<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 March 31, 1999
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 May 17, 1999: 8,129,917.
(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, 1998.
2
<PAGE>3
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> March 31, December 31,
1999 1998
--------- -------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS (In thousands)
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 31,452 $ 32,007
Accounts receivable, net................................................ 19,736 19,612
Prepaids and other...................................................... 2,782 2,210
------- -------
Total current assets.................................................. 53,970 53,829
VESSELS AND EQUIPMENT, at cost, net of accumulated depreciation
of $33,573,000(unaudited) in 1999 and $31,839,000 in 1998................ 192,295 192,615
GOODWILL, NET............................................................. 17,313 17,689
OTHER ASSETS.............................................................. 7,366 7,236
------- -------
$ 270,944 $ 271,369
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt............. $ 60 $ 60
Accounts payable........................................................ 4,924 7,030
Accrued personnel costs................................................. 1,059 1,314
Accrued interest expense................................................ 3,788 955
Other accrued liabilities............................................... 2,855 2,930
------- -------
Total current liabilities............................................. 12,686 12,289
------- -------
LONG-TERM DEBT............................................................ 130,120 130,136
DEFERRED TAXES AND OTHER.................................................. 21,165 20,454
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 and 8,123,365 shares issued and outstanding............... 81 81
Additional paid-in capital.............................................. 62,812 62,812
Retained earnings....................................................... 49,968 47,060
Cumulative translation adjustment....................................... (5,888) (1,463)
------- -------
Total stockholders' equity............................................ 106,973 108,490
------- -------
$ 270,944 $ 271,369
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>4
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
------ -------
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES............................................... $21,127 $16,046
COSTS AND EXPENSES:
Direct operating expenses............................ 9,946 5,794
General and administrative expenses.................. 1,643 1,369
Depreciation and amortization........................ 3,120 2,359
------- -------
14,709 9,522
------- -------
OPERATING INCOME....................................... 6,418 6,524
OTHER INCOME (EXPENSE):
Interest expense..................................... (2,751) (1,638)
Interest income...................................... 579 256
Minority interest.................................... -- (96)
Other................................................ (108) 26
------- -------
(2,280) (1,452)
------- -------
Income before taxes.................................... 4,138 5,072
INCOME TAX PROVISION................................... (1,230) (1,605)
------- -------
NET INCOME............................................. $ 2,908 $ 3,467
======= =======
BASIC EARNINGS PER SHARE:
Net Income ........................................... $ 0.36 $ 0.43
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC)............ 8,123 7,976
======= =======
DILUTED EARNINGS PER SHARE:
Net Income ......................................... $ 0.35 $ 0.42
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED)......... 8,251 8,236
======= =======
</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>
Three Months Ended
March 31,
----------------------
1999 1998
------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 2,908 $ 3,467
Adjustments to reconcile income from continuing operations to
net cash provided by continuing operations:
Depreciation and amortization............................................ 3,120 2,359
Deferred and other income tax provision.................................. 1,162 1,550
Minority interest........................................................ -- 96
Change in operating assets and liabilities:
Accounts receivable.................................................. (497) (2,346)
Inventory, prepaids and other........................................ (153) (46)
Accounts payable..................................................... (1,982) (701)
Other accrued liabilities............................................ 2,531 (1,495)
Other, net............................................................... (385) (289)
------- -------
Net cash provided by operating activities............................ 6,704 2,595
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of vessels and equipment....................................... (6,243) (17,434)
Expenditures for drydocking and main engine overhaul..................... (896) --
Purchase of Brovig stock, net of cash acquired........................... -- (25,543)
------- -------
Net cash used in investing activities................................ (7,139) (42,977)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt, net of direct financing cost......................... -- 31,680
Proceeds from exercise of options........................................ -- 123
Repayments of debt....................................................... (9) (2,468)
------- -------
Net cash provided by (used in)financing activities.................... (9) 29,335
Effect of exchange rate changes on cash.................................... (111) 65
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................. (555) (10,982)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD....................... 32,007 25,885
------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD............................. $ 31,452 $ 14,903
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of interest capitalized................................. $ (226) $ 931
======= =======
Income taxes paid.......................................................... $ 26 $ 29
======= =======
</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
formerly a part of GulfMark International, Inc. (the "Predecessor")
until it was spun-off in 1997.
The Company operates offshore support vessels, principally in the
North Sea and Southeast Asia. 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.
The consolidated financial statements include the accounts of
GulfMark and its majority owned subsidiaries. Investments in
unconsolidated subsidiaries are accounted for on the equity method.
