<PAGE> 1
Filed Pursuant to
Rule 424(B)(4)
Reg. No. 333-34603
PROSPECTUS
5,000,000 SHARES
COMMON STOCK
[TRANSCOASTAL MARINE SERVICES, INC. LOGO]
------------------------
All of the shares of common stock, par value $.001 per share ("Common
Stock"), of TransCoastal Marine Services, Inc. ("TCMS") offered hereby are being
sold by TCMS. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "TCMS." Prior to the Offering, there has been
no public market for the Common Stock. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF MATERIAL
RISKS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
-------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $18.00 $1.26 $16.74
Total(3)................................ $90,000,000 $6,300,000 $83,700,000
</TABLE>
- ---------------
(1) TCMS has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by TCMS estimated at $1,300,000.
(3) TCMS has granted the Underwriters a 30-day option to purchase up to an
additional 750,000 shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $103,500,000,
$7,245,000 and $96,255,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by the Underwriters. The
Underwriters reserve the right to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor in New York, New York on or about November 4, 1997.
------------------------
JEFFERIES & COMPANY, INC. JOHNSON RICE & COMPANY L.L.C.
October 30, 1997
<PAGE> 2
[GRAPHIC: PHOTOGRAPH OF M/V DISCOVERY.]
THE M/V DISCOVERY PERFORMING JETTING OPERATIONS IN THE GULF OF MEXICO.
[GRAPHIC: PHOTOGRAPH OF SPUD BARGE SPREAD ON LOCATION AT A WORK SITE.]
SPUD BARGE SPREAD INSTALLING A PIPELINE IN THE GULF OF MEXICO TRANSITION
ZONE.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
Concurrently with and as a condition to the closing of the Offering,
TransCoastal Marine Services, Inc., a recently organized Delaware corporation,
will acquire, in separate transactions (collectively, the "Acquisitions"), in
exchange for cash and shares of its Common Stock, four privately owned marine
construction businesses (each a "Founding Company") and certain real properties
used in the businesses of the Founding Companies. Unless otherwise indicated by
the context, references herein to (i) "TCMS" mean TransCoastal Marine Services,
Inc. (and its predecessor), prior to consummation of the Acquisitions, and (ii)
the "Company" mean TCMS, pro forma to give effect to the Acquisitions.
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated by the context, all share, per share and financial
information set forth herein (i) has been adjusted to give effect to the
Acquisitions (except that no effect is given to the post-closing adjustments to
the acquisition consideration provided for in the acquisition agreements
relating to two of the Acquisitions, which the Company currently estimates will
result in increases to the acquisition consideration that will not exceed $0.5
million in the aggregate); (ii) assumes that the Underwriters' over-allotment
option will not be exercised; and (iii) gives effect to a stock split of the
outstanding shares of Common Stock effected in August 1997. Unless otherwise
indicated by the context, all references herein to Common Stock include both
Common Stock, par value $.001 per share, and Restricted Common Stock, par value
$.001 per share ("Restricted Common Stock"), of the Company.
THE COMPANY
GENERAL
TCMS was organized in April 1996 to become a fully integrated marine
construction company focusing on the transition zone (marsh, swamp and coastal
regions out to water depths of 20 feet) and shallow water (water depths of 20 to
200 feet) regions along the U.S. Gulf Coast. The Company's goal is to become a
leader in the consolidation of these fragmented segments of the marine
construction industry through an aggressive acquisition program. TCMS has
entered into definitive agreements to acquire the Founding Companies
concurrently with the closing of the Offering. As a result of the Acquisitions,
the Company believes it will be the largest provider of transition zone marine
construction services along the U.S. Gulf Coast, as well as a significant
provider of shallow water construction services. The Company's primary services
include pipeline installation and repair, hydrostatic testing and commissioning
of pipelines and fabrication and refurbishment of components for offshore
platforms and drilling rigs.
Although TCMS has recently been formed and has no operating history, the
Founding Companies have been in business an average of 47 years and have
substantial experience in operating in difficult transition zone and shallow
water environments. Marine construction activities in the transition zone
require substantial expertise and customized equipment, as compared to open
water operations, due to the unique physical characteristics often involved,
including unstable marshbeds and obstructions such as trees, submerged stumps
and a substantial infrastructure of existing pipelines. The Company believes it
will benefit from the expertise developed by the management and personnel of the
Founding Companies in operating in transition zone and shallow water
environments and its ability to design and manufacture its own specialized
equipment for these operations.
Following the Acquisitions, the Company will provide marine construction
and related services from five port facilities strategically located along the
U.S. Gulf Coast from Orange, Texas to Mobile, Alabama. The Company believes this
geographic coverage will create marketing advantages and operating efficiencies
for the Founding Companies by improving their access to projects in this region
and providing the ability to offer a broader range of services to their existing
customer bases. The Company believes these advantages will result in higher
utilization of its assets. The Company also believes it will be able to use its
fabrication operations to reduce its equipment maintenance costs and related
vessel downtime and eliminate subcontracting of certain services (including
hydrostatic testing and pipeline burial) on many of its pipeline installation
and repair projects.
3
<PAGE> 4
OPERATIONS
Pipeline Installation and Repair. The efficient development of an offshore
oil and gas field frequently involves the addition or extension of an
infrastructure of gathering lines and trunklines (large diameter pipelines). The
Company's pipeline installation operations are focused on the transition zone
and shallow water regions along the U.S. Gulf Coast, where the Company believes
it is the only company providing pipeline installation and repair services from
water depths of 200 feet through the transition zone and to onshore gathering
and processing facilities. The Company's fleet includes (i) 15 spud barges and
ancillary equipment, operated in water depths of up to 20 feet, and (ii) two
anchor barges and three multipurpose vessels (used in both pipeline installation
and repair and hydrostatic testing, commissioning and related operations),
primarily operated in water depths beyond 20 feet. The Company also owns
specialized equipment for offshore pipeline jetting (a specialized pipeline
burying technique) and testing services, marine dredging and trench digging. The
Company generated revenue of approximately $53.5 million and $45.9 million from
its pipeline installation and repair services during the twelve months ended
December 31, 1996 and the six months ended June 30, 1997, respectively.
Hydrostatic Testing and Commissioning. The Company performs onshore and
offshore hydrostatic testing and commissioning of pipelines for oil and gas
producers and pipeline construction companies along the U.S. Gulf Coast and in
certain international markets. During hydrostatic testing, water is pumped into
a newly installed or existing pipeline to increase the internal pressure beyond
the designed capacity of the pipeline in order to test its structural integrity.
Pipeline commissioning involves final preparation of a completed and
successfully tested pipeline for operation in accordance with applicable
regulatory standards. In connection with its hydrostatic testing and
commissioning services, the Company also performs pipeline cleaning, drying and
dehydration services. The Company generated revenue of approximately $7.6
million and $4.4 million from its hydrostatic testing and commissioning and
related services during the twelve months ended December 31, 1996 and the six
months ended June 30, 1997, respectively.
Offshore Fabrication. The Company fabricates and refurbishes (i) structural
components of fixed platforms for use in the offshore development and production
of oil and gas and (ii) structural components, primarily deck structures, for
offshore drilling rigs and barge drilling rigs. The Company also manufactures
amphibious undercarriages for marine construction equipment used in transition
zone waters. The Company generated revenue of approximately $11.8 million and
$5.8 million from its offshore fabrication services during the twelve months
ended December 31, 1996 and the six months ended June 30, 1997, respectively.
INDUSTRY OVERVIEW
The market for offshore pipeline installation and related services along
the U.S. Gulf Coast is primarily dependent on the levels of oil and gas
exploration, development and production activities and pipeline capacity
utilization in the Gulf of Mexico. The Company believes recent increases in oil
and gas production in the Gulf of Mexico have significantly reduced available
pipeline capacity to transport the hydrocarbons to onshore gathering,
transmission and processing facilities. In a report published in January 1997,
the Minerals Management Service of the U.S. Department of the Interior (the
"MMS") projected an increase in Gulf of Mexico oil production of up to 76% from
1,097 Mbpd (thousand barrels per day) in 1996 to 1,932 Mbpd by 2000, and an
increase in natural gas production of up to 25% from 13.8 Bcfd (billion cubic
feet per day) in 1996 to 17.2 Bcfd by 2000, assuming increased use of new
technologies, such as 3-D seismic and horizontal drilling techniques, would
offset declines in production from currently producing fields. This outlook is
supported by recent increases in offshore leases awarded by the Department of
the Interior in its semi-annual Outer Continental Shelf ("OCS") lease auctions.
The number of offshore leases awarded to operators increased from 202 in 1992,
covering approximately 1.0 million acres, to 1,508 in 1996, covering
approximately 8.0 million acres.
The MMS anticipates that a substantial portion of the increased oil and gas
production in the Gulf of Mexico will come from deep water projects. The Company
believes the continued development of deep water (depths of 200 feet to 1,000
feet) and very deep water (depths of 1,000 feet and deeper) oil and gas fields
will require construction of new pipelines and tie-ins to existing pipeline
systems in the transition zone and shallow
4
<PAGE> 5
water regions along the U.S. Gulf Coast to transport future hydrocarbon
production to shore. The Company also expects increases in demand for its
services resulting from new pipeline construction needed to support incremental
development activity within these transition zone and shallow water regions, as
well as the repair service requirements of the existing pipeline infrastructure.
According to a June 1997 report by Offshore Data Services, Inc., there were 255
pipeline construction projects in the design or planning phase in the Gulf of
Mexico, including 165 in water depths of less than 150 feet.
BUSINESS STRATEGY
The Company's business strategy emphasizes growth through continued
consolidation of the transition zone and shallow water segments of the marine
construction industry and internal development. Key elements of the Company's
business strategy include:
Maintaining Focus on Transition Zone and Shallow Water Market Segments. The
Company intends to maintain its focus on the U.S. Gulf Coast transition zone and
shallow water markets because of its strong competitive position and substantial
expertise in these markets and the positive outlook for new oil and gas
exploration and development activity in the Gulf of Mexico. The Company
anticipates substantial growth in these markets as new pipelines are added to
gather and transport the higher levels of production expected to result from
increased exploration and development activity in the Gulf of Mexico.
Capitalizing on Combined Capabilities of the Founding Companies. The
Company believes that, as a result of the consolidation of the Founding
Companies, it is the only company providing pipeline installation and repair
services from water depths of 200 feet through the transition zone and to
onshore gathering, transmission and processing facilities along the U.S. Gulf
Coast. The Company's competitors in the pipeline installation and repair
services market currently provide services either in the transition zone or
shallow water regions, but not both. This market segmentation often requires
customers to separate an installation or repair project into different
components and award it to multiple contractors or award the project to a single
contractor and rely on that contractor's ability to coordinate with
subcontractors to complete the balance of the project.
Expanding through Acquisitions. The Company intends to increase its market
presence by acquiring additional businesses and assets. The Company believes the
highly fragmented nature of the industry presents a substantial consolidation
opportunity for a well-capitalized competitor with a strong market presence.
Pursuing International Expansion Opportunities. The Company also intends to
expand internationally by capitalizing on its relationships with hydrostatic
testing customers in international markets and domestic customers with
international operations and the experience of its management in developing
business and conducting operations in international markets. The Company intends
to target areas for international expansion with geographic conditions similar
to those along the U.S. Gulf Coast, such as Venezuela and offshore West Africa.
Improving Operating Margins. The Company believes the combination of the
Founding Companies will provide significant opportunities to improve operating
margins and increase profitability. The Company believes it will be able to
achieve operating efficiencies and cost savings by consolidating overlapping
facilities and administrative functions and by implementing a comprehensive
marketing effort emphasizing its abilities as an integrated provider of pipeline
installation and repair and related services in the transition zone and shallow
water market segments.
SUMMARY OF THE ACQUISITIONS
TCMS has entered into definitive agreements to acquire the Founding
Companies concurrently with and as a condition to the closing of the Offering.
The consideration TCMS will pay to acquire the Founding Companies and certain
related real estate consists of (i) approximately $85.7 million in cash, (ii)
$3.0 million in 8.0% notes payable over a ten-year term ending in 2007 and (iii)
2,142,441 shares of Common Stock, and the Company will also assume up to $11.5
million of indebtedness of the Founding Companies. Two of the Acquisitions are
subject to post-closing adjustments, based on a multiple of estimated earnings
before interest, taxes, depreciation and amortization ("EBITDA") and payable in
a combination of cash and shares of Common Stock. Based on a preliminary
determination, the Company currently estimates that such post-closing
adjustments will not exceed $0.5 million. See "Certain
Transactions -- Acquisitions of the Founding Companies."
5
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by TCMS................. 5,000,000 shares
Common Stock outstanding after the
Offering(1)................................ 8,398,441 shares
Use of Proceeds.............................. The net proceeds from the Offering will be
used, together with $20.0 million of initial
borrowings under a new credit agreement (the
"Credit Agreement"), to pay the cash portion
of the aggregate purchase price for the
Acquisitions, to repay indebtedness of TCMS
and the Founding Companies and to pay certain
costs related to the Offering and the
Acquisitions. Additional borrowings under the
Credit Agreement will be available for other
general corporate purposes, which may include
future acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol................ TCMS
</TABLE>
- ---------------
(1) The number of shares to be outstanding when the Offering closes will consist
of (i) an aggregate of 1,256,000 shares issued to founders of TCMS and
certain of its executive officers and consultants, (ii) 2,142,441 shares to
be issued as consideration in the Acquisitions and (iii) the 5,000,000
shares being offered hereby. Such share number does not include (i)
approximately 442,000 shares subject to options anticipated to be
outstanding under TCMS' 1997 Stock Option Plan (the "1997 Stock Option
Plan") on the date the Offering closes, (ii) an aggregate of 50,000 shares
issuable pursuant to a warrant (the "MG Warrant") issued by TCMS to
McFarland, Grossman & Company, Inc. ("MGCO"), a financial advisory firm that
assisted the Company in connection with the Acquisitions and in arranging
the Credit Agreement, or (iii) an aggregate of 175,000 shares issuable
pursuant to a warrant (the "Lender Warrant") issued by TCMS to Joint Energy
Development Investments, Limited Partnership, an affiliate of Enron Capital
& Trade Resources Corp. (the "Lender"), in connection with the Credit
Agreement. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Combined Liquidity and Capital Resources,"
"Management -- 1997 Stock Option Plan" and "Certain
Transactions -- Organization of the Company," "-- Acquisitions of the
Founding Companies" and "-- Financial Advisory Services." The holders of
3,398,441 shares have agreed not to offer or sell any of their shares for a
period of one year from the date of this Prospectus without the prior
written consent of Jefferies & Company, Inc. See "Underwriting." In
addition, all shares issued as consideration in the Acquisitions will be
"restricted securities" under Rule 144 of the Securities Act of 1933, as
amended (the "Securities Act"), and will be issued to an aggregate of nine
persons, all of whom are affiliates of Founding Companies.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
6
<PAGE> 7
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following summary unaudited pro forma combined financial information
presents certain historical information of the Company, as adjusted to give
effect to (i) the Acquisitions, (ii) the closing of the Offering and the
application of the proceeds therefrom, (iii) the receipt and application of
$20.0 million of initial borrowings under the Credit Agreement and (iv) the
other pro forma adjustments referred to below. See "Selected Financial
Information" and the Unaudited Pro Forma Combined Financial Statements and the
notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Statement of Operations Information(1):
Revenue................................................... $ 72,744 $ 54,906
Cost of revenue........................................... 60,573 42,923
Selling, general and administrative expenses(2)........... 6,931 3,943
Depreciation and amortization(3).......................... 5,976 3,656
Operating income (loss)................................... (736) 4,384
Interest expense(4)....................................... (3,411) (1,705)
Other income, net......................................... 1,163 617
Provision (benefit) for income taxes...................... (523) 1,653
Net income (loss)......................................... $ (2,461) $ 1,643
========== ==========
Pro forma income (loss) per share......................... $ (.29) $ .19
Shares used in computing pro forma income (loss) per
share(5)............................................... 8,426,219 8,426,219
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED(1)
--------------
JUNE 30, 1997
--------------
(IN THOUSANDS)
<S> <C>
Balance Sheet Information:
Working capital........................................... $ 8,095
Property, plant and equipment, net........................ 63,493
Total assets.............................................. 163,880
Long-term debt, net of current maturities................. 22,700
Stockholders' equity...................................... 101,446
</TABLE>
- ---------------
(1) The pro forma combined statement of operations information assumes the
Offering, the Acquisitions, $20.0 million of initial borrowings under the
Credit Agreement and the issuance of the presently outstanding Common Stock
all were closed on January 1 of each period presented. The pro forma, as
adjusted, balance sheet information assumes those transactions were closed
on June 30, 1997. The pro forma combined financial information (i) is not
necessarily indicative of the results the Company would have obtained had
these events actually occurred when assumed or of the Company's future
results, (ii) is based on preliminary estimates (primarily of the aggregate
purchase price of the Acquisitions), available information and certain
assumptions management deems appropriate and (iii) should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus.
(2) Includes the effect of certain eliminations of related-party rental and
lease expenses resulting from the purchase of certain real properties as
part of the Acquisitions, as follows: (i) $357,000 for the year ended
December 31, 1996; and (ii) $179,000 for the six months ended June 30, 1997.
Does not include anticipated future costs related to TCMS' new corporate
management and costs associated with being a public company, which cannot be
accurately estimated at this time and which management of TCMS expects will
be offset by certain cost savings and margin improvements resulting from the
combination of the Founding Companies (which also cannot be accurately
estimated at this time).
(3) Includes amortization of the $67.0 million of goodwill to be recorded as a
result of the Acquisitions and additional depreciation expense due to the
allocation of $43.7 million of the purchase price to property, plant and
equipment, as described in the Notes to the Unaudited Pro Forma Combined
Financial Statements.
(4) Reflects interest expense relating to $20.0 million of initial borrowings
under the Credit Agreement and the $3.0 million of 8.0% notes being issued
to the sole shareholder of RFCNI as part of the Acquisition of RFCNI, net of
a reduction in interest expense related to the refinancing of the Founding
Companies' outstanding indebtedness.
(5) Includes (i) an aggregate of 1,256,000 shares issued to founders of TCMS and
certain of its executive officers and consultants, (ii) 2,142,441 shares to
be issued as consideration in the Acquisitions, (iii) the effect of 50,000
shares issuable pursuant to the MG Warrant and (iv) the 5,000,000 shares
being offered hereby.
7
<PAGE> 8
SUMMARY HISTORICAL FINANCIAL INFORMATION FOR THE FOUNDING COMPANIES
The following table presents summary historical financial information for
each of the Founding Companies (see "The Company" for the complete names of
each) for the three most recent fiscal years (except where otherwise indicated),
the six months ended June 30, 1996 and 1997 and the eight months ended August
31, 1997. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
EIGHT
SIX MONTHS ENDED MONTHS
JUNE 30 ENDED
------------------ AUGUST 31,
1994 1995 1996 1996 1997 1997
------- ------- ------- ------- ------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Woodson(1):
Revenue..................... $ 7,786 $18,075 $17,933 $10,689 $18,104 $26,039
Cost of revenue............. 5,874 12,716 13,561 7,833 15,243 21,200
Selling, general and
administrative
expenses................. 3,011 2,672 2,968 1,479 1,435 1,791
Depreciation and
amortization............. 728 574 562 291 455 634
Operating income (loss)..... (1,827) 2,113 842 1,086 971 2,414
CSI(2):
Revenue..................... $ 5,331 $ 5,226 $ 8,447 $ 3,815 $ 9,606 $11,032
Cost of revenue............. 2,964 3,334 5,264 2,463 5,651 6,619
Selling, general and
administrative
expenses................. 1,725 2,285 2,435 1,160 1,270 1,758
Depreciation and
amortization............. 288 269 359 202 245 336
Operating income (loss)..... 354 (662) 389 (10) 2,440 2,319
HBH(1):
Revenue..................... $15,261 $14,771 $36,873 $19,062 $23,850 $33,323
Cost of revenue............. 12,585 16,803 33,727 16,343 19,394 25,700
Selling, general and
administrative
expenses................. 929 867 1,000 484 671 1,056
Depreciation and
amortization............. 503 871 1,482 719 750 1,007
Operating income (loss)..... 1,244 (3,770) 664 1,516 3,035 5,560
RFCNI(1):
Revenue..................... $ 5,611 $10,497 $ 9,730 $ 3,159 $ 4,536 $ 7,062
Cost of revenue............. 4,715 9,426 8,260 2,708 3,825 5,596
Selling, general and
administrative
expenses................. 650 698 885 363 674 919
Depreciation and
amortization............. 16 15 12 8 8 14
Operating income............ 230 358 573 80 29 533
</TABLE>
- ---------------
(1) Fiscal year results are for fiscal years ended December 31, 1994, 1995 and
1996.
(2) Fiscal year results are for fiscal years ended May 31, 1994 and 1995 and the
twelve months ended December 31, 1996.
8
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective investors should carefully consider
the following factors, as well as the other information contained in this
Prospectus.
FORWARD-LOOKING INFORMATION
This Prospectus contains certain forward-looking statements. The words
"expect," "believe," "anticipate," "project," "estimate," "predict" and similar
expressions are intended to identify forward-looking statements. Such statements
involve risks, uncertainties and assumptions (including the risk factors
described below). Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated.
CYCLICAL INDUSTRY; DEPENDENCE ON OIL AND GAS INDUSTRY
The demand for marine construction services has traditionally been
cyclical, depending primarily on the capital expenditures of oil and gas
companies for developmental construction. These capital expenditures are
influenced by such factors as prevailing oil and gas prices, expectations about
future prices, the cost of exploring for, producing and delivering oil and gas,
the sale and expiration dates of available offshore leases, the discovery rate
of new oil and gas reserves in offshore areas, local and international political
and economic conditions, technological advances, and the ability of oil and gas
companies to generate funds for capital expenditures. Oil and natural gas prices
and the level of offshore drilling and exploration activity have varied
substantially in recent years, resulting in significant fluctuations in demand
for the Company's services. Significant downturns in demand have in the past
adversely impacted each of the Founding Companies, with the result that each of
the Founding Companies has from time to time incurred operating losses. See
"-- History of Operating Losses of the Founding Companies." A significant or
prolonged reduction in oil or natural gas prices in the future would likely
depress offshore drilling and development activity. A substantial reduction of
such activity would reduce demand for the Company's services and could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Industry Overview."
HISTORY OF OPERATING LOSSES OF THE FOUNDING COMPANIES
Each of the Founding Companies has, from time to time, incurred losses from
operations, particularly during periods of low industry demand for marine
construction services. Some of these operating losses have been incurred in
recent periods. Woodson and RFCNI incurred net operating losses in the three
months ended March 31, 1997, and CSI and HBH incurred net operating losses in
fiscal 1995 and in the three months ended March 31, 1996. The predecessor to
RFCNI completed bankruptcy proceedings in 1988 following a prolonged period of
operating losses. In the event of a substantial or prolonged decline in demand,
the Company could be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Industry Overview."
RISKS ASSOCIATED WITH CONTRACTUAL PRICING IN THE OFFSHORE CONSTRUCTION INDUSTRY
As a result of the competitive conditions in the marine construction
industry, a substantial number of the Company's projects are performed on a
fixed-price basis. The revenue, costs and gross profit realized on a contract
will often vary from the estimated amounts for various reasons, including errors
in estimates or bidding, changes in the availability and cost of labor and
material and variations in productivity from the original estimates. These
variations and the risks inherent in the marine construction industry may result
in revenue and gross profits different from those originally estimated and can
result in reduced profitability or losses on projects. Depending on the size of
a project, variations from estimated contract performance can have a significant
impact on the Company's operating results for any particular fiscal quarter or
year. See "Business -- Customers and Contracts."
9
<PAGE> 10
ABSENCE OF COMBINED OPERATING HISTORY
TCMS was organized in April 1996 and has conducted no operations to date
other than in connection with the Offering and the Acquisitions. The Founding
Companies have operated as separate, independent businesses, and there can be no
assurance that the Company will be able to integrate the operations of these
businesses successfully or to institute the systems and procedures, including
accounting and financial reporting systems, necessary to manage the combined
enterprises on a profitable basis. Until the Company establishes centralized
accounting and other administrative systems, it will rely on the separate
systems of the Founding Companies. The success of the Company will depend, in
part, on the extent to which the Company is able to centralize these functions,
eliminate the unnecessary duplication of other functions and otherwise integrate
the Founding Companies and such additional businesses as the Company may
acquire. TCMS' executive management team has only recently been assembled, and
no assurance can be given that those executive officers will be able to manage
effectively the combined entity or implement the Company's business strategy.
The inability of the Company to integrate the Founding Companies successfully
would have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows. See "Business -- Business
Strategy" and "Management."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
On closing of the Acquisitions and the Offering, 8,398,441 shares of Common
Stock (including 250,000 shares of Restricted Common Stock) will be outstanding.
The 5,000,000 shares of Common Stock offered hereby will be freely tradable
unless acquired by affiliates of TCMS. All the remaining shares of Common Stock
to be outstanding on the closing of the Acquisitions and the Offering (as well
as all shares issuable pursuant to the MG Warrant and the Lender Warrant) may be
resold publicly only following their effective registration under the Securities
Act or pursuant to an exemption from the registration requirements of that act,
such as Rule 144 thereunder. Shareholders of the Founding Companies will have
certain registration rights with respect to 1,975,775 shares of Common Stock
received by them in the Acquisitions, subject to the one-year Lockup Period
described below. The availability for sale, or sale, of the shares of Common
Stock eligible for future sale could adversely affect the market price of the
Common Stock prevailing from time to time.
After the Offering closes, TCMS intends to file a registration statement on
Form S-8 with the Securities and Exchange Commission (the "Commission") to
register the shares issuable pursuant to the 1997 Stock Option Plan under the
Securities Act. After that registration statement becomes effective, the shares
registered thereby generally will on issuance be freely tradable by holders who
are not affiliates of TCMS and, subject to the volume and other limitations of
Rule 144, by holders who are affiliates of TCMS. See "Management -- 1997 Stock
Option Plan."
TCMS and its directors and executive officers, MGCO, J&D Capital
Investments, L.C. (which is majority owned by G. Darcy Klug, a promoter of
TCMS), all of TCMS' other current stockholders and all persons who receive
shares of Common Stock in connection with the Acquisitions (other than Common
Stock issuable upon exercise of the Lender Warrant) have agreed not to offer or
sell any of those shares for a period of one year from the date of this
Prospectus (the "Lockup Period") without the prior written consent of Jefferies
& Company, Inc., except that TCMS may issue Common Stock in connection with the
Acquisitions and, subject to certain conditions, in connection with future
acquisitions, on exercise of the MG Warrant and the Lender Warrant and pursuant
to awards under the 1997 Stock Option Plan. Jefferies & Company, Inc. has
advised TCMS that it has no present intention to waive the restrictions on sales
of shares of Common Stock during the Lockup Period. See "Shares Eligible for
Future Sale."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company intends to grow by acquiring additional marine construction
businesses. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate
acquired businesses, if any, into the Company without substantial costs, delays,
or other operational or financial difficulties. The Company expects to face
competition for acquisition candidates, which may limit the number of
acquisition opportunities available to the Company and may lead to higher
acquisition prices. Further, acquisitions involve a number of other risks,
including failure of the acquired
10
<PAGE> 11
business to achieve expected results, diversion of management's attention and
resources to acquisitions, failure to retain key customers or personnel of the
acquired business and risks associated with unanticipated events or liabilities,
some or all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Acquisitions accounted
for as purchases may result in substantial annual noncash amortization charges
for goodwill and other intangible assets in the Company's statements of
operations. See "Business -- Business Strategy."
The Company's acquisition strategy will require substantial capital. Using
internally generated cash or debt to complete acquisitions could substantially
limit the Company's operational and financial flexibility. The extent to which
the Company will be able or willing to use shares of Common Stock to consummate
acquisitions will depend on its market value from time to time and the
willingness of potential sellers to accept it as full or partial payment. Using
shares of Common Stock for this purpose may result in significant dilution to
then existing stockholders. No assurance can be given the Company will be able
to obtain the capital it will need to continue to finance a successful
acquisition program and its other cash needs. In addition, acquisitions
involving consideration in excess of $5.0 million will require the consent of
the Lender under the Credit Agreement. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Liquidity and Capital Resources."
NEED FOR SKILLED WORKERS
The Company's ability to remain productive and become profitable will
depend substantially on its ability to retain and attract skilled construction
workers, primarily welders, pipefitters and equipment operators. The Company's
ability to expand its operations is impacted by its ability to increase its
labor force. The demand for skilled workers is high and the supply is limited. A
significant increase in the wages paid by competing employers could result in a
reduction in the Company's skilled labor force, increases in the wage rates paid
by the Company, or both. If either of these events occurred, the capacity and
profitability of the Company could be diminished and the growth potential of the
Company could be impaired. See "Business -- Employees."
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including the
timing of future acquisitions, seasonal fluctuations in the demand for marine
construction services (particularly during the winter months) and competitive
factors. Accordingly, quarterly comparisons of the Company's revenue and
operating results should not be relied on as an indication of future
performance, and the results of any quarterly period may not be indicative of
results to be expected for a full year. The Company recognizes most of its
contract revenue on a percentage-of-completion basis. Accordingly, contract
price and cost estimates are reviewed periodically as the work progresses, and
adjustments proportionate to the percentage of completion are reflected in
income in the period when the facts giving rise to a revised estimate become
known. To the extent that these adjustments result in a reduction or elimination
of previously reported profits with respect to a project, the Company would
recognize a charge against current earnings, which could be material. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Customers and Contracts."
OPERATING RISKS
Domestic. Marine construction involves a high degree of operational risk.
Hazards such as vessels capsizing, sinking, grounding, colliding and sustaining
damage from severe weather conditions are inherent in marine operations. These
hazards can cause personal injury or loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage and
suspension of operations. Certain employees of the Company are covered by
provisions of the Jones Act, the Death on the High Seas Act and general maritime
law, which laws operate to make the liability limits established by state
workers' compensation laws inapplicable to these employees and, instead, permit
them or their representatives to pursue actions against the Company and the
applicable vessel for damages or job-related injuries, with generally no
statutory limitations on the Company's potential liability. The failure of
offshore pipelines and structural components during and after installation can
result in similar injuries and damages. Litigation arising from such an
occurrence may
11
<PAGE> 12
result in the Company being named as a defendant in lawsuits asserting large
claims. The Company maintains such insurance protection as it deems prudent,
including hull insurance on its vessels. However, certain risks are either not
insurable or insurance is available only at rates that the Company considers not
to be economical. There can be no assurance that any such insurance will be
sufficient or effective under all circumstances or against all hazards to which
the Company may be subject. A successful claim for which the Company is not
fully insured could have a material adverse effect on the Company. Moreover, no
assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable. For a discussion of
two class action lawsuits involving large claims for compensatory and punitive
damages against one of the Founding Companies arising from events that occurred
during the course of a pipeline installation project for a third party gas
transmission company (and as to which the total amount of damages to which the
Company may have exposure cannot reasonably be estimated at this time), see
"Business -- Legal Proceedings."
International. The Company's international operations are subject to a
number of risks inherent in business operations in foreign countries, including
political, social and economic instability, potential seizure or nationalization
of assets, currency restrictions and exchange rate fluctuations, nullification,
modification or renegotiation of contracts, import-export quotas and other forms
of public and governmental regulations, all of which are beyond the control of
the Company. Additionally, the ability of the Company to compete in
international markets may be adversely affected by import duties and fees,
foreign taxes, foreign governmental regulations that favor or require the
awarding of contracts to local contractors, or regulations requiring foreign
contractors to employ citizens of, or purchase supplies from, a particular
jurisdiction.
COMPETITION
The marine construction services business is highly competitive and in
recent years has been characterized by overcapacity, which resulted in
substantial pressure on pricing and operating margins. Overcapacity in the
industry may recur in the future. Contracts for marine construction services are
usually awarded on a competitive bid basis. Price competition is a primary
factor in determining which qualified contractor with available equipment is
awarded a contract. Some of the Company's competitors are larger and have
greater financial and other resources than the Company. See "-- Cyclical
Industry; Dependence on Oil and Gas Industry" and "Business -- Competition."
