforcement and its Safety and Environmental Management System regulations, in which case we are also required to certify that our maritime operations adhere to those regulations. In addition, we are subject to regulation by private industry organizations such as the American Bureau of Shipping and Det Norske Veritas. We are also subject to international laws and conventions and the laws of international jurisdictions where we operate. We believe that we are in compliance, in all material respects, with all applicable U.S. and international laws and regulations.

 

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Maritime Regulations

 

We are subject to the Merchant Marine Act of 1936, which provides that, upon proclamation by the President of the United States of a national emergency or a threat to the security of the national defense, the Secretary of Transportation may requisition or purchase any vessel or other watercraft owned by United States citizens (which includes our company), including vessels under construction in the United States. If any of the vessels in our fleet were purchased or requisitioned by the federal government under this law, we would be entitled to be paid just compensation, which is generally the fair market value of the vessel in the case of a purchase or, in the case of a requisition, the fair market value of charter hire. However, we would not be entitled to be compensated for any consequential damages we suffer as a result of the requisition or purchase of any of our vessels.

 

Under the Jones Act, the transportation of merchandise or passengers for hire in Coastwise Trade is restricted to vessels that are qualified under the Jones Act, which are vessels that are owned and operated by U.S. Citizens, built in and registered under the laws of the United States, and manned by predominantly U.S. Citizen crews. A corporation is not considered a U.S. Citizen for purposes of owning and operating a vessel in Coastwise Trade unless:

 

 

the corporation is organized under the laws of the United States or of a state, territory or possession thereof;

 

the chief executive officer, by whatever title, and the chairman of the board of directors are U.S. Citizens;

 

no more than a minority of the number of directors of such corporation necessary to constitute a quorum for the transaction of business are non-U.S. Citizens; and

 

at least 75 percent of the ownership and voting power of each class or series of the shares of the capital stock is owned by, voted by and controlled by U.S. Citizens, free from any trust or fiduciary obligations in favor of, or any contract or understanding under which voting power or control may be exercised directly or indirectly on behalf of, non-U.S. Citizens.

 

We are currently a U.S. Citizen under these requirements and hence eligible to engage in Coastwise Trade. If we fail to comply with these U.S. Citizen requirements, however, we would no longer be considered a U.S. Citizen. Such an event could result in our ineligibility to engage in Coastwise Trade, the imposition of substantial penalties against us, including fines and seizure and forfeiture of our vessels, and the inability to flag our vessels in the United States and maintain a coastwise endorsement, each of which could have a material adverse effect on our financial condition and results of operations.

 

To facilitate compliance with the Jones Act, our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws: (i) limit the aggregate percentage ownership by non-U.S. Citizens of any class or series of our capital stock (including Common Stock) to 24% of the outstanding shares of each such class or series to ensure that ownership by non-U.S. Citizens will not exceed the maximum percentage permitted by applicable maritime law (presently 25%); (ii) provide that any issuance or transfer of shares in excess of such permitted percentage shall be ineffective as against our company and that neither our company nor its transfer agent shall register such purported issuance or transfer of shares or be required to recognize the purported transferee or owner as a stockholder of our company for any purpose whatsoever except to exercise our company’s remedies; (iii) provide that any such excess shares shall not have any voting or dividend rights; (iv) permit our company to redeem any such excess shares; and (v) permit the Board of Directors to make such reasonable determinations as may be necessary to ascertain such ownership and implement such limitations.

 

Environmental Regulations

 

Our operations are subject to a variety of federal, state, local and international laws and regulations regarding the emission or discharge of materials into the environment or otherwise relating to environmental protection. As some environmental laws impose strict liability for remediation of spills and releases of oil and hazardous substances, we could be subject to liability even if we were not negligent or at fault. These laws and regulations may expose us to liability for the conduct of or conditions caused by others, including charterers.

 

Numerous governmental authorities, such as the Coast Guard, EPA, analogous state agencies, and, in certain instances, citizens’ groups, have the power to enforce compliance with these laws and regulations and the permits issued under them. Failure to comply with applicable environmental laws and regulations may result in the imposition of administrative, civil and criminal penalties, revocation of permits, issuance of corrective action orders and suspension or termination of our operations. Environmental laws and regulations may change in ways that substantially increase costs, or impose additional requirements or restrictions which could adversely affect our financial condition and results of operations. We believe that we are in substantial compliance with currently applicable environmental laws and regulations, but failure to comply with these laws and regulations could have material adverse consequences. Environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements could have a material adverse effect upon our capital expenditures, earnings or competitive position, including the suspension or cessation of operations in affected areas. As such, there can be no assurance that material costs and liabilities related to compliance with environmental laws and regulations will not be incurred in the future.

 

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International Safety Management and International Ship & Port Facility Security Codes

 

The International Maritime Organization, or IMO, has made the regulations of the International Safety Management Code, or ISM Code, mandatory through the adoption by flag states of the ISM Code under the International Convention for the Safety of Life at Sea. The ISM Code provides an international standard for the safe management and operation of ships, pollution prevention and certain crew and vessel certifications. IMO has also adopted the International Ship & Port Facility Security Code, or ISPS Code. The ISPS Code provides that owners or operators of certain vessels and facilities must provide security and security plans for their vessels and facilities and obtain appropriate certification of compliance. We believe all of our vessels presently are certificated in accordance with ISPS Code. The risks of incurring substantial compliance costs, liabilities and penalties for noncompliance are inherent in offshore marine operations.

 

International Labour Organization’s Maritime Labour Convention

 

The International Labour Organization’s Maritime Labour Convention, 2006, as amended, or the MLC, entered into force on August 20, 2013. Since then, 88 countries have ratified the MLC, making for a diverse geographic footprint of enforcement. The MLC establishes comprehensive minimum requirements for working conditions of seafarers including, among other things, conditions of employment, hours of work and rest, grievance and complaints procedures, accommodations, recreational facilities, food and catering, health protection, medical care, welfare, and social security protection. The MLC also provides a definition of seafarer that includes all persons engaged in work on a vessel in addition to the vessel's crew. Under this MLC definition, we may be responsible for proving that customer and contractor personnel aboard its vessels have contracts of employment that comply with the MLC requirements. We could also be responsible for salaries and/or benefits of third parties that may board one of our vessels. The MLC requires certain vessels that engage in international trade to maintain a valid Maritime Labour Certificate issued by their flag administration. Although the United States is not a party to the MLC, U.S.-flag vessels operating internationally must comply with the MLC when visiting a port in a country that is a party to the MLC.

 

Accordingly, we continue prioritizing certification of our vessels to MLC requirements based on the dates of enforcement by countries in which we have operations, recruit seafarers, perform maintenance and repairs at shipyards, or may make port calls during ocean voyages. Once obtained, vessel certifications are maintained, regardless of the area of operation. Additionally, where possible, we continue to work with certain flag states to seek substantial equivalencies to comparable national and industry laws that meet the intent of the MLC, but allow us to maintain our longstanding operational protocols and mitigate changes to our business processes. As ratifications of the MLC continue, we continue to assess our global seafarer labor relationships and fleet operational practices not only to undertake compliance with the MLC but also to gauge the impact of enforcement, the effects of which cannot be reasonably estimated at this time.

 

MARPOL

 

The International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978, or MARPOL, is the main IMO international convention covering prevention of pollution of the marine environment by vessels from operational or accidental causes. MARPOL has been updated by amendments through the years and is implemented in the United States by the Act to Prevent Pollution from Ships. MARPOL has six specific annexes. Of relevance to our operations, Annex I governs oil pollution, Annex V governs garbage pollution, and Annex VI governs air pollution.

 

MARPOL Annex VI, which addresses air emissions from vessels, requires the use of low sulfur fuel worldwide in both auxiliary and main propulsion diesel engines on ships. Annex VI also specifies requirements for Emission Control Areas, or ECAs, with stricter limitations on sulfur emissions in these areas. Historically, ships operating in the Baltic Sea ECA, the North Sea/English Channel ECA and the North American ECA were required to use fuel with a sulfur content of no more than 1% or use alternative emission reduction methods rather than the current 3.5% global (non-ECA) limit. Beginning in January 2015, the fuel sulfur content limit in ECAs was reduced to 0.1%. The MARPOL global limit on fuel sulfur content outside of ECAs will be reduced to 0.5% beginning in January 2020. We may incur additional compliance costs as part of our efforts to comply with Annex VI and other provisions of MARPOL. In addition, we could face fines and penalties for failure to meet requirements imposed by MARPOL and similar laws related to the operation of our vessels.

 

The Clean Water Act

 

The Clean Water Act, or CWA, imposes strict controls on the discharge of pollutants into the navigable waters of the United States. The CWA also provides for civil, criminal and administrative penalties for any unauthorized discharge of oil or other hazardous substances in reportable quantities and imposes liability for the costs of removal and remediation of an unauthorized discharge. Many states have laws that are analogous to the CWA and also require remediation of accidental releases of petroleum or other pollutants in reportable quantities. Our vessels routinely transport diesel fuel to offshore rigs and platforms and also carry diesel fuel for their own use. We maintain response plans as required by the CWA to address potential oil and fuel spills from either our vessels or our shore-based facilities.

 

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In addition, the CWA established the National Pollutant Discharge Elimination System, or NPDES, permitting program, which governs discharges of pollutants into navigable waters of the United States from point sources, such as vessels operating in the navigable waters. Pursuant to the NPDES permitting program, the EPA issued a Vessel General Permit, or VGP. The current Vessel General Permit, or the 2013 VGP, which became effective on December 19, 2013, applies to commercial vessels that are at least 79 feet in length and therefore applies to our vessels. The 2013 VGP requires vessel owners and operators to adhere to “best management practices” to manage the 27 types of covered discharges, including ballast water, which occur normally in the operation of a vessel. In addition, the 2013 VGP requires vessel owners and operators to implement various training, inspection, monitoring, recordkeeping, and reporting requirements, as well as corrective actions upon identification of each deficiency. The purpose of these limitations is to reduce the number of living organisms discharged via ballast water into waters regulated by the 2013 VGP. The 2013 VGP also contains requirements for oil-to-sea interfaces, which seeks to improve environmental protection of U.S. waters, by requiring all vessels to use an “Environmentally Acceptable Lubricant” in all oil-to-sea interfaces, unless not technically feasible. These regulations may increase the costs of compliance for our operations. In addition, failure to comply with the requirements of the 2013 VGP and other provisions of the CWA could result in the imposition of substantial fines and penalties. The 2013 VGP expires on December 18, 2018. We expect a new VGP to be proposed in 2018, which may lead to additional compliance costs.

 

The Oil Pollution Act

 

The Oil Pollution Act of 1990, or OPA, establishes a comprehensive regulatory and liability regime designed to increase pollution prevention, ensure better spill response capability, increase liability for oil spills, and facilitate prompt compensation for cleanup and damages. OPA is applicable to owners and operators of facilities operating near U.S. navigable waters and to owners, operators and bareboat charterers whose vessels operate in U.S. waters, which include the navigable waters of the United States (generally three nautical miles from the coastline) and the 200 nautical mile exclusive economic zone of the United States. Under OPA, owners and operators of regulated facilities and owners, operators and bareboat charterers of vessels are “responsible parties” and are jointly, severally and strictly liable for removal costs and damages arising from discharges or threatened discharges of oil from their facilities or vessels, respectively, up to their limits of liability (except if the limits are broken as described below) unless the discharge results solely from the act or omission of certain third parties under specified circumstances, an act of God or an act of war. “Damages” are defined broadly under OPA to include:

 

 

damages for injury to natural resources and the costs of remediation thereof;

 

damages for injury to, or economic losses resulting from the destruction of, real or personal property;

 

the net loss of taxes, royalties, rents, fees and profits by the United States government, and any state or political subdivision thereof;

 

lost profits or impairment of earning capacity due to property or natural resources damage;

 

the net costs of providing increased or additional public services necessitated by a spill response, such as protection from fire or other hazards or taking additional safety precautions; and

 

the loss of subsistence use of available natural resources.

 

OPA, through implementing regulations, currently limits the liability of responsible parties for discharges from non-tank vessels to $1,100 per gross ton or $939,800, whichever is greater. These limits are subject to increase. OPA’s liability limits do not apply: (1) if an incident was proximately caused by violation of applicable federal safety, construction or operating regulations or by a responsible party’s gross negligence or willful misconduct; or (2) if the responsible party fails or refuses to report the incident, fails to provide reasonable cooperation and assistance required by a responsible official in connection with oil removal activities, or without sufficient cause fails to comply with an order issued under OPA. If an oil discharge or a substantial threat of discharge were to occur involving one of our shore-based facilities or vessels, we may be liable for removal costs and damages, which could be material to our results of operations and financial position. In addition, failure to comply with OPA may result in the assessment of civil, administrative and criminal penalties.

 

In addition, OPA requires owners and operators of vessels over 300 gross tons to provide the Coast Guard with evidence of financial responsibility to cover the cost of cleaning up oil spills from such vessels. We have provided satisfactory evidence of financial responsibility to the Coast Guard for all of our vessels that are over 300 gross tons.

 

Under the Nontank Vessel Response Plan Final Rule, which became effective October 30, 2013, owners and operators of nontank vessels are required by the Coast Guard to prepare and submit Nontank Vessel Response Plans, or NTVRPs. This rule implemented a 2004 statutory mandate expanding oil spill response planning standards that are applicable to tank vessels under OPA amendments to the CWA to self-propelled nontank vessels of 400 or more gross tons that carry oil of any kind as fuel for main propulsion and that operate on the navigable waterways of the United States. Under this rule, we are required to prepare NTVRPs and contract with oil spill removal organizations to meet certain response planning requirements based on the capacity of a particular vessel. We have, in all material respects, complied with these requirements.

 

OPA allows states to impose their own liability regimes with respect to oil pollution incidents occurring within their boundaries and many states have enacted legislation providing for unlimited liability for oil spills. Some states have issued regulations addressing financial responsibility and vessel response planning requirements. We do not anticipate that state legislation or regulations will have a material impact on our operations.

 

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Hazardous Wastes and Substances

 

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, also known as CERCLA or Superfund, and similar laws, impose liability for releases of hazardous substances into the environment. CERCLA currently exempts crude oil from the definition of hazardous substances for purposes of the statute, but our operations may involve the use or handling of other materials that may be classified as hazardous substances. CERCLA assigns strict liability to each responsible party for all response costs, as well as natural resource damages. CERCLA also imposes liability similar to OPA and provides compensation for cleanup, removal and natural resource damages. Liability per vessel under CERCLA is limited to the greater of $300 per gross ton or $5 million, unless the release is the result of willful misconduct or willful negligence, the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations, or the responsible person fails to provide reasonable cooperation and assistance in connection with response activities, in which case liability is unlimited. A responsible person may be liable to the United States for punitive damages up to three times the amount of any costs incurred by the federal Hazardous Substances Superfund as a result of such person’s failure to take proper action. We could be held liable for releases of hazardous substances that resulted from operations by third parties not under our control or for releases associated with practices performed by us or others that were standard in the industry at the time. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment.

 

The Resource Conservation and Recovery Act, or RCRA, regulates the generation, transportation, storage, treatment and disposal of onshore hazardous and non-hazardous wastes and requires states to develop programs to ensure the safe disposal of wastes. We generate non-hazardous wastes and small quantities of hazardous wastes in connection with routine operations. We believe that all of the wastes that we generate are handled, in all material respects, in compliance with RCRA and analogous state statutes.

 

Insurance

 

   We review our insurance coverages annually.  In particular, we assess our coverage levels and limits for possible marine liabilities, including pollution, personal injury or death, and property damage.  We can provide no assurance, however, that our insurance coverage will be available beyond the renewal periods, or that it will be adequate to cover future claims that may arise. Claims covered by insurance are subject to deductibles, the aggregate amount of which could be material. Insurance policies are also subject to certain exclusions and compliance with certain conditions, the failure of which could lead to a denial of coverage as to a particular claim or the voiding of a particular insurance policy. There can be no assurance that existing insurance coverage can be renewed at commercially reasonable rates or that available coverage will be adequate to cover future claims.

 

Litigation

 

We are not a party to any material pending regulatory litigation or other proceeding and we are unaware of any threatened litigation or proceeding, which, if adversely determined, would have a material adverse effect on our financial condition or results of operations.

 

Employees

 

We have approximately 950 employees located principally in the United States, the United Kingdom, Norway and Southeast Asia. Through our contract with a crewing agency, we participate in the negotiation of collective bargaining agreements for approximately 420 contract crew members, approximately half of our labor force, who are members of two North Sea unions. Wages are renegotiated annually in the second half of each year for the North Sea unions. We have no other collective bargaining agreements; however, we do employ crew members who are members of national unions but we do not participate in the negotiation of those collective bargaining agreements. We consider relations with our employees to be satisfactory. To date, our operations have not been interrupted by strikes or work stoppages. In addition, our obligations to our crew members are governed by the International Labour Organization’s Maritime Labour Convention which has been adopted in varying degrees by different flag states. We have adopted proactive procedures to ensure that we comply with or are entitled to an exemption from the Convention.

 

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ITEM 1A. Risk Factors

 

We operate globally in challenging and highly competitive markets, and our business is subject to a variety of risks, including the risks described below, which could cause our actual results to differ materially from those anticipated, projected or assumed in forward-looking statements. You should carefully consider these risks when evaluating us and our securities. The risks and uncertainties described below are not the only ones facing our company. We are also subject to a variety of risks that affect many other companies generally, as well as additional risks and uncertainties not known to us or that, as of the date of this report, we believe are not as significant as the risks described below. If any of the following risks actually occur, the accuracy of any forward-looking statements made by us, including in this report, and our business, financial condition, results of operations and cash flows, and the trading prices of our securities, may be materially and adversely affected.

 

We recently emerged from bankruptcy, which could adversely affect our business and relationships.

 

It is possible that our having filed for bankruptcy and our recent emergence from the Chapter 11 Case could adversely affect our business and relationships with vendors, suppliers, service providers, customers, employees and other third parties. Due to uncertainties, many risks exist, including the following:

 

 

key suppliers or vendors could terminate their relationship with us or require additional financial assurances or enhanced performance from us;

 

the ability to renew existing contracts and compete for new business may be adversely affected;

 

the ability to attract, motivate and/or retain key executives and employees may be adversely affected;

 

the ability to attract, motivate and/or retain employees may be adversely affected;

 

employees may be distracted from performance of their duties or more easily attracted to other employment opportunities; and

 

competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted.

 

The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation. We cannot assure you that having been subject to bankruptcy protection will not adversely affect our business or operations in the future.

 

In connection with the disclosure statement we filed with the Bankruptcy Court, and the hearing to consider confirmation of the Plan, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan and our ability to continue operations upon our emergence from bankruptcy. Those projections were prepared solely for the purpose of the bankruptcy proceedings and have not been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections.

 

The continuing downturn in the oil and gas industry has had a significant negative effect on our results of operations and revenues, our customers’ ability to pay and our profitability.

 

Demand for our vessels and services, and therefore our results of operations, are highly dependent on the level of spending and investment in offshore exploration, development and production by the companies that operate in the energy industry. The energy industry’s level of capital spending is directly related to current and expected future demand for hydrocarbons and the prevailing commodity prices of crude oil and, to a lesser extent, natural gas. Hydrocarbon supply has increased at a faster pace than hydrocarbon demand, despite a significant decrease in exploration and development spending. This has resulted in significant declines in crude oil prices. When our customers experience low commodity prices or come to believe that they will be low in the future, they generally reduce their capital spending for offshore drilling, exploration and field development. The precipitous decline in crude oil prices that began in late 2014 and reached a 12-year low of less than $30/barrel in early 2016 resulted in a decrease in the energy industry’s level of capital spending. Although crude oil prices have improved from these low levels, if prices decline further or continue to remain depressed for an extended period of time, capital spending and demand for our services may remain similarly depressed. If certain major oil producing nations do not intend to reduce crude oil output the current over-supply environment may continue for the foreseeable future unless there is a significant increase in worldwide demand, which may not occur or may occur very slowly. These market conditions negatively affected our 2017 results and are expected to continue to significantly affect future results, particularly if exploration and production activity levels and, therefore, demand for our products and services, as well as our customers’ ability to pay, remain depressed or continue to decline. The decrease in demand for offshore services could cause the industry to experience a prolonged downturn. These conditions could have a material adverse effect on our business, financial condition and results of operations.

 

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We rely on the oil and natural gas industry, and volatile oil and natural gas prices impact demand for our services.

 

Demand for our services depends on activity in offshore oil and natural gas exploration, development and production. The level of exploration, development and production activity is affected by factors such as:

 

 

prevailing oil and natural gas prices;

 

expectations about future prices and price volatility;

 

worldwide supply and demand for oil and gas;

 

the level of economic activity in energy-consuming markets;

 

the worldwide economic environment, trends in international trade or other economic trends, such as recessions;

 

the ability of the Organization of Petroleum Exporting Countries (OPEC) to set and maintain production levels and pricing;

 

the level of production in non-OPEC countries;

 

international sanctions on oil producing countries and the lifting of certain sanctions against Iran;

 

civil unrest and the worldwide political and military environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities involving the Middle East, Russia, other oil-producing regions or other geographic areas or further acts of terrorism in the United States or elsewhere;

 

the cost of exploring for, producing and delivering oil and natural gas;

 

reallocation of drilling budgets away from offshore drilling in favor of other priorities, such as shale or other land-based projects;

 

sale and expiration dates of available offshore leases;

 

demand for petroleum products;

 

current availability of oil and natural gas resources;

 

rate of discovery of new oil and natural gas reserves in offshore areas;

 

local and international political, environmental and economic conditions;

 

changes in laws and regulations;

 

technological advances;

 

ability of oil and natural gas companies to obtain leases and permits, or obtain funds for capital expenditures; and

 

development and exploitation of alternative fuels or energy sources.

 

An increase in commodity demand and prices will not necessarily result in an immediate increase in offshore drilling activity since our customers’ project development times, reserve replacement needs, expectations of future commodity demand, prices and supply of available competing vessels all combine to affect demand for our vessels. The level of offshore exploration, development and production activity has historically been characterized by volatility, and that volatility is likely to continue. The decline in exploration and development of offshore areas has resulted in a decline in the demand for our offshore marine services and may continue to do so or may worsen. Any such decrease in activity is likely to reduce our day rates and our utilization rates and, therefore, could have a material adverse effect on our financial condition and results of operations.

 

If we are unable to generate enough cash flow from operations to service our indebtedness or are unable to use future borrowings to fund other capital needs, we may have to undertake alternative financing plans, which may have onerous terms or may be unavailable.

 

If our business does not generate cash flow from operations in the future that is sufficient to service our outstanding indebtedness and other capital needs, we cannot assure you that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other capital needs. If operational performance does not improve significantly and oil companies do not increase spending for exploration and production activities, we expect to need additional sources of liquidity as a result of an inability to generate sufficient cash flow from operations to service our long-term capital needs. We have a substantial amount of indebtedness, and if we do not generate sufficient cash flow from operations in the future to satisfy our debt obligations and other capital needs, we may have to undertake alternative financing plans, such as:

 

 

refinancing or restructuring all or a portion of our debt;

 

obtaining alternative financing;

 

selling assets;

 

reducing or delaying capital investments;

 

seeking to raise additional capital; or

 

revising or delaying our strategic plans.

 

We cannot assure you, however, that we would be able to implement alternative financing plans, if necessary, on commercially reasonable terms or at all, or that undertaking alternative financing plans, if necessary, would allow us to meet our debt obligations and capital requirements or that these actions would be permitted under the terms of our debt instruments. In addition, any effort to implement alternative financing plans would result in diversion of management time and focus away from operating our business and could also result in dilutive issuances of our equity securities or the incurrence of debt, which could adversely affect our business and financial condition.

 

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Our inability to generate sufficient cash flow in the future to satisfy our debt obligations or to obtain alternative financing could materially and adversely affect our business, financial condition, results of operations and prospects. Any failure to make required or scheduled payments of interest and principal on our outstanding indebtedness could harm our ability to incur additional indebtedness on acceptable terms. Further, if for any reason we are unable to satisfy our covenants, debt service or repayment obligations, we would be in default under the terms of the agreements governing such debt, which, if not remedied or waived, would allow our creditors to declare all such outstanding indebtedness to be due and payable. The lenders under our credit agreement would have the right to terminate their commitments to loan money, and such lenders could foreclose against our assets securing their borrowings, which would have a material adverse effect on our business, financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Emergence from Bankruptcy - Exit Credit Facility” and Note 2 to our Consolidated Financial Statements in Part II, Item 8.

 

Our ability to raise capital in the future may be limited, which could make us unable to fund our capital requirements.

 

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new secured debt securities, the secured debt holders would have rights senior to holders of Common Stock to make claims on our assets, and the terms of any additional debt could restrict our operations, including our ability to pay dividends on our Common Stock. If we issue additional equity securities, existing stockholders may experience dilution. Our Amended and Restated Certificate of Incorporation permits our Board of Directors to issue preferred stock which could have rights and preferences senior to those of our Common Stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our security holders bear the risk of our future securities offerings reducing the market price of our Common Stock or other securities, diluting their interest or being subject to rights and preferences senior to their own.

 

We may be unable to maintain compliance with financial ratio covenants in our outstanding indebtedness which could result in an event of default that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

 

Our credit agreement requires us to satisfy certain financial covenants, including the following:

 

 

minimum liquidity covenants of at least $15,000,000 in cash and $30,000,000 minimum liquidity;

 

a leverage ratio (total debt to 12 months EBITDA) of not more than 5.0 to 1.0, tested quarterly beginning December 31, 2020;

 

a total debt to capital ratio, tested quarterly, not to exceed 0.45 to 1.0; and

 

a collateral to commitment coverage ratio (the ratio of aggregate collateral vessels’ fair market value to the total outstanding amount, including commitments, of the facilities under our credit agreement) of at least 2.50 to 1.0.

 

As of December 31, 2017, we were in compliance with our financial covenants; however, we cannot guarantee that we will be able to comply with such terms at all times in the future. A failure to comply with the financial covenants in our credit agreement that is not waived by our lenders or otherwise cured could lead to a termination of our credit agreement or acceleration of all amounts due under our credit agreement, which would have a material adverse effect on our business, financial condition and results of operations. These restrictions may limit our ability to obtain future financings to withstand a future downturn in our business or the economy in general, or to otherwise conduct necessary corporate activities.

 

Our credit agreement contains a number of covenants that limit our ability to make dispositions or investments, incur additional indebtedness and engage in other transactions, which could adversely affect our ability to meet our future goals.

 

Our credit agreement contains a number of covenants that limit our operational flexibility. The sale of collateral vessels that are pledged to secure our obligations under our credit agreement is subject to various restrictions and will trigger payment of a prepayment premium if made during the applicable premium payment period. Collateral vessel operations are also subject to a variety of restrictive provisions, including customary provisions related to vessel flag, registry, safety standards, environmental compliance, insurance, technical and commercial management, joint venture activities, modification limits, chartering scope limits, survey and inspection requirements, and other limitations. Proceeds of the facilities under our credit agreement may not be used to acquire vessels or finance business acquisitions generally.

 

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Under our credit agreement, we are also subject to restrictions on:

 

 

additional indebtedness;

 

additional liens on assets;

 

investments;

 

mergers and acquisitions;

 

vessel dispositions;

 

joint ventures;

 

vessel classification maintenance;

 

distributions to equity holders;

 

affiliate transactions;

 

leasing limits; and

 

other customary matters.

 

Our credit agreement also requires us to comply with certain financial covenants as discussed above. A breach of any of these covenants could result in a default under our credit agreement. If an event of default occurs, the lenders under our credit agreement may elect to declare all outstanding borrowings, together with accrued interest, to be immediately due and payable. The lenders under our credit agreement would also have the right in these circumstances to cancel any commitments they have to provide further borrowings. If we are unable to repay our indebtedness when due or declared due, the lenders thereunder would also have the right to proceed against the vessels and other collateral pledged to them to secure the indebtedness. We may also be prevented from taking advantage of business opportunities that arise because of the limitations that the restrictive covenants under our indebtedness impose on us.

 

We may not be able to renew or replace expiring contracts for our vessels.

 

We have a number of charters that will expire in 2018. Our ability to renew or replace expiring contracts or obtain new contracts, and the terms of any such contracts, will depend on various factors, including market conditions and the specific needs of our customers. Given the highly competitive and historically cyclical nature of our industry, we may not be able to renew or replace the contracts or we may be required to renew or replace expiring contracts or obtain new contracts at rates that are below, and potentially substantially below, existing day rates, or that have terms that are less favorable to us than our existing contracts, or we may be unable to secure contracts for these vessels. This could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Our industry is highly competitive, which could depress vessel prices and utilization and adversely affect our financial performance.

 

We operate in a competitive industry. The principal competitive factors in the marine support and transportation services industry include:

 

 

price, service and reputation of vessel operations and crews;

 

national flag preference;

 

operating conditions;

 

suitability of vessel types;

 

vessel availability;

 

technical capabilities of equipment and personnel;

 

safety and efficiency;

 

complexity of maintaining logistical support; and

 

cost of moving equipment from one market to another.

 

In addition, an expansion in the supply of vessels in the regions in which we compete, whether through new vessel construction, the refurbishment of older vessels, or the conversion of vessels, could lower charter rates, which could adversely affect our business, financial condition and results of operations. Many of our competitors have substantially greater resources than we have. Competitive bidding and downward pressures on profits and pricing margins could adversely affect our business, financial condition and results of operations.

 

An increase in the supply of offshore supply vessels would likely have a negative effect on charter rates for our vessels, which could reduce our earnings.

 

Our industry is highly competitive, with oversupply and intense price competition. Charter rates for marine supply vessels depend in part on the supply of the vessels. We could experience an increased reduction in demand as a result of the current oversupply of vessels. Excess vessel capacity has resulted from:

 

 

constructing new vessels;

 

moving vessels from one offshore market area to another;

 

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converting vessels formerly dedicated to services other than offshore marine services; and

 

declining offshore oil and gas drilling production activities.

 

In the past decade, construction of vessels of the types we operate has increased. Significant new OSV construction and upgrades of existing OSVs have intensified price competition. The resulting increase in OSV supply has depressed OSV utilization and intensified price competition from both existing competitors, as well as new entrants into the offshore vessel supply market. As of the date of this report, not all of the vessels currently under construction have been contracted for future work, which may further intensify price competition as scheduled delivery dates occur. Such price competition could further reduce day rates, utilization rates and operating margins, which would adversely affect our financial condition and results of operations.

 

As the markets recover or we change our marketing strategies or for other reasons, we may be required to incur higher than expected costs to return previously stacked vessels to class.

 

Stacked vessels are not maintained with the same diligence as our marketed fleet. Depending on the length of time the vessels are stacked, we may incur costs beyond normal drydock costs to return these vessels to active service. These costs are difficult to estimate and may be substantial.

 

We have been adversely affected by a decrease in offshore oil and gas drilling as a result of unconventional crude oil and unconventional natural gas production and the improved economics of producing natural gas and oil from shale.

 

The rise in production of unconventional crude oil and gas resources in North America and the commissioning of a number of new large liquefied natural gas export facilities around the world are, at least to date, primarily contributing to an over-supplied natural gas market. While production of crude oil and natural gas from unconventional sources is still a relatively small portion of the worldwide crude oil and natural gas production, production from unconventional resources is increasing because improved drilling efficiencies are lowering the costs of extraction. There is an oversupply of natural gas inventories in the United States in part due to the increased development of unconventional crude oil and natural gas resources. Prolonged increases in the worldwide supply of crude oil and natural gas, whether from conventional or unconventional sources, will likely continue to depress crude oil and natural gas prices. Prolonged periods of low natural gas prices have a negative impact on development plans of exploration and production companies, which in turn, results in a decrease in demand for offshore support vessel services. The rise in production of natural gas and oil, particularly from onshore shale, as a result of improved drilling efficiencies that are lowering the costs of extraction, has resulted in a reduction of capital invested in offshore oil and gas exploration. Because we provide vessels servicing offshore oil and gas exploration, the significant reduction in investments in offshore exploration and development has had a material adverse effect on our operations and financial position.

 

The ownership position of our significant stockholders limits other stockholders’ ability to influence corporate matters and could affect the price of our Common Stock.

 

As of March 30, 2018, based on their most recent Schedule 13D or Schedule 13G filings, Raging Capital Management, LLC beneficially owned 32.7% of our outstanding Common Stock, Captain Q, LLC beneficially owned 16.2% of our outstanding Common Stock and Canyon Capital Advisors LLC beneficially owned 15.4% of our Common Stock, which in total represents approximately 64.3% of our outstanding Common Stock. While these stockholders are not a group, these three stockholders in and of themselves have the ability to influence significantly all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. These three stockholders may have interests that differ from other stockholders, and they may each vote in a way with which other stockholders disagree and one or more of them may be adverse in the future to the interests of other stockholders. The concentration of ownership of our Common Stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their Common Stock as part of a sale of our company, and may adversely affect the market price of our Common Stock. This concentration of ownership of our Common Stock may also have the effect of influencing the completion of a change in control that may not necessarily be in the best interests of all of our stockholders.

 

Due to the continuous evolution of laws and regulations in the various markets in which we operate, we may be restricted or even lose the right to operate in certain international markets where we currently have a presence.

 

Many of the countries in which we operate have laws, regulations and enforcement systems that are largely undeveloped, and the requirements of these systems are not always readily discernible even to experienced operators. Further, these laws, regulations and enforcement systems can be subject to frequent change or reinterpretation, sometimes with retroactive effect, and taxes, fees, fines or penalties may be sought from us based on such a reinterpretation or retroactive effect. While we endeavor to comply with applicable laws and regulations, our compliance efforts might not always be wholly successful, and failure to comply with such laws and regulations may result in administrative and civil penalties, criminal sanctions, imposition of remedial obligations or the suspension or termination of our operations in the jurisdiction. In addition, laws and regulations could be changed or be interpreted in new, unexpected ways that substantially increase our costs, which we may not be able to pass through to our customers. Any changes in laws, regulations or standards that would impose additional costs, requirements or restrictions could adversely affect our financial condition, results of operations or cash flows.

 

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A decrease in our customer base could adversely affect demand for our services and reduce our revenues.

 

We derive a significant amount of our revenue from a small number of offshore energy companies. Our loss of one of these significant customers, if not offset by sales to new or other existing customers, could have a material adverse effect on our business, financial condition and results of operations. In addition, in recent years, oil and natural gas companies, energy companies and drilling contractors have undergone substantial consolidation and additional consolidation is possible. Consolidation results in fewer companies to charter or contract for our services. Also, merger activity among both major and independent oil and natural gas companies affects exploration, development and production activity as the consolidated companies integrate operations to increase efficiency and reduce costs. Less promising exploration and development projects of a combined company may be dropped or delayed. Such activity may result in an exploration and development budget for a combined company that is lower than the total budget of both companies before consolidation, which could adversely affect demand for our vessels and thereby reduce our revenues.

 

Maintaining our current fleet size and configuration and acquiring vessels required for additional future growth require significant capital.

 

Expenditures required for the repair, certification and maintenance of a vessel typically increase with vessel age. These expenditures may increase to a level at which they are not economically justifiable and, therefore, to maintain our current fleet size we may seek to construct or acquire additional vessels. Also, customers may prefer modern vessels over older vessels, especially in weaker markets. The cost of adding a new vessel to our fleet can be substantial.

 

While we expect our cash on hand, cash flow from operations and available borrowings under our credit agreement to be adequate to fund our existing commitments, our ability to pay these amounts is dependent upon the success of our operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Emergence from Bankruptcy - Exit Credit Facility” included in Part II, Item 7. We can give no assurance that we will have sufficient capital resources to build or acquire the vessels required to expand or to maintain our current fleet size and vessel configuration.

 

We are subject to hazards customary for the operation of vessels that could adversely affect our financial performance if we are not adequately insured or indemnified.

 

Our operations are subject to various operating hazards and risks, including:

 

 

catastrophic marine disaster;

 

adverse sea and weather conditions;

 

mechanical failure;

 

navigation errors;

 

collision;

 

oil and hazardous substance spills, containment and clean up;

 

labor shortages and strikes;

 

damage to and loss of drilling rigs and production facilities;

 

war, sabotage, piracy, cyber-attack and terrorism risks; and

 

outbreak of contagious disease.

 

These risks present a threat to the safety of our personnel and to our vessels, cargo, equipment under tow and other property, as well as the environment. We could be required to suspend our operations or request that others suspend their operations as a result of these hazards. In such event, we would experience loss of revenue and possibly property damage, and additionally, third parties may make significant claims against us for damages due to personal injury, death, property damage, pollution and loss of business.

 

We maintain insurance coverage against many of the casualty and liability risks listed above, subject to deductibles and certain exclusions. We have renewed our primary insurance program for the insurance year 2018/2019. We can provide no assurance, however, that our insurance coverage will be available beyond the renewal periods, or that it will be adequate to cover future claims that may arise. Claims covered by insurance are subject to deductibles, the aggregate amount of which could be material. Insurance policies are also subject to compliance with certain conditions, the failure of which could lead to a denial of coverage as to a particular claim or the voiding of a particular insurance policy. There also can be no assurance that existing insurance coverage can be renewed at commercially reasonable rates or that available coverage will be adequate to cover future claims. If a loss occurs that is partially or completely uninsured, we could be exposed to substantial liability that could have a material adverse effect on our financial condition, results of operations and cash flows.

 

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We may not be fully indemnified by our customers for damage to their property or the property of their other contractors. Our contracts are individually negotiated, and the levels of indemnity and allocation of liabilities in them can vary from contract to contract depending on market conditions, particular customer requirements and other factors existing at the time a contract is negotiated. Additionally, the enforceability of indemnification provisions in our contracts may be limited or prohibited by applicable law or may not be enforced by courts having jurisdiction, and we could be held liable for substantial losses or damages and for fines and penalties imposed by regulatory authorities. The indemnification provisions of our contracts may be subject to differing interpretations, and the laws or courts of certain jurisdictions may enforce such provisions while other laws or courts may find them to be unenforceable, void or limited by public policy considerations, including when the cause of the underlying loss or damage is our gross negligence or willful misconduct, when punitive damages are attributable to us or when fines or penalties are imposed directly against us. The law with respect to the enforceability of indemnities varies from jurisdiction to jurisdiction. Current or future litigation in particular jurisdictions, whether or not we are a party, may impact the interpretation and enforceability of indemnification provisions in our contracts. There can be no assurance that our contracts with our customers, suppliers and subcontractors will fully protect us against all hazards and risks inherent in our operations. There can also be no assurance that those parties with contractual obligations to indemnify us will be financially able to do so or will otherwise honor their contractual obligations.

 

Failure to comply with the Foreign Corrupt Practices Act and similar worldwide anti-bribery laws may have an adverse effect on us.

 

Our international operations require us to comply with a number of U.S. and international laws and regulations, including those involving anti-bribery and anti-corruption. We do business and may do additional business in the future in countries and regions where strict compliance with anti-bribery laws may not be customary. In order to effectively operate in certain foreign jurisdictions, circumstances may require that we establish joint ventures with local operators or find strategic partners. As a U.S. company, we are subject to the regulations imposed by the Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business or obtaining an improper business benefit. We have an ongoing program of proactive procedures to promote compliance with the FCPA and other similar anti-bribery and anti-corruption laws, but we may be held liable for actions taken by our strategic or local partners or agents even though these partners or agents may not themselves be subjected to the FCPA or other similar laws.  Our personnel and intermediaries, including our local operators and strategic partners, may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in the future.  As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees or intermediaries, even if such parties are not always subject to our control or are not themselves subject to the FCPA or other similar laws to which we may be subject. Any allegation that we have violated the FCPA or other similar laws or any determination that we have violated the FCPA or other similar laws could have a material adverse effect on our business, results of operations, and cash flows.

 

Our Common Stock is subject to restrictions on non-U.S. Citizen ownership and possible required divestiture by non-U.S. Citizen stockholders.