All significant intercompany accounts and transactions between
GulfMark and its subsidiaries have been eliminated.
(2) EARNINGS PER SHARE ("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 details of the EPS calculations for
continuing operations for the three months ended March 31, 1999 and
1998 are as follows (in thousands except per share data):
6
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<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
-------------------------------------
Per Share
Income Shares Amount
------- ------- ---------
<S> <C> <C> <C>
Net Income per share, basic................................... $ 2,908 8,123 $0.36
====
Dilutive effect of common stock options....................... -- 128
------ -----
Net Income per share, diluted................................. $ 2,908 8,251 $0.35
====== ===== ====
Three Months Ended March 31, 1998
-------------------------------------
Per Share
Income Shares Amount
------- ------- ---------
<S> <C> <C> <C>
Net Income per share, basic................................... $ 3,467 7,976 $0.43
====
Dilutive effect of common stock options....................... -- 260
------ -----
Net Income per share, diluted................................. $ 3,467 8,236 $0.42
====== ===== ====
</TABLE>
(3) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. SFAS
No. 133 will be effective beginning in 2000. The Company does not
expect the adoption of this statement to have a material effect on its
financial position or results of operations.
(4) COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." 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 be included in
other comprehensive income.
7
<PAGE>8
The components of comprehensive income, net of related tax, for
the first quarter of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 31,
-----------------------------------
1999 1998
------ ------
<S> <C> <C>
Net income.......................................................... $ 2,908 $ 3,467
Foreign currency translation adjustments,
net of tax of $1,896 and $105................................... (4,425) (203)
------ ------
Comprehensive income (loss)......................................... $(1,517) $ 3,264
======= =======
</TABLE>
The Company's only accumulated comprehensive income item relates to
its cumulative foreign currency translation adjustment.
(5) BROVIG SUPPLY ASA ACQUISITION
The financial statements included herein include the results of
Brovig Supply ASA from its acquisition on February 10, 1998. The
following unaudited pro forma results of operations have been prepared
assuming that the acquisition had occurred on January 1, 1998. 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
March 31,
-------------------------
1999 1998
-------- --------
(In thousands except per share data)
<S> <C> <C>
Revenues................................... $ 21,127 $ 17,901
Operating income........................... 6,418 6,943
Net Income................................. 2,908 3,439
Per share data:
Net Income (basic)......................... $ 0.36 $ 0.43
Net Income (diluted)....................... 0.35 0.42
</TABLE>
8
<PAGE>9
(6) VESSEL ACQUISITIONS
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. Delivery of the first vessel is anticipated in May 1999
and the second vessel is anticipated in late June 1999. The
specifications of 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 months ended March 31, 1999, $332,000 was
capitalized. During the three months ended March 31, 1998, $265,000
was capitalized.
(7) OPERATING SEGMENT INFORMATION
The operations of the Company are reported in a single business
segment, offshore marine services. The business operates offshore
support vessels in various geographic locations. The vessels provide
transportation of materials, supplies and personnel to and from
offshore platforms and drilling rigs. Some of the vessels also
perform anchor handling and towing services.
Geographic Regions
Information by geographical area is based on the location where
services are performed. General corporate expenses incurred in the
United States have not been allocated to foreign operations for
purposes of this disclosure.
9
<PAGE>10
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
-------- --------
(In thousands except per share data)
<S> <C> <C>
Revenues from unaffiliated customers:
Europe (primarily UK)...................... $ 16,557 $ 9,770
Far East................................... 2,947 5,885
Brazil and other........................... 1,623 391
------ ------
TOTAL REVENUES......................... $ 21,127 $ 16,046
======= =======
</TABLE>
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 two vessels
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 42 vessels through strategic acquisitions and new
construction of technologically advanced vessels, partially offset by
dispositions of certain older, less profitable vessels. Twenty-eight
vessels in GulfMark's fleet are owned, three are bareboat chartered
and eleven 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
10
<PAGE>11
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.
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 may incur
expenses at similar rates. However, chartered vessels also incur
bareboat charter expense rather than depreciation expense. Bareboat
charter fees are generally more than depreciation expense.
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.
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.
11
<PAGE>12
Under applicable maritime regulations, vessels must be drydocked
twice in a five-year period for inspection and routine maintenance and
repair. Should the Company undertake a large number of drydockings in
a particular fiscal quarter, comparative results may be affected. For
the three months ended March 31, 1999, 3 vessels were required to be
drydocked at an aggregate cost of $0.9 million compared to the three
months ended March 31, 1998 when no vessels were required to be
drydocked.
