<PAGE>1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-22853
GULFMARK OFFSHORE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0526032
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 POST OAK PARK, SUITE 1170 77027
Houston, Texas
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(713) 963-9522
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. YES /X/ NO / /
Number of shares of Common Stock, $0.01 Par Value, outstanding as
of November 6, 1998: 8,123,365.
(Exhibit Index Located on Page 23)
<PAGE>2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements
included herein have been prepared by the Company. In the opinion
of management, all adjustments, which include reclassifications and
normal recurring adjustments necessary to present fairly the
financial statements for the periods indicated have been made.
Certain information relating to the Company's organization and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles has been condensed or omitted in this Form 10-Q pursuant
to such rules and regulations. However, the Company believes that
the disclosures herein are adequate to make the information
presented not misleading. It is recommended that these financial
statements be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
2
<PAGE>3
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- -------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS (In thousands)
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 35,562 $ 25,885
Accounts receivable................................................. 20,267 10,505
Prepaids and other.................................................. 1,309 633
------- -------
Total current assets.............................................. 57,138 37,023
VESSELS AND EQUIPMENT, at cost, net of accumulated depreciation
of $30,543,000(unaudited) in 1998 and $23,641,000 in 1997........... 190,030 105,262
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY............................... -- 8,388
GOODWILL, NET......................................................... 18,384 --
DEFERRED ISSUANCE COSTS, NET.......................................... 4,552 --
OTHER ASSETS.......................................................... 2,825 3,988
------- -------
$ 272,929 $ 154,661
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt......... $ 63 $ 10,506
Accounts payable.................................................... 5,590 3,839
Other accrued liabilities........................................... 7,167 3,261
------- -------
Total current liabilities......................................... 12,820 17,606
------- -------
LONG-TERM DEBT........................................................ 569 42,918
SENIOR NOTES PAYABLE, net of discount................................. 129,583 --
DEFERRED TAXES AND OTHER.............................................. 21,926 8,255
MINORITY INTEREST..................................................... -- 610
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 2,000,000 authorized; no
shares issued..................................................... -- --
Common stock, $.01 par value; 15,000,000 shares authorized;
8,123,365 (unaudited) and 7,915,962 shares issued and outstanding. 81 79
Additional paid-in capital.......................................... 61,164 60,487
Retained earnings................................................... 43,267 26,271
Cumulative translation adjustment................................... 3,519 (1,565)
------- -------
Total stockholders' equity........................................ 108,031 85,272
------- -------
$ 272,929 $ 154,661
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>4
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
1998 1997 1998 1997
------ ------- ------ -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES............................................ $24,334 $12,642 $62,827 $33,673
COSTS AND EXPENSES:
Direct operating expenses......................... 9,326 4,736 22,966 13,622
General and administrative expenses............... 1,548 1,389 4,335 4,059
Depreciation and amortization..................... 2,939 1,678 8,265 4,962
------- ------- ------- -------
13,813 7,803 35,566 22,643
------- ------- ------- -------
OPERATING INCOME.................................... 10,521 4,839 27,261 11,030
OTHER INCOME (EXPENSE):
Interest expense.................................. (2,550) (1,215) (6,625) (3,831)
Interest income................................... 337 268 809 483
Minority interest................................. 88 (73) (150) (47)
Gain on sale of joint venture interest............ 2,920 -- 2,920 --
Other............................................. (8) 18 18 36
------- ------- ------- -------
787 (1,002) (3,028) (3,359)
------- ------- ------- -------
Income from continuing operations before taxes...... 11,308 3,837 24,233 7,671
INCOME TAX PROVISION................................ (3,109) (1,211) (7,237) (2,331)
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS................... 8,199 2,626 16,996 5,340
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAXES....................................... -- -- -- (648)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
NET OF TAXES....................................... -- -- -- (1,426)
------- ------- ------- -------
NET INCOME ......................................... $ 8,199 $ 2,626 $16,996 $ 3,266
======= ======= ======= ========
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations.................. $ 1.01 $ 0.36 $ 2.12 $ 0.77
Loss from discontinued operations,
net of taxes..................................... -- -- -- (0.09)
Loss on disposal of discontinued operations,
net of taxes..................................... -- -- -- (0.21)
------- ------- ------- -------
$ 1.01 $ 0.36 $ 2.12 $ 0.47
======= ======= ======= ========
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC)......... 8,104 7,278 8,021 6,898
======= ======= ======= ========
DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations................. $ 0.99 $ 0.35 $ 2.06 $ 0.76
Loss from discontinued operations,
net of taxes..................................... -- -- -- (0.09)
Loss on disposal of discontinued operations,
net of taxes..................................... -- -- -- (0.20)
------- ------- ------- -------
$ 0.99 $ 0.35 $ 2.06 $ 0.47
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED)...... 8,268 7,611 8,248 7,030
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>5
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 16,996 $ 3,266