GOVERNMENTAL REGULATION
The Company's operations are subject to and affected by various types of
governmental regulation, including numerous federal, state and local
environmental protection laws and regulations, which are becoming increasingly
complex, stringent and expensive. Significant fines and penalties may be imposed
for noncompliance, and certain environmental laws impose joint and several
"strict liability" for remediation of spills and releases of oil and hazardous
substances, creating liability for environmental damages, without regard to
negligence or fault. Such laws and regulations may expose the Company to
liability for the conduct of or conditions caused by others, including the
Company's subcontractors, or for acts of the Company which were in compliance
with all applicable laws at the time such acts were performed. Future
acquisitions by the Company also may be subject to regulation, including
antitrust reviews. In addition, the Company depends on the demand for its
services from the oil and gas industry and could be affected materially by
changes in taxes, price controls or other laws relating to the oil and gas
industry generally. The adoption of laws or regulations curtailing exploration
and development drilling for oil and gas for economic, environmental or other
policy reasons could adversely affect the Company's operations by limiting
demand for its services. See "Business -- Governmental Regulation and
Environmental Matters."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Following the closing of the Acquisitions and the Offering, TCMS' founders,
executive officers and directors and the persons receiving shares of Common
Stock in connection with the Acquisitions will beneficially own 3,398,441 shares
of Common Stock. These stockholders will control in the aggregate approximately
40.5% of the votes of all shares of Common Stock and, if acting in concert, may
be able to exercise control over the Company's affairs, elect the entire Board
of Directors and control the outcome of any
12
<PAGE> 13
matter submitted to a vote of the Company's stockholders. See "Security
Ownership of Certain Beneficial Owners and Management."
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES OF FOUNDING COMPANIES
Of the estimated net proceeds of the Offering and the initial borrowings
under the Credit Agreement, approximately $85.7 million will be paid as the cash
portions of the purchase prices for the Acquisitions and the related real
estate. As a result of the CSI acquisition, Mr. Daniel N. Hargett, Sr., will
receive $36.7 million and will hold more than five percent of the shares of
Common Stock outstanding when the Offering closes. Following the CSI
Acquisition, Mr. Hargett will serve as a director of TCMS and will continue to
serve as president of CSI. Shareholders of Woodson will receive an aggregate of
$19.8 million in cash and will hold approximately 12% of the Common Stock
outstanding when the Offering closes. Four of the Woodson shareholders will
continue to serve as president of the respective Woodson companies following the
closing of the Offering.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL
The success of the Company's operations will depend on the continuing
efforts of its executive officers and the senior operating management of the
Founding Companies, and likely will depend on the senior management of any
significant businesses the Company acquires in the future. The business or
prospects of the Company could be affected adversely if any of those persons
does not continue in his or her management role after joining the Company, and
the Company is unable to attract and retain qualified replacements. See
"Management."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which TCMS and representatives of the
Underwriters have negotiated, may not be indicative of the price at which the
Common Stock will trade after the Offering. See "Underwriting" for the factors
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market, but no assurance
can be given that an active trading market will develop or be maintained for the
Common Stock. The market price of the Common Stock after the Offering may
fluctuate significantly from time to time in response to numerous factors,
including the timing of any acquisitions by the Company, variations in the
reported financial results of the Company or those of its competitors, changes
by financial research analysts in their estimates of future earnings of the
Company, changing conditions in the economy in general or in the Company's
industry in particular and unfavorable publicity or changes in applicable laws
and regulations (or judicial or administrative interpretations thereof)
affecting the Company or its business. In addition, the stock markets experience
significant price and volume volatility from time to time which may affect the
market price of the Common Stock for reasons unrelated to the Company's
performance.
POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
The Amended and Restated Certificate of Incorporation of TCMS (the
"Charter") authorizes the Board of Directors to issue, without stockholder
approval, one or more series of preferred stock having such preferences, powers
and relative, participating, optional and other rights (including preferences
over the Common Stock respecting dividends and distributions and voting rights)
as the Board of Directors may determine. The issuance of this "blank-check"
preferred stock could render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest or
otherwise. In addition, the Charter contains a prohibition of stockholder action
by written consent and an anti-greenmail provision. Certain provisions of the
Delaware General Corporation Law (the "DGCL") may also discourage takeover
attempts that have not been approved by the Board of Directors. See "Description
of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate,
substantial dilution in the net tangible book value of their stock of $13.90 per
share and may experience further dilution in that value from issuances of Common
Stock in the future. See "Dilution."
13
<PAGE> 14
THE COMPANY
TCMS was organized in April 1996 to become a fully integrated marine
construction company focusing on the transition zone (marsh, swamp and coastal
regions out to water depths of 20 feet) and shallow water (water depths of 20 to
200 feet) regions along the U.S. Gulf Coast. The Company's goal is to become a
leader in the consolidation of these fragmented segments of the marine
construction industry through an aggressive acquisition program. On closing of
the Acquisitions, the Company's services will include offshore pipeline
installation and repair services, hydrostatic testing and commissioning of
pipelines and fabrication and refurbishment of components for offshore platforms
and drilling rigs. TCMS has entered into definitive agreements to acquire the
Founding Companies concurrently with and as a condition to the closing of the
Offering. In 1996, the Founding Companies, which have been in business an
average of 47 years, had pro forma combined revenue of approximately $73.0
million. For a description of the transactions pursuant to which these
businesses will be acquired, see "Certain Transactions -- Organization of the
Company." The following is a brief description of the Founding Companies:
Woodson. Woodson Construction Company (collectively with three affiliated
companies, "Woodson") is primarily engaged in the business of installing and
repairing pipelines in water depths of up to 20 feet, through the transition
zone to onshore gathering, transmission and processing facilities along the U.
S. Gulf Coast. Woodson is headquartered in Lafayette, Louisiana and maintains
its primary operating facility in Delcambre, Louisiana. Woodson primarily
operates in the marshland areas of Louisiana and, to a lesser extent, in similar
regions in neighboring states. In addition to pipeline installation and repair,
Woodson also (i) manufactures amphibious undercarriages for use in its own
operations and for sale to third parties, and (ii) performs onshore
environmental site assessments and on-site remediation of petroleum-contaminated
areas. Woodson generated revenue of approximately $17.9 million and $18.1
million during the year ended December 31, 1996 and the six months ended June
30, 1997, respectively.
CSI. CSI Hydrostatic Testers, Inc. (collectively with a subsidiary and an
affiliated company, "CSI"), performs (i) onshore and offshore hydrostatic
testing and commissioning of pipelines, (ii) pipeline cleaning, drying and
dehydration and (iii) pipeline jetting and other pipeline burial services. CSI
is headquartered in Lafayette, Louisiana and operates along the U.S. Gulf Coast
and in certain international markets. CSI generated revenue of approximately
$8.4 million and $9.6 million during the year ended December 31, 1996 and the
six months ended June 30, 1997, respectively.
HBH. HBH, Inc. ("HBH") focuses its operations on installing and repairing
offshore pipelines for the oil and gas industry within the transition zone and
shallow water regions along the U. S. Gulf Coast. HBH is headquartered in Belle
Chasse, Louisiana and operates primarily off the coast of Louisiana and in
Mobile Bay, off the coast of Alabama. HBH generated revenue of approximately
$36.9 million and $23.9 million during the year ended December 31, 1996 and the
six months ended June 30, 1997, respectively.
RFCNI. The Red Fox Companies of New Iberia, Inc. ("RFCNI") is primarily
engaged in the fabrication and refurbishment of (i) structural components of
fixed platforms for use in the development of oil and gas, and (ii) structural
components, primarily deck structures, for offshore drilling rigs and barge
drilling rigs. RFCNI also fabricates marine sewage treatment units, which are
installed on offshore platforms and drilling rigs. RFCNI's headquarters and
principal fabrication yard are located in New Iberia, Louisiana. RFCNI generated
revenue of approximately $9.7 million and $4.5 million during the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively.
SUMMARY OF TERMS OF THE ACQUISITIONS. The aggregate consideration TCMS will
pay to acquire the Founding Companies and certain related real estate consists
of (i) approximately $85.7 million in cash, (ii) $3.0 million in 8.0% notes
payable over a ten-year term ending in 2007 and (iii) 2,142,441 shares of Common
Stock. The Company will also assume up to $11.5 million of indebtedness of the
Founding Companies and then repay or refinance substantially all that
indebtedness at or shortly after the closing of the Acquisitions. In addition,
the acquisition agreements for the RFCNI and CSI acquisitions provide for
post-closing adjustments, which are to be determined based on a multiple of
estimated EBITDA for RFCNI and one of the entities comprising CSI, payable in a
combination of cash and shares of Common Stock. Based
14
<PAGE> 15
on a preliminary determination, the Company currently estimates that such
post-closing adjustments will not exceed $0.5 million.
The closing of each Acquisition is subject to customary conditions,
including, among others: the continuing accuracy of the representations and
warranties made by the Founding Companies, their principal shareholders and
TCMS; the performance of each of their respective covenants included in the
agreements relating to the Acquisitions; and the nonexistence of a material
adverse change in the results of operations, financial condition or business of
each Founding Company prior to the closing date.
Any Founding Company's acquisition agreement may be terminated under
certain circumstances prior to the closing of the Offering, including: (i) by
the mutual consent of the Board of Directors of TCMS and the owner or owners of
that Founding Company; (ii) by TCMS if the disclosure schedules to the
acquisition agreement are amended to reflect a material adverse change in that
Founding Company; or (iii) if a material breach or default under the agreement
by one party occurs and is not waived. No assurance can be given that the
conditions to the closing of all the Acquisitions will be satisfied or waived or
that each Acquisition will close. See "Certain Transactions -- Acquisitions of
the Founding Companies."
Senior management of each of the Founding Companies will continue to be
employed by the respective Founding Companies immediately following the
Offering. In addition to serving as directors of TCMS, H. Daniel Hughes II and
Daniel N. Hargett, Sr. will continue to serve as president of HBH and CSI,
respectively, each under a three-year employment agreement. The current
president of each Woodson company and ten other senior members of management of
the Founding Companies will also execute employment agreements to continue to
serve their respective Founding Companies.
TCMS is a Delaware corporation. Its corporate offices are located at 3535
Briarpark, Suite 210, Houston, Texas 77042, and its telephone number is (713)
784-7429.
15
<PAGE> 16
USE OF PROCEEDS
TCMS' net proceeds from the Offering will be approximately $82.5 million
(approximately $95.1 million if the Underwriters exercise their over-allotment
option in full), after deducting the underwriting discounts and commissions and
estimated offering expenses, including approximately $0.7 million to be used to
repay advances under the J&D Loan Agreement, which were used to fund Offering
expenses. The Company will use these net proceeds, together with $20.0 million
of initial borrowings under the Credit Agreement, to (i) pay the $85.7 million
cash portion of the aggregate purchase price for the Acquisitions, (ii) repay up
to $11.5 million of outstanding indebtedness of the Founding Companies, (iii)
pay success bonuses and salaries aggregating $0.5 million to certain members of
executive management of TCMS, (iv) pay financial advisory fees of $1.2 million
to MGCO, (v) pay debt costs related to the Credit Agreement of $0.9 million and
(vi) for general corporate purposes. Additional borrowings under the Credit
Agreement will be available for general corporate purposes, which may include
future acquisitions.
Borrowings under the Credit Agreement are secured by liens on substantially
all the Company's assets (including accounts receivable and after-acquired
property). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Combined Liquidity and Capital Resources."
The indebtedness of the Founding Companies to be repaid from the proceeds
of the Offering bears interest at rates ranging from 6.6% to 11.2% per annum and
would otherwise mature at various dates through April 2003. Advances under the
J&D Loan Agreement bear interest at a rate of 10.0% per annum and are due on or
before the earlier of June 19, 1998 and 30 days following the closing of the
Offering.
DIVIDEND POLICY
TCMS currently intends to retain its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. Any future dividends will be at the discretion
of the Board of Directors, after taking into account various factors, including,
among others, the Company's financial condition, results of operations, cash
flows from operations, current and anticipated cash needs and expansion plans,
the income tax laws then in effect, the requirements of Delaware law, the
restrictions imposed by the Credit Agreement and any restrictions that may be
imposed by the Company's future credit arrangements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Liquidity and Capital Resources."
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the short-term debt and current maturities
of long-term debt and capitalization of the Company as of June 30, 1997(i) on a
pro forma combined basis to give effect to the Acquisitions and (ii) as adjusted
to give effect to the Offering and the application of the estimated net proceeds
therefrom and the receipt and application of $20.0 million of initial borrowings
under the Credit Agreement, as described in "Use of Proceeds." This table should
be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements of the Company and the notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable and current maturities of long-term debt(1)... $ 4,027 $ 1,294
Notes payable to founding stockholders(2)................... 85,686 --
------- --------
Total short-term debt............................. $89,713 $ 1,294
======= ========
Long-term debt, net of current maturities................... $11,654 $ 22,700
Stockholders' equity:
Preferred Stock, $.001 par value, 2,000,000 shares
authorized; none issued and outstanding................ -- --
Common Stock, $.001 par value, 20,000,000 shares
authorized; 3,148,441 issued and outstanding, pro
forma; and 8,148,441 issued and outstanding, as
adjusted............................................... 3 8
Restricted Common Stock, $.001 par value, 3,000,000 shares
authorized; 250,000 issued and outstanding, pro forma
and as adjusted........................................ -- --
Additional paid-in capital................................ 12,288 94,789
Retained earnings......................................... 6,635 6,635
Net unrealized gain on available for sale securities, net
of deferred income taxes............................... 14 14
------- --------
Total stockholders' equity........................... 18,940 101,446
------- --------
Total capitalization.............................. $30,594 $124,146
======= ========
</TABLE>
- ---------------
(1) For a description of the Company's debt, see the notes to Unaudited Pro
Forma Combined Financial Statements and notes to the Founding Companies'
Financial Statements included herein.
(2) Includes the cash portion of the aggregate consideration to be paid in
connection with the Acquisitions, which will be paid from a portion of the
net proceeds of the Offering and borrowings under the Credit Agreement.
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<PAGE> 18
DILUTION
The deficit in pro forma net tangible book value of the Company as of June
30, 1997 was approximately $(48.0) million, or approximately $(14.14) per share
of Common Stock, after giving effect to the Acquisitions and the financings
thereof. The pro forma net tangible book value per share represents the quotient
of the Company's pro forma tangible net worth (pro forma total tangible assets
less pro forma total liabilities) divided by the number of shares of Common
Stock to be outstanding after giving effect to the Acquisitions. After giving
effect to the sale of the shares of Common Stock offered hereby, and after
deducting underwriting discounts and estimated offering expenses payable by the
Company and the application of the net proceeds therefrom and the receipt and
application of $20.0 million of initial borrowings under the Credit Agreement,
as described in "Use of Proceeds," the Company's pro forma net tangible book
value as of June 30, 1997 would have been approximately $34.5 million, or
approximately $4.10 per share. This represents an immediate increase in pro
forma net tangible book value of approximately $18.24 per share to existing
stockholders and an immediate dilution of approximately $13.90 per share to new
investors purchasing shares in the Offering. The following table illustrates
this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $18.00
Pro forma net tangible book value per share before the
Offering.................................................. $(14.14)
Increase in pro forma net tangible book value per share
attributable to new investors............................. 18.24
-------
Pro forma net tangible book value per share after the
Offering.................................................. 4.10
------
Dilution per share to new investor(s)....................... $13.90
======
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Acquisitions as of June 30, 1997, the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by existing stockholders and the new investors purchasing shares of Common
Stock from the Company in the Offering (before deducting underwriting discounts
and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 3,398,441 40.5% $(48,049,000)(1) (115)% $(14.14)
New investors.............. 5,000,000 59.5% 90,000,000 215 18.00
--------- ----- ------------ -----
Total............ 8,398,441 100.0% $ 41,951,000 100.0%
========= ===== ============ =====
</TABLE>
- ---------------
(1) Total consideration paid by existing stockholders represents the Company's
pro forma combined stockholders' equity less pro forma combined goodwill, in
each case before giving effect to the post-merger adjustments set forth in
the Unaudited Pro Forma Combined Balance Sheet of TCMS and the Founding
Companies included herein.
18
<PAGE> 19
SELECTED FINANCIAL INFORMATION
In accordance with the applicable accounting rules of the Commission,
Woodson has been identified as the "accounting acquiror" for financial
accounting purposes. The following selected historical consolidated financial
information of the accounting acquiror has been derived (i) from the audited
financial statements of Woodson for the years ended December 31, 1992, 1993,
1994, 1995 and 1996 and (ii) from the unaudited financial statements of Woodson
for the six months ended June 30, 1996 and 1997, which have been prepared on the
same basis as the audited statements and, in the opinion of Woodson, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of that information. See the combined historical financial
statements of Woodson and the notes thereto included herein. The following
summary unaudited pro forma financial information represents historical
information of the Company, as adjusted to give effect to (i) the Acquisitions,
(ii) the closing of the Offering and the application of the proceeds therefrom,
(iii) the receipt and application of $20.0 million of initial borrowings under
the Credit Agreement and (iv) the other pro forma adjustments referred to below.
See the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS
INFORMATION FOR WOODSON:
Revenue.............................. $25,529(1) $14,302 $ 7,786 $18,075 $17,933 $10,689 $18,104
Cost of revenue...................... 21,845(1) 10,909 5,874 12,716 13,561 7,833 15,243
Selling, general and administrative
expenses........................... 3,254 2,991 3,011 2,672 2,968 1,479 1,435
Depreciation and amortization........ 794 831 728 574 562 291 455
------- ------- ------- ------- ------- ------- -------
Operating income (loss).............. (364) (429) (1,827) 2,113 842 1,086 971
Interest income...................... 59 43 20 25 86 40 64
Interest expense..................... (57) (58) (101) (109) (35) (6) (45)
Other income, net.................... 248(2) 107 96 69 357(3) 99 496(3)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.... (114) (337) (1,812) 2,098 1,250 1,219 1,486
Provision (benefit) for income
taxes.............................. (4) (141) (86) 91 91 17 191
Cumulative effect of accounting
change............................. -- 225(4) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $ (110) $ 29 $(1,726) $ 2,007 $ 1,159 $ 1,202 $ 1,295
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1996 ENDED JUNE 30, 1997
----------------- --------------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE INFORMATION)
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION(5):
Revenue................................................... $ 72,744 $ 54,906
Cost of revenue........................................... 60,573 42,923
Selling, general and administrative expenses(6)........... 6,931 3,943
Depreciation and amortization(7).......................... 5,976 3,656
---------- ----------
Operating income (loss)................................... (736) 4,384
Interest expense(8)....................................... (3,411) (1,705)
Other income, net......................................... 1,163 617
Provision (benefit) for income taxes...................... (523) 1,653
---------- ----------
Net income (loss)......................................... $ (2,461) $ 1,643
========== ==========
Pro forma income (loss) per share......................... $ (.29) $ .19
Shares used in computing pro forma income (loss) per
share(9)................................................ 8,426,219 8,426,219
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30, 1997
------------------------------------------ ------------------------
PRO FORMA
AS
1992 1993 1994 1995 1996 HISTORICAL ADJUSTED(5)
------ ------ ------ ------ ------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working capital............................... $3,938 $2,862 $1,401 $4,628 $3,803 $ 3,432 $ 8,095
Property, plant and equipment, net............ 2,745 2,669 2,252 1,872 2,956 4,348 63,493
Total assets.................................. 9,956 8,764 6,997 9,007 9,156 13,648 163,880
Long-term debt, net of current maturities..... 79 48 19 -- -- -- 22,700
Shareholders' equity.......................... 7,775 7,370 5,646 7,616 7,717 8,707 101,446
</TABLE>
- ---------------
(1) Variance between years is primarily attributable to a higher level of
construction activity and the fact that the 1992 period was a thirteen-month
period due to a change in fiscal year end.
(2) This amount is primarily comprised of royalty income not realized in other
periods.
(3) This amount primarily represents gains recognized on the sale of various
assets.
(4) Represents the net effect of adopting FASB No. 109, "Accounting for Income
Taxes."
(5) The pro forma combined statement of operations information assumes the
Offering, the Acquisitions, $20.0 million of initial borrowings under the
Credit Agreement and the issuance of the presently outstanding Common Stock
all were closed on January 1 of each period presented. The pro forma, as
adjusted balance sheet information assumes those transactions were closed on
June 30, 1997. The pro forma combined financial information (i) is not
necessarily indicative of the results the Company would have obtained had
these events actually occurred when assumed or of the Company's future
results, (ii) is based on preliminary estimates, available information and
certain assumptions management deems appropriate and (iii) should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus.
(6) Includes the effect of certain eliminations of related-party rental and
lease expenses resulting from the purchase of certain real properties as
part of the Acquisitions, as follows: (i) $357,000 for the year ended
December 31, 1996 and (ii) $179,000 for the six months ended June 30, 1997.
Does not include anticipated future costs related to TCMS' new corporate
management and costs associated with being a public company, which cannot be
accurately estimated at this time and which management of TCMS expects will
be offset by certain cost savings and margin improvements resulting from the
combination of the Founding Companies (which also cannot be accurately
estimated at this time).
(7) Includes amortization of the $67.0 million of goodwill to be recorded as a
result of the Acquisitions and additional depreciation expense due to the
allocation of $43.7 million of the purchase price to property, plant and
equipment, as described in the Notes to the Unaudited Pro Forma Combined
Financial Statements.
(8) Reflects interest expense relating to $20.0 million of initial borrowings
under the Credit Agreement and the $3.0 million of 8.0% notes being issued
to the sole shareholder of RFCNI as part of the Acquisition of RFCNI, net of
a reduction in interest expense related to the refinancing of the Founding
Companies' outstanding indebtedness.
(9) Includes (i) an aggregate of 1,256,000 shares issued to founders of TCMS and
certain of its executive officers and consultants, (ii) 2,142,441 shares to
be issued as consideration in the Acquisitions, (iii) the effect of 50,000
shares issuable pursuant to the MG Warrant and (iv) the 5,000,000 shares
being offered hereby.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Information" and the financial statements and the notes thereto
included elsewhere in this Prospectus. The following information contains
forward-looking statements. For a discussion of certain limitations inherent in
such statements, see "Risk Factors -- Forward-Looking Information."
INTRODUCTION
The Company derives its revenue primarily from providing services related
to pipeline installation and repair, hydrostatic testing and commissioning of
pipelines, and fabrication and refurbishment of components for oil and gas
production platforms and drilling rigs. To a lesser extent, the Company
generates revenue from (i) the manufacture and sale of amphibious undercarriages
for marine construction equipment used in stump-studded swamp terrain and (ii)
onshore environmental site assessments and on-site remediation of petroleum-
contaminated areas.
Most of the Company's services are provided under fixed-priced contracts
and are generally completed within one year. These contracts are usually
accounted for using the percentage-of-completion method of accounting. Under
this method, the percentage-of-completion is determined by comparing contract
costs incurred to date with total estimated contract costs. Any significant
revision in cost and income estimates is reflected in the accounting period in
which the facts that require the revision become known. Income is recognized by
applying the percentage completed to the projected total income for each
contract in progress. Cost of revenue consists of direct material, labor and
subcontracting costs and indirect costs related to contract performance, such as
indirect labor, supplies and tools. Cost of revenue also includes the
manufacturing costs related to the amphibious undercarriages sold and costs
associated with the services provided for site assessments and remediation
activities. Selling, general and administrative expenses have historically
consisted primarily of compensation and benefits to owners as well as to sales
and administrative employees, fees for professional services and other general
office expenses. Selling, general and administrative expenses have also
historically included incentive and discretionary bonuses paid to owners,
including amounts paid in lieu of S corporation distributions to enable them to
meet their income tax obligations.
The Founding Companies have historically operated as independent, privately
owned entities, and their results of operations reflect varying tax structures
(S corporations or C corporations) which have influenced the historical level of
owners' compensation. Cost of revenue and selling, general and administrative
expenses as a percentage of revenue may not be comparable among the individual
Founding Companies because of differences in their operations.
The Company believes the combination of the Founding Companies will provide
opportunities to improve operating margins and increase profitability. The
Company believes it will be able to achieve operating efficiencies and cost
savings by consolidating overlapping facilities and certain administrative
functions, eliminating the rental expense on certain related party leases
relating to certain real properties being purchased as part of the Acquisitions
and by rationalizing its asset base. In addition, the Company believes it will
be able to increase its asset utilization by implementing a comprehensive
marketing effort to capitalize on its position as an integrated provider of
pipeline installation and repair and related services in both the transition
zone and shallow water market segments. The Company anticipates the savings and
margin improvements from these efforts will be partially offset by costs related
to the Company's new corporate management and by costs associated with being a
public company; however, the Company cannot currently quantify these anticipated
savings, margin improvements or costs. Except for the elimination of the rental
expense referred to above, the pro forma financial information herein reflects
neither expected savings, margin improvements nor expected incremental costs.
The marine construction industry along the U. S. Gulf Coast is highly
seasonal as a result of weather conditions, the availability of daylight hours
and the timing of capital expenditures by oil and gas companies. Historically,
the Founding Companies have performed a substantial portion of their services
during the period from March through November, and, therefore, a
disproportionate portion of their contract revenue, gross
21
<PAGE> 22
profit and net income generally has been earned during the second and third
quarters of the calendar year. Because of this seasonality, the Company's future
full year results are not likely to be a direct multiple of any particular
quarter or combination of quarters. Additionally, the Company's results of
operations will also be affected by the level of oil and gas exploration and
development activity maintained by oil and gas companies in the Gulf of Mexico.
The level of exploration and development activity is related to several factors,
including trends of oil and gas prices, exploration and production companies'
expectations of future oil and gas prices, and changes in technology which
reduce costs and improve expected returns on investment.
In July 1996, the Commission issued Staff Accounting Bulletin No. 97 ("SAB
97"), relating to business combinations immediately prior to an initial public
offering. SAB 97 requires that these combinations be accounted for using the
purchase method of accounting and requires one of the companies to be designated
as the accounting acquiror. In connection with the Acquisitions and the
Offering, Woodson has been designated as the acquiring company because its
current shareholders, in the aggregate, represent the highest percentage of the
Common Stock (other than shares of Common Stock to be issued in the Offering)
that will be issued to former shareholders of the Founding Companies. For the
remaining Founding Companies including TCMS, $67.0 million (pro forma as of June
30, 1997) of the excess of the purchase price over the fair value of the net
assets to be acquired, will be recorded as "goodwill" and will be amortized as a
non-cash charge to the Company's statements of operations over a 40-year period.
The annual pro forma impact of this amortization expense, which is generally
non-deductible for tax purposes, is $1.7 million. Prior to the issuance of SAB
97, goodwill and related amortization expense were not required to be recorded
for most business combinations similar to the Acquisitions. See "Certain
Transactions -- Organization of the Company."
COMBINED RESULTS OF OPERATIONS
The combined results of operations of the Founding Companies for the
periods presented in the table below do not represent combined results of
operations presented in accordance with generally accepted accounting principles
(because combining companies not under common control is not permitted under
those principles), but are only a summation of the revenue, cost of revenue,
selling, general and administrative expenses and depreciation and amortization
of TCMS and the individual Founding Companies on a historical basis (and these
items as a percentage of revenue). The combined results exclude the effects of
pro forma adjustments and intercompany eliminations between the Founding
Companies and, therefore, may not be comparable to the Company's
post-combination results of operations because: (i) the Founding Companies were
not under common control or common management during the periods presented; (ii)
the Founding Companies had different tax structures during the periods
presented; (iii) the Company will incur incremental costs related to its new
corporate management and being a public company; (iv) the Company will use the
purchase method to record the Acquisitions, resulting in the recording of
goodwill, which will be amortized over 40 years; and (v) the combined
information does not reflect the potential benefits and cost savings the Company
expects to realize when operating as a combined entity.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------------------
1994(1) 1995(1) 1996(2) 1996 1997
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ $33,989 100.0% $48,569 100.0% $72,983 100.0% $36,725 100.0% $56,096 100.0%
Costs and expenses:
Cost of revenue.............. 26,138 76.9 42,279 87.0 60,812 83.3 29,347 79.9 44,113 78.6
Selling, general and
administrative expenses.... 6,315 18.6 6,522 13.4 7,288 10.0 3,486 9.5 4,122 7.4
Depreciation and
amortization............... 1,535 4.5 1,729 3.6 2,415 3.3 1,220 3.3 1,458 2.6
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income (loss)........ $ 1 --% $(1,961) (4.0)% $ 2,468 3.4% $ 2,672 7.3% $ 6,403 11.4%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(1) The financial information is presented on the basis of a year ended December
31 for each Founding Company except CSI, which is presented for the fiscal
year ended May 31.
(2) Reflects results of operations for the Founding Companies for the twelve
months ended December 31, 1996.
22
<PAGE> 23
Recent Unaudited Pro Forma Combined Financial Results
On a pro forma combined basis, the Founding Companies generated revenue of
$76.3 million for the eight months ended August 31, 1997. The pro forma combined
operating income for the period was $8.0 million, which is net of $4.9 million
of depreciation and amortization on a pro forma combined basis. Pro forma
combined net income for the eight months ended August 31, 1997 was $3.3 million,
resulting in pro forma income per share of $0.39 (using 8,426,219 shares of
Common Stock in the computation of pro forma income per share).
Combined results for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996
Revenue. Revenue increased $19.4 million, or 52.7%, for the six months
ended June 30, 1997 compared to the corresponding period in the prior year. The
increase primarily resulted from increased pipeline construction activity at
Woodson and HBH, with revenue increasing by $12.2 million from this activity. In
addition, revenue increased $5.8 million at CSI, with the newly acquired (and
recently refurbished) M/V Discovery (a multi-purpose service vessel) generating
most of this increase, and $1.4 million at RFCNI, as a result of increased
fabrication activity during the 1997 period.
Cost of revenue. Cost of revenue increased $14.8 million, or 50.3%, for the
six months ended June 30, 1997 compared to the corresponding period in the prior
year. The increase primarily resulted from increased costs of $10.5 million at
Woodson and HBH, associated principally with increased pipeline construction
activity. In addition, costs associated with the operation of the M/V Discovery
were primarily responsible for a $3.2 million increase in cost of revenue at CSI
for the 1997 period. As a percentage of revenue, cost of revenue was 78.6% for
the six months ended June 30, 1997 compared to 79.9% for the corresponding
period in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.6 million, or 18.2%, for the six months
ended June 30, 1997 compared to the corresponding period in the prior year. As a
percentage of revenue, selling, general and administrative expenses were 7.4%
for the six months ended June 30, 1997 compared to 9.5% for the corresponding
period in the prior year.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.2 million, or 19.5%, for the six months ended June 30, 1997
compared to the corresponding period in the prior year. The increase was related
to equipment purchases and the acquisition of, and improvements to, the M/V
Discovery.
Combined results for 1996 compared to 1995
Revenue. Revenue increased $24.4 million, or 50.3%, in 1996 compared to
1995. The increase was due primarily to the increased revenues of $22.1 million
at HBH resulting largely from a full year of operations of the BH-400 pipelay
barge, which was placed in service in October 1995, and the completion of a
large pipeline installation project in the transition zone along the U.S. Gulf
Coast.
Cost of revenue. Cost of revenue increased $18.5 million, or 43.8%, in 1996
compared to 1995. The increase was primarily attributable to the increase in
activity resulting from a full year of operations of the BH-400. As a percentage
of revenue, cost of revenue was 83.3% in 1996 compared to 87.0% in 1995. The
improved margin was primarily due to reductions in standby time, weather
downtime and subcontract services.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.8 million, or 11.7%, in 1996 compared to
1995. As a percentage of revenue, selling, general and administrative expenses
were 10.0% in 1996 compared to 13.4% in 1995.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.7 million, or 39.7%, in 1996 compared to 1995, due primarily to the
acquisition of the BH-400 in October 1995.
Combined results for 1995 compared to 1994
Revenue. Revenue increased $14.6 million, or 42.9%, in 1995 compared to
1994. The increase was due primarily to increased pipeline installation and
repair operations and increased fabrication activity.