 

Certain of our operations are conducted in the Coastwise Trade and are governed by U.S. federal laws commonly known as the Jones Act. The Jones Act restricts waterborne transportation of merchandise and passengers for hire between points in the United States to vessels owned and operated by U.S. Citizens. We could lose the privilege of owning and operating vessels in the Coastwise Trade and may become subject to penalties and risk seizure and forfeiture of our U.S.-flag vessels if non-U.S. Citizens were to own or control, in the aggregate, more than 25% of any class or series of our capital stock. Such loss would have a material adverse effect on our results of operations.

 

Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws authorize our Board of Directors to establish with respect to any class or series of our capital stock certain rules, policies and procedures, including procedures with respect to transfer of shares, to ensure compliance with the Jones Act. In order to provide a reasonable margin for compliance with the Jones Act, our Amended and Restated Certificate of Incorporation contains provisions that limit the aggregate percentage ownership by non-U.S. Citizens of any class or series of our capital stock (including the Common Stock) to 24% of the outstanding shares of each such class or series to ensure that ownership by non-U.S. Citizens will not exceed the maximum percentage permitted by the Jones Act (presently 25%). On the Effective Date, the maximum percentage of shares of Common Stock held by non-U.S. Citizens allowable under such provisions was reached. At and during such time that the limit is reached with respect to shares of Common Stock, we will be unable to issue any further shares of Common Stock or permit transfers of Common Stock to non-U.S. Citizens. Any issuance or transfer of shares in excess of such permitted percentage shall be ineffective as against us and neither we nor our transfer agent is required to register such purported issuance or transfer of shares or required to recognize the purported transferee or owner as a stockholder of our company for any purpose whatsoever except to exercise our remedies. Any such excess shares in the hands of a non-U.S. Citizen shall not have any voting or dividend rights and are subject to redemption by our company at a redemption price that may be paid in redemption warrants, cash or promissory notes at the discretion of our Board of Directors. As a result of these provisions, a purported stockholder who is not a U.S. Citizen may not receive any return on its investment in any such excess shares. Further, we may have to incur additional indebtedness, or use available cash (if any), to fund all or a portion of such redemption, in which case our financial condition may be materially weakened. The existence and enforcement of these requirements could have an adverse impact on the liquidity or market value of our equity securities in the event that U.S. Citizens were unable to transfer shares in our company to non-U.S. Citizens. Furthermore, under certain circumstances, this ownership restriction could discourage, delay or prevent a change of control of our company.

 

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So that we may ensure compliance with the Jones Act, provisions in our Amended and Restated Certificate of Incorporation permit us to require that owners of any shares of our capital stock provide confirmation of their citizenship. In the event that a person does not submit such documentation to us, those provisions provide us with certain remedies, including the suspension of voting and dividend rights and treatment of such person as a non-U.S. Citizen unless and until we receive the requested documentation confirming that such person is a U.S. Citizen. As a result of non-compliance with these provisions, an owner of the shares of our Common Stock may lose significant rights associated with those shares.

 

Our business could be adversely affected if we do not comply with the Jones Act.

 

We are subject to the Jones Act, which requires that vessels carrying merchandise or passengers for hire in Coastwise Trade be owned and operated by U.S. Citizens, be built in and registered under the laws of the United States, and manned by predominantly U.S. Citizen crews. Violations of the Jones Act would result in our losing eligibility to engage in Coastwise Trade, the imposition of substantial penalties against us, including fines and seizure and forfeiture of our vessels, and/or the inability to register our vessels in the United States with coastwise endorsements, any of which could have a material adverse effect on our financial condition and results of operations. Although we currently believe we meet the requirements to engage in Coastwise Trade, and there are provisions in our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws that were designed to assist us in complying with these requirements, there can be no assurance that we will be in compliance with the Jones Act in the future.

 

Circumvention or repeal of the Jones Act may have an adverse impact on us.

 

The Jones Act’s provisions restricting Coastwise Trade to vessels owned and operated by U.S. Citizens may from time to time be circumvented by foreign interests that seek to engage in trade reserved for U.S.-flag vessels owned and operated by U.S. Citizens and otherwise qualifying for Coastwise Trade. Legal challenges against such actions are difficult, costly to pursue and are of uncertain outcome. There have also been attempts to repeal or amend the Jones Act, and these attempts are expected to continue. In addition, the Secretary of the Department of Homeland Security may waive the requirement for using U.S.-flag vessels with coastwise endorsements in the Coastwise Trade in the interest of national defense. Furthermore, the Jones Act restrictions on the maritime cabotage services are subject to certain exceptions under certain international trade agreements, including the General Agreement on Trade in Services and the North American Free Trade Agreement. If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade agreements, the shipping of maritime cargo between covered U.S. ports could be opened to foreign-flag, foreign-built vessels or foreign-owned vessels. To the extent foreign competition is permitted from vessels built in lower-cost shipyards and crewed by non-U.S. Citizens with favorable tax regimes and with lower wages and benefits, such competition could have a material adverse effect on domestic companies, such as ours, in the offshore service vessel industry subject to the Jones Act.

 

Our U.S.-flag vessels may be requisitioned or purchased by the United States in the event of a national emergency or a threat to security.

 

We are subject to the Merchant Marine Act of 1936, which provides that, upon proclamation by the President of a national emergency or a threat to the security of the national defense, the Secretary of Transportation may requisition or purchase any vessel or other watercraft owned by United States citizens (which includes United States corporations), including vessels under construction in the United States. If our vessels were purchased or requisitioned by the federal government, we would be entitled to be paid just compensation, which is generally the fair market value of the vessel in the case of a purchase or, in the case of a requisition, the fair market value of charter hire, but we would not be entitled to be compensated for any consequential damages we suffer. The purchase or the requisition for an extended period of time of one or more of our vessels could adversely affect our results of operations and financial condition.

 

We are subject to war, sabotage, piracy, cyber-attacks and terrorism risk.

 

War, sabotage, pirate, cyber and terrorist attacks or any similar risk may adversely affect our operations in unpredictable ways, including changes in the insurance markets, disruptions of fuel supplies and markets, particularly oil, and the possibility that infrastructure facilities, including pipelines, production facilities, refineries, electric generation, transmission and distribution facilities, offshore rigs and vessels, and communications infrastructures, could be direct targets of, or indirect casualties of, a cyber-attack or an act of piracy or terror. War or risk of war or any such attack may also have an adverse effect on the economy, which could adversely affect activity in offshore oil and natural gas exploration, development and production and the demand for our services. Insurance coverage can be difficult to obtain in areas of pirate and terrorist attacks resulting in increased costs that could continue to increase. We periodically evaluate the need to maintain this insurance coverage as it applies to our fleet. Instability in the financial markets as a result of war, sabotage, piracy, cyber-attacks or terrorism could also adversely affect our ability to raise capital and could also adversely affect the oil, natural gas and power industries and restrict their future growth.

 

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A failure in our operational systems or cyber security attacks on any of our facilities, or those of third parties, may adversely affect our financial results.

 

Our business is dependent upon our operational systems to process a large amount of data and complex transactions.  If any of our financial, operational, or other data processing systems fail or have other significant shortcomings, our financial results could be adversely affected.  Our financial results could also be adversely affected if an employee or other third party causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems.  In addition, dependence upon automated systems may further increase the risk that operational system flaws, employee or other tampering or manipulation of those systems will result in losses that are difficult to detect.

 

Due to increasing technological advances, we have become more reliant on technology to help increase efficiency in our business.  We use computer programs to help run our financial and operations sectors, and this may subject our business to increased risks.  Any cyber security attacks that affect our facilities or operations, our customers or any financial data could have a material adverse effect on our business.  In addition, cyber-attacks on our customer and employee data may result in a financial loss and may negatively impact our reputation.  Third-party systems on which we rely could also suffer such attacks or operational system failures.  Any of these occurrences could disrupt our business, result in potential liability or reputational damage or otherwise have an adverse effect on our business, operations and financial results.

 

Our tax expense and effective tax rate on our worldwide earnings could be higher if there are changes in tax legislation in countries where we operate, if we lose our tonnage tax qualifications or tax exemptions, if we increase our operations in high tax jurisdictions where we operate, if there are changes in the mix of income and losses we recognize in tax jurisdictions and/or if we elect to repatriate cash from our foreign operations in amounts higher than recent years.

 

Our worldwide operations are conducted through our various domestic and foreign subsidiaries and as a result we are subject to income taxes in the United States and foreign jurisdictions. Any material changes in tax laws and related regulations, tax treaties or their interpretations where we have significant operations could result in a higher effective tax rate on our worldwide earnings and a materially higher tax expense.

 

For example, our North Sea operations based in the U.K. and Norway have special tax incentives for qualified shipping operations, commonly referred to as tonnage tax, which provides for a tax based on the net tonnage capacity of qualified vessels, resulting in significantly lower taxes than those that would apply if we were not a qualified shipping company in those jurisdictions. There is no guarantee that current tonnage tax regimes will not be changed or modified which could, along with any of the above-mentioned factors, materially adversely affect our international operations and, consequently, our business, operating results and financial condition. Our U.K. and Norway tonnage tax companies are subject to specific disqualification triggers, which, if we fail to manage them, could jeopardize our qualified tonnage tax status in those countries. Certain of the disqualification events or actions are coupled with one or more opportunities to cure or otherwise maintain the tonnage tax qualification but not all are curable. Our qualified Singapore-based vessels are exempt from Singapore taxation through December 2027, with extensions available in certain circumstances beyond 2027, but there is no assurance that extensions will be granted. The qualified Singapore vessels are also subject to specific qualification requirements which, if not met, could jeopardize our qualified status in Singapore.

 

In addition, our worldwide operations may change in the future such that the mix of our income and losses recognized in the various jurisdictions could change. Any such changes could reduce our ability to utilize tax benefits, such as foreign tax credits, and could result in an increase in our effective tax rate and tax expense.

 

We may have higher than anticipated tax liabilities.

 

We conduct business globally and file income tax returns in various tax jurisdictions. Our effective tax rate could be adversely affected by several factors, many of which are outside of our control, including:

 

 

changes in income before taxes in various jurisdictions in which we operate that have differing statutory tax rates;

 

changing tax laws, regulations, and/or interpretations of such tax laws in multiple jurisdictions;

 

effect of tax rate on accounting for acquisitions and dispositions;

 

issues arising from tax audit or examinations and any related interest or penalties; and

 

uncertainty in obtaining tax holiday extensions or expiration or loss of tax holidays in various jurisdictions.

 

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We report our results of operations based on our determination of the amount of taxes owed in various tax jurisdictions in which we operate. The determination of our worldwide provision for income taxes and other tax liabilities requires estimation, judgment and calculations where the ultimate tax determination may not be certain. Our determination of tax liability is always subject to review or examination by tax authorities in various tax jurisdictions. Any adverse outcome of such review or examination could have a negative impact on our operating results and financial condition. The results from various tax examinations and audits may differ from the liabilities recorded in our financial statements and could adversely affect our financial results and cash flows.

 

On December 22, 2017, President Trump signed into law the statute originally named the Tax Cuts and Jobs Act, or the 2017 Tax Act or TCJA. The TCJA contains significant changes to U.S. federal corporate income taxation, including a reduction of the federal statutory tax rate from 35% to 21% for U.S. taxable income, which results in a one-time remeasurement of deferred tax assets and liabilities at the newly enacted statutory rate of 21%. The 2017 Tax Act also includes a new limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, deemed repatriation resulting in one-time taxation of offshore earnings at reduced rates, the elimination of U.S. tax on foreign earnings (subject to certain important exceptions), and immediate expensing of qualified capital expenditures. We are currently evaluating the overall effect of the TCJA on our business and financial condition.

 

Adverse results of legal proceedings could materially adversely affect us.

 

We are subject to and may in the future be subject to a variety of legal proceedings and claims that arise out of the ordinary conduct of our business. Results of legal proceedings cannot be predicted with certainty. Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and may require significant expenditures and cause diversion of management attention. We may be faced with significant monetary damages or injunctive relief against us that could materially adversely affect a portion of our business operations or materially and adversely affect our financial position and our results of operations should we fail to prevail in such matters.

 

The ability to attract, recruit and retain key personnel is critical to the success of our business and may be affected by our U.S. Citizen requirements and our emergence from bankruptcy.

 

We depend to a significant extent upon the efforts and abilities of our executive officers and other key management personnel. There is no assurance that these individuals will continue in such capacity for any particular period of time. The loss of the services of one or more of our executive officers or key management personnel could adversely affect our operations.

 

Our Amended and Restated Bylaws provide that our chairman of the board and chief executive officer, by whatever title, must be U.S. Citizens. In addition, our Amended and Restated Bylaws specify that not more than a minority of directors comprising the minimum number of members of the Board of Directors necessary to constitute a quorum of the Board of Directors (or such other portion as the Board of Directors determines is necessary to comply with the Jones Act) may be non-U.S. Citizens. Our Amended and Restated Bylaws provide for similar U.S. Citizen requirements with regard to committees of the Board of Directors. As a result, we may be unable to allow a non-U.S. Citizen, who would otherwise be qualified, to serve as a director or as our chairman of the board or chief executive officer.

 

The ability to attract and retain key personnel may also be difficult in light of our emergence from bankruptcy, the uncertainties currently facing the business and changes we may make to the organizational structure to adjust to changing circumstances. We may need to enter into retention or other arrangements that could be costly to maintain. If executives, managers or other key personnel resign, retire or are terminated or their service is otherwise interrupted, we may not be able to replace them in a timely manner and we could experience significant declines in productivity.

 

Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

 

Certain provisions of our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. These provisions provide for, among other things:

 

 

the ability of our Board of Directors to issue, and determine the rights, powers and preferences of, one or more series of preferred stock;

 

advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

limitations on convening special stockholder meetings;

 

the availability for issuance of additional shares of Common Stock; and

 

restrictions on the ability of any natural person or entity that does not satisfy the citizenship requirements of the U.S. maritime laws to own, in the aggregate, more than 24% of the outstanding shares of our Common Stock.

 

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These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our Common Stock and other securities. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

We may not be able to sell vessels to improve our cash flow and liquidity because we may be unable to locate buyers with access to financing or to complete any sales on acceptable terms or within a reasonable timeframe.

 

We may seek to sell some of our vessels to provide liquidity and cash flow. However, given the current downturn in the oil and gas industry, there may not be sufficient activity in the market to sell our vessels and we may not be able to identify buyers with access to financing or to complete any such sales. Even if we are able to locate appropriate buyers for our vessels, any sales may occur on significantly less favorable terms than the terms that might be available in a more liquid market or at other times in the business cycle.

 

The early termination of contracts on our vessels could have an adverse effect on our operations and our backlog may not be converted to actual operating results for any future period.

 

Most of the long-term contracts for our vessels and all contracts with governmental entities and national oil companies contain early termination options in favor of the customer, in some cases permitting termination for any reason. Although some of these contracts have early termination remedies in our favor or other provisions designed to discourage the customers from exercising such options, we cannot assure you that our customers would not choose to exercise their termination rights in spite of such remedies or the threat of litigation with us. Moreover, most of the contracts for our vessels have a term of one year or less and can be terminated with 90 days or less notice. Until replacement of such business with other customers, any termination could temporarily disrupt our business or otherwise adversely affect our financial condition and results of operations. We might not be able to replace such business or replace it on economically equivalent terms. In those circumstances, the amount of backlog could be reduced and the conversion of backlog into revenue could be impaired. Additionally, because of depressed commodity prices, restricted credit markets, economic downturns, changes in priorities or strategy or other factors beyond our control, a customer may no longer want or need a vessel that is currently under contract or may be able to obtain a comparable vessel at a lower rate. For these reasons, customers may seek to renegotiate the terms of our existing contracts, terminate our contracts without justification or repudiate or otherwise fail to perform their obligations under our contracts. In any case, an early termination of a contract may result in our vessel being idle for an extended period of time. Each of these results could have a material adverse effect on our financial condition, results of operations and cash flows.

 

We may be unable to collect amounts owed to us by our customers.

 

We typically grant our customers credit on a short-term basis. Related credit risks are inherent as we do not typically collateralize receivables due from customers. We provide estimates for uncollectible accounts based primarily on our judgment using historical losses, current economic conditions and individual evaluations of each customer as evidence supporting the receivables valuations stated on our financial statements. However, our receivables valuation estimates may not be accurate and receivables due from customers reflected in our financial statements may not be collectible. Our inability to perform under our contractual obligations, or our customers’ inability or unwillingness to fulfill their contractual commitments to us, may have a material adverse effect on our financial condition, results of operations and cash flows.

 

Our international operations are vulnerable to currency exchange rate fluctuations and exchange rate risks.

 

We are exposed to foreign currency exchange rate fluctuations and exchange rate risks as a result of our foreign operations. To reduce the financial impact of these risks, we attempt to match the currency of our debt and operating costs with the currency of the revenue streams. Because we conduct a large portion of our operations in foreign currencies, any increase in the value of the U.S. Dollar in relation to the value of applicable foreign currencies could adversely affect our operating revenue or construction costs when translated into U.S. Dollars.

 

A substantial portion of our revenue is derived from our international operations which are subject to foreign government regulation and operating risks.

 

We derive a substantial portion of our revenue from foreign sources. We therefore face risks inherent in conducting business internationally, such as:

 

 

foreign currency exchange rate fluctuations;

 

legal and governmental regulatory requirements;

 

difficulties and costs of staffing and managing international operations;

 

language and cultural differences;

 

potential vessel seizure or nationalization of assets;

 

30

 

 

 

import-export quotas or other trade barriers;

 

difficulties in collecting accounts receivable and longer collection periods;

 

political and economic instability;

 

changes to shipping tax regimes;

 

risk arising from counterparty conduct;

 

imposition of currency exchange controls; and

 

potentially adverse tax consequences.

 

We cannot predict whether any such conditions or events might develop in the future or whether they might have a material effect on our operations. Our ability to compete in international markets may be adversely affected by foreign government regulations, such as regulations that favor or require the awarding of contracts to local competitors, or that require foreign persons to employ citizens of, or purchase supplies from, a particular jurisdiction.

 

Our subsidiary structure and our operations are in part based on certain assumptions about various foreign and domestic tax laws, currency exchange requirements and capital repatriation laws. While we believe our assumptions are correct, there can be no assurance that taxing or other authorities will reach the same conclusions. If our assumptions are incorrect or if the relevant countries change or modify such laws or the current interpretation of such laws, we may suffer adverse tax and financial consequences, including the reduction of cash flow available to meet required debt service and other obligations.

 

       U.S. federal income tax reform could adversely affect us.

 

On December 22, 2017, President Trump signed into law the 2017 Tax Act, which enacts a broad range of changes to the U.S. Internal Revenue Code. The 2017 Tax Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating losses, allows for the expensing of certain capital expenditures, and puts into effect a number of changes impacting operations outside of the United States including, but not limited to, the imposition of a one-time tax on accumulated post-1986 deferred foreign income that has not previously been subject to U.S. taxation, and possible U.S. tax implications associated with the treatment of certain foreign earnings. We continue to examine the impact this tax legislation may have on our business.

 

The overall impact of the 2017 Tax Act on our future financial results is subject to uncertainties and our financial results could be adversely impacted by certain aspects of the 2017 Tax Act, allowing a domestic corporation an immediate deduction in U.S. taxable income for a portion of its foreign-derived intangible income, and the base erosion anti-abuse tax. These factors could result in our 2018 provisional income tax expense effective tax rate to differ from our expectations.

 

Doing business through joint venture operations may require us to surrender some control over our assets and may lead to disruptions in our operations and business.

 

We operate in several foreign areas through joint ventures with local companies, in some cases because of local laws requiring local company ownership. While the joint venture partner may provide local knowledge and experience, entering into joint ventures often requires us to surrender a measure of control over the assets and operations devoted to the joint venture, and occasions may arise when we do not agree with the business goals and objectives of our joint venture partner, or other factors may arise that make the continuation of the relationship unwise or untenable. Any such disagreements or discontinuation of the relationship could disrupt our operations, put assets dedicated to the joint venture at risk, or adversely affect the continuity of our business. If we are unable to resolve issues with a joint venture partner, we may decide to terminate the joint venture and either locate a different partner and continue to work in the area or seek opportunities for our assets in another market. The unwinding of an existing joint venture could prove to be difficult or time-consuming, and the loss of revenue related to the termination or unwinding of a joint venture and costs related to the sourcing of a new partner or the mobilization of assets to another market could adversely affect our financial condition, results of operations or cash flows.

 

Vessel enhancement, repair and drydock projects are subject to risks, including delays, cost overruns, and ship yard insolvencies which could have an adverse impact on our results of operations.

 

Our vessel enhancement, repair and drydock projects are subject to risks, including delay and cost overruns, inherent in any large construction project, including:

 

 

shortages of equipment;

 

unforeseen engineering problems;

 

work stoppages;

 

lack of shipyard availability;

 

weather interference;

 

unanticipated cost increases;

 

shortages of materials or skilled labor; and

 

insolvency of the ship repairer or ship builder.

 

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Significant cost overruns or delays in connection with our vessel construction, enhancement, repair and drydock projects could adversely affect our financial condition and results of operations. Significant delays could also result, under certain circumstances, in penalties under, or the termination of, long-term contracts under which our vessels operate. The demand for vessels we construct may diminish from anticipated levels, or we may experience difficulty in acquiring new vessels or obtaining equipment to repair our older vessels due to high demand, and both circumstances may have a material adverse effect on our revenues and profitability. Recent global economic issues may increase the risk of insolvency of ship builders and ship repairers, which could adversely affect the cost of new construction and the vessel repairs and could result, under certain circumstances, in penalties under, or termination of, long-term contracts relating to vessels under construction.

 

The operations of our fleet may be subject to seasonal factors.

 

Operations in the North Sea are generally at their highest levels during the months from April through August and at their lowest levels from December through February, primarily due to lower construction activity and harsh weather conditions during the winter months affecting the movement of drilling rigs. Vessels operating offshore Southeast Asia are generally at their lowest utilization rates during the monsoon season, which moves across the Asian continent between September and early March. The monsoon season for a specific Southeast Asian location generally lasts about two months. Activity in the U.S. Gulf of Mexico, like the North Sea, is often slower during the winter months when construction projects and other specialized jobs are most difficult, and during the hurricane season from June through November. Operations in any market may be affected by seasonality often related to unusually long or short construction seasons due to, among other things, abnormal weather conditions, as well as market demand associated with changes in drilling and development activities.

 

Upon our emergence from bankruptcy, the composition of our Board of Directors changed significantly.

 

Pursuant to the Plan, the composition of our Board of Directors changed significantly upon our emergence from bankruptcy. Our Board is now made up of seven directors, with a new non-executive Chairman of the Board, and six of whom did not previously serve on our Board. The new directors have different backgrounds, experiences and perspectives from those individuals who previously served on our Board and, thus, may have different views on the issues that will determine the future of our company. There is no guarantee that the new Board will pursue, or will pursue in the same manner, our strategic plans in the same manner as our prior Board. As a result, our future strategy and plans may differ materially from those of the past.

 

Government regulation and environmental risks can reduce our business opportunities, increase our costs, and adversely affect the manner or feasibility of doing business.

 

We believe that we are in compliance in all material respects with the applicable environmental laws and regulations to which we are subject. We maintain a robust compliance program to ensure that we maintain and update our programs to meet or exceed regulatory requirements in the areas which we operate. However, we are subject to extensive governmental regulation in the form of international conventions, federal, state and local laws and laws and regulations in jurisdictions where our vessels operate and are registered. The risks of incurring substantial compliance costs and liabilities and penalties for noncompliance are inherent in offshore marine service operations. Compliance with the Jones Act, as well as with environmental, occupational, health and safety, and vessel and port security laws, can reduce our business opportunities and increase our costs of doing business. Additionally, these laws and regulations are subject to frequent changes. Therefore, we are unable to predict with certainty the future costs or other future impact of these laws on our operations and our customers. We could also incur substantial costs, including cleanup costs, fines, civil or criminal sanctions and third party claims for property damage or personal injury as a result of violations of, or liabilities under, environmental laws and regulations. In addition, there can be no assurance that we can avoid significant costs, liabilities and penalties imposed on us as a result of government regulation in the future.

 

Growth through acquisitions and investment could result in operating difficulties, dilution and other harmful consequences that may adversely impact our business and results of operations.

 

We routinely evaluate potential acquisitions of single vessels, vessel fleets and businesses, and we expect to continue to enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquisition could create unforeseen operating difficulties and expenditures. The areas where we face risks include:

 

 

diversion of management time and focus away from operating our business to integrating the business;

 

integration of the acquired company’s accounting, human resources and other administrative systems and the coordination of various business functions;

 

implementation of, and changes to, controls, procedures and policies at the acquired company;

 

transition of customers into our operations;

 

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries or regions;

 

32

 

 

 

cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire;

 

liability for activities of the acquired company before the acquisition, including violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and

 

litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties.

 

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions or investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business in general.

 

Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt or contingent liabilities, an increase in amortization expenses or write-offs of goodwill, any of which could harm our financial condition.

 

We can give no assurance that we will be able to identify desirable acquisition candidates or that we will have the financial resources necessary to pursue desirable acquisition candidates or be successful in entering into definitive agreements or closing any such acquisition on satisfactory terms. An inability to acquire additional vessels or businesses may limit our growth potential.

 

We may be unable to attract and retain qualified, skilled employees necessary to operate our business.

 

Our success depends in large part on our ability to attract and retain highly skilled and qualified personnel. Our inability to hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business. In crewing our vessels, we require skilled employees who can perform physically demanding work, often in harsh or challenging environments for extended periods of time. As a result of the volatility of the oil and gas industry and the demanding nature of the work, potential vessel employees may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. Further, we face strong competition within the broader oilfield industry for potential employees, including competition from drilling rig operators, for our fleet personnel. It is possible that we will have to raise wage rates to attract workers and to retain our current employees. If we are not able to increase our charges to our customers to compensate for wage increases, our financial condition and results of operations may be adversely affected. If we are unable to recruit qualified personnel we may not be able to operate our vessels at full utilization, which would adversely affect our results of operations.

 

We may incur additional asset impairments as a result of reduced demand for certain vessels.

 

The current oversupply of vessels in offshore oil and gas exploration and production markets has resulted in numerous vessels being idled or stacked and, in some cases, retired or scrapped. We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment write-offs could result if, for example, any of our vessels become obsolete or commercially less desirable or their carrying values become excessive due to the condition of the vessel, stacking the vessel, the expectation of stacking the vessel in the near future, a decision to retire or scrap the vessel, changes in technology, market demand or market expectations, or excess spending over budget on a new-build vessel. Asset impairment evaluations are, by their nature, highly subjective. The use of different estimates and assumptions could result in materially different carrying values of our assets, which could impact the need to record an impairment charge and the amount of any charge taken. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates Long-Lived Assets, Goodwill and Intangibles” in Part II, Item 7 and Note 3 to our Consolidated Financial Statements included in Part II, Item 8.

 

We can provide no assurance that our assumptions and estimates used in our asset impairment evaluations will ultimately be realized or that the current carrying value of our property and equipment will ultimately be realized.

 

Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information as a result of the implementation of the Plan and the transactions contemplated thereby and our adoption of Fresh Start Accounting.

 

We emerged from bankruptcy under Chapter 11 of the Bankruptcy Code on November 14, 2017. Upon our emergence from bankruptcy, we adopted Fresh Start Accounting, as a consequence of which our assets and liabilities were adjusted to fair values and our accumulated deficit was restated to zero. Accordingly, our future financial condition and results of operations may not be comparable to the financial condition or results of operations reflected in our historical financial statements. The lack of comparable historical financial information may discourage investors from purchasing our securities. In addition, in conjunction with our emergence from bankruptcy and our adoption of Fresh Start Accounting, we adopted new accounting policies relating to drydocks and useful lives and estimated salvage values of our vessels. Prior to emergence, we expensed regulatory drydocks as they were incurred. With Fresh Start Accounting, we will capitalize the cost of regulatory drydocks and amortize such cost over 30 months, the regulatory interval between required drydocks. Prior to emergence, we depreciated the cost of each vessel over a useful life of 25 years to an estimated salvage value of 15% of original cost. Under Fresh Start Accounting, we reduced our useful life estimate of each vessel to 20 years and our salvage value estimate to 5%.

 

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We currently have no plans to pay cash dividends or other distributions on our Common Stock.

 

We currently do not expect to pay any cash dividends or other distributions on our Common Stock in the foreseeable future. Any future determination to pay cash dividends or other distributions on our Common Stock will be at the sole discretion of our Board of Directors and, if we elect to pay such dividends in the future, we may reduce or discontinue entirely the payment of such dividends at any time. The Board of Directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, agreements governing any existing and future indebtedness we or our subsidiaries may incur and other contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders, and such other factors as the Board of Directors may deem relevant.

 

Climate change, climate change regulations and greenhouse gas effects may adversely impact our operations and markets.

 

There is a concern that emissions of greenhouse gases, or GHGs, such as carbon dioxide and methane, alter the composition of the global atmosphere in ways that affect the global climate. Climate change, including the impact of global warming, may create physical and financial risk for organizations whose operations are affected by the climate. Some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our business, financial condition and results of operations.

 

Financial risks relating to climate change are likely to arise from increasing regulation of GHG emissions, as compliance with any new rules could be difficult and costly. For example, from time to time legislation has been proposed in the U.S. Congress to reduce GHG emissions. In addition, in the absence of federal GHG legislation, the EPA has taken steps to regulate GHG emissions. Depending on the outcome of these or other regulatory initiatives, increased energy, environmental and other costs and capital expenditures could be necessary to comply with the relevant limitations. Our vessels also operate in foreign jurisdictions that are addressing climate changes by legislation or regulation. Unless and until legislation or regulations are enacted and their terms are finalized, we cannot reasonably or reliably estimate its impact on our financial condition, operating performance or ability to compete. In addition, any GHG related legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and gas produced by our customers. Consequently, legislation and regulatory programs to reduce emissions of GHGs could have an adverse effect on our business, financial condition and results of operations.

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. Properties

 

Our principal executive offices are leased and located in Houston, Texas. We lease offices and, in most cases, warehouse facilities for our local operations. Offices for our Southeast Asia operating segment are located in Singapore. Offices for our North Sea operating segment are located in Aberdeen, Scotland and Sandnes, Norway. Offices for our Americas operating segment are located in Macae, Brazil; Ciudad del Carmen, Mexico; Chaguaramus, Trinidad; and St. Rose, Louisiana. Our operations generally do not require highly specialized facilities, and suitable facilities are generally available on a lease basis as required.

 

ITEM 3. Legal Proceedings

 

On May 17, 2017, GulfMark Offshore, Inc. filed a voluntary petition, or the Chapter 11 Case, under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court. On October 4, 2017, the Bankruptcy Court entered an order approving our Amended Chapter 11 Plan of Reorganization, as confirmed, or the Plan. On November 14, 2017, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case.

 

Various legal proceedings and claims that arise in the ordinary course of business may be instituted or asserted against us. Although the outcome of litigation cannot be predicted with certainty, we believe, based on discussions with legal counsel and in consideration of reserves recorded, that an unfavorable outcome of these legal actions would not have a material adverse effect on our consolidated financial position and results of operations. We cannot predict whether any such claims may be made in the future.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

From January 1, 2016 through April 10, 2017, the Predecessor’s Class A common stock was listed on the New York Stock Exchange, or NYSE, under the symbol “GLF.” During the period from April 11, 2017 until the Effective Date, the Predecessor’s Class A common stock was quoted in the “Pink Sheets” of OTC Pink, an over-the-counter market, under the symbol “GLFM.” On the Effective Date, by operation of the Plan, all agreements, instruments and other documents evidencing, relating to or connected with any equity interests of the Predecessor, including the outstanding shares of the Predecessor’s Class A common stock, issued and outstanding immediately prior to the Effective Date, and any rights of any holder in respect thereof, were deemed cancelled, discharged and of no force or effect.

 

The Successor’s Common Stock and warrants exercisable for shares of Common Stock for cash at an initial exercise price of $100.00 per share, or in certain circumstances, in accordance with a cashless exercise, or Equity Warrants, are listed on the NYSE American under the symbols “GLF” and “GLF.WS”, respectively, and have been trading since November 16, 2017. On March 5, 2018, the Successor’s warrants exercisable for shares of Common Stock at an initial exercise price of $0.01 per share, or Noteholder Warrants, began being quoted and traded on the OTCQX market (which is operated by OTC Markets Group, Inc.) under the symbol “GLFMW.” There can be no assurance that an active trading market for the Noteholder Warrants will develop. As of March 30, 2018, there were approximately 2 holders of record of our Noteholder Warrants.

 

The following table sets forth the range of high and low sales prices per share for the Predecessor’s Class A common stock and the Successor’s Common Stock for the periods indicated, as reported by the NYSE, OTC Pink and NYSE American, as applicable.

 

Predecessor Class A Common Stock

 

   

2016

 
   

High

   

Low

 

First Quarter

  $ 7.38     $ 2.60  

Second Quarter

  $ 6.94     $ 3.06  

Third Quarter

  $ 3.76     $ 1.52  

Fourth Quarter

  $ 2.30     $ 1.10  

 

   

2017

 
   

High

   

Low

 

First Quarter

  $ 1.750     $ 0.350  

Second Quarter

  $ 0.336     $ 0.140  

Third Quarter

  $ 0.210     $ 0.133  

Fourth Quarter October 1 - November 14

  $ 0.185     $ 0.130  

 

 

Successor Common Stock

 

   

2017

 
   

High

   

Low

 

Fourth Quarter November 16 - December 31

  $ 34.96     $ 6.05  

 

As of March 30, 2018, there were approximately 286 holders of record of our Common Stock.

 

The following table sets forth, for the periods indicated, the high and low sales prices of our Equity Warrants as reported by the NYSE American.

 

 

Successor Equity Warrants

 

   

2017

 
   

High

   

Low

 

Fourth Quarter November 16 - December 31

  $ 4.00     $ 0.03  

 

As of March 30, 2018, there were approximately 414 holders of record of our Equity Warrants.

 

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Dividend Policy

 

The Board of Directors did not declare any dividends for the years ended December 31, 2017 and 2016.

 

We do not anticipate that cash dividends or other distributions will be paid with respect to our Common Stock in the foreseeable future. In addition, restrictive covenants in certain debt instruments to which we are, or may be, a party, limit our ability to pay dividends or our ability to receive dividends from our operating companies, and may negatively impact the trading price of our Common Stock.

 

While we have no current plans to pay dividends on our Common Stock, we will continue to evaluate the cash generated by our business and may decide to pay a dividend in the future. Any future determinations relating to our dividend policies and the declaration, amount and payment of any future dividends on our Common Stock will be at the sole discretion of our Board of Directors and, if we elect to pay such dividends in the future, we may reduce or discontinue entirely the payment of such dividends at any time. The Board of Directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, agreements governing any existing and future indebtedness we or our subsidiaries may incur and other contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders, and such other factors as the Board of Directors may deem relevant.

 

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ITEM 6. Selected Financial Data

 

The data that follows should be read in conjunction with our Consolidated Financial Statements and the notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Part II, Item 7.

 

   

Successor

   

Predecessor

 
   

Period from

November 15

Through

December 31,

   

Period from

January 1

Through

November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

   

2014

   

2013

 
           

(Amounts in thousands, except per share amounts and vessels)

 

Operating Data:

                                               

Revenue

  $ 13,593     $ 88,229     $ 123,719     $ 274,806     $ 495,769     $ 454,604  

Direct operating expenses

    9,859       69,821       83,165       169,837       236,244       217,422  

Drydock expense

    -       5,432       4,662       15,387       24,840       24,094  

General and administrative expenses

    3,408       32,369       37,663       47,280       62,728       54,527  

Pre-petition restructuring charges

    -       17,861       -       -       -       -  

Depreciation and amortization

    4,425       47,721       58,182       72,591       75,336       63,955  

Impairment charges

    -       -       162,808       152,103       8,995       -  

(Gain) loss on sale of assets and other

    -       5,207       8,564       1,160       (14,039 )     (5,870 )

Operating income (loss)

    (4,099 )     (90,182 )     (231,325 )     (183,552 )     101,665       100,476  

Interest expense

    (1,343 )     (28,815 )     (33,486 )     (36,946 )     (29,332 )     (23,821 )

Interest income

    57       26       133       260       307       202  

Gain on extinguishment of debt

    -       -       35,912       458       -       -  

Reorganization items

    (969 )     (319,922 )     -       -       -       -  

Other financing costs

    -       -       (11,287 )     -       -       -  

Foreign currency loss and other

    (439 )     (270 )     (2,384 )     (1,088 )     (995 )     (1,289 )

Income tax (provision) benefit (a)

    10,304       38,244       39,458       5,633       (9,270 )     (4,962 )
                                                 

Net income (loss)

  $ 3,511     $ (400,919 )   $ (202,979 )   $ (215,235 )   $ 62,375     $ 70,606  

Amounts per common share (basic) (b):

                                               

Net income (loss)

  $ 0.35     $ (15.47 )   $ (8.09 )   $ (8.70 )   $ 2.39     $ 2.70  

Weighted average common shares outstanding (basic)

    9,998       25,917       25,094       24,729       26,097       26,175  

Amounts per common share (diluted) (b):

                                               

Net income (loss)

  $ 0.35     $ (15.47 )   $ (8.09 )   $ (8.70 )   $ 2.39     $ 2.70  

Weighted average common shares outstanding (diluted)

    9,998       25,917       25,094       24,729       26,097       26,185  

Statement of Cash Flows Data:

                                               

Cash provided by (used in) operating activities

  $ (9,256 )   $ (63,818 )   $ (23,339 )   $ 43,357     $ 153,848     $ 126,702  

Cash used in investing activities

    (141 )     (21,918 )     (9,659 )     (22,835 )     (121,104 )     (210,069 )

Cash provided by (used in) financing activities

    (862 )     151,088       20,167       (47,281 )     (40,024 )     (39,598 )

Effect of exchange rate changes on cash

    (67 )     765       (286 )     (2,087 )     (2,501 )     (1,644 )

Other Data:

                                               

Adjusted EBITDA (c)

  $ 326     $ (42,461 )   $ (10,335 )   $ 41,142     $ 185,996     $ 164,431  

Cash dividends per share (d)

  $ -     $ -     $ -     $ -     $ 1.00     $ 1.00  

Total vessels in fleet as of year end (e)

    69       69       71       73       76       79  

Average number of owned or chartered vessels (f)

    66.0       66.4       68.9       71.4       74.3       70.5  

 

   

Successor

   

Predecessor

 
   

As of

December 31,

   

As of December 31,

 
   

2017

   

2016

   

2015

   

2014

   

2013

 
           

(In thousands)

 

Balance Sheet Data:

                                       

Cash and cash equivalents

  $ 64,613     $ 8,822     $ 21,939     $ 50,785     $ 60,566  

Vessels, equipment and other fixed assets, including construction in progress, net

    364,128       995,220       1,266,487       1,484,561       1,494,611  

Total assets

    471,955       1,052,525       1,361,252       1,716,355       1,773,292  

Current portion of long-term debt (g)

    -       483,326       -       -       -  

Long-term debt (h)

    92,365       -       490,589       544,732       500,864  

Total stockholders’ equity

    324,490       449,621       698,308       968,753       1,063,341  

 

(a)

See Note 7 “Income Taxes” to our Consolidated Financial Statements included in Part II, Item 8.

 

(b)

Earnings per share is based on the weighted-average number of shares of common stock and common stock equivalents outstanding.

 

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(c)

EBITDA is defined as net income (loss) before interest expense, interest income, income tax (benefit) provision, and depreciation, amortization and impairment. Adjusted EBITDA is calculated by adjusting EBITDA for certain items that we believe are non-cash or non-operational, consisting of: (i) the cumulative effect of change in accounting principle, (ii) debt refinancing costs, (iii) loss from unconsolidated ventures, (iv) minority interests, (v) gain on extinguishment of debt, and (vi) other (income) expense, net. EBITDA and Adjusted EBITDA are not measurements of financial performance under generally accepted accounting principles, or GAAP, and should not be considered as an alternative to cash flow data, a measure of liquidity or an alternative to operating income or net income as indicators of our operating performance or any other measures of performance derived in accordance with GAAP.