Loss from discontinued operations, net.............................. -- 2,074
------- -------
Income from continuing operations................................... 16,996 5,340
Adjustments to reconcile income from continuing operations to
net cash provided by continuing operations:
Depreciation and amortization...................................... 8,422 4,962
Deferred and other income tax provision............................ 6,859 1,992
Gain on sale of investment in joint venture........................ (2,920) --
Minority interest.................................................. (191) 48
Change in operating assets and liabilities:
Accounts receivable............................................ (6,894) (1,268)
Prepaids and other............................................. (472) 135
Accounts payable............................................... 1,289 121
Other accrued liabilities...................................... 3,880 114
Other, net..................................................... (1,127) 204
------- ------
Cash provided by continuing operations......................... 25,842 11,648
Cash flow from discontinued operations......................... -- (1,360)
------- -------
Net cash provided by operating activities...................... 25,842 10,288
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of vessels and equipment................................. (28,764) (16,713)
Purchase of Brovig stock, net of cash acquired..................... (25,543) --
Expenditures for drydocking and main engine overhaul............... (922) (2,903)
Proceeds from sale of investment in joint venture.................. 3,090 --
------- -------
Net cash used in investing activities.......................... (52,139) (19,616)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Notes, net of offering costs.................. 124,873 --
Proceeds from stock offering, net of offering costs................ -- 33,358
Repayments of debt................................................. (103,632) (9,020)
Proceeds from debt, net of direct financing cost................... 14,705 7,393
Proceeds from exercise of options.................................. 679 355
------- -------
Net cash provided by financing activities....................... 36,625 32,086
Effect of exchange rate changes on cash.............................. (651) (530)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 9,677 22,228
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD................. 25,885 17,234
------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD....................... $35,562 $39,462
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of interest capitalized........................... $ 2,519 $ 3,772
======= =======
Income taxes paid.................................................... $ 84 $ 65
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>6
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BACKGROUND AND ORGANIZATION
GulfMark Offshore, Inc., ("GulfMark" or the "Company") was
formed on April 30, 1997, when its predecessor, GulfMark
International, Inc. spun-off its marine operations. The
Consolidated Financial Statements presented herein reflect the net
assets, results of operations and cash flows of the non-marine
operations as discontinued operations.
(2) EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128"). SFAS 128 revises the methodology
to be used in computing earnings per share ("EPS") such that the
computations required for primary and fully diluted EPS were
replaced with "basic" and "diluted" EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS is
computed using the treasury stock method for common stock
equivalents. The Company adopted SFAS 128 in the fourth quarter of
1997 and restated EPS for all prior periods. The following
reconciles basic and diluted weighted average shares:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted Average Shares:
Basic shares outstanding................ 8,104 7,278 8,021 6,898
Effect of dilutive securities:
Common stock options.................. 164 333 227 132
-------- ------- ------- -------
Diluted shares outstanding............ 8,268 7,611 8,248 7,030
======= ======= ======= =======
</TABLE>
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information"
6
<PAGE>7
("SFAS 131"). SFAS 131 redefines how operating segments are
determined and requires disclosure of certain additional financial
and descriptive information about a company's operating segments.
SFAS 131 may require additional footnote disclosures and will be
adopted by the Company in the fourth quarter of 1998.
In June 1998 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133").
This new standard is required to be adopted by the Company no later
than January 1, 2000. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction
and, if so, the type of hedge transaction. The Company is currently
evaluating the impact of the adoption of this new standard.
(4) COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components.
The adoption of this Statement requires unrealized gains or losses
on the Company's foreign currency translation adjustments to be
included in comprehensive income.
The components of comprehensive income, net of related tax are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income.................................. $ 8,199 $ 2,626 $16,996 $ 3,266
Foreign currency translation adjustments,
net of tax 4,753 (1,015) 5,084 (730)
------- ------- ------- -------
Comprehensive Income........................ $12,952 $ 1,611 $22,080 $ 2,536
======= ======= ======= =======
</TABLE>
Currently, the Company's only comprehensive income item
relates to its cumulative foreign currency translation adjustment.
7
<PAGE>8
(5) INCOME TAXES
During the quarter ended September 30, 1998, legislation in
the United Kingdom was passed that lowered the tax rate to 30%. As
a result, previous deferred taxes were restated to reflect the
current rate. The cumulative effect of the adjustment to
previously stated deferred taxes resulted in a reduction in the tax
provision of $0.4 million in the current quarter.
(6) SALE OF JOINT VENTURE INTEREST
During July 1998, the Company sold for approximately $3.1
million cash its interest in a 51% owned joint venture, SeaMark
Ltd., which operated two bareboat chartered vessels in Southeast
Asia. The after tax gain from the transaction of approximately
$1.9 million ($0.23 per share) is included in the Company's results
for the quarter ended September 30, 1998.