23
<PAGE> 24
Cost of revenue. Cost of revenue increased $16.1 million, or 61.8%, in 1995
compared to 1994. The increase was due to increased pipeline installation and
repair activity, including increased costs relating to standby time, weather
downtime and subcontract services caused in part by the late delivery of the
BH-400. In addition, increased activity in lower margin, material-intensive
fabrication work contributed to the cost increase as well as to the higher cost
as a percentage of revenue. As a percentage of revenue, cost of revenue was
87.0% in 1995 compared to 76.9% in 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 3.3%, in 1995 compared to
1994. As a percentage of revenue, selling, general and administrative expenses
were 13.4% in 1995 compared to 18.6% in 1994.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.2 million, or 12.6%, due primarily to equipment purchases by HBH.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1997, TCMS and the Founding Companies
generated a combined $2.5 million of net cash from operating activities. Net
cash used in investing activities was a combined $2.9 million. Principal uses of
cash consisted of $5.5 million of capital expenditures, including approximately
$3.5 million to acquire the M/V Discovery, offset partially by $2.4 million in
proceeds from sales of investments. Net cash provided by financing activities
was a combined $2.2 million, due to net increases in long-term debt. At June 30,
1997, TCMS and the Founding Companies had working capital of $5.7 million and
long-term debt, net of current maturities, of $10.0 million. On a pro forma
basis, after giving effect to the Offering and the application of the proceeds
therefrom together with $20.0 million of initial borrowings under the Credit
Agreement, the Company would have had combined working capital of $8.1 million
and long-term debt, net of current maturities, of $22.7 million at June 30,
1997.
During 1996, the Founding Companies generated a combined $3.5 million in
net cash from operating activities. Principal sources of cash were net income of
$2.5 million and depreciation and amortization of $2.4 million, offset partially
by net uses of cash for working capital, principally accounts receivable. Net
cash used in investing activities was a combined $1.9 million. Principal uses of
cash consisted of $5.0 million for purchases of equipment, offset partially by
proceeds from the sales of investments, collection of notes receivable from a
shareholder and proceeds from the sale of equipment. Net cash used in financing
activities was a combined $2.1 million. At December 31, 1996, the Founding
Companies had combined working capital of $2.6 million and long-term debt of
$7.4 million.
TCMS entered into the Credit Agreement with the Lender on October 28, 1997.
The Credit Agreement provides for borrowings of up to $75.0 million, with the
initial borrowing availability being $50.0 million (the "Initial Availability")
and the remaining $25.0 million being made available from time to time and in
such amounts as the Lender may determine in its sole discretion. The Credit
Agreement is divided into two tranches: (i) a senior secured revolving credit
facility (the "Revolving Credit Facility"), providing for borrowings of up to
$60.0 million ($40.0 million of which comprises part of the Initial
Availability), and (ii) $15.0 million of senior subordinated term loan
borrowings (the "Term Loan Facility") ($10.0 million of which comprises the
remainder of the Initial Availability). Borrowings under the Revolving Credit
Facility will bear interest at LIBOR plus 275 basis points (8.41% at October 28,
1997), payable quarterly, and borrowings under the Term Loan Facility will bear
interest at LIBOR plus 375 basis points (9.41% at October 28, 1997), payable
quarterly. Interest expense will be effected by approximately $25,000 for a 1/8
percent variance in the LIBOR rate on the initial borrowings of $20.0 million.
Borrowings under the Credit Agreement are secured by liens on substantially all
the Company's assets (including accounts receivable and after-acquired property)
and a pledge of the capital stock of the Founding Companies and each of the
Company's other subsidiaries. Borrowings under the Credit Agreement are expected
to be used to pay a portion of the aggregate purchase price for the Acquisitions
and for general corporate purposes, which may include future acquisitions. The
Credit Agreement requires the Company to comply with various loan covenants,
including (i) maintenance of certain financial ratios; (ii) restrictions on
additional indebtedness; and (iii) restrictions on liens, guarantees, advances
and dividends. The term of the Credit Agreement extends
24
<PAGE> 25
through October 1999 and all outstanding principal and accrued and unpaid
interest under the Revolving Credit Facility and the Term Loan Facility as of
that date will be due and payable on that date. The Credit Agreement contains
mandatory prepayment provisions requiring prepayment of outstanding borrowings
from the issuance of debt or equity securities for cash and any proceeds from
other borrowings.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions through the issuance of additional equity as well as
through a combination of working capital, cash flow from operations and
borrowings, including borrowings under the Credit Agreement.
The Company is, from time to time, exposed to various contingencies arising
in the ordinary course of business, including, among others, legal actions
arising from accidents and other events resulting from the operational risks
inherent in the marine construction business. For a discussion of two class
action lawsuits involving large claims for compensatory and punitive damages
against one of the Founding Companies arising from events that occurred during
the course of a pipeline installation project for a third party gas transmission
company (and as to which the total amount of damages to which the Company may
have exposure cannot reasonably be estimated at this time), see
"Business -- Legal Proceedings." There can be no assurance that these lawsuits
or other legal actions or contingencies that may arise in the future will not
have a material adverse effect on the Company's business, financial condition,
results of operations and liquidity.
INFLATION
Inflation has not had a material impact on the Company's results of
operations for the last three years or during the six months ended June 30,
1997.
RESULTS OF OPERATIONS -- WOODSON
The following table presents certain selected data (and that data as a
percentage of revenue) of Woodson on a historical basis for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------------------------------- ---------------------------------
1994 1995 1996 1996 1997
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........................... $ 7,786 100.0% $18,075 100.0% $17,933 100.0% $10,689 100.0% $18,104 100.0%
Costs and expenses:
Cost of revenue................. 5,874 75.4 12,716 70.3 13,561 75.6 7,833 73.3 15,243 84.2
Selling, general and
administrative expenses....... 3,011 38.7 2,672 14.8 2,968 16.6 1,479 13.8 1,435 7.9
Depreciation and amortization... 728 9.4 574 3.2 562 3.1 291 2.7 455 2.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income (loss)........... $(1,827) (23.5)% $ 2,113 11.7% $ 842 4.7% $ 1,086 10.2% $ 971 5.4%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Woodson's results for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996
Revenue. Revenue increased $7.4 million, or 69.4%, for the six months ended
June 30, 1997 compared to the corresponding period in the prior year. The
increase was primarily due to increases of $7.2 million and $0.6 million,
respectively, in pipeline construction revenue and revenue related to the
manufacturing of amphibious undercarriages, partially offset by a decrease of
$0.4 million in revenue from environmental services. The pipeline construction
revenue increase was attributable to improved market activity in 1997.
Cost of revenue. Cost of revenue increased $7.4 million, or 94.6%, for the
six months ended June 30, 1997 compared to the corresponding period in the prior
year. The increase was primarily due to the increase in pipeline construction
activity in the 1997 period. As a percentage of revenue, cost of revenue was
84.2% for the six months ended June 30, 1997 compared to 73.3% for the
corresponding period in the prior year.
25
<PAGE> 26
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $44,000, or 3.0%, for the six months ended
June 30, 1997 compared to the corresponding period in the prior year. As a
percentage of revenue, selling, general and administrative expenses were 7.9%
for the six months ended June 30, 1997 compared to 13.8% for the corresponding
period in the prior year.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.2 million, or 56.4%, for the six months ended June 30, 1997
compared to the corresponding period in the prior year. The increase was due to
the additional property, plant and equipment placed in service in 1996 and early
1997.
Woodson's results for 1996 compared to 1995
Revenue. Revenue decreased $0.1 million, or 0.8%, in 1996 compared to 1995.
The decrease was primarily a result of a $0.7 million decrease in environmental
services revenue caused by less activity with the Louisiana Department of
Environmental Quality, partially offset by a $0.6 million increase in revenue
from sales of amphibious undercarriages.
Cost of revenue. Cost of revenue increased $0.8 million, or 6.6%, in 1996
compared to 1995. The increase was primarily due to additional maintenance costs
during equipment downtime. As a percentage of revenue, cost of revenue was 75.6%
in 1996 compared to 70.3% in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.3 million, or 11.1%, in 1996 compared to
1995. The increase was primarily due to a one-time bonus paid to officers and
the employment of a safety consultant. As a percentage of revenue, selling,
general and administrative expenses were 16.6% in 1996 compared to 14.8% in
1995.
Depreciation and amortization. Depreciation and amortization expenses were
essentially unchanged for 1996 compared to 1995.
Woodson's results for 1995 compared to 1994
Revenue. Revenue increased $10.3 million, or 132%, in 1995 compared to
1994. The increase was primarily due to the unusual decline in 1994 new sales
contracts resulting from adverse market conditions and a corresponding increase
in 1995 revenue because of increased activity, primarily in the pipeline
construction market.
Cost of revenue. Cost of revenue increased $6.8 million, or 117%, in 1995
compared to 1994. As a percentage of revenue, cost of revenue was 70.3% in 1995
compared to 75.4% in 1994. The percentage decrease was primarily due to higher
utilization rates for Woodson's pipelaying barges and related equipment, which
resulted in a reduction in maintenance costs as there was less time available in
1995 to perform maintenance on idle equipment.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.3 million, or 11.3%, in 1995 compared to
1994. The decrease was primarily due to a reduction in bad debt expense. As a
percentage of revenue, selling, general and administrative expenses were 14.8%
in 1995 compared to 38.7% in 1994. The percentage decrease was primarily due to
the significant increase in revenue discussed above without a commensurate
increase in overhead expenses.
Depreciation and amortization. Depreciation and amortization expenses
decreased $0.2 million 1995, or 21.2%, compared to 1994.
Woodson's liquidity and capital resources
Woodson generated $0.3 million in net cash in operating activities for the
six months ended June 30, 1997. Generally, sufficient funds for operating the
business have been generated from operations with minimum borrowings, due in
part to the S elections made by two of the affiliated entities, which limited
corporate level income taxes. Net cash provided by investing activities was $1.3
million, primarily from proceeds from sales of investments, which were offset
partially by capital expenditures. Net cash used in
26
<PAGE> 27
financing activities was $0.8 million, representing repayments of short-term
borrowings. At June 30, 1997, Woodson had working capital of $3.4 million,
including $1.0 million in short-term borrowings.
Woodson generated $2.7 million in net cash from operating activities in the
year ended December 31, 1996. Net cash used in investing activities was
approximately $1.8 million, principally for capital expenditures. Net cash used
in financing activities was $0.6 million, primarily for the payment of
dividends. At December 31, 1996, Woodson had working capital of $3.8 million,
including $0.7 million in short-term borrowings.
RESULTS OF OPERATIONS -- CSI
The following table presents certain selected data (and that data as a
percentage of revenue) of CSI on a historical basis for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------------------
1994(1) 1995(1) 1996(2) 1996 1997
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........................... $ 5,331 100.0% $ 5,226 100.0% $ 8,447 100.0% $ 3,815 100.0% $ 9,606 100.0%
Costs and expenses:
Cost of revenue................. 2,964 55.6 3,334 63.8 5,264 62.3 2,463 64.6 5,651 58.8
Selling, general and
administrative expenses....... 1,725 32.4 2,285 43.7 2,435 28.8 1,160 30.4 1,270 13.2
Depreciation and amortization... 288 5.4 269 5.1 359 4.3 202 5.3 245 2.6
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income (loss)........... $ 354 6.6% $ (662) (12.7)% $ 389 4.7% $ (10) (0.3)% $ 2,440 25.4%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(1) The financial information is presented for the twelve months ended May 31.
(2) Reflects results of operations for the twelve months ended December 31,
1996.
CSI's results for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996
Revenue. Revenue increased $5.8 million, or 152%, for the six months ended
June 30, 1997 compared to the corresponding period in the prior year. The
increase was primarily due to the additional revenue generated by the M/V
Discovery, which was acquired in early January 1997.
Cost of revenue. Cost of revenue increased $3.2 million, or 129%, for the
six months ended June 30, 1997 compared to the corresponding period in the prior
year. The increase was primarily due to costs associated with the operation of
the M/V Discovery. As a percentage of revenue, cost of revenue was 58.8% for the
six months ended June 30, 1997 compared to 64.6% for the corresponding period in
the prior year. The decrease as a percentage of revenue was due to increased
marine construction activity.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.1 million, or 9.5%, for the six months
ended June 30, 1997 compared to the corresponding period in the prior year. As a
percentage of revenue, selling, general and administrative expenses were 13.2%
for the six months ended June 30, 1997 compared to 30.4% for the corresponding
period in the prior year. The percentage decrease was primarily attributable to
the significant increase in revenue relating to the M/V Discovery without a
commensurate increase in overhead expenses.
Depreciation and amortization. Depreciation and amortization expenses
increased $43,000, or 21.3%, for the six months ended June 30, 1997 compared to
the corresponding period in the prior year. The increase was related to the
acquisition of, and improvements to, the M/V Discovery.
CSI's results for the year ended December 31, 1996 compared to the year ended
May 31, 1995
Revenue. Revenue increased $3.2 million, or 61.3%, in 1996 compared to the
1995 period. The increase was primarily due to an increase in marine
construction activity in the Gulf of Mexico.
27
<PAGE> 28
Cost of revenue. Cost of revenue increased $1.9 million, or 57.9%, in 1996
compared to the 1995 period. The increase in cost of revenue was primarily due
to the corresponding increase in revenue and related direct costs resulting from
the increased activity. As a percentage of revenue, cost of revenue was 62.3% in
1996 compared to 63.8% in the 1995 period.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 6.6%, in 1996 compared to the
1995 period. As a percentage of revenue, selling, general and administrative
expenses were 28.8% in 1996 compared to 43.7% in the 1995 period. The percentage
decrease was primarily due to the significant increase in revenue experienced in
1996 without a commensurate increase in overhead expenses.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.1 million, or 33.5%, for 1996 compared to the 1995 period. The
increase was related to additions of property, plant and equipment in 1995 and
1996.
CSI's results for the year ended May 31, 1995 compared to the year ended May
31, 1994
Revenue. Revenue decreased nominally in 1995 compared to the 1994 period.
Cost of revenue. Cost of revenue increased $0.4 million, or 12.5%, in 1995
compared to the 1994 period. As a percentage of revenue, cost of revenue was
63.8% in 1995 compared to 55.6% in the 1994 period. The percentage increase was
primarily due to lower margins on contracts for hydrostatic testing services
performed in the 1995 period, resulting from price discounting.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.6 million, or 32.5%, in 1995 compared to
the 1994 period. The increase was primarily due to an expansion of the
administrative staff and the payment of a one-time bonus of $100,000 to CSI's
principal officers. As a percentage of revenue, selling, general and
administrative expenses were 43.7% in 1995 compared to 32.4% in the 1994 period.
Depreciation and amortization. Depreciation and amortization expenses were
essentially unchanged in 1995 compared to the 1994 period.
CSI's results for the seven months ended December 31, 1995
The following table presents certain selected data (and that data as a
percentage of revenue) of CSI on a historical basis for the period indicated
(dollars in thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
DECEMBER 31,
1995
-----------------
<S> <C> <C>
Revenue..................................................... $6,041 100.0%
Costs and expenses:
Cost of revenue........................................... 3,010 49.8
Selling, general and administrative expenses.............. 1,282 21.2
Depreciation and amortization............................. 177 3.0
------ -----
Operating income............................................ $1,572 26.0%
====== =====
</TABLE>
Revenue. Revenue for the seven months ended December 31, 1995 included
three significant high-margin jobs totaling $2.5 million, or 41.4% of the total
revenue for the period. These unusually high-margin, short-duration jobs were
bid on the basis of standard rental rates and included substantially higher
built-in margins compared to competitive bid projects.
Cost of revenue. As a percentage of revenue, cost of revenue was 49.8%,
compared to 63.8% for the twelve months ended May 31, 1995. The decrease as a
percentage of revenue was due primarily to the higher-margin jobs included in
the job mix in the seven-month period.
28
<PAGE> 29
Selling, general and administrative expenses. As a percentage of revenue,
selling, general and administrative expenses were 21.2%, compared to 43.7% for
the twelve months ended May 31, 1995. The seven months represented an active
period during which revenues increased substantially while selling, general and
administrative expenses remained relatively constant.
Depreciation and Amortization. On a per-month basis, depreciation and
amortization expenses were relatively constant in the seven months ended
December 31, 1995 and the twelve months ended May 31, 1995.
CSI's liquidity and capital resources
CSI generated $0.5 million in net cash from operating activities during the
six months ended June 30, 1997. Net cash used in investing activities was $3.8
million, with $4.2 million used for capital expenditures being offset partially
by the sale of certain investments that generated net proceeds of $0.4 million.
Net cash provided by financing activities was approximately $3.7 million,
principally related to the issuance of notes payable. At June 30, 1997, CSI had
working capital of $2.1 million and $5.8 million of debt outstanding (of which
$1.1 million was classified as current). Long-term debt consisted of a $3.4
million mortgage note on the M/V Discovery and three bank notes aggregating $1.9
million.
CSI generated $1.2 million in net cash from operating activities during the
year ended December 31, 1996. Net cash used in investing activities was
approximately $0.2 million, principally for capital expenditures, which was
offset by proceeds from sales of investments. Net cash used in financing
activities was $1.2 million, which included borrowings of $2.5 million and
repayments of $1.2 million and purchase of treasury stock for $2.3 million. At
December 31, 1996, CSI had working capital of $1.7 million and $2.1 million of
debt outstanding.
RESULTS OF OPERATIONS -- HBH
The following table presents certain selected data (and that data as a
percentage of revenue) of HBH on a historical basis for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
---------------------------------------------------- ----------------------------------
1994 1995 1996 1996 1997
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... $15,261 100.0% $14,771 100.0% $36,873 100.0% $19,062 100.0% $23,850 100.0%
Costs and expenses:
Cost of revenue................ 12,585 82.4 16,803 113.7 33,727 91.5 16,343 85.7 19,394 81.3
Selling, general and
administrative expenses...... 929 6.1 867 5.9 1,000 2.7 484 2.5 671 2.8
Depreciation and
amortization................. 503 3.3 871 5.9 1,482 4.0 719 3.8 750 3.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income (loss).......... $ 1,244 8.2% $(3,770) (25.5)% $ 664 1.8% $ 1,516 8.0% $ 3,035 12.7%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
HBH's results for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996
Revenue. Revenue increased $4.8 million, or 25.1%, for the six months ended
June 30, 1997 compared to the corresponding period in the prior year. The
revenue increase was attributable to improved pipeline construction activity in
1997, with two major projects contributing $16.8 million in revenue.
Cost of revenue. Cost of revenue increased $3.1 million, or 18.7%, for the
six months ended June 30, 1997 compared to the corresponding period in the prior
year. The increase was primarily attributable to costs related to the higher
level of activity in pipeline construction in 1997. Improved pricing and less
subcontracting costs as a percentage of overall cost on the major projects in
the current period have contributed to higher margins. As a percentage of
revenue, cost of revenue was 81.3% for the six months ended June 30, 1997
compared to 85.7% for the corresponding period in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 38.6%, for the six months
ended June 30, 1997 compared to the corresponding period in the prior year. The
increase was primarily attributable to accruals of performance bonuses in 1997,
which were partially
29
<PAGE> 30
offset by the elimination of consulting fees paid in 1996 to HBH's former sole
shareholder. As a percentage of revenue, selling, general and administrative
expenses were 2.8% for the six months ended June 30, 1997 compared to 2.5% for
the corresponding period in the prior year.
Depreciation and amortization. Depreciation and amortization expenses
increased $31,000, or 4.3%, for the six months ended June 30, 1997 compared to
the corresponding period in the prior year due to additions to its property,
plant and equipment.
HBH's results for 1996 compared to 1995
Revenue. Revenue increased $22.1 million, or 150%, in 1996 compared to
1995. The increase was due primarily to full year operating results of the
BH-400, which was placed in service in October 1995, and the completion of a
large pipeline installation project which generated $13.0 million in revenue.
Cost of revenue. Cost of revenue increased $16.9 million, or 101%, in 1996
compared to 1995. The increase was primarily attributable to direct costs, such
as labor, associated with the operations of the BH-400. As a percentage of
revenue, cost of revenue was 91.5% in 1996 compared to 113.7% in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.1 million, or 15.3%, in 1996 compared to
1995. The increase was primarily attributable to increased salaries. As a
percentage of revenue, selling, general and administrative expenses were 2.7% in
1996 compared to 5.9% in 1995.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.6 million, or 70.2%, in 1996 compared to 1995, due primarily to the
acquisition of the BH-400 in October 1995.
HBH's results for 1995 compared to 1994
Revenue. Revenue decreased $0.5 million, or 3.2%, in 1995 compared to 1994.
The decrease was due primarily to the completion of a large pipeline
installation project in 1994, which generated $5.6 million in revenue.
Cost of revenue. Cost of revenue increased $4.2 million, or 33.5%, in 1995
compared to 1994. The increase was primarily attributable to the late delivery
of the BH-400, which delayed the start of two fixed-price contract jobs, thereby
increasing costs relating to standby time, weather downtime and sub-contract
services. As a percentage of revenue, cost of revenue was 114% in 1995 compared
to 82.5% in 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.1 million, or 6.7%, in 1995 compared to
1994. The decrease was primarily attributable to the payment of performance
bonuses in 1994. As a percentage of revenue, selling, general and administrative
expenses were 5.9% in 1995 compared to 6.1% in 1994.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.4 million, or 73.2%, in 1995 compared to 1994, due primarily to the
acquisition of the BH-400 in October 1995 and other additions to property, plant
and equipment in 1994 and 1995.
HBH's liquidity and capital resources
HBH generated $1.2 million in net cash from operating activities during the
six months ended June 30, 1997. Net cash used in investing activities was $0.3
million, principally for capital expenditures. Net cash used in financing
activities was $0.9 million, which included $20.2 million proceeds from a bank
line of credit and $21.2 million of repayments. At June 30, 1997, HBH had a
working capital deficit of $0.2 million, including $1.5 million of current
maturities of debt.
HBH generated $0.1 million in net cash from operating activities during the
year ended December 31, 1996. Net cash provided by investing activities was
approximately $0.1 million, principally for capital expenditures of $1.0 million
which was offset by $0.9 million of collections on notes. Net cash used in
financing activities was $0.1 million, which included $29.0 million of
borrowings throughout the year under a
30
<PAGE> 31
bank line of credit, $0.6 million from subordinated debt and $0.3 million from
capital contributions from HBH's sole shareholder, together with debt repayments
throughout the year of $30.5 million. At December 31, 1996, HBH had a working
capital deficit of $3.5 million, including $2.4 million of current maturities of
debt.
RESULTS OF OPERATIONS -- RFCNI
The following table presents certain selected data (and that data as a
percentage of revenue) of RFCNI on a historical basis for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
-------------- --------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. $5,611 100.0% $10,497 100.0% $9,730 100.0% $3,159 100.0% $4,536 100.0%
Costs and expenses:
Cost of revenue................... 4,715 84.0 9,426 89.8 8,260 84.9 2,708 85.7 3,825 84.3
Selling, general and
administrative expenses......... 650 11.6 698 6.7 885 9.1 363 11.5 674 14.9
Depreciation and amortization..... 16 .3 15 .1 12 .1 8 .3 8 .2
------ ----- ------- ----- ------ ----- ------ ----- ------ -----
Operating income.................... $ 230 4.1% $ 358 3.4% $ 573 5.9% $ 80 2.5% $ 29 0.6%
====== ===== ======= ===== ====== ===== ====== ===== ====== =====
</TABLE>
RFCNI's results for the six months ended June
30, 1997 compared to the six months ended June 30, 1996
Revenue. Revenue increased $1.4 million, or 43.6%, in the six months ended
June 30, 1997 compared to the corresponding period in the prior year. Revenue
from general fabrication work increased $0.8 million and revenue from
fabrication of sewage treatment units increased $0.6 million for the 1997
period.
Cost of revenue. Cost of revenue increased $1.1 million, or 41.2%, for the
six months ended June 30, 1997 compared to the corresponding period in the prior
year. As a percentage of revenue, cost of revenue was 84.3% for the six months
ended June 30, 1997 compared to 85.7% for the corresponding period in the prior
year.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.3 million, or 85.7%, for the six months
ended June 30, 1997 compared to the corresponding period in the prior year. The
increase was primarily attributable to higher levels of marketing personnel and
related costs. As a percentage of revenue, selling, general and administrative
expenses were 14.9% for the six months ended June 30, 1997 compared to 11.5% for
the corresponding period in the prior year.
Depreciation and amortization. Depreciation and amortization expenses were
unchanged for the period ended June 30, 1997 compared to the corresponding
period in the prior year.
RFCNI's results for 1996 compared to 1995
Revenue. Revenue decreased $0.8 million, or 7.3%, in 1996 compared to 1995.
The decrease was due primarily to the completion of a large deck and jacket
fabrication project in 1995, which generated $4.7 million in revenue.
Cost of revenue. Cost of revenue decreased $1.2 million, or 12.4%, in 1996
compared to 1995. The decrease was primarily attributable to less subcontracting
of fabrication work in 1995 compared to 1996. As a percentage of revenue, cost
of revenue was 84.9% in 1996 compared to 89.8% in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 26.8%, in 1996 compared to
1995. The increase was primarily attributable to an increase in payroll and
related costs due to personnel added to expand RFCNI's marketing capabilities.
As a percentage of revenue, selling, general and administrative expenses were
9.1% for 1996 compared to 6.7% in 1995.
Depreciation and amortization. Depreciation and amortization expenses were
essentially unchanged in 1996 compared to 1995.
31
<PAGE> 32
RFCNI's results for 1995 compared to 1994
Revenue. Revenue increased $4.9 million, or 87.1%, in 1995 compared to
1994. The increase was due primarily to revenue generated from a large deck and
jacket fabrication project in 1995, which generated $4.7 million in revenue.
Cost of revenue. Cost of revenue increased $4.7 million, or 99.9%, in 1995
compared to 1994. The increase was primarily attributable to high material
procurement costs associated with the above-mentioned deck and jacket
fabrication project. As a percentage of revenue, cost of revenue was 89.8% in
1995 compared to 84.0% in 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $48,000, or 7.4%, in 1995 compared to 1994. As
a percentage of revenue, selling, general and administrative expenses were 6.7%
in 1995 compared to 11.6% in 1994.
Depreciation and amortization. Depreciation and amortization expenses were
essentially unchanged in 1995 compared to 1994.
RFCNI's liquidity and capital resources
RFCNI generated $0.7 million in net cash from operating activities during
the six months ended June 30, 1997. Net cash used in investing activities was
minimal. At June 30, 1997, RFCNI had working capital of $0.5 million and no debt
outstanding.
RFCNI used $0.6 million in net cash from operating activities during the
year ended December 31, 1996. Net cash provided from investing activities was
approximately $0.1 million, principally from collections of debt from related
parties. Net cash used in financing activities was $0.2 million, primarily for
dividend payments to RFCNI's sole shareholder. At December 31, 1996, RFCNI had
working capital of $0.5 million and no debt outstanding.
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128, which is effective for periods ending after December 15, 1997,
including interim periods, simplifies the standards for computing earnings per
share and replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. Initial adoption of this standard is
not expected to have a material impact on the Company's financial position or
results of operations.
32
<PAGE> 33
BUSINESS
GENERAL
TCMS was organized in April 1996 to become a fully integrated marine
construction company focusing on the transition zone (marsh, swamp and coastal
regions out to water depths of 20 feet) and shallow water (water depths of 20 to
200 feet) regions along the U.S. Gulf Coast. The Company's goal is to become a
leader in the consolidation of these fragmented segments of the marine
construction industry through an aggressive acquisition program. TCMS has
entered into definitive agreements to acquire the Founding Companies
concurrently with the closing of the Offering. As a result of the Acquisitions,
the Company believes it will be the largest provider of transition zone marine
construction services along the U.S. Gulf Coast, as well as a significant
provider of shallow water construction services. The Company's primary services
include pipeline installation and repair, hydrostatic testing and commissioning
of pipelines and fabrication and refurbishment of components for offshore
platforms and drilling rigs.
Although TCMS has recently been formed and has no operating history, the
Founding Companies have been in business an average of 47 years and have
substantial experience in operating in difficult transition zone and shallow
water environments. Marine construction activities in the transition zone
require substantial expertise and customized equipment, as compared to open
water operations, due to the unique physical characteristics often involved,
including unstable marshbeds and obstructions such as trees, submerged stumps
and a substantial infrastructure of existing pipelines. The Company believes it
will benefit from the expertise developed by the management and personnel of the
Founding Companies in operating in transition zone and shallow water
environments and its ability to design and manufacture its own specialized
equipment for these operations.
Following the Acquisitions, the Company will provide marine construction
and related services from five port facilities strategically located along the
U.S. Gulf Coast from Orange, Texas to Mobile, Alabama. The Company believes this
geographic coverage will create marketing advantages and operating efficiencies
for the Founding Companies by improving their access to projects in this region
and providing the ability to offer a broader range of services to their existing
customer bases. The Company believes these advantages will result in higher
utilization of its assets. The Company also believes it will be able to use its
fabrication operations to reduce its equipment maintenance costs and related
vessel downtime and eliminate subcontracting of certain services (including
hydrostatic testing and pipeline burial) on many of its pipeline installation
and repair projects.
OPERATIONS
Pipeline Installation and Repair. The efficient development of an offshore
oil and gas field frequently involves the addition or extension of an
infrastructure of gathering lines and trunklines (large diameter pipelines). The
Company's pipeline installation operations are focused on the transition zone
and shallow water regions along the U.S. Gulf Coast, where the Company believes
it is the only company providing pipeline installation and repair services from
water depths of 200 feet through the transition zone and to onshore gathering
and processing facilities. The Company's fleet includes (i) 15 spud barges and
ancillary equipment, operated in water depths of up to 20 feet, and (ii) two
anchor barges and three multipurpose vessels (used in both pipeline installation
and repair and hydrostatic testing, commissioning and related operations),
primarily operated in water depths beyond 20 feet. The Company also owns
specialized equipment for offshore pipeline jetting (a specialized pipeline
burying technique) and testing services, marine dredging and trench digging. The
Company generated revenue of approximately $53.5 million and $45.9 million from
its pipeline installation and repair services during the twelve months ended
December 31, 1996 and the six months ended June 30, 1997, respectively.
Offshore pipeline installation generally involves welding together standard
lengths (typically 40-foot lengths) of concrete coated steel pipe using a series
of welding, X-ray, coating and inspection stations along the length of a barge.
The new welds are X-rayed to ensure their integrity and then coated with
protective materials to inhibit corrosion and add weight to the pipe. In many
cases, the barge moves ahead on its anchors
33
<PAGE> 34
or spuds and the completed pipe sections are moved off the stern to settle on
the seabed. In swamps, marshes and certain other transition zone waters, the
completed pipeline is often installed by pulling it from the barge using a winch
while the barge remains in place. When necessary, a pontoon ramp or "stinger"
system is used in these operations to support the descending pipe to avoid
over-stressing the pipeline.
Once the pipeline has settled on the seabed, it is often buried to a
specified depth in order to protect it from potential damage or to comply with
environmental regulations and concerns. For example, in waters offshore the
United States, state and federal governmental regulations require that offshore
oil and gas pipelines greater than 8.75 inches in diameter and located in water
depths of 200 feet or less be buried at least three feet below the sea floor.
Pipelines are generally buried either by dredging or digging a trench ahead of
the pipelaying operations for the pipeline to settle into as it is installed or
by following the pipelaying operations with a towed jet sled, which uses high
pressure bursts of air and water to create a trench underneath the pipeline as
it settles into the seabed.
The Company owns and operates various barges, vessels and other items of
equipment to perform full-service pipeline construction projects in transition
zone and shallow water regions. The Company also provides construction
personnel, support equipment and logistical services as required for each
individual project. For pipelaying in water depths of 10 feet to 200 feet, the
Company uses its pipelay barge BH-400, which is capable of laying pipe from two
inches to 36 inches in diameter. For transition zone and other shallow water
projects, the Company uses a variety of equipment, including its pipelay barge
BH-300, which is capable of laying pipe from two inches to 36 inches in diameter
in water depths of up to 40 feet. Both the BH-400 and the BH-300 can be
outfitted with either a seabed plow or a skid-mounted jet sled for pipeline
burial operations. For swamp and marsh projects, the Company owns a lay barge
spread consisting of three interconnected spud barges (a barge that uses
multiple spuds attached vertically to the hull, which are lowered and raised as
necessary to anchor the barge in the seabed) and related equipment. The Company
also owns the equipment necessary to outfit a second spread of spud barges,
which it historically has rented from time to time as demand has dictated. In
addition, the Company has two jet/bury barges (BH-200 and BH-202), which are
equipped to bury pipe from two inches to 20 inches in diameter and are capable
of working in water depths as shallow as three feet and as deep as 25 feet.