 

EBITDA and Adjusted EBITDA are presented because they are widely used by securities analysts, creditors, investors and other interested parties in the evaluation of companies in our industry. This information is a material component of certain financial covenants in our debt obligations. Failure to comply with the financial covenants could result in an inability to borrow under our revolving credit facility and the imposition of restrictions on our financial flexibility. When viewed with GAAP results and the accompanying reconciliation, we believe the EBITDA and Adjusted EBITDA calculations provide additional information that is useful to gain an understanding of the factors and trends affecting our ability to service debt and meet our ongoing liquidity requirements. EBITDA is also a financial metric used by management as a supplemental internal measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. However, because EBITDA and Adjusted EBITDA are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations, EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures used by other companies or comparable for other purposes. Also, EBITDA and Adjusted EBITDA, as non-GAAP financial measures, have material limitations as compared to cash flow provided by operating activities. EBITDA does not reflect the future payments for capital expenditures, financing–related charges and deferred income taxes that may be required as part of normal business operations. The following table summarizes the calculation of EBITDA and Adjusted EBITDA for the periods indicated.

 

   

Successor

   

Predecessor

 
   

November 15 Through December 31,

   

January 1, Through November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

   

2014

   

2013

 
           

(In thousands)

         

Net income (loss)

  $ 3,511     $ (400,919 )   $ (202,979 )   $ (215,235 )   $ 62,375     $ 70,606  

Interest expense

    1,343       28,815       33,486       36,946       29,332       23,821  

Interest income

    (57 )     (26 )     (133 )     (260 )     (307 )     (202 )

Income tax provision (benefit)

    (10,304 )     (38,244 )     (39,458 )     (5,633 )     9,270       4,962  
                                                 

Depreciation, amortization and impairment

    4,425       47,721       220,990       224,694       84,331       63,955  

EBITDA

    (1,082 )     (362,653 )     11,906       40,512       185,001       163,142  

Adjustments:

                                               

Other, net *

    1,408       320,192       (22,241 )     630       995       1,289  

Adjusted EBITDA

  $ 326     $ (42,461 )   $ (10,335 )   $ 41,142     $ 185,996     $ 164,431  

 

*   Net amount includes foreign currency transaction adjustments, other financing costs and gain/loss on extinguishment of debt.

 

(d)

In each quarter of 2013 and 2014, the Predecessor’s Board of Directors declared a quarterly cash dividend of $0.25 per share for a total dividend of $1.00 per share in each of the years 2013 and 2014. In February 2015, the Predecessor’s dividend was suspended and no dividends were declared in 2015, 2016 or 2017.

 

(e)

Includes managed vessels in addition to those that are owned at the end of the applicable period (excludes vessels held for sale). See “Worldwide Fleet” in Part I, Item 1 “Business” for further information concerning our fleet.

 

(f)

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 and is adjusted for additions and dispositions occurring during each period.

 

(g)

Amounts at December 31, 2016 reflect the reclassification of the $483.3 million of long-term debt to current as a result of an event of default under the Predecessor’s Multicurrency Facility Agreement. On May 17, 2017, we filed a voluntary petition under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. On November 14, 2017, we emerged from the Chapter 11 Case. For a more detailed discussion of our bankruptcy proceedings and our emergence from bankruptcy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – Bankruptcy Filing and Emergence” included in Part II, Item 7, and Note 2 to our Consolidated Financial Statements included in Part II, Item 8.

 

(h)

Excludes current portion of long-term debt.

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This information should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, contained in Part II, Item 8 “Financial Statements and Supplementary Data.” See also Part II, Item 6 “Selected Financial Data” and “Cautionary Note Regarding Forward-Looking Statements.”

 

On May 17, 2017, GulfMark Offshore, Inc. filed a voluntary petition, or the Chapter 11 Case, under 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. On October 4, 2017, the Bankruptcy Court entered an order, or the Confirmation Order, approving our Amended Chapter 11 Plan of Reorganization, as confirmed, or the Plan. On November 14, 2017, or the Effective Date, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case. For a more detailed discussion of our bankruptcy proceedings and our emergence from bankruptcy, see “- General - Bankruptcy Filing and Emergence below and Note 2 to our Consolidated Financial Statements included in Part II, Item 8.

 

General

 

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 March 30, 2018, our fleet includes 66 owned vessels, 29 of which are stacked, and three managed vessels, one of which is stacked.

 

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 decline in the price of oil since 2014 has materially and negatively impacted our results of operations.

 

We also provide management services to other vessel owners for a fee. 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. As of the date of this report, one of our managed vessels is 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 October 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.

 

In addition to direct operating costs, we incur fixed charges related to the depreciation of our fleet, modifications designed to ensure compliance with applicable regulations and maintaining certifications for our vessels with various international classification societies. The demands of the market, the expiration of existing contracts, the commencement of new contracts, seasonal factors and customer preferences can influence the timing of drydocks to some extent. 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.

 

0il 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 continues into 2018. Beginning in late 2014, oil prices declined significantly from early year levels of over $100 per barrel. 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 began to recover 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 by year end. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovering to over $60 per barrel in January 2018. 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.

 

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Bankruptcy Filing and Emergence

 

On May 17, 2017, GulfMark Offshore, Inc. filed the Chapter 11 Case under the Bankruptcy Code in the Bankruptcy Court, and on October 4, 2017, the Bankruptcy Court entered the Confirmation Order approving the Plan. On the Effective Date, November 14, 2017, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case.

 

On May 15, 2017, the Predecessor 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 Predecessor’s senior notes, to support a restructuring on the terms of the Plan.  The RSA provided for, among other things, the Predecessor’s $125.0 million cash rights offering, or the Rights Offering.  Upon emergence from bankruptcy, we implemented the provisions of the RSA in accordance with the Plan on the Effective Date as follows:

 

  Pursuant to the Rights Offering (subject to Jones Act limitations described below), eligible Noteholders purchased their pro rata share of 60% of the Common Stock of the Successor, or as applicable, Noteholder Warrants (as defined below), or the Successor Equity. The Rights Offering was backstopped by certain Noteholders for a 6.0% commitment premium that was paid with an additional 3.6% of the Successor Equity.
     
  Each holder of the Predecessor’s senior notes received (subject to Jones Act limitations described below) its pro rata share of 35.65% of the Successor Equity.
     
  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. On the Effective Date, certain Noteholders who were eligible to receive Common Stock of the Successor pursuant to the Plan or the Rights Offering but who were non-U.S. holders received warrants to acquire Common Stock of the Successor at an exercise price of $.01 per share, or the Noteholder Warrants.
     
  Outstanding Class A common stock of the Predecessor was cancelled and each holder of such Class A common stock received its pro rata share of (a) Common Stock representing in the aggregate 0.75% of the Successor Equity and (b) Equity Warrants with an exercise price of $100 per share for 7.5% of the equity of the Successor.
     
  The Successor Equity purchased in the Rights Offering, issued to pay the backstop premium, issued in exchange for the Predecessor’s senior notes or in exchange for the Predecessor’s Class A common stock is subject to dilution by the Successor Equity issued or issuable under the proposed management incentive plan and upon exercise of the Equity Warrants.
     
  The Predecessor repaid in full its debtor-in-possession financing.     Holders of allowed claims arising under administrative expense claims, priority tax claims, other priority claims, and other secured claims of the Predecessor have received or will receive payment in full in cash. The Successor will continue to pay any general unsecured claims in the ordinary course of business.

 

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Markets

 

North Sea. We continue to expect significant activity in the North Sea region during 2018. We also expect the continued focus on operator savings and oversupply of OSVs to adversely impact vessel day rates. Although cost efficiencies are currently a priority of operators, we believe the North Sea region remains viable long-term with several large field developments in the United Kingdom, or U.K., and Norwegian sectors forecasted by industry analysts, along with decommissioning work and projects in the renewables sector. We expect these factors, combined with an upturn in drilling in remote northerly areas such as the Barents Sea, Kara Sea and offshore Greenland, to drive demand in the North Sea region in the coming years, although we can provide no assurance as to when these developments may occur.

 

Southeast Asia. The Southeast Asia resource basin consists predominantly of shallow water mature fields where production drilling is expected to continue throughout 2018. It is apparent that operators, both national oil companies and independent operators, are experiencing significant pressure to reduce their costs in light of depressed oil prices and as a result their capital expenditure budgets may continue to fall. As of the date of this report, we generally expect exploration drilling activities to remain at current levels throughout 2018 in the Southeast Asian markets, resulting in a continuation of current market conditions for AHTS support, although further declines in commodity prices or reductions of operators’ capital budgets would result in additional downward pressure on drilling activities in this region, and therefore on market conditions for AHTS support vessels.

 

Americas. During 2017, we continued to experience pressure on our utilization and day rates in the Americas in all areas in which we operate. We do not expect the market in the Americas operating segment to recover to any great extent in 2018. In December 2013, Mexico’s Congress approved a constitutional reform to allow private investment in Mexico’s energy sector which effectively ended the state controlled (Petróleos Mexicanos) 75-year monopoly on oil and natural gas extraction and production. We anticipate Mexico to be a growing market for expanded deepwater activity when market conditions improve. We plan to continue to actively pursue opportunities in the area as they arise.

 

Fleet Commitments and Backlog

 

A portion of our available fleet is committed under contracts of various terms. The following table outlines the percentage of our forward days under contract and revenue backlog as of the dates shown:

 

    Successor  
   

As of March 30, 2018

 
   

2018

Vessel Days

   

2019

Vessel Days

 

North Sea

    35.6%       11.4%  

Southeast Asia

    18.4%       0.0%  

Americas

    6.1%       0.0%  

Overall Fleet

    19.1%       4.3%  

 

 

Our revenue backlog is calculated based on executed contracts with scheduled start dates. Some of the long-term contracts for our vessels and all contracts with governmental entities and national oil companies contain early termination options in favor of the customer, in some cases permitting termination for any reason. Although some of these contracts have early termination remedies in our favor or other provisions designed to discourage the customers from exercising such options, we cannot assure you that our customers would not choose to exercise their termination rights in spite of such remedies or the threat of litigation with us.

 

Critical Accounting Policies and Estimates

 

The Consolidated Financial Statements, including the notes thereto, contained in Part II, Item 8 “Financial Statements and Supplementary Data,” contain information that is pertinent to management’s discussion and analysis of our financial condition and results of operations. The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities. Management believes these accounting policies involve judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset and liability amounts. We believe we have exercised proper judgment in determining these estimates based on the facts and circumstances available to management at the time the estimates were made.

 

Fresh Start Accounting

 

As discussed further in Note 2 to our Consolidated Financial Statements in Part II, Item 8 “Financial Statements and Supplementary Data,” we have adopted Fresh Start Accounting as of November 15, 2017, concurrent with our emergence from bankruptcy. Under Fresh Start Accounting, our balance sheet on the date of emergence reflects all of our assets and liabilities at their fair values. Our emergence and the adoption of Fresh Start Accounting resulted in a new reporting entity, or the Successor, for financial reporting purposes. To facilitate our discussion and analysis of our vessels, financial condition and results of operations herein, we refer to the reorganized company as the Successor for periods subsequent to November 14, 2017 and the Predecessor for periods prior to November 15, 2017. At the date of emergence, we also adopted new accounting policies related to drydock costs, useful lives of our vessels and estimated salvage value of our vessels. The Predecessor expensed the cost of required drydocks as the costs were incurred and depreciated the cost of our vessels over 25 years to an estimated salvage value of 15 percent of original cost. The Successor is capitalizing drydock costs as the costs are incurred and amortizing the costs over 30 months and is depreciating the cost of our vessels over 20 years to an estimated salvage value of five percent of original cost. As a result, our Consolidated Financial Statements and the accompanying notes thereto after November 14, 2017 are not comparable to our Consolidated Financial Statements and the accompanying notes thereto prior to November 15, 2017. Our presentations herein include a “black line” division to delineate and reinforce this lack of comparability. In order to facilitate the comparative discussion herein, we have addressed the Successor and Predecessor periods discretely and have provided comparative analysis, to the extent practical, where appropriate.

 

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Income Taxes

 

The majority of our non-U.S. based operations are subject to foreign tax systems that provide significant incentives to qualified shipping activities. Our U.K. and Norway based vessels are taxed under “tonnage tax” regimes. Our U.K. regime was renewed in November 2010 for another ten years. Our qualified Singapore based vessels are exempt from Singapore taxation through December 2027 with extensions available in certain circumstances beyond 2027, although there is no assurance that the extensions will be granted. The qualified Singapore vessels are also subject to specific qualification requirements which if not met could jeopardize our qualified status in Singapore. The tonnage tax regimes provide for a tax based on the net tonnage weight of a qualified vessel. These foreign tax beneficial systems continued to result in our earnings incurring significantly lower taxes than those that would apply if we were not a qualified shipping company in those jurisdictions. The tonnage tax regimes in the North Sea significantly reduce the cash required for taxes in that region.

 

Our overall effective tax rate is substantially lower than the U.S. federal statutory income tax rate because our Southeast Asia and North Sea operations are tonnage tax qualified shipping activities that are taxed at relatively low rates and our qualified Singapore based vessels are exempt from Singapore taxation through 2027. Should our operational structure change or should the laws that created these shipping tax regimes change, we could be required to provide for taxes at rates much higher than those currently reflected in our consolidated financial statements. In addition, if our pre-tax earnings in higher tax jurisdictions increase, there could be a significant increase in our annual effective tax rate. Any such increase could cause volatility in the comparisons of our effective tax rate from period to period.

 

U.S. foreign tax credits may be carried forward for ten years. As of December 31, 2017, we have $4.1 million of such foreign tax credit carry-forwards that begin to expire in 2020. We recorded a full valuation allowance for all of our remaining foreign tax credit carryforwards as we do not expect to be able to realize these credits under the new tax laws provided by the statute originally named the Tax Cuts and Jobs Act, or the 2017 Tax Act. We have considered estimated future taxable income in the relevant tax jurisdictions to utilize these tax credits and have considered what we believe to be ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. This information is based on estimates and assumptions including projected taxable income. If these estimates and related assumptions change in the future, or if we determine that we would not be able to realize other deferred tax assets in the future, an adjustment to the valuation allowance would be provided in the period such determination was made.

 

Utilizing a more likely than not, or greater than 50% probability, minimum recognition threshold for measurement of a tax position taken or expected to be taken in a tax return, we evaluate and record in certain circumstances an income tax asset/liability for uncertain income tax positions. Numerous factors contribute to our evaluation and estimation of our tax positions and related tax liabilities and/or benefits, which may be adjusted periodically and may ultimately be resolved differently than we anticipate. We also consider existing accounting guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and disclosure. We continue to recognize income tax related penalties and interest in our provision for income taxes and include those interest and penalties and any amounts for uncertain tax positions in the corresponding consolidated balance sheet presentations for accrued income tax assets and liabilities.

 

See also Note 1 and Note 7 to our Consolidated Financial Statements included in Part II, Item 8.

 

Long-Lived Assets, Goodwill and Intangibles

 

   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, the oil and gas industry experienced a significant decline in the price of oil causing an industry-wide downturn that continues into 2018. Prices continued to decline throughout 2015 and into 2016, reaching a low of less than $30 per barrel in early 2016. Prices began to recover 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 by year end. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovering to over $60 per barrel in January 2018. 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. 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.

 

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   See the discussions below detailing our impairment analyses and processes for each of goodwill, long-lived assets, intangible assets, vessel components and assets held for sale. The components of reduction in value of assets are as follows (in thousands):

 

   

Successor

   

Predecessor

 
   

November 15 Through December 31,

   

January 1 Through November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

 

Goodwill impairment

  $ -     $ -     $ -     $ 22,554  

Long-lived assets impairment

    -       -       160,222       115,489  

Intangible asset impairment

    -       -       -       13,695  

Vessel component impairment

    -       -       2,586       365  

Total reduction in value of assets

    -       -     $ 162,808     $ 152,103  

 

 

Goodwill Impairment

 

We completed a qualitative analysis of goodwill of the Predecessor in 2015 and determined that further testing was necessary. Our goodwill impairment evaluation indicated that the carrying value of the North Sea segment exceeded its fair value so that goodwill was potentially impaired. We then performed the second step of the goodwill impairment test, which involved calculating the implied fair value of our goodwill by allocating the fair value of the North Sea segment to all of the assets and liabilities (other than goodwill) and comparing it to the carrying amount of goodwill. To estimate the fair value of the reporting unit we used a 50% weighting of the discounted cash flow method and a 50% weighting of the public company guideline method in determining fair value of the North Sea reporting unit.

 

We determined that the implied fair value of our goodwill for the North Sea segment was less than its carrying value and recorded a $22.6 million impairment of the North Sea segment’s goodwill. As a result of this impairment, we no longer have any goodwill.

 

Long-Lived Asset Impairment

 

In the Predecessor 2015 period, we recorded $129.2 million of impairment expense related to our long-lived assets in the U.S. Gulf of Mexico, which is a part of our Americas segment. The impairment consisted of $115.5 million related to our vessels and $13.7 million related to our intangible asset. As a result of this impairment, we no longer have an intangible asset.

 

In the Predecessor 2016 period, we recorded an aggregate of $160.2 million of impairment expense related to our long-lived assets. Impairment charges totaled $94.5 million for the U.S. Gulf of Mexico and $15.9 million for the non-U.S. Americas, both part of the Americas segment. We also recorded impairment in Southeast Asia totaling $49.8 million.

 

Vessel Component Impairment

 

   We have vessel components in our North Sea and Southeast Asia segments that we intend to sell. We recorded impairment based on third party appraisals of the North Sea components totaling $0.4 million in the Predecessor 2015 period. Based on third party valuations, 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, in the Predecessor 2016 period.

 

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Deferred financing costs are capitalized and amortized over the expected term of the related debt. Should the specific debt terminate by means of payment in full, tender offer or lender termination, the associated deferred financing costs would be immediately expensed.

 

Allowance for Doubtful Accounts

 

Our customers are primarily major and independent oil and gas companies, national oil companies and oil service companies. Our historical losses on accounts receivable have been insignificant and it is our belief that our related credit risks are minimal, and consequently our major and independent oil and gas company and oil service company customers are generally granted credit on customary business terms. Our exposure to foreign government-owned and controlled oil and gas companies, as well as companies that provide logistics, construction or other services to such oil and natural gas companies, may result in longer payment terms; however, we monitor our aged accounts receivable on an ongoing basis and provide an allowance for doubtful accounts in accordance with our written policy. This formalized policy requires a critical review of our aged accounts receivable to evaluate the collectability of our receivables and to establish appropriate allowances for bad debt. The amount of an allowance to be established by management is based on the facts and circumstances relating to the particular customer.

 

Historically, we have collected substantially all of our accounts receivable balances. However, we have recently seen an increase in uncollectible amounts from certain customers. As of November 14, 2017 and December 31, 2016 and 2015, the Predecessor recorded an allowance for doubtful accounts of $3.4 million, $2.5 million and $1.5 million, respectively. For the period from November 15, 2017 through December 31, 2017, the Successor did not record any additional allowance for doubtful accounts. Additional allowances for doubtful accounts may be necessary as a result of our ongoing assessment of our customers’ ability to pay, particularly in light of current industry conditions. Since amounts due from individual customers can be significant, future adjustments to our allowance for doubtful accounts could be material if one or more individual customer balances are deemed uncollectible. If an account receivable were deemed uncollectible and all reasonable collection efforts were exhausted, the balance would be removed from accounts receivable and the allowance for doubtful accounts.

 

Commitments and Contingencies

 

We have contingent liabilities and future claims for which 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. 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. We determine our contingent liabilities based on the most recent information available to us at the time of such determination regarding the nature of the exposure. Such exposures 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.

 

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Off-Balance Sheet Arrangements

 

At December 31, 2017 for the Successor and November 14, 2017 and December 31, 2016, for the Predecessor, we had no off-balance sheet debt or other arrangements required to be disclosed.

 

 

Consolidated Results of Operations

 

Comparison of Fiscal Years Ended December 31, 2017 and December 31, 2016

 

Our consolidated revenue decreased from $123.7 million for the year ended December 31, 2016 to $101.8 million during the combined Successor and Predecessor periods in 2017, a decrease of $21.9 million or 17.7%. For the combined Successor and Predecessor periods in 2017, we had net loss of $397.4 million compared to a net loss of $203.0 million for the Predecessor year ended December 31, 2016.    

 

The price of oil has a significant impact on the operating plans for our customers. The oil price has been depressed since 2014 which has had a negative effect on the demand for offshore supply vessels and, consequently, there has been substantial pressure on day rates and utilization. During the combined Successor and Predecessor periods in 2017, overall fleet utilization increased by 5.0% which increased revenue by $12.5 million, while day rates decreased by $1,975 per day contributing to a decrease in revenue of $35.5 million. The continued strength of the U.S. Dollar caused a further decrease in revenue of $2.2 million, as a large portion of our revenue is earned in foreign currencies. Partially offsetting these decreases was an increase in capacity of $3.3 million. The capacity increase was related to the addition of one new-build vessel in 2016 and one additional new-build vessel during the Predecessor period in 2017, partially offset by the sale of six older vessels during 2016 and the Predecessor 2017 period. Our total fleet size decreased from an average of 69.0 vessels during 2016 to an average of 66.3 vessels during the combined 2017 periods.

 

 

   

Successor

   

Predecessor

 
   

November 15 Through December 31,

   

January 1 Through November 14,

   

Year Ended December 31,

   

Increase

 
   

2017

   

2017

   

2016

   

(Decrease)

 
           

dollar amounts in thousands

         

Average Rate Per Day Worked (a) (b):

                               

North Sea (c)

  $ 9,765     $ 10,287     $ 11,960     $ (1,673 )

Southeast Asia ( c)

    5,359       5,457       7,291       (1,834 )

Americas ( c)

    8,096       8,267       10,441       (2,174 )

Overall Utilization (a) (b):

                               

North Sea

    62.6 %     63.1 %     66.8 %     (3.7 )%

Southeast Asia

    53.3 %     46.9 %     42.5 %     4.4 %

Americas

    40.0 %     32.5 %     20.7 %     11.8 %

Average Owned or Chartered Vessels (a) (d):

                               

North Sea

    25.0       24.9       25.7       (0.8 )

Southeast Asia

    10.0       10.0       12.0       (2.0 )

Americas

    31.0       31.4       31.3       0.1  

Total

    66.0       66.3       69.0       (2.7 )

 

 

 

(a)

Owned 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 the total number of days of availability in the period.

 

45

 

 

 

(c)

Revenues for vessels in our North Sea fleet are primarily earned in GBP, NOK and Euros, and have been converted to U.S. Dollars at the average exchange rate (U.S. Dollar/GBP, U.S. Dollar/NOK and U.S. Dollar/Euro) for the periods indicated below. Payment for vessels in our Americas fleet can be earned in other currencies, including the Brazilian Reais (or BRL), and have been converted to U.S. Dollars at the average exchange rate (U.S. Dollar/BRL) for the periods indicated below.

 

   

Successor

   

Predecessor

 
   

November 15 Through December 31,

   

January 1 Through November 14,

   

Year Ended

December 31,

 
   

2017

   

2017

   

2016

 
$1 US=GBP     0.748       0.779       0.738  
$1 US=NOK     8.275       8.253       8.395  
$1 US=Euro     0.845       0.89       0.903  
$1 US=BRL     3.281       3.183       3.467  
$1 US=SGD     1.348       1.384       1.38  

 

 

(d)

Adjusted for vessel additions and dispositions occurring during each period.

 

During the combined Predecessor and Successor periods in 2017, we continued cost saving initiatives that were started in 2015. As a result, direct operating expenses decreased $3.5 million from 2016 to the combined 2017 periods. Drydock expense increased $0.8 million, as we spent 18 additional days in drydock during the combined 2017 periods. General and administrative expenses decreased $1.9 million during the combined 2017 periods. During the Predecessor 2017 period we recognized $17.9 million of pre-petition restructuring charges. Depreciation expense decreased $6.0 million, mainly due to a smaller fleet size and an impairment write-down of assets during 2016. During 2016 and the combined 2017 periods, we sold six older vessels and recognized losses of $8.6 million and $5.2 million, respectively. During 2016 we recognized an impairment charge of $162.8 million related to the write-down of certain assets as described in Note 3 to our Consolidated Financial Statements in Part II, Item 8.

 

Other expenses increased by $340.6 million in the combined Predecessor and Successor periods of 2017 compared to 2016. The change is due primarily to $320.9 million in reorganization expense related to our bankruptcy filing. Interest expense decreased $3.3 million, while other financing costs decreased by $11.3 million, related to the absence in 2017 of an attempted capital restructuring during 2016. We also benefitted from lower foreign currency expense during the combined 2017 periods.

 

During the combined Successor and Predecessor 2017 periods, we had an income tax benefit of $48.5 million, compared to a benefit of $39.5 million for 2016. The 2017 effective tax rate was negative (10.9)% and the 2016 effective tax rate was negative (16.3)%. The income tax benefit in the year ended December 31, 2017 compared to the income tax benefit in the year ended December 31, 2016 was largely due to the impact of applying the provisions of the 2017 Tax Act and Fresh Start Accounting adjustments reflected in the Predecessor’s final statement of operations.

 

During 2017, as a result of the enactment of the 2017 Tax Act, our foreign earnings and profits accumulated and deferred from U.S. taxation under former tax law are now deemed repatriated. We expect to offset the liability related to mandatory deemed repatriation with available net operating loss carryforwards and therefore do not expect to incur any cash tax cost related to this provision of the 2017 Tax Act. In addition, the enactment of the 2017 Tax Act resulted in a 3.4 percentage point increase in our effective tax rate related to the one-time tax effects of the 2017 Tax Act. The decrease in statutory rate from 35% to 21% under the 2017 Tax Act resulted in a $1.5 million tax benefit due to the remeasurement of deferred tax liabilities.

 

In addition to these discrete impacts, the effective tax rate was favorably impacted by benefits provided by the exclusion of cancellation of indebtedness income from gross income for U.S. federal income tax purposes and Fresh Start Accounting adjustments attributable to foreign jurisdictions where we are taxed under non-income-based tonnage tax regimes.

 

Comparison of Fiscal Years Ended December 31, 2016 and December 31, 2015

 

Our consolidated revenue decreased from $274.8 million in 2015 to $123.7 million in 2016, a decrease of $151.1 million or 55.0%. For the year ended December 31, 2016, we had a net loss of $203.0 million, or $8.09 per share, compared to a net loss of $215.2 million, or $8.70 per share, for the year ended December 31, 2015.

 

In late 2014, the oil and natural gas industry entered a downturn precipitated by falling oil prices. The oil price decline had a significant negative effect on the demand for offshore supply vessels and, consequently, there has been substantial pressure on day rates and utilization. In 2016, overall fleet utilization decreased by 23.9% which lowered revenue by $113.1 million compared to 2015, while day rates decreased by $5,253 per day contributing to a decline in revenue of $29.8 million. The continued strength of the U.S. Dollar caused a further decrease in revenue of $9.7 million, as a large portion of our revenue is earned in foreign currencies. Partially offsetting these reductions was an increase in capacity of $1.0 million. The capacity increase was related to the addition of one new-build vessel in 2016 and one additional work day during 2016, partially offset by the sale of four older vessels during 2016. Our total fleet size decreased from an average of 71.4 vessels during 2015 to an average of 69.0 vessels during 2016.

 

46

 

 

   

Predecessor

 
   

Year Ended December 31,

 
                   

Increase

 
   

2016

   

2015

   

(Decrease)

 
   

(Dollars in thousands)

 

Average Rate Per Day Worked (a) (b):

                       

North Sea (c)

  $ 11,960     $ 16,991     $ (5,031 )

Southeast Asia ( c)

    7,291       11,471       (4,180 )

Americas ( c)

    10,441       17,128       (6,687 )

Overall Utilization (a) (b):

                       

North Sea

    66.8 %     80.5 %     (13.7 )%

Southeast Asia

    42.5 %     64.2 %     (21.7 )%

Americas

  20.7 %     52.1 %     (31.4 )%

Average Owned or Chartered Vessels (a) (d):

                       

North Sea

    25.7       28.4       (2.7 )

Southeast Asia

    12.0       13.0       (1.0 )

Americas

    31.3       30.0       1.3  

Total

    69.0       71.4       (2.4 )

 

 

(a)

Owned 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 the total number of days of availability in the period.

 

(c)

Revenues for vessels in our North Sea fleet are primarily earned in GBP, NOK and Euros, and have been converted to U.S. Dollars at the average exchange rate (U.S. Dollar/GBP, U.S. Dollar/NOK and U.S. Dollar/Euro) for the periods indicated below. Payment for vessels in our Americas fleet can be earned in other currencies, including BRL, and have been converted to U.S. Dollars at the average exchange rate (U.S. Dollar/BRL) for the periods indicated below.

 

   

Year Ended December 31,

 
   

2016

   

2015

 

$1 US=GBP

    0.738       0.654  

$1 US=NOK

    8.395       8.048  

$1 US=Euro

    0.903       0.901  

$1 US=BRL

    3.467       3.277  

$1 US=SGD

    1.380       1.374  

 

 

(d)

Adjusted for vessel additions and dispositions occurring during each period.

 

During 2016 we continued cost saving initiatives that were started in 2015, including the additional reduction of onshore staffing levels. These initiatives continued to significantly decrease our operating costs in 2016. Direct operating expenses decreased $86.7 million from 2015 to 2016, drydock expense decreased $10.7 million, and general and administrative expenses decreased $9.6 million. Depreciation expense decreased $14.4 million due to the sale of seven older vessels during 2015 and 2016, for which we recognized a loss of $1.2 million and $8.6 million, respectively. During 2016 we recognized impairment charges of $162.8 million, a $10.7 million increase from the 2015 impairment charges of $152.1 million. These impairment charges were related to the write-down of certain assets as described in Note 3 to our Consolidated Financial Statements in Part II, Item 8.

 

During 2016 we had an income tax benefit of $39.5 million, compared to a benefit of $5.6 million for 2015. The 2016 effective tax rate was negative (16.3)% and the 2015 effective tax rate was also negative (2.6)%. Tax expense from year to year can vary based on the mix of profitability and taxing jurisdictions.

 

Segment Results

 

As discussed in “General Business” included in Part I, Item 1 “Business,” we have three operating segments: the North Sea, Southeast Asia and the Americas, each of which is considered a reportable segment under FASB ASC 280. The majority of our revenue is derived from our long-lived assets located in foreign jurisdictions. We had $19.9 million in revenue for the combined Predecessor and Successor periods in 2017 and $99.2 million in long-lived assets as of December 31, 2017 attributed to the United States, our country of domicile.

 

Management evaluates segment performance primarily based on operating income. Cash and debt are managed centrally, and since the regions do not manage those items, the gains and losses on foreign currency re-measurements associated with these items are excluded from operating income. Management considers segment operating income to be a good indicator of each segment’s operating performance from its continuing operations, because it represents the results of the ownership interest in operations without regard to financing methods or capital structures. Each segment’s operating income is summarized in the following table, and further detailed in the following paragraphs.

 

47

 

 

Operating Loss by Operating Segment

 

   

Successor

   

Predecessor

 
   

November 15

Through

December 31,

   

January 1, Through

November 14,

    Year Ended December 31,  
   

2017

   

2017

   

2016

   

2015

 
           

(In thousands)

         

North Sea

  $ (305 )   $ (20,577 )   $ (10,686 )   $ (8,774 )

Southeast Asia

    (761 )     (9,506 )     (64,784 )     29  

Americas

    (1,394 )     (29,799 )     (133,884 )     (147,577 )

Total reportable segment operating loss

    (2,460 )     (59,882 )     (209,354 )     (156,322 )

Other

    (1,639 )     (30,300 )     (21,971 )     (27,230 )

Total reportable segment and other operating loss

  $ (4,099 )   $ (90,182 )   $ (231,325 )   $ (183,552 )

 

 

North Sea Region: 

 

   

Successor

   

Predecessor

 
   

November 15

Through

December 31,

   

January 1

Through

November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

 
           

(In thousands)

         

Revenue

  $ 8,304     $ 52,217     $ 76,759     $ 142,168  

Direct operating expenses

    5,387       36,365       45,872       84,474  

Drydock expense

    -       4,269       2,549       4,112  

General and administrative expense

    741       11,987       6,961       9,469  

Depreciation and amortization expense

    2,481       20,173       24,157       28,724  

Impairment charge

    -       -       1,986       22,919  

Loss on sale of assets and other

    -       -       5,920       1,244  

Operating loss

  $ (305 )   $ (20,577 )   $ (10,686 )   $ (8,774 )

 

 

Comparison of Fiscal Years Ended December 31, 2017 and December 31, 2016

 

Revenue for the North Sea region decreased $16.3 million, or 21.2%, from $76.8 million in 2016 to $60.5 million in the combined Predecessor and Successor periods in 2017. Utilization decreased from 66.8% during 2016 to 63.0% during the combined 2017 periods, causing a decrease in revenue of $9.7 million. Day rates decreased by $1,740 per day, from $11,960 in 2016 to $10,220 in the combined 2017 periods, which accounted for a $7.7 million reduction in revenue. The continued strength of the U.S. Dollar resulted in lower revenue of $2.2 million. Capacity produced an increase in revenue of $2.3 million from 2016 to the combined 2017 periods mainly due to the delivery of one new-build vessel during the Predecessor 2017 period. Operating loss increased by $10.2 million, from $10.7 million in 2016 to $20.9 million in the combined 2017 periods. Excluding the impairment charge recorded in 2016, the increase in operating loss would have been $12.2 million. The decrease in revenue was the main contributing factor in the decline in operating income. Partially offsetting the decrease in revenue were reductions in direct operating expenses of $4.1 million and depreciation and amortization expense of $1.5 million. All these reductions are directly attributable to cost cutting measures implemented during 2015 and the decrease in average fleet size. In addition, during 2016 we recognized a loss on sale of assets of $5.9 million which was not repeated during 2017. Offsetting these reductions were increases in drydock expense of $1.7 million and general and administrative expenses of $5.8 million, of which $5.2 million related to payments related to our reorganization. The decrease in depreciation expense was mainly due to Fresh Start Accounting adjustments in 2017.

 

48

 

 

Comparison of Fiscal Years Ended December 31, 2016 and December 31, 2015

 

Revenue for the North Sea region decreased $65.4 million, or 46.0%, from $142.2 million in 2015 to $76.8 million in 2016. Utilization decreased from 80.5% during 2015 to 66.8% during 2016, causing a decrease in revenue of $35.9 million. Day rates decreased by $5,031 per day, from $16,991 in 2015 to $11,960 in 2016. This decrease accounted for $17.0 million of the revenue decrease. The continued strength of the U.S. Dollar contributed $9.7 million to the decrease in revenue. In addition, the sale of four vessels during 2015 and 2016 and the transfer of two vessels to another region during the third quarter of 2016 resulted in a decrease in revenue of $3.4 million. The average fleet size in the region decreased from 28.4 vessels in 2015 to 25.7 vessels in 2016. Operating loss increased by $1.9 million, from $8.8 million in 2015 to $10.7 million in 2016. Excluding the impairment charges of $22.9 million and $2.0 million recorded in 2015 and 2016, respectively, the decrease in operating income would have been $22.8 million. The decrease in revenue was the main contributing factor in the decrease in operating income. In addition, during 2016 we recognized a loss on sale of assets of $5.9 million, compared to a loss of $1.2 million during 2015. Offsetting these decreases were reductions in direct operating expenses of $38.6 million, drydock expense of $1.6 million, general and administrative expenses of $2.5 million, and depreciation expense of $4.6 million. All these reductions are directly attributable to cost cutting measures implemented during 2015 and the decrease in average fleet size.

 

Southeast Asia Region: 

 

   

Successor

   

Predecessor

 
   

November 15

Through

December 31,

   

January 1

Through

November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

 
           

(In thousands)

         

Revenue

  $ 1,368     $ 8,606     $ 14,069     $ 35,524  

Direct operating expenses

    1,047       7,879       11,308       16,483  

Drydock expense

    -       959       588       4,356  

General and administration expense

    382       3,103       5,218       4,296  

Depreciation and amortization expense

    700       6,222       8,654       10,419  

Impairment charge

    -       -       50,437       -  

(Gain) loss on sale of assets and other

    -       (51 )     2,648       (59 )

Operating income (loss)

  $ (761 )   $ (9,506 )   $ (64,784 )   $ 29  

 

 

Comparison of Fiscal Years Ended December 31, 2017 and December 31, 2016

 

Revenues for the Southeast Asia based fleet decreased by $4.1 million, or 29.1%, from $14.1 million in 2016 to $10.0 million in the combined Predecessor and Successor periods of 2017. Utilization increased from 42.5% in 2016 to 47.7% in the combined 2017 periods. However, as a result of the sale of three vessels that were stacked during 2016 and the stacking of an additional vessels during the Predecessor 2017 period, the impact of utilization on revenue was a decrease of $0.3 million. Day rates declined from $7,291 during 2016 to $5,443 during the combined 2017 periods, causing a further reduction in revenue of $3.7 million. Although we sold three vessels from the region during 2016, capacity decreased slightly as the sold vessels had been stacked for most of the 2016. However, average fleet size decreased from 12.0 vessels in 2016 to 10.0 vessels in the combined 2017 periods. Operating income for the region increased by $54.5 million. During 2016, we recorded an impairment charge of $50.4 million. Excluding this charge, the increase in operating income was $4.1 million. This change was mainly a result of a $2.4 million decrease in operating expenses resulting from cost cutting measures that were implemented during 2015, a decrease of $1.7 million in general and administrative expenses, and a decrease of $1.7 million in depreciation and amortization expenses due mainly to the impairment write down in 2016 and Fresh Start Accounting adjustment in 2017. Partially offsetting these improvements was the decrease in revenue and a slight increase in drydock expense. We also incurred a loss of $2.6 million on the sale of three older vessels during 2016.

 

Comparison of Fiscal Years Ended December 31, 2016 and December 31, 2015

 

Revenues for the Southeast Asia based fleet decreased by $21.5 million to $14.1 million in 2016. Utilization decreased from 64.2% in 2015 to 42.5% in 2016, decreasing revenue by $13.8 million. Day rates decreased from $11,471 during 2015 to $7,291 for 2016, causing a further reduction in revenue of $7.7 million. Although we sold three vessels from the region during the second half of 2016, capacity did not change as the sold vessels had been stacked for most of the year. However, average fleet size decreased from 13.0 vessels in 2015 to 12.0 vessels in 2016. Operating income for the region decreased by $64.8 million. During 2016, we recorded an impairment charge of $50.4 million. Excluding this charge, the decrease in operating income for the region was $14.4 million. The decrease in revenue was the largest contributor to the change in operating income. In addition, an increase in general and administrative expenses of $0.9 million, mainly related to an increase in bad debt expense, contributed to the reduction. We also incurred a loss of $2.6 million on the sale of three older vessels. Partially offsetting these expenses and losses were cost cutting measures undertaken during 2015, the decrease in fleet size, and the effect of the impairment charges to the vessel net book value, the overall effect of which was a decrease in operating expenses of $5.2 million, drydock expense of $3.8 million, and depreciation and amortization of $1.8 million.