(7) LONG-TERM DEBT
8.75% Senior Notes Due 2008
On June 8, 1998, the Company completed the sale of
$130,000,000 aggregate principal amount of its 8.75% Senior Notes
Due 2008 (the "Initial Notes") which will mature on June 1, 2008.
The offering was made pursuant to Rule 144A of the Securities Act
of 1933 as amended. The Initial Notes were issued at a discount to
yield 8.8%.
On July 24, 1998, the Company commenced an exchange offer (the
"Exchange Offer") through which it offered to exchange all of the
Initial Notes for a series of 8.75% Senior Notes (the "Exchange
Notes" and, together with the Initial Notes, the "Notes") which are
identical in all material respects to the Initial Notes, except that
they are registered under the Securities Act of 1933, as amended.
The Exchange Offer was completed on August 24, 1998.
Interest on the Notes is payable semiannually on June 1 and
December 1 of each year commencing December 1, 1998. Up to 35% of
the Notes may be redeemed prior to June 1, 2001 at the option of
the Company at a price of 108.75% with proceeds from a public
equity offering. Otherwise, the Notes are not redeemable until
June 1, 2003. Thereafter, at the Company's option, the Notes will
be subject to redemption in whole or in part, at redemption prices
expressed as a percentage of principal amounts plus accrued and
unpaid interest, if any, to the redemption date. If redeemed
8
<PAGE>9
during the twelve month period beginning on June 1 of the years
indicated below, the redemption amount is as follows:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<C> <C>
2003 104.375%
2004 102.917%
2005 101.458%
2006 and thereafter 100.000%
</TABLE>
The Company incurred approximately $4.7 million in costs
associated with the sale of the Notes including $3.9 million of
underwriters' discount. These debt issuance costs are reported in
the condensed consolidated balance sheet as deferred issuance costs
and will be amortized over the life of the Notes. The Notes were
issued under an indenture (the "Indenture") between the Company and
State Street Bank and Trust Company, N.A., as Trustee. The
Indenture contains covenants including, among other provisions,
limitations on liens and sale and leasebacks of certain properties
and certain restrictions on the Company consolidating with or
merging into another entity.
BANK CREDIT FACILITY
On June 8, 1998, the Company entered into an agreement for a
reducing revolving credit facility (the "Credit Facility") with
certain banks (the "Lenders"). The Credit Facility contains two
tranches. As of September 30, 1998, none of the Credit Facility
has been drawn.
Tranche 1 is available for general corporate purposes and is
unsecured. The maximum committed amount is initially $25 million.
Interest accrues at LIBOR plus a margin ranging from 1.0% to 1.375%
per annum based upon the Company's ratio of funded debt to total
capitalization ("Leverage Ratio").
Tranche 2 is available for financing acquisitions and if
drawn, will be secured by either the capital stock of the acquired
company or with respect to acquired vessel assets, (i) a first
priority mortgage, (ii) an assignment of earnings and insurance and
(iii) an assignment of charters over one year. The maximum
committed amount under Tranche 2 is initially $25 million. The
interest rate on Tranche 2 is LIBOR plus a margin of 0.80% to 1.25%
per annum as determined by the Company's Leverage Ratio.
9
<PAGE>10
Under certain circumstances, the maximum committed amounts
under Tranche 1 and Tranche 2 may be increased to $30 million and
$45 million, respectively. Both tranches will begin to reduce 39
months after closing. Each quarter thereafter, the Credit Facility
will further reduce such that the Credit Facility is fully
amortized after five years.
Until termination of the Credit Facility, a commitment fee is
payable on a quarterly basis, at a rate of 0.5% per annum on the
average unfunded portion of the Credit Facility.
The Credit Facility requires the Company, on a consolidated
basis, to maintain a maximum Leverage Ratio, a specified interest
coverage ratio, and a minimum net worth.
(8) BROVIG SUPPLY ACQUISITION
As of December 31, 1997, the Company owned approximately 25
percent of the outstanding shares of Brovig Supply ASA, a publicly
traded Norwegian company ("Brovig"). On February 10, 1998, the
Company completed its acquisition of approximately 96 percent of
the Brovig shares. The remaining four percent was acquired on
March 26, 1998. Brovig has been renamed Gulf Offshore Norge AS.
Total consideration for the acquisition was approximately
$73.0 million, which included the assumption of debt of
approximately NOK 277 million ($37.4 million). Approximately $16.4
million of the purchase price was funded through a Floating Rate
Bridge Loan Facility dated February 4, 1998 (the "Bridge Loan")
with a bank. The balance of the purchase price was funded by the
Company's cash on hand. The shares were acquired pursuant to a
public bid made by the Company in accordance with Norwegian law and
the requirements of the Oslo Stock Exchange.