The Company's fleet also includes three multi-purpose vessels, the
M/V Discovery, the M/V Sea Level 21 and the M/V Sand Queen. The M/V Discovery is
used for pipeline jetting and other support services, as well as hydrostatic
testing and commissioning services. The M/V Sea Level 21 and M/V Sand Queen are
used primarily in hydrostatic testing and commissioning services, but can also
be used as support vessels in connection with the Company's pipeline
installation and repair services. For a listing of the Company's principal
marine equipment, see "-- Marine Vessels and Equipment."
Hydrostatic Testing and Commissioning. The Company performs onshore and
offshore hydrostatic testing and commissioning of pipelines for oil and gas
producers and pipeline construction companies along the U.S. Gulf Coast and in
certain international markets. During hydrostatic testing, water is pumped into
a newly installed or existing pipeline to increase the internal pressure beyond
the designed capacity of the pipeline in order to test its structural integrity.
Pipeline commissioning involves final preparation of a completed and
successfully tested pipeline for operation in accordance with applicable
regulatory standards. In connection with its hydrostatic testing and
commissioning services, the Company also performs pipeline cleaning, drying and
dehydration services. The Company has three vessels that are used for
hydrostatic testing, including the M/V Discovery, a 270-foot, multi-purpose
construction utility vessel equipped with a dynamic positioning system. The
Company generated revenue of approximately $7.6 million and $4.4 million from
its hydrostatic testing and commissioning and related services during the twelve
months ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
Offshore Fabrication. The Company fabricates and refurbishes (i) structural
components of fixed platforms for use in the offshore development and production
of oil and gas and (ii) structural components, primarily deck structures, for
offshore drilling rigs and barge drilling rigs. Components are built either as
single structures or in sections to be installed on location. The Company also
manufactures amphibious undercarriages for marine construction equipment used in
transition zone waters. The Company generated revenue of
34
<PAGE> 35
approximately $11.8 million and $5.8 million from its offshore fabrication
services during the twelve months ended December 31, 1996 and the six months
ended June 30, 1997, respectively.
INDUSTRY OVERVIEW
The market for offshore pipeline installation and related services along
the U.S. Gulf Coast is primarily dependent on the levels of oil and gas
exploration, development and production activities and pipeline capacity
utilization in the Gulf of Mexico. The Company believes recent increases in oil
and gas production in the Gulf of Mexico have significantly reduced available
pipeline capacity to transport the hydrocarbons to onshore gathering,
transmission and processing facilities. In a report published in January 1997,
the Minerals Management Service of the U.S. Department of the Interior (the
"MMS") projected an increase in Gulf of Mexico oil production of up to 76.1%
from 1,097 Mbpd (thousand barrels per day) in 1996 to 1,932 Mbpd by 2000, and an
increase in natural gas production of up to 25% from 13.8 Bcfd (billion cubic
feet per day) in 1996 to 17.2 Bcfd by 2000, assuming increased use of new
technologies, such as 3-D seismic and horizontal drilling techniques, would
offset declines in production from currently producing fields. This outlook is
supported by recent increases in offshore leases awarded by the Department of
the Interior in its semi-annual Outer Continental Shelf ("OCS") lease auctions.
The number of offshore leases awarded to operators increased from 202 in 1992,
covering approximately 1.0 million acres, to 1,508 in 1996, covering
approximately 8.0 million acres.
The MMS anticipates that a substantial portion of the increased oil and gas
production in the Gulf of Mexico will come from deep water projects. The Company
believes the continued development of deep water (depths of 200 feet to 1,000
feet) and very deep water (depths of 1,000 feet and deeper) oil and gas fields
will require construction of new pipelines and tie-ins to existing pipeline
systems in the transition zone and shallow water regions along the U.S. Gulf
Coast to transport future hydrocarbon production to shore. The Company also
expects increases in demand for its services resulting from new pipeline
construction needed to support incremental development activity within these
transition zone and shallow water regions, as well as the repair service
requirements of the existing pipeline infrastructure. According to a June 1997
report by Offshore Data Services, Inc., there were 255 pipeline construction
projects in the design or planning phase in the Gulf of Mexico, including 165 in
water depths of less than 150 feet.
BUSINESS STRATEGY
The Company's business strategy emphasizes growth through continued
consolidation of the transition zone and shallow water segments of the marine
construction industry and internal development. Key elements of the Company's
business strategy include:
Maintaining Focus on Transition Zone and Shallow Water Market Segments. The
Company intends to maintain its focus on the U.S. Gulf Coast transition zone and
shallow water markets because of its strong competitive position and substantial
expertise in these markets and the positive outlook for new oil and gas
exploration and development activity in the Gulf of Mexico. The Company
anticipates substantial growth in these markets as new pipelines are added to
gather and transport the higher levels of production expected to result from
increased exploration and development activity in the Gulf of Mexico.
Capitalizing on Combined Capabilities of the Founding Companies. The
Company believes that, as a result of the consolidation of the Founding
Companies, it is the only company providing pipeline installation and repair
services from water depths of 200 feet through the transition zone and to
onshore gathering, transmission and processing facilities along the U.S. Gulf
Coast. The Company's competitors in the pipeline installation and repair
services market currently provide services either in the transition zone or
shallow water regions, but not both. This market segmentation often requires
customers to separate an installation or repair project into different
components and award it to multiple contractors or award the project to a single
contractor and rely on that contractor's ability to coordinate with
subcontractors to complete the balance of the project. The Company believes its
capabilities place it in a favorable position to bid and compete for contracts
requiring expertise in both the transition zone and shallow water regions.
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<PAGE> 36
Expanding Through Acquisitions. The Company intends to increase its market
presence by acquiring additional businesses and assets. The market for
transition zone and shallow water marine construction services is primarily
served by small and medium-sized private companies, and the Company believes the
highly fragmented nature of the industry presents a substantial consolidation
opportunity for a well-capitalized competitor with a strong market presence.
Pursuing International Expansion Opportunities. The Company also intends to
expand internationally by capitalizing on its relationships with hydrostatic
testing customers in international markets and domestic customers with
international operations and the experience of its management in developing
business and conducting operations in international markets. The Company intends
to target areas for international expansion with geographic conditions similar
to those along the U.S. Gulf Coast, such as Venezuela and offshore West Africa.
The Company may pursue international expansion through acquisitions of regional
marine construction companies or relocation of existing equipment.
Improving Operating Margins. The Company believes the combination of the
Founding Companies will provide significant opportunities to improve operating
margins and increase profitability. The Company believes it will be able to
achieve operating efficiencies and cost savings by consolidating overlapping
facilities and certain administrative functions and by rationalizing its asset
base. In addition, the Company believes it will be able to increase its asset
utilization by implementing a comprehensive marketing effort to capitalize on
its position as an integrated provider of pipeline installation and repair and
related services in the transition zone and shallow water market segments.
MARINE VESSELS AND EQUIPMENT
The Company's fleet includes three multi-purpose vessels, two anchor barges
and 15 spud barges. The following table describes the Company's principal marine
construction equipment.
<TABLE>
<CAPTION>
DIMENSIONS
NAME TYPE (FEET) FUNCTION
---- ---- ---------- --------
<S> <C> <C> <C>
M/V Discovery... Multi-purpose 270 x 42 x 19 Hydrostatic testing, pipeline jetting, diving
Construction Ship support, coring support; 8-point mooring system;
(Panamanian flagged) dynamic positioning system; accommodations for 54
persons
M/V Sea Level Multi-purpose 165 x 40 x 12 Hydrostatic testing, diving support, coring support;
21............ Construction Ship 4-point mooring system; accommodations for 28 persons
(U.S. flagged)
M/V Sand Multi-purpose 96 x 24 x 7 Hydrostatic testing and diving support;
Queen......... Utility Vessel accommodations for 19 persons
(U.S. flagged)
BH-400.......... Anchor Barge 260 x 72 x 16 Pipe laying (2"-36" diameter pipe) in 10' to 300'
(U.S. flagged) water depths; 8-point mooring system; accommodations
for 84 persons
BH-300.......... Anchor Barge 185 x 45 x 9 Pipe laying (2"-36" diameter pipe) in 5' to 40'
water depths; 4-point mooring system and spuds
BH-203.......... Spud/Utility Barge 90 x 26 x 5 Pipeline repair, pipeline burial in 4' to 25' water
depths
BH-202.......... Spud/Bury Barge 100 x 32 x 5 Pipeline jetting, dredging in 5' to 25' water
depths
BH-200.......... Spud/Bury Barge 120 x 30 x 7 Pipeline jetting, dredging in 5' to 25' water
depths
BH-105.......... Spud/Anchor Barge 150 x 40 x 8 Pipe laying (2"-20" diameter pipe), dredging, pile
driving in 5' to 100' water depths
BH-104.......... Spud Barge 110 x 34 x 6 Pipe laying (2"-20" diameter pipe), dredging, pile
driving in 4' to 25' water depths
Woodson Marsh Three Interconnected 140 x 38 x 7 Pipe laying (2"-48" diameter pipe) in 1' to 40'
Pipelay Spud Barges 140 x 36 x 7 water depths
Spread........ 140 x 36 x 7
</TABLE>
The Company anticipates that all the vessels and barges (together with all
the other property, plant and equipment currently owned by the Company) will be
subject to liens securing indebtedness outstanding under
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<PAGE> 37
the Credit Agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Combined Liquidity and Capital
Resources."
FACILITIES
Administration. The Company owns administrative buildings in Lafayette and
Belle Chasse, Louisiana, and leases office space in New Iberia, Louisiana and
Houston, Texas.
Construction Support Facilities. The Company's marine construction
activities are supported by five onshore bases which provide administrative
functions for projects and dock space for the Company's floating equipment with
the ability to supply the vessels with provisions and fuel, and to perform
maintenance and repairs to vessels and equipment. The facility located in Belle
Chasse, Louisiana is owned by the Company. The facilities and dock frontage at
Berwick and Delcambre, Louisiana, and Mobile Bay, Alabama are leased, with
remaining lease terms ranging from month-to-month to 16 years.
Fabrication Yard. The Company's principal fabrication yard is located in
New Iberia, Louisiana, with waterfront docking and direct, deep channel access
to the Gulf of Mexico. The fabrication facility includes approximately 14 acres
of leased land and a 23,200 square foot fabrication shop which is supplied with
automatic welding, heavy fabrication and material handling equipment. The
fabrication yard also has specially designed concrete reinforcements and
approximately 700 linear feet of water frontage. The Company is improving the
fabrication yard to provide it with the ability to load out structures weighing
up to 5,000 tons. The fabrication yard also has a rail spur, which provides it
direct access to rail transportation. The Company also owns an 18,000 square
foot fabrication facility situated on approximately two acres of land in
Lafayette, Louisiana, and has an option to purchase a 10,000 square foot
fabrication facility situated on approximately five acres of land in Belle
Chasse, Louisiana.
MATERIALS
The principal materials used by the Company in its business are carbon and
alloy steel in various forms, welding supplies, fuel oil, gasoline and paint,
which are currently available in adequate supply from many sources. The Company
does not depend on any single supplier or source. Pipe used in the Company's
pipeline construction operations is generally provided by the Company's
customers.
SAFETY AND QUALITY ASSURANCE
Management is concerned with the safety and health of the Company's
employees and maintains a stringent safety assurance program to reduce the
possibility of costly accidents. Each of the Founding Companies has established
guidelines to ensure compliance with all applicable state and federal safety
regulations. Each of them provides ongoing training and safety education through
orientations for new employees and subcontractors, periodic crew safety training
meetings and first aid and CPR training. Each of the Founding Companies has a
comprehensive drug testing program and conducts periodic employee health
screenings.
The Company's operations are conducted in compliance with the applicable
standards of the American Petroleum Institute, the American Welding Society and
the American Society of Mechanical Engineers, as well as customer
specifications. Training programs have been instituted to upgrade the skills of
the Company's personnel and maintain high-quality standards. Management believes
these programs enhance the quality of its services and reduce the total cost of
work performed.
CUSTOMERS AND CONTRACTS
The Company's primary customers are major and independent oil and gas
exploration and production companies, drilling contractors, hydrocarbon
transportation companies and other marine construction companies. The level of
construction services required by any one customer depends on the amount of that
customer's capital expenditure budget devoted to marine construction in any
single year. Consequently, customers that account for a significant portion of
revenue in one fiscal year may represent an immaterial
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<PAGE> 38
portion of revenue in subsequent fiscal years. The five most significant
customers of the Founding Companies on a combined basis during fiscal 1996 (in
alphabetical order) were: Mallard Bay Drilling, Inc., Mobil Corporation,
Offshore Energy Development Corporation, Samedan Oil Corporation and Shell Oil
Company. The Company had only one customer that represented more than 10% of its
pro forma combined revenues in fiscal 1996. While the Company is not dependent
on any one customer, the loss of one of its significant customers could, at
least on a short-term basis, have an adverse effect on the Company's results of
operations.
The Company's contracts are typically of short duration, being completed in
one to six months. A substantial number of the Company's projects are performed
on a fixed-price basis, although some projects are performed on an
alliance/partnering or cost-plus basis. Under a fixed-price contract, the
Company receives the price fixed in the contract, subject to adjustment only for
change orders placed by the customer. As a result, the Company is responsible
for all cost overruns under fixed-price contracts. Under a typical
alliance/partnering arrangement, the Company and the customer agree in advance
to a target price that includes specified levels of labor and material costs and
profit margins. If the project is completed at less than the cost levels
targeted in the contract, the contract price is reduced by a portion of the
savings. If the cost to completion is greater than targeted costs, the contract
price is increased, but generally to the target price plus the actual
incremental cost of material and direct labor. Accordingly, under an
alliance/partnering arrangement, the Company has some protection against cost
overruns but must share a portion of any cost savings with the customer. Under
cost-plus arrangements, the Company receives a specified fee in excess of its
direct labor and material cost and so is protected against cost overruns but
does not benefit directly from cost savings. The revenue, costs and gross profit
realized on a contract will often vary from the estimated amounts on which such
contracts were originally based because of various reasons, including errors in
estimates or bidding, changes in the availability and cost of labor and material
and variations in productivity from the original estimates. These variations and
the risks inherent in the marine construction industry may result in revenue and
gross profits different from those originally estimated and can result in
reduced profitability or losses on projects. Depending on the size of a project,
variations from estimated contract performance can have a significant impact on
the Company's operating results for any particular fiscal quarter or year.
COMPETITION
The marine construction services business is highly competitive and in
recent years has been characterized by overcapacity, which has resulted in
substantial pressure on pricing and operating margins. The Company expects the
overcapacity in the industry to reoccur from time to time in the future.
Contracts for marine construction services are usually awarded on a competitive
bid basis. Although the Company believes customers consider, among other things,
the availability and technical capabilities of equipment and personnel,
efficiency, condition of equipment, safety record and reputation, price
competition is currently a primary factor in determining which qualified
contractor with available equipment is awarded a contract. Some of the Company's
competitors are larger and have greater financial and other resources than the
Company.
The Company categorizes the market for offshore construction services into
four segments: (i) transition zone (less than 20 feet), (ii) shallow water (20
feet to 200 feet), (iii) deep water (200 feet to 1,000 feet) and (iv) very deep
water (1,000 feet or deeper). The Company generally focuses on projects in
transition zone and shallow water regions along the U.S. Gulf Coast. Activity
in these regions has increased significantly in recent years primarily because
of increases in oil and gas production in the Gulf of Mexico. Several companies
that have one or more derrick or pipelaying barges compete in the transition
zone and shallow water regions. The Company believes, however, that, on the
closing of the Acquisitions, it will be the largest transition zone marine
construction services company focused on the U.S. Gulf Coast and a significant
provider of shallow water marine construction services in that area. The Company
believes that competition for projects in the deep water (greater than 200 feet)
and the very deep water (greater than 1,000 feet) regions of the Gulf of Mexico
is primarily limited to two large competitors, Global Industries, Ltd. and J.
Ray McDermott, S.A., with several other international contractors capable of
relocating equipment to the Gulf of Mexico to work on specific deep or very deep
water contracts. Because projects in the deep and very deep water regions
involve different vessels and equipment, as well as different technical
expertise, the Company does not presently intend to compete in those markets.
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<PAGE> 39
The Company also competes with numerous competitors in connection with its
hydrostatic testing and commission services and fabrication operations.
BACKLOG
As of August 31, 1997, the Company's unfilled contracts and backlog orders
(including verbal orders) amounted to approximately $58.8 million; however, the
Company does not consider its backlog amounts to be a reliable indicator of
future revenue because most of the Company's projects are awarded and performed
within a relatively short period of time. The Company's backlog fluctuates
significantly based on the timing of contract awards and varying levels of
operating activity throughout the year. The Company is generally able to
complete its projects within a 12-month period.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
General
Many aspects of the Company's operations are subject to governmental
regulation, including regulation by the U.S. Coast Guard, the National
Transportation Safety Board, the U.S. Customs Service and the Occupational
Safety and Health Administration, as well as by private industry organizations
such as the American Bureau of Shipping. The Coast Guard and the National
Transportation Safety Board set safety standards and are authorized to
investigate vessel accidents and recommend improved safety standards relating to
vessels. The Occupational Safety and Health Administration performs similar
functions with respect to the Company's onshore facilities and operations. In
addition, the Company depends on the demand for its services from the oil and
gas industry and, therefore, the Company's business is affected by the laws and
regulations, as well as changing taxes and governmental policies, relating to
the oil and gas industry generally.
Certain of the Company's barges and vessels are subject to safety and
classification standards imposing requirements for periodic inspections and the
maintenance of certain certificates and insurance coverages, generally depending
on the type and size of and service performed by the barge or vessel. In
addition, in order for a vessel to engage in the U.S. Coastwise Trade (providing
transportation services between the states), the vessel must have been built in
the United States. All the Company's barges and vessels are eligible for service
in the U.S. Coastwise Trade, except for the M/V Discovery, a Panamanian flagged
vessel. As a multi-purpose construction vessel providing non-transportation
services to the offshore oil and gas industry, the Company believes the market
for the services performed by the M/V Discovery is not materially limited by its
Panamanian registration.
The Company is required by various governmental and quasi-governmental
agencies to obtain certain permits, licenses and certificates with respect to
its operations. The Company believes that it has obtained all permits, licenses
and certificates necessary to the conduct of its business.
In addition to government regulation, various private industry
organizations, such as the American Petroleum Institute, the American Society of
Mechanical Engineers and the American Welding Society, promulgate technical
standards that must be adhered to during the course of the Company's fabrication
operations.
Environmental, Health and Safety
The operations of the Company are also affected by numerous federal, state
and local laws and regulations relating to protection of the environment
including the Outer Continental Shelf Lands Act, the Federal Water Pollution
Control Act of 1972 and the Oil Pollution Act of 1990. The Company is not aware
of any noncompliance with applicable environmental laws and regulations that
would likely have a material adverse effect on the Company's business or
financial condition. The requirements of these laws and regulations are becoming
increasingly complex, stringent and expensive, and some provide for liability
for damages to natural resources or threats to public health and safety. Certain
environmental laws provide for "strict liability" for remediation of spills and
releases of hazardous substances. Sanctions for noncompliance may include
revocation of permits, corrective action orders, administrative or civil
penalties, and criminal
39
<PAGE> 40
prosecution. Such laws and regulations may expose the Company to liability for
(i) its actions that may cause environmental damage such as barge or vessel
collisions with rigs, tankers or pipelines or defective Company manufactured
products or improper installation of products of others, (ii) the conduct of or
conditions caused by others or (iii) acts of the Company that are in compliance
with all applicable laws at the time such acts were performed. It is possible
that changes in the environmental laws and enforcement policies thereunder, or
claims for damages to persons, property, natural resources or the environment,
could result in substantial costs and liabilities to the Company. The Company's
insurance policies provide liability coverage for sudden and accidental
occurrences of pollution and cleanup and containment of the foregoing in amounts
the Company believes are comparable to policy limits carried by other
construction contractors in the offshore industry.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, and similar laws provide for responses to and liability for
releases of hazardous substances into the environment. Additionally, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Safe Drinking Water Act, the Emergency Planning and Community Right to Know Act,
each as amended, and similar foreign, state or local counterparts to these
federal laws, regulate air emissions, water discharges, hazardous substances and
wastes, and may require public disclosure related to the use of various
hazardous substances. Compliance with these environmental laws and regulations
may require the acquisition of permits or other authorizations for certain
activities and compliance with various standards or procedural requirements. The
Company believes its facilities are in substantial compliance with these
regulatory standards, and the Company does not currently anticipate any material
adverse effect on its business or consolidated financial position as a result of
future compliance with existing environmental laws and regulations controlling
the discharge of materials into the environment or otherwise relating to the
protection of the environment. However, future events, such as changes in
existing laws and regulations or their interpretation, more vigorous enforcement
policies of regulatory agencies, or stricter or different interpretations of
existing laws and regulations, may require expenditures by the Company which may
be material. Accordingly, there can be no assurance that the Company will not
incur significant environmental compliance costs in the future. In addition,
offshore construction and drilling in certain areas has been opposed by
environmental groups and, in certain areas, has been restricted. To the extent
laws are enacted or other governmental actions are taken that prohibit or
restrict offshore construction and drilling or impose environmental protection
requirements that result in increased costs to the oil and gas industry in
general and the offshore construction industry in particular, the business and
prospects of the Company could be adversely affected.
The Company's operations are also governed by laws and regulations relating
to workplace and worker health, primarily the Occupational Safety and Health Act
and the regulations promulgated thereunder. In addition, various other
governmental and quasi-governmental agencies require the Company to obtain
certain permits, licenses and certificates from time to time with respect to its
operations. The Company believes it has all material permits, licenses and
certificates necessary to the conduct of its existing business.
Certain employees of the Company are covered by provisions of the Jones
Act, the Death on the High Seas Act and general maritime law, which laws operate
to make the liability limits established by state workers' compensation laws
inapplicable to these employees and, instead, permit them or their
representatives to pursue actions against the Company for damages or job-related
injuries, with generally no limitations on the Company's potential liability.
The Company's ownership and operation of vessels can give rise to large and
varied liability risks, such as risks of collisions with other vessels or
structures, sinking, fires and other marine casualties, which can result in
significant claims for damages against both the Company and third parties for,
among other things, personal injury, death, property damage, pollution and loss
of business.
LEGAL PROCEEDINGS
The Company is currently involved in two class action lawsuits for
unspecified personal injury and property damages arising from events in October
1991 and January 1992 during the course of a pipeline installation project for a
third party gas transmission company. One of the class actions, involving
approximately 9,840 class members, entitled Rivera v. United Gas Pipeline Co.,
No. 28738, was instituted against Woodson Construction Company, Inc. on October
29, 1991 in the 40th Judicial District Court, Parish of
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<PAGE> 41
St. John the Baptist, State of Louisiana, and the other class action, involving
approximately 7,858 class members, entitled Husseiney v. United Gas Pipeline
Co., No. 29089, was instituted on January 27, 1992 against Woodson Construction
Company, Inc. in the 40th Judicial District Court, Parish of St. John the
Baptist, State of Louisiana. The claims of 24 representative class members in
each case were tried in 1995, and judgments were rendered against Woodson
Construction Company, Inc., which were later affirmed by the court of appeal. In
the Rivera lawsuit, five of the 24 representative plaintiffs were awarded
compensatory damages of $7,500 in the aggregate, but punitive damages were
denied. In the Husseiney lawsuit, compensatory damages of $18,589 and punitive
damages of $9,500 in the aggregate were assessed against Woodson Construction
Company, Inc. in favor of 16 of the 24 representative plaintiffs. In both
lawsuits, the compensatory damages awarded are expected to be covered by the
Company's insurance, but punitive damage awards are not expected to be covered
by insurance. The compensatory and punitive damages awarded to the 16
representative class members varied according to the representatives' proximity
to the incident and individual experience with respect to it. The amount of
compensatory and punitive damages applicable to the remaining 7,834 class
members who seek to adjudicate their damage claims will be litigated on an
individual basis. Until those remaining damage claims are finally adjudicated,
settled, dismissed or otherwise terminated, the total amount of the punitive
damages to which the Company may be subject cannot reasonably be estimated, and
there can be no assurance that it will not be materially adverse to the
Company's financial position or results of operations. In July 1997, all parties
involved applied to the Louisiana Supreme Court for further discretionary review
of the existing judgments. The Company believes that there are meritorious
arguments favorable to its position, but is unable to predict whether the
Louisiana Supreme Court will grant relief from the judgments.
The Company is involved in various other lawsuits arising in the ordinary
course of business, some of which involve substantial claims for damages. While
the outcome of these other lawsuits cannot be predicted with certainty,
management believes these other matters will not have a material adverse effect
on the consolidated financial position or results of operations of the Company.
INSURANCE
The Company's operations are subject to inherent risks of offshore and
inland marine activity, including hazards such as vessels capsizing, sinking,
grounding, colliding and sustaining damage from severe weather conditions. These
hazards can cause personal injury or loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage and
suspension of operations. The Company maintains such insurance protection as it
deems prudent, including hull insurance. However, certain risks are either not
insurable or insurance is available only at rates that the Company considers not
to be economical. There can be no assurance that any such insurance will be
sufficient or effective under all circumstances or against all hazards to which
the Company may be subject. A successful claim for which the Company is not
fully insured could have a material adverse effect on the Company. Moreover, no
assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.
INTELLECTUAL PROPERTY
Although the Company's intellectual property rights are, in the aggregate,
important to the Company's business, the Company believes its technical
knowledge and experience, reputation and customer relationships are more
important to its competitive position than any patents, licenses, trademarks or
other intellectual property rights.
EMPLOYEES
The size of the Company's work force, other than its clerical and
administrative personnel, is variable and depends on the Company's workload at
any particular time. As of July 31, 1997, the Founding Companies had an
aggregate of approximately 645 employees. In addition, many workers are hired on
a contract basis and are available to the Company on short notice. None of the
Company's employees are covered by a collective bargaining agreement.
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<PAGE> 42
The Company's ability to remain productive and become profitable will
depend substantially on its ability to retain and attract skilled construction
workers, primarily welders, pipefitters and equipment operators. The Company's
ability to expand its operations depends on its ability to increase its labor
force. The demand for such workers is high and the supply is limited. While the
Company believes its wage rates are competitive and its relationship with its
skilled labor force is good, a significant increase in the wages paid by
competing employers could result in a reduction in the Company's skilled labor
force, increases in the wage rates paid by the Company, or both. If either of
these events occurred, the profits realized by the Company from work then in
progress would be reduced or eliminated and, in the long-term, the capacity and
profitability of the Company could be diminished and the growth potential of the
Company could be impaired.
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<PAGE> 43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers and directors of TCMS as of the closing of the Offering (ages are as of
August 31, 1997).
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bill E. Stallworth................ 65 Chairman of the Board of Directors and Chief
Executive Officer(1)
Thad "Bo" Smith................... 55 President, Chief Operating Officer and Director
Johnnie W. Domingue............... 50 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
H. Daniel Hughes II............... 38 Director(4); President of HBH
Daniel N. Hargett, Sr. ........... 57 Director(1)(4); President of CSI
Patrick B. Collins................ 68 Director(3)
Clifford E. McFarland............. 41 Director(1)(3)
D. Glenn Richardson............... 54 Director(2)
Jean Savoy........................ 50 Director(1)(2)(3)
Nathan M. Avery................... 62 Director(1)(2)(4)
</TABLE>
- ---------------
(1) Member of Board Executive Committee.
(2) Member of Board Compensation Committee.
(3) Member of Board Audit Committee.
(4) Appointment will become effective when the Offering closes.
Bill E. Stallworth has served as Chairman of the Board and Chief Executive
Officer of TCMS since August 1997. Mr. Stallworth has over 40 years of
experience in the oil and gas engineering and construction industries including
experience as a field engineer, construction manager, project director, group
vice president of fabrication, offshore installation and submarine pipeline
construction, and, as the President of Brown & Root International, Inc.,
executive manager of worldwide engineering and construction activities. Mr.
Stallworth served in various capacities with Brown & Root, Inc. ("Brown & Root")
from 1956 to 1986, including service as a member of Brown & Root's Board of
Directors from 1981 to 1986. Mr. Stallworth founded an engineering and
construction consulting company in 1986, providing services in the international
oil and gas and construction industries. Mr. Stallworth is currently serving on
the Board of Directors of Fugro N.V., a multi-national consulting company, and
on the Texas A&M Board of Advisors for the Center of International Business
Studies. Mr. Stallworth holds a bachelor of science degree in architectural
construction from Texas A&M University.
Thad "Bo" Smith has served as President and Chief Operating Officer of TCMS
since August 1997. Mr. Smith has 29 years of experience in offshore and shallow
water marine construction projects, including field supervision, cost
estimating, contract procurement, operations management, corporate business
development, strategic planning and executive management, with direct
involvement in offshore pipeline construction and fabrication operations in both
domestic and international shallow water regions. From January 1997 to August
1997, he worked as an independent consultant in the areas of business strategy
and product development. From 1967 to 1996, Mr. Smith held various positions
with Brown & Root, where his last position was President of Brown & Root's
Worldwide Service, Civil and Environmental Business. Mr. Smith was with Brown &
Root's Marine Division from 1967 to 1986 with his last position as Senior Vice
President with responsibilities for its European and African offshore oil and
gas construction business. Mr. Smith is currently serving on the University of
Houston, College of Business Dean's Executive Advisory Board and is a Director
for the Houston Area Research Council. Mr. Smith holds a bachelor of business
administration degree in management from the University of Houston.
Johnnie W. Domingue has served as Senior Vice President and Chief Financial
Officer of TCMS since May 1997. From 1996 to 1997, Mr. Domingue was Vice
President and Chief Financial Officer of Ankle &
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<PAGE> 44
Foot Centers of America, a start-up venture for the consolidation of foot and
ankle specialists. From 1988 to 1995, he was employed by Community Health
Computing, Corp., a computer software and service company, in various positions
including President and Chief Executive Officer. In 1995, Community Health
Computing Corp. and Community Health Computing, Inc., one of its subsidiaries,
were reorganized under bankruptcy proceedings pursuant to Chapter 11 of the
United States Bankruptcy Code. Mr. Domingue served as Vice President, Finance
and Treasurer of Synercom Technology, Inc., a publicly traded company, from 1982
to 1988. From 1976 to 1982, he served as Vice President of Finance and
Controller of Galveston-Houston Company. From 1970 to 1976, Mr. Domingue served
in a number of positions as a certified public accountant with Coopers & Lybrand
LLP.
H. Daniel Hughes II will become a director of TCMS on the closing of the
Offering. Mr. Hughes has served as the President of HBH since 1993 and served as
its Vice President from 1991 to 1993. Prior to joining HBH, he held various
positions in related entities since 1981, including service as President of
Dixie Machine Welding and Metalworks, Inc., a topside ship repair and industrial
fabrication company. Mr. Hughes holds a bachelor of business administration from
the University of Texas at Austin.
Daniel N. Hargett, Sr. will become a director of TCMS on the closing of the
Offering. He has served as Chief Executive Officer of CSI since 1963. In 1981,
Mr. Hargett founded Hargett Mooring & Marine, Inc., a supplier of vessels
providing marine construction support.
Patrick B. Collins was elected to the Board of Directors in September 1997.
From 1967 to 1991, Mr. Collins was a partner with Coopers & Lybrand LLP. Since
1991, Mr. Collins has been an independent business consultant specializing in
financial and accounting matters. Mr. Collins is currently serving on the Board
of Directors of HCC Insurance Holdings, Inc., a property and casualty insurance
company based in Houston, Texas.