 

49

 

 

Americas Region:

 

   

Successor

   

Predecessor

 
   

November 15

Through

December 31,

   

January 1

Through

November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

 
           

(In thousands)

         

Revenue

  $ 3,921     $ 27,406     $ 32,891     $ 97,114  

Direct operating expenses

    3,425       25,577       25,985       68,880  

Drydock expense

    -       204       1,525       6,919  

General and administrative expense

    728       6,937       6,876       9,906  

Depreciation and amortization expense

    1,162       19,229       22,008       29,827  

Impairment charge

    -       -       110,385       129,184  

Pre-petition restructuring charge

    -       -       -       -  

(Gain) loss on sale of assets and other

    -       5,258       (4 )     (25 )

Operating income (loss)

  $ (1,394 )   $ (29,799 )   $ (133,884 )   $ (147,577 )

 

 

Comparison of Fiscal Years Ended December 31, 2017 and December 31, 2016

 

Revenue for the Americas region decreased by $1.6 million in the combined Predecessor and Successor periods in 2017 to $31.3 million from $32.9 million in 2016. Day rates decreased from $10,441 in 2016 to $8,241 in the combined 2017 periods, contributing $24.0 million to the decline in revenue. Partially offsetting this decrease was an increase in utilization of 12.7%, from 20.7% in 2016 to 33.4% in the combined 2017 periods, resulting in higher revenues of $22.5 million. In addition, the region experienced an increase of $1.0 million related to the full year effect of the delivery of a new-build vessel during 2016. During the combined Predecessor and Successor periods in 2017, the region had an operating loss of $31.2 million, compared to a loss of $133.9 million during 2016. During 2016 we recorded impairment charges of $110.4 million; excluding these charges, the decrease in operating income was $7.7 million. In addition to the decrease in revenue were increases in direct operating expenses of $3.0 million and general and administrative expenses of $0.8 million. Partially offsetting these reductions was a decrease in drydock expense of $1.3 million. Depreciation and amortization expense decreased by $1.6 million due to the asset write-down in 2016 and Fresh Start Accounting adjustment in 2017. In addition, during the Predecessor 2017 period we recorded a $5.3 million loss on the sale of two older vessels.

 

Comparison of Fiscal Years Ended December 31, 2016 and December 31, 2015

 

Revenue for the Americas region decreased by $64.2 million, or 66.1%, from $97.1 million in 2015 to $32.9 million in 2016. Utilization for the region decreased from 52.1% in 2015 to 20.7% in 2016, resulting in a decrease in revenue of $63.4 million. Day rates decreased from $17,128 in 2015 to $10,441 in 2016, contributing $5.2 million to the revenue decrease. Partially offsetting these decreases was an increase in revenue of $4.4 million related to the delivery of one new-build vessel and the transfer of two vessels in from another region during 2016. Average fleet size increased from 30.0 vessels in 2015 to 31.3 vessels in 2016. During 2016 the region had an operating loss of $133.9 million, compared to a loss of $147.6 million during 2015, an increase of $13.7 million. During 2016 and 2015, we recorded impairment charges of $110.4 million and $129.2 million, respectively. Excluding these charges, the decrease in operating income was $5.1 million. The decrease in revenue was the main contributor to the decrease in operating income. Partially offsetting the decrease in revenue were decreases in direct operating expenses of $42.9 million, drydock expense of $5.4 million, general and administrative expenses of $3.0 million, and depreciation and amortization of $7.8 million. These decreases were the direct result of cost cutting measures undertaken in early 2015, and the effect of vessel impairment charges.

 

50

 

 

Liquidity, Capital Resources and Financial Condition

 

On May 17, 2017, GulfMark Offshore, Inc. filed the Chapter 11 Case under the Bankruptcy Code in the Bankruptcy Court, and on October 4, 2017, the Bankruptcy Court entered the Confirmation Order approving the Plan. On the Effective Date, November 14, 2017, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case.

 

Our 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.

 

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 continues into 2018. Beginning in late 2014, oil prices declined significantly, reaching a low of less than $30 per barrel in the first quarter of 2016. Prices began to recover 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 by year end. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovering to over $60 per barrel in January 2018. 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. 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.

 

A primary cause of our bankruptcy filing was that our operating cash flows had reached a level that could not maintain our operations and service our debt. In the months immediately following the beginning of the industry downturn in late 2014, we prioritized cash cost reductions by, among other measures, reducing office staff and mariners, reducing compensation to remaining staff and mariners, and stacking vessels, including eliminating crews for stacked vessels and deferring required drydocks. We were successful in significantly reducing our cost structure with operating costs dropping by over 65% from 2014 to 2017 and general and administrative costs decreasing by a third. However, our revenues declined in the same comparative period by 80%. In the bankruptcy, our focus was to reduce our debt and infuse additional capital. Significant achievements in the bankruptcy were the elimination of almost $450 million of long term debt (plus accrued interest), a complete restructuring of our bank financing and the inflow of $125 million in cash for new equity. We expect operating cash flows to continue to be marginal in the near term. Upon emerging from bankruptcy, we had $100 million in long term debt outstanding with the capacity to borrow an additional $25 million under our Revolving Credit Facility described below. See “Emergence from Bankruptcy – Exit Credit Facility.” At December 31, 2017, we had approximately $64.6 million in cash on hand, $23.3 million in borrowing capacity under our $25.0 million Revolving Credit Facility and an agreement governing our $100 million term loan and our $25 million revolving credit facility (discussed below) under which repayment provisions and some restrictive financial covenants do not become fully effective until 2020. Our future results will depend on our ability to maintain a low-cost structure and the level to which the industry recovers. We believe we have sufficient cash on hand plus borrowing capacity under our Revolving Credit Facility to supplement our operations to enable us to continue to fund our operations and to service our existing debt.

 

Due to the recent changes in tax law under the 2017 Tax Act, a one-time transition income inclusion was included in income as we transition to the new dividend-exemption system. As a result of the new tax legislation and lower effective tax rate now applied to the now mandatory deemed repatriation we were able to recognize a $1.5 million tax benefit due to the reduction of the deferred tax liability previously recognized through income tax expense. We have recorded a deemed repatriation income inclusion of $23.7 million based on accumulated post-1986 earnings of our foreign subsidiaries. We expect this inclusion to be completely offset with existing net operating loss carryforwards, thus resulting in no incremental cash taxes payable.       

 

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Cash and Working Capital

 

At December 31, 2017, our cash on hand totaled $64.6 million and net working capital was $71.0 million. The following table shows cash flows from operating, investing and financing activities:

 

    Successor     Predecessor  
   

November 15

Through

December 31,

   

January 1

Through

November 14,

   

Year Ended

December 31,

   

Year Ended

December 31,

 
   

2017

   

2017

   

2016

   

2015

 
           

(in millions)

                 

Net cash provided by (used in) operating activities

  $ (9.3 )   $ (63.8 )   $ (23.3 )   $ 43.4  

Net cash used in investing activities

    (0.1 )     (21.9 )     (9.7 )     (22.8 )

Net cash provided by (used in) financing activities

    (0.9 )     151.1       20.2       (47.3 )

Net increase (decrease) in cash and cash equivalents

  $ (10.3 )   $ 65.4     $ (12.8 )   $ (26.7 )

 

Operating Activities

 

Net cash used in operating activities for the Successor period ended December 31, 2017 was $9.3 million. Net cash used in operating activities for the Predecessor period ended November 14, 2017 was $63.8 million. Net cash used in operating activities for the Predecessor year ended December 31, 2016 was $23.3 million, while net cash provided by operating activities for the Predecessor year ended December 31, 2015 was $43.4 million. The decreases were due primarily to lower revenue in 2017 and 2016.

 

Investing Activities

 

Net cash used in investing activities for the Successor period ended December 31, 2017 was $0.1 million. Net cash used in investing activities for the Predecessor period ended November 14, 2017 was $21.9 million. Net cash used in investing activities for the Predecessor years ended December 31, 2016 and 2015 was $9.7 million and $22.8 million, respectively. The cash used in investing activities during the combined 2017 period and the years ended December 31, 2016 and 2015 was primarily related to activity in our new build program.

 

Financing Activities

 

Net cash used by financing activities for the Successor period ended December 31, 2017 was $0.9 million, while net cash provided by financing activities for the Predecessor period ended November 14, 2017 was $151.1 million. Net cash provided by financing activities for the Predecessor year ended December 31, 2016 was $20.2 million compared to $47.3 million used in financing activities for the Predecessor year ended December 31, 2015. The increase in cash provided by financing activities during the combined 2017 periods was primarily due to proceeds from debt and rights offerings received in relation to our restructuring, partially offset by repayments of debt. The increase in cash provided by financing activities in 2016 was due to lower repayments of borrowings in 2016, offset by the repurchases of the Predecessor’s former 6.375% senior notes due 2022, or Senior Notes, and the incurrence of other financing costs related to the attempted debt and equity restructuring that we launched in the fourth quarter of 2016.

 

Emergence from Bankruptcy

 

On May 17, 2017, GulfMark Offshore, Inc. filed the Chapter 11 Case under the Bankruptcy Code in the Bankruptcy Court, and on October 4, 2017, the Bankruptcy Court entered the Confirmation Order approving the Plan. On the Effective Date, November 14, 2017, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case.

 

  Restructuring Support Agreement

 

On May 15, 2017, the Predecessor 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 Predecessor’s senior notes, to support a restructuring on the terms of the Plan.  The RSA provided for, among other things, the Predecessor’s $125 million cash rights offering, or the Rights Offering.  Upon emergence from bankruptcy, we implemented the provisions of the RSA in accordance with the Plan on the Effective Date as follows:

 

 

Pursuant to the Rights Offering (subject to Jones Act limitations described below), eligible Noteholders purchased their pro rata share of 60% of the Common Stock of the Successor, or as applicable, Noteholder Warrants (as defined below), or the Successor Equity. The Rights Offering was backstopped by certain Noteholders for a 6.0% commitment premium that was paid with an additional 3.6% of the Successor Equity.

 

52

 

 

 

Each holder of the Predecessor’s senior notes received (subject to Jones Act limitations described below) its pro rata share of 35.65% of the Successor Equity.

 

 

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. On the Effective Date, certain Noteholders who were eligible to receive Common Stock of the Successor pursuant to the Plan or the Rights Offering but who were non-U.S. holders received warrants to acquire Common Stock of the Successor at an exercise price of $.01 per share, or the Noteholder Warrants.

 

 

Outstanding Class A common stock of the Predecessor was cancelled and each holder of such Class A common stock received its pro rata share of (a) Common Stock representing in the aggregate 0.75% of the Successor Equity and (b) Equity Warrants with an exercise price of $100 per share for 7.5% of the equity of the Successor.

 

 

The Successor Equity purchased in the Rights Offering, issued to pay the backstop premium, issued in exchange for the Predecessor’s senior notes or in exchange for the Predecessor’s Class A common stock is subject to dilution by the Successor Equity issued or issuable under the proposed management incentive plan and upon exercise of the Equity Warrants.

 

 

 

The Predecessor repaid in full its debtor-in-possession financing. Holders of allowed claims arising under administrative expense claims, priority tax claims, other priority claims, and other secured claims of the Predecessor have received or will receive payment in full in cash. The Successor will continue to pay any general unsecured claims in the ordinary course of business.

 

Reorganization Items 

 

Our consolidated statements of operations for the Successor period ended December 31, 2017 and the Predecessor period ended November 14, 2017 include reorganization items which reflect gains recognized on the settlement of liabilities subject to compromise and costs and other expenses associated with the bankruptcy proceedings, principally professional fees as well as the Fresh Start Accounting adjustments. Similar costs that were incurred during the pre-petition periods have been reported as pre-petition restructuring charges in our consolidated statements of operations.

 

The following table summarizes the components included in reorganization items, in our consolidation statements of operations for the periods presented (in thousands):

 

   

Successor

   

Predecessor

 
   

November 15

Through

December 31,

   

January 1

Through

November 14,

 
   

2017

   

2017

 

Gains on the settlement of liabilities subject to compromise

  $ -     $ (342,969 )

Fresh start accounting adjustments

    -       633,970  

Legal and professional fees and expenses

    969       28,921  

Total reduction in value of assets

  $ 969     $ 319,922  

 

 

 

Exit Credit Facility

 

On November 14, 2017, GulfMark Rederi AS, or Rederi, a subsidiary of GulfMark Offshore, Inc., entered into an agreement, or the Credit Facility Agreement, with DNB Bank ASA, New York Branch, as agent, DNB Capital LLC as revolving and swingline lender, and certain funds managed by Hayfin Capital Management LLP as term lenders, providing for two credit facilities: a senior secured revolving credit facility, or the Revolving Credit Facility, and a senior secured term loan facility, or the Term Loan Facility (or, together, the Facilities). The Revolving Credit Facility provides $25 million of borrowing capacity, including $12.5 million for swingline loans and $5.0 million for letters of credit. The Term Loan Facility provides a $100 million term loan, which was funded in full on the November 14, 2017. Borrowings under the Revolving Credit Facility may be denominated in U.S. Dollars, NOK, GBP and Euros. Both Facilities mature on November 14, 2022.

 

53

 

 

Borrowings under the Facilities accrue interest on U.S. Dollar borrowings at our option using either (i) the adjusted U.S. prime rate, or ABR, plus 5.25%, or (ii) the LIBOR Rate plus 6.25%. NOK loans substitute LIBOR with an adjusted Norwegian offered quotation rate for deposits in NOK and Euro loans substitute LIBOR with an adjusted euro interbank offered rate administered by the European Money Markets Institute.

 

Repayment of borrowings under the Facilities is guaranteed by GulfMark Offshore, Inc. and each of its significant subsidiaries (or, collectively, with Rederi, the Obligors), and is secured by a lien on 27 collateral vessels, or the Collateral Vessels, and substantially all other assets of the Obligors.

 

Commitments under the Revolving Credit Facility will be reduced beginning on November 14, 2020 in semiannual increments of approximately $3.1 million until maturity. The Term Loan Facility is payable in semiannual installments beginning on November 14, 2020 and based on a five-year level principal payment schedule, payable semiannually.

 

Term Loan Facility prepayments prior to November 14, 2019 are subject to a make-whole premium based on the present value of interest otherwise payable from the prepayment date forward. Prepayments on or after November 14, 2019 and prior to November 14, 2020 are subject to a 2% premium. Mandatory prepayments, other than those triggered by a casualty event, are subject to prepayment premiums. Mandatory prepayments are required upon the occurrence of certain events including, but not limited to, a change of control or the sale or total loss of a Collateral Vessel. Prepayments of the Revolving Credit Facility are not materially restricted or penalized. 

 

The Credit Facility Agreement was evaluated for embedded derivatives that must be bifurcated and separately accounted for as freestanding derivatives. The Term Loan Facility and Revolving Credit Facility are not derivatives and are not measured at fair value. Therefore, the nature of any embedded features must be analyzed to determine whether each feature requires bifurcation by both (1) meeting the definition of a derivative and (2) not being considered clearly and closely related to the host contract. We have identified three features in the Credit Facility Agreement that are considered embedded derivatives. There is a contingent interest feature related to default interest, a breakage costs potential not related to prepayments, and certain potential contingent payments related to increased costs caused by changes in law. We determined that the value of these features are de minimis at the inception of the agreement and that we do not foresee events that would require a value adjustment in our consolidated financial statements. We will continue to assess the likelihood of triggering events and to the extent they are determined to be material, these features will be bifurcated from the debt instrument and subsequently marked to fair value through earnings.

 

The Credit Facility Agreement contains financial covenants that require that we maintain: (i) minimum liquidity of $30.0 million, including $15.0 million in cash, (ii) a leverage ratio (total debt to 12 months EBITDA) of not more than 5.0 to 1.0, tested quarterly beginning December 31, 2020, (iii) a total debt to capital ratio, tested quarterly, not to exceed 0.45 to 1.0, and (iv) a collateral to commitment coverage ratio of at least 2.50 to 1.0. The Credit Facility Agreement contains a number of restrictions that limit our ability to, among other things, sell Collateral Vessels, borrow money, make investments, incur additional liens on assets, buy or sell assets, merge, or pay dividends and contain a number of potential events of default related to our business, financial condition and vessel operations. Collateral Vessel operations are also subject to a variety of restrictive provisions. Proceeds from borrowings under the Credit Facility Agreement may not be used to acquire vessels or finance business acquisitions generally. At December 31, 2017, we were in compliance with all of the financial covenants under the Credit Facility Agreement.

 

Contractual Obligations

 

The following table summarizes our contractual obligations at December 31, 2017, and the effect these obligations are expected to have on liquidity and cash flows in future periods (in millions).

 

    Payments Due By Period  

Contractual Obligations

 

Total

   

Less than

one year

   

One to

three

years

   

Three to five

years

   

Thereafter

 

Repayment of Long-Term Debt

  $ 100.0     $ -     $ -     $ 100.0     $ -  

Interest Payments

    41.8       8.6       17.2       16.0       -  

Non-Cancelable Operating Leases

    9.4       1.2       2.1       2.0       4.1  

Other

    2.2       1.1       1.1       -       -  

Total

  $ 153.4     $ 10.9     $ 20.4     $ 118.0     $ 4.1  

 

Other Commitments

 

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. We had $3.2 million in letters of credit outstanding at December 31, 2017. In the past, no significant claims have been made against these financial instruments. We believe the likelihood of demand for payment is minimal and expect no material cash outlays to occur from these instruments.

 

54

 

 

Currency Fluctuations and Inflation

 

A majority of our operations are international; therefore, we are exposed to currency fluctuations and exchange rate risks. Charters for vessels in our North Sea fleet are primarily denominated in GBP, with a portion denominated in NOK or Euros. In areas where currency risks are potentially high, we normally accept only a small percentage of charter hire in local currency, with the remainder payable 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. The North Sea fleet generated 58% of our total consolidated revenue for the combined Successor and Predecessor periods in 2017.

 

In 2017, the exchange rates of GBP, NOK, Euro, BRL and SGD against the U.S.  Dollar ranged as follows:

 

   

High

   

Low

   

Year

Average

 

$1 US=GBP

    0.831       0.736       0.777  

$1 US=NOK

    8.682       7.730       8.255  

$1 US=Euro

    0.960       0.831       0.886  

$1 US=BRL

    3.370       3.057       3.191  

$1 US=SGD

    1.452       1.337       1.381  

 

 

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 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; and

 

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

 

One or more of these factors may change and, in response, we may begin to use financial instruments to hedge risks of currency fluctuations. We may 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.

 

Reflected in the accompanying consolidated balance sheet at December 31, 2017, is a $3.0 million gain in accumulated other comprehensive income relating to the change in exchange rates at December 31, 2017 in comparison to the exchange rate at the date of our emergence from bankruptcy. Changes in the accumulated other comprehensive income 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.

 

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

 

New Accounting Pronouncements

 

Refer to Note 1 “Nature of Operations and Summary of Significant Accounting Policies – New Accounting Pronouncements” to our Consolidated Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data-.”

 

55

 

 

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

 

The information included in this Item 7A is considered to constitute “forward-looking statements” for purposes of the statutory safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act. See “Cautionary Note Regarding Forward-Looking Statements.”

 

Financial Instruments 

 

We are subject to financial market risks, including fluctuations in foreign currency exchange rates and interest rates. In order to manage and mitigate our exposure to these risks, we may use derivative financial instruments in accordance with established policies and procedures. At December 31, 2017, we had no outstanding derivative contracts. Refer to Note 1 “Nature of Operations and Summary of Significant Accounting Policies—Fair Value of Financial Instruments” to our Consolidated Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information on financial instruments.

 

Foreign Currency Risk

 

The functional currency for the majority of our international operations is that operation’s local currency. Adjustments resulting from the translation of the local functional currency financial statements to the U.S. Dollar, which is based on current exchange rates, are included in the Consolidated Statements of Stockholders’ Equity as a separate component of “Accumulated Other Comprehensive Income (Loss).” Working capital of our international operations may in part be held or denominated in a currency other than the local currency, and gains and losses resulting from holding those balances are included in the Consolidated Statements of Operations in “Foreign currency loss and other” in the current period.

 

We operate in a number of international areas and are involved in transactions denominated in currencies other than U.S. Dollars, which exposes us to foreign currency exchange rate risk. At various times we may utilize forward exchange contracts, local currency borrowings and the payment structure of customer contracts to selectively hedge exposure to exchange rate fluctuations in connection with monetary assets, liabilities and cash flows denominated in certain foreign currencies. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Currency Fluctuations and Inflation.” Other than trade accounts receivable and trade accounts payable, we do not currently have financial instruments that are sensitive to foreign currency exchange rates.

 

We transact business in various foreign currencies which subjects our cash flows and earnings to exposure related to changes in foreign currency exchange rates. We generally attempt to manage this exposure through operational strategies and not through the use of foreign currency forward exchange contracts. We do not engage in hedging activity for speculative or trading purposes.

 

From time to time, however, we may hedge firmly committed, anticipated transactions in the normal course of business and these contracts are designated and qualify as fair value hedges. Changes in the fair value of derivatives that are designated as fair value hedges are deferred in the Consolidated Statements of Stockholders’ Equity as a separate component of “Consolidated Statements of Comprehensive Income” until the underlying transactions occur. At such time, the related deferred hedging gains or losses are recorded on the same line as the hedged item.

 

Net foreign currency losses, including derivative activity, for the combined Predecessor and Successor 2017 periods and the Predecessor years ended December 31, 2016 and 2015 were $0.4 million, $2.4 million and $1.1 million, respectively.

 

Interest Rate Risk

 

We are subject to market risk for changes in interest rates related primarily to our long-term debt. The following table, which presents principal cash flows by expected maturity dates and weighted average interest rates, summarizes our fixed and variable rate debt obligations at December 31, 2017 (Successor) and at December 31, 2016 (Predecessor) that are sensitive to changes in interest rates. The floating portion of our variable rate debt is based on the adjusted U.S. prime rate, LIBOR and certain market rates related to the NOK and the Euro, depending on which currency we designate to borrow funds.

 

56

 

 

The following table shows our debt principal obligations as of December 31, 2017 for the Successor and December 31, 2016 for the Predecessor and the related interest rate exposure:

 

 

 

December 31, 2017 (Successor)

 

2018

   

2019

   

2020

   

2021

   

2022

   

Thereafter

 
   

(Dollar amounts in thousands)

 

Long-term Debt:

                                               

Term Loan

  $ 100,000     $ 100,000     $ 100,000     $ 100,000     $ 100,000     $ 100,000  

Average interest rate

    7.824 %     7.824 %     7.824 %     7.824 %     7.824 %     7.824 %

 

 

December 31, 2016 (Predecessor)

 

2017

   

2018

   

2019

   

2020

   

2021

   

Thereafter

 
   

(Dollar amounts in thousands)

 

Long-term Debt:

                                               

Senior Notes (fixed rate)

  $ 429,640     $ 429,640     $ 429,640     $ 429,640     $ 429,640     $ 429,640  

Average interest rate

    6.375 %     6.375 %     6.375 %     6.375 %     6.375 %     6.375 %
                                                 

Variable rate-Multicurrency Facility Agreement

  $ 49,000     $ 49,000     $ 49,000     $ -     $ -     $ -  

Average interest rate

    4.62 %     4.62 %     4.62 %     0.00 %     0.00 %     0.00 %
                                                 

Variable rate-Norwegian Facility Agreement

  $ 11,157     $ 11,157     $ 11,157     $ -     $ -     $ -  

Average interest rate

    4.59 %     4.59 %     4.59 %     0.00 %     0.00 %     0.00 %

 

 

 

 

 

 

 

 

 

 

57

 

 

ITEM 8. Financial Statements and Supplementary Data

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Stockholders and Board of Directors
GulfMark Offshore, Inc.:

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of GulfMark Offshore, Inc. and consolidated subsidiaries (the Company) as of December 31, 2017 (Successor) and 2016 (Predecessor), the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the periods of November 15, 2017 to December 31, 2017 (Successor), January 1, 2017 to November 14, 2017 (Predecessor), and for the years ended December 31, 2016 and 2015 (Predecessor), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 (Successor) and 2016 (Predecessor), and the results of its operations and its cash flows for the periods of November 15, 2017 to December 31, 2017 (Successor), January 1, 2017 to November 14, 2017 (Predecessor) and for the years ended December 31, 2016 and 2015 (Predecessor), in conformity with U.S. generally accepted accounting principles.

 

New Basis of Presentation

 

As discussed in Note 1 to the consolidated financial statements, on October 4, 2017, the United States Bankruptcy Court in the District of Delaware entered an order confirming the Company’s plan for reorganization under Chapter 11 of the Bankruptcy Code, which became effective on November 14, 2017. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with Accounting Standards Codification 852-10, Reorganizations, for the Successor as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods as described in Note 2.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

We have served as the Company’s auditor since 2011.

 

/s/ KPMG LLP

 

Houston, Texas

April 2, 2018

 

58

 

 

 

GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

   

Successor

   

Predecessor

 
   

December 31,

 
   

2017

   

2016

 
ASSETS                
Current assets:                

Cash and cash equivalents

  $ 64,613     $ 8,822  

Trade accounts receivable, net of allowance for doubtful accounts of $3,470 and $2,482, respectively

    20,378       22,043  

Other accounts receivable

    7,471       7,650  

Inventory

    1,323       7,465  

Prepaid expenses

    4,319       3,799  

Other current assets

    5,416       1,813  

Total current assets

    103,520       51,592  

Vessels, equipment, and other fixed assets at cost, net of accumulated depreciation and amortization of $4,392 and $468,817, respectively

    363,845       970,522  

Construction in progress

    283       24,698  

Deferred costs and other assets

    4,307       5,713  

Total assets

  $ 471,955     $ 1,052,525  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                

Current liabilities:

               

Current maturities of long-term debt

  $ -     $ 483,326  

Accounts payable

    12,770       11,666  

Income and other taxes payable

    1,540       3,678  

Accrued personnel costs

    5,040       9,109  

Accrued interest expense

    451       8,163  

Accrued restructuring charges

    7,458       -  

Accrued professional fees

    1,825       5,791  

Other accrued liabilities

    3,406       3,514  

Total current liabilities

    32,490       525,247  

Long-term debt

    92,365       -  

Long-term income taxes:

               

Deferred income tax liabilities

    2,992       56,716  

Other income taxes payable

    18,374       17,768  

Other liabilities

    1,244       3,173  

Stockholders' equity:

               

Successor:

               

Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued

    -       -  

Common stock, $0.01 par value; 25,000 shares authorized; 7,043 shares issued and 7,042 outstanding

    70       -  

Additional paid-in capital

    317,932       -  

Retained earnings

    3,511       -  

Accumulated other comprehensive income

    2,977       -  

Treasury stock

    (70 )     -  

Deferred compensation

    70       -  

Predecessor:

               

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; 29,104 shares issued and 27,122 outstanding; Class B Common Stock $.01 par value; 60,000 shares authorized; no shares issued

    -       278  

Additional paid-in capital

    -       411,983  

Retained earnings

    -       241,207  

Accumulated other comprehensive loss

    -       (148,402 )

Treasury stock, at cost

    -       (64,580 )

Deferred compensation

    -       9,135  

Total stockholders' equity

    324,490       449,621  

Total liabilities and stockholders' equity

  $ 471,955     $ 1,052,525  

 

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

 

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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

   

Successor

   

Predecessor

 
   

Period from

November 15, 2017

Through

   

Period from January

1, 2017 Through

   

Year Ended December 31,

 
   

December 31, 2017

   

November 14, 2017

   

2016

   

2015

 
                                 
                                 

Revenue

  $ 13,593     $ 88,229     $ 123,719     $ 274,806  

Costs and expenses:

                               

Direct operating expenses

    9,859       69,821       83,165       169,837  

Drydock expenses

    -       5,432       4,662       15,387  

General and administrative expenses

    3,407       32,369       37,663       47,280  

Pre-petition restructuring charges

    1       17,861       -       -  

Depreciation and amortization

    4,425       47,721       58,182       72,591  

Impairment charges

    -       -       162,808       152,103  

Loss on sale of assets and other

    -       5,207       8,564       1,160  

Total costs and expenses

    17,692       178,411       355,044       458,358  

Operating loss

    (4,099 )     (90,182 )     (231,325 )     (183,552 )

Other income (expense):

                               

Interest expense

    (1,343 )     (28,815 )     (33,486 )     (36,946 )

Interest income

    57       26       133       260  

Gain on extinguishment of debt

    -       -       35,912       458  

Reorganization items

    (969 )     (319,922 )     -       -  

Other financing costs

    -       -       (11,287 )     -  

Foreign currency loss and other

    (439 )     (270 )     (2,384 )     (1,088 )

Total other expense

    (2,694 )     (348,981 )     (11,112 )     (37,316 )

Loss before income taxes

    (6,793 )     (439,163 )     (242,437 )     (220,868 )

Income tax benefit

    10,304       38,244       39,458       5,633  

Net income (loss)

  $ 3,511     $ (400,919 )   $ (202,979 )   $ (215,235 )

Earnings (loss) per share:

                               

Basic

  $ 0.35     $ (15.47 )   $ (8.09 )   $ (8.70 )

Diluted

  $ 0.35     $ (15.47 )   $ (8.09 )   $ (8.70 )

Weighted average shares outstanding:

                               

Basic

    9,998       25,917       25,094       24,729  

Diluted

    9,998       25,917       25,094       24,729  

 

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

 

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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   

Successor

   

Predecessor

 
   

Period from

November 15

Through

December 31,

   

Period from

January 1

Through

November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

 
           

(In thousands)

         

Net income (loss)

  $ 3,511     $ (400,919 )   $ (202,979 )   $ (215,235 )

Comprehensive income:

                               

Foreign currency and other gain (loss)

    2,977       29,301       (52,168 )     (65,569 )

Total comprehensive income (loss)

  $ 6,488     $ (371,618 )   $ (255,147 )   $ (280,804 )

 

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

 

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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

   

Common

                     

Accumulated

                                 
   

Stock at

    Additional            

Other

   

Treasury Stock

   

Deferred

   

Total

 
   

$0.01 Par

    Paid-in    

Retained

   

Comprehensive

           

Share

   

Compen-

   

Stockholders'

 
   

Value

   

Capital

   

Earnings

   

Income (loss)

   

Shares

   

Value

   

sation

   

Equity

 
                                                                 

Predecessor

                                                               

Balance at December 31, 2014

  $ 271     $ 410,641     $ 659,403     $ (30,665 )     (2,484 )   $ (78,441 )   $ 7,544     $ 968,753  

Net loss

    -       -       (215,235 )     -       -       -       -       (215,235 )

Issuance of common stock

    3       9,890       -       -       -       -       -       9,893  

Deferred compensation plan

    -       (3,242 )     -       -       (104 )     (1,176 )     1,176       (3,242 )

Treasury stock activity (net)

    -       -       -       -       45       3,695       -       3,695  

Forfeiture of dividends

    -       -       13       -       -       -       -       13  

Translation adjustment

    -       -       -       (65,569 )     -       -       -       (65,569 )

Balance at December 31, 2015

    274       417,289       444,181       (96,234 )     (2,543 )     (75,922 )     8,720       698,308  

Net loss

    -       -       (202,979 )     -       -       -       -       (202,979 )

Issuance of common stock

    4       6,265       -       -       -       -       -       6,269  

Deferred compensation plan

    -       (11,571 )     -       -       (263 )     (415 )     415       (11,571 )

Treasury stock activity (net)

    -       -       -       -       220       11,757       -       11,757  

Dividends paid

    -       -       5       -       -       -       -       5  

Translation adjustment

    -       -       -       (52,168 )     -       -       -       (52,168 )

Balance at December 31, 2016

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

Net loss

    -       -       (400,919 )     -       -       -       -       (400,919 )

Issuance of common stock

    18       3,718       -       -       -       -       -       3,736  

Deferred compensation plan

    -       (29,685 )     -       -       (945 )     (193 )     193       (29,685 )

Treasury stock activity (net)

    -       -       -       -       842       29,892       -       29,892  

Stock compensation tax adjustment

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

Translation adjustment

    -       -       -       29,301       -       -       -       29,301  

Balance at November 14, 2017 (Predecessor)

    296       386,016       (153,781 )     (119,101 )     (2,689 )     (34,881 )     9,328       87,877  

Cancellation of Predecessor equity

    (296 )     (386,016 )     153,781       119,101       2,689       34,881       (9,328 )     (87,877 )

Balance at November 14, 2017 (Predecessor)

  $ -     $ -     $ -     $ -       -     $ -     $ -     $ -  
                                                                 
                                                                 

Successor

                                                               

Issuance of Successor common stock-

                                                         

Rights offering

  $ 43     $ 124,936     $ -     $ -       -     $ -     $ -     $ 124,979  

Backstop commitment premium

    4       7,496       -       -       -       -       -       7,500  

Exchange of claims

    23       185,500       -       -       -       -       -       185,523  

Net income

    -       -       3,511       -       -       -       -       3,511  

Deferred compensation plan

    -       -       -       -       (2 )     (70 )     70       -  

Translation adjustment

    -       -       -       2,977       -       -       -       2,977  

Balance at December 31, 2017

  $ 70     $ 317,932     $ 3,511     $ 2,977       (2 )   $ (70 )   $ 70     $ 324,490  

 

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

 

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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Successor

   

Predecessor

 
   

Period from

November 15 to

December 31,

   

Period from

January 1,

2017 to

November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

 
           

(In thousands)

         

Cash flows from operating activities:

                               

Net income (loss)

  $ 3,511     $ (400,919 )   $ (202,979 )   $ (215,235 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                                

Depreciation and amortization

    4,425       47,721       58,182       72,591  

Amortization of deferred financing costs

    275       10,314       3,254       2,394  

Amortization of stock-based compensation

    -       2,805       5,209       6,735  

Provision for doubtful accounts receivable, net of write offs

    -       879       1,801       (862 )

Deferred income tax provision (benefit)

    (9,658 )     66,004       (38,456 )     (3,784 )

Loss on sale of assets

    -       5,207       8,564       1,160  

Impairment charges

    -       -       162,808       152,103  

Gain on extinguishment of debt

    -       -       (35,912 )     (458 )

Other financing costs

    -       -       5,988       -  

Foreign currency (gain) loss

    392       (428 )     1,025       (160 )

Reorganization items, net

    -       188,286       -       -  

Change in operating assets and liabilities

                               

Accounts receivable

    (1,275 )     3,205       15,144       47,317  

Prepaids and other

    714       (3,229 )     1,677       214  

Accounts payable

    424       238       (593 )     (8,602 )

Other accrued liabilities and other

    (8,064 )     16,099       (9,051 )     (10,056 )

Net cash (used in) provided by operating activities

    (9,256 )     (63,818 )     (23,339 )     43,357  

Cash flows from investing activities:

                               

Purchases of vessels, equipment and other fixed assets

    (141 )     (24,983 )     (16,188 )     (35,428 )

Release of deposits held in escrow

    -       -       -       3,683  

Proceeds from disposition of vessels, equipment and other fixed assets

    -       3,065       6,529       8,910  

Net cash used in investing activities

    (141 )     (21,918 )     (9,659 )     (22,835 )

Cash flows from financing activities:

                               

Proceeds from debt, net of direct financing cost

    -       227,443       -       -  

Repayments of debt

    -       (187,637 )     -       -  

Rights offering proceeds

    -       124,979       -       -  

Repuchase of 6.375% senior notes

    -       -       (33,448 )     (542 )

Repayment of revolving loan facility

    -       -       (5,000 )     (91,000 )

Borrowings under revolving loan facility, net

    -       -       65,194       47,000  

Debt issuance costs

    (862 )     (9,398 )     (971 )     (3,566 )

Other financing costs

    -       (4,299 )     (5,988 )     -  

Proceeds from issuance of stock

    -       -       380       827  

Net cash provided by (used in) financing activities

    (862 )     151,088       20,167       (47,281 )

Effect of exchange rate changes on cash

    (67 )     765       (286 )     (2,087 )

Net increase (decrease) in cash and cash equivalents

    (10,326 )     66,117       (13,117 )     (28,846 )

Cash and cash equivalents at beginning of year

    74,939       8,822       21,939       50,785  

Cash and cash equivalents at end of year

  $ 64,613     $ 74,939     $ 8,822     $ 21,939  

Supplemental cash flow information:

                               

Interest paid, net of interest capitalized

  $ 1     $ 7,514     $ 30,820     $ 29,834  

Income taxes paid, net

  $ -     $ 1,456     $ 2,124     $ 2,048  

 

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

 

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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

GulfMark Offshore, Inc. and its subsidiaries (collectively referred to as “we”, “us”, “our” or the “Company”) own and operate offshore supply vessels, principally in the North Sea, offshore Southeast Asia and offshore the Americas. The vessels provide transportation of materials, supplies and personnel to and from offshore platforms and drilling rigs. Some of these vessels also perform anchor handling and towing services.

 

On May 17, 2017, GulfMark Offshore, Inc. filed a voluntary petition, or the Chapter 11 Case, under 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. On October 4, 2017, the Bankruptcy Court entered an order, or the Confirmation Order, approving the Amended Chapter 11 Plan of Reorganization, as confirmed, or the Plan. On November 14, 2017, or the Effective Date, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case. For a more detailed discussion of our bankruptcy proceedings and our emergence from bankruptcy, see Note 2.

 

On the Effective Date, we adopted and applied the relevant guidance with respect to the accounting and financial reporting for entities that have emerged from bankruptcy proceedings, or Fresh Start Accounting. Under Fresh Start Accounting, our balance sheet on the Effective Date reflects all of our assets and liabilities at their fair values. Our emergence and the adoption of Fresh Start Accounting resulted in a new reporting entity, or the Successor, for financial reporting purposes. To facilitate our discussion and analysis of our vessels, financial condition and results of operations herein, we refer to the reorganized company as the Successor for periods subsequent to November 14, 2017 and the Predecessor for periods prior to November 15, 2017. For a more detailed discussion, including the disclosure of our final Predecessor balance sheet as of November 14, 2017 and our beginning Successor balance sheet as of November 15, 2017, see Note 2.

 

Principles of Consolidation

 

Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The accompanying consolidated financial statements include significant estimates for allowance for doubtful accounts receivable, depreciable lives of vessels and equipment, income taxes and commitments and contingencies. While we believe current estimates are reasonable and appropriate, actual results could differ from these estimates.

 

Cash and Cash Equivalents

 

Our investments, consisting of U.S. Government securities and commercial paper with original maturities of up to three months, are included in cash and cash equivalents in the accompanying consolidated balance sheets and consolidated statements of cash flows.

 

Vessels and Equipment

 

Vessels and equipment are stated at cost, net of accumulated depreciation, which is provided by the straight-line method over their estimated useful life. At the date of emergence from bankruptcy, we adopted new accounting policies to reflect our change in estimates related to useful lives of our vessels and estimated salvage value of our vessels. The Successor is depreciating the cost of our vessels over 20 years to an estimated salvage value of five percent of original cost. The Predecessor depreciated the cost of our vessels over 25 years to an estimated salvage value of 15 percent of original cost. Interest is capitalized in connection with the construction of vessels. The capitalized interest is included as part of the asset to which it relates and is depreciated over the asset’s estimated useful life. In the Successor 2017 period we did not capitalize any interest. In the Predecessor 2017 period we capitalized $0.1 million and in the Predecessor years ended December 31, 2016 and 2015 we capitalized $2.6 million and $5.0 million, respectively. Office equipment, furniture and fixtures, and vehicles are depreciated over two to five years.

 

64

 

 

We incur significant costs for each vessel every 30 months for scheduled drydocks which are required to maintain our vessels in class. At the date of emergence from bankruptcy, the Successor adopted an accounting policy whereby we capitalize drydock costs and amortize the expense over 30 months. The Predecessor expensed drydock costs as they were incurred.

 

Major renovation costs and modifications that extend the life or usefulness of the related assets are capitalized and depreciated over the assets’ estimated remaining useful lives. Maintenance and repair costs are expensed as incurred. Included in the consolidated statements of operations for the Successor 2017 period is $1.5 million of maintenance and repairs. In the Predecessor 2017 period and the Predecessor years ended December 31, 2016 and 2015, we recorded $9.0 million, $9.3 million and $19.3 million, respectively, of costs for maintenance and repairs.

 

Impairment of Long-Lived Assets

 

We review long-lived assets for impairment whenever there is evidence that the carrying amount of such assets may not be recoverable. This review consists of comparing the carrying amount of the asset with its expected future undiscounted cash flows before tax and interest costs. If the asset’s carrying amount is less than such cash flow estimate, it is written down to its fair value on a discounted cash flow basis. Estimates of expected future cash flows represent management’s best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized is permanent and may not be restored. See Note 3 for the results of our impairment analyses.