Results of Operations
The table below sets forth, by region, 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
operating profit. The information that follows is utilized by the
Company's management to evaluate the performance of the business.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
------ ------
<S> <C> <C>
Rates Per Day Worked (a)(b):
North Sea Capable Fleet (c) $10,957 $10,511
Other (Primarily Southeast Asia) 4,823 4,771
Overall Utilization(a):
North Sea Capable Fleet (percent) 95.3 98.8
Other (Primarily Southeast Asia) (percent) 66.6 85.9
Average Owned/Chartered Vessels(a)(d)
North Sea Capable Fleet 19.0 12.0
Other (Primarily Southeast) 12.0 13.0
------ ------
Total 31.0 25.0
====== ======
</TABLE>
- ----------------------
(a) Includes all owned or bareboat chartered vessels.
(b) Rates per day worked is defined as total charter revenues divided
by number of days worked. Utilization rate is defined as the total
days worked divided by total days of availability in the period.
(c) Revenues for vessels in the North Sea fleet are primarily earned
in Sterling (GBP) and have been converted to US Dollars (US$) at
the average exchange rate (US$/GBP) for the periods indicated.
The average rates were GBP=$1.6248 and GBP=$1.6460 for the quarters
12
<PAGE>13
ended March 31, 1999 and 1998, respectively.
(d) Adjusted for vessel additions and dispositions occurring during
each period.
Comparison of the Three Months Ended March 31, 1999 with the Three
Months Ended March 31, 1998.
Earnings for the quarter ended March 31, 1999 were $2.9 million
or $0.35 per diluted share on revenues of $21.1 million. Net earnings
in the comparable 1998 quarter were $3.5 million or $0.42 per diluted
share on revenues of $16.0 million.
Revenues increased in the North Sea by $5.3 million largely due
to the addition of several vessels during the course of 1998. The
Company added five vessels in February 1998 (the "Brovig vessels")
with the acquisition of Brovig Supply ASA (now known as Gulf Offshore
Norge AS). Additionally, the Company took delivery of two newbuild
vessels, the Highland Rover (March 1998) and the Highland Spirit
(November 1998). Revenues in the region also benefited from the
addition of two vessels bareboat chartered by the Company during 1998.
The addition of the new, highly specialized vessels, coupled with
existing contracts resulted in a slight increase in the average
dayrate for North Sea capable vessels. The increased dayrates on
these vessels were able to overcome the otherwise deteriorating
chartering market which has been adversely impacted by low oil prices
and the resultant reduction in exploration and development activity.
Outside of the North Sea, lower utilization and a reduction in the
number of the Company's vessels operating in Southeast Asia resulted
in decreased revenue which was largely offset by the addition of the
bareboat chartered vessel, Leopard Bay, presently operating in Brazil.
Operating income remained fairly constant between the two periods
in spite of the increased revenues due, in part, to higher operating
costs associated with the three bareboat chartered vessels, as well as
increased depreciation from the newly acquired vessels. Bareboat
charter rates are generally higher than depreciation charges for a
vessel.
The Company's depreciation and amortization expense for the
period increased by $0.8 million primarily as a result of the newly
acquired Brovig vessels and the delivery of the Highland Rover and
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<PAGE>14
Highland Spirit. Interest expense, net of interest income, for the
quarter increased to $2.2 million in the quarter ended March 31, 1999
compared to $1.4 million in the same quarter of 1998 as a result of
the vessel acquisitions described above and the sale of $130 million,
8.75% Senior Notes, due June 1, 2008, (the "Senior Notes") completed
by the Company in June 1998 (the "Senior Notes Offering"). Capitalized
interest in each period was approximately $0.3 million.
The Company's current financial position reflects approximately
$41.3 million of net working capital, including $31.5 million in cash.
Additionally, the Company has $75 million of availability under its
credit facility. The Company has two vessels under construction with
delivery expected in the second quarter of this year. Cash required to
complete these vessels is expected to be approximately $4 million.
The Company expects to drydock nine(9) vessels during the remaining
three quarters of 1999 and anticipates expenditures for this purpose
of less than $3 million.
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
the Senior Notes. The net proceeds were used to repay substantially
all the outstanding indebtedness of the Company under various bank
credit facilities which were secured by mortgages on many of the
Company's vessels.
At March 31, 1999, the Company had total outstanding debt of
$130.2 million. Scheduled principal and interest repayments are
expected to total $11.4 million for the remainder of 1999.
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 ("Bender"). 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 May 1999, and
14
<PAGE>15
the second vessel is anticipated in July 1999. To date a total of
$18.6 million has been paid related to these vessels including $5.8
million in the quarter ended March 31, 1999. The Company also has an
option with Bender for the construction of two additional vessels. An
additional $3.8 million is expected to be remitted in 1999.