Clifford E. McFarland was elected to the Board of Directors in September
1997. In November 1991, Mr. McFarland co-founded McFarland, Grossman & Company,
Inc., a Houston, Texas-based investment banking and financial advisory firm, and
has served as its Managing Director and President since that time. Mr. McFarland
is currently serving on the Board of Directors of Teletouch Communications, Inc.
of Tyler, Texas and Sport Clips, Inc., of Georgetown, Texas.
D. Glenn Richardson was elected to the Board of Directors in September
1997. Mr. Richardson founded Falcon Drilling Company, Inc. of Houston, Texas,
which he served as a director and as President and Chief Operating Officer from
1990 until his retirement in June 1996. Mr. Richardson founded Glendel Drilling
Company, Inc., a barge drilling rig operator based in Abbeville, Louisiana, and
served as its President from 1980 to 1989. Mr. Richardson currently owns and
operates a cattle ranch in Louisiana.
Jean Savoy was elected to the Board of Directors in September 1997. Mr.
Savoy, a promoter of TCMS, is a member, manager and director of J&D Capital
Investments, L.C., a consulting and financial services company based in
Lafayette, Louisiana. For more than the past 25 years, Mr. Savoy has served as
an independent directional and horizontal drilling consultant for independent
and major oil and gas companies and various directional drilling concerns.
Nathan M. Avery will become a director of TCMS on the closing of the
Offering. Since 1972, Mr. Avery has served as Chairman of the Board, President
and Chief Executive Officer of Galveston-Houston Company, a company specializing
in manufacturing oilfield service products. He has been active in the oil and
gas industry since the 1960s. Mr. Avery is currently a director and member of
the Executive Committee of Daniel Industries, Inc. and a director of Prime
Cable. He is also an advisory director of Cooper Cameron Corporation. Mr. Avery
was Chairman of the Board of the Board of Directors of Bettis Corporation until
December 1996.
In addition to these persons, the Company intends to continue to employ
substantially all of the senior operating management of each of the Founding
Companies following the closing of the Acquisitions.
44
<PAGE> 45
COMMITTEES OF THE BOARD
The Board of Directors has established an Executive Committee, an Audit
Committee and a Compensation Committee. The Executive Committee advises the
Board of Directors on matters relating to the senior management of the Company.
The Audit Committee recommends the appointment of auditors and oversees the
accounting and audit functions of the Company. The Compensation Committee
determines executive officers' and key employees' salaries and bonuses and
administers the 1997 Stock Option Plan. Messrs. Stallworth, Hargett, Savoy,
McFarland and Avery will serve as members of the Executive Committee. Messrs.
Collins, McFarland and Savoy will serve as members of the Company's Audit
Committee and Messrs. Richardson, Avery and Savoy will serve as members of the
Compensation Committee.
DIRECTOR COMPENSATION
After the closing of the Offering, each member of the Board of Directors
who is not a full-time employee of the Company (a "Non-Employee Director") will
be paid (i) an annual retainer of $5,000, payable in quarterly installments, and
(ii) $500 per meeting of the Board of Directors or any committee thereof (unless
held on the same day as a Board meeting) at which the director is present.
Directors who are full-time employees of the Company will not receive any
compensation for serving as directors. All directors will be reimbursed for all
ordinary and necessary expenses incurred in attending any meeting of the Board
of Directors or any committee thereof or otherwise incurred in their capacity as
directors.
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
TCMS was organized in April 1996 and, prior to the Offering, has not
conducted any operations other than activities related to the Acquisitions and
the Offering. TCMS did not pay any compensation to its executive officers during
1996. During 1997, TCMS has compensated Mr. Domingue $50,000 under an employment
memorandum executed on April 21, 1997 between TCMS and Mr. Domingue. Prior to
their becoming officers of the Company, Messrs. Stallworth and Smith were
compensated under a consulting agreement between the Company and Stallworth,
Frankhouser & Associates, a Houston-based consulting firm. See "Certain
Transactions." Pursuant to their respective employment agreements, Messrs.
Stallworth, Smith and Domingue will receive success bonuses of $115,000,
$130,000 and $100,000, respectively, on the closing of the Offering. See
"-- 1997 Stock Option Plan."
TCMS has entered into employment agreements with Messrs. Stallworth and
Smith effective August 1, 1997 and will have employment agreements with each of
Messrs. Hargett, Domingue and Hughes following the closing of the Offering.
Their annualized base salaries will be: Mr. Stallworth -- $200,000; Mr. Smith --
$200,000; Mr. Hargett -- $200,000; Mr. Domingue -- $180,000; and Mr.
Hughes -- $175,000.
The following summary of the executive employment agreements does not
purport to be complete and is qualified by reference to them, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. Each such employment agreement provides for an annual base
salary in an amount not less than the initial specified amount and entitling the
employee to participate in all TCMS' compensation plans (as defined) in which
other executive officers of TCMS participate. Each of these agreements has a
three-year term and continues thereafter on a year-to-year basis on the same
terms and conditions existing at the time of renewal, subject to the right of
TCMS and the employee to terminate the employee's employment at any time. If the
employee's employment is terminated by TCMS without cause (as defined), the
employee will be entitled, for 12 months following the effective date of such
termination, to (i) periodic payments equal to his annual cash base salary (as
defined) from TCMS, including bonuses, if any, and (ii) continued participation
in all TCMS' compensation plans (other than the granting of new awards under the
1997 Stock Option Plan or any other performance-based plan) during such period.
If a change of control (as defined) of TCMS occurs and the terms of the
employment agreement are not adopted, the employee will be entitled to receive
an amount equal to 36 months of his then-current base salary under the
agreement, payable semimonthly. The employment agreements contain or will
contain covenants limiting competition with the Company during the term of the
employment agreement and for additional periods up to two years after the
termination of employment.
45
<PAGE> 46
1997 STOCK OPTION PLAN
In August 1997, the Board of Directors and the stockholders of TCMS
approved the 1997 Stock Option Plan. The 1997 Stock Option Plan provides for the
granting of stock options ("Options") to directors, executive officers, certain
other employees and certain non-employee consultants of the Company. Within
certain limitations provided by the 1997 Stock Option Plan, such Options may
include provisions regarding vesting, exercise price, the amount of each grant
and other terms as shall be approved by the Board of Directors or by a committee
designated by the Board. Options granted under the 1997 Stock Option Plan may be
either options that qualify as "incentive stock options," within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
("Incentive Options"), or those that do not qualify as such ("Non-qualified
Options"). The 1997 Stock Option Plan, which permits up to 750,000 shares of
Common Stock to be issued, terminates in August 2007.
The 1997 Stock Option Plan is administered by the Board of Directors or by
the Compensation Committee of the Board, which committee, to the extent
required, will be constituted so as to qualify for certain exemptions under Rule
16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and, to satisfy the requirements of Section 162(m) of the Code, will at all
times consist of at least two non-employee directors. Subject to the terms of
the 1997 Stock Option Plan, the Board of Directors or the Compensation Committee
determines the persons to whom Options are granted and the terms and the number
of shares covered by each Option. The term of each Option may not exceed ten
years from the date the Option is granted, or five years in the case of an
Incentive Option granted to a holder of more than 10% of the fully diluted
capital stock of TCMS. Non-qualified Options and Incentive Options may become
exercisable six months after the date of grant and may continue to be
exercisable, in whole or in part, up to ten years after the date of grant, as
determined by the Board or the Compensation Committee.
The 1997 Stock Option Plan provides that all Non-qualified Options and
Incentive Options which are not exercisable on the date of termination of an
Optionholder's employment generally expire when the optionee ceases to be
affiliated with the Company; however, the Board of Directors or the Compensation
Committee may, in its discretion, permit the holder to exercise unvested Options
following such termination for specified periods of time if the six-month
waiting period has been satisfied. Options may not be transferred other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee may be exercised only by the optionee. The 1997 Stock Option Plan
provides that each stock option agreement with respect to any Non-qualified
Option or Incentive Option shall specify the effects of termination of
employment or consulting on exercisability of such options.
The 1997 Stock Option Plan contains a provision accelerating the
exercisability of Options upon the occurrence of specified events, including
merger, consolidation, dissolution or liquidation of TCMS. The acceleration of
vesting of Options in the event of a merger or other similar event may be seen
as an anti-takeover provision and may have the effect of discouraging a proposal
for merger, a takeover attempt or other efforts to gain control of TCMS.
Payment on the exercise of an Option may be in cash, by check or, at the
discretion of the Board, by delivery of shares of Common Stock with a "fair
market value," as defined in the 1997 Stock Option Plan, equal to the aggregate
exercise price, or by means of a "cashless exercise" involving the sale of
shares by, or a loan from, a broker.
Pursuant to the 1997 Stock Option Plan, Incentive Options to purchase
shares of Common Stock have been granted to the persons named in "-- Executive
Compensation and Employment Agreements" above as follows: 27,778 shares to Mr.
Stallworth, 27,778 shares to Mr. Smith, 25,000 shares to Mr. Domingue, 27,778
shares to Mr. Hargett and 24,306 shares to Mr. Hughes. Each of those Options
will have an exercise price of $18.00 per share. These Options will vest at the
rate of 20% per year, commencing on the first anniversary of the closing of the
Offering, and will expire at the earlier of ten years from the date of grant or
three months following termination of employment.
Pursuant to an October 1997 action of the Board of Directors and under the
terms of the 1997 Stock Option Plan, the Company has approved Non-qualified
Options for each of the initial Non-Employee Directors as follows (the
"Non-Employee Director Awards"): (i) the automatic grant to each of the initial
46
<PAGE> 47
Non-Employee Directors (including those elected to begin service upon completion
of the Offering) of options to purchase 5,000 shares, effective as of the date
the initial public offering price was determined, at an exercise price of $18.00
per share, (ii) the automatic grant to each Non-Employee Director elected after
the completion of the Offering of options to purchase 5,000 shares, effective on
the date of such person's initial election as a director, at an exercise price
equal to the fair market value of the Common Stock on the date of such grant,
and (iii) the automatic grant to each Non-Employee Director of options to
purchase 5,000 shares at each annual meeting of stockholders thereafter at which
such director is re-elected or remains a director, unless such annual meeting is
held within three months following such person's election as a director, at an
exercise price equal to the fair market value of the Common Stock on the date of
such grant. The Company has reserved 100,000 shares of Common Stock for issuance
pursuant to the Non-Employee Directors Awards; however, the Board of Directors
may revoke at any time the next automatic grant of options otherwise provided
for pursuant to the Non-Employee Director Awards. Each option granted pursuant
to the Non-Employee Director Awards shall be exercisable in full six months
after the date of grant and shall expire ten years after the date of grant,
unless sooner exercised or cancelled due to termination of service or death.
47
<PAGE> 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of October 30, 1997, and as adjusted to give
effect to the closing of the Acquisitions and the Offering, as to (i) all
persons who will then be the "beneficial owners" (as defined by the Commission)
of 5% or more of the Common Stock, (ii) each director and person nominated to
become a director on closing of the Offering; (iii) each executive officer; (iv)
certain executive officers of each of the Founding Companies; and (v) all
executive officers and directors of the Company as a group. All persons listed
have an address c/o the Company's principal executive offices and have sole
voting and investment power with respect to their shares, unless otherwise
indicated.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES
OWNED AS OF BENEFICIALLY
OCTOBER 30, OWNED AFTER
1997 OFFERING
------------------- -------------------
NUMBER OF NUMBER OF
SHAREHOLDERS SHARES PERCENT SHARES PERCENT
------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Jean Savoy(1)(2)................................. 737,500 58.9% 737,500 8.4%
G. Darcy Klug(1)(2).............................. 737,500 58.7 737,500 8.4
J&D Capital Investments, L.C.(2)................. 737,500 58.7 737,500 8.4
James B. Thompson, Jr.(2)........................ 100,000 8.0 100,000 1.1
Bill E. Stallworth............................... 100,000 8.0 100,000 1.1
Thad Smith....................................... 100,000 8.0 100,000 1.1
Johnnie W. Domingue.............................. 75,000 6.0 75,000 *
Beldon E. Fox, Jr.(2)............................ 75,000 6.0 75,000 *
Clifford E. McFarland(3)......................... 50,000 4.2 50,000 *
Patrick B. Collins............................... 3,000 * 3,000 *
The Succession of Herbert D. Hughes.............. -- -- 500,000 6.0
Louis Woodson.................................... -- -- 483,333 5.8
Daniel N. Hargett, Sr............................ -- -- 444,444 5.3
H. Daniel Hughes II.............................. -- -- -- --
D. Glenn Richardson.............................. -- -- -- --
Nathan Avery..................................... -- -- -- --
All executive officers, directors and persons
nominated to become directors as a group (10
persons)....................................... 1,065,500 81.6 1,509,944 17.9
</TABLE>
- ---------------
* Less than one percent
(1) Shares shown include 737,500 shares held by J&D Capital Investments, L.C.,
of which Mr. Klug owns 73.75% and Mr. Savoy owns 26.25% of the membership
interests.
(2) The holders have agreed to exchange an aggregate of 250,000 shares of Common
Stock for an equal number of shares of Restricted Common Stock
contemporaneously with the closing of the Offering. See "Certain
Transactions -- Acquisitions of the Founding Companies" and "Description of
Capital Stock -- Common Stock and Restricted Common Stock."
(3) Shares shown reflect warrants to purchase 50,000 shares issued to McFarland,
Grossman & Company, Inc., of which Mr. McFarland is a co-founder and
managing director.
48
<PAGE> 49
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
In connection with its formation, TCMS issued 600,000 shares of its Common
Stock to J&D Capital Investments, L.C. ("J&D") for an aggregate cash
consideration of $600 (62,500 of which shares were subsequently sold to
unrelated third parties). G. Darcy Klug and Jean Savoy, promoters of TCMS, own
73.75% and 26.25% of the membership interests of J&D, respectively. TCMS also
issued, in connection with its formation, 300,000 shares of Common Stock to Mr.
Klug, individually (200,000 of which shares were subsequently contributed by Mr.
Klug to J&D and 100,000 of which shares were subsequently sold to James B.
Thompson, Jr.), and 75,000 shares of Common Stock to Beldon E. Fox, Jr., each
for cash consideration equal to $.001 per share. On closing of the Offering, the
holders of these 975,000 shares of Common Stock have agreed to exchange an
aggregate of 250,000 shares for an equal number of shares of Restricted Common
Stock to the extent required to ensure that shareholders of the Woodson
companies become, collectively, the largest holder of TCMS voting stock
immediately following the Acquisitions.
Effective February 19, 1997, TCMS and J&D entered into a consulting
agreement pursuant to which J&D provides consulting and financial services to
TCMS. Under the consulting agreement, J&D is to receive a consulting fee of
$12,500 per month, payable on the closing of the Offering, at which time the
agreement shall terminate. On September 24, 1997, TCMS and J&D amended the
consulting agreement, so that, following the completion of the Offering, J&D
will provide the Company financial advisory and related services in connection
with its acquisition program. J&D will receive a consulting fee of $23,500 per
month and Non-Qualified options under the 1997 Stock Option Plan to purchase
36,667 shares for an exercise price of $18.00 per share. These options will vest
at the rate of 20% per year, commencing on the first anniversary of the closing
of the Offering, and will expire at the earlier of ten years from the date of
grant or three months following termination of the consulting and financial
services agreement. In addition, J&D will also be eligible to receive annual
performance-based bonuses. In addition, J&D has made advances to TCMS pursuant
to the J&D Loan Agreement to enable TCMS to pay various professional and
administrative expenses in connection with its formation and the Offering. As of
September 30, 1997, there were outstanding advances under the J&D Loan Agreement
totaling $554,583, which amount bears interest at a rate of 10% per annum and is
payable on or before the earlier of June 19, 1998 or 30 days following the
closing of the Offering. All the advances made under the J&D Loan Agreement,
together with accrued interest thereon, will be repaid from the net proceeds of
the Offering. See "Use of Proceeds."
On April 14, 1997, TCMS entered into an agreement for consulting services
("Executive Services Agreement") with Stallworth, Frankhouser & Associates, a
Houston-based business consulting firm ("SFA"), pursuant to which Bill E.
Stallworth and Thad Smith have provided executive services to TCMS in connection
with its formation, the Acquisitions and the Offering. Under the Executive
Services Agreement, SFA is entitled to receive (i) $10,000 per month for the
services provided by Mr. Stallworth so long as he provides a minimum of 85 hours
of services per month to TCMS and (ii) $250 per hour for the services provided
by Mr. Smith, with a maximum daily charge of $2,000 per day. Either TCMS or SFA
may terminate the Executive Services Agreement by providing the other party 30
days' prior notice. The Executive Services Agreement was amended to provide for
termination of consulting services effective August 1, 1997, and to provide for
the payment of cash bonuses, payable upon the closing of the Offering, to Mr.
Stallworth and Mr. Smith in the amount of $115,000 and $130,000, respectively.
Effective August 1, 1997, the Company entered into employment agreements with
Mr. Stallworth and Mr. Smith under which each will receive a base salary of
$10,000 per month prior to the closing of the Offering.
On April 21, 1997, TCMS executed a memorandum agreement with Johnnie W.
Domingue, providing the terms of Mr. Domingue's employment with TCMS in
connection with its formation, the Acquisitions and the Offering. Under that
agreement, Mr. Domingue receives a base salary of $10,000 per month. Mr.
Domingue will receive a success bonus of $100,000 on the closing of the
Offering. Either party may terminate the agreement on 30 days' written notice.
49
<PAGE> 50
From March 1997 to April 1997, TCMS also sold a total of 275,000 shares of
Common Stock at $.001 per share to various members of management as follows: Mr.
Stallworth -- 100,000 shares; Mr. Smith -- 100,000 shares; and Mr.
Domingue -- 75,000 shares.
TCMS has entered into stock repurchase agreements with each of Messrs.
Stallworth, Smith and Domingue, pursuant to which TCMS is entitled to
repurchase, for $.001 per share, a portion of the shares of Common Stock
previously issued to each of them, in the event such individual (i) is
terminated from his employment with TCMS for cause (as defined in the
agreements) or (ii) voluntarily resigns from his employment with TCMS within 18
months of the closing of the Offering. All shares of Common Stock held by such
persons on the closing of the Offering will initially be subject to the
repurchase rights and that number will be reduced pro rata each month thereafter
until the end of that 18-month period, when no shares will be subject to
repurchase by TCMS. Messrs. Stallworth, Smith and Domingue may not sell any
shares of Common Stock so long as they remain subject to the repurchase rights.
ACQUISITIONS OF THE FOUNDING COMPANIES
Concurrently with the closing of the Offering, TCMS will acquire by merger
or stock purchase all the issued and outstanding capital stock of the Founding
Companies, at which time, each Founding Company will become a wholly owned
subsidiary of TCMS. The aggregate consideration TCMS will pay to acquire the
Founding Companies and certain related real estate consists of (i) approximately
$85.7 million in cash, (ii) $3.0 million in 8% notes payable over a ten-year
term ending in 2007 and (iii) 2,142,441 shares of Common Stock. TCMS will also
assume up to $11.5 million of indebtedness of the Founding Companies and then
repay or refinance substantially all that indebtedness at or shortly after the
closing of the Acquisitions. In addition, the acquisition agreements for the
RFCNI and CSI Acquisitions provide for post-closing adjustments, which are to be
determined based on a multiple of estimated EBITDA of RFCNI and one of the
entities comprising CSI, payable in a combination of cash and shares of Common
Stock. Based on a preliminary determination, the Company currently estimates
that such post-closing adjustments will not exceed $0.5 million.
The consideration being paid by TCMS for each Founding Company was
determined by arm's-length negotiations between TCMS and the owner or owners of
that Founding Company.
HBH and two of the Woodson companies are S corporations. In connection with
the Acquisitions, these companies will make distributions to their shareholders
equal to 42% of their undistributed net earnings since January 1, 1997 ("S
Corporation Distributions"). If the S Corporation Distributions were distributed
as of June 30, 1997, the aggregate amount of the S Corporation Distributions
would have been $2.6 million.
The following table sets forth the estimated consideration to be paid by
TCMS for each of the Founding Companies and related real estate (dollars in
thousands). These amounts do not include any S Corporation Distributions to be
made to the shareholders of the various Founding Companies.
<TABLE>
<CAPTION>
SHARES OF
LONG-TERM COMMON DEBT
CASH DEBT STOCK ASSUMED
------- --------- --------- -------
<S> <C> <C> <C> <C>
Woodson(1)(2).................................... $19,836 $ -- 1,031,331 $ --
CSI.............................................. 40,000 -- 444,444 5,500
HBH.............................................. 24,350(3) -- 500,000 6,000
RFCNI............................................ 1,500 3,000 166,666 --
------- ------ --------- -------
Total.................................. $85,686 $3,000 2,142,441 $11,500
======= ====== ========= =======
</TABLE>
- ---------------
(1) Three of the Woodson Companies will be acquired for TCMS Common Stock in
separate merger transactions and the stock of the fourth Woodson Company
will be purchased for cash and shares of TCMS Common Stock.
(2) J&D, James B. Thompson, Jr. and Beldon E. Fox, Jr. have each agreed to
exchange, in the aggregate, 250,000 of their shares of Common Stock for
Restricted Common Stock contemporaneously with the
50
<PAGE> 51
closing of the Offering to ensure that shareholders of the Woodson companies
become, collectively, the largest holder of Common Stock entitled to vote
immediately following the Acquisitions. See "Description of Capital
Stock -- Common Stock and Restricted Common Stock."
(3) Does not include an option exercise price of $1.2 million applicable to an
option to purchase a five-acre tract of real property and improvements
adjacent to a 13-acre tract of land used by HBH, which is being acquired in
connection with the Acquisition of HBH.
In connection with the Acquisitions, and as consideration for their
interests in the Founding Companies, the following officers, directors and
beneficial owners of more than 5% of the outstanding shares of Common Stock will
receive cash and shares of Common Stock as set forth in the following table
(dollars in thousands). These amounts do not include any S Corporation
Distributions to be made to the shareholders of the various Founding Companies.
<TABLE>
<CAPTION>
SHARES OF
NAME CASH COMMON STOCK
---- ------- ------------
<S> <C> <C>
Daniel N. Hargett, Sr...................................... $36,670 444,444
Louis Woodson.............................................. -- 483,333
The Succession of Herbert D. Hughes........................ 24,350 500,000
------- ---------
Total............................................ $61,020 1,427,777
======= =========
</TABLE>
Certain of the Founding Companies have incurred indebtedness which has been
personally guaranteed by its stockholders or by entities controlled by its
stockholders. At June 30, 1997, the aggregate amount of indebtedness of these
Founding Companies that was subject to personal guarantees was approximately
$12.5 million. TCMS intends to repay such indebtedness at the closing of the
Acquisitions.
Certain of the Acquisitions (the "Mergers") are structured so that each
relevant Founding Company will be merged with and into a subsidiary of TCMS,
with the subsidiary surviving the transaction. TCMS has received an opinion of
counsel that no Founding Company will recognize income or gain in connection
with the Mergers, which opinion is based on certain assumptions as to factual
matters (which the Company believes are correct). If gain were recognized, the
Company would be liable for federal and state income taxes (without recourse to
others), the amount of which would depend on the difference between the value of
the assets of the relevant Founding Company reduced by the adjusted basis
thereof. Such federal or state income tax liabilities, if imposed, could have a
material adverse effect on the financial condition of the Company.
The closing of each Acquisition is subject to customary conditions
including, among others: the continuing accuracy of the representations and
warranties made by the Founding Companies, their principal shareholders and
TCMS, the performance of each of their respective covenants included in the
agreements relating to the Acquisitions and the nonexistence of a material
adverse change in the results of operations, financial condition or business of
each Founding Company prior to the closing date.
Any Founding Company's acquisition agreement may be terminated under
certain circumstances prior to the closing of the Offering, including: (i) by
the mutual consent of the Board of Directors of TCMS and the owner or owners of
that Founding Company; (ii) by TCMS if the disclosure schedules to the
acquisition agreement are amended to reflect a material adverse change in that
Founding Company; or (iii) if a material breach or default under the agreement
by one party occurs and is not waived. No assurance can be given that the
conditions to the closing of all the Acquisitions will be satisfied or waived or
that each Acquisition will close.
FINANCIAL ADVISORY SERVICES
In February 1997, the Company engaged McFarland, Grossman & Company, Inc.
("MGCO") to provide financial advisory services for a period of six months in
connection with the Acquisitions and related financings. Under the terms of the
engagement letter between the Company and MGCO, as amended on June 25, 1997 (the
"MGCO Engagement Letter"), the Company paid MGCO an initial financial advisory
fee of $15,000, plus monthly fees aggregating $30,000, and reimbursed MGCO for
its out-of-pocket expenses
51
<PAGE> 52
relating to the services provided. In connection with the MGCO Engagement
Letter, the Company issued the MG Warrant to MGCO for $100 in cash. The MG
Warrant provides for the purchase of up to 50,000 shares of Common Stock, at an
exercise price of $8.00 per share. The MG Warrant may be exercised in whole or,
from time to time, in part, at any time during the five-year period beginning on
the issuance date of the MG Warrant. The Company granted certain registration
rights to MGCO with respect to the shares of Common Stock issuable upon exercise
of the MG Warrant.
Pursuant to the MGCO Engagement Letter, MGCO will be entitled to receive
the following fees in the future: (i) a $400,000 success fee, payable on closing
of the Acquisitions; and (ii) a senior debt placement fee of $800,000, payable
on the initial funding under the Credit Agreement.
52
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
GENERAL
TCMS' Charter authorizes the issuance of 25,000,000 shares of capital
stock, consisting of 20,000,000 shares of Common Stock, 3,000,000 shares of
Restricted Common Stock and 2,000,000 shares of Preferred Stock, par value $.001
per share ("Preferred Stock"). At October 30, 1997, 1,256,000 shares of Common
Stock were outstanding, and no shares of either Restricted Common Stock or
Preferred Stock were outstanding. On closing of the Acquisitions and the
Offering, TCMS will have outstanding 8,148,441 shares of Common Stock and
250,000 shares of Restricted Common Stock and no shares of Preferred Stock will
be outstanding. The following summary description of certain terms of the
capital stock of TCMS is qualified in its entirety by reference to the Charter,
which is included as an exhibit to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The holders of Restricted Common Stock have no voting rights.
After the closing of the Offering, the Board of Directors will be elected
annually and will serve one-year terms. Cumulative voting for the election of
directors is not permitted. Any director, or the entire Board of Directors, may
be removed at any time, with cause, by a majority of the aggregate number of
votes which may be cast by the holders of outstanding shares of Common Stock.
Shares of Restricted Common Stock will automatically convert into Common
Stock on a share-for-share basis (i) in the event any person acquires beneficial
ownership of 25% or more of the outstanding shares of Common Stock of TCMS in or
as a result of a transaction or a series of transactions that shall not have
been approved or ratified by at least 80% of the Continuing Directors (as
defined in the Charter), (ii) 18 months after the closing of the Offering or
(iii) in the event a majority of the aggregate number of votes which may be cast
by the holders of outstanding shares of Common Stock approve such conversion.
Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock (and Restricted Common Stock if any are issued) are
entitled to participate pro rata in such dividends as may be declared in the
discretion of the Board of Directors out of the funds legally available
therefor. Holders of Common Stock and Restricted Common Stock are entitled to
share ratably in the net assets of TCMS on liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. Holders of Common Stock and holders of
Restricted Common Stock will have no preemptive rights to purchase shares of
stock of TCMS. Shares of Common Stock are not subject to any redemption
provisions and are not convertible into any other securities of TCMS. Shares of
Restricted Common Stock are not subject to any redemption provisions, but are
convertible into Common Stock on the occurrence of certain events as described
above. All outstanding shares of Common Stock (including the 250,000 shares of
Common Stock being converted into shares of Restricted Common Stock) are, and
the shares of Common Stock to be issued pursuant to the Offering and the
Acquisitions will be, on payment therefor, fully paid and non-assessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more classes or series. Subject to the provisions of the
Charter and limitations prescribed by law, the Board of Directors is expressly
authorized to adopt resolutions to issue the shares, to fix the number of shares
and to change the number of shares constituting any class or series and to
provide for or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, including dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any series of the Preferred Stock, in each case without
any further action or vote by the stockholders. TCMS has no current plans to
issue any shares of Preferred Stock.
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<PAGE> 54
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of TCMS by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of the management of TCMS. The
issuance of shares of the Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by TCMS may rank prior to the
Common Stock and Restricted Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares of
Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
TCMS is subject to Section 203 of the DGCL which, with certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that stockholder became an interested stockholder,
unless: (i) prior to that date, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) on closing of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(a) by persons who are directors and also officers of the corporation and (b) by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or after that date, the
business combination is approved by the corporation's board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock not owned by the
interested stockholder. Under Section 203, the restrictions described above also
do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors who were directors prior to that person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed those directors by a majority of those directors. An
"interested stockholder" is defined as any person that is (a) the owner of 15%
or more of the outstanding voting stock of the corporation or (b) an affiliate
or associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date it is sought to be determined whether that
person was an interested stockholder.
CERTAIN PROVISIONS OF THE CHARTER AND BYLAWS
Pursuant to the Charter and as permitted by Delaware law, a director of
TCMS is not liable to TCMS or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability in connection with a
breach of duty of loyalty to TCMS or its stockholders, for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, for dividend payments, stock repurchases or redemptions illegal under
Delaware law or any transaction in which that director derived an improper
personal benefit.
Additionally, the Charter provides that directors and officers of TCMS will
be indemnified by TCMS to the fullest extent authorized by Delaware law, as it
now exists or may in the future be amended, against all expenses and liabilities
actually and reasonably incurred in connection with service for or on behalf of
TCMS, and further permits the advancing of expenses incurred in defense of
claims.
The Charter provides that any action required or permitted to be taken by
the stockholders of TCMS must be effected at a duly called meeting and may not
be taken or effected by a written consent of stockholders in lieu thereof. The
Charter provides that a special meeting of stockholders may be called only by
the President, the Board of Directors or by such other person or persons as may
be authorized in the Bylaws of
54
<PAGE> 55
TCMS. Those Bylaws provide that only those matters set forth in the notice of
the special meeting may be considered or acted on at that special meeting. The
Charter provides that the Board of Directors may adopt, amend or repeal the
Bylaws of TCMS by the affirmative vote of a majority of the Board of Directors
without the consent or vote of the stockholders of TCMS; provided, however, that
the stockholders of TCMS may adopt, amend or repeal its Bylaws by the
affirmative vote of the holders of at least a majority of the shares entitled to
vote in the election of directors which are present in person or represented by
proxy at a duly constituted meeting of the stockholders at which a quorum is
present.
The Charter contains an "anti-greenmail" mechanism which prohibits the
Company from acquiring any voting securities from any beneficial owner of more
than 10% of the outstanding voting securities of the Company, except for (i)
acquisitions pursuant to a tender offer to all of the holders of the Company's
voting securities at the same price and on the same terms and conditions, (ii)
acquisitions in compliance with Rule 10b-18 under the Securities and Exchange
Act of 1934, as amended, or (iii) acquisitions at a price not exceeding the
"fair market value" (as defined in the Charter) per share.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
On closing of the Acquisitions and completion of the Offering, 8,398,441
shares of Common Stock (including 250,000 shares of Restricted Common Stock)
will be outstanding. See "Certain Transactions -- Acquisitions of the Founding
Companies." The 5,000,000 shares of Common Stock offered hereby will be freely
tradable unless acquired by affiliates of TCMS. All the remaining 3,398,441
shares (including the 2,142,441 shares to be issued to affiliates of the
Founding Companies) of Common Stock to be outstanding on the closing of the
Acquisitions and the Offering (as well as all shares issuable pursuant to the MG
Warrant and the Lender Warrant) may be resold publicly only following their
effective registration under the Securities Act or pursuant to an exemption from
the registration requirements of that act, such as Rule 144 thereunder. As
described below, certain shareholders of the Founding Companies will have
certain registration rights with respect to the shares of Common Stock received
by them in the Acquisitions.