 

Fair Value of Financial Instruments

 

Our financial instruments consist primarily of accounts receivable and payable (which are stated at carrying value which approximates fair value) and long-term debt. Periodically, we enter into forward derivative contracts to hedge our exposure to interest rate or foreign currency fluctuations. In the past, we have had open positions in such derivative contracts that are considered financial instruments for which we would disclose certain fair value information. As of December 31, 2017 for the Successor and December 31, 2016 for the Predecessor, there were no forward derivative open contracts.

 

Deferred Costs and Other Assets

 

Deferred costs and other assets consist primarily of deferred financing costs for revolving credit arrangements, deferred vessel mobilization costs and deferred drydock costs. Deferred financing costs are amortized over the expected term of the related debt. Should the debt for which a deferred financing cost has been recorded terminate by means of payment in full, tender offer or lender termination, the associated deferred financing costs would be immediately expensed.

 

In connection with new long-term contracts, costs incurred that directly relate to mobilization of a vessel from one region to another are deferred and recognized over the primary contract term. Should either party terminate the contract prior to the end of the original contract term, the deferred amount would be immediately expensed. Costs of relocating vessels from one region to another without a contract are expensed as incurred.

 

Revenue Recognition

 

Revenue from charters for offshore marine services is recognized as performed based on contractual charter rates and when collectability is reasonably assured. Currently, charter terms range from as short as several days to as long as 5 years in duration. Management services revenue is recognized in the period in which the services are performed.

 

Income Taxes

 

We recognize the amount of current year income taxes payable or refundable and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns previously filed. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates and laws in effect for the years in which the differences are expected to reverse. The likelihood and amount of future taxable income and tax planning strategies are included in the criteria used to determine the timing and amount of net deferred tax assets recognized for net operating loss and tax credit carry-forwards in our consolidated financial statements. These deferred tax assets are, when appropriate, reduced by a valuation allowance resulting in net deferred tax assets that are more likely than not to be realized.

 

A significant amount of judgment in our use of assumptions and estimates is required in our methodology for determining and recording income taxes. In some instances we use forecasts of expected operations and related tax implications and we consider the possibility of implementing tax planning strategies. Such variables can result in uncertainty and measurable variation between anticipated and actual results can occur. Changes to these variables as a result of unforeseen events may have a material impact on our income tax accounts.

 

65

 

 

In recent years we have had operations in over 40 countries and are or have been subject to a significant number of taxing jurisdictions. Our income earned in these jurisdictions is taxed on various bases, including actual income earned, deemed profits, and revenue based withholding taxes. Our income tax determinations involve the interpretation of applicable tax laws, tax treaties, and related tax rules and regulations of those jurisdictions. Changes in tax law, currency/repatriation controls and interpretation of local tax laws by the relevant tax authority could impact our income tax liabilities or assets in those jurisdictions.

 

On December 22, 2017, the statute originally named the Tax Cuts and Jobs Act, or the 2017 Tax Act, was signed into law making significant changes to the Internal Revenue Code, or the Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017 as well as a one-time transition tax related to the U.S. taxation of foreign earnings and profits that had not been previously taxed in the U.S. We have estimated our provision for income taxes in accordance with the 2017 Tax Act guidance available as of the date of this report and as a result have recorded $15.2 million as additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted.

 

On December 22, 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. In accordance with SAB 118, we have determined that the $15.2 million of the deferred tax benefit recorded in connection with the one-time transition tax on foreign earnings and profits and the remeasurement of certain deferred tax assets and liabilities are provisional amounts and represent a reasonable estimate at December 31, 2017. Any subsequent adjustment to these amounts will be recorded to income tax expense in the quarter of 2018 when the analysis is complete.

 

In addition, we also account for uncertainty in income taxes by utilizing a more likely than not, or greater than 50% probability, minimum recognition threshold for measurement of a tax position taken or expected to be taken in a tax return that would be sustained upon examination by the relevant tax authorities. We recognize penalties and/or interest related to uncertain tax benefits as a component of income tax expense. Numerous factors contribute to our evaluation and estimation of our tax positions and related tax liabilities and /or benefits, which may be adjusted periodically and may be resolved differently than we anticipate. See Note 7. 

 

Foreign Currency Translation

 

The local currencies of the majority of our foreign operations have been determined to be their functional currencies, except for certain foreign operations whose functional currency has been determined to be the U.S. Dollar, based on an assessment of the economic circumstances of the foreign operations. Assets and liabilities of our foreign affiliates are translated at year-end exchange rates, while revenue and expenses are translated at average rates for the period. As a result, amounts related to changes in assets and liabilities reported in the consolidated statements of cash flows will not necessarily agree to changes in the corresponding balances on the consolidated balance sheets. We consider most intercompany loans to be long-term investments; accordingly, the related translation gains and losses are reported as a component of stockholders’ equity. Transaction gains and losses are reported directly in the consolidated statements of operations. In the Successor 2017 period, the Predecessor 2017 period and during the Predecessor years ended December 31, 2016 and 2015 we reported net foreign currency losses in the amounts of $0.1 million, $0.3 million, $2.4 million and $1.1 million, respectively.

 

Concentration of Credit Risk

 

We extend credit to various companies in the energy industry that may be affected by changes in economic or other external conditions. Our policy is to manage our exposure to credit risk through credit approvals and limits. Our trade accounts receivable are aged based on contractual payment terms and an allowance for doubtful accounts is established in accordance with our written corporate policy. The age of the trade accounts receivable, customer collection history and management’s judgment as to the customer’s ability to pay are considered in determining whether an allowance is necessary. For the Successor period ended December 31, 2017, there were no significant write-offs or increases in our allowance for doubtful accounts and no customer accounted for 10% or more of the Successor’s total consolidated revenue. For the Predecessor period ended November 14, 2017, the Predecessor reserved $1.0 million related to Southeast Asia and Americas customers and had revenue from one customer in the Americas which accounted for 10% or more of total consolidated revenue, totaling $9.0 million or 10.2% of total consolidated revenue. In 2016, the Predecessor reserved $1.8 million related to three Southeast Asia customers. For the year ended December 31, 2016, no customer accounted for 10% or more of the Predecessor’s total consolidated revenue. For the year ended December 31, 2015, the Predecessor had revenue from one customer in the North Sea and one customer in the Americas which each accounted for 10% or more of total consolidated revenue, totaling $32.4 million and $31.9 million, respectively, or 23.5% of total consolidated revenue.

 

Stock-Based Compensation

 

The Predecessor had share-based compensation plans covering officers and other employees as well as the Predecessor Board of Directors. Stock-based grants made under the Predecessor’s stock plans were recorded at fair value on the date of the grant and the cost was recognized ratably over the vesting period for the restricted stock and the stock options. The fair value of stock option awards was determined using the Black-Scholes option-pricing model. Restricted stock awards were valued using the market price of the Predecessor’s Class A common stock on the grant date. Our stock-based compensation plans are more fully described in Note 9.

 

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Our employee stock purchase plan would be considered compensatory whereby it allowed all of our U.S. employees and employees of participating subsidiaries to acquire shares of the Predecessor’s Class A common stock at 85% of the fair market value of the Class A common stock under a qualified plan as defined by Section 423 of the Code. The employee stock purchase plan was terminated in the first quarter of 2017.

 

Warrants

 

We account for common stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement.  The warrants to acquire shares of Successor common stock at an exercise price of $.01 per share, or the Noteholder Warrants, and the warrants to acquire shares of Successor common stock at an exercise price of $100.00 per share, or the Equity Warrants, both qualify for the scope exception in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, No. 815, “Derivatives and Hedging,” for derivative accounting and therefore qualify for classification as equity.  The equity scope exception is subject to review in each subsequent reporting period.

 

Earnings Per Share

 

Basic earnings per share, or EPS, is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted EPS is computed using the treasury stock method for common stock equivalents. The Successor issued Noteholder Warrants to purchase common stock to certain of holders of the Predecessor’s long-term debt in the emergence from bankruptcy. The Noteholder Warrants have an exercise price of $.01 per share and are immediately exercisable. As a result, the Noteholder Warrants are considered to be outstanding shares of common stock and are included in the denominator of both basic and diluted EPS.  The Equity Warrants issued to the Predecessor’s stockholders are not participating securities and do not impact basic EPS prior to exercise.

 

Reclassifications

 

Certain reclassifications of previously reported information have been made to conform to the current year presentation.

 

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 core principle of the new standard is that a company will recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for these goods or services. We have determined that the adoption of this standard will not have a material effect on our financial condition, results of operations, or cash flows. We are adopting this standard effective January 1, 2018 using the retrospective option with practical expedients.

 

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. While we are continuing to assess all potential impacts of these standards, we expect the measurement and recording of our revenues related to the offshore marine support and transportation services to remain substantially unchanged. However, the actual revenue recognition treatment required under the new standard may be dependent on contract-specific terms and may vary in some instances. The new standard is effective for fiscal years beginning after December 15, 2018. We intend to adopt the new lease standard on January 1, 2019.

 

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 classification issues related to the statement of cash flows. This standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017. The standard should be applied retrospectively to all periods presented. The adoption of this standard will not have a material effect on our financial condition or results of operations. We are adopting this standard effective January 1, 2018.

 

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. The adoption of this standard will not have a material effect on our financial condition or results of operations. We are adopting this standard effective January 1, 2018.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230):  Restricted Cash”.  The ASU is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows and requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows.  The new standard is effective for fiscal years beginning after December 15, 2017.  The adoption of this standard will not have a material effect on our financial condition or results of operations.   We are adopting this standard January 1, 2018.

 

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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. The adoption of this standard will not have a material effect on our financial condition or results of operations. We are adopting this standard effective January 1, 2018.

 

 

(2) EMERGENCE FROM BANKRUPTCY PROCEEDINGS AND FRESH START ACCOUNTING

 

On May 17, 2017, GulfMark Offshore, Inc. filed the Chapter 11 Case under the Bankruptcy Code in the Bankruptcy Court, and on October 4, 2017, the Bankruptcy Court entered the Confirmation Order approving the Plan. On the Effective Date, November 14, 2017, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case.

 

Restructuring Support Agreement

 

On May 15, 2017, the Predecessor 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 Predecessor’s senior notes, to support a restructuring on the terms of the Plan. The RSA provided for, among other things, the Predecessor’s $125 million cash rights offering, or the Rights Offering. Upon emergence from bankruptcy, we implemented the provisions of the RSA in accordance with the Plan on the Effective Date as follows:

 

 

Pursuant to the Rights Offering (subject to Jones Act limitations described below), eligible Noteholders purchased their pro rata share of 60% of the common stock of the Successor, or as applicable, Noteholder Warrants, or the Successor Equity. The Rights Offering was backstopped by certain Noteholders for a 6.0% commitment premium that was paid with an additional 3.6% of the Successor Equity. The participants in the Rights Offering received 4,340,733 shares of common stock and 1,659,269 Noteholder Warrants. In addition, the Noteholders that agreed to backstop the Rights Offering received 360,000 shares of common stock.

 

 

Each holder of the Predecessor’s senior notes received (subject to Jones Act limitations described below) its pro rata share of 35.65% of the Successor Equity, or 2,267,408 shares of common stock and 1,297,590 Noteholder 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. On the Effective Date, certain Noteholders who were eligible to receive common stock of the Successor pursuant to the Plan or the Rights Offering but who were non-U.S. holders received Noteholder Warrants to acquire common stock of the Successor at an exercise price of $.01 per share.

 

 

Outstanding Class A common stock of the Predecessor was cancelled and each holder of such Class A common stock received its pro rata share of (a) common stock representing in the aggregate 0.75% of the Successor Equity, or 75,000 shares, and (b) Equity Warrants with an exercise price of $100 per share for 7.5% of the equity of the Successor, or 810,811 Equity Warrants.

 

 

The Successor Equity purchased in the Rights Offering, issued to pay the backstop premium, issued in exchange for the Predecessor’s senior notes or in exchange for Predecessor’s Class A common stock is subject to dilution by the Successor Equity issued or issuable under the proposed management incentive plan and upon exercise of the Equity Warrants.

 

 

The Predecessor repaid in full its debtor-in-possession financing. Holders of allowed claims arising under administrative expense claims, priority claims and other secured claims of the Predecessor have received or will receive payment in full in cash. The Successor will continue to pay any general unsecured claims in the ordinary course of business.

 

Fresh Start Accounting

 

We adopted Fresh Start Accounting on the Effective Date in connection with our emergence from bankruptcy. Upon emergence from the Chapter 11 Case, we qualified for and adopted Fresh Start Accounting in accordance with the provisions set forth in FASB ASC No. 852, “Reorganizations” as (i) holders of existing shares of the Predecessor immediately before the Effective Date received less than 50 percent of the voting shares of the Successor entity and (ii) the reorganization value of the Successor was less than its post-petition liabilities and estimated allowed claims immediately before the Effective Date. Under Fresh Start Accounting, our balance sheet on the date of emergence reflects all of our assets and liabilities at their fair values. Our emergence and the adoption of Fresh Start Accounting resulted in a new reporting entity, or the Successor, for financial reporting purposes. To facilitate our discussion and analysis of our vessels, financial condition and results of operations herein, we refer to the reorganized company as the Successor for periods subsequent to November 14, 2017 and the Predecessor for periods prior to November 15, 2017. In addition, we adopted new accounting policies related to drydock expenditures and depreciation of our long-lived assets. See Note 1. As a result, our consolidated financial statements and the accompanying notes thereto after November 14, 2017 are not comparable to our consolidated financial statements and the accompanying notes thereto prior to November 15, 2017. Our presentations herein include a “black line” division to delineate and reinforce this lack of comparability. The effects of the Plan and the application of Fresh Start Accounting were reflected in the consolidated balance sheet as of November 14, 2017, and the related adjustments thereto were recorded in the consolidated statement of operations for the Predecessor period ended November 14, 2017.      

 

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Reorganization Value

 

As part of Fresh Start Accounting, we were required to determine the Reorganization Value of the Successor upon emergence from the Chapter 11 Case. Reorganization value represents the fair value of the Successor’s total assets prior to the consideration of liabilities and is intended to approximate the amount a willing buyer would pay for our assets immediately after a restructuring. The reorganization value, which was derived from the Successor’s enterprise value, was allocated to our individual assets based on their estimated fair values (except for deferred income taxes) in accordance with FASB ASC No. 805, “Business Combinations.” The amount of deferred income taxes recorded was determined in accordance with FASB ASC No. 740, “Income Taxes.”

 

Enterprise value represents the estimated fair value of our long-term debt and shareholders’ equity. The Successor’s enterprise value, as approved by the Bankruptcy Court in support of the Plan, was estimated to be within a range of $300 million to $400 million. Based on the estimates and assumptions utilized in our Fresh Start Accounting process, we estimated the Successor’s enterprise value to be approximately $336 million. Fair values are inherently subject to significant uncertainties and contingencies beyond our control. Accordingly, there can be no assurance that the estimates, assumptions, valuations, appraisals and financial projections will be realized, and actual results could vary materially.

 

The following table reconciles the enterprise value to the estimated fair value of our Successor common stock as of the Effective Date (in thousands, except shares outstanding):

 

Enterprise value

  $ 335,862  

Plus: Cash and cash equivalents

    74,939  

Less: Fair value of debt

    (92,799 )

Less: Fair value of warrants

    (88,228 )

Fair value of Successor common stock

  $ 229,774  

Shares outstanding as of November 14, 2017

    7,041,521  

 

The following table reconciles the enterprise value to the reorganization value of the Successor’s assets as of the Effective Date (in thousands):

 

Enterprise value

  $ 335,862  

Plus: Cash and cash equivalents

    74,939  

Plus: Current liabilities

    36,138  

Plus: Non-current liabilities excluding long-term debt

    35,075  

Reorganization value

  $ 482,014  

 

Reorganization Items 

 

Our consolidated statements of operations for the Successor period ended December 31, 2017 and the Predecessor period ended November 14, 2017 include reorganization items which reflect gains recognized on the settlement of liabilities subject to compromise and costs and other expenses associated with the bankruptcy proceedings, principally professional fees as well as the Fresh Start Accounting adjustments. Similar costs that were incurred during the pre-petition periods have been reported as pre-petition restructuring charges in our consolidated statements of operations.

 

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The following table summarizes the components included in reorganization items, in our consolidation statements of operations for the periods presented (in thousands):

 

   

Successor

   

Predecessor

 
   

November 15

Through

December 31,

   

January 1

Through

November 14,

 
   

2017

   

2017

 

Gains on the settlement of liabilities subject to compromise

  $ -     $ (342,969 )

Fresh start accounting adjustments

    -       633,970  

Legal and professional fees and expenses

    969       28,921  

Total reduction in value of assets

  $ 969     $ 319,922  

 

Valuation Process

 

The fair values of the Successor’s assets were determined with the assistance of a third-party valuation expert. The reorganization value was allocated to our individual assets and liabilities based on their estimated fair values. Our principal assets are our platform supply vessels. For purposes of estimating the fair value of our vessels we used a combination of the discounted cash flow method (income approach) that we discounted at rates ranging between 18% to 29%, the guideline public company method (market approach) and the cost approach. The income approach was utilized to estimate the fair value of vessels that generated positive returns on projected cash flows over the remaining economic useful life of the vessels. The market approach was used to estimate the fair value of vessels with projected cash flow losses. The fair value of our other personal property was determined utilizing cost approach adjusted, as needed, for asset type, age, physical deterioration and obsolescence.  

 

The spare parts inventory were valued primarily using a combination of either (i) a cost approach that incorporated depreciation and obsolescence to the extent applicable on an asset-by-asset basis or (ii) market data for comparable assets to the extent that such information was available.

 

The remaining reorganization value is attributable to cash and cash equivalents and working capital assets including accounts receivable and prepaids. Accounts receivable were subjected to analysis on an individual basis and reserved to the extent appropriate. The remaining assets approximate their fair values on the Effective Date.

 

Liabilities on the Effective Date include borrowings under our Term Loan Facility, working capital liabilities, long-term deferred income tax, other long-term income taxes payable and other liabilities which are primarily multi-employer pension obligations. The fair value of borrowings under our Term Loan Facility was determined by reviewing the agreement governing the Term Loan Facility, analyzing the terms and comparing the interest rate to market rates. It was determined that the face value of the borrowings under our Term Loan Facility approximates fair value. See Note 5. Our working capital liabilities are obligations in the ordinary course of business and their carrying amounts approximate their fair values. The multi-employer pension obligations were valued at the present value of amounts expected to be paid. Other income taxes payable reflects amounts expected to be paid for income tax related penalties and interest as well as liabilities for uncertain tax positions.

 

The fair value of the Noteholder Warrants was determined utilizing the closing trading price of our common stock, subsequent to the Effective Date, less the $0.01 strike price. The fair value of the Equity Warrants was determined utilizing the Black Scholes Valuation model.

 

Although we believe the assumptions and estimates used to develop enterprise value and reorganization value are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require judgment.

 

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Successor Balance Sheet

 

The following table reflects the reorganization and application of Fresh Start Accounting adjustments the Predecessor’s Consolidated Balance Sheet as of November 14, 2017:

 

   

Predecessor

   

Reorganization

Adjustments

   

Fresh Start

Adjustments

   

Successor

 
   

(In thousands)

 

ASSETS

                                           

Current assets:

                                           

Cash and cash equivalents

  $ 14,900     $ 60,039     (1)                   $ 74,939  

Trade accounts receivable, net

    18,722                                   18,722  

Other accounts receivable

    7,638                                   7,638  

Inventory

    7,489                     (6,189 )   (15)       1,300  

Prepaid expenses

    4,948       150     (2)                     5,098  

Restricted cash

    3,460                                   3,460  

Other current assets

    1,880                                   1,880  

Total current assets

    59,037       60,189             (6,189 )           113,037  

Vessels, equipment, and other fixed assets, net

    992,085                     (626,429 )   (15)       365,656  

Construction in progress

    1,166                     (1,026 )   (15)       140  

Deferred costs and other assets

    2,837       755     (3)       (411 )   (15)       3,181  

Total assets

  $ 1,055,125     $ 60,944           $ (634,055 )         $ 482,014  
                                             
LIABILITIES AND STOCKHOLDERS' EQUITY                                            

Current liabilities:

                                           

Current maturities of long-term debt

  $ 118,066     $ (118,066 )   (4)                   $ -  

Debtor in possession financing

    29,000       (29,000 )   (5)                     -  

Accounts payable

    12,447       (196 )   (6)                     12,251  

Income and other taxes payable

    2,155                                   2,155  

Accrued personnel costs

    12,015       (5,126 )   (7)                     6,889  

Accrued interest expense

    1,503       (1,503 )   (8)                     -  

Other accrued liabilities

    4,255       10,588     (9)                     14,843  

Total current liabilities

    179,441       (143,303 )                         36,138  
                                             

Long-term debt

            92,799     (10)                     92,799  

Long-term income taxes:

                                           

Deferred income tax liabilities

    115,917                     (102,239 )   (15)       13,678  

Other income taxes payable

    18,489                                   18,489  

Other liabilities

    3,469                     (561 )   (15)       2,908  

Total liabilities not subject to compromise

    317,316       (50,504 )           (102,800 )           164,012  

Liabilities subject to compromise

    448,124       (448,124 )   (11)                     -  

Stockholders' equity:

                                           

Common stock (Predecessor)

    296       (296 )   (12)                     -  

Additional paid-in capital (Predecessor)

    386,016       (386,016 )   (12)                     -  

Accumulated other comprehensive loss (Predecessor)

    (119,101 )     119,101     (12)                     -  

Treasury stock, at cost (Predecessor)

    (34,881 )     34,881     (12)                     -  

Deferred compensation expense (Predecessor)

    9,328       (9,328 )   (12)                     -  

Common stock (Successor)

    -       70     (13)                     70  

Additional paid-in capital (Successor)

    -       317,932     (13)                     317,932  

Retained earnings

    48,027       483,228     (14)       (531,255 )   (16)       -  

Total stockholders' equity

    289,685       559,572             (531,255 )           318,002  

Total liabilities and stockholders' equity

  $ 1,055,125     $ 60,944           $ (634,055 )         $ 482,014  

 

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Reorganization adjustments

   

(1)

Represents the net cash payments that occurred on the Effective Date

 

Sources:

               

Proceeds from the Term Loan

  $ 100,000          

Proceeds from the Rights Offering

    124,979          

Total sources

          $ 224,979  

Uses:

               

Repayment of Multi Currency Facility Agreeement

  $ 72,000          

Accrued interest payable on Multi Currency Facility Agreement

    958          

Repayment of Norwegian Facility Agreement

    45,817          

Accrued interest payable on Norwegian Facility Agreement

    502          

Repayment of Debtor in Possession financing

    29,000          

Accrued interest payable on Debtor in Possession financing

    187          

Debt issuance costs on the Term Loan and Revolving Credit Facility

    6,706          

Professional and success fees paid on the Effective Date

    4,394          

Payment of certain allowed claims

    5,376          

Total uses

            164,940  
            $ 60,039  

 

(2)

Represents the capitalization of annual administration fee attributable to the $25 million Revolving Credit Facility and the $100 million Term Loan

(3)

Represents capitalization of debt issuance costs attributable to the $25 million Revolving Credit Facility

(4)

Represents repayment of Multi Currency Facility Agreement and Norwegian Facility Agreement

(5)

Represents repayment of Debtor in Possession financing

(6)

Represents payment of allowed claims

(7)

Represents payments of cash obligations under deferred compensation arrangements

(8)

Represents payments of interest payable on the Multi Currency Facility Agreement, the Norwegian Facility Agreement and the Debtor in Possession financing

(9)

Represents accrual for the remaining unpaid administrative expense claims

(10)

Represents initial borrowings under the Term Loan of $100 million, less debt issuance costs of $7.2 million

(11)

Liabilities subject to compromise and gain on settlement of liabilities subject to compromise are as follows:

 

Senior Notes

  $ 429,640  

Accrued interest on the Senior Notes

    18,484  

Total liabilities subject to compromise

  $ 448,124  

Fair value of equity and warrants issued to Predecessor Noteholders

    (105,155 )

Gain on settlement of liabilities subject to compromise

  $ 342,969  

 

(12)

Represents the cancellation of the Predecessor common stock and related components of the Predecessor equity

(13)

Represents the issuance of Successor equity. The Successor issued approximately 7 million shares of new common stock including approximaely 6.9 million shares to the Predecessor Noteholders and 0.1 million shares to the holders of the Predecessor Stock. Also approximately 3 million Noteholder Warrants were issued upon emergence to the Predecessor Noteholders with an exercise price of $0.01 per share which were valued a $29.49 per share. Additionally, approximately 811,000 Equity Warrants were issued to the holders of Predecessor Stock with an exercise price of $100 per share. The value of each Equity Warrant was estimated at $1.27 per share

(14)

Represents the cumulative impact of the reorganization adjustments described above

   

Fresh Start Adjustments

(15)

Represents the Fresh Start Accounting valuation adjustments applied to our vessels and spare parts inventory of the Company, combined with the related tax effects resulting from reduction in the book basis of these assets

(16)

Represents the cumulative impact of the Fresh Start Accounting adjustments discussed above

 

 

 

(3) IMPAIRMENT CHARGES

 

Reduction in Value of Long-lived Assets and Goodwill 

 

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.

 

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Beginning in late 2014, the oil and gas industry experienced a significant decline in the price of oil causing an industry-wide downturn that continues into 2018. Prices continued to decline throughout 2015 and into 2016, reaching a low of less than $30 per barrel in early 2016. Prices began to recover 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 by year end. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovering to over $60 per barrel in January 2018. 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. 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.

 

See the discussions below detailing our impairment analyses and processes for each of goodwill, long-lived assets, intangible assets, vessel components and assets held for sale. The components of reduction in value of assets are as follows (in thousands):

 

   

Successor

   

Predecessor

 
   

November 15

Through

December 31,

   

January 1

Through

November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

 

Goodwill impairment

  $ -     $ -     $ -     $ 22,554  

Long-lived assets impairment

    -       -       160,222       115,489  

Intangible asset impairment

    -       -       -       13,695  

Vessel component impairment

    -       -       2,586       365  

Total reduction in value of assets

  $ -     $ -     $ 162,808     $ 152,103  

 

Goodwill Impairment

 

We completed a qualitative analysis of goodwill of the Predecessor in 2015 and determined that further testing was necessary. Our goodwill impairment evaluation indicated that the carrying value of the North Sea segment exceeded its fair value so that goodwill was potentially impaired. We then performed the second step of the goodwill impairment test, which involved calculating the implied fair value of our goodwill by allocating the fair value of the North Sea segment to all of the assets and liabilities (other than goodwill) and comparing it to the carrying amount of goodwill. To estimate the fair value of the reporting unit we used a 50% weighting of the discounted cash flow method and a 50% weighting of the public company guideline method in determining fair value of the North Sea reporting unit.

 

We determined that the implied fair value of our goodwill for the North Sea segment was less than its carrying value and recorded a $22.6 million impairment of the North Sea segment’s goodwill. As a result of this impairment, we no longer have any goodwill.

 

Long-Lived Asset Impairment

 

In the Predecessor 2015 period, we recorded $129.2 million of impairment expense related to our long-lived assets in the U.S. Gulf of Mexico, which is a part of our Americas segment. The impairment consisted of $115.5 million related to our vessels and $13.7 million related to our intangible asset. As a result of this impairment, we no longer have an intangible asset.

 

In the Predecessor 2016 period, we recorded an aggregate of $160.2 million of impairment expense related to our long-lived assets. Impairment charges totaled $94.5 million for the U.S. Gulf of Mexico and $15.9 million for the non-U.S. Americas, both part of the Americas segment. We also recorded impairment in Southeast Asia totaling $49.8 million.

 

Vessel Component Impairment

 

   We have vessel components in our North Sea and Southeast Asia segments that we intend to sell. We recorded impairment based on third party appraisals of the North Sea components totaling $0.4 million in the Predecessor 2015 period. Based on third party valuations, 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, in the Predecessor 2016 period.

 

 

(4) VESSEL ACQUISITIONS, DISPOSITIONS AND NEW-BUILD PROGRAM

 

During 2016, the Predecessor sold one older vessel from our North Sea region fleet and three vessels from our Southeast Asia fleet for combined proceeds of $6.5 million. The sales of these vessels generated a combined loss on sales of assets of $8.6 million. In March 2017, the Predecessor sold two fast supply vessels and recorded combined losses on sales of assets of $5.3 million.

 

73

 

 

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 could elect not to take delivery of the second vessel and forego the final payment, in which case the shipbuilder would retain the vessel. In May 2017, we elected not to take the vessel. We have no further purchase obligations under such contract.

 

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.

 

Vessel Additions Since December 31, 2016

Vessel

Region

Type(1)

Year

Built

Length

(feet)

BHP(2)

DWT(3)

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(1)

Year

Built

Length

(feet)

BHP(2)

DWT(3)

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, SpV - Special Purpose Vessel, SmAHTS - Small Anchor Handling Vessel

(2)BHP - Brake Horsepower

(3)DWT - Deadweight Tons

 

 

(5) LONG-TERM DEBT

 

Our long-term debt at December 31, 2017 for the Successor, and December 31, 2016 for the Predecessor, consisted of the following (in thousands):

 

   

Successor

   

Predecessor

 
   

December 31,

2017

   

December 31,

2016

 
                 

Term Loan Facility

  $ 100,000     $ -  

Revolving Credit Facility

    -       -  

Senior Notes Due 2022

    -       429,640  

Multicurrency Facility Agreement

    -       49,000  

Norwegian Facility Agreement

    -       11,157  
      100,000       489,797  

Debt Premium

    -       423  

Debt Issuance Costs

    (7,635 )     (6,894 )

Total

  $ 92,365     $ 483,326  

`

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

 

Year

 

Debt Maturity

 
   

(In thousands)

 

2018

    -  

2019

    -  

2020

    10,000  

2021

    20,000  

2022

    70,000  

Thereafter

    -  

Total

  $ 100,000  

 

74

 

 

Credit Facility Agreement

 

On November 14, 2017, GulfMark Rederi AS, or Rederi, a subsidiary of GulfMark Offshore, Inc., entered into an agreement, or the Credit Facility Agreement, with DNB Bank ASA, New York Branch, as agent, DNB Capital LLC as revolving and swingline lender, and certain funds managed by Hayfin Capital Management LLP as term lenders, providing for two credit facilities: a senior secured revolving credit facility, or the Revolving Credit Facility, and a senior secured term loan facility, or the Term Loan Facility (or, together, the Facilities). The Revolving Credit Facility provides $25.0 million of borrowing capacity, including $12.5 million for swingline loans and $5.0 million for letter of credit. The Term Loan Facility provides a $100.0 million term loan, which was funded in full on the November 14, 2017. Borrowings under the Revolving Credit Facility may be denominated in U.S. Dollars, NOK, GBP and Euros. Both Facilities mature on November 14, 2022. At December 31, 2017, we had $23.3 million of unused borrowing capacity under the Revolving Credit Facility.

 

Our costs incurred to negotiate and close the Credit Facility Agreement totaled $9.6 million. These costs are deferred and amortized into interest expense in our consolidated statements of operations. We attributed $7.8 million, or 80%, of the debt issuance costs to the Term Loan Facility. These costs are amortized into interest expense using the effective interest method. The unamortized cost totaling $7.6 million at December 31, 2017, is presented in our consolidated balance sheets as an offset to our Term Loan Facility borrowing. We attributed $1.8 million, or 20%, of the debt issuance costs to the Revolving Credit Facility. These costs are amortized into interest expense using the straight-line method over the term of the agreement. The unamortized cost totaling $1.7 million at December 31, 2017, is presented in our consolidated balance sheets in deferred costs and other assets.

 

Borrowings under the Facilities accrue interest on U.S. Dollar borrowings at our option using either (i) the adjusted U.S. prime rate, or ABR, plus 5.25%, or (ii) the LIBOR Rate plus 6.25%. NOK loans substitute LIBOR with an adjusted Norwegian offered quotation rate for deposits in NOK and Euro loans substitute LIBOR with an adjusted euro interbank offered rate administered by the European Money Markets Institute.

 

At December 31, 2017, we had $100.0 million in borrowings outstanding under the Term Loan Facility and no borrowings outstanding under the Revolving Credit Facility. At December 31, 2017, we had $25.0 million of borrowing capacity under the Revolving Credit Facility. At December 31, 2017, our weighted average interest rate on borrowings under the Term Loan Facility was 7.8%.

 

Repayment of borrowings under the Facilities is guaranteed by GulfMark Offshore, Inc. and each of its significant subsidiaries (or, collectively, with Rederi, the Obligors), and are secured by a lien on 27 collateral vessels, or the Collateral Vessels, and substantially all other assets of the Obligors.

 

Commitments under the Revolving Credit Facility will be reduced beginning on November 14, 2020 in semiannual increments of approximately $3.1 million until maturity. The Term Loan Facility is payable in semiannual installments beginning on November 14, 2020 and based on a five-year level principal payment schedule, payable semiannually.

 

Term Loan Facility prepayments prior to November 14, 2019 are subject to a make-whole premium based on the present value of interest otherwise payable from the prepayment date forward. Prepayments on or after November 14, 2019 and prior to November 14, 2020 are subject to a 2% premium. Mandatory prepayments, other than those triggered by a casualty event, are subject to prepayment premiums. Mandatory prepayments are required upon the occurrence of certain events including, but not limited to, a change of control or the sale or total loss of a Collateral Vessel. Prepayments of the Revolving Credit Facility are not materially restricted or penalized. 

 

The Credit Facility Agreement was evaluated for embedded derivatives that must be bifurcated and separately accounted for as freestanding derivatives. The nature of any embedded features must be analyzed to determine whether each feature requires bifurcation by both (1) meeting the definition of a derivative and (2) not being considered clearly and closely related to the host contract. We have identified three features in the Credit Facility Agreement that are considered embedded derivatives. There is a contingent interest feature related to default interest, a breakage costs potential not related to prepayments, and certain potential contingent payments related to increased costs caused by changes in law. We determined that the value of these features are de minimis at the inception of the agreement and that we do not foresee events that would require a value adjustment in our consolidated financial statements. We will continue to assess the likelihood of triggering events and to the extent they are determined to be material, these features will be bifurcated from the debt instrument and subsequently marked to fair value through earnings.

 

The Credit Facility Agreement contains financial covenants that require that we maintain: (i) minimum liquidity of $30.0 million, including $15.0 million in cash, (ii) a leverage ratio (total debt to 12 months EBITDA) of not more than 5.0 to 1.0, tested quarterly beginning December 31, 2020, (iii) a total debt to capital ratio, tested quarterly, not to exceed 0.45 to 1.0, and (iv) a collateral to commitment coverage ratio of at least 2.50 to 1.0. The Credit Facility Agreement contains a number of restrictions that limit our ability to, among other things, sell Collateral Vessels, borrow money, make investments, incur additional liens on assets, buy or sell assets, merge, or pay dividends and contain a number of potential events of default related to our business, financial condition and vessel operations. Collateral Vessel operations are also subject to a variety of restrictive provisions. Proceeds from borrowings under the Credit Facility Agreement may not be used to acquire vessels or finance business acquisitions generally. At December 31, 2017, we were in compliance with all of the financial covenants under the Credit Facility Agreement.

 

75

 

 

Predecessor’s Senior Notes Due 2022

 

In March and December 2012, the Predecessor issued $500.0 million aggregate principal amount of 6.375% senior notes due 2022, or the Senior Notes. In 2015 and 2016, the Predecessor repurchased in the open market $70.4 million face value of the Senior Notes, recording gains on extinguishment of debt totaling $35.9 million in 2016, leaving $429.6 million aggregate principal amount of the Senior Notes outstanding at December 31, 2016.

 

In conjunction with the Senior Notes offering, the Predecessor incurred a total of $12.7 million in debt issuance costs, of which $6.9 million remained unamortized at December 31, 2016. The Predecessor also sold the Senior Notes at a premium, of which $0.4 million remained unamortized at December 31, 2016. In the first quarter of 2017, based on negotiations that were underway with holders of the Predecessor’s 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, the Predecessor accelerated the amortization of the debt premium and debt issuance costs, recording additional interest expense of $6.3 million in the first quarter of 2017.

 

In accordance with the Plan and the RSA (see Note 2 for detailed discussion of the bankruptcy and emergence), upon emergence from bankruptcy each holder of the Predecessor’s Senior Notes received (subject to Jones Act limitations described herein) in exchange for its Senior Notes and accrued interest, its pro rata share of 35.65% of the Successor Equity. 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. On the Effective Date, certain Noteholders who were eligible to receive common stock of the Successor pursuant to the Plan or the Rights Offering but who are non-U.S. holders received Noteholder Warrants to acquire common stock of the Successor at an exercise price of $.01 per share. In total, the Successor issued 2,267,408 shares of its common stock and 1,297,590 Noteholder Warrants to the Predecessor’s former Noteholders in exchange for 100% of the outstanding Senior Notes and accrued interest. The Predecessor recorded a $343.0 million gain on settlement of liabilities subject to compromise as a result of the exchange.

 

Predecessor’s Multicurrency Facility Agreement

 

The Predecessor was party to a senior secured, revolving multicurrency credit facility, or the Multicurrency Facility Agreement, among GulfMark Offshore, Inc., as guarantor, one of the Predecessor’s indirect wholly-owned subsidiaries, GulfMark Americas, Inc., as the Borrower, a group of financial institutions as the lenders and the Royal Bank of Scotland plc, as agent for the lenders, and the other parties thereto. The Multicurrency Facility Agreement had a scheduled maturity date of September 26, 2019 and, as amended, committed 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 contained a sublimit of $25.0 million for swingline loans and a sublimit of $5.0 million for the issuance of letters of credit. The Multicurrency Facility Agreement was secured by 24 vessels owned by the Borrower.

 

The Predecessor had unamortized fees paid to the arrangers, the agent and the security trustee totaling $2.5 million at December 31, 2016, which fees were amortized into interest cost on a straight-line basis over the term of the Multicurrency Facility Agreement. In the first quarter of 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, the Predecessor accelerated the amortization of debt issuance costs, recording additional interest expense of $2.3 million in the first quarter of 2017.

 

On November 14, 2017, in conjunction with the emergence from bankruptcy, the Predecessor repaid all amounts outstanding under the Multicurrency Facility Agreement, including accrued interest, and terminated the agreement.

 

Predecessor’s Norwegian Facility Agreement

 

The Predecessor was party to a senior secured revolving credit facility, or the Norwegian Facility Agreement, among GulfMark Offshore, Inc., as guarantor, one of the Predecessor’s indirect wholly-owned subsidiaries, Rederi, as the borrower, which we refer to as the Norwegian Borrower, and DNB Bank ASA, a Norwegian bank, as lead arranger and lender, which we refer to as the Norwegian Lender. The Norwegian Facility Agreement had a scheduled maturity date of September 30, 2019 and committed the Norwegian Lender to provide loans of up to an aggregate principal amount of 600.0 million NOK (or approximately $73.1 million using the 2017 year end rate) at any one time outstanding, subject to certain terms and conditions. The Norwegian Facility Agreement was secured by seven vessels owned by our subsidiary GulfMark UK Ltd. and by five vessels of the Norwegian Borrower.

 

The Predecessor had unamortized fees paid to the arrangers, the agent and the security trustee totaling $1.2 million at December 31, 2016, which fees were amortized into interest cost on a straight-line basis over the term of the Norwegian Facility Agreement. In the first quarter of 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, the Predecessor accelerated the amortization of debt issuance costs, recording additional interest expense of $1.1 million in the first quarter of 2017.