Net cash provided by operating activities of continuing operations
was $6.7 million for the three month period ended March 31, 1999, as
compared to $2.6 million for the same period in 1998.
Net cash used in investing activities was $7.1 million and $43.0
million for the three months ended March 31, 1999 and 1998,
respectively. In the 1998 period, the Company completed its
acquisition of Brovig Supply ASA requiring cash, net of cash acquired,
in the amount of $25.5 million. Additionally, the Company made the
final payment on the Highland Rover of approximately $14.0 million in
March 1998 and also made progress payments toward the completion of
the Highland Spirit as well as the Bender Vessels. In the three month
period ended March 31, 1999, the Company had 2 vessels drydocked
compared to no vessel drydockings in the same prior year period.
Net cash provided by financing activities was $29.3 million for
the period ended March 31, 1998. During the period ended March 31,
1999, no financing transactions were completed and only nominal
principal repayments were required. The 1998 period included proceeds
from a nine-month bridge facility for the purchase of Brovig Supply
ASA as well as for the delivery of the Highland Rover. Additionally,
in connection with the acquisition of Brovig Supply ASA, the Company
assumed approximately NOK 277 million ($37.4 million) of its long-term
debt.
Substantially all of the Company's tax provision is for deferred
taxes. The net operating loss available in the United Kingdom is
primarily the 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 credit
arrangements will provide sufficient resources to finance internal
operating requirements for the forseeable future.
15
<PAGE>16
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 are
primarily denominated in Sterling ("GBP") with a portion denominated
in Norwegian Kroner. 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 March 31, 1999,
currency fluctuations in Norwegian Kroner did not have a material
impact on the results of the Company's operations. As of March 31,
1999, the Norwegian Kroner/U.S. Dollar exchange rate was Norwegian
Kroner = $0.1288. The North Sea operations generated $16.6 million in
revenues, $5.5 million in operating income and $4.0 million of cash
flows from operations for the three months ended March 31, 1999. In
the first quarter of 1999 the Sterling/U.S. Dollar exchange rate
ranged from a high of GBP = $1.6598 to a low of GBP = $1.5960. For
the three month period ended March 31, 1999, the average Sterling to
U.S. Dollar exchange rate was GBP = $1.6248. The exchange rate in the
comparable 1998 period was GBP = $1.6460. As of March 31, 1999, the
Sterling/U.S. Dollar exchange rate was GBP = $1.6118.
Historically certain of the Company's Southeast Asia charters
were denominated in Malaysian ringgits as were 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 $0.4 million for 1998 while revenues fixed
in Malaysian ringgit in the three month period ended March 31, 1999
were $0.1 million. The Company does not currently hedge this
currency. In areas where currency risks are potentially high, the
Company normally accepts only a small percentage of charter hire in
local currency and the remainder is paid in U.S. dollars.
Reflected in the accompanying balance sheet as of March 31, 1999,
is a $5.9 million cumulative translation adjustment primarily relating
to the lower Sterling exchange rate as of March 31, 1999 in comparison
to the exchange rate when the Company invested capital in its United
Kingdom subsidiaries. Changes in the cumulative translation
adjustment are non-cash items that are primarily attributable to
investments in vessels and dollar denominated loan's between the
Company and its U.K. subsidiaries.
16
<PAGE>17
With the completion of the Senior Notes Offering in June 1998,
the Company's debt is predominately denominated in U.S. dollars, while
a substantial portion of the Company's revenue continues to be
generated in Sterling. The Company has carefully evaluated these
conditions and determined that it is in the best interest of the
Company not to use any financial instruments to hedge this exposure
under present conditions. The Company's decision is based on a number
of factors including among others,(i) the cost of using such
instruments in relation to the risks of currency fluctuations, (ii)
the propensity for adjustments in Sterling denominated vessel day
rates over time to compensate for changes in the purchasing power of
Sterling as measured in U.S. dollars, (iii) the Company's strong cash
position substantially held in U.S. dollars, (iv) the level of U.S.
dollar denominated borrowings available to the Company and (v) the
conditions in the Company's U.S. dollar generating regional markets.
One or more of these factors may change and the Company, in response,
may choose to use financial instruments to hedge risks of currency
fluctuations.
The Company will from time to time hedge known liabilities
denominated in foreign currencies to reduce the effects of exchange
rate fluctuations on the Company's financial results. As of March 31,
1999, the Company had no foreign currency contracts outstanding.
To date, general inflationary trends have not had a material
effect on the operating revenues or expenses of the Company.