In connection with the sale of the Initial Notes referred to
in Note 7, the Company repaid the Bridge Loan and all debt assumed
with the acquisition of Brovig. Brovig owns five offshore support
vessels, including one newly built vessel which was delivered on
December 19, 1997, and provides marine support and transportation
services to companies engaged in offshore exploration and
production of oil and natural gas in the North Sea.
The acquisition has been accounted for as a purchase and
accordingly, the purchase price has been allocated to the assets
and liabilities of Brovig based on their estimated fair market
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<PAGE>11
values on February 10, 1998. The excess of the purchase price over
the fair market value of the net tangible assets acquired has been
recorded as goodwill ($18.2 million) and is subject to final
determination. Goodwill is being amortized over 40 years. A final
determination of required purchase accounting adjustments for the
acquisition including the allocation of purchase price to the
assets acquired and liabilities assumed based on their fair values
has not yet been made.
The financial statements included herein include the results
of Brovig from February 10, 1998. The following unaudited pro
forma results of operations have been prepared assuming that the
acquisition had occurred at the beginning of each period. This pro
forma information is not necessarily indicative of the results of
operations that would have occurred had the acquisition been made
on those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Revenues................................... $24,334 $16,523 $64,682 $44,148
Operating income........................... 10,521 6,445 27,680 13,463
Income from continuing operations.......... 8,199 3,685 17,168 5,578
Per share data:
Income from continuing operations(basic)... $ 1.01 $ 0.51 $ 2.14 $ 0.81
Income from continuing operations(diluted). 0.99 0.48 2.08 0.79
</TABLE>
(9) VESSEL ACQUISITIONS
In April 1997 the Company purchased an unfinished supply
vessel hull from a Singapore shipyard. In October 1997, the hull
was delivered to a shipyard in England for completion. The
anticipated cost of completing the hull including the cost of the
hull is approximately $16.6 million, excluding capitalized
interest. Delivery of the vessel is expected in November 1998.
Additionally, the Company has entered into an agreement with
Bender Shipbuilding & Repair, Inc, of Mobile, Alabama, for the
construction of two 217' offshore support vessels at an approximate
total cost of $22 million, excluding capitalized interest.
Delivery of the first vessel is anticipated early in 1999 and the
second vessel is anticipated in mid-1999. The specifications of
11
<PAGE>12
these vessels were developed jointly between the Company and the
shipyard for use in international applications. The Company also
has an option to construct two additional vessels under this
agreement.
Interest is capitalized in connection with the construction of
vessels. During the three and nine months ended September 30, 1998
$0.5 million and $1.1 million was capitalized, respectively,
compared to the previous year when capitalizable amounts were
immaterial.
In addition to owned vessels, the Company will from time to
time enter into bareboat charter arrangements whereby the Company
pays the vessel owner a set rate for the vessel only. The Company
currently has three vessels under long term bareboat charters.
These vessels were delivered in June 1998, July 1998 and October
1998. Each of these vessels are chartered for an initial term of
three years and the first two deliveries have begun working under
three-year contracts.
(10) DISCONTINUED OPERATIONS
The following selected financial information for discontinued
operations relates to the non-marine operations of the Company's
predecessor and is presented for informational purposes only. The
operations were disposed of on May 1, 1997. The information does
not necessarily reflect what the results of operations would have
been had such discontinued operations operated as a stand-alone
entity.
Summary Operating Data of Discontinued Operations
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
-------- --------
(In Millions)
<S> <C> <C>
Total revenue............................ $ -- $ 1.1
Loss, net of taxes....................... $ -- $ (0.6)
</TABLE>
12
<PAGE>13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company provides marine support and transportation
services to companies involved in the offshore exploration and
production of oil and natural gas. The Company's vessels transport
drilling materials, supplies and personnel to offshore facilities,
as well as move and position drilling structures. The majority of
its operations are conducted in the North Sea and, with the
exception of one vessel operating in Brazil, the balance of the
Company's operations are conducted in Southeast Asia. The
Company's fleet has grown in size and capability from an original
11 vessels acquired in late 1990 to its present level of 37 vessels
through strategic acquisitions and new construction of
technologically advanced vessels, partially offset by dispositions
of certain older, less profitable vessels. Twenty-seven vessels in
the Company's fleet are owned, three are bareboat chartered and
seven are managed.