 

76

 

 

On May 18, 2017, Rederi, as borrower, the other loan parties party thereto, the lenders and DNB Bank ASA, as arranger and agent, entered into an agreement that amended and restated the Norwegian Facility Agreement in order to provide funds to Rederi for purposes of making loans to GulfMark Offshore, Inc., as debtor, under the intercompany debtor-in-possession credit agreement among the debtor, as borrower, Rederi, as lender, and DNB Bank ASA, as issuing bank. Pursuant to the Norwegian Facility Agreement as so amended and restated, the Norwegian Lender agreed to make an additional $35.0 million senior secured term loan facility available to Rederi. To secure such 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 of our other subsidiaries. In addition, the UK Parent and the Norwegian Parent pledged their shares in the UK Guarantor and Rederi, respectively, to the Norwegian Lender.

 

On November 14, 2017, in conjunction with the emergence from bankruptcy, the Predecessor repaid all amounts outstanding under the Norwegian Facility Agreement, including amounts borrowed to support such intercompany debtor-in-possession credit agreement, including accrued interest, and terminated the agreement.

 

 

(7) INCOME TAXES

 

Emergence from Bankruptcy and Fresh Start Accounting

 

Under the Plan, the Predecessor’s pre-petition equity, bank related debt and certain other obligations were cancelled and extinguished. Absent an exception, a debtor recognizes cancellation of debt income, or CODI, upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. In accordance with Section 108 of the Code, the Predecessor excluded the amount of discharged indebtedness from taxable income since the Code provides that a debtor in a bankruptcy case may exclude CODI from income but must reduce certain tax attributes by the amount of CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less than the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued, and (iii) the fair market value the of any other consideration, including equity, issued.

 

CODI from the discharge of indebtedness was $297.3 million. As a result of the CODI and in accordance with rules under the Code, we reduced our gross federal net operating loss, or NOL, carryforwards by $229.3 million. The Predecessor was able to retain $48.1 million of gross federal NOLs, $0.3 million of alternative minimum tax credit and $4.1 million of foreign tax credit carryforwards following the bankruptcy.

 

Pursuant to the Plan, on the Effective Date, the existing equity interests of the Predecessor were extinguished. New equity interests were issued to creditors in connection with the terms of the Plan, resulting in an ownership change as defined under Section 382 of the Code. Section 382 generally places a limit on the amount of NOLs and other tax attributes arising before the change that may be used to offset taxable income generated after the ownership change. The utilization of our remaining attributes will depend on several factors, including its future financial performance and certain tax elections. Specifically, utilization of NOLs will be governed by Section 382(l)(6), which will subject us to an overall annual limitation on its use of NOLs and foreign tax credits. This Section 382 limitation is not expected at this time to significantly impact our ability to realize these attributes.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of existing deferred tax liabilities, projected future results of operations, and tax planning strategies in making this assessment. Based upon the scheduled reversal of existing deferred tax liabilities relating to the U.S. based Vessels, management has concluded that a partial valuation allowance was appropriate as of December 31, 2017.

 

The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to recognize a one-time transition income inclusion related to all earnings of certain foreign subsidiaries that were previously deferred from U.S. tax and will also create a new tax regime on certain future foreign sourced earnings. As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the 2017 Tax Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition income inclusion. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under FASB ASC No. 740, “Income Taxes,” and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional income tax benefit of $15.2 million, which is included as a component of income tax expense from continuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law.

 

77

 

 

Provisional Amounts

 

Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the 2017 Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional tax benefit recorded related to the remeasurement of our deferred tax liabilities was $1.5 million.

 

Foreign Tax Effects 

 

The one-time transition tax is based on our total post-1986 earnings and profits, or E&P, that we had previously recognized at 35%, net of future foreign tax credits. The one-time transition tax was fully offset by the tax effects of tax carryforwards and thus did not have a material impact to the income tax provision. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable.

 

In addition, we had provided deferred tax liabilities in the past on foreign earnings that were not indefinitely reinvested. As a result of the 2017 Tax Act, we reversed an estimate of the deferred taxes that are no longer expected to be needed due to the change to the territorial tax system. The provisional tax benefit recorded related to the reversal of previously recognized deferred tax liabilities relating to existing undistributed earnings was $15.2 million.

 

The majority of our non-U.S. based operations are subject to foreign tax systems that provide significant incentives to qualified shipping activities. Our U.K. and Norway based vessels are taxed under “tonnage tax” regimes. Our qualified Singapore based vessels are exempt from Singapore taxation through December 2027 with extensions available in certain circumstances beyond 2027. The qualified Singapore vessels are also subject to specific qualification requirements which if not met could jeopardize our qualified status in Singapore. The tonnage tax regimes provide for a tax based on the net tonnage weight of a qualified vessel. These beneficial foreign tax structures continued to result in our earnings incurring significantly lower taxes than those that would apply under the U.S. statutory tax rates or if we were not a qualified shipping company in those foreign jurisdictions.

 

Should our operational structure change or should the laws that created these shipping tax regimes change, we could be required to provide for taxes at rates much higher than those currently reflected in our financial statements. Additionally, if our pre-tax earnings in higher tax jurisdictions increase, there could be a significant increase in our annual effective tax rate. Any such increase could cause volatility in the comparisons of our effective tax rate from period to period.

 

Tax Provision

 

Income (loss) before income taxes attributable to domestic and foreign operations was (in thousands):

 

    Successor     Predecessor  
   

Period from

November 15,

2017 Through

December 31, 2017

   

Period from

January 1, 2017

Through

November 14, 2017

   

Year ended

December 31, 2016

   

Year ended

December 31, 2015

 

U.S. (a)

  $ (3,688 )   $ 4,835     $ (133,572 )   $ (198,175 )

Foreign (b)

    (3,105 )     (443,998 )     (108,865 )     (22,693 )
    $ (6,793 )   $ (439,163 )   $ (242,437 )   $ (220,868 )

 

(a) - Included in this amount is $228.9 million of adjustments to domestic assets and liabilities as a result of the application of the guidance in ASC 805

(b) - Included in this amount is $405.1 million of adjustments to foreign assets and liabilities as a result of the application of the guidance in ASC 805

 

78

 

 

The components of our tax provision (benefit) attributable to income before income taxes are as follows for the following periods (in thousands):

 

    Successor     Predecessor  
   

Period from November 15, 2017 Through

December 31, 2017

   

Period from January 1, 2017 Through November 14,

2017

 
   

Current

   

Deferred

   

Other

   

Total

   

Current

   

Deferred

   

Other (a)

   

Total

 

U.S & State

  $ -     $ (10,381 )   $ -     $ (10,381 )   $ 3     $ 64,485     $ (101,784 )   $ (37,296 )

Foreign

    357       (75 )     (205 )     77       1,058       (998 )     (1,008 )     (948 )
    $ 357     $ (10,456 )   $ (205 )   $ (10,304 )   $ 1,061     $ 63,487     $ (102,792 )   $ (38,244 )

 

    Predecessor  
   

Year Ended December 31, 2016

   

Year Ended December 31, 2015

 
   

Current

   

Deferred

   

Other

   

Total

   

Current

   

Deferred

   

Other

   

Total

 

U.S & State

  $ -     $ (36,442 )   $ (6 )   $ (36,448 )   $ (69 )   $ (3,270 )   $ 39     $ (3,300 )

Foreign

    1,419       (2,014 )     (2,415 )     (3,010 )     1,130       (553 )     (2,910 )     (2,333 )
    $ 1,419     $ (38,456 )   $ (2,421 )   $ (39,458 )   $ 1,061     $ (3,823 )   $ (2,871 )   $ (5,633 )

 

(a) Includes income tax effects of Fresh Start Accounting adjustments.

 

 

The mix of our operations within various taxing jurisdictions affects our overall tax provision. The difference between the provision at the statutory U.S. federal tax rate and the tax provision attributable to income before income taxes in the accompanying consolidated statements of operations is as follows:

 

   

Successor

    Predecessor  
   

For the Period from

November 15, 2017

Through December 31, 2017

   

For the Period from

January 1, 2017

Through November 14, 2017

   

For the Year

Ended

December 31, 2016

   

For the

Year Ended

December 31, 2015

 

U.S. federal statutory income tax rate

    (35.0

%)

    (35.0

%)

    (35.0

%)

    (35.0

%)

Effect of foreign operations

    16.0       3.1       14.5       2.5  

US state income taxes net of Federal benefit

    14.5       (0.1 )     (1.1 )     (1.7 )

Foreign earnings repatriation

    -       (3.1 )     6.7       34.4  

U.S. foreign tax credit

    -       (1.0 )     (2.7 )     (7.8 )

Valuation allowance

    76.5       21.7       1.8       5.1  

Gain on extinguishment of debt

    -       (27.3 )     -       -  

Fresh-Start Reporting Adjustments

    -       27.1       -       -  

Transaction Costs

    -       2.8       -       -  

Effects of U.S. Tax Reform

    (224.1 )     -       -       -  

Other

    0.4       2.9       (0.5 )     (0.1 )

Total

    (151.7

%)

    (8.7

%)

    (16.3

%)

    (2.6

%)

 

79

 

 

Deferred Taxes

 

Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The components of the net deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows:

 

   

Successor

   

Predecessor

 
    December 31,  
   

2017

   

2016

 
   

(in thousands)

   

(in thousands)

 

Deferred tax assets

               

Net operating loss carryforwards

  $ 28,638     $ 60,772  

Items currently not deductible for tax purposes

    3,071       21,445  

Foreign and other tax credit carryforwards

    4,822       34,131  
      36,531       116,348  

Less valuation allowance

    (29,051 )     (33,037 )

Net deferred tax assets

  $ 7,480     $ 83,311  
                 

Deferred tax liabilities

               

Depreciation

  $ (6,343 )   $ (91,105 )

Other

    (4,129 )     (48,922 )

Total deferred tax liabilities

  $ (10,472 )   $ (140,027 )

Net deferred tax liability

  $ (2,992 )   $ (56,716 )

 

 

The change in the valuation allowance for the year ended December 31, 2017 from December 31, 2016 was a decrease of $4.0 million. As of December 31, 2017, we had NOL carryforwards for income tax purposes totaling $8.1 million in the federal U.S., $6.2 million in Louisiana, $2.6 million in Mexico, $3.0 million in Norway, $0.2 million in the U.K., $0.2 million in Singapore, and $8.3 million in Brazil that are, subject to certain limitations, available to offset future taxable income. We have deferred tax liability reversals for depreciation for which we expect to partially utilize the U.S. NOLs. The U.S. NOLs will begin to expire beginning in 2027. It is more likely than not that the Mexico NOLs, Norway NOLs and Brazilian NOLs will not be utilized and a full valuation allowance has been established for such NOLs. Under the 2017 Tax Act, many of the foreign tax credit utilization rules were changed that required us to reassess the realizability of our foreign tax credit deferred tax asset. After review, it was determined that under the new U.S. foreign tax credit rules we would not ultimately realize the full benefit associated with our foreign tax credits at December 31, 2017. Accordingly, we recognized a provisional estimate of a valuation allowance related to our foreign tax credits in the amount of $4.1 million. Based on future expected taxable losses in Mexico, we do not anticipate we will benefit from certain deferred tax assets and have recorded a valauation allowance of $1.6 million against them. The following table provides information about the activity of our deferred tax valuation allowance:

 

    Successor     Predecessor  
    December 31,  
    2017     2016  
   

(in thousands)

   

(in thousands)

 
                 

Balance, beginning of period

  $ (33,037 )   $ (24,112 )

Additions (reductions) recorded in the provision for income taxes

    (89,399 )     (8,925 )

Fresh-Start Reporting (a)

    93,385       -  

Balance, end of period

  $ (29,051 )   $ (33,037 )

 

(a) Represents release of the valuation allowance in fresh-start reporting due to the write-off of related deferred tax assets primarily as a result of cancellation of indebtedness (COD) income excluded from gross from gross income for US federal income tax purposes and applied to reduce net operating loss carryforwards.

 

Based on a more likely than not, or greater than 50% probability, recognition threshold and criteria for measurement of a tax position taken or expected to be taken in a tax return, we evaluate and record in certain circumstances an income tax liability for uncertain income tax positions. Numerous factors contribute to our evaluation and estimation of our tax positions and related tax liabilities and/or benefits, which may be adjusted periodically and may ultimately be resolved differently than we anticipate. We also consider existing accounting guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Accordingly, we continue to recognize income tax related penalties and interest in our provision for income taxes and, to the extent applicable, in the corresponding balance sheet presentations for accrued income tax assets and liabilities, including any amounts for uncertain tax positions included in other income taxes payable in the consolidated balance sheets and which total $21.7 million at December 31, 2017, $21.1 million at December 31, 2016 and $24.7 million at December 31, 2015. In addition, the deferred tax asset was reduced by a $3.3 million unrecognized tax benefit for an uncertain tax position.

 

80

 

 

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

 

   

Successor

   

Predecessor

 
   

As of December 31,

2017

   

As of December 31,

2016

 
   

(in thousands)

   

(in thousands)

 
                 

Unrecognized tax benefits balance at January 1,

  $ 9,174     $ 10,899  

Gross increases for tax positions taken in prior years

    135       240  

Gross decreases for tax positions taken in prior years

    (565 )     (152 )

Other

    469       (1,813 )

Unrecognized tax benefits balance at December 31,

  $ 9,213     $ 9,174  

 

 

We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. At December 31, 2017, we had accrued interest and penalties related to unrecognized tax benefits of $12.5 million. The amount of interest and penalties recognized in our tax provision for the year ended December 31, 2017 was $0.6 million. The unrecognized tax benefits if recognized would affect the effective tax rate. We do not expect a significant change to our unrecognized tax benefits in the next 12 months.

 

As of December 31, 2017, we may be subject to examination in the U.S. for years after 2002 and in seven major foreign tax jurisdictions with open years from 2002 to 2016.

 

 

(8) COMMITMENTS AND CONTINGENCIES

 

At December 31, 2017, we had long-term operating leases for office space, automobiles, temporary residences, and office equipment. Aggregate operating lease expense for the Successor period ended December 31, 2017, the Predecessor period ended November 14, 2017 and the Predecessor years ended December 31, 2016 and 2015 was $0.3 million, $2.0 million, $2.5 million and $2.8 million, respectively. Future minimum rental commitments under these leases are as follows (in thousands):

 

Year

 

Minimum Rental

Commitments

 

2018

  $ 1,243  

2019

    1,122  

2020

    994  

2021

    984  

2022

    984  

Thereafter

    4,074  

Total

  $ 9,401  

 

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 as of December 31, 2017 attributable to the Successor was $3.2 million. The aggregate notional value of these instruments attributable to the Predecessor was $3.2 million at November 14, 2017, $1.2 million at December 31, 2016 and $1.8 million at December 31, 2015. 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 for which 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. We determine our contingent liabilities based on the most recent information available to us at the time of such determination 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.

 

81

 
 

 

 

(9)

EQUITY INCENTIVE PLANS

 

Stock Options, Restricted Stock and Stock Option Plans

 

On the Effective Date, and in accordance with the Plan, we reserved 876,553 shares of Successor common stock for issuance under a management incentive plan. The Board has not yet approved a management incentive plan and no shares had been granted as of December 31, 2017.

 

In the Predecessor periods of 2017, 2016 and 2015, we had outstanding equity-classified awards in the form of stock options and restricted stock under three former Equity Incentive Plans, or the Former Equity Plans. All awards under the Former Equity Plans that had not been forfeited were deemed to vest on a date prior to the Effective Date in connection with the Plan. Predecessor Class A common stock underlying such awards were cancelled on the Effective Date and the holders of such interests received their pro rata share of Successor common stock and Equity Warrants.                                                                             

 

A summary of the unvested restricted stock awarded pursuant to our Predecessor incentive equity plans as of December 31, 2016 and changes during 2017 is presented below:

 

Predecessor stock options granted to purchase our shares had an exercise price equal to, or greater than, the fair market value of the Predecessor’s Class A common stock on the date of grant. These stock options vested over three years from the date of grant and terminated at the earlier of the date of exercise or seven years from the date of grant. The fair value of stock option awards is determined using the Black-Scholes option-pricing model. The expected life of an option is estimated based on historical exercise behavior. Volatility assumptions are estimated based on the average of historical volatility over the previous three years measured from the grant date. Risk-free interest rates are based on U.S. Government Zero Coupon Bonds with a maturity corresponding to the Safe Harbor term. The dividend yield is based on the previous four quarters to the date of grant divided by the average stock price for the previous 200 days. Expected forfeiture rates are estimated based on historical forfeiture experience. We used the following weighted-average assumptions to estimate the fair value of stock options granted during 2015. The Predecessor did not grant any options in 2017 or 2016.

 

   

2015

 

Expected option life - years

    4.5  

Volatility

    41.05 %

Risk-free interest rate

    1.30 %

Dividend yield

    0 %

 

 

 

The following table summarizes the stock option activity of our Predecessor stock incentive plans in the indicated periods:

 

   

Predecessor

 
   

January 1, 2017

Through November

14, 2017

   

2016

   

2015

 
            Weighted             Weighted             Weighted  
           

Average

           

Average

           

Average

 
           

Exercise

           

Exercise

           

Exercise

 
   

Shares

   

Price

   

Shares

   

Price

   

Shares

   

Price

 

Outstanding at beginning of year

    212,019     $ 27.69       222,019     $ 27.01       140,293     $ 41.68  

Granted

    -       -       -       -       165,879       12.45  

Forfeitures

    (212,019 )     27.69       (10,000 )     12.55       (84,153 )     26.85  

Outstanding at end of year

    -     $ -       212,019     $ 27.69       222,019     $ 27.01  

Exercisable shares and weighted average exercise price

    -     $ -       128,532     $ 33.83       57,859     $ 42.05  

Shares available for future grants:

    876,553               414,975               1,061,130          

 

82

 

 

The restrictions related to restricted stock awards terminated at the end of three years from the date of grant and the value of the restricted shares is amortized to expense over that period. Total amortization of stock-based compensation related to restricted stock was $2.6 million, $4.7 million and $5.9 million for the Predecessor period ended November 14, 2017 and the years ended December 31, 2016 and 2015, respectively. Total stock-based compensation for stock options was $0.2 million, $0.4 million and $0.6 million at November 14, 2017 and December 31, 2016 and 2015, respectively.

 

ESPP

 

We had an employee stock purchase plan, or ESPP, that was available to all of our U.S. employees and certain subsidiaries, which we terminated in early 2017. During the term of the ESPP, the employee contributions were used to acquire shares of the Predecessor’s Class A common stock at 85% of the fair market value of the Class A common stock. Total compensation expense related to the ESPP was $0.2 million and $0.2 million during the years ended December 31, 2016 and 2015, respectively.

 

U.K. ESPP

 

Certain employees of our U.K. subsidiaries participated in a share incentive plan, which was similar to our ESPP but contained certain provisions designed to meet the requirements of the U.K. tax authorities. This plan was also terminated in early 2017.

 

Deferred Compensation Plan

 

We maintain a deferred compensation plan, or DC Plan, under which a portion of the compensation for certain of our key employees, including officers, and non-employee directors, can be deferred for payment after retirement or termination of employment. Under the DC Plan, deferred compensation could be used to purchase our common stock or could be retained by us and earn interest at prime plus 2%. The first 7.5% of compensation deferred is required to be used to purchase the common stock and is matched by us.

 

We have established a “Rabbi” trust to hold the stock portion of benefits under the DC Plan. The funds provided to the trust are invested by a trustee independent of us in our common stock, which is purchased by the trustee on the open market. The assets of the trust are available to satisfy the claims of all general creditors in the event of bankruptcy or insolvency. Dividend equivalents are paid on the stock units at the same rate as dividends on our common stock and are re-invested as additional stock units based upon the fair market value of a share of our common stock on the date of payment of the dividend. On the Effective Date, the DC Plan received Successor common stock and Equity Warrants that were issued pursuant to the Plan in exchange for the Predecessor Class A common stock previously held by the trust. Accordingly, the Successor common stock held by the trust and our liabilities under the DC Plan are included in the accompanying consolidated balance sheets as treasury stock and deferred compensation expense.

 

 

(10) EMPLOYEE BENEFIT PLANS

 

401(k) Plan

 

We offer a 401(k) plan to all of our U.S. employees and provide matching contribution to those employees that participate. The matching contributions paid by us totaled $1.0 million for the year ended December 31, 2015. In August 2015, we suspended the matching contribution.

 

Multi-employer Pension Obligation          

 

Certain of our current and former U.K. subsidiaries are participating in a multi-employer retirement fund known as the Merchant Navy Officers Pension Fund, or MNOPF.  At December 31, 2017, the Successor had accrued $1.2 million related to this liability, which reflects the present value of all obligations assessed on us by the fund’s trustee as of such date. This figure is the same as was accrued by the Predecessor at November 14, 2017. We continue to have employees who participate in the MNOPF and will as a result continue to make routine payments to the fund as those employees accrue additional benefits over time.  The status of the fund is calculated by an actuarial firm every three years. The last assessment was completed in March 2015 and resulted in a significantly improved funding position, mainly due to hedging the interest rate and inflation risk, to between 65% and 80%.  The reported net deficit of the fund at March 31, 2015 was $7.5 million and, as a result, the MNOPF trustee did not propose to collect any additional deficit contributions related to the new deficit.  The amount and timing of additional potential future obligations relating to underfunding depend on a number of factors, but principally on future fund performance and the underlying actuarial assumptions. Our share of the fund’s deficit is dependent on a number of factors including future actuarial valuations, asset performance, the number of participating employers, and the final method used in allocating the required contribution among participating employers. In addition, our obligation could increase if other employers no longer participated in the plan. In the Predecessor period ended November 14, 2017 and for the years ended December 31, 2016 and 2015, the Predecessor made deficit contributions to the plan of $0.4 million, $0.4 million and $0.4 million, respectively.  In the Successor period ended December 31, 2017 we made no additional contribution. Our contributions do not make up more than five percent of total contributions to the plan.

 

83

 

 

In addition, we participate in the Merchant Navy Ratings Pension Fund, or MNRPF, in a capacity similar to our participation in the MNOPF.  Prior to 2013, we were not required to contribute to any deficit in the MNRPF. Due to a change in the plan rules, however, we were advised that we would be required to make contributions beginning in 2013.  As of November 14, 2017, the Predecessor had accrued $1.8 million for this fund. The most recent actuarial valuation was completed as of March 31, 2017 and deficit information was communicated in the fourth quarter of 2017. Our share of the deficit was calculated at $0.5 million for which we expect to receive a formal payment demand in the third quarter of 2018.  As of December 31, 2017, the amount of the MNRPF accrual recorded by the Successor was adjusted to $0.6 million, which is a combination of the deficit mentioned above plus an estimate of further deficit amounts from April 2017 onward.

 

 

Norwegian Pension Plans

 

The Norwegian benefit pension plans include approximately 144 of our employees, primarily seamen, and are defined benefit, multiple-employer plans, insured with Nordea Liv. We also instituted a defined contribution plan in 2008 for shore-based personnel that existing personnel could elect to participate in while discontinuing any further obligations in the defined benefit plan. All newly hired shore-based personnel are required to join the defined contribution plan. Benefits under the defined benefit plans are based primarily on participants’ years of credited service, wage level at age of retirement and the contribution from the Norwegian National Insurance. A December 31, 2017, measurement date is used for the actuarial computation of the defined benefit pension plans. The following tables provide information about changes in the benefit obligation and plan assets and the funded status of the Norwegian defined benefit pension plans (in thousands):

 

    Successor     Predecessor  
   

Period from

November 15,

2017 Through

December 31,

2017

   

Period from

January 1,

2017 Through

November 14,

2017

   

Year ended

December 31,

2016

 

Change in Benefit Obligation

                       

Benefit obligation at beginning of the period

  $ 5,443     $ 5,202     $ 6,394  

Benefit periodic cost

    33       224       319  

Interest cost

    18       121       144  

Withdrawal

    -       -       (377 )

Benefits paid

    (35 )     (237 )     (289 )

Actuarial gain

    (16 )     (108 )     (1,117 )

Translation adjustment

    36       241       128  

Benefit obligation at period end

  $ 5,479     $ 5,443     $ 5,202  

 

   

Period from

November 15,

2017 Through

December 31,

2017

   

Period from

January 1,

2017 Through

November 14,

2017

   

Year ended

December 31,

2016

 

Change in Plan Assets

                       

Fair value of plan assets at beginning of the period

  $ 5,576     $ 5,486     $ 5,486  

Actual return on plan assets

    27       181       182  

Contributions

    46       310       303  

Withdrawal

    -       -       (237 )

Settlement/curtailment

    -       -       82  

Benefits paid

    (35 )     (237 )     (297 )

Administrative fee

    (7 )     (48 )     (56 )

Actuarial loss

    (55 )     (369 )     (63 )

Translation adjustment

    38       253       86  

Fair value of plan assets at period end

  $ 5,590     $ 5,576     $ 5,486  
                         

Funded status

  $ 111     $ 133     $ 284  

 

84

 

 

Amounts recognized in the balance sheet consist of (in thousands):

 

   

Successor

   

Predecessor

 
   

December 31,

2017

   

December 31,

2016

 
                 

Deferred costs and other assets

  $ 429     $ 474  

Other liabilities

    (318 )     (190 )
    $ 111     $ 284  

 

    Successor     Predecessor  
   

Period from

November 15,

2017 Through

December 31,

2017

   

Period from

January 1, 2017

Through

November 14,

2017

   

Year Ended

December 31,

2016

   

Year Ended

December 31,

2015

 

Components of Net Period Benefit Cost

                               

Service cost

  $ 33     $ 222     $ 329     $ 416  

Interest cost

    18       120       149       169  

Return on plan assets

    (27 )     (180 )     (182 )     (185 )

Administrative fee

    7       48       56       61  

Recognized net actuarial gain

    44       296       (329 )     (544 )

Net periodic benefit cost

  $ 75     $ 506     $ 23     $ (83 )

 

The vested benefit obligation is calculated as the actuarial present value of the vested benefits to which employees are currently entitled based on the employees’ expected date of separation or retirement.

 

   

Successor

   

Predecessor

 

Weighted-average assumptions

 

Period from

November 15,

2017 Through

December 31,

2017

   

Period from

January 1, 2017

Through

November 14,

2017

   

Year

Ended

December

31, 2016

 

Discount rate

    2.4 %     2.4 %     2.6 %

Return on plan assets

    4.1 %     4.1 %     3.6 %

Rate of compensation increase

    2.5 %     2.5 %     2.5 %

 

 

The weighted average assumptions shown above were used for both the determination of net periodic benefit cost and the determination of benefit obligations as of the measurement date. In determining the weighted average assumptions, the overall market performance and specific historical performance of the investments of the Norwegian pension plan were reviewed. The asset allocations at the measurement date were as follows:

 

    Successor     Predecessor        
   

December 31,

2017

   

December 31,

2016

   

Level

 

Equity securities

    11%       5%       1  

Property

    10%       10%       3  

Money market

    14%       24%       2  

Held-to-Maturity bonds

    27%       32%       2  

Bonds

    13%       7%       1  

Other

    25%       22%       3  

All asset categories

    100%       100%          

 

The investment strategy focuses on providing a stable return on plan assets using a diversified portfolio of investments.

 

The projected benefit obligation and the fair value of plan assets for the Norwegian pension plan were approximately $5.5 million and $5.6 million, respectively, as of December 31, 2017, and $5.2 million and $5.5 million, respectively, as of December 31, 2016. The accumulated benefit obligation was $4.8 million and $4.8 million as of December 31, 2017 and 2016, respectively. We expect to contribute approximately $0.4 million to the Norwegian pension plan in 2018. No plan assets are expected to be returned to us in 2018.

 

85

 

 

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

 

Year ended December 31,

 

Benefit Payments

 

2018

    254  

2019

    254  

2020

    254  

2021

    255  

2022

    255  

Total

  $ 1,272  

 

 

 

(11) STOCKHOLDERS’ EQUITY

 

Common Stock

 

All the Predecessor’s Class A common stock was cancelled upon our emergence from bankruptcy on the Effective Date in exchange for 75,000 shares of Successor common stock and 810,811 Equity Warrants.

 

We have authority to issue 25,000,000 shares of common stock. We are subject to U.S. maritime laws that generally require that only U.S. citizens own and operate U.S.-flag vessels for trade between points in the United States.  Our Certificate of Incorporation provides that no shares of any class or series of our capital stock may be transferred to a Non-U.S. Citizen (as therein defined) if, upon completion of such transfer, the number of shares beneficially owned by all Non-U.S. Citizens in the aggregate would exceed the 24%, or the Permitted Percentage, of the total issued and outstanding shares. The shares of such class or series of capital stock beneficially owned by Non-U.S. Citizens in excess of the Permitted Percentage are referred to as Excess Shares. To prevent the percentage of aggregate shares of our capital stock owned by Non-U.S. Citizens from exceeding the Permitted Percentage, we, at our sole discretion, will have the power to redeem all or any number of such Excess Shares. We have the option to redeem the Excess Share for: (i) cash; (ii) Redemption Warrants, which are warrants to purchase one share of our common stock at $.01 per share and do not give the holder any rights as a shareholder; or (iii) Redemption Notes, which are interest-bearing promissory notes with a maturity date of ten years or less. Until such Excess Shares are redeemed, or they are no longer Excess Shares, the holders of such shares will not be entitled to any voting rights with respect to such Excess Shares and we will pay any dividends or distributions with respect to such Excess Shares, if any, into a segregated account.

 

 Noteholder Warrants

 

The Jones Act, which applies to companies that engage in maritime transportation of merchandise and passengers between points in the United States, 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, Non-U.S. Citizen creditors who would otherwise be recipients of Successor common stock pursuant to the Plan or the Rights Offerings received, in lieu of Successor common stock, Noteholder Warrants to acquire Successor common stock at an exercise price of $.01 per share.

 

On the Effective Date, we entered into a warrant agreement, pursuant to which we issued the Noteholder Warrants entitling the holders thereof to purchase an aggregate of 2,956,859 shares of Successor common stock. The Noteholder Warrants are exercisable for a 25-year term commencing on the Effective Date at an exercise price of $.01 per share. Any outstanding Noteholder Warrant that has not been exercised upon maturity of the Noteholder Warrants on November 14, 2042 will be exchanged for Redemption Warrants that will be substantially in the same form of the existing Noteholder Warrants. No Noteholder Warrants were exercised during the period from November 15, 2017 to December 31, 2017.

 

Equity Warrants

 

On the Effective Date, we entered into a warrant agreement, pursuant to which we issued the Equity Warrants entitling the holders thereof to purchase an aggregate of 810,811 shares of Successor common stock, exercisable for a 7-year period commencing on the Effective Date at an exercise price of $100.00 per share, subject to adjustment as described in the warrant agreement for the Equity Warrants.

 

The Equity Warrants contain certain provisions to facilitate our compliance with the U.S. Maritime Laws limiting the ownership of our common stock by Non-U.S. Citizens. No Equity Warrants were exercised during the period from November 15, 2017 to December 31, 2017.

 

86

 

 

Common Stock Issuances

 

During 2017, no proceeds were received from the issuance of the Predecessor’s Class A common stock. During 2016, 165,849 shares of Predecessor’s Class A common stock were issued, generating approximately $0.4 million in proceeds. During 2015, 101,179 shares of Predecessor’s Class A common stock were issued generating approximately $0.7 million in proceeds.

 

Preferred Stock

 

We are authorized by our Certificate of Incorporation, as amended, to issue up to 5,000,000 shares of preferred stock, $.01 par value per share. No such shares have been issued.

 

Stock Repurchases

 

In December 2012, the Predecessor Board of Directors approved a stock repurchase program for up to a total of $100.0 million of our issued and outstanding Predecessor Class A common stock. We did not repurchase any Predecessor Class A common stock in 2017, 2016 or 2015.

 

 

(12) OPERATING SEGMENT INFORMATION

 

Business Segments

 

We operate our business based on geographic locations and maintain three operating segments: the North Sea, Southeast Asia and the Americas. Our chief operating decision-maker regularly reviews financial information about each of these operating segments in deciding how to allocate resources and evaluate performance. The business within each of these geographic regions has similar economic characteristics, services, distribution methods and regulatory concerns. All of the operating segments are considered reportable segments under FASB ASC No. 280, “Segment Reporting.”

 

87

 

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. 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. All significant transactions between segments are conducted on an arms-length basis based on prevailing market prices and are accounted for as such. Operating income and other information regularly provided to our chief operating decision-maker is summarized in the following table (all amounts in thousands):

 

   

North

   

Southeast

   

Americas

   

Other

   

Total

 
   

Sea

   

Asia

                         
   

Successor

 

Period from November 15 Through December 31, 2017

                                       

Revenue

  $ 8,304     $ 1,368     $ 3,921     $ -     $ 13,593  

Direct operating expenses

    5,387       1,047       3,425       -       9,859  

Drydock expense

    -       -       -       -       -  

General and administrative expense

    740       382       728       1,557       3,407  

Pre-petition restructuring charges

    1       -       -       -       1  

Depreciation and amortization

    2,481       700       1,162       82       4,425  

Impairment charge

    -       -       -       -       -  

Gain on sale of assets and other

    -       -       -       -       -  

Operating income (loss)

  $ (305 )   $ (761 )   $ (1,394 )   $ (1,639 )   $ (4,099 )
                                         

Predecessor

 

Period from January 1 Through November 14, 2017

                                       

Revenue

  $ 52,217     $ 8,606     $ 27,406     $ -     $ 88,229  

Direct operating expenses

    36,365       7,879       25,577       -       69,821  

Drydock expense

    4,269       959       204       -       5,432  

General and administrative expense

    11,987       3,103       6,937       10,342       32,369  

Pre-petition restructuring charges

    -       -       -       17,861       17,861  

Depreciation and amortization

    20,173       6,222       19,229       2,097       47,721  

Impairment charge

    -       -       -       -       -  

Gain on sale of assets and other

    -       (51 )     5,258       -       5,207  

Operating income (loss)

  $ (20,577 )   $ (9,506 )   $ (29,799 )   $ (30,300 )   $ (90,182 )
                                         

Year Ended December 31, 2016

                                       

Revenue

  $ 76,759     $ 14,069     $ 32,891     $ -     $ 123,719  

Direct operating expenses

    45,872       11,308       25,985       -       83,165  

Drydock expense

    2,549       588       1,525       -       4,662  

General and administrative expense

    6,961       5,218       6,876       18,608       37,663  

Depreciation and amortization

    24,157       8,654       22,008       3,363       58,182  

Impairment charge

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

Gain on sale of assets and other

    5,920       2,648       (4 )     -       8,564  

Operating income (loss)

  $ (10,686 )   $ (64,784 )   $ (133,884 )   $ (21,971 )   $ (231,325 )
                                         

Year Ended December 31, 2015

                                       

Revenue

  $ 142,168     $ 35,524     $ 97,114     $ -     $ 274,806  

Direct operating expenses

    84,474       16,483       68,880       -       169,837  

Drydock expense

    4,112       4,356       6,919       -       15,387  

General and administrative expense

    9,469       4,296       9,906       23,609       47,280  

Depreciation and amortization

    28,724       10,419       29,827       3,621       72,591  

Impairment charge

    22,919       -       129,184       -       152,103  

Gain on sale of assets and other

    1,244       (59 )     (25 )     -       1,160  

Operating income (loss)

  $ (8,774 )   $ 29     $ (147,577 )   $ (27,230 )   $ (183,552 )

Successor

 

As of December 31, 2017

                                       

Cash and cash equivalents

  $ 47,686     $ 2,029     $ 5,766     $ 9,132     $ 64,613  

Long-lived assets(a)

    203,505       60,890       97,515       2,218       364,128  

Total assets

    271,759       66,299       118,654       15,243       471,955  

Capital expenditures

    8       -       -       133       141  
                                         

Predecessor

 

Year Ended December 31, 2016

                                       

Cash and cash equivalents

  $ 5,436     $ 3,008     $ 364     $ 14     $ 8,822  

Long-lived assets(a)

    440,670       149,668       401,425       3,457       995,220  

Total assets

    465,908       158,671       424,398       3,548       1,052,525  

Capital expenditures

    12,550       90       2,751       797       16,188  
                                         

Year Ended December 31, 2015

                                       

Cash and cash equivalents

  $ 12,930     $ 4,911     $ 1,221     $ 2,877     $ 21,939  

Long-lived assets(a)

    544,904       216,477       499,083       6,022       1,266,486  

Total assets

    589,934       232,356       529,654       9,308       1,361,252  

Capital expenditures

    5,992       253       26,602       2,581       35,428  

 

88

 

 

(a)   Vessels under construction are included in other assets until delivered. Revenue, long-lived assets and capital expenditures presented in the table above are allocated to segments based on the location where the vessel is employed, which in some instances differs from the segment where the vessel is legally owned. For the Successor period from November 15, 2017 through December 31, 2017, we had $3.4 million in revenue and $91.7 million in long-lived assets attributed to the United States, our country of domicile. In the Predecessor period from January 1, 2017 through November 14, 2017, we had $16.5 million in revenue attributed to the United States. In 2016, we had $28.5 million in revenue and $371.6 million in long-lived assets attributed to the United States, our country of domicile. In 2015, we had $73.4 million in revenue and $431.7 million in long-lived assets attributed to the United States.

 

 

 

(13) UNAUDITED QUARTERLY FINANCIAL DATA

 

Summarized quarterly financial data for the Successor period ended December 31, 2017, the Predecessor period ended November 14, 2017 and the Predecessor year ended December 31, 2016 are as follows:

 

 

 

   

Predecessor

   

Successor

 
   

First

Quarter

   

Second

Quarter

   

Third

Quarter

   

Period from

October 1

Through

November 14, 2017

   

Period from

November 15

Through

December 31, 2017

 
    (In thousands, except per share amounts)        

2017

                                       

Revenues

  $ 24,359     $ 24,641     $ 25,805     $ 13,424     $ 13,593  

Operating loss

    (31,992 )     (30,680 )     (18,202 )     (9,308 )     (21,859 )

Net loss

    (124,815 )     (40,547 )     (24,643 )     (210,914 )     3,511  

Per share (basic)

  $ (4.93 )   $ (1.58 )   $ (0.94 )   $ (8.13 )   $ 0.35  

Per share (diluted)

  $ (4.93 )   $ (1.58 )   $ (0.94 )   $ (8.13 )   $ 0.35  

 

 

   

Predecessor

 
   

First

   

Second

   

Third

   

Fourth

 
   

Quarter

   

Quarter

   

Quarter

   

Quarter

 
   

(In thousands, except per share amounts)

 

2016

                               

Revenues

  $ 38,794     $ 30,487     $ 27,821     $ 26,617  

Operating loss

    (128,256 )     (66,338 )     (19,766 )     (16,965 )

Net loss

    (91,182 )     (47,580 )     (24,729 )     (39,488 )

Per share (basic)

  $ (3.66 )   $ (1.90 )   $ (0.98 )   $ (1.57 )

Per share (diluted)

  $ (3.66 )   $ (1.90 )   $ (0.98 )   $ (1.57 )

 

89

 

 

 

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

ITEM 9A. Controls and Procedures

 

Disclosure 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 Exchange Act 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 our disclosure controls and procedures as of the end of the Predecessor period ended November 14, 2017 and the Successor period ended December 31, 2017, both of which are covered by this Annual Report on Form 10-K. Our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of each such period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.

 

Our management assessed the effectiveness of our internal control over financial reporting at November 14, 2017 for the Predecessor and at December 31, 2017 for the Successor, and in making this assessment, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management determined that our internal control over financial reporting was effective as of November 14, 2017 for the Predecessor and as of December 31, 2017 for the Successor.