When the Offering closes, TCMS also will have outstanding (i) options to
purchase up to a total of approximately 442,000 shares of Common Stock pursuant
to the 1997 Stock Option Plan, (ii) the MG Warrant (which provides for the
issuance of up to 50,000 shares of Common Stock and grants the holder thereof
certain registration rights) and (iii) the Lender Warrant (which provides for
the issuance of up to 175,000 shares of Common Stock and grants the holder
thereof certain registration rights). TCMS intends to file a registration
statement on Form S-8 with the Commission to register the shares issuable
pursuant to its 1997 Stock Option Plan under the Securities Act. After that
registration statement becomes effective, the shares registered thereby
generally will on issuance be available for sale in the open market by holders
who are not affiliates of TCMS and, subject to the volume and other limitations
of Rule 144, by holders who are affiliates of TCMS. See "Management -- 1997
Stock Option Plan."
In general, under Rule 144, if a minimum of one year has elapsed since the
later of the date of acquisition of the restricted securities from TCMS or an
affiliate of TCMS, the holder (or holders whose shares of Common Stock are
aggregated) of such restricted securities, including holders who may be deemed
"affiliates of TCMS," is entitled to sell within any three-month period a number
of shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Common Stock (approximately 83,984 shares on
completion of the Offering) or (ii) the average weekly reported volume of
trading of the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions regarding the manner
of sale, notice requirements and the availability of current public information
about TCMS. Affiliates may sell shares not constituting restricted securities in
accordance with the foregoing volume limitations and other requirements but
without regard to the one year holding period. Under Rule 144(k), if a period of
at least two years has elapsed since the later of the date on which restricted
securities were acquired from TCMS or the date they were acquired from an
affiliate of TCMS, a holder of
55
<PAGE> 56
such restricted securities who is not an affiliate of TCMS at the time of the
sale and has not been such an affiliate for at least three months prior to the
sale is entitled to sell the shares immediately without regard to the volume
limitations and other conditions of Rule 144 described above. The foregoing
summary of Rule 144 is not intended to be a complete description thereof and is
qualified in its entirety by reference thereto. The Commission has proposed
certain amendments to Rule 144 that would, among other things, eliminate the
manner of sale requirements and revise the notice provisions of that rule. The
Commission has also solicited comments on other possible changes to Rule 144,
including possible revisions to the one- and two-year holding periods and volume
limitations described above.
TCMS has entered into registration rights agreements with the shareholders
of each of Woodson, CSI and HBH, who, collectively, will acquire 1,975,775
shares of Common Stock in connection with the Acquisitions. Pursuant to each of
those agreements, at any time after one year from the date of the closing of the
Offering, the former shareholders of each of those companies may make one
request that TCMS file a registration statement registering the resale of the
Common Stock held by them. In addition, pursuant to the registration rights
agreements, each of the former shareholders of Woodson, CSI and HBH will have
the right to include any shares of Common Stock owned by them in certain
registration statements filed by TCMS under the Securities Act. TCMS is
generally required to pay the costs associated with any offering by those
shareholders pursuant to the exercise of their registration rights. The
registration rights agreements provide that the number of shares of Common Stock
that must be registered on behalf of the selling stockholders is subject to
limitation if the managing underwriter or TCMS' financial advisor, as the case
may be, determines that market conditions so require. TCMS will indemnify the
selling stockholders, and those stockholders will indemnify TCMS, against
certain liabilities in respect of any registration statement or offering that
includes shares pursuant to the registration rights agreements.
TCMS and its directors and executive officers, MGCO, J&D, all of TCMS'
other current stockholders and all persons who receive shares of Common Stock in
connection with the Acquisitions (other than Common Stock issuable upon exercise
of the Lender Warrant) have agreed not to offer or sell any of those shares for
a Lockup Period of one year from the date of this Prospectus without the prior
written consent of Jefferies & Company, Inc., except that TCMS may issue Common
Stock in connection with the Acquisitions and, subject to certain conditions, in
connection with future acquisitions, on exercise of the MG Warrant and the
Lender Warrant and pursuant to awards under the 1997 Stock Option Plan.
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<PAGE> 57
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriters named below (the
"Underwriters"), for whom Jefferies & Company, Inc. and Johnson Rice & Company
L.L.C. are acting as the representatives (the "Representatives"), and the
Underwriters have severally agreed to purchase, the number of shares of Common
Stock set forth opposite their respective names in the table below at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITERS ---------
<S> <C>
Jefferies & Company, Inc. .................................. 1,940,000
Johnson Rice & Company L.L.C. .............................. 1,940,000
Bear, Stearns & Co. Inc. ................................... 70,000
Credit Lyonnais Securities (USA) Inc. ...................... 70,000
A.G. Edwards & Sons, Inc. .................................. 70,000
Furman Selz LLC............................................. 70,000
Lazard Freres & Co. LLC..................................... 70,000
Oppenheimer & Co., Inc. .................................... 70,000
Prudential Securities Incorporated.......................... 70,000
Salomon Brothers Inc ....................................... 70,000
Schroder & Co. Inc. ........................................ 70,000
Smith Barney Inc. .......................................... 70,000
First of Michigan Corporation............................... 35,000
Gaines, Berland Inc......................................... 35,000
Ladenburg, Thalmann & Co. Inc. ............................. 35,000
Morgan Keegan & Company, Incorporated ...................... 35,000
Nesbitt Burns Securities Inc. .............................. 35,000
Rauscher Pierce Refsnes, Inc. .............................. 35,000
Raymond James & Associates, Inc. ........................... 35,000
Rodman & Renshaw, Inc. ..................................... 35,000
Sanders Morris Mundy Inc. .................................. 35,000
Simmons & Company International............................. 35,000
Sutro & Co. Incorporated.................................... 35,000
Van Kasper & Company........................................ 35,000
---------
Total............................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of Common Stock offered hereby is subject to certain
conditions, including the closing of each of the Acquisitions. The Underwriters
are committed to purchase all of the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below), if any
are purchased.
The Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $0.70 per share. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $0.10 per share to certain other dealers. After the
initial public offering of the Common Stock, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Representatives.
TCMS has granted the Underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to 750,000 additional shares of
Common Stock at the initial public offering price, less the underwriting
discount. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase additional shares of
Common Stock proportionate to such Underwriter's initial commitment as indicated
in the preceding table. The Underwriters may exercise such right of purchase
only for the purpose of covering over-allotments, if any, made in connection
with the shares of Common Stock offered hereby.
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<PAGE> 58
TCMS and its directors and executive officers, MGCO, J&D, all of TCMS'
other current stockholders and all persons who receive shares of Common Stock in
connection with the Acquisitions have agreed not to offer or sell any of those
shares for a period of one year from the date of this Prospectus without the
prior written consent of Jefferies & Company, Inc., except that TCMS may issue
Common Stock in connection with the Acquisitions and, subject to certain
conditions, in connection with future acquisitions, on exercise of the MG
Warrant and the Lender Warrant and pursuant to awards under the 1997 Stock
Option Plan.
The Representatives have informed TCMS that they do not expect the
Underwriters to confirm sales of Common Stock offered by this Prospectus to any
accounts over which they exercise discretionary authority.
At the request of TCMS, the Underwriters have reserved up to 250,000 shares
of the Common Stock offered hereby for sale at the initial public offering price
to employees of the Company and certain other persons designated by TCMS who
have expressed an interest in purchasing shares of Common Stock. The number of
shares of Common Stock available to the general public will be reduced to the
extent these persons purchase the reserved shares.
TCMS has agreed to indemnify the Underwriters against certain liabilities
that may be incurred in connection with the offering of the shares of Common
Stock, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Prior to the Offering, there has been no public trading market for the
shares of Common Stock, and there can be no assurance that an active trading
market will develop or be sustained upon the completion of the Offering. The
initial public offering price of the shares of Common Stock has been determined
by negotiations between TCMS and the Representatives. Among the factors they
considered in determining such public offering price were the history of and the
prospects for the industry in which the Founding Companies compete, an
assessment of the Company's management, the past and present operations of the
Founding Companies, the past and present earnings of the Founding Companies and
the trend of their earnings, the general condition of the securities markets at
the time of the Offering, the price-earning ratios and market prices of publicly
traded securities of companies that TCMS and the Representatives believe to be
comparable to TCMS, and other factors deemed to be relevant.
In order to facilitate the Offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, the
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer in distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed shares of Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end any of these activities at any time.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed on for the Company by Chamberlain, Hrdlicka, White,
Williams & Martin, Houston, Texas and for the Underwriters by Baker & Botts,
L.L.P., Houston, Texas.
EXPERTS
The audited financial statements of TCMS, Woodson and CSI included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The audited financial statements of HBH, as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996, included
in this Prospectus, have been audited by Deloitte &
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<PAGE> 59
Touche LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The audited financial statements of RFCNI included in this Prospectus have
been audited by Darnall, Sikes & Frederick, independent certified public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of such firm as experts in giving such
report.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed a
Registration Statement on Form S-1 (together with all amendments, schedules and
exhibits thereto, the "Registration Statement") with the Commission under the
Securities Act, with respect to the Common Stock offered hereby. This
Prospectus, which is included as part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
portions of which have been omitted in accordance with the rules and regulations
of the Commission. Statements contained in this Prospectus as to the contents of
any contract or other document referred to herein are not necessarily complete,
and in each instance that a reference is made to a contract or other document
filed as an exhibit to the Registration Statement, each such statement is
qualified in all respects by such reference. A copy of the Registration
Statement may be examined without charge at the Commission's principal offices
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices
of the Commission located at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the Commission upon payment of
certain fees prescribed by the Commission. Copies of such materials may also be
obtained over the Internet at http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports
containing audited financial statements examined by an independent public
accounting firm for each fiscal year.
59
<PAGE> 60
TRANSCOASTAL MARINE SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
TransCoastal Marine Services, Inc. Unaudited Pro Forma:
Basis of Presentation..................................... F-2
Unaudited Pro Forma Combined Balance Sheet................ F-3
Unaudited Pro Forma Combined Statements of Operations..... F-4
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-6
TransCoastal Marine Services, Inc.:
Report of Independent Public Accountants.................. F-12
Consolidated Balance Sheets............................... F-13
Consolidated Statements of Operations..................... F-14
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-15
Consolidated Statements of Cash Flows..................... F-16
Notes to Consolidated Financial Statements................ F-17
Founding Companies:
The Woodson Companies
Report of Independent Public Accountants............... F-22
Combined Balance Sheets................................ F-23
Combined Statements of Operations...................... F-24
Combined Statements of Shareholders' Equity............ F-25
Combined Statements of Cash Flows...................... F-26
Notes to Combined Financial Statements................. F-27
The CSI Companies
Report of Independent Public Accountants............... F-36
Combined Balance Sheets................................ F-37
Combined Statements of Operations...................... F-38
Combined Statements of Owners' Equity.................. F-39
Combined Statements of Cash Flows...................... F-40
Notes to Combined Financial Statements................. F-41
HBH, Inc.
Independent Auditors' Report........................... F-48
Balance Sheets......................................... F-49
Statements of Operations............................... F-50
Statements of Shareholder's Equity (Deficit)........... F-51
Statements of Cash Flows............................... F-52
Notes to Financial Statements.......................... F-53
The Red Fox Companies of New Iberia, Inc.
Report of Independent Public Accountants............... F-58
Balance Sheets......................................... F-59
Statements of Operations............................... F-60
Statements of Shareholder's Equity..................... F-61
Statements of Cash Flows............................... F-62
Notes to Financial Statements.......................... F-63
</TABLE>
F-1
<PAGE> 61
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the acquisitions by TransCoastal Marine Services, Inc. ("TCMS") of the
outstanding capital stock of The Woodson Companies, The CSI Companies, HBH,
Inc., and the Red Fox Companies of New Iberia, Inc. ("RFCNI") (together, the
"Founding Companies") and certain related real properties. TCMS and the Founding
Companies are hereinafter referred to as the Company. These acquisitions (the
"Acquisitions") will occur concurrently with and as a condition to the closing
of TCMS's initial public offering (the "Offering") and will be accounted for
using the purchase method of accounting, with The Woodson Companies being
reflected as the "accounting acquiror."
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on June 30, 1997. The
unaudited pro forma combined statement of operations gives effect to the
Acquisitions and the Offering as if they had occurred on January 1 of each
period presented.
TCMS has preliminarily analyzed the savings that it expects to realize from
reductions in rent expense resulting from elimination of certain leases with
certain former stockholders of the Founding Companies or their affiliates with
respect to certain real properties being purchased in connection with the
Acquisitions. TCMS cannot currently quantify other potential savings until
completion of the combination of the Founding Companies. It is anticipated that
these savings will be partially offset by the costs related to the Company's new
corporate management and by the costs associated with being a public company;
however, because these costs cannot be accurately quantified at this time, they
have not been included in the pro forma financial information of the Company.
The pro forma adjustments are based on preliminary estimates (primarily of
the aggregate purchase price of the Acquisitions), available information and
certain assumptions that management deems appropriate, but which may be revised
as additional information becomes available. The pro forma financial information
does not purport to represent what the Company's financial position or results
of operations would actually have been if such transactions had in fact occurred
on the dates assumed and are not necessarily representative of the Company's
financial position or results of operations for any future period. Since the
Founding Companies were not under common control or management, historical
combined results may not be comparable to, or indicative of, future performance.
The unaudited pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included in
this Prospectus. See "Risk Factors" included in this Prospectus.
F-2
<PAGE> 62
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE THE
WOODSON CSI PRO FORMA
COMPANIES COMPANIES HBH, INC. RFCNI TCMS ADJUSTMENTS PRO FORMA
--------- --------- --------- ------ ---- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................. $ 1,919 $ 1,332 $ 59 $ 707 $ 1 $ (2,590) $ 1,428
Receivables, net.................. 4,753 4,490 10,225 1,242 -- -- 20,710
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 1,053 -- 1,539 358 -- -- 2,950
Inventory......................... 364 -- -- -- -- -- 364
Other............................. 284 1,389 564 128 462 732 3,559
------- ------- ------- ------ ---- -------- --------
Total current assets........ 8,373 7,211 12,387 2,435 463 (1,858) 29,011
------- ------- ------- ------ ---- -------- --------
PROPERTY AND EQUIPMENT, net......... 4,348 7,053 8,328 44 -- 43,720 63,493
GOODWILL............................ -- -- -- -- -- 66,989 66,989
OTHER............................... 927 39 157 34 40 3 1,200
------- ------- ------- ------ ---- -------- --------
Total assets................ $13,648 $14,303 $20,872 $2,513 $503 $108,854 $160,693
======= ======= ======= ====== ==== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities..................... $ 3,229 $ 4,116 $11,141 $1,508 $375 $ 1,571 $ 21,940
Notes payable and current
maturities of long-term debt.... 994 1,069 1,477 -- 187 300 4,027
Payable to founding
stockholders.................... -- -- -- -- -- 85,686 85,686
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... 718 -- -- 422 -- -- 1,140
------- ------- ------- ------ ---- -------- --------
Total current liabilities... 4,941 5,185 12,618 1,930 562 87,557 112,793
------- ------- ------- ------ ---- -------- --------
LONG-TERM DEBT...................... -- 4,696 5,267 -- -- 1,691 11,654
DEFERRED INCOME TAXES............... -- 670 -- 8 -- 16,628 17,306
------- ------- ------- ------ ---- -------- --------
Total liabilities........... 4,941 10,551 17,885 1,938 562 105,876 141,753
------- ------- ------- ------ ---- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 98 264 66 1 1 (427) 3
Additional paid-in capital........ 25 380 808 -- 12 11,063 12,288
Retained earnings (deficit)....... 8,570 5,672 2,113 574 (72) (10,222) 6,635
Treasury stock.................... -- (2,564) -- -- -- 2,564 --
Net unrealized gain on
available-for-sale securities... 14 -- -- -- -- -- 14
------- ------- ------- ------ ---- -------- --------
Total stockholders' equity
(deficit)................. 8,707 3,752 2,987 575 (59) 2,978 18,940
------- ------- ------- ------ ---- -------- --------
Total liabilities and
stockholders' equity...... $13,648 $14,303 $20,872 $2,513 $503 $108,854 $160,693
======= ======= ======= ====== ==== ======== ========
<CAPTION>
POST-ACQUISITION AS
ADJUSTMENTS ADJUSTED
---------------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................. $ 2,706 $ 4,134
Receivables, net.................. -- 20,710
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... -- 2,950
Inventory......................... -- 364
Other............................. (1,194) 2,365
-------- --------
Total current assets........ 1,512 30,523
-------- --------
PROPERTY AND EQUIPMENT, net......... -- 63,493
GOODWILL............................ -- 66,989
OTHER............................... 1,675 2,875
-------- --------
Total assets................ $ 3,187 $163,880
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities..................... $ (1,946) $ 19,994
Notes payable and current
maturities of long-term debt.... (2,733) 1,294
Payable to founding
stockholders.................... (85,686) --
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... -- 1,140
-------- --------
Total current liabilities... (90,365) 22,428
-------- --------
LONG-TERM DEBT...................... 11,046 22,700
DEFERRED INCOME TAXES............... -- 17,306
-------- --------
Total liabilities........... (79,319) 62,434
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 5 8
Additional paid-in capital........ 82,501 94,789
Retained earnings (deficit)....... -- 6,635
Treasury stock.................... -- --
Net unrealized gain on
available-for-sale securities... -- 14
-------- --------
Total stockholders' equity
(deficit)................. 82,506 101,446
-------- --------
Total liabilities and
stockholders' equity...... $ 3,187 $163,880
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-3
<PAGE> 63
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE THE
WOODSON CSI HBH, PRO FORMA
COMPANIES COMPANIES INC. RFCNI TCMS TOTAL ADJUSTMENTS PRO FORMA
--------- --------- ------- ------ ---- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE........................... $17,933 $8,447 $36,873 $9,730 $-- $72,983 $ 239 $ 72,744
COSTS AND EXPENSES:
Cost of revenue................. 13,561 5,264 33,727 8,260 -- 60,812 (239) 60,573
Selling, general and
administrative expenses....... 2,968 2,435 1,000 885 -- 7,288 (357) 6,931
Depreciation and amortization... 562 359 1,482 12 -- 2,415 3,561 5,976
------- ------ ------- ------ ---- ------- ------- ---------
Operating income (loss)... 842 389 664 573 -- 2,468 (3,204) (736)
INTEREST EXPENSE.................. (35) (137) (853) (30) -- (1,055) (2,356) (3,411)
OTHER INCOME (EXPENSE), net....... 443 134 646 (60) -- 1,163 -- 1,163
------- ------ ------- ------ ---- ------- ------- ---------
Income (loss) before
taxes................... 1,250 386 457 483 -- 2,576 (5,560) (2,984)
PROVISION (BENEFIT) FOR INCOME
TAXES........................... 91...... 205 -- 197 -- 493 (1,016) (523)
------- ------ ------- ------ ---- ------- ------- ---------
NET INCOME (LOSS)................. $ 1,159 $ 181 $ 457 $ 286 $-- $ 2,083 $(4,544) $ (2,461)
======= ====== ======= ====== ==== ======= ======= =========
PRO FORMA LOSS PER SHARE.......... $ (.29)
=========
SHARES USED IN COMPUTING PRO FORMA
LOSS PER SHARE.................. 8,426,219
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE> 64
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE THE
WOODSON CSI PRO FORMA
COMPANIES COMPANIES HBH, INC. RFCNI TCMS TOTAL ADJUSTMENTS PRO FORMA
--------- --------- --------- ------ ---- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE................... $18,104 $9,606 $23,850 $4,536 $-- $56,096 $ 1,190 $ 54,906
COSTS AND EXPENSES:
Cost of revenue......... 15,243 5,651 19,394 3,825 -- 44,113 (1,190) 42,923
Selling, general and
administrative
expenses.............. 1,435 1,270 671 674 72 4,122 (179) 3,943
Depreciation and
amortization.......... 455 245 750 8 -- 1,458 2,198 3,656
------- ------ ------- ------ ---- ------- ------- ----------
Operating income
(loss)......... 971 2,440 3,035 29 (72) 6,403 (2,019) 4,384
INTEREST EXPENSE.......... (45) (214) (368) (7) -- (634) (1,071) (1,705)
OTHER INCOME (EXPENSE),
net..................... 560 44 26 (13) -- 617 -- 617
------- ------ ------- ------ ---- ------- ------- ----------
Income (loss)
before taxes... 1,486 2,270 2,693 9 (72) 6,386 (3,090) 3,296
PROVISION (BENEFIT) FOR
INCOME TAXES............ 191 931 -- 2 -- 1,124 529 1,653
------- ------ ------- ------ ---- ------- ------- ----------
NET INCOME (LOSS)......... $ 1,295 $1,339 $ 2,693 $ 7 $(72) $ 5,262 $(3,619) $ 1,643
======= ====== ======= ====== ==== ======= ======= ==========
PRO FORMA INCOME PER
SHARE................... $ .19
==========
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE................... 8,426,219
==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE> 65
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL
TCMS was organized in April 1996 to become a fully integrated marine
construction company focusing on the transition zone (marsh and swamp regions
out to water depths of 20 feet) and shallow water (water depths of 20 to 200
feet) regions along the U.S. Gulf Coast. TCMS has conducted no operations to
date and will acquire the Founding Companies concurrently with and as a
condition to the closing of the Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The periods
included in these financial statements for the individual Founding Companies are
as of and for the six months ended June 30, 1997, and for the year ended
December 31, 1996. The audited historical financial statements included herein
have been included in accordance with Rule 3-05 of Regulation S-X of the
Securities and Exchange Commission.
2. ACQUISITION OF FOUNDING COMPANIES
Concurrent with and as a condition to the closing of the Offering, TCMS
will acquire all of the outstanding capital stock of the Founding Companies and
related real estate. The Acquisitions will be accounted for using the purchase
method of accounting, with The Woodson Companies being treated as the accounting
acquiror.
The following table sets forth the estimated consideration to be paid in
cash, long-term debt and shares of TCMS common stock ("Common Stock") to the
owners of each of the Founding Companies. In addition, TCMS will be assuming
debt on certain of the Founding Companies. For purposes of computing the
estimated purchase price for accounting purposes, the value of the shares is
determined using an estimate of the fair value. The estimated purchase price for
each Acquisition and related allocations of the excess purchase price are based
on preliminary estimates and, in the case of RFCNI, are subject to certain
purchase price adjustments at and following closing (in thousands, except share
amounts):
<TABLE>
<CAPTION>
ESTIMATED CONSIDERATION
----------------------------------
LONG-TERM SHARES OF DEBT
CASH DEBT COMMON STOCK ASSUMED
------- --------- ------------ -------
<S> <C> <C> <C> <C>
The Woodson Companies....................... $19,836 $ -- 1,031,331 $ --
The CSI Companies........................... 40,000 -- 444,444 5,500
HBH, Inc.................................... 24,350 -- 500,000 6,000
RFCNI....................................... 1,500 3,000 166,666 --
------- ------ --------- -------
Total............................. $85,686 $3,000 2,142,441 $11,500
======= ====== ========= =======
</TABLE>
In connection with the acquisitions of the Founding Companies, the excess
of cost over fair value of net assets acquired will be amortized using the
straight-line method over 40 years. Management of the acquired businesses have
successfully operated the Founding Companies for a number of years and, with the
additional capital provided by TCMS, should be positioned to take advantage of
increased opportunities. TCMS has no reason to expect major changes in the
business conditions in which the acquired Founding Companies operate which might
affect the recoverability of the recorded intangibles. However, in the event
business conditions change, the recoverability will be reevaluated based upon
revised projections of future undiscounted operating income and cash flows and,
if impaired, the balances will be adjusted accordingly.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS AS OF JUNE 30, 1997
(a) Records the purchase of the Founding Companies by TCMS as described in
Note 2 consisting of $85.7 million in cash, $3.0 million in long-term debt and
2,142,441 shares of Common Stock together with the assumption of $11.5 million
in debt for a total estimated purchase price of $131.0 million, and also records
the
F-6
<PAGE> 66
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of TCMS' assets and liabilities, resulting in excess purchase price
over the fair value of assets acquired of $67.0 million. Also records the S
corporation distribution for certain Founding Companies of approximately $2.6
million. Records estimated deferred offering costs (excluding underwriting
fees), costs associated with warrants issued and non-employee stock options and
deferred taxes related to S corporations assuming C corporation treatment.
(b) Records the cash proceeds from the issuance of shares of Common Stock
net of estimated Offering costs. Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and printing
expenses.
(c) Records the cash portion of the consideration to be paid to the
shareholders of the Founding Companies in connection with the Acquisitions and
the reduction of certain debt obligations with the proceeds from this Offering.
(d) Records $20.0 million of initial borrowings under a new credit
agreement (the "Credit Agreement"), related debt issuance costs (see Note 6) and
related current maturities.
The following tables summarize unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-----------
(A)
<S> <C>
ASSETS
Cash........................................................ $ (2,590)
Other current assets........................................ 732
Property and equipment, net................................. 43,720
Goodwill.................................................... 66,989
Other....................................................... 3
---------
Total assets...................................... $ 108,854
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Accounts payable and accrued liabilities.................. $ (1,571)
Notes payable and current maturities of long-term debt.... (300)
Payable to founding stockholders.......................... (85,686)
---------
Total current liabilities......................... (87,557)
Long-term debt, net of current maturities................... (1,691)
Deferred income taxes....................................... (16,628)
---------
Total liabilities................................. (105,876)
Stockholders' equity --
Common stock.............................................. 427
Additional paid-in capital................................ (11,063)
Retained earnings......................................... 10,222
Treasury stock............................................ (2,564)
---------
Total stockholders' equity........................ (2,978)
---------
Total liabilities and stockholders' equity........ $(108,854)
=========
</TABLE>
F-7
<PAGE> 67
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
POST-ACQUISITION
(B) (C) (D) ADJUSTMENTS
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Current assets --
Cash and cash equivalents..................... $ 81,610 $(97,186) $ 18,282 $ 2,706
Other current assets.......................... (1,194) -- -- (1,194)
Other non current assets...................... -- -- 1,675 1,675
-------- -------- -------- --------
Total assets.................................. $ 80,416 $(97,186) $ 19,957 $ 3,187
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Accounts payable and accrued liabilities...... $ 1,903 $ -- $ 43 $ 1,946
Notes payable and current portion of long-term
debt....................................... 187 2,546 2,733
Payable to founding stockholders.............. -- 85,686 -- 85,686
-------- -------- -------- --------
Total current liabilities............. 2,090 88,232 43 90,365
Long-term debt, net of current maturities....... -- 8,954 (20,000) (11,046)
-------- -------- -------- --------
Total liabilities..................... 2,090 97,186 (19,957) 79,319
Stockholders' equity --
Common stock.................................. (5) -- -- (5)
Additional paid-in capital.................... (82,501) -- -- (82,501)
-------- -------- -------- --------
Total stockholders' equity............ (82,506) -- -- (82,506)
-------- -------- -------- --------
Total liabilities and stockholders'
equity.............................. $(80,416) $ 97,186 $(19,957) $ (3,187)
======== ======== ======== ========
</TABLE>
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
(a) Reflects the increase in depreciation and amortization and the
reduction in certain related-party rental and lease expenses based upon the
assumed ownership of certain leased property, pursuant to the terms of certain
acquisition agreements. Also reflects a $2.2 million non-cash compensation
charge related to the issuance of 275,000 shares of common stock to management
of TCMS which is offset by a reversal of such charge due to its non-recurring
nature.
(b) Reflects goodwill amortization of $1.7 million relating to the
Acquisitions, using a 40-year estimated life, plus additional depreciation
expense of $1.7 million due to the allocation of a portion of the excess
purchase price to fixed assets.
(c) Reflects the anticipated reduction in interest expense of $1.1 million
due to refinancing the outstanding indebtedness of the Founding Companies in
conjunction with the Acquisitions, net of the additional interest expense of
$3.4 million on the $3.0 million in long-term debt incurred as part of the
Acquisitions and $20.0 million of initial borrowings under the Credit Agreement.
(d) Reflects the incremental provision for federal and state income taxes
for all entities being combined.
(e) Reflects the elimination of intercompany revenues and associated costs
for all entities being combined.
F-8
<PAGE> 68
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
----- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. $ -- $ -- $ -- $ -- $ 239 $ 239
Costs and expenses:
Cost of revenue.................... -- -- -- -- (239) (239)
Selling, general and administrative
expenses........................ (357) -- -- -- -- (357)
Depreciation and amortization........ 181 3,380 -- -- -- 3,561
----- ------- ------- ------- ------- -------
Operating income (loss)......... 176 (3,380) -- -- -- (3,204)
Interest expense................... -- -- (2,356) -- -- (2,356)
----- ------- ------- ------- ------- -------
Income (loss) before taxes...... 176 (3,380) (2,356) -- -- (5,560)
Provision (benefit) for income
taxes.............................. -- -- -- (1,016) -- (1,016)
----- ------- ------- ------- ------- -------
Net income (loss).................... $ 176 $(3,380) $(2,356) $ 1,016 $ -- $(4,544)
===== ======= ======= ======= ======= =======
</TABLE>
During 1996, The CSI Companies recognized an extraordinary gain of $342,000
related to forgiving certain debt. Due to the nonrecurring nature of this
extraordinary gain, it has not been reflected in the unaudited pro forma
combined statement of operations for the year ended December 31, 1996.
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(a) Reflects the increase in depreciation and amortization and the
reduction in certain related-party rental and lease expenses based upon the
assumed ownership of certain leased property, pursuant to the terms of certain
acquisition agreements. Also reflects a $2.2 million non-cash compensation
charge related to the issuance of 275,000 shares of common stock to management
of the Company which is offset by a reversal of such charge due to its
non-recurring nature.
(b) Reflects goodwill amortization of $0.8 million relating to the
Acquisitions, using a 40-year estimated life, plus additional depreciation
expense of $1.3 million resulting from the allocation of a portion of the excess
purchase price to property and equipment.
(c) Reflects the anticipated reduction in interest expense of $0.6 million
resulting from refinancing the outstanding indebtedness of the Founding
Companies in conjunction with the Acquisitions, net of the additional interest
expense of $1.7 million on the $3.0 million in long-term debt incurred as part
of the Acquisitions and $20.0 million of initial borrowings under the Credit
Agreement.
(d) Reflects the incremental provision for federal and state income taxes
for all entities being combined.
(e) Reflects the elimination of intercompany revenues and associated costs
for all entities being combined.
F-9
<PAGE> 69
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes unaudited pro forma combined statement of
operations adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
---- ------- ------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................................... $ -- $ -- $ -- $ -- $ 1,190 $ 1,190
Costs and expenses:
Cost of revenue......................... -- -- -- -- (1,190) (1,190)
Selling, general and administrative
expenses............................. (179) -- -- -- -- (179)
Depreciation and amortization........... 91 2,107 -- -- -- 2,198
---- ------- ------- ------ ------- -------
Operating income (loss).............. 88 (2,107) -- -- -- (2,019)
Interest expense........................ -- -- (1,071) -- -- (1,071)
---- ------- ------- ------ ------- -------
Income (loss) before taxes........... 88 (2,107) (1,071) -- -- (3,090)
Provision (benefit) for income taxes...... -- -- -- 529 -- 529
---- ------- ------- ------ ------- -------
Net income (loss)......................... $ 88 $(2,107) $(1,071) $ (529) $ -- $(3,619)
==== ======= ======= ====== ======= =======
</TABLE>
5. PRO FORMA INCOME (LOSS) PER SHARE
The following table summarizes shares used in computing pro forma income
(loss) per share:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
TCMS --
Founders.................................................. 975,000 975,000
Management................................................ 275,000 275,000
Consultants............................................... 6,000 6,000
Founding Companies --
The Woodson Companies..................................... 1,031,331 1,031,331
The CSI Companies......................................... 444,444 444,444
HBH, Inc.................................................. 500,000 500,000
RFCNI..................................................... 166,666 166,666
Offering.................................................... 5,000,000 5,000,000
Effect of assumed exercise of Common Stock purchase warrant
(see Note 6).............................................. 27,778 27,778
--------- ---------
Shares used in computing pro forma income (loss) per
share..................................................... 8,426,219 8,426,219
========= =========
</TABLE>
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
simplifies the standards required under current accounting rules for computing
earnings per share and replaces the presentation of primary earnings per share
and fully diluted earnings per share with a presentation of basic earnings per
share ("basic EPS") and diluted earnings per share ("diluted EPS"). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock. Diluted EPS is computed similarly to fully diluted earnings
per share under current accounting rules. The implementation of SFAS No. 128 in
1997 is not expected to have a material effect on TCMS's earnings per share as
determined under current accounting rules.
F-10
<PAGE> 70
TRANSCOASTAL MARINE SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENTS
Common Stock
In March and April 1997, 175,000 and 100,000 shares of Common Stock,
respectively, were sold to management at $.001 per share. As a result, the
Company will record a non-recurring, non-cash compensation charge of $2.2
million effective with the closing of the Offering, representing the difference
between the amount paid for the shares and the estimated fair value of the
shares on the date of sale of such Common Stock. Due to the non-recurring nature
of this item, this amount has been excluded from the pro forma combined
statement of operations.
Common Stock Purchase Warrant
During the first quarter of 1997, the Company entered into an advisory
agreement with an investment banking firm, which was amended in June 1997 to
provide for the sale of a warrant to acquire 50,000 shares of Common Stock (the
"MG Warrant") for $.001 per share. The MG Warrant has an exercise price of the
lesser of $8 per share or 70 percent of the initial price to the public in the
Offering and is exercisable for five years, beginning six months after closing
of the Offering.
Credit Agreement
TCMS entered into the Credit Agreement with the lender thereunder on
October 28, 1997. Borrowings under the Credit Agreement are intended to be used
to pay part of the cash portion of the aggregate purchase price for the Founding
Companies and general corporate purposes. In connection with the Credit
Agreement, the Company issued to the lender a warrant to acquire 175,000 shares
of Common Stock at an exercise price of $18.00 per share. The consideration for
that warrant was $1,750 and the warrant is exercisable for five years from the
date of issuance.
Tax Election
TCMS, The Woodson Companies and HBH, Inc. will review the feasibility of
entering into agreements to make an Internal Revenue Code Section 338(h)(10) tax
election related to the acquisitions of Laine Construction Company and HBH, Inc.
by TCMS. The irrevocable tax election allows the acquiring corporation to treat
the anticipated stock purchases as deemed asset purchases. The election can only
occur with the consent of the selling shareholders. The election provides a
step-up in basis for tax purposes equal to the excess of the sales proceeds plus
any liabilities assumed over the acquired companies' adjusted tax basis.
Accordingly, TCMS would receive a higher depreciable tax basis in the assets
providing significant future tax benefits to TCMS.
F-11
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TransCoastal Marine Services, Inc.:
We have audited the accompanying consolidated balance sheet of TransCoastal
Marine Services, Inc. and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from inception (April 2, 1996) through December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TransCoastal Marine Services, Inc. and subsidiary as of December 31, 1996, and
the consolidated results of their operations and their cash flows for the period
from inception (April 2, 1996) through December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 11, 1997
F-12
<PAGE> 72
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 1 $ 1
Deferred offering costs................................... -- 462
Other assets.............................................. -- 40
---- -------
Total assets...................................... $ 1 $ 503
==== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Short-term borrowings from related party.................. $ -- $ 187
Accounts payable and accrued expenses..................... -- 375
---- -------
Total liabilities................................. -- 562
---- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 2,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.001 par value, 20,000,000 shares
authorized, 975,000 and 1,253,000 shares issued and
outstanding at December 31, 1996 and June 30, 1997,
respectively........................................... 1 1
Restricted common stock, $.001 par value, 3,000,000 shares
authorized, none issued and outstanding........... -- --
Additional paid-in capital................................ -- 12
Retained deficit.......................................... -- (72)
---- -------
Total stockholders' equity (deficit).............. 1 (59)
---- -------
Total liabilities and stockholders' equity........ $ 1 $ 503
==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 73
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 2, 1996) SIX MONTHS
THROUGH ENDED JUNE 30,
DECEMBER 31, -------------------------
1996 1996 1997
--------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE................................................. $ -- $ -- $ --
GENERAL AND ADMINISTRATIVE EXPENSES..................... -- -- 72
---- ---- ----
LOSS BEFORE INCOME TAXES................................ -- -- (72)
INCOME TAXES............................................ -- -- --
---- ---- ----
NET LOSS................................................ $ -- $ -- $(72)
==== ==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE> 74
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RESTRICTED
COMMON STOCK COMMON STOCK ADDITIONAL
------------------ -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION (April 2,
1996).......................... -- $ -- -- $ -- $ -- $ -- $ --
SALE OF COMMON STOCK............. 975,000 1 -- -- -- -- 1
--------- ---- --- ------- ---- ---- ----
BALANCE AT DECEMBER 31, 1996..... 975,000 1 -- -- -- -- 1
SALE OF COMMON STOCK............. 278,000 -- -- -- -- -- --
ADDITIONAL PAID-IN CAPITAL....... -- -- -- -- 12 12
NET LOSS (Unaudited)............. -- -- -- -- -- (72) (72)
--------- ---- --- ------- ---- ---- ----
BALANCE AT JUNE 30, 1997
(Unaudited).................... 1,253,000 $ 1 -- $ -- $ 12 $(72) $(59)
========= ==== === ======= ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE> 75
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 2, 1996) SIX MONTHS
THROUGH ENDED JUNE 30,
DECEMBER 31, --------------------------
1996 1996 1997
--------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $ -- $ -- $ (72)
Adjustments to reconcile net loss to net cash used in
operating activities --
Changes in operating assets and liabilities --
Deferred operating costs........................ -- -- (462)
Other assets.................................... -- -- (40)
Accounts payable and accrued expenses........... -- -- 375
---- ----- -----
Net cash used in operating activities........ -- -- (199)
---- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance......................... 1 1 12
Proceeds from short-term borrowings.................. -- -- 187
---- ----- -----
Net cash provided by financing activities.... 1 1 199
---- ----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 1 1 --
CASH AND CASH EQUIVALENTS, beginning of period......... -- -- 1
---- ----- -----
CASH AND CASH EQUIVALENTS, end of period............... $ 1 $ 1 $ 1
==== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 76
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
TransCoastal Marine Services, Inc., a Delaware corporation ("TCMS"),
commenced operations in April 1996. TCMS intends to acquire four businesses (the
"Founding Companies") in separate transactions (collectively, the
"Acquisitions") simultaneously with an initial public offering (the "Offering")
of its common stock (the "Common Stock"). Unless otherwise indicated, all
references herein to the "Company" include the Founding Companies, and
references herein to "TCMS" mean TransCoastal Marine Services, Inc., prior to
the consummation of the Acquisitions.
TCMS operations to date have related to the Offering and the Acquisitions.
All expenditures to date have been funded through loans from J&D Capital
Investments, L.C. ("J&D"). J&D is owned by two of the Company's founders. At
December 31, 1996, no costs had been incurred in connection with the Offering.
At June 30, 1997, approximately $462,000 has been incurred in connection with
the Offering. TCMS has accounted for these costs as deferred offering costs.
TCMS is dependent on the Offering to complete the pending Acquisitions and to
repay J&D. There is no assurance that the pending Acquisitions will be completed
or that the Company will be able to generate future operating revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TCMS and its wholly owned subsidiary, Red Fox International, Inc., a Louisiana
corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
Income Taxes
TCMS accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, the Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized differently
in the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax basis of assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation allowance
should be provided. Income tax expense is the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
Recent Accounting Pronouncements
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities to
choose between a new fair value-based method of accounting for employee stock
options or similar equity instruments and the current intrinsic, value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. TCMS has elected to account
for the issuance of stock options pursuant to APB Opinion No. 25 and will
provide pro forma disclosure of net income and earnings per share, as
applicable, in the notes to future consolidated financial statements.
F-17
<PAGE> 77
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." For the Company, SFAS No. 128 will be effective for
the year ended December 31, 1997. SFAS No. 128 simplifies the standards required
under current accounting rules for computing earnings per share and replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share ("basic EPS") and diluted
earnings per share ("diluted EPS"). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted earnings per share under
current accounting rules. The implementation of SFAS No. 128 is not expected to
have a material effect on the Company's earnings per share as determined under
current accounting rules.
Interim Financial Information
The interim consolidated balance sheet as of June 30, 1997, and statements
of operations for the six months ended June 30, 1996 and 1997, are unaudited,
and certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the
consolidated financial position, results of operations and cash flows with
respect to the interim financial statements have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
3. SUMMARY OF FINANCING ARRANGEMENTS
In February 1997, TCMS and J&D entered into an agreement providing for an
unsecured revolving credit facility (the "J&D Loan Agreement"), which was
amended in June 1997 to provide for borrowings up to $1.0 million, with interest
of 10 percent per annum due on the unpaid principal balance outstanding computed
from the date of each advance until maturity. Amounts outstanding under the J&D
Loan Agreement are due and payable on the earlier of June 19, 1998 or 30 days
following the successful completion of the Offering. As of June 30, 1997,
advances of $187,000 were outstanding.
4. SHAREHOLDERS' EQUITY
Preferred Stock
TCMS's Board of Directors is authorized to designate the voting power,
preferences, dividends, liquidation rights, redemption and other features
related to the TCMS's preferred stock. As of December 31, 1996 and June 30,
1997, no TCMS preferred stock had been issued.
Common Stock
TCMS effected a 1,000-for-one stock split in August 1997 of the outstanding
shares of Common Stock. In addition, TCMS increased the number of authorized
shares of Common Stock to 20,000,000 and authorized 3,000,000 shares of
restricted common stock ("Restricted Common Stock"). The effects of the stock
split and the increase in the shares of authorized Common Stock and Restricted
Common Stock have been retroactively reflected on the accompanying balance
sheets and in those notes.
In March and April 1997, 175,000 shares and 100,000 shares of Common Stock,
respectively, were sold to management at $.001 per share. TCMS will record a
non-recurring, non-cash compensation charge of $2.2 million effective with the
closing of the Offering, representing the difference between the amount paid for
the shares and the estimated fair value of the shares on the date of sale of
such Common Stock.
F-18
<PAGE> 78
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1997, TCMS issued 3,000 shares of Common Stock to a consultant for
services performed in connection with the Offering. The $12,200 difference
between the amount paid and the estimated fair market value of the shares on the
date of issue was recorded as deferred offering costs in the second quarter of
1997. In July 1997, an additional 3,000 shares of Common Stock were issued with
the same terms to another consultant for services performed in connection with
the Offering. An additional $32,000 will be recorded as deferred offering costs
in the third quarter of 1997.
Restricted Common Stock
Shares of Restricted Common Stock, if issued, will have no voting rights.
Shares of Restricted Common Stock, if issued, would be convertible into shares
of Common Stock on a share-for-share basis (i) in the event of certain ownership
changes, (ii) 18 months after the Offering or (iii) in the event of approval by
a majority of holders of the Common Stock. As of December 31, 1996 and June 30,
1997, no Restricted Common Stock has been issued.
Employee Stock Option Plan
In August 1997, TCMS' stockholders approved the TCMS 1997 Stock Option Plan
(the "Plan"), which provides for the granting of stock options to directors,
executive officers, certain other employees and certain non-employee consultants
of the Company. The Plan permits the granting of options for up to 750,000
shares of Common Stock. The terms of the option awards will be established by
the compensation committee of the board of directors of TCMS. TCMS has granted
stock options to purchase an estimated 97,000 shares of Common Stock to certain
members of the executive management team of the Company. The number of shares
estimated to be issued is based upon 2.5 times the annual compensation of the
respective executives divided by the initial public offering price. These
options will be exercisable at an exercise price equal to the per share initial
public offering price, vest over a five-year period from the date of grant and
expire 10 years from the date of grant. Additionally, the Company expects to
grant stock options to purchase an estimated 360,000 shares of Common Stock to
certain other members of management and key operating personnel of the Founding
Companies.
5. COMMITMENTS AND CONTINGENCIES
Advisory Agreement
In February 1997, the Company entered into an advisory agreement with a
financial advisory firm (the firm) for a period of six months in connection with
the Acquisitions and related financings. Under the terms of the agreement
between the Company and the firm, as amended on June 25, 1997, the Company paid
the firm an initial financial advisory fee of $15,000, plus monthly fees
aggregating $30,000, and reimbursed the firm for its out-of-pocket expenses
relating to the services provided. The Company also issued a warrant to the firm
for $100 in cash. The warrant provides for the purchase of up to 50,000 shares
of Common Stock, at a per share exercise price equal to the lesser of $8.00 or
70% of the initial public offering price. The warrant may be exercised in whole
or, from time to time, in part, at any time during the five-year period
beginning six months after the Offering closes. In connection with the warrant,
the Company granted certain registration rights to the firm.
The firm will be entitled to receive the following fees in the future: (i)
a $400,000 success fee, payable on closing the Acquisitions; (ii) a senior debt
placement fee of up to 2% of a new credit agreement (the "Credit Agreement")(see
Note 6), payable on closing of the Credit Agreement; and (iii) a private
placement fee equal to five percent of the amount of any private placement made
by the Company within two years of August 12, 1997 with any capital source
introduced to the Company by the firm, together with a warrant to purchase an
amount equal to 10% of the securities issued in any such private placement.
F-19
<PAGE> 79
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consulting Agreements
In February 1997, TCMS entered into a consulting and financial advisory
agreement (the "Consulting Agreement") with J&D. The Consulting Agreement
provides for a monthly fee of $12,500, payable on the closing of the Offering
and terminates on the earlier of the closing of the Offering or December 31,
1997. All amounts incurred through June 30, 1997 were capitalized as deferred
offering costs. On September 24, 1997, TCMS and J&D amended the consulting
agreement, so that, following the completion of the Offering, J&D will provide
the Company financial advisory and related services in connection with its
acquisition program. J&D will receive a consulting fee of $23,500 per month and
non-qualified options under the 1997 Stock Option Plan, to purchase 44,000
shares (assuming an initial public offering price of $15.00 per share) for an
exercise price equal to the initial public offering price per share. These
options will vest at the rate of 20% per year, commencing on the first
anniversary of the closing of the Offering, and will expire at the earlier of
ten years from the date of grant or three months following termination of the
consulting and financial services agreement. In addition, J&D will be eligible
to receive annual performance-based bonuses.
In April 1997, TCMS entered into consulting services agreements with
certain officers of the Company. Pursuant to these agreements, the officers will
provide executive services in connection with the formation of TCMS and the
closing of the Offering. Expenses related to these contract services are
estimated to be approximately $30,000 per month until the date the Offering
closes, at which time these agreements automatically terminate.
Employment Agreements
In August 1997, TCMS entered into employment agreements with three officers
of the Company. Two of the agreements are effective August 1, 1997 and one upon
closing of the Offering. The term of the agreements extends three years
following the closing of the Offering. Additionally, the Company is committed to
offer employment agreements to certain members of management and key operating
personnel of the Founding Companies on similar terms and conditions to existing
agreements.
6. SUBSEQUENT EVENTS
Acquisitions
The Company has entered into definitive agreements to acquire the Founding
Companies and related real estate on the date the Offering closes. The Founding
Companies are The Woodson Companies, The CSI Companies, HBH, Inc. and The Red
Fox Companies of New Iberia, Inc. The aggregate consideration expected to be
paid by TCMS to acquire the Founding Companies is approximately $85,650,000 in
cash, $3,000,000 in debt and 2,570,933 shares of Common Stock (including certain
estimated post-closing adjustments). In addition, the Company will be assuming
debt on certain of the Founding Companies.
Credit Agreement
Prior to the closing of the Offering, TCMS intends to enter into the Credit
Agreement with Joint Energy Development Investments, Limited Partnership, an
affiliate of Enron Capital & Trade Resources Corp. (the "Lender"). TCMS expects
that the Credit Agreement will provide for borrowings up to $75.0 million, with
the initial borrowing availability being $50.0 million (the "Initial
Availability") and the remaining $25.0 million being made available from time to
time and in such amounts as the Lender shall determine in its sole discretion.
The Credit Agreement will be divided into two tranches: (i) a senior secured
revolving credit facility (the "Revolving Credit Facility"), providing for
borrowings of up to $60.0 million ($40.0 million of which will comprise part of
the Initial Availability), and (ii) $15.0 million of senior subordinated term
loan borrowings (the "Term Loan Facility") ($10.0 million of which will comprise
the remainder of the Initial Availability). The Company also expects (i)
borrowings under the Credit Agreement will bear interest at
F-20
<PAGE> 80
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LIBOR plus 275 basis points (8.37% at October 3, 1997), payable quarterly, and
(ii) borrowings under the Term Loan Facility will bear interest at LIBOR plus
375 basis points (9.37% at October 3, 1997), payable quarterly. Borrowings under
the Credit Agreement will be secured by liens on substantially all the Company's
assets (including accounts receivable and after-acquired property) and a pledge
of the capital stock of the Founding Companies and each of the Company's other
subsidiaries. Borrowings under the Credit Agreement are expected to be used to
pay a portion of the aggregate purchase price for the Acquisitions and for
general corporate purposes, which may include future acquisitions. The Company
expects that the Credit Agreement will require the Company to comply with
various loan covenants, including (i) maintenance of certain financial ratios;
(ii) restrictions on additional indebtedness; and (iii) restrictions on liens,
guarantees, advances and dividends. The Company anticipates the Credit Agreement
will extend through October 1999 and all outstanding principal and accrued and
unpaid interest under the Revolving Credit Facility and the Term Loan Facility
as of that date will be due and payable on that date. The Company also
anticipates the Credit Agreement will contain mandatory prepayment provisions
requiring prepayment of outstanding borrowings from the issuance of debt or
equity securities for cash and any proceeds from other borrowings. In connection
with the Credit Agreement, the Company will issue to the Lender a warrant to
acquire 175,000 shares of Common Stock at an exercise price equal to the initial
per share price to the public in the Offering. The consideration for that
warrant will be $1,750 and the warrant is expected to be exercisable for five
years from its date of issuance.
Registration Statement
In August 1997, the Company filed a registration statement on Form S-1 for
the Offering. An investment in shares of Common Stock involves a high degree of
risk, including, among others, absence of a combined operating history, risks
relating to the Company's acquisition strategy, risks relating to acquisition
financing, reliance on key personnel and a substantial portion of the proceeds
from the Offering payable to affiliates of the Founding Companies. For a more
thorough discussion of risk factors, see "Risk Factors" included in this
Prospectus.
F-21
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Woodson Companies:
We have audited the accompanying combined balance sheets of The Woodson
Companies (as defined in Note 1) as of December 31, 1995 and 1996, and the
related combined statements of operations, shareholders' equity and cash flows
for the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the management of The Woodson Companies.
Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Woodson
Companies as of December 31, 1995 and 1996, and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 18, 1997 (except with respect
to the matter discussed in
Note 12, as to which
the date is July 31, 1997).
F-22
<PAGE> 82
THE WOODSON COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 852 $1,117 $ 1,919
Accounts receivable....................................... 343 103 433
Contracts receivable...................................... 2,871 1,315 4,320
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 45 -- 1,053
Inventory................................................. 179 243 364
Available-for-sale securities, at fair value.............. 1,249 1,603 81
Other current assets...................................... 480 861 203
------ ------ -------
Total current assets.............................. 6,019 5,242 8,373
PROPERTY, PLANT AND EQUIPMENT, net.......................... 1,872 2,956 4,348
OTHER ASSETS:
Notes receivable from related parties..................... 560 657 657
Other..................................................... 556 301 270
------ ------ -------
Total assets...................................... $9,007 $9,156 $13,648
====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Short-term borrowings..................................... $ -- $ 229 $ 994
Notes payable to shareholders............................. -- 450 --
Current maturities of long-term debt...................... 19 -- --
Accounts payable.......................................... 234 510 1,813
Accrued expenses.......................................... 138 250 1,416
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 1,000 -- 718
------ ------ -------
Total liabilities................................. 1,391 1,439 4,941
------ ------ -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock.............................................. 98 98 98
Additional paid-in capital................................ 25 25 25
Retained earnings......................................... 7,382 7,275 8,570
Net unrealized gain on available-for-sale securities, net
of deferred income taxes............................... 111 319 14
------ ------ -------
Total shareholders' equity........................ 7,616 7,717 8,707
------ ------ -------
Total liabilities and shareholders' equity........ $9,007 $9,156 $13,648
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-23
<PAGE> 83
THE WOODSON COMPANIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE...................................... $ 7,786 $18,075 $17,933 $10,689 $18,104
COSTS AND EXPENSES:
Cost of revenue............................ 5,874 12,716 13,561 7,833 15,243
Selling, general and administrative
expenses................................ 3,011 2,672 2,968 1,479 1,435
Depreciation and amortization.............. 728 574 562 291 455
------- ------- ------- ------- -------
Operating income (loss)................. (1,827) 2,113 842 1,086 971
OTHER INCOME (EXPENSE):
Interest income............................ 20 25 86 40 64
Interest expense........................... (101) (109) (35) (6) (45)
Other...................................... 96 69 357 99 496
------- ------- ------- ------- -------
Total other income (expense)....... 15 (15) 408 133 515
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES............ (1,812) 2,098 1,250 1,219 1,486
INCOME TAXES PROVISION (BENEFIT)............. (86) 91 91 17 191
------- ------- ------- ------- -------
NET INCOME (LOSS)............................ $(1,726) $ 2,007 $ 1,159 1,202 1,295
======= ======= ======= ======= =======
PRO FORMA INFORMATION (UNAUDITED) (Note 2)
Income (loss) before income taxes....... $(1,812) $ 2,098 $ 1,250 1,219 1,486
Pro forma income taxes.................. -- 839 500 488 594
------- ------- ------- ------- -------
Pro forma net income (loss)............. $(1,812) $ 1,259 $ 750 731 892
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE> 84
THE WOODSON COMPANIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) ON
----------------- PAID-IN RETAINED AVAILABLE-FOR-SALE
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
--------- ------ ---------- -------- ------------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993..................... 76,057.50 $98 $25 $ 7,384 $(138) $ 7,369
DIVIDENDS........................................ -- -- -- (193) -- (193)
NET LOSS......................................... -- -- -- (1,726) -- (1,726)
CHANGE IN VALUATION ALLOWANCE FOR NET UNREALIZED
GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES... -- -- -- -- (97) (97)
--------- --- --- ------- ------ -------
BALANCE AT DECEMBER 31, 1994..................... 76,057.50 98 25 5,465 (235) 5,353
DIVIDENDS........................................ -- -- -- (90) -- (90)
NET INCOME....................................... -- -- -- 2,007 -- 2,007
CHANGE IN VALUATION ALLOWANCE FOR NET UNREALIZED
GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES... -- -- -- -- 346 346
--------- --- --- ------- ------ -------
BALANCE AT DECEMBER 31, 1995..................... 76,057.50 98 25 7,382 111 7,616
DIVIDENDS........................................ -- -- -- (1,266) -- (1,266)
NET INCOME....................................... -- -- -- 1,159 -- 1,159
CHANGE IN VALUATION ALLOWANCE FOR NET UNREALIZED
GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES... -- -- -- -- 208 208
--------- --- --- ------- ------ -------
BALANCE AT DECEMBER 31, 1996..................... 76,057.50 98 25 7,275 319 7,717
NET INCOME....................................... -- -- -- 1,295 -- 1,295
CHANGE IN VALUATION ALLOWANCE FOR NET UNREALIZED
GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES... -- -- -- -- (305) (305)
--------- --- --- ------- ------ -------
BALANCE AT JUNE 30, 1997......................... 76,057.50 $98 $25 $ 8,570 $ 14 $ 8,707
========= === === ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE> 85
THE WOODSON COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,726) $ 2,007 $ 1,159 $1,202 $1,295
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization........................... 728 574 562 291 455
Provision for doubtful accounts......................... 217 4 -- -- --
(Gain) loss on sale of property, plant and equipment.... (68) 98 (340) (101) --
Realized gains on sale of available-for-sale
securities............................................ -- -- -- -- (517)
Dividend income......................................... -- -- (36) (24) --
Deferred income taxes................................... (86) 91 91 17 190
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable................................. 67 (231) 240 288 (330)
Contracts receivable................................ 1,036 (1,349) 1,556 (891) (3,005)
Cost and estimated earnings in excess of billings on
uncompleted contracts............................. (141) 179 45 (328) (1,053)
Inventory........................................... 17 24 (64) (86) (121)
Other current assets................................ (193) 248 71 373 207
Other assets........................................ 75 (9) (15) (20) (2)
Increase (decrease) in --
Accounts payable and accrued expenses............... (708) 176 388 1,108 2,469
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... -- 1,000 (1,000) (550) 718
------- ------- ------- ------ ------
Net cash provided by (used in) operating
activities........................................ (782) 2,812 2,657 1,279 306
------- ------- ------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of capital assets...................... 71 182 427 1 239
Capital expenditures...................................... (314) (1,039) (1,801) (562) (994)
Purchase of investments................................... (30) (124) (93) (56) --
Proceeds from sale of investments......................... -- -- 113 -- 2,028
Collections on amounts due from affiliate................. 19 192 -- -- --
(Advances) collections on notes receivable, net........... 5 (45) (392) 25 --
------- ------- ------- ------ ------
Net cash provided by (used in) investing
activities........................................ (249) (834) (1,746) (592) 1,273
------- ------- ------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans against cash surrender value of
officers' life insurance policies....................... 142 -- -- -- --
Proceeds from notes payable............................... 1,206 3,846 615 -- --
Proceeds from issuance of notes payable to shareholders... 1,260 -- 450 -- --
Principal payments on notes payable....................... (733) (4,582) (445) (14) (327)
Principal payments on notes payable to shareholders....... (1,050) (420) -- -- (450)
Payment of dividends to shareholders...................... (193) (90) (1,266) (1,260) --
------- ------- ------- ------ ------
Net cash provided by (used in) financing
activities........................................ 632 (1,246) (646) (1,274) (777)
------- ------- ------- ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (399) 732 265 (587) 802
CASH AND CASH EQUIVALENTS, beginning of period.............. 519 120 852 852 1,117
------- ------- ------- ------ ------
CASH AND CASH EQUIVALENTS, end of period.................... $ 120 $ 852 $ 1,117 $ 265 $1,919
======= ======= ======= ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest................................................ $ 101 $ 102 $ 35 $ 6 $ 45
Non-cash investing and financing activities:
Purchase of assets through assumption of debt........... -- -- -- -- 1,093
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-26
<PAGE> 86
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Principles of Combination
The accompanying combined financial statements include the accounts of the
following corporations, all headquartered in Lafayette, Louisiana, which are
related by the common ownership of immediate family members:
Woodson Construction Company, Inc. (WCC)
Laine Construction Company, Inc. (Laine)
Kori Corporation (Kori)
EnviroSystems, Inc. (Enviro)
Financial statements for the aforementioned companies (collectively, "The
Woodson Companies" or the "Companies") have been prepared on a combined basis
due to the Companies' common ownership by immediate family members acting as a
control group.
Description of Operations
WCC and Laine are in the business of constructing pipelines for the oil and
gas industry primarily offshore Louisiana, Texas, Mississippi and Alabama. WCC
secures contracts with customers and subcontracts substantially all the work to
Laine, which is owned by several officers of WCC.
Kori manufactures amphibious undercarriages for use primarily in marine
construction in the transition zone (from zero to 20 feet in depth). As an
Original Equipment Manufacturer ("OEM"), Kori supplies amphibious undercarriages
to companies that manufacture and/or distribute excavators..
Enviro performs sight assessments and on-site remediation of
petroleum-based products. Enviro also assists customers in the preparation and
submission of applications for reimbursement to the Louisiana Department of
Environmental Quality. All of Enviro's revenue is derived from sources within
the State of Louisiana.
Although the Companies have experienced growth in revenue over the past few
years, there is an inherent concentration of credit risk associated with
contracts receivable from their major customers. At December 31, 1995 and 1996,
two customers comprised approximately 42 percent and 61 percent, respectively,
of the total contracts receivable balance. As the Companies have historically
funded their operations with cash flows from operations, the combined entity may
be impacted by its dependence on a limited number of customers. Management
believes the risk is mitigated by the long-standing business relationships with
and reputation of the Companies' major customers. Although there is no assurance
with regard to the future business associations between the Companies and their
major customers, management believes the Companies do not have a significant
concentration of risk at December 31, 1995 and 1996. See Note 13 for a summary
of sales to major customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
F-27
<PAGE> 87
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
original maturities of three months or less.
Inventory
Inventories represent raw materials and production supplies and are stated
at cost using the specific-identification method. Cost is not in excess of
market. At December 31, 1995 and 1996, the amount of inventory (including
materials and work-in-process) held was approximately $179,000 and $243,000,
respectively. Work-in-process inventory historically has not been significant.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line and accelerated
methods based on the estimated useful lives of the assets, which range from five
to 31.5 years. Additions, improvements and renewals significantly adding to the
asset value or extending the life of the asset are capitalized. Ordinary
maintenance and repairs which do not extend the physical or economic lives of
the plant or equipment are charged to expense as incurred (see Note 5 for a
summary of property, plant and equipment).
Revenue Recognition
Revenues from construction contracts, which are typically of short
duration, are recognized on the percentage-of-completion method. Under this
method, the percentage of completion is determined by comparing contract costs
incurred to date with total estimated contract costs. Income is recognized by
applying the percentage complete to the projected total income for each contract
in progress. Contract costs include all direct material, labor and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, supplies and tools. Revisions in cost and income estimates are reflected
in the accounting period in which the facts requiring revision become known. In
addition, anticipated losses to be incurred on contracts in progress are charged
to income as soon as such losses can be determined.
Fair Value of Financial Instruments
The Woodson Companies consider the fair value of all financial instruments
to not be materially different from their carrying values at each year-end based
on management's estimate of the Companies' ability to borrow funds under terms
and conditions similar to those applicable to the Companies' existing debt.
Income Taxes
The Companies account for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the Companies recognize deferred tax liabilities and assets
for the expected future tax consequences of events recognized differently in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax basis of assets and liabilities using enacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation allowance should be
provided. Income tax expense is the tax payable for the year and the change
during the year in deferred tax assets and liabilities.
The Woodson Companies' shareholders have elected to have two of the
combined companies (Laine and Enviro) taxed as S Corporations for federal and
state income tax purposes whereby shareholders are liable for individual federal
and state income taxes on their allocated portions of the applicable entity's
taxable income.
F-28
<PAGE> 88
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, the historical financial statements do not include provisions for
income taxes relating to those entities.
Pro forma net income (loss) consists of the historical net income (loss) of
the Companies, including two S Corporations, adjusted for income taxes that
would have been recorded had each company operated as a C Corporation.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Woodson Companies
adopted SFAS No. 121 on January 1, 1996. The impact of adopting this standard
did not have a material impact on the Companies' combined results of operations.
Interim Financial Information
The interim combined balance sheet as of June 30, 1997 and combined
statements of operations for the six months ended June 30, 1996 and 1997 are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim combined financial statements have been included. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
3. CONTRACTS AND ACCOUNTS RECEIVABLE
Amounts due on contracts as of the dates shown are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1996
------ ------
<S> <C> <C>
Completed contracts......................................... $ 469 $ 908
Contracts in progress --
Current................................................... 1,496 250
Retainage due within one year............................. 906 157
------ ------
$2,871 $1,315
====== ======
</TABLE>
The portion of the retainage due in excess of one year is not significant.
The Woodson Companies' accounts receivable balances as of December 31, 1995
and 1996 were approximately $343,000 and $103,000, respectively. The Woodson
Companies charge uncollectible receivables (contracts and accounts) to expense
when available information indicates that it is probable that the assets have
been impaired. Bad debt expense amounted to $217,000, $4,000 and $-- for the
years ended December 31, 1994, 1995 and 1996, respectively.
F-29
<PAGE> 89
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of the dates shown is
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- ------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 5,736 $ --
Estimated profit earned to date............................. 1,270 --
------- ------
7,006 --
Less -- Billings to date.................................... (7,961) --
------- ------
$ (955) $ --
======= ======
</TABLE>
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- ------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 45 $ --
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (1,000) --
------- ------
$ (955) $ --
======= ======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the dates shown
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996
------ ------
<S> <C> <C>
Buildings................................................... $ 750 $ 490
Machinery and equipment..................................... 5,325 5,953
Furniture and fixtures...................................... 594 661
Transportation equipment.................................... 1,520 1,500
------ ------
8,189 8,604
Less -- Accumulated depreciation and amortization........... 6,317 5,648
------ ------
$1,872 $2,956
====== ======
</TABLE>
The Woodson Companies lease certain equipment used in the normal course of
their operations typically under month-to-month lease agreements. During the
years ended December 31, 1994, 1995 and 1996, the Companies expensed $650,000,
$1,783,000 and $1,920,000, respectively, relating to these leases.