Year 2000 Disclosure
The Year 2000 ("Y2K") issue is the result of computerized systems
being written to store and process the year portion of dates using two
digits rather than four so that date sensitive systems may fail or
produce erroneous results on or before January 1, 2000 because the year
2000 will be interpreted as the year 1900. The Company has been
conducting a comprehensive review of its computer systems to ensure that
all of its significant computer systems will be able to process dates
from and after January 1, 2000 without critical failure. Computerized
systems are integral to the Company's operations, particularly for
accounting and administrative software applications used throughout its
locations. Computerized systems are furthermore used for communication,
navigational and other systems aboard certain of the Company's vessels.
Most of the Company's software applications are licensed through
17
<PAGE>18
commercial third party software developers with whom the Company has
maintenance contracts. Each of these software developers have already
modified and released newer versions of their product that are Y2K
compliant. The Company has implemented or is in the process of
implementing these Y2K compliant versions. The Company expects to
complete the implementation of both Y2K compliant accounting and
administrative software and related hardware by the end of the quarter
ending June 30, 1999. Each of the upgrades in software versions was
provided as part of the Company's maintenance agreement with the
provider or were part of routine version upgrades. Costs for the
upgrade of hardware are expected to be minimal. The Company does not
expect the costs to modify its hardware and software to be Y2K compliant
will be material to its financial condition or results of operations.
The Company continues to review the date-aware systems that are used
aboard its vessels with completion expected by mid year 1999. While the
status of this review does not yet permit management to accurately
forecast costs of making all such systems Y2K compliant, to date all
required changes have required minimal cost.
The Company's computer systems are not widely integrated with the
systems of its suppliers and customers. A potential Y2K risk
attributable to third parties would be from a temporary disruption in
certain materials and services provided by third parties. Major
suppliers have been contacted regarding Y2K compliance, and recently,
the Company added Y2K compliance requirements to all of its purchasing
contracts. An assessment of Y2K third-party risk is scheduled for
completion by mid year 1999.
At present, the Company has not finalized a contingency plan to
address all areas of risk associated with Y2K compliance but is
currently testing possible Y2K failures as part of its routine vessel
safety checks. The Company is committed to ensuring that it is fully Y2K
ready and believes that, when completed, its plans will adequately
address the above-mentioned risks.
Based upon the Y2K risk assessment work performed thus far, the
Company believes the most likely Y2K-related failures would be related
to a disruption of materials and services provided by third parties.
Although the Company does not expect that such disruptions would have a
material adverse effect on the Company's financial condition or results
of operations, there can be no assurance that the Company's belief is
18
<PAGE>19
correct or that its risk assessments are, in fact, accurate. The
Company believes that the upgrades to its hardware and software systems,
in conjunction with any contingency plans developed prior to January 1,
2000, will permit a transition through that date without significant
interruption in its business or operations, however, such assessment is
predicated on the timely completion of the above referenced software
modifications. Should these modifications and upgrades be delayed or the
Company's contingency plans fail, the Y2K issue could have a material
impact on the Company's financial condition or results of operations. In
addition, there can be no assurance that the Company's vendors,
suppliers and other parties with whom the Company does business will
successfully resolve their Y2K problems. In the event of any such
failures or other Y2K failures, there can be no assurance that, despite
the Company's contingency plans, there will not be a material adverse
effect on the Company's financial condition or results of operations.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company's financial instruments that are potentially
sensitive to changes in interest rates include the Senior Notes. As
of March 31, 1999, the fair value of these notes, based on quoted
19
<PAGE>20
market prices, was approximately $118.3 million compared to a carrying
amount of $129.6 million.
Exchange Rate Sensitivity
Other than accounts receivable and trade accounts payable, the
Company does not currently have financial instruments that are
sensitive to foreign currency exchange rates. Other information
required under Item 3 has been incorporated into Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
20
<PAGE>21
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
*27.1 - Financial Data Schedule.
* Filed herewith.
(b) Reports on Form 8-K.
On March 4, 1999, the Company filed a report on Form 8-K
announcing the release of the results of its operations for the
year ended December 31, 1998.
On May 4, 1999, the Company filed a report on Form 8-K
announcing the release of the results of its operations for the
quarter ended March 31, 1999.
21
<PAGE>22
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/ Kevin Mitchell
-----------------------------
Kevin D. Mitchell
Controller
(Principal Accounting Officer)
Date: May 17, 1999
2
<PAGE>23
EXHIBIT INDEX
Exhibit No.
*27.1 - Financial Data Schedule.
* Filed herewith.
23
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