 

There are inherent limitations to the effectiveness of any control system, however well designed, including the possibility of human error or mistakes, faulty judgments in decision-making and the possible circumvention or overriding of controls. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Management must make judgments with respect to the relative cost and expected benefits of any specific control measure. The design of a control system also is based in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that a control will be effective under all potential future conditions. As a result, even an effective system of internal controls can provide no more than reasonable assurance with respect to the fair presentation of financial statements and the processes under which they were prepared. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because if changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

Changes in Internal Control over Financial Reporting

 

During the Predecessor period ended November 14, 2017, we implemented a change in internal control over financial reporting related to review of the calculation and reconciliation of income tax provision and related accounts. This change was implemented to remediate a material weakness in process level controls over management review of the calculation and reconciliation of income tax provision and related accounts. This material weakness arose in prior Predecessor periods and resulted in a calculation error that, while not material to the Predecessor’s consolidated financial statements, could have accumulated to a material amount. To remediate this deficiency, the Predecessor employed a third-party expert to assist with the review of the calculation and reconciliation of income tax provision and related accounts. This material weakness did not have a pervasive effect on internal control over financial reporting for the Predecessor, as it was limited only to review of the calculation, allocation and reconciliation of income taxes and had no effect over internal control over financial reporting for the Successor.

 

     There were no other changes in our internal control over financial reporting during the Predecessor period beginning October 1, 2017 and ended November 14, 2017, or the Successor period ended December 31, 2017 that materially affected, or would be reasonably likely to materially affect, our internal control over financial reporting in either period.

 

90

 

 

ITEM 9B. Other Information

 

On October 26, 2017, we reported, under Item 5.02 of our Current Report on Form 8-K filed on October 26, 2017, the departure of our Senior Vice President – General Counsel and Secretary, Cindy M. Muller, effective as of October 20, 2017.

 

On January 16, 2018, we entered into a Separation and General Release Agreement with Ms. Muller, or the Muller Separation Agreement. Under the Muller Separation Agreement, Ms. Muller received approximately $144,312 (representing six months of her base salary and three months of welfare benefit continuation) in full satisfaction of our obligations to her under our Severance Benefits Policy, as in effect at the time of her termination, and the Change of Control Agreement, dated March 17, 2017, between us and Ms. Muller, or the Change of Control Agreement. The Muller Separation Agreement also contains a general release and subjects Ms. Muller to a three-month non-competition provision and customary confidentiality and non-solicitation covenants. A copy of the Muller Separation Agreement is filed as Exhibit 10.19 to this Annual Report on Form 10-K.

 

PART III

 

ITEM 10. Directors, Executive Officers and Corporate Governance

 

DIRECTORS

 

Our Board of Directors, or the Board, consists of seven members. Pursuant to our Bylaws, the Board has established three standing committees, including the Audit Committee, the Compensation Committee and the Governance and Nominating Committee. The name, age, period of service, committee memberships, biographical and other information with respect to each member of the Board, including the specific attributes of each director that the Board has determined qualify that person for service on the Board, are set forth below.

 

       

Committee

Memberships

Name

Age

Director

Since

Independent

AC

CC

GNC

Eugene Davis

64

2017

X

X

   

Domenic DiPiero

46

2017

X

 

X

 

Quintin V. Kneen

52

2013

       

Scott McCarty

44

2017

X

 

C

 

Louis Raspino

64

2017

X, CBD

X

 

X

Krishna Shrivram

54

2017

X,FE

C

   

Kenneth Traub

56

2017

X

 

X

C

 

AC

CC

C

CBD

FE

GNC

Audit Committee

Compensation Committee

Member and Chair of a Committee

Chairman of the Board of Directors

Financial expert

Governance and Nominating Committee

 

 

Eugene Davis is the Chairman and Chief Executive Officer of PIRINATE Consulting Group, LLC, a firm he founded in 1999. In this capacity, he has managed numerous debtor and creditor side pre- and post-restructuring assignments in several industries including the oil and gas sector.  In addition, Mr. Davis has 35 years of experience in the oil and gas industry, including as an exploration and production attorney at Exxon Corporation and an international negotiator at Standard Oil Company (Indiana) (Amoco). He currently serves as chairman of the board of Atlas Iron Limited, an ASX-listed mining company; chairman of the board of U.S. Concrete, Inc., a NASDAQ-listed concrete company; as co-chairman of the board and member of the corporate governance and nominating committee of Verso Corporation, an NYSE-listed paper company; as chairman of the audit & finance committee of VICI Properties Inc.; and as a director of Titan Energy, LLC, an exploration and production company trading on the OTC Markets. During the past five years, Mr. Davis has also been a director of the following publicly traded companies: Atlas Air Worldwide Holdings, Inc.; The Cash Store Financial Services, Inc.; Dex One Corp.; Genco Shipping & Trading Limited; Global Power Equipment Group, Inc.; Goodrich Petroleum Corp.; Great Elm Capital Corporation; GSI Group, Inc.; Hercules Offshore, Inc.; HRG Group, Inc.; Knology, Inc.; SeraCare Life Sciences, Inc.; Spansion, Inc.; Spectrum Brands Holdings, Inc.; and WMIH Corp. He has also served on numerous boards of companies in the oil and gas industry, including Texas American Resources Company; Trident Exploration Corp.; Throne Petroleum; Magnum Hunter Resources Corp.; Hercules Offshore, Inc.; Stallion Oilfield Services; Warren Resources, Inc.; Coho Energy Inc.; and PetroRig. His experience in serving on numerous public and private company boards provides valuable insight into the business and financial decisions that come before our Board.

 

Domenic DiPiero is the Founder of Newport Capital Group, a national investment advisory firm, and has served as its President since 2004. With over twenty years of experience in the petroleum industry in shipping and marketing, Mr. DiPiero previously served as the President of Dove Terminals, a bulk petroleum storage company, from 1993 until 2005. He is also the former President of Delphi Petroleum Bunkering Division, where he was responsible for the supply and marketing of ship fuels in the U.S. representing Exxon from 2000 until 2004. He previously served as the President of the Marketing Division of Delphi Petroleum, a global energy trading firm specializing in the distribution of physical petroleum from 1994 until 2000. Mr. DiPiero served on the boards of Delphi Petroleum, Inc. from 2004 until 2015, and Zipz, Inc. from 2014 until the present. He served as chairman of the board of the Meridian Health System Foundation in 2012, and the Riverview Medical Center Foundation from 2011 until 2012. Since 2012, Mr. DiPiero has served as a Trustee of Drexel University. His extensive knowledge of the shipping and oil and gas services industries, his experience as a director of various companies, his banking experience and his financial and executive management expertise, provide Mr. DiPiero unique insight into the business decisions that come before our Board.

 

91

 

 

Quintin V. Kneen is our President and Chief Executive Officer. He was named our Executive Vice President and Chief Financial Officer in 2009 and served in those roles until he was appointed as our President and Chief Executive Officer in June 2013. Mr. Kneen joined GulfMark in June 2008 as Vice President – Finance and was named Senior Vice President – Finance and Administration in December 2008. Previously, he was Vice President – Finance & Investor Relations for Grant Prideco, Inc., serving in executive finance positions at Grant Prideco since 2003. Prior to joining Grant Prideco, Mr. Kneen held executive finance positions at Azurix Corp. and was an Audit Manager with the Houston office of Price Waterhouse LLP. He holds a Master of Business Administration from Rice University and a Bachelor of Business Administration in Accounting from Texas A&M University and is a Certified Public Accountant and a Chartered Financial Analyst. Mr. Kneen’s extensive financial expertise and his position as our President and Chief Executive Officer provide him with unique personal knowledge and experience regarding our Company and its operations.

 

Scott McCarty is a partner of Q Investments and has been with Q Investments since 2002. Prior to his current position as manager of the venture capital, private equity and distressed investment groups, he was a portfolio manager. Before joining Q Investments, Mr. McCarty was a captain in the United States Army. Mr. McCarty has served as a member of the compensation committee of Vantage Drilling International since February 2016 and has served as a member of the nominating and corporate governance committee of Jones Energy, Inc., an NYSE-listed oil and gas exploration and development company, since February 2018. He previously served as a member of the compensation committee of Travelport Worldwide Limited, an NYSE-listed technology company, from May 2013 until November 2014. Mr. McCarty’s experience gained from serving as a director of public companies, his military experience and his extensive background in finance provide valuable insight into business deliberations and decisions that come before our Board.

 

Louis Raspino’s career has spanned almost 40 years in the energy industry, most recently as Chairman of Clarion Offshore Partners, a partnership with Blackstone that served as its platform for pursuing worldwide investments in the offshore oil & gas services sector, from October 2015 until October 2017.   Mr. Raspino served as President, Chief Executive Officer and a director of Pride International, Inc. from June 2005 until the company merged with Ensco plc in May 2011 and as its Executive Vice President and Chief Financial Officer from December 2003 until June 2005. From July 2001 until December 2003, he served as Senior Vice President, Finance and Chief Financial Officer of Grant Prideco, Inc. and from February 1999 until March 2001, he served as Vice President of Finance at Halliburton. Prior to joining Haliburton, Mr. Raspino served as Senior Vice President at Burlington Resources, Inc. from October 1997 until July 1998. From 1978 until its merger with Burlington Resources, Inc. in 1997, he held a variety of positions at Louisiana Land and Exploration Company, most recently as Senior Vice President, Finance and Administration and Chief Financial Officer. Mr. Raspino previously served as a director of Chesapeake Energy Corporation and chairman of its audit committee from March 2013 until March 2016, and as a director of Dresser-Rand Group, Inc., where he served as chairman of the compensation committee and member of the audit committee, from December 2005 until its merger into Siemens in June 2015. He has served as a director of Forum Energy Technologies, an NYSE-listed global oilfield products company, since January 2012 and currently serves as the chairman of its compensation committee.  Mr. Raspino also currently serves on the board of The American Bureau of Shipping, where he is a member of the audit and compensation committees.  Mr. Raspino’s experience gained from his executive leadership roles for energy companies, including as chief executive officer and chief financial officer, and on various oil and gas industry boards, provides in-depth operational and financial expertise to our Board.

 

Krishna Shivram is the Chief Executive Officer and a director of Sentinel Energy Services Inc., a NASDAQ-listed special purpose acquisition company, that had a successful IPO in November 2017. Previously, Mr. Shivram served as the Interim Chief Executive Officer of Weatherford International PLC, an NYSE-listed oil and gas services company, from November 2016 to March 2017 and as its Chief Financial Officer from November 2013 to November 2016. From February 1988 to October 2013, Mr. Shivram held various positions at Schlumberger Limited, an NYSE-listed oil and gas services company, including Vice President and Treasurer, Controller and Head of M&A. Prior to joining Schlumberger, Mr. Shivram held positions with public accounting firms Arthur Andersen and Ernst & Young. Since August 2017, Mr. Shivram has served as the chairman of the audit committee of Ranger Energy Services, an NYSE-listed oilfield services company. Mr. Shivram’s extensive executive management background with NYSE-listed oil and gas services companies provides valuable industry insight relevant to many of the business decisions that come before our Board.

 

Kenneth Traub has served as a Managing Partner of Raging Capital Management, LLC, a diversified investment firm, since December 2015. Prior to joining Raging Capital Management, LLC, he served as President and Chief Executive Officer of Ethos Management, LLC from 2009 through 2015. Mr. Traub has served as Chairman of the Board of DSP Group, Inc., a NASDAQ-listed leading supplier of wireless chipset solutions for converged communications, since 2012, Intermolecular, Inc., a NASDAQ-listed innovator in materials sciences, since 2016 and IDW Media Holdings, Inc. a diversified media company, since 2016, each of which is a Raging Capital Management, LLC portfolio company. Mr. Traub has previously served on the boards of numerous companies including MIPS Technologies, Inc., a provider of industry standard processor architectures and cores, from 2011 until 2013, Xyratex Limited, a leading supplier of data storage technologies, from 2013 until 2014, Vitesse Semiconductor Corporation, a supplier of integrated circuit solutions for next-generation carrier and enterprise networks, from 2013 until 2015, Athersys, Inc., a biotechnology company engaged in the discovery and development of therapeutic product candidates, from 2012 to 2016, A. M. Castle & Co., a specialty metals distribution company from, 2014 to 2016 and MRV Communications, Inc., a supplier of communication networking equipment, from 2011 until 2017. Mr. Traub’s extensive management background and experience serving on a wide variety of corporate boards enable Mr. Traub to provide valuable financial and transactional expertise and insight to our Board.

 

92

 

 

Audit Committee

 

We have an Audit Committee established in accordance with Section 3(a) (58) (A) of the Exchange Act. Messrs. Shivram (Chairman), Davis and Raspino are the current members of the Audit Committee. The Board has determined that all of the Audit Committee members are “independent” as defined in the NYSE American listing requirements applicable to us. Mr. Shivram, by virtue of his financial, audit and accounting expertise gained from his previous positions at large publicly traded companies and top tier accounting firms, has been designated as an Audit Committee financial expert within the meaning of Item 407(d)(5) of Regulation S-K. The Audit Committee’s function is to provide oversight of our accounting policies. Its principal oversight responsibilities are to:

 

 

make recommendations to the Board concerning the selection and discharge of our independent public accountants;

 

 

discuss with our internal auditors and independent public accountants the overall scope and plans for their respective audits, including the adequacy of staffing and compensation; and

 

 

discuss with management, internal auditors and independent public accountants the adequacy and effectiveness of our accounting and financial controls.

 

The Board adopted a written charter for the Audit Committee which is posted on our website at www.gulfmark.com.

 

DIRECTOR COMPENSATION

 

Fees and Awards

 

Each of our non-employee directors is currently paid a cash retainer of $8,750 each quarter. Mr. Raspino is paid an additional $6,250 each quarter to serve as Chairman of our Board. We maintain committee chairman retainer arrangements whereby we pay Messrs. Shivram, McCarty and Traub $4,000, $2,500 and $1,250, respectively, per quarter for serving as Chairman of the Audit Committee, Compensation Committee and Governance and Nominating Committee, respectively. Messrs. Raspino, Davis and Raspino are paid $2,000 per quarter to serve on the Audit Committee. Messrs. DiPiero and Traub are paid $1,250 per quarter to serve on the Compensation Committee. Messrs. Raspino and McCarty are paid $625 per quarter to serve on the Governance and Nominating Committee. Prior to our emergence from bankruptcy, each of the Predecessor’s non-employee directors was paid a cash retainer of $11,250 each quarter. Mr. Butters was also paid an additional cash retainer of $8,333 per month for serving as Chairman of the Board. We also previously maintained committee chairman retainer arrangements whereby we paid Messrs. Ford, Butters and Bijur $3,750, $2,500 and $2,500, respectively, per quarter for serving as Chairman of the Audit Committee, Compensation Committee and Governance and Nominating Committee, respectively.

 

Total compensation paid in 2017 to non-employee directors of the Predecessor and the Successor, including cash director fees and retainers, matching and discretionary contributions made by us under the GulfMark Offshore, Inc. Deferred Compensation Plan, or the DC Plan (which is described below), and earnings under the DC Plan (to the extent such earnings are considered preferential under SEC rules), is as follows:   

  

Name

 

Fees Earned

or Paid in

Cash(1)

 

Eugene Davis

  $ -  

Domenic DiPiero

    -  

Scott McCarty

    -  

Louis Raspino

    -  

Krishna Shrivram

    -  

Kenneth Traub

    -  

Peter I. Bijur (2)

    41,250  

David J. Butters (2)

    124,583  

Brian R. Ford (2)

    45,000  

Sheldon S. Gordon (2)

    33,750  

Steven W. Kohlhagen (2)

    33,750  

William C. Martin (3)

    -  

Rex C. Ross (2)

    33,750  

Charles K. Valutas (2)

    33,750  

 

 

(1)

Certain non-employee directors elected for 2017 to defer all or a portion of the cash fees reported in this column under the DC Plan.

 

(2)

Pursuant to the Plan, Messrs. Bijur, Butters, Ford, Gordon, Kohlhagen, Ross and Valutas were deemed to have resigned from our Board as of November 14, 2017 in connection with our emergence from bankruptcy.

 

(3)

Mr. Martin resigned from our Board on March 3, 2017.

 

93

 

 

Quintin V. Kneen, our President and Chief Executive Officer, is not included in the table above because he was an employee of our Company during 2017, and therefore received no compensation for his services as a director. The compensation received by Mr. Kneen as an employee of the Company during 2017 is shown in the 2017 Summary Compensation Table below.

 

EXECUTIVE OFFICERS

 

The following are our current executive officers, who serve at the discretion of the Board:

 

Name

Position

Age

Quintin V. Kneen

President and Chief Executive Officer

52

James M. Mitchell

Executive Vice President and Chief Financial Officer

50

Samuel R. Rubio

Senior Vice President - Controller, Chief Accounting Officer and Assistant Secretary

58

 

 

Quintin V. Kneen’s biographical information can be found in “Directors” above.

 

James (Jay) M. Mitchell was named our Executive Vice President and Chief Financial Officer in June 2013. His expertise includes strategic planning, merger and acquisitions, finance, accounting, treasury, taxation, risk management and investor relations. Prior to joining the Company, he was Chief Executive Officer of the privately held Flex Energy. Previously, Mr. Mitchell served as Senior Vice President and CFO of T-3 Energy Services, a publicly traded company, until its successful sale in 2011. He earned a MPA in Taxation from the University of Texas at Austin, and a B.B.A. in Accounting from Georgia State University.

 

Samuel R. Rubio was named our Vice President – Controller, Chief Accounting Officer and Assistant Secretary in December 2008 and was promoted to Senior Vice President in the same function in June 2012. Mr. Rubio joined us in 2005 as Assistant Controller and was subsequently promoted to Controller in 2007. He has a Bachelor of Business Administration degree from Sul Ross State University and is a Certified Public Accountant and a member of both the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. In addition, Mr. Rubio has over 25 years of experience in accounting at both operating division and corporate levels as well as the management of accounting organizations.

 

No family relationship exists between any of the directors or the executive officers listed above under “Directors” and “Executive Officers.” As previously announced, Mr. Mitchell will step down from all positions with our company and its affiliates as of the date on which we file this annual report on Form 10-K (or such other date mutually agreed between the parties), whereupon Mr. Rubio will be promoted to the position of Chief Financial Officer.

 

Code of Business Conduct and Ethics

 

The Board adopted a Code of Business Conduct and Ethics applicable to all of our employees and agents as well as a Code of Ethics for our Principal Executive Officer and Senior Financial Officers, which are posted on our website at www.gulfmark.com. We intend to satisfy the disclosure requirement regarding any changes to our code of ethics we adopt and/or any waiver from our code of ethics that we grant by posting such information on our website, www.gulfmark.com, or by filing a Current Report on Form 8-K for such event.

 

Availability of Corporate Governance Documents 

 

Stockholders may obtain copies of the charters of the Audit Committee, the Compensation Committee, and the Governance and Nominating Committee, our Governance & Nominating Policy and our Code of Business Conduct and Ethics free of charge by contacting our Corporate Secretary at our principal office address of 842 West Sam Houston Parkway North, Suite 400, Houston, Texas 77024, or by accessing our website at www.gulfmark.com, selecting the “Investors” tab and then selecting “Corporate Governance.”

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of our common stock, par value $.01 per share, or Common Stock, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required by the regulation to furnish us with copies of all Section 16(a) reports they file.

 

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Based solely on our review of the copies of such reports received, or written representations from certain reporting persons that no Form 5 reports were required for those persons, we believe that all reports that were required to be filed under Section 16(a) during 2017 were timely filed except for the following:

 

 

A report on Form 5 filed by Quintin V. Kneen on March 27, 2018 reporting 20 transactions;

 

A report on Form 5 filed by James M. Mitchell on March 27, 2018 reporting 20 transactions;

 

A report on Form 5 filed by Samuel R. Rubio on March 27, 2018 reporting seven transactions;

 

A report on Form 5 filed by David E. Darling on March 27, 2018 reporting seven transactions;

 

A report on Form 5 filed by Cindy M. Muller on March 27, 2018 reporting seven transaction

 

A report on Form 3 filed by Louis Raspino on March 5, 2018;

 

A report on Form 3 filed by Domenic DiPiero on December 2, 2017;

 

A report on Form 3 filed by Eugene Davis on December 1, 2017;

 

A report on Form 3 filed by Krishna Shivram on December 1, 2017;

 

A report on Form 3 filed by Scott McCarty on December 1, 2017; and

 

A report on Form 5 filed by Samuel R. Rubio on April 13, 2017 reporting two transactions.

 

ITEM 11. Executive Compensation

 

COMPENSATION OVERVIEW

 

This Compensation Overview provides information regarding the 2017 compensation program in place for (i) our President and Chief Executive Officer, (ii) our two other most highly-compensated executive officers serving as of December 31, 2017 and (iii) Ms. Muller, who would have been one of our two other most highly-compensated executive officers but for the fact that she departed effective as of October 20, 2017 and was no longer serving as of December 31, 2017, whom we refer to collectively as our named executive officers. This section includes information regarding our compensation philosophy and objectives, the components of our compensation program, and the key factors the Board, the Compensation Committee and our President and Chief Executive Officer considered in determining the compensation for our named executive officers in 2017. For 2017, our named executive officers were:

 

 

Name

Position

Quintin V. Kneen

President and Chief Executive Officer

James M. Mitchell

Executive Vice President and Chief Financial Officer

Samuel R. Rubio

Senior Vice President - Controller, Chief Accounting Officer and Assistant Secretary

Cindy M. Muller

Senior Vice President - General Counsel and Secretary

 

Compensation Philosophy and Objectives

 

Our compensation philosophy is to set the fixed compensation of our senior executives competitively for their demonstrated skills and industry experience. Variable compensation, both annual and long-term, should reflect the results of performance against a combination of quantitative and subjective measures. In 2016 and 2017, we did not benchmark executive compensation to any peer group.

 

Our compensation and benefits programs are designed to achieve the following objectives:

 

 

Compensation should enable us to attract, motivate and retain talented executive officers capable of leading us in a competitive and changing industry and to align the interests of our executives with those of our stockholders to promote long-term success and optimize stockholder value.

 

 

Compensation should reflect the marketplace for talent. We strive to remain competitive with the pay of other companies with which we compete for talent.

 

 

Annual cash and equity awards should reflect progress towards our financial and operational goals that balance rewards for both short-term and long-term performance.

 

Administration of our Executive Compensation Program

 

Our executive compensation program is developed and administered by the Compensation Committee, which is comprised of three non-employee independent directors. The Compensation Committee is responsible for the review and assessment of all aspects of our executive compensation program. The recommendations of the Compensation Committee are approved by the full Board, including a majority of the independent directors.

 

Role of Executive Officers in Executive Compensation Decisions

 

Our President and Chief Executive Officer works closely with the Compensation Committee providing his assessment and recommendations on the competitiveness of the programs, performance issues and challenges, and makes recommendations for consideration pertaining to the compensation of the executive team, including the performance criteria for the named executive officers other than himself. The Compensation Committee takes these recommendations into consideration and either approves the proposal of the President and Chief Executive Officer or works with the President and Chief Executive Officer to develop suitable alternatives. In consultation with the President and Chief Executive Officer, the Compensation Committee determines the specific base salary and bonus compensation for our Senior Vice Presidents. The President and Chief Executive Officer does not make, participate in, provide input for or make recommendations about his own compensation. In addition, none of the other named executive officers participate in the deliberation process of the Compensation Committee. Such executive officers do, however, participate in the review and award process for other key employees.

 

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Setting Performance Measures

 

When setting performance goals and objectives, we attempt to use criteria that assess our performance while taking into account industry conditions, rather than absolute performance. This is based on the belief that our absolute performance can be affected both negatively and positively by industry factors over which our executives have no control, such as prices for oil and natural gas. We have developed metrics we feel reflect performance with a balance of specific internal goals that will enhance our ability to grow and create further stockholder value.

 

Performance Review 

 

At the end of each year in which performance goals have been established, calculations required to support achievement of compensation goals established by the Compensation Committee are provided to the Compensation Committee by our financial department. The Compensation Committee then reviews the performance of our named executive officers based on their achievement of the established objectives, contribution to our performance and individual performance. This review is shared with the President and Chief Executive Officer and recommendations for compensation are provided to the Board for consideration and approval.

 

For our Senior Vice Presidents, our past practice has been to set performance criteria at the beginning of the year that are reviewed at the end of the year. Recommendations regarding the compensation awarded to these individuals is approved by the Compensation Committee in consultation with our President and Chief Executive Officer. In view of industry conditions, in 2017 the Compensation Committee did not award any performance-based incentive cash bonuses to any of our named executive officers.

 

Compensation Program Components

 

The compensation of our executive officers typically consists of:

 

 

Base salary;

 

Annual non-equity incentives (although no performance-based incentive cash bonuses were awarded to any of our named executive officers for performance in 2017);

 

Long-term equity incentive awards (in the form of restricted stock);

 

Severance and change of control arrangements; and

 

Other benefits and perquisites (including participation in our deferred compensation plan).

 

The balance among these components is established annually by the Compensation Committee and is designed to recognize past performance, retain our executive officers and encourage future performance.

 

The particular elements that comprise the executive compensation program for our named executive officers are set forth in more detail below.

 

Base Salary

 

Base salary for our executive officers is reviewed and set annually by the Compensation Committee. Salary levels are adjusted to take into account job responsibility, job complexity, individual performance, cost of living and other relevant factors. We believe this component of pay is one of the most effective ways to attract and retain executives. In addition to market practices and the other factors described above, in determining the overall salary amounts that are established each year, the Compensation Committee considers industry information and current economics. The objective is to provide a salary at a level sufficient to retain, motivate and reward successful performance while maintaining affordability within our business plan.

 

In 2015, as a result of the severe downturn in our industry, base salaries for our executive officers were reduced by 15% for our Chief Executive Officer, by 10% for our Executive Vice Presidents and by 5% for our Senior Vice Presidents. In 2016 and 2017, due to continuing depressed commodity prices and industry conditions, the Compensation Committee did not increase any base salaries for executive officers but instead maintained executive officers’ base salaries at these reduced levels set in 2015.

 

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Annual Non-Equity Incentives

 

Although in the past we have provided annual non-equity incentive compensation to our executive officers in the form of annual cash bonuses relating to financial and operational achievements during the year, for the purpose of retaining and motivating our executive officers, no performance-based incentive cash bonuses were awarded to any of our named executive officers for performance in 2017. Similarly, due to the downturn in the industry and its effects on our financial performance, we did not pay our executive officers any incentive cash bonus awards in 2017 for the 2016 performance year.

 

 Long-Term Equity Incentive Awards

 

In the past, we provided long-term incentive compensation to our executive officers through equity awards granted pursuant to the GulfMark Offshore, Inc. Amended and Restated 2014 Omnibus Equity Incentive Plan, or the 2014 Omnibus Plan. With respect to the 2015 performance year, the Compensation Committee approved awards of restricted stock that were granted to executive officers in 2016.  Pursuant to SEC rules, these awards are disclosed as 2016 compensation in the 2017 Summary Compensation Table, even though such awards were considered by the Compensation Committee as compensation with respect to the 2015 performance year. The Compensation Committee did not award any restricted stock or other equity incentive awards to executive officers in 2017 with respect to the 2016 performance year. The restrictions on all restricted stock held by our executive officers lapsed on the Effective Date pursuant to the Plan.

 

The use of equity awards is intended to provide incentives to our executive officers to work toward our long-term goals. Pursuant to the Plan, on the Effective Date, we reserved 876,553 shares of Common Stock for issuance by the Board as awards under a post-Effective Date management incentive plan. As of the date of this report, the Board has not yet adopted a management incentive plan.

 

Severance and Change of Control Arrangements

 

Currently, we have an employment agreement with our President and Chief Executive Officer that provides for certain severance payments in the event he is terminated without cause or terminates his employment for good reason, including as a result of a change of control, as provided in the agreement. In addition, we have an employment agreement and separate change of control agreement with our Executive Vice President and Chief Financial Officer that include similar provisions. Additional information regarding the terms and provisions of the employment agreements is provided below under “Additional Narrative Disclosure – Agreements Related to Employment.”

 

The purpose of the severance and change of control arrangements with our named executive officers is to:

 

 

maintain the continued dedication of the executive officers; and

 

 

diminish the inevitable distraction of the executive resulting from the uncertainties and risks created by a pending or threatened change of control.

 

The change of control provision included in each of these agreements requires a “double trigger” in order for the executive officer to receive any payment in the event of a change of control situation. First, a change of control must occur and, second, the individual must terminate his employment for good reason or we must terminate his employment without cause during a specified protection period. We believe providing the officer this change of control protection helps to ensure impartiality and objectivity of these named executive officers in the context of a change of control situation and protects the interests of our stockholders.

 

We have also entered into a severance protection agreement with our Senior Vice President – Controller, Chief Accounting Officer and Assistant Secretary. The severance protection agreement provides for a severance payment to the executive if he incurs a specified involuntary termination of employment during its term. See “Additional Narrative Disclosure – Agreements Related to Employment – Severance Protection Agreement.” The severance protection agreement is intended to foster the continued employment of this named executive officer and encourage his continued attention and dedication to the Company.

 

     We are also party to a change of control agreement with our former Senior Vice President, General Counsel and Secretary that provides for certain severance payments and benefits if she incurs a specified termination after a change of control occurs. The change of control agreement only addresses the terms of employment and compensation in the event of a termination of employment in connection with a change of control of the Company, and not as a result of a termination unrelated to such a change of control. It is intended to provide an appropriate retention incentive while balancing the value to the Company of such retention during a change of control transition period. The initial term of the change of control agreement is two years. See “Additional Narrative Disclosure – Change of Control Agreement with Cindy M. Muller.”

 

Ms. Muller did not have a severance agreement and was an eligible participant in our Severance Benefits Policy applicable to all our employees generally, as in effect at the time of her termination, which provides severance pay based on years of continuous service to terminated or laid-off employees under certain circumstances, including termination without cause or because of a change of control. See “Additional Narrative Disclosure – Severance Benefits Policy.”

 

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Deferred Compensation Plan

 

We provide our executive officers with the opportunity to defer certain portions of their salary and bonuses paid by us for distribution after retirement or resignation through our DC Plan. The DC Plan is intended to encourage the continued employment of the participating employees and to facilitate the recruiting of executive officers and other highly compensated employees required for our continued growth and profitability. The first 7.5% of compensation deferred by a participant under the DC Plan must be invested in our Common Stock and contributions in excess of that amount can be allocated into either our Common Stock or an account in which we provide a return equivalent to the prime rate plus 2%. Contributions by participants are matched dollar-for-dollar up to 7.5% of the participant’s total cash compensation and we may elect to make additional annual discretionary contributions to the DC Plan equal to a designated percentage of a participant’s total cash compensation for the year. These company-provided contributions vest pro rata over five years. See “Additional Narrative Disclosure – Deferred Compensation Plan.”

 

ESPP

 

For a portion of 2017, our Amended and Restated 2011 Employee Stock Purchase Plan, or ESPP, which was qualified under Section 423 of the Internal Revenue Code, was available to all of our U.S. employees and certain subsidiaries. We established the ESPP to permit eligible participants to purchase Common Stock from the Company on favorable terms and pay for such purchases through regular payroll deductions. At the end of each fiscal quarter, or Option Period, during the term of the ESPP, the employee contributions were used to acquire shares of our Common Stock at 85% of the fair market value of the Common Stock on the first or the last day of the Option Period, whichever was lower. In 2017, the Board determined that it was in the best interests of the Company to discontinue the ESPP and terminated the ESPP on March 23, 2017.

 

Other Benefits

 

Our executive officers participate in our other benefit plans on the same terms as other employees. These plans include a defined contribution plan, our 401(k) plan, and medical, dental and term life insurance. We have not made any Company contributions to the 401(k) plan since we suspended them in 2015.

 

Perquisites

 

We provide our executive officers with limited perquisites and other personal benefits that the Compensation Committee believes are reasonable and consistent with our overall compensation program. For example, we may, from time to time, pay for the monthly membership fees for certain golf or social clubs for our executive officers so that they have an appropriate entertainment forum for customers and vendors.

 

Although these limited perquisites and other personal benefits do not constitute a material part of our executive compensation program, we believe that they help provide a competitive package to attract and retain executive talent.

 

Current Base Salary

 

In light of the continued depressed commodity prices and industry conditions that began in 2014 and have continued into 2018, the Compensation Committee determined that base salaries for our executive officers for 2017 should remain the same as their base salaries for 2015 and 2016, as discussed above. Based on its analysis of these conditions and the factors, goals and objectives described above in “Compensation Program Components – Base Salary,” the Compensation Committee established the following base salaries for 2018 for our named executive officers who are current executive officers, which are the same as their 2017 base salaries, except for Mr. Rubio. As previously reported, Mr. Rubio will be promoted to the position of Chief Financial Officer upon completion of the filing of this Annual Report on Form 10-K and, in connection with his promotion, Mr. Rubio’s salary was increased to $275,000 per annum.

 

Name

 

2018 Base Salary

 

Quintin V. Kneen

  $ 510,000  

James M. Mitchell

    304,200  

Samuel R. Rubio

    275,000  

 

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2017 SUMMARY COMPENSATION TABLE

 

Name and Principal Position

Year

 

Salary

   

Bonus

   

Stock

Awards(1)

   

All Other

Compensation(2)

   

Total

 

Quintin V. Kneen

2017

  $ 510,000     $ 510,000     $ -     $ 53,675     $ 1,073,675  

President and Chief

2016

    510,000       -       660,653       92,825       1,263,478  

Executive Officer

                                         

James M. Mitchell

2017

    304,200       304,200       -       26,877       635,277  

Executive Vice

2016

    304,200       37,500       367,764       57,821       767,285  

President and Chief Financial Officer

                                         

Samuel R. Rubio

2017

    223,269       223,269       -       1,032       447,570  

Sr.Vice President- Controller

2016

    223,269       25,000       212,400       34,523       495,192  

and Chief Accounting Officer

                                         

Cindy M. Muller

2017

    270,000       270,000       -       1,584       541,584  

Sr. Vice President -

2016

    172,083       10,000       36,500       24,776       243,359  

General Counsel and Secretary

                                         

 

 

 

(1)

For the annual restricted stock awards, in most years the Compensation Committee meets in the first quarter of each year to establish a value for stock to be awarded to the named executive officers with respect to the preceding performance year. The value of restricted stock awarded is determined using an average of the high and low stock price on the grant date of restricted stock awards as follows: June 6, 2016 ($3.54 per share). The restricted stock awards approved by the Compensation Committee on April 12, 2016 subject to stockholder approval at our 2016 annual meeting of stockholders, which were granted on June 6, 2016 for the 2015 performance year, are reported in the “Stock Awards” column for 2016 in accordance with SEC rules. The amounts reported in the “Stock Awards” column reflect the aggregate grant date fair value of the awards, computed in accordance with FASB ASC No. 718, “Compensation — Stock Compensation” excluding the effect of estimated forfeitures, if any, and do not reflect the actual value that may be realized by the executive. See Note 9 to our consolidated financial statements included in Part II, Item 8 of this report for additional detail regarding assumptions underlying the value of these equity awards.

 

 

(2)

All other compensation for 2017 includes the following:

 

Name

 

Insurance

Policy

Premiums

   

Club Dues

   

DC Match and

Discretionary

Contributions

   

Total

 

Quintin V. Kneen

  $ 552     $ 14,873     $ 38,250     $ 53,675  

James M. Mitchell

    360       3,702       22,815       26,877  

Samuel R. Rubio

    1,032       -       -       1,032  

Cindy M. Muller

    1,584       -       -       1,584  

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

None of our named executive officers had any unexercised options, unvested shares or other equity incentive plan awards outstanding as of December 31, 2017.

 

ADDITIONAL NARRATIVE DISCLOSURE               

 

Agreements Related to Employment

 

We currently have employment agreements with Messr. Kneen and Mitchell. Each agreement entitles the employee to be employed in a specified position with us and to receive a minimum annual base salary. The current term of each agreement expires on December 31, 2017, in each case subject to automatic renewal for additional terms of one year unless 120 days’ notice is given by us or the executive officer prior to termination of the then-current term or the employment agreement otherwise terminates according to its terms. Each employment agreement provides that the executive officer will be eligible to participate in our incentive, savings, retirement and other benefit plans applicable to our executives generally, and for the applicable perquisites described above. The purpose of the employment agreements is to provide the executive officers with compensation and benefits arrangements that are competitive with those of other companies with which we compete for talent.

 

Our agreements with Messrs. Kneen and Mitchell further provide for certain severance payments and other termination benefits to the executive officers, including in connection with a change of control.

 

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Employment Agreement with Quintin V. Kneen 

 

Under Mr. Kneen’s employment agreement, he is entitled to receive termination benefits in the event his employment terminates under certain specified conditions.

 

The terms “cause,” “good reason,” “retirement” and “change of control” are defined in Mr. Kneen’s employment agreement and have the meanings generally described below. You should refer to the agreement for the actual definitions.

 

“Cause” is defined as: (i) the willful and continued failure by the executive to substantially perform his duties; (ii) the executive being convicted of or entering a plea of nolo contendere to the charge of a felony; (iii) the commission by the executive of a material act of dishonesty or breach of trust resulting or intending to result in personal benefit or enrichment to the executive at our expense; or (iv) an unauthorized absence from employment.

 

“Good reason” is defined as: (i) the assignment to the executive of duties inconsistent with his position or, in connection with or within one year following a change of control, the assignment of substantially diminished duties and responsibilities or a material change in reporting responsibilities; (ii) relocation more than 75 miles from his present business address; (iii) a material breach by us of his employment agreement; or (iv) in connection with or within one year following a change of control, the giving of notice to the executive that the term of the employment agreement will not be extended.

 

“Retirement” is defined as the executive’s voluntary termination on or after his attainment of age 62, following which he does not become employed by any entity engaged in the same or similar line of business.

 

“Change of control” generally means that: (i) the majority of the Board of Directors consists of individuals other than those serving as of the date of the named executive’s employment agreement or those that were elected by at least 50% of the directors serving as of that date; (ii) there has been a merger or other business combination or a sale of all or substantially all of our assets, in each case, in which at least 50% of the combined post-merger voting power of the surviving entity does not consist of our pre-merger voting power; (iii) at least 20% of our Common Stock has been acquired by one person or persons acting as a group; or (iv) we are liquidated.

 

If Mr. Kneen’s employment is terminated due to his retirement, then, until he becomes eligible for Medicare, we will continue to provide him and his family medical benefits at least equal to those he would have been provided if his employment had not terminated. Mr. Kneen is not currently eligible to terminate employment due to retirement under his employment agreement.

 

If Mr. Kneen’s employment is terminated by him for “good reason” or is terminated without “cause” by us, either during the term of his agreement or during a “change of control” period, defined as the period beginning on the six month anniversary of a change of control and ending on the twelve month anniversary of a change of control, he will be entitled to receive: (i) a pro-rata bonus equal to the annual non-equity incentive award paid for the prior year multiplied by a fraction, the numerator of which is the number of days during the calendar year until the date of termination, and the denominator of which is 365, (ii) an amount equal to two times the sum of his annual base salary as then in effect and the annual non-equity incentive award paid for the prior year, (iii) full accelerated vesting of all outstanding stock options and restricted stock not then vested or exercisable, (iv) continued medical and other welfare benefit plan coverage through the end of the term of the employment agreement, (v) an amount equal to the undiscounted value of employer contributions to the 401(k) plan and the DC Plan that would have been made on Mr. Kneen’s behalf during the two year period following the termination date, and (vi) reimbursement for up to six months for reasonable expenses related to outplacement services. These payments are subject to Mr. Kneen’s execution and delivery of a comprehensive release of claims agreement in favor of the Company. Mr. Kneen will also receive his annual base salary through the date of termination, any compensation he is owed pursuant to the terms and conditions of our retirement and other benefit plans, and any accrued vacation pay.

 

If any payment or distribution to Mr. Kneen would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, or any successor provision thereto, or any interest or penalties are incurred by him for the excise tax imposed on golden parachute payments made in connection with a change of control, then he is entitled to receive an additional payment, or a Gross-Up Payment, in an amount such that after payment of all taxes (including any interest or penalties imposed), including any income taxes (and any interest and penalties imposed with respect thereto) and any excise tax imposed upon the Gross-Up Payment, he retains an amount of the Gross-Up Payment equal to the excise tax imposed upon the payments.

 

Mr. Kneen is subject to certain confidentiality and non-solicitation restrictions under the employment agreement. The confidentiality requirements are perpetual while the non-solicitation restrictions apply for one year following termination of employment.