6. AVAILABLE-FOR-SALE SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Companies' marketable equity securities are
included in an available-for-sale caption in the accompanying
F-30
<PAGE> 90
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
balance sheets and are carried at market value, with the difference between cost
and market value, net of related tax effects, included as a component of
shareholders' equity computed as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996
------ ------
<S> <C> <C>
Fair value.................................................. $1,249 $1,603
Cost........................................................ 1,084 1,121
------ ------
Gross unrealized gain..................................... 165 482
Deferred tax effects........................................ 54 163
------ ------
Net unrealized gain....................................... $ 111 $ 319
====== ======
</TABLE>
Subsequent to December 1996, the Companies sold certain marketable equity
securities for net proceeds of $1,578,000. This transaction resulted in a gain
of $516,000, before related tax effects. Additionally, as a result of this sale,
the net unrealized gain on available-for-sale securities, net of deferred income
taxes, will be reduced by $305,000.
7. SUMMARY OF FINANCING ARRANGEMENTS
Short-term borrowings and notes payable to nonaffiliates consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1995 1996
---- -----
<S> <C> <C>
Note payable to an insurance company in monthly installments
of $70,000, including interest at 7.45%, maturing April
15, 1997.................................................. $ -- $ 209
Note payable to an equipment company in monthly installments
of $3,000, including interest, maturing July 9, 1997,
secured by machinery and equipment........................ -- 20
Note payable to contractor in monthly installments of
$2,000, including interest, paid in 1996, secured by
machinery and equipment................................... 19 --
---- -----
Total financing obligations to nonaffiliates...... 19 229
Less -- Current portion..................................... (19) (229)
---- -----
Long-term balance................................. $ -- $ --
==== =====
</TABLE>
8. INCOME TAXES
Federal income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Federal provision (benefit) --
Current................................................... $ -- $-- $--
Deferred.................................................. (86) 91 91
</TABLE>
F-31
<PAGE> 91
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Provision at the statutory rate............................ $(616) $ 713 $ 425
Increase resulting from --
Permanent differences --
S Corporation nontaxable income....................... 300 (642) (346)
Recognition of valuation allowance on net operating
loss carryforwards.................................. 237 -- --
Expenses not deductible for tax purposes.............. 7 18 5
State income tax and other, net....................... (14) 2 7
----- ----- -----
$ (86) $ 91 $ 91
===== ===== =====
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1995 1996
---- -----
<S> <C> <C>
Tax benefit of net operating loss carryforwards, net of
valuation allowance of $237............................... $272 $ 265
Tax effect on deferred gain on available-for-sale
securities................................................ (54) (163)
Other accrued expenses not deductible for tax purposes...... 84 10
Basis differences on property, plant and equipment.......... 5 (6)
---- -----
Net deferred tax assets........................... $307 $ 106
==== =====
</TABLE>
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets --
Current................................................... $ -- $ --
Long-term................................................. 361 275
---- ----
Total............................................. 361 275
---- ----
Deferred tax liabilities --
Current................................................... -- --
Long-term................................................. 54 169
---- ----
Total............................................. 54 169
---- ----
Net deferred income tax assets.................... $307 $106
==== ====
</TABLE>
9. RELATED-PARTY TRANSACTIONS
On December 31, 1996, the Companies advanced to their shareholders $450,000
pursuant to three promissory notes. The promissory notes are payable to the
Companies on demand, bear interest annually at a rate of 8 percent and are
included in other current assets in the accompanying balance sheets.
During December 1996, the Companies issued three unsecured promissory notes
to their shareholders, payable on demand and bearing interest at 8 percent. The
balance on the notes payable to the shareholders at December 31, 1996, was
$450,000.
F-32
<PAGE> 92
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The companies lease office space from certain of their shareholders. The
amount recorded as expense related to this lease was $142,200 for each of the
three years ended December 31, 1994, 1995 and 1996.
In addition to the above transactions, WCC sold certain buildings, land and
improvements during the years ended December 31, 1995 and 1996 to companies
owned by three of its officers who are also immediate family members of a major
shareholder for a total of $567,000 and $106,000, respectively. WCC realized a
loss on the transaction in the amount of $96,000 and a gain of $100,000 during
the years ended December 31, 1995 and 1996, respectively. These transactions
resulted in notes receivable from related parties as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1995 1996
---- ----
<S> <C> <C>
Notes receivable from related parties, dated December 29,
1995 and January 2, 1996, payable in 30 annual
installments ranging from $2,000 to $9,000, including
principal and interest.................................... $567 $665
Less -- Current portion................................ (7) (8)
---- ----
Long-term receivable.............................. $560 $657
==== ====
</TABLE>
These notes receivable resulted in interest income of $43,000 for the year
ended December 31, 1996.
10. RETIREMENT PLAN
The Woodson Companies Employee Profit Sharing Plan ("the Plan") provides
for contributions of up to 10 percent of the annual compensation of each
participant. The Plan includes employees of at least 21 years of age with one
year of completed service. Participants who became eligible after January 1,
1990 remain nonvested until the completion of five years of service, at which
time the participants become 100 percent vested. The Companies have obtained a
favorable tax determination letter from the Internal Revenue Service with
respect to the Plan.
The Woodson Companies made Plan contributions of $--, $30,000 and $26,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
11. SHAREHOLDERS' EQUITY
The components of capital stock as of December 31, 1995 and 1996 are as
follows (in thousands except share and per-share information):
<TABLE>
<CAPTION>
CLASS OF SHARES SHARES PAR VALUE STATED
COMPANY SHARES AUTHORIZED ISSUED PER SHARE VALUE
------- -------- ---------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
WCC ................................ Common 200,000 75,000.00 $1 $75
Laine .............................. Common 500 7.50 $100 1
Kori................................ Common 5,000 750.00 $10 7
Enviro.............................. Common 10,000 300.00 No Par 15
--------- ---
Total capital stock....... 76,057.50 $98
========= ===
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
Insurance
The Woodson Companies are subject to numerous risks and uncertainties
because of the nature and status of their operations. The Woodson Companies
maintain insurance coverage for events and in amounts that they deem
appropriate. With the exception of certain uninsured punitive damage claims
which cannot reasonably be estimated at this time as described under the heading
"Litigation," management believes that uninsured losses, if any, will not be
materially adverse to the Companies' financial position or results of
operations.
The Woodson Companies maintain a self-insurance program for their workers'
compensation claims. The insurance carrier requires the Companies to retain
$81,000 in a money market account and a $37,000 escrow
F-33
<PAGE> 93
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
fund, which the Companies have included in other assets in the accompanying
balance sheets. The program provides for self-insurance coverage of $10,000 per
occurrence, subject to a maximum exposure of $50,000 per year. No expenses were
accrued relative to the self-insurance program for the periods shown in the
statements of operations.
Litigation
The Companies are currently involved in two class action lawsuits for
unspecified personal injury and property damages arising from events in October
1991 and January 1992 during the course of a pipeline installation project for a
third party gas transmission company. One of the class actions, involving
approximately 9,840 class members, entitled Rivera v. United Gas Pipeline Co.,
No. 28738, was instituted against Woodson Construction Company, Inc. on October
29, 1991 in the 40th Judicial District Court, Parish of St. John the Baptist,
State of Louisiana, and the other class action, involving approximately 7,858
class members, entitled Husseiney v. United Gas Pipeline Co., No. 29089, was
instituted on January 27, 1992 against Woodson Construction Company, Inc. in the
40th Judicial District Court, Parish of St. John the Baptist, State of
Louisiana. The claims of 24 representative class members in each case were tried
in 1995, and judgments were rendered against Woodson Construction Company, Inc.,
which were later affirmed by the court of appeal. In the Rivera lawsuit, five of
the 24 representative plaintiffs were awarded compensatory damages of $7,500 in
the aggregate, but punitive damages were denied. In the Husseiney lawsuit,
compensatory damages of $18,589 and punitive damages of $9,500 in the aggregate
were assessed against Woodson Construction Company, Inc. in favor of 16 of the
24 representative plaintiffs. In both lawsuits, the compensatory damages awarded
are expected to be covered by the Companies' insurance, but punitive damage
awards are not expected to be covered by insurance. The compensatory and
punitive damages awarded to the 16 representative class members varied according
to the representatives' proximity to the incident and individual experience with
respect to it. The amount of compensatory and punitive damages applicable to the
remaining 7,834 class members who seek to adjudicate their damage claims will be
litigated on an individual basis. Until those remaining damage claims are
finally adjudicated, settled, dismissed or otherwise terminated, the total
amount of the punitive damages to which the Companies may be subject cannot
reasonably be estimated, and there can be no assurance that it will not be
materially adverse to the Woodson Companies' financial position or results of
operations. In July 1997, all parties involved applied to the Louisiana Supreme
Court for further discretionary review of the existing judgments. The Companies
believe that there are meritorious arguments favorable to their position, but
are unable to predict whether the Louisiana Supreme Court will grant relief from
the judgments.
The Companies are involved in various other lawsuits arising in the
ordinary course of business, some of which involve substantial claims for
damages. While the outcome of these other lawsuits cannot be predicted with
certainty, management believes these other matters will not have a material
adverse effect on the combined financial position or results of operations of
the Companies.
13. SALES TO MAJOR CUSTOMERS
The customer bases for the Companies are primarily concentrated in the oil
and gas industry. The revenue earned from each customer varies from year to year
based on the contracts awarded. Sales to customers comprising 10 percent or more
of the Companies' total revenue are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 19.7% 13.7% 10.1%
Customer B................................................. 17.8 -- --
Customer C................................................. -- 32.8 55.0
</TABLE>
F-34
<PAGE> 94
THE WOODSON COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS
The Woodson Companies and their shareholders expect to enter into
definitive agreements with TransCoastal Marine Services, Inc. ("TCMS"), pursuant
to which all the outstanding shares of the common stock of WCC, Kori and Enviro
will be acquired for TCMS common stock in three separate merger transactions,
and all the outstanding shares of the common stock of Laine will be purchased
for cash and shares of TCMS common stock concurrently with the closing of the
initial public offering (the "Offering") of the common stock of TCMS.
Shortly before the closing of the Offering, the Companies' shareholders
will elect to terminate the status as an S corporation for Laine and Enviro and
those companies will become subject to federal and state income taxes. Prior to
their termination as S corporations, subject to the terms of the acquisition
agreements, the Companies must refrain from declaring or paying any dividends or
Subchapter S distributions to any shareholders, directors, management sales
agents, employees or other personnel, except for dividends and distributions to
shareholders paid or declared in 1997 which in the aggregate do not exceed 43.2%
of the Companies' pretax income during 1997 excluding certain other mutually
agreed-to distributions, through the earlier of September 30, 1997 or the
Closing Date.
F-35
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The CSI Companies:
We have audited the accompanying combined balance sheets of The CSI
Companies (as defined in Note 1), as of December 31, 1995 and 1996, and the
related combined statements of operations, owners' equity and cash flows for
each of the two years in the period ended May 31, 1995, the seven months ended
December 31, 1995, and the year ended December 31, 1996. These financial
statements are the responsibility of the management of The CSI Companies. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The CSI
Companies, as of December 31, 1995 and 1996, and the combined results of their
operations and their cash flows for each of the two years in the period ended
May 31, 1995, the seven months ended December 31, 1995 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 18, 1997 (except with
respect to the matter discussed
in Note 10, as to which the date is
July 31, 1997)
F-36
<PAGE> 96
THE CSI COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------- JUNE 30,
1995 1996 1997
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 758 $ 571 $ 872
Restricted cash equivalents............................... -- 460 460
Accounts receivable....................................... 2,534 1,368 4,490
Available-for-sale securities, at fair value.............. 2,418 522 151
Receivables from related parties.......................... 282 746 760
Other current assets...................................... 167 708 478
------ ------- -------
Total current assets.............................. 6,159 4,375 7,211
PROPERTY, PLANT AND EQUIPMENT, net.......................... 1,400 3,109 7,053
OTHER ASSETS................................................ 42 18 39
------ ------- -------
Total assets...................................... $7,601 $ 7,502 $14,303
====== ======= =======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $1,144 $ 355 $ 1,069
Accounts payable.......................................... 718 1,591 140
Accrued expenses.......................................... 192 282 2,780
Income taxes payable...................................... 217 478 1,196
------ ------- -------
Total current liabilities......................... 2,271 2,706 5,185
------ ------- -------
DEFERRED INCOME TAX LIABILITY............................... 630 561 670
LONG-TERM DEBT.............................................. 25 1,738 4,696
COMMITMENTS AND CONTINGENCIES
OWNERS' EQUITY:
Common stock.............................................. 264 264 264
Additional paid-in capital................................ 380 380 380
Retained earnings......................................... 4,031 4,417 5,672
Treasury stock, at cost, 83.3 shares as of December 31,
1996 and March 31, 1997................................ -- (2,564) (2,564)
------ ------- -------
Total owners' equity.............................. 4,675 2,497 3,752
------ ------- -------
Total liabilities and owners' equity.............. $7,601 $ 7,502 $14,303
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE> 97
THE CSI COMPANIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEVEN MONTHS ENDED
MAY 31 ENDED YEAR ENDED JUNE 30
--------------- DECEMBER 31, DECEMBER 31, ---------------
1994 1995 1995 1996 1996 1997
------ ------ ------------ ------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUE................................ $5,331 $5,226 $6,041 $8,447 $3,815 $9,606
COSTS AND EXPENSES:
Cost of revenue...................... 2,964 3,334 3,010 5,264 2,463 5,651
Selling, general and administrative
expenses.......................... 1,725 2,285 1,282 2,435 1,160 1,270
Depreciation and amortization........ 288 269 177 359 202 245
------ ------ ------ ------ ------ ------
Operating income (loss)........... 354 (662) 1,572 389 (10) 2,440
OTHER INCOME (EXPENSE):
Interest income...................... 84 117 80 159 33 72
Interest expense..................... (14) (5) (11) (137) (28) (214)
Other................................ 73 14 (6) (25) 54 (28)
------ ------ ------ ------ ------ ------
Total other income
(expense).................. 143 126 63 (3) 59 (170)
------ ------ ------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES...... 497 (536) 1,635 386 49 2,270
INCOME TAXES PROVISION (BENEFIT)....... 190 (150) 642 205 84 931
EXTRAORDINARY GAIN..................... -- -- -- 342 342 --
------ ------ ------ ------ ------ ------
NET INCOME (LOSS)...................... $ 307 $ (386) $ 993 $ 523 $ 307 $1,339
====== ====== ====== ====== ====== ======
PRO FORMA INFORMATION (UNAUDITED) (NOTE
2)
Income (loss) before income taxes.... $ 497 $ (536) $1,635 $ 386 $ 49 $2,270
Extraordinary gain................... -- -- -- 342 342 --
Pro forma income taxes............... 222 (125) 684 356 156 940
------ ------ ------ ------ ------ ------
Pro forma net income (loss)............ $ 275 $ (411) $ 951 $ 372 $ 235 $1,330
====== ====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE> 98
THE CSI COMPANIES
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------ ------ ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1993.................... 1,166 $264 $380 $3,117 $ -- $ 3,761
NET INCOME................................. -- -- -- 307 -- 307
----- ---- ---- ------ ------- -------
BALANCE AT MAY 31, 1994.................... 1,166 264 380 3,424 -- 4,068
NET LOSS................................... -- -- -- (386) -- (386)
----- ---- ---- ------ ------- -------
BALANCE AT MAY 31, 1995.................... 1,166 264 380 3,038 -- 3,682
NET INCOME................................. -- -- -- 993 -- 993
----- ---- ---- ------ ------- -------
BALANCE AT DECEMBER 31, 1995............... 1,166 264 380 4,031 -- 4,675
DISTRIBUTION TO PARTNER OF
HARGETT INVESTMENTS LLC.................. -- -- -- (137) -- (137)
NET INCOME................................. -- -- -- 523 -- 523
PURCHASE OF TREASURY STOCK................. (83) -- -- -- (2,564) (2,564)
----- ---- ---- ------ ------- -------
BALANCE AT DECEMBER 31, 1996............... 1,083 264 380 4,417 (2,564) 2,497
DISTRIBUTION TO PARTNER OF
HARGETT INVESTMENT LLC................... -- -- -- (84) -- (84)
NET INCOME (Unaudited)..................... -- -- -- 1,339 -- 1,339
----- ---- ---- ------ ------- -------
BALANCE AT JUNE 30, 1997 (Unaudited)....... 1,083 $264 $380 $5,672 $(2,564) $ 3,752
===== ==== ==== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE> 99
THE CSI COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN SIX MONTHS
YEAR ENDED MONTHS ENDED
MAY 31 ENDED YEAR ENDED JUNE 30
---------------- DECEMBER 31, DECEMBER 31, ------------------
1994 1995 1995 1996 1996 1997
------ ------ ------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 307 $ (386) $ 993 $ 523 $ 307 $ 1,339
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Depreciation and amortization............... 288 269 177 359 202 245
Provision for doubtful accounts............. 41 6 6 24 -- 40
Deferred tax provision (benefit)............ 214 (97) 349 (69) (74) 109
Extraordinary gain.......................... -- -- -- (342) (342) --
(Gain) loss on sale of property, plant and
equipment................................. 61 13 -- 19 6 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Restricted cash equivalents............. -- -- -- (460) -- --
Accounts receivable..................... (53) 146 (1,872) 1,142 433 (3,162)
Receivables from related parties........ (264) -- (18) (728) (401) (14)
Other current assets.................... 200 (168) 171 (541) (153) 230
Other assets............................ 258 96 (6) 24 41 (21)
Increase (decrease) in --
Accounts payable and accrued expenses... 173 132 307 963 96 1,047
Income taxes payable.................... (24) (52) 291 261 91 717
------ ------ ------- ------- ------- -------
Net cash provided by (used in) in
operating activities.................. 1,201 (41) 398 1,175 206 530
------ ------ ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of capital assets.......... 90 -- -- 3 3 --
Capital expenditures.......................... (142) (408) (238) (2,090) (374) (4,188)
Proceeds from sale (purchase) of investments,
net......................................... (957) (498) (963) 1,896 1,093 371
------ ------ ------- ------- ------- -------
Net cash provided by (used in) investing
activities............................ (1,009) (906) (1,201) (191) 722 (3,817)
------ ------ ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable........... (417) (388) (184) (1,201) (58) (1,344)
Proceeds from issuance of notes payable....... 121 530 40 2,467 1,657 5,016
Distribution to partner of Hargett Investments
LLC......................................... -- -- -- (137) -- (84)
Purchase of treasury stock.................... -- -- -- (2,300) (2,300) --
------ ------ ------- ------- ------- -------
Net cash provided by (used in) financing
activities............................ (296) 142 (144) (1,171) (701) 3,588
------ ------ ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (104) (805) (947) (187) 227 301
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 2,614 2,510 1,705 758 758 571
------ ------ ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period........ $2,510 $1,705 $ 758 $ 571 $ 985 $ 872
====== ====== ======= ======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest.................................... $ 14 $ 5 $ 11 $ 138 $ 28 $ 214
Taxes....................................... -- -- -- 102 -- --
Exchange of receivable from related party for
treasury stock.............................. -- -- -- 264 -- --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE> 100
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Principles of Combination
The accompanying combined financial statements include the accounts of the
following companies, all headquartered in Lafayette, Louisiana, which are
related by the common ownership of a major shareholder and immediate family
members:
CSI Hydrostatic Testers, Inc. (CSI) and its wholly owned subsidiary,
Blue-Water Hydro Test
Corporation (Blue-Water)
Hargett Mooring and Marine, Inc. (HMMI)
Hargett Investments LLC (HI)
Financial statements for the aforementioned companies ("The CSI Companies"
or the "Companies") have been prepared on a combined basis due to the Companies'
common ownership.
DESCRIPTION OF OPERATIONS
CSI is primarily engaged in testing offshore oil and gas pipelines and
providing sandblasting and painting services to companies in the oil and gas
industry. CSI's main operating area is in and around the Gulf of Mexico.
Blue-Water had no operations as of December 31, 1996. HMMI is a marine vessel
company, focused on chartering vessels for certain energy-related services. HI's
operations consist of leasing office space to CSI.
Although the Companies have experienced growth in revenue over the past few
years, there is an inherent concentration of credit risk associated with
contracts receivable from their major customers. At December 31, 1995 and 1996,
two customers comprised approximately 55 percent and three customers comprised
approximately 45 percent, respectively, of the total accounts receivable
balance. As the Companies have historically funded their operations with cash
flows from operations, the combined entity may be impacted by its dependence on
a limited number of customers. Management believes the risk is mitigated by the
long-standing business relationship with and reputation of the Companies' major
clients. Although there is no assurance with regard to the future business
associations between the Companies and their major customers, management
believes the Companies do not have a significant concentration of risk at
December 31, 1995 and 1996. See Note 12 for a summary of sales to major
customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
original maturities of three months or less.
Restricted Cash
Restricted cash represents cash equivalent investments to support letters
of credit established by the Companies in the normal course of business with
certain vendors.
F-41
<PAGE> 101
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line and accelerated
methods based on the estimated useful lives of the assets, which range from
three to 30 years. Additions, improvements and renewals significantly adding to
the asset value or extending the life of the asset are capitalized. Ordinary
maintenance and repairs which do not extend the physical or economic lives of
the plant or equipment are charged to expense as incurred.
Revenue Recognition
The Companies follow the percentage-of-completion method of accounting for
construction contracts which are typically of short duration. Under this method,
the percentage of completion is determined by comparing contract costs incurred
to date with total estimated contract costs. Income is recognized by applying
the percentage complete to the projected total income for each contract in
progress. Contract costs include all direct material, labor and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, supplies and tools. Revisions in cost and income estimates are reflected
in the accounting period in which the facts requiring revision become known. In
addition, anticipated losses to be incurred on contracts in progress are charged
to income as soon as such losses can be determined. With regard to pipeline
testing services performed, the companies recognize revenues on an as-billed
basis, with an accrual made at each period end for unbilled revenue.
Fair Value of Financial Instruments
The CSI Companies consider the fair value of all financial instruments to
not be materially different from their carrying values at each year-end based on
management's estimate of the Companies' ability to borrow funds under terms and
conditions similar to those applicable to the Companies' existing debt.
Income Taxes
The Companies account for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the Companies recognize deferred tax liabilities and assets
for the expected future tax consequences of events that have been recognized
differently in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax basis of assets and
liabilities using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse. Deferred tax assets are evaluated for
realization based on a more-likely-than-not criteria in determining if a
valuation allowance should be provided. Income tax expense is the tax payable
for the year and the change during the year in deferred tax assets and
liabilities.
One of the combining entities, HI, is a limited liability corporation. Its
members are liable for individual federal and state income taxes on their
allocated portions of its taxable income. Accordingly, the historical financial
statements do not include provisions for income taxes relating to HI.
Pro forma net income (loss) consists of the historical net income (loss) of
the Companies', including HI, a limited liability corporation, adjusted for
income taxes that would have been recorded had each Company operated as a C
corporation.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Companies adopted SFAS
No. 121 on January 1, 1996. The impact of adopting this standard did not have a
material impact on the combined results of operations.
F-42
<PAGE> 102
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The interim combined balance sheet as of June 30, 1997 and combined
statements of operations for the six months ended June 30, 1996 and 1997 are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim combined financial statements have been included. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of the dates shown (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996
------ ------
<S> <C> <C>
Billed to customers......................................... $2,074 $1,206
Revenues earned not yet billed.............................. 460 162
------ ------
$2,534 $1,368
====== ======
</TABLE>
Bad debt expense amounted to $41,000, $6,000, $6,000 and $24,000 for the
years ended May 31, 1994 and 1995, the seven months ended December 31, 1995 and
the year ended December 31, 1996, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the dates shown
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- -------
<S> <C> <C>
Land........................................................ $ 258 $ 258
Buildings and improvements.................................. 1,641 1,533
Machinery and equipment..................................... 2,983 3,370
Furniture and fixtures...................................... 464 26
Marine vessels.............................................. 635 2,217
------- -------
5,981 7,404
Less -- Accumulated depreciation and amortization........... (4,581) (4,295)
------- -------
$ 1,400 $ 3,109
======= =======
</TABLE>
The CSI Companies lease certain equipment used in the normal course of
their operations under, typically month-to-month lease agreements. During the
years ended May 31, 1994 and 1995, the seven months ended December 31, 1995 and
the year ended December 31, 1996, the Companies expensed $236,000, $243,000,
$688,000 and $1,019,000, respectively, related to these leases.
5. AVAILABLE-FOR-SALE SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Companies' marketable equity securities are
included in an available-for-sale caption in the accompanying combined balance
sheets and are carried at market value. The difference between cost and market
value is not material.
F-43
<PAGE> 103
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUMMARY OF FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- -------
<S> <C> <C>
Note payable to a finance company in monthly installments of
$1,000, including interest at 8.50%, maturing June 1998,
secured by equipment and a personal guarantee by an
officer and shareholder of the Companies.................. $ 36 $ 25
Two notes payable to a financing company in monthly
installments of $27,000 and $26,000, including interest at
8.25% and 7.82%, maturing April 1996 and 1997,
respectively, secured by unearned insurance policy
premiums.................................................. 105 162
Note payable to a bank, due in monthly installments of
$24,000, including interest at 9.25%, maturing April 2003,
secured by equipment and a personal guarantee by an
officer and shareholder of the Companies.................. -- 1,398
Note payable to a trust company............................. 1,028 --
Note payable to a bank, due in monthly installments of
$5,000, including interest at 9.00%, maturing June 2001
with a balloon payment of $475,000, secured by real estate
and a personal guarantee by an officer and shareholder of
the Companies............................................. -- 508
------- -------
Total financing obligations....................... 1,169 2,093
Less -- Current portion of long-term debt................... (1,144) (355)
------- -------
Long-term debt.................................... $ 25 $ 1,738
======= =======
</TABLE>
The note payable to a trust company for $1,028,000 was secured by a
mortgage on certain of the Companies' real estate. The Companies retired the
outstanding balance of that note in 1996 for $680,000. In connection with the
retirement, the Companies recognized an extraordinary gain of $342,000 for the
difference between the outstanding balance on the note at the time of retirement
and the amount paid.
Aggregate annual principal payments on financing obligations outstanding at
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 355
1998........................................................ 211
1999........................................................ 217
2000........................................................ 238
2001........................................................ 703
Thereafter.................................................. 369
------
Total............................................. $2,093
======
</TABLE>
Additionally, in October 1996, the Companies established a $500,000 line of
credit with a bank, bearing interest at 9.5 percent, due on demand or in monthly
payments. The line of credit matures in October 1997 and is secured by equipment
and accounts receivable of the Companies and by the personal guarantee of the
chief executive officer and principal shareholder. As of December 31, 1996, no
amounts had been drawn under the line of credit.
F-44
<PAGE> 104
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
SEVEN
YEAR ENDED MONTHS
MAY 31 ENDED YEAR ENDED
------------ DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---- ----- ------------ ------------
<S> <C> <C> <C> <C>
Federal and state --
Current.................................... $(24) $ (53) $293 $274
Deferred................................... 214 (97) 349 (69)
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
SEVEN
YEAR ENDED MONTHS
MAY 31 ENDED YEAR ENDED
------------ DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---- ----- ------------ ------------
<S> <C> <C> <C> <C>
Provision at the statutory rate.............. $169 $(182) $556 $248
Increase resulting from --
Permanent differences --
Limited liability company nontaxable
income................................ (21) (25) (18) (136)
State income tax, net................... 17 (11) 57 28
Other................................... 25 68 47 65
---- ----- ---- ----
$190 $(150) $642 $205
==== ===== ==== ====
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
----- -----
<S> <C> <C>
Utilization of operating losses............................. $ -- $ (84)
Bad debt expense............................................ (76) 58
Other accrued expenses not deductible for tax purposes...... 19 59
Basis differences on property, plant and equipment.......... (98) (114)
State taxes................................................. 45 40
Overseas operations......................................... (520) (520)
----- -----
Net deferred tax liability........................ $(630) $(561)
===== =====
</TABLE>
F-45
<PAGE> 105
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets --
Current................................................... $ 39 $147
Long-term................................................. 15 --
---- ----
Total............................................. 54 147
---- ----
Deferred tax liabilities --
Current................................................... 558 488
Long-term................................................. 126 220
---- ----
Total............................................. 684 708
---- ----
Net deferred income tax liability................. $630 $561
==== ====
</TABLE>
8. RETIREMENT PLAN
The Companies maintain an Internal Revenue Code Section 401(k) plan which
covers all qualified employees meeting certain service and age requirements. The
Companies' contribution is discretionary. The Companies contributed $-- and
$18,000 for the seven-month period ended December 31, 1995 and the year ended
December 31, 1996, respectively. The 401(k) plan was discontinued in early 1997.
9. SHAREHOLDERS' EQUITY
The components of shareholders' equity as of December 31, 1995 and 1996,
are as follows (in thousands, except share and per share data) (see Note 1):
<TABLE>
<CAPTION>
CLASS OF SHARES SHARES PAR VALUE STATED
COMPANY OWNERSHIP AUTHORIZED ISSUED PER SHARE VALUE
------- ------------ ---------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
CSI and subsidiary................. Common stock 700 166.67 $50.00 $ 9
HMMI............................... Common stock 999 999.00 No par 255
HI................................. Member units N/A N/A N/A N/A
-------- ----
1,165.67 $264
======== ====
</TABLE>
Total capital related to HI is included in additional paid-in capital in
the accompanying balance sheets.
During 1996, CSI purchased 83 1/3 shares of common stock (one-half of its
outstanding shares) from an officer of CSI for $2,564,000. The purchase price
consisted of $2,300,000 in cash plus the forgiveness of a $264,000 receivable
from the officer. The purchased common stock has been recorded as treasury stock
in the accompanying financial statements.
10. COMMITMENTS AND CONTINGENCIES
Litigation
The CSI Companies are involved in various legal actions incidental to the
ordinary course of business. A former employee brought one such lawsuit against
HMMI in 1991. The former employee alleged personal injury while in the course
and scope of his employment and submitted an opening settlement demand of
$700,000. The case is currently pending trial in state district court. In the
opinion of the Companies' management, after consultation with outside legal
counsel, the ultimate disposition of such proceedings, including the case above,
will not have a material adverse effect on the Companies' financial position or
results of operations.
F-46
<PAGE> 106
THE CSI COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
The Companies currently lease two vehicles under noncancelable operating
leases that provide for two-year terms. Future minimum lease payments under such
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
- -----------
<S> <C> <C>
1997.................................................................. $12
1998.................................................................. 28
---
$40
===
</TABLE>
Rental expense for the vehicle leases as described above and various other
leases for the years ended May 31, 1994 and 1995, the seven months ended
December 31, 1995 and the year ended December 31, 1996 was $--, $25,000, $17,000
and $17,000, respectively.
11. SALES TO MAJOR CUSTOMERS
The customer bases for the Companies are primarily concentrated in the oil
and gas industry. The revenue earned from each customer varies from year to year
based on the contracts awarded. Sales to customers comprising 10 percent or more
of the Companies' total revenue are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS
MAY 31 ENDED YEAR ENDED
----------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---- ---- ------------ ------------
<S> <C> <C> <C> <C>
Customer A..................................... 29% 26% --% --%
Customer B..................................... 14 10 -- --
Customer C..................................... 16 17 -- --
Customer D..................................... 11 -- -- --
Customer E..................................... -- -- 22 --
Customer F..................................... -- -- -- 12
Customer G..................................... -- -- -- 21
Customer H..................................... -- -- -- 20
</TABLE>
12. SUBSEQUENT EVENTS
Definitive Agreement
The CSI Companies and their shareholders expect to enter into a definitive
agreement with TransCoastal Marine Service, Inc. ("