The Company's results of operations are affected primarily by
day rates, fleet utilization and the number and type of vessels in
its fleet. These factors are driven by trends within the oil and
natural gas exploration and production industry, which generally
affect the demand for vessels, as well as by trends impacting the
broader economy and capital markets, which generally affect the
supply of vessels. While offshore support vessels service existing
oil and natural gas production platforms and exploration and
development activities, incremental demand depends primarily upon
drilling activity, which, in turn is related to both short-term and
long-term trends in oil and natural gas prices. As a result,
trends in oil and natural gas prices may significantly affect fleet
utilization and day rates. While the declines in oil and natural
gas prices in 1998 have not significantly affected the Company's
operations, any prolonged depression in oil and natural gas prices
could have a material adverse effect on the Company.
An additional factor affecting operating earnings is the mix
of vessels owned versus bareboat chartered by the Company. Owned
and bareboat chartered vessels generate operating revenues and
incur expenses at similar rates. However, chartered vessels also
incur bareboat charter expense rather than depreciation expense.
Bareboat charter expense is generally higher than depreciation
expense.
13
<PAGE>14
In addition, the Company provides management services to other
vessel owners for a fee. Charter revenues and vessel expenses of
such vessels are not included in the Company's operating results,
however management fees are included in operating revenues. These
vessels have been excluded for purposes of calculating fleet rates
per day worked and utilization in the applicable periods as shown
in the table included in "Results of Operations".
The Company's operating costs are primarily a function of
fleet size and utilization levels. The most significant direct
operating costs are wages paid to vessel crews, maintenance and
repairs and marine insurance. Generally, fluctuations in vessel
utilization affect only that portion of the Company's direct
operating costs that are incurred when the vessels are active. As
a result, direct operating costs as a percentage of revenues may
vary substantially due to changes in day rates and utilization.
In addition to these variable costs, the Company incurs fixed
charges related to the depreciation of its fleet and costs for
routine drydock inspections, maintenance and repairs designed to
ensure compliance with applicable regulations and maintaining
certifications for its vessels with various international
classification societies.
Maintenance and repair expenses and marine inspection
amortization charges are generally determined by the aggregate
number of drydockings and other repairs undertaken in a given
period. Costs incurred for drydock inspection and regulatory
compliance are capitalized and amortized over the period between
such drydockings, typically two to three years.
Under applicable maritime regulations, vessels must be
drydocked twice in a five-year period for certification. Should
the Company undertake a large number of drydockings in a particular
fiscal quarter, comparative results may be affected. For the three
months ended September 30, 1998, five vessels were drydocked at a
cost of $0.9 million compared to the three months ended September
30, 1997 when the Company drydocked two vessels at an aggregate
cost of $0.6 million.
RESULTS OF OPERATIONS
The table below sets forth, by fleet, the average day and
utilization rates for the Company's vessels and the average number
of vessels owned or chartered during the periods indicated. These
vessels generate substantially all of the Company's revenues and
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<PAGE>15
operating profit. The information detailed below is utilized by
the Company's management to evaluate the performance of the
business.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Rates Per Day Worked (a)(b):
North Sea Capable Fleet (c)(e) $ 13,276 $ 9,799 $ 12,268 (e) $ 9,869
Other (primarily Southeast Asia) 4,961 4,113 4,858 3,736
Overall Utilization(a)(b):
North Sea Capable Fleet (percent)(e) 96.6% 99.9% 97.9%(e) 96.5%
Other (primarily Southeast Asia)(percent) 84.7% 88.2% 86.0% 72.4%
Average Owned/Chartered Vessels(a)(d)
North Sea Capable Fleet (e) 16.8 9.0 14.7 (e) 9.0
Other (primarily Southeast Asia) 12.2 14.0 13.4 14.0
------ ------ ------ ------
Total 29.0 23.0 28.1 23.0
====== ====== ====== ======
</TABLE>
- -----------------------
(a) Includes all owned or bareboat chartered vessels.
(b) Rates per day worked is defined as total charter revenues divided by
number of days worked, and utilization rate is total days worked
divided by total days of availability in the period.
(c) Revenues for vessels in the North Sea fleet are primarily earned in
Sterling (GBP) and have been converted to US Dollars (US$) at the average
exchange rate (US$/GBP) for the periods indicated. The average
rates were GBP=$1.6541 and GBP=$1.6269 for the quarters ended September 30,
1998 and 1997, respectively. The average rates were GBP=$1.6513 and
GBP=$1.6330 for the nine months ended September 30, 1998 and 1997,
respectively.
(d) Adjusted for vessel additions and dispositions occurring during
each period.
(e) Includes the acquisition of Brovig calculated from February 10, 1998
and forward.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 WITH THE
THREE MONTHS ENDED SEPTEMBER 30, 1997.
Revenues in the quarter ended September 30, 1998 increased by
$11.7 million, or 92% over the same period in 1997. Net income
tripled from $2.6 million, $0.35 per share (diluted) in 1997 to
$8.2 million, $.99 per share (diluted) in 1998. The Brovig
acquisition accounted for almost 43% of the revenue and operating
income improvements. Other increases came from the recently
delivered Highland Rover (March 1998). Day rate improvements of
35% for the North Sea capable vessels and 21% for other vessels
also contributed to the improvements over the prior year quarter.
15
<PAGE>16
Included in the current quarter's income is an after tax gain
of approximately $1.9 million ($0.23 per diluted share) for the
July sale of the Company's 51% owned joint venture, SeaMark Ltd.,
which operated two bareboat chartered vessels in Southeast Asia for
$3.1 million cash. Additionally the current quarter's results
include the favorable impact of a change in tax rates in the United
Kingdom, the cumulative effect of which reduced the tax provision
by $0.4 million, or almost $0.05 per diluted share.
The Company's depreciation and amortization expense for the
period increased by $1.3 million primarily as a result of the newly
acquired Brovig vessels and the delivery of the Highland Rover.
Interest expense increased by $1.3 million over the same period in
1997 due to the increase in debt balances related to the
acquisition of Brovig, the delivery of the Highland Rover and the
impact of the Notes offering as further described in Liquidity and
Capital Resources. The increase in interest expense was partially
offset by increased interest income on higher cash balances.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 WITH THE
NINE MONTHS ENDED SEPTEMBER 30, 1997.
Changes in the Company's fleet were significant between the
two periods. The 1998 period included more than seven months'
operations of the five vessels acquired as part of the acquisition
of Brovig in February of 1998. Additionally, the Company added the
Highland Rover to the North Sea fleet on March 7, 1998.
Revenues for the nine months ended September 30, 1998
increased 87% over the same period in 1997. Income from continuing
operations increased $11.7 million to $17.0 million ($2.06 per
share) for the nine-month period ended September 30, 1998 from $5.3
million ($0.76 per share) for the same period in 1997.
The North Sea fleet accounted for over two-thirds of the
increases in revenues and 71% of the increases in earnings. Brovig
vessels represented just over 63% of the North Sea revenue
increases and over half of the earnings increases with the
remaining increases coming from a 24% improvement in day rates.
The nine-month period ended September 30, 1998 also reflected
an after tax gain of $1.9 million ($0.23 per diluted share) related
to the July sale of the Company's 51% owned joint venture, SeaMark
Ltd., which operated two bareboat chartered vessels in Southeast
Asia for $3.1 million cash. Additionally the current quarter's
results include the favorable impact of a change in tax rates in
the United Kingdom, the
16
<PAGE>17
cumulative effect of which reduced the tax provision by $0.4
million, or almost $0.05 per diluted share.
The Company's depreciation expense for the nine-month period
ended September 30, 1998 increased by $3.3 million primarily as a
result of the newly acquired vessels. Interest expense for the
nine-month period ended September 30, 1998 was up $2.8 million from
the comparable period in 1997 related to the debt for the
acquisition of the new vessels.
In the nine month period ended September 30, 1997, the Company
reflected a loss from discontinued operations, net of taxes, of
$0.6 million related to the non-marine operations of the Company's
predecessor.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing liquidity requirements are generally
associated with its need to service debt, fund working capital,
acquire or improve equipment and make other investments. Since
its inception, the Company has been active in the acquisition of
additional vessels through both the resale market and new
construction. Bank financing and internally generated funds have
provided funding for these activities. In June 1998, the Company
sold $130 million in 8.75% Senior Notes due June 1, 2008 (the
"Initial Notes"), pursuant to Rule 144A of the Securities Act of
1933 (the "Offering"). The Initial Notes were issued at a discount
to yield 8.8%. The net proceeds of the Offering were used to repay
the Company's outstanding indebtedness under its existing
facilities. At September 30, 1998, the Company had total
outstanding debt of $130.1 million. On August 24, 1998, the
Company completed an exchange offer through which it exchanged all
of the Initial Notes for a series of 8.75% Senior Notes (the
"Exchange Notes"), identical in all material respects to the
Initial Notes, except that the Notes are registered under the
Securities Act of 1933, as amended.
In addition to the Offering, on June 8, 1998, the Company
entered into an agreement for a reducing revolving credit facility
(the "Credit Facility") with certain banks (the "Lenders"). The
Credit Facility contains two tranches.
Tranche 1 is unsecured and is available for general corporate
purposes. The maximum committed amount is initially limited to $25
million. Interest on outstanding balances accrues at LIBOR plus a
17
<PAGE>18
margin ranging from 1.0% to 1.375% per annum as determined by the
Company's ratio of funded debt to total capitalization ("Leverage
Ratio").
Tranche 2 is available for financing acquisitions and if
drawn, will be secured by either the capital stock of the acquired
company or with respect to acquired vessel assets, (i) a first
priority mortgage, (ii) an assignment of earnings and insurance and
(iii) an assignment of charters over one year. The maximum
committed amount under Tranche 2 is initially $25 million. The
interest rate on outstanding balances under Tranche 2 is LIBOR plus
a margin of 0.80% to 1.25% per annum as determined by the Company's
Leverage Ratio.
Under certain circumstances, the maximum committed amounts
under Tranche 1 and Tranche 2 may be increased to $30 million and
$45 million respectively. Both tranches will begin to reduce 39
months after closing. Each quarter thereafter, the Credit Facility
will ratably reduce such that the Credit facility is fully reduced
after five years.
In April 1997, the Company acquired an unfinished supply
vessel hull from a Singapore shipyard (the "Gallant Project"). In
October of the same year, the hull was delivered to a shipyard in
the United Kingdom for completion. The anticipated cost of the
completed hull, including the acquisition cost of the hull, is
approximately $16.6 million, excluding capitalized interest. A
total of $14.2 million of the cost has been paid as of September
30, 1998, with the balance to be paid upon delivery. Delivery of
the completed vessel, now named the Highland Spirit, is anticipated
in November of 1998.
In October 1997, the Company entered into a contract for the
construction and delivery of two platform supply vessels (the
"Bender Vessels") with Bender Shipbuilding and Repair, Inc., of
Mobile, Alabama. The contract cost for the completion of each of
these vessels is approximately $11.0 million, excluding capitalized
interest. Delivery of the first vessel is expected in early 1999,
and the second vessel is anticipated in mid-1999. As of September
30, 1998, a total of $6.6 million has been paid related to these
vessels. An additional $8.2 million is expected to be remitted by
the end of 1998 with the balance due in 1999. The Company also has
an option for the construction of two additional vessels. Net cash
provided by operating activities of continuing operations was $25.8
million for the nine-month period ended September 30, 1998, as
compared to $11.6 million for the same period in 1997.
18
<PAGE>19
Net cash used in investing activities was $52.1 million and
$19.6 million for the nine months ended September 30, 1998 and
1997, respectively. In the 1998 period, the Company completed its
acquisition of Brovig requiring cash, net of cash acquired, of
$25.5 million. This acquisition was funded through a nine-month
bridge facility with a bank totaling GBP 10 million ($16.4
million) and from funds on hand. Additionally, the Company made the
final payment on the Highland Rover of approximately $14.0 million
in March 1998 and made progress payments during the nine months in
1998 toward the completion of the Highland Spirit (formerly
described as the Gallant Project) as well as the Bender Vessels. In
the comparable 1997 period, the Company made the final payment on
the Highland Drummer of approximately $12.9 million including a
portion which was subsequently reimbursed in the form of a subsidy
from the Norwegian government. In the three-month period ended
September 30, 1998, the Company had five vessels drydocked compared
to two drydockings in the same prior year period.
Net cash provided by financing activities was $36.6 million
for the nine-month period ended September 30, 1998 and $32.1
million for the period ended September 30, 1997. The 1998 period
includes proceeds from a nine-month bridge facility for the
purchase of Brovig as well as from new debt for the delivery of the
Highland Rover. Additionally, in connection with the acquisition of
Brovig, the Company assumed approximately NOK 277 million ($37.4
million) of Brovig's long-term debt. The Company repaid these
facilities with the net proceeds from the Offering. In the
comparable 1997 period, the Company took delivery of the Highland
Drummer which was partially funded from the Company's then existing
credit facilities.
Substantially all of the Company's tax provision is for
deferred taxes. The Company has a net operating loss available in
the United Kingdom primarily as a result of accelerated
depreciation allowances under United Kingdom tax law.
The Company believes that its current reserves of cash and
short term investments, cash flows from operations and access to
various credit arrangements will provide sufficient resources to
finance internal operating requirements.
CURRENCY FLUCTUATIONS AND INFLATION
Substantially all of the operations of the Company are
international; therefore it is exposed to currency fluctuations and
exchange rate risks. Charters for vessels in the North Sea fleet
19
<PAGE>20
are primarily denominated in Sterling with a much smaller portion
denominated in Norwegian Kroner subsequent to the acquisition of
Brovig. Operating costs are substantially denominated in the same
currency as charter hire in order to reduce the risk of currency
fluctuations. For the three months ended September 30, 1998,
currency fluctuations in Norwegian Kroner did not have a material
impact on the results of the Company's operations. As of September
30, 1998, the Norwegian Kroner/U.S. Dollar exchange rate was
Norwegian Kroner = $.1354. The North Sea operations generated
$18.4 million in revenues, $8.6 million in operating income and
$14.7 million of cash flows from operations for the three months
ended September 30, 1998. In the third quarter of 1998 the
Sterling/U.S. Dollar exchange rate ranged from a high of GBP =
U.S.$1.7085 to a low of GBP = U.S. $1.6160. For the three-month
period ended September 30, 1998, the average Sterling to U.S.
Dollar exchange rate was 1.6541. The exchange rate in the
comparable 1997 period was 1.6269. As of September 30, 1998, the
Sterling/U.S. Dollar exchange rate was GBP = U.S.$1.7000.
Reflected in the accompanying balance sheet for September 30,
1998, is a $3.5 million cumulative translation adjustment primarily
relating to a higher Sterling exchange rate as of September 30,
1998 than the average exchange rate weighted on the date of
investment in its United Kingdom subsidiaries. Changes in the
cumulative translation adjustment are non-cash items.
The Company generates a substantial portion of its revenues in
non-U.S. dollar currencies of which GBP is the largest component.
Although a portion of the costs related to non-U.S. dollar revenues
are denominated in their respective non-U.S. currencies, the
Company is exposed to risks from currency fluctuations on the
portion of the revenues in excess of these costs. In order to
mitigate the foreign currency risk, the Company may enter into
hedging transactions designed to offset the risks from fluctuations
in foreign currencies, although historically, the Company has not
entered into any such hedging transactions.
Portions of certain of the Company's Southeast Asia charters
are denominated in Malaysian ringgits as are a portion of its
operating costs. Beginning in 1998, charters in Malaysia have been
fixed in U.S. dollars with only a portion approximately equal to
local expenses fixed in Malaysian ringgit. Revenues fixed in this
currency were approximately $1.1 million for all of 1997 while
revenues fixed in Malaysian ringgit in the three-month and
nine-month periods ended September 30, 1998 were $0.1 million and
$0.3 million. The Company does not currently hedge this currency.
20
<PAGE>21
In areas where currency risks are potentially high, the Company
accepts only a small percentage of charter hire in local currency
and the remainder is paid in U.S. dollars.
To date, general inflationary trends have not had a material
effect on the operating revenues or expenses of the Company.
YEAR 2000
The Company is currently in the process of reviewing its
existing software and hardware for potential Year 2000 impact.
Certain modifications are currently underway. The Company expects
this process to be completed in advance of the year 2000 with the
cost of the modifications being immaterial to the Company's results
of operations and financial position.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and
other statements that are not historical facts concerning, among
other things, market conditions, the demand for marine support
services and future capital expenditures. Such statements are
subject to certain risks, uncertainties and assumptions, including,
without limitation, dependence on the oil and gas industry, oil and
gas prices, ongoing capital expenditure requirements, uncertainties
surrounding environmental and government regulation, risk relating
to leverage, risk of foreign operations assumptions concerning
competition and risk of currency fluctuations and other matters.
There can be no assurance that the Company has accurately
identified and properly weighted all of the factors which affect
market conditions and demand for the Company's vessels, that the
information upon which the Company has relied is accurate or
complete, that the Company's analysis of the market and demand for
its vessels is correct or that the strategy based on such analysis
will be successful.
21
<PAGE>22
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.1 - Indenture dated as of June 8, 1998, among the
Company as Issuer and State Street
Bank and Trust Company, as Trustee including a form
of the Company's 8 3/4% Senior Notes Due 2008
(incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-4 No. 333-594152.
*27.1 - Financial Data Schedule.
* Filed herewith.
(b) Reports on Form 8-K.
On July 30, 1998, the Company filed a report on Form 8-K
announcing the release of the results of its operations for the
quarter ended June 30, 1998.
On October 29, 1998, the Company filed a report on Form 8-K
announcing the release of the results of its operations for the
quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GulfMark Offshore, Inc.
(Registrant)
By: /s/ Frank R. Pierce
-----------------------------
Frank R. Pierce
Executive Vice President
(Principal Financial Officer)
Date: November 6, 1998
22
<PAGE>23
EXHIBIT INDEX
Exhibit No.
4.1 - Indenture dated as of June 8, 1998, among the
Company as Issuer and State Street
Bank and Trust Company, as Trustee including a form
of the Company's 8 3/4% Senior Notes Due 2008
(incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-4 No. 333-594152.
*27.1 - Financial Data Schedule.
* Filed herewith.
23
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 35,562
<SECURITIES> 0
<RECEIVABLES> 20,267
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,138
<PP&E> 220,573
<DEPRECIATION> 30,543
<TOTAL-ASSETS> 272,929
<CURRENT-LIABILITIES> 12,820
<BONDS> 129,583
0
0
<COMMON> 81
<OTHER-SE> 107,950
<TOTAL-LIABILITY-AND-EQUITY> 272,929
<SALES> 62,827
<TOTAL-REVENUES> 62,827
<CGS> 22,966
<TOTAL-COSTS> 35,566
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,625
<INCOME-PRETAX> 24,233
<INCOME-TAX> 7,237
<INCOME-CONTINUING> 16,996
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,996
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 2.06
</TABLE>