 

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Employment, Change of Control and Separation Agreements with James M. Mitchell

 

Under the employment agreement with Mr. Mitchell, he is entitled to receive termination benefits in the event his employment terminates under certain specified conditions.

 

If his employment is terminated by him for “good reason” or is terminated without “cause” by us, he will be entitled to receive: (i) a pro-rata bonus equal to the annual non-equity incentive award paid for the prior year multiplied by a fraction, the numerator of which is the number of days during the calendar year until the date of termination, and the denominator of which is 365, (ii) an amount equal to two times his annual base salary as then in effect, (iii) full accelerated vesting of all outstanding stock options and restricted stock not then vested or exercisable, (iv) an amount equal to the undiscounted value of employer contributions to the 401(k) plan and the DC Plan that would have been made on the executive officer’s behalf during the one year period following the termination date, (v) reimbursement for up to six months for reasonable expenses related to outplacement services (not to exceed $20,000) and (vi) an amount equal to 12 times the monthly COBRA premium amount for group medical continuation coverage for him and his eligible dependents. These payments are also due to Mr. Mitchell if his employment is terminated due to his disability and are subject to his execution and delivery of a comprehensive release of claims agreement in favor of the Company. He will also receive his annual base salary through the date of termination, any compensation he is owed pursuant to the terms and conditions of our retirement and other benefit plans, and any accrued vacation pay.

 

Mr. Mitchell is subject to certain confidentiality, noncompetition and non-solicitation restrictions under his employment agreement. The confidentiality requirements are perpetual while the non-competition and non-solicitation restrictions apply for one year following termination of employment.

 

The terms “cause” and “good reason” for purposes of the employment agreement with Mr. Mitchell generally have the same meanings as described above for Mr. Kneen’s employment agreement, except that “good reason” means only a material breach of the employment agreement by us.

 

Mr. Mitchell also has a change of control agreement with us that provides certain payments and benefits if employment is terminated without “cause” or for “good reason” within one year following “change of control.” Consistent with Board policy, Mr. Mitchell’s change of control agreement does not include any Gross-Up Payments related to potential golden parachute payments in connection with a change of control.

 

The terms “cause,” “good reason,” and “change of control” are defined in the change of control agreement and have the meanings generally described below. You should refer to the change of control agreement for the actual definitions.

 

“Good reason” is defined as: (i) a substantial diminution of duties or responsibilities as compared to the duties and responsibilities immediately prior to a change of control or a material change in reporting responsibilities, titles or offices as in effect immediately prior to a change of control; (ii) a reduction of annual base salary and compensation, except for across-the-board reductions; (iii) relocation more than 50 miles from his present business address immediately prior to a change of control; or (iv) failure by us to continue compensation plans or benefits substantially similar to those immediately prior to a change of control.

 

“Cause” is defined as: (i) the willful and continued failure by the executive to perform his duties; or (ii) the willful engaging by the executive in conduct which is demonstrably and materially injurious to us.

 

“Change of control” has the same definition as in Mr. Kneen’s employment agreement.

 

If Mr. Mitchell’s employment terminates as described above under the change of control agreement, he will be entitled to receive: (i) a pro-rata bonus equal to the annual non-equity incentive award paid for the prior year multiplied by a fraction, the numerator of which is the number of days during the calendar year until the date of termination, and the denominator of which is 365, (ii) an amount equal to two times his annual base salary (as in effect immediately prior to the change of control, the first occurrence of a “good reason” event or his termination of employment, whichever is greatest), (iii) full accelerated vesting of all outstanding stock options and restricted stock not then vested or exercisable, (iv) an amount equal to the undiscounted value of employer contributions to the 401(k) plan and the DC Plan that would have been made on his behalf during the two year period following the termination date, (v) reimbursement for up to six months for reasonable expenses related to outplacement services, and (vi) an amount equal to 12 times the monthly COBRA premium amount for group medical continuation coverage for the executive officer and his eligible dependents. He will also receive his annual base salary through the date of termination, any compensation he is owed pursuant to the terms and conditions of our retirement and other benefit plans, and any accrued vacation pay.

 

Separation Agreement with James M. Mitchell

 

As previously disclosed, we have entered into a Separation and Mutual Release Agreement, dated February 16, 2018, with Mr. Mitchell, or the Separation Agreement. The Separation Agreement provides that Mr. Mitchell will receive approximately $490,253 (representing 18 months of base salary and welfare benefit continuation) in full satisfaction of our obligations to him under any and all plans, programs or arrangements of our company under which Mr. Mitchell may be entitled to payments and/or benefits in connection with the termination of his employment, including pursuant to his employment agreement and change in control agreement. The Separation Agreement also contains a limited mutual release, as well as mutual non-disparagement obligations. Further, pursuant to the Separation Agreement, Mr. Mitchell will be subject to a six-month non-competition provision and customary confidentiality and non-solicitation covenants.

 

101

 

 

Severance Protection Agreement

 

On April 6, 2016, we entered into a Severance Protection Agreement, or Severance Agreement, with Mr. Rubio.

 

The Severance Agreement has a term of two years and provides for the following severance benefits in the event that the executive incurs an Involuntary Termination of Employment during the term of the Severance Agreement:

  

 

the Company will pay the executive, at the time specified in the Severance Agreement, an amount equal to two times the executive’s Base Compensation (as defined in the Severance Agreement) in effect immediately prior to the Involuntary Termination of Employment (or, if greater, two times the executive’s Base Compensation in effect immediately prior to March 15, 2015); and

 

 

all risk of forfeiture and transferability restrictions applicable to the executive’s then outstanding restricted stock awards granted by the Company will lapse, and the executive will have a fully vested and transferable interest in the executive’s then outstanding restricted stock awards granted by the Company, immediately prior to the Involuntary Termination of Employment.

 

An Involuntary Termination of Employment means the complete severance of the executive’s employment relationship with the Company (i) because the executive’s position is eliminated, (ii) because the executive and the Company agree to the executive’s resignation of his position at the request of the Company, (iii) because the Company terminates the executive’s employment with the Company without Cause (as defined in the Severance Agreement), or (iv) for any other reason which is deemed an Involuntary Termination by the Company. An Involuntary Termination does not include (a) a termination of employment for Cause, (b) a transfer of employment within the Company or a transfer of employment to a venture or entity in which the Company has any equity interest, (c) a temporary absence, such as a Family and Medical Leave Act leave or a temporary layoff in which the executive retains entitlement to re-employment, (d) the executive’s death, Disability (as defined in the Severance Agreement) or retirement or (e) a voluntary termination of employment by the executive (other than a resignation at the request of the Company).

 

The executive’s right to receive any of the severance benefits described above is contingent upon the executive’s execution of a general release of claims against the Company and the other parties identified in the Severance Agreement. The Severance Agreement also contains covenants in favor of the Company regarding confidential information and non-solicitation of certain customers and employees.

 

Amendments to Employment Agreements and Severance Protection Agreement

 

On November 8, 2017, the Company entered into a letter agreement, each an Amendment Agreement, with each of Messrs. Kneen, Mitchell and Rubio, amending, among other things, each of their respective employment agreements and Severance Agreement, each an Existing Agreement. Each Amendment Agreement provides that, as set forth in the RSA and the Plan:

 

 

prior to the assumption or rejection of the applicable Existing Agreement, such executive officer and the Board of Directors of the reorganized Company will engage in good faith negotiations regarding changes to such executive officer’s Existing Agreement within the 30-day period following the Effective Date of the Plan; and

 

 

neither our bankruptcy reorganization nor the transactions contemplated by the Plan will constitute a “Change of Control” for purposes of such Existing Agreement or any other employment, severance, change of control or similar type agreement or arrangement covering such executive officer.

 

Each Amendment Agreement provides that the Successor will have the right to reject such executive officer’s Existing Agreement if such executive officer and the Board of Directors of the Successor do not come to a mutually acceptable agreement during their respective negotiations.

 

Retention Bonus Agreements

 

On March 13, 2017, in an effort to retain top-tier executive talent, the Board, after consultation with our outside advisors and the Compensation Committee, approved the payment of key employee retention bonuses and the execution of agreements, each of which we refer to as a Retention Bonus Agreement, with certain executives of the Company, including each of the named executive officers. The key employee retention bonuses were designed to supplement our existing employee compensation programs. Pursuant to the Retention Bonus Agreements, the Company paid the following aggregate amounts to the named executive officers: Mr. Kneen, $510,000; Mr. Mitchell, $304,200; Mr. Rubio, $250,000; and Ms. Muller, $250,000.

 

The Retention Bonus Agreements provided for payment to each recipient of cash-denominated awards in two equal installments, subject to continued employment through March 13, 2018, or the Vesting Date, as described below. The first installment was paid upon execution of a Retention Bonus Agreement by the recipient on March 31, 2017. The second installment payment was paid on May 15, 2017 prior to the filing of the Chapter 11 Case.

 

102

 

 

Under the Retention Bonus Agreements, if prior to the Vesting Date the recipient either (i) voluntarily terminated his or her employment with the Company, other than as a result of an Eligible Retirement (as defined therein) or (ii) his or her employment was terminated by the Company for Cause (as defined in therein), then the recipient would forfeit the right to payment of any remaining installment payments and would be obligated to repay the Company the total amount previously paid pursuant to a Retention Bonus Agreement prior to such termination. If a recipient’s employment was terminated prior to the Vesting Date without Cause, as an Eligible Retirement or by reason of Disability (as defined therein) or death, the recipient would remain eligible to receive any scheduled installment payments and to retain any prior payments under the Retention Bonus Agreements. The recipient’s retention of all or any portion of the retention bonus under his or her Retention Bonus Agreement in connection with a termination without Cause or as an Eligible Retirement was contingent on the recipient executing and not revoking a release agreement.

 

Deferred Compensation Plan

 

We sponsor the DC Plan whereby participants were, prior to our emergence from bankruptcy, permitted to elect to contribute a portion of their cash compensation, which was matched by the Predecessor up to a certain point, and to which the Predecessor could elect to make additional discretionary contributions. Contributions by our participants made prior to our emergence from bankruptcy continue to be held in the DC Plan. No participants have made contributions since the Effective Date. Contributions are generally not taxable to the participant until distributed, which generally occurs after retirement or resignation. Participants in the DC Plan are generally our directors and senior management, including all directors prior to the Effective Date and named executive officers.

 

Although discretionary, the Predecessor had elected every year since inception of the DC Plan to contribute 7.5% of a participant’s total cash compensation to the DC Plan. In addition, contributions by the participants were matched dollar-for-dollar up to 7.5% of the participant’s total cash compensation.

 

Prior to the Effective date, employee participants were permitted to elect to contribute up to 50% of their base salary and between 10% and 100% of their annual non-equity incentive awards. The first 7.5% of compensation contributed by participants was required to be invested in the Predecessor’s Class A common stock, and all matching and discretionary contributions by the Predecessor were made in the Predecessor’s Class A common stock. Contributions by participants in excess of 7.5% of their cash compensation could be allocated into either the Predecessor’s Class A common stock or an account in which we provide a return equivalent to the prime rate (as reported by the Federal Reserve) plus 2%. For 2017, total stockholder return on the Predecessor’s Class A common stock was a decline of 82% and the applicable interest rate provided under the DC Plan was 5.0%. Subsequent to the Effective Date, no participants in the DC Plan are making current contributions.

 

Participants are always fully vested in their contributions to the DC Plan and vest in contributions made by us pro rata over five years. Vesting in contributions made by us is accelerated upon a participant’s attainment of normal retirement age, incurrence of a disability, death or the occurrence of a change of control event. The DC Plan’s assets are available to satisfy the claims of our general creditors in the event of our bankruptcy or insolvency.

 

In accordance with established procedures, a participant may elect to have his account balance in the DC Plan distributed upon the earliest to occur of (i) his separation from service, (ii) a specified date, (iii) his disability, (iv) his death, or (v) the occurrence of a change of control event. The payment of all or a portion of a participant’s account may be accelerated in certain circumstances as permitted under Section 409A of the Internal Revenue Code. Benefits will be distributed in shares of our Common Stock (to the extent invested in Common Stock) or in cash (to the extent not invested in Common Stock).

 

Indemnification Agreements

 

In addition, we have indemnification agreements with certain of our executive officers and our independent directors, which provide for indemnification rights in addition to those provided under our governing documents.

 

Change of Control Agreement with Cindy M. Muller

 

On March 17, 2017, we entered into the Change of Control Agreement with Ms. Muller. The Change of Control Agreement provided that in the event that Ms. Muller’s employment terminated during the term of the Change of Control Agreement without “Cause,” or Ms. Muller terminated employment for “Good Reason” after a “Change of Control” occured or, in certain circumstances, in connection with an anticipated Change of Control (in each case as such terms were defined in the Change of Control Agreement), Ms. Muller would be entitled to receive payment of the following amounts and benefits:

 

 

accrued salary and vacation through the date of termination;

 

an amount equal to 2.0 times Ms. Muller’s highest annual salary; and

 

immediate vesting of all unvested stock options and restricted stock.

 

103

 

 

The Change of Control Agreement only addressed the terms of employment and compensation in the event of a termination of employment in connection with a Change of Control of the Company and not as a result of termination unrelated to such a Change of Control and was intended to provide an appropriate retention incentive while balancing the value to the Company of such retention during a Change of Control transition period. Ms. Muller left our employment on October 20, 2017 and entered into the Muller Separation Agreement on January 26, 2018.

 

Muller Separation Agreement

 

As stated above, under the Muller Separation Agreement, Ms. Muller received approximately $144,312 (representing six months of her base salary and three months of welfare benefit continuation) in full satisfaction of our obligations to her under our Severance Benefits Policy, as in effect at the time of her termination, and her Change of Control Agreement. The Muller Separation Agreement also contains a general release and subjects Ms. Muller to a three-month non-competition provision and customary confidentiality and non-solicitation covenants.

 

Severance Benefits Policy

 

Ms. Muller did not have an employment agreement or severance agreement with us. Instead, her right to payments and benefits upon a termination or change of control were governed by our Severance Benefits Policy, as in effect at the time of her termination, applicable to all our employees generally, in addition to her rights under the Change of Control Agreement. An employee was eligible for severance benefits under such policy if he or she was terminated due to a reduction in our work force, elimination of the job or position, an insufficient aptitude for continued employment not attributable to any willful cause, or a sale, merger or change of control of the Company. The amount of severance pay received is based on the employee’s years of continuous service. If an employee was laid off due to a reduction in work force, the employee would receive (i) two weeks of pay in lieu of notice if advance notification is not possible, and (ii) two weeks of pay per year of service, subject to a minimum of four weeks and a maximum of 26 weeks or two times the employee’s annual compensation for the prior year (if less). If an employee was terminated within nine months following a change of control for any reason other than resignation or for cause, the employee would receive (i) four weeks of pay in lieu of notice if advance notification was not possible, and (ii) three weeks of pay per year of service, subject to a stated minimum number of weeks based on employment category and a maximum of 52 weeks. Outplacement services were provided in the discretion of the Company, medical and basic life insurance coverage continued for 90 days following termination, and pay was received for vacation earned but not taken. For purposes of such policy, “change of control” had the same meaning as in the employment agreements described above.

 

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

The following table sets forth certain information for each person who, as of March 30, 2018, was known by us to be the beneficial owner of more than 5% of the outstanding Common Stock:

 

Name and Address of Beneficial Owner

 

Number of Shares

Beneficially Owned (1)

   

Percent of Class(2)

 

Raging Capital Management, LLC (3)

William C. Martin

Kenneth H. Traub

Ten Princeton Avenue

P.O. Box 228

Rocky Hill, NJ 08553

    2,358,388       32.7 %

Captain Q, LLC (4)

301 Commerce Street, Suite 3200

Fort Worth, TX 76102

    1,168,816       16.2 %

Canyon Capital Advisors LLC (5)

Mitchell R Julis

Joshua S. Friedman

2000 Avenue of the Stars, 11th Floor

Los Angeles, CA 90067

    1,110,220       15.4 %

FMR LLC (6)

245 Summer Street

Boston, MA 02210

    706,394       9.8 %

TIAA-CREF Investment Management, LLC (7)

TIAA-CREF High Yield Fund

Teachers Advisors, LLC

730 Third Avenue

New York, NY 10017-3206

    591,434       8.2 %

Robert B. Millard (8)

9 East 88th Street

New York, NY 10128

    425,047       5.9 %

Solus Alternative Asset Management LP (9)

Solus GP LLC

Christopher Pucillo

410 Park Avenue, 11th Floor

New York, NY 10022

    384,485       5.3 %

 

104

 

 

 

(1)

Unless otherwise indicated, to our knowledge, the persons listed have sole voting and investment power with respect to their shares of Common Stock as of the date indicated in the footnotes below.

 

  (2) Ownership percentages are calculated in accordance with the SEC’s beneficial ownership rules based on 7,221,645 shares of Common Stock outstanding as of March 30, 2018 and based on the beneficial ownership reported by the persons and groups as set forth herein and in the following footnotes.
     
 

(3)

The information shown in the table above and disclosed in this footnote was obtained from the Schedule 13D filed with the SEC by Raging Capital Offshore Fund, Ltd., a Cayman Islands exempted company, or Raging Capital Offshore Fund, Raging Capital Fund (QP), LP, a Delaware limited partnership, or Raging Capital Fund QP, and, together with Raging Capital Offshore Fund, the Raging Funds, Raging Capital Management, LLC, a Delaware limited liability company, or Raging Capital, and William C. Martin on November 23, 2015, as amended by the Schedule 13D/A (Amendment No. 1) filed by such reporting persons on December 9, 2015, the Schedule 13D/A (Amendment No. 2) filed by Raging Capital and William C. Martin on November 28, 2016, the Schedule 13D/A (Amendment No. 3) filed by such reporting persons on March 7, 2017, the Schedule 13D/A (Amendment No. 4) filed by such reporting persons on May 17, 2017 and the Schedule 13D/A (Amendment No. 5) filed by Raging Capital, William C. Martin and Kenneth H. Traub on November 17, 2017.

 

Raging Capital is the General Partner of RC GLF 1, LP, a Delaware limited partnership, or RC GLF, in whose name certain of the securities of the Company are held. William C. Martin is the Chairman, Chief Investment Officer and Managing Member of Raging Capital. RC GLF has delegated to Raging Capital sole investment authority with respect to the securities held by RC GLF pursuant to its Limited Partnership Agreement, dated July 17, 2017, which authority may not be terminated by RC GLF upon less than sixty-one days’ written notice to Raging Capital. As a result, each of Raging Capital and William C. Martin may be deemed to beneficially own the securities of the Company held by RC GLF.

 

Raging Capital is the Investment Manager of the Raging Funds, in whose names certain of the securities of the Company are held. William C. Martin is the Chairman, Chief Investment Officer and Managing Member of Raging Capital. The Raging Funds have delegated to Raging Capital sole investment authority with respect to the securities held by the Raging Funds pursuant to an Investment Management Agreement, dated November 9, 2012, or the IMA. The IMA may be terminated by any party thereto effective at the close of business on the last day of any fiscal quarter by giving the other party not less than sixty-one days’ written notice. As a result, each of Raging Capital and William C. Martin may be deemed to beneficially own the securities of the Company held by the Raging Funds.

 

In the Schedule 13D/A (Amendment No. 5) filed on November 17, 2017, Raging Capital and William C. Martin each reported shared voting power and shared dispositive power with respect to 2,357,748 shares, including 149,900 shares underlying Equity Warrants; Raging Capital reported sole voting and dispositive power with respect to no shares of Common Stock; William C. Martin reported sole voting and dispositive power with respect to 640 shares, including 586 shares underlying Equity Warrants; and Kenneth H. Traub reported no sole or shared voting or dispositive power with respect to any shares. Such Schedule 13D/A (Amendment No. 5) reported that each of the reporting persons, as a member of a “group” with the other reporting persons for purposes of Rule 13d-5(b)(1) of the Exchange Act, may be deemed to beneficially own the securities of the Company owned by the other reporting persons; the filing of such Schedule 13D shall not be deemed an admission that the reporting persons are, for purposes of Section 13(d) of the Exchange Act, the beneficial owners of any securities of the Company he or it does not directly own; each of the reporting persons specifically disclaims beneficial ownership of the securities of the Company reported therein that he or it does not directly own; and as of the close of business on the date thereof, Kenneth H. Traub did not directly own any securities of the Company.

 

 

(4)

The information shown in the table above and disclosed in this footnote was obtained from the Schedule 13D filed with the SEC by Captain Q, LLC, a Texas limited liability company, or Captain Q, on November 22, 2017, which reported that Captain Q is the general partner of 5 Essex, L.P., or 5 Essex, and includes information with respect to the following persons (collectively referred to as the Controlling Persons): Renegade Swish, LLC, a Delaware limited liability company, or RS, and Geoffrey Raynor. Such Schedule 13D indicates that Captain Q and the Controlling Persons may be deemed to constitute a “group” within the meaning of Section 13(d)(3) of the Exchange Act, although neither the fact of such filing nor anything contained therein shall be deemed to be an admission by them that such a group exists. 5 Essex was a holder of Unsecured Notes Claims (as described in the Plan) and, on the Effective Date, 5 Essex received 1,168,816 shares of the Common Stock issued under the Plan. Captain Q reported sole voting and dispositive power with respect to such 1,168,816 shares. RS is the sole manager of Captain Q and Mr. Raynor controls and indirectly wholly owns RS. On November 14, 2017, Scott McCarty, who is an employee of RS, was appointed to the Board of Directors of the Company.

 

105

 

 

 

(5)

The information shown in the table above and disclosed in this footnote was obtained from the Schedule 13G filed with the SEC by Canyon Capital Advisors LLC, or CCA, Mitchell R Julis and Joshua S. Friedman on December 8, 2017, as amended by the Schedule 13G/A (Amendment No. 1) filed by such reporting persons on February 14, 2018, which reported that CCA has sole voting and dispositive power with respect to 1,110,220 shares and Messrs. Julis and Friedman have shared voting and dispositive power with respect to such shares. CCA is an investment advisor to various managed accounts, including Canyon Value Realization Fund, L.P., The Canyon Value Realization Master Fund (Cayman), L.P., Canyon Value Realization Fund MAC 18, Ltd., Canyon Balanced Master Fund, Ltd., Canyon-GRF Master Fund II, L.P., Canyon Distressed Opportunity Master Fund II, L.P., Canyon Blue Credit Investment Fund L.P., Canyon-SL Value Fund, L.P., Canyon-ASP Fund, L.P., EP Canyon Ltd., Canyon Distressed Opportunity Investing Fund II, L.P. and Canyon NZ-DOF Investing, L.P., with the right to receive, or the power to direct the receipt, of dividends from, or the proceeds from the sale of the securities held by, such managed accounts. Messrs. Julis and Friedman control entities which own 100% of CCA.

 

 

(6)

The information shown in the table above and disclosed in this footnote was obtained from the Schedule 13G/A filed with the SEC by FMR LLC and Abigail P. Johnson on February 13, 2018, which reported that FMR LLC has sole voting power with respect to 526,408 shares and sole dispositive power with respect to 706,394 shares, and Abigail P. Johnson has sole voting power with respect to none of such shares and sole dispositive power with respect to 706,394 shares. The Schedule 13G/A further states that members of the Johnson family, including Abigail P. Johnson, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders’ voting agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders’ voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Abigail P. Johnson has the sole power to vote or direct the voting of the shares owned directly by the various investment companies registered under the Investment Company Act, or Fidelity Funds, advised by Fidelity Management & Research Company, or FMR Co, a wholly owned subsidiary of FMR LLC, which power resides with the Fidelity Funds’ Boards of Trustees. FMR Co carries out the voting of the shares under written guidelines established by the Fidelity Funds’ Boards of Trustees.

 

 

(7)

The information shown in the table above and disclosed in this footnote was obtained from the Schedule 13G filed with the SEC by TIAA-CREF Investment Management, LLC, or Investment Management, TIAA-CREF High Yield Fund and Teachers Advisors, LLC, or Advisors, on February 14, 2018, which reported that TIAA-CREF High Yield Fund had shared voting and dispositive power with respect to 514,665 shares, Advisors had sole voting and dispositive power with respect to 591,434 shares and Investment Management did not have sole or shared voting or dispositive power with respect to any shares. Investment Management is the investment adviser to the College Retirement Equities Fund, or CREF, a registered investment company, and may be deemed to be a beneficial owner of zero shares of our Common Stock owned by CREF. Advisors is the investment adviser to three registered investment companies, TIAA-CREF Funds, or Funds, TIAA-CREF Life Funds, or Life Funds, and TIAA Separate Account VA-1, or VA-1, as well as one or more separately managed accounts of Advisors (collectively referred to as the Separate Accounts), and may be deemed to be a beneficial owner of 591,434 shares of the our Common Stock owned separately by Funds, Life Funds, VA-1 and/or the Separate Accounts. Investment Management and Advisors reported their combined holdings for the purpose of administrative convenience. Each of Investment Management and Advisors expressly disclaims beneficial ownership of the other’s securities holdings and each disclaims that it is a member of a “group” with the other. The number of shares of Common Stock beneficially owned includes the shares of Common Stock issuable upon exercise of the Noteholder Warrants that were issued to the reporting persons.

 

 

(8)

The information shown in the table above and disclosed in this footnote was obtained from the Schedule 13G filed with the SEC by Robert B. Millard on December 7, 2017, which reported that Mr. Millard has sole voting and dispositive power with respect to 425,047 shares.

 

 

(9)

The information shown in the table above and disclosed in this footnote was obtained from the Schedule 13G filed with the SEC by Solus Alternative Asset Management LP, a Delaware limited partnership, or Solus, Solus GP LLC, a Delaware limited liability company, or GP, and Christopher Pucillo, on February 14, 2018, which reported that each such reporting person has shared voting and dispositive power with respect to 384,485 shares. Solus serves as the investment manager, or the Investment Manager, to certain investment funds and/or accounts, or the Funds, with respect to the shares of our Common Stock held by the Funds; GP serves as the general partner to the Investment Manager with respect to the shares of our Common Stock held by the Funds; and Mr. Pucillo serves as the managing member to the GP with respect to the shares of our Common Stock held by the Funds.

 

106

 

 

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

 

The following table sets forth, as of March 30, 2018, the number and percentage of shares of Common Stock beneficially owned by each of our directors and director nominees, each executive officer named in the 2017 Summary Compensation Table above, and all directors and executive officers as a group. Except as otherwise noted, the named beneficial owner has sole voting power and sole investment power with respect to the shares of Common Stock shown below.

 

 

Name

 

 

Common

Stock

Beneficially

Owned

   

Equity

Warrants

Beneficially

Owned

   

Units

Equivalent to

Common Stock

Beneficially

Owned(1)

   

Units

Equivalent to

Equity

Warrants

Beneficially

Owned(1)

   

Total Common

Stock

Beneficially

Owned

   

Percent of

Class(2)

 

Eugene Davis

    -       -       -       -       -       *  

Domenic DiPiero

    -       -       -       -       -       *  

Scott McCarty

    -       -       -       -       -       *  

Louis Raspino

    -       -       -       -       -       *  

Krishna Shrivram

    -       -       -       -       -       *  

Kenneth Traub

    -       -       -       -       -       *  

Quintin V. Kneen

    675       7,296       643       6,949       15,563        

James M. Mitchell

    323       3,488       368       3,981       8,160        

Samuel R. Rubio

    196       2,115       97       1,051       3,459        

Cindy Muller

    20       213       25       266       524        

All directors and executive officers as a group (9 individuals)

    1,194       12,899       1,108       11,981       27,182        
                                                 

* less than 1 percent

                                         

 


 

 

(1)

Includes shares of our Common Stock and Equity Warrants held for our directors and executive officers under DC Plan that have vested.

 

 

(2)

Percentage based solely on Total Common Stock Beneficially Owned.

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

 As of December 31, 2017, we had no compensation plans (including individual compensation arrangements) under which any of our equity securities were authorized for issuance.

 

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

 

Approval of Related Person Transactions

 

Our Audit Committee is responsible for reviewing and approving the terms and conditions of all proposed transactions between us, any of our officers or directors, or relatives or affiliates of any such officers or directors, to determine whether any such related-party transaction is fair and is in our overall best interest. There have been no related-party transactions since January 1, 2016 to report.

 

Board Independence

 

 Our Board has determined that all six of our current non-management directors qualify as “independent” directors under the NYSE American corporate governance rules and that each member of the Audit Committee qualifies as “independent” under Rule 10A-3 of the Exchange Act. Each of our six non-management directors is also a “non-employee director” as defined under Exchange Act Rule 16b-3 and an “outside director” as defined in Section 162(m) of the Internal Revenue Code.

 

107

 

 

 In accordance with the independence requirements under the NYSE American rules, our Board affirmatively determined that all six non-management directors had no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). A director is not independent under the NYSE American listing requirements applicable to us if:

 

 

the director was employed by us within the preceding three years;

 

an immediate family member of the director was an executive officer for us within the preceding three years;

 

the director or an immediate family member of the director received from us more than $120,000 during any twelve-month period, within the preceding three years, in direct compensation, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such service is not contingent in any way on continued service);

 

the director was affiliated with or employed by, or an immediate family member of the director was affiliated with or employed in a professional capacity by, a present or former internal or external auditor of us, within the preceding three years;

 

the director or an immediate family member of the director was employed, within the preceding three years, as an executive officer of another company where any of our present executives serve or served on that company’s compensation committee; or

 

the director is a current employee, or an immediate family member of the director is a current executive officer, of a company that has made payments to or received payments from us for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $200,000 or five percent of such other company’s consolidated gross revenues.

 

Our Board does not consider a material relationship that would impair a director’s independence to exist solely due to the fact that a director is an executive officer of, or beneficially owns in excess of a 10% equity interest in, another company:

 

 

that does business with us, and the amount of the annual payments to us is less than five percent of our annual consolidated gross revenues, or $200,000, whichever is more;

 

that does business with us, and the amount of the annual payments by us to such other company is less than five percent of our annual consolidated gross revenues, or $200,000, whichever is more; or

 

to which we were indebted at the end of its last fiscal year in an aggregate amount that is less than five percent of our consolidated assets.

 

 For relationships not covered by the guidelines in the immediately preceding paragraph, the determination of whether the relationship is material or not, and therefore whether the director would be independent or not, is made by our Board members who satisfy the independence guidelines described above.

 

ITEM 14. Principal Accountant Fees and Services

 

Independent Public Accountant Fees and Services

 

Audit fees billed for the last two years for professional services rendered by KPMG LLP in 2017 and in 2016 are set forth on the table below:

 

   

Year Ended December 31,

 
   

2017

   

2016

 

Audit Fees(1)

  $ 1,635,083     $ 1,295,825  

Audit-Related Fees(2)

    22,015       75,382  

Tax Fees(3)

    -       -  

Other(4)

    60,774       54,698  

Total

  $ 1,717,872     $ 1,425,905  

 

 

(1)

Relates to services rendered in connection with auditing our annual consolidated financial statements and our internal controls over financial reporting for each applicable year and reviewing our quarterly financial statements. Also, includes services rendered in connection with statutory audits and financial statement audits of our subsidiaries and expenses.

 

 

(2)

Relates to audit support services including foreign entity equity transactions, dividends and marine certifications and the 401(k) plan audit.

 

 

(3)

Relates to tax compliance services including preparation of federal and state tax returns and certain foreign entity tax returns.

 

 

(4)

Relates to statutory reporting and organizational matters.

 

108

 

 

Audit Committee Pre-Approval Policies and Procedures

 

The Audit Committee approves all audit and tax services provided by our independent auditor prior to the engagement of the independent auditor with respect to such services. The Audit Committee’s pre-approval policy provides for pre-approval of specifically described audit related and other services by the Chairman of the Audit Committee with respect to the permitted services. None of the services described above were approved by the Audit Committee under the de minimis exception provided by Rule 2-01(c) (7) (i) (C) under Regulation S-X.

 

PART IV

 

ITEM 15. Exhibits, Financial Statement Schedules

 

(a)

Exhibits, Financial Statements and Financial Statement Schedules.

 

 

(1)

and (2) Financial Statements and Financial Statement Schedules.

 

Consolidated Financial Statements of the Company are included in Part II, Item 8 “Financial Statements and Supplementary Data.” All schedules have been omitted because the required information is not present or not present in an amount sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the notes thereto.

 

(3) Exhibits

 

2.1

 

Order of the Bankruptcy Court, dated October 4, 2017, confirming the Company’s Amended Chapter 11 Plan of Reorganization, including a copy of the Company’s Amended Chapter 11 Plan of Reorganization (incorporated by reference to Exhibit 2.1 to our Form 8-K filed on October 5, 2017).

     

3.1

 

Amended and Restated Certificate of Incorporation of GulfMark Offshore, Inc. (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form 8-A filed on November 14, 2017).

     

3.2

 

Amended and Restated Bylaws of GulfMark Offshore, Inc. (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form 8-A filed on November 14, 2017).

     

4.1

 

Provisions of our Amended and Restated Certificate of Incorporation defining the rights of the holders of Common Stock (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form 8-A filed on November 14, 2017).

     

4.2

 

Provisions of our Amended and Restated Bylaws defining the rights of the holders of Common Stock (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form 8-A filed on November 14, 2017).

     

4.3

 

Specimen Stock Certificate representing Common Stock (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form 8-A filed on November 14, 2017).

     

4.4

 

Form of Redemption Warrant Agreement (incorporated by reference to Exhibit 4.2 to our Registration Statement on Form 8-A filed on November 14, 2017).

     

4.5

 

Equity Warrant Agreement, dated as of November 14, 2017, between the Company and American Stock Transfer & Trust Company, LLC, as warrant agent (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form 8-A filed on November 14, 2017).

     

4.6

 

Noteholder Warrant Agreement, dated as of November 14, 2017, between the Company and American Stock Transfer & Trust Company, LLC, as warrant agent (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on November 17, 2017).

     

10.1

 

Registration Rights Agreement by and among GulfMark Offshore, Inc. and certain holders identified therein (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form 8-A filed on November 14, 2017).

     

10.2

 

Credit Facility Agreement, dated November 14, 2017, by and among GulfMark Rederi AS, DNB Bank ASA, New York Branch, as agent, DNB Capital LLC as revolving lender and as swingline lender, and certain funds managed by Hayfin Capital Management LLP as term lenders (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on November 17, 2017).

 

109

 

 

10.3+

 

Letter Agreement, dated November 8, 2017, between GulfMark Offshore, Inc. and Quintin V. Kneen (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on November 15, 2017).

     

10.4+

 

Letter Agreement, dated November 8, 2017, between GulfMark Offshore, Inc. and James M. Mitchell (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on November 15, 2017).

     

10.5+

 

Letter Agreement, dated November 8, 2017, between GulfMark Offshore, Inc. and Samuel R. Rubio (incorporated by reference to Exhibit 10.3 to our Form 8-K filed on November 15, 2017).

     

10.6+

 

Amended and Restated Employment Agreement, dated effective as of May 11, 2017, among GulfMark Offshore, Inc., GulfMark Americas, Inc. and Quintin V. Kneen (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on May 18, 2017).

     

10.7+

 

Change of Control Agreement dated March 17, 2017 and effective January 1, 2017 between GulfMark Offshore, Inc. and Cindy Muller (incorporated by reference to Exhibit 10.5 to our quarterly report on Form 10-Q filed on May 10, 2017).

     

10.8+

 

Form of Key Employee Retention Bonus Agreement dated effective March 13, 2017 between GulfMark Offshore, Inc. and named executive officers of GulfMark Offshore, Inc. (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on March 17, 2017).

     

10.9+

 

Severance Protection Agreement, dated April 6, 2016, by and between GulfMark Offshore, Inc. and Samuel R. Rubio (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on April 11, 2016).

     

10.10+

 

Letter agreement between Quintin V. Kneen and GulfMark Offshore, Inc. dated March 23, 2015 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on March 26, 2015).

     

10.11+

 

Letter agreement between James M. Mitchell and GulfMark Offshore, Inc. dated March 23, 2015 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on March 26, 2015).

     

10.12+

 

Employment Agreement, dated May 30, 2013, between James M. Mitchell and GulfMark Offshore, Inc. (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on June 4, 2013).

     

10.13+

 

Change of Control Agreement, dated May 30, 2013, between James M. Mitchell and GulfMark Offshore, Inc. (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on June 4, 2013).

     

10.14+

 

GulfMark Offshore, Inc. Deferred Compensation Plan  (incorporated by reference to Appendix C to our definitive proxy statement filed on April 29, 2011) (SEC File No. 001-33607).

     

10.15+

 

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on February 24, 2010) (SEC File No. 001-33607).

     

10.16+

 

GulfMark Offshore, Inc. Severance Benefits Policy, effective as of August 1, 2001 (incorporated by reference to Exhibit 10.6 to our Form 8-K filed on October 19, 2009) (SEC File No. 001-33607).

     

10.17+

 

Amendment to GulfMark Offshore, Inc. Severance Benefits Policy, effective as of October 13, 2009 (incorporated by reference to Exhibit 10.7 to our Form 8-K filed on October 19, 2009) (SEC File No. 001-33607).

     

10.18+

 

Separation and Mutual Release Agreement, dated February 16, 2018, between GulfMark Offshore, Inc. and James M. Mitchell (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on February 22, 2018).

     

10.19+*

 

Separation and General Release Agreement, dated January 16, 2018, between GulfMark Offshore, Inc. and Cindy Muller.

     

21.1*

 

Subsidiaries of GulfMark Offshore, Inc.

 

110

 

 

23.1*

 

Consent of KPMG LLP.

     

31.1*

 

Section 302 Certification for Q.V. Kneen.

     

31.2*

 

Section 302 Certification for J.M. Mitchell.

     

32.1*

 

Section 906 Certification furnished for Q.V. Kneen.

     

32.2*

 

Section 906 Certification furnished for J.M. Mitchell.

     

101.INS**

 

XBRL Instance Document.

     

101.SCH**

 

XBRL Taxonomy Extension Schema Document.

     

101.CAL**

 

XBRL Taxonomy Calculation Linkbase Document.

     

101.LAB**

 

XBRL Taxonomy Label Linkbase Document.

     

101.PRE**

 

XBRL Presentation Linkbase Document.

     

101.DEF**

 

XBRL Taxonomy Extension Definition.

     

+ Management contracts or compensatory plans or arrangements.

 

* Filed or furnished herewith.

 

** The documents formatted in XBRL (Extensible Business Reporting Language) and attached as Exhibit 101 to this report are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act, and otherwise, not subject to liability under these sections.

 

 

 

ITEM 16. Form 10-K Summary

 

     None.

 

111

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

 

 

GulfMark Offshore, Inc.

 

 

 

 

 

 

By:

/s/ Quintin V. Kneen

 

 

 

Quintin V. Kneen

 

 

 

Chief Executive Officer, President and Director

 

    (Principal Executive Officer)  

 

Date: April 2, 2018

 

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

 

/s/ Quintin V. Kneen

Chief Executive Officer, President and Director

April 2, 2018

      Quintin V. Kneen

(Principal Executive Officer)

 
     

/s/ James. M. Mitchell

Executive Vice President and Chief Financial Officer

April 2, 2018

      James M. Mitchell

(Principal Financial Officer)

 
     

/s/ Samuel R. Rubio

Senior Vice President, Controller and Chief Accounting Officer

April 2, 2018

      Samuel R. Rubio

(Principal Accounting Officer)

 
     

/s/ Eugene Davis

Director

April 2, 2018

      Eugene Davis

   

 

112

 

 

/s/ Domenic DiPiero

Director

April 2, 2018

      Domenic DiPiero

   
     

/s/ Scott McCarty

Director

April 2, 2018

      Scott McCarty

   
     

/s/ Louis Raspino

Director

April 2, 2018

      Louis Raspino

   
     

/s/ Krishna Shivram

Director

April 2, 2018

      Krishna Shivram

   
     
/s/ Kenneth Traub Director April 2, 2018

      Kenneth Traub

 

 

 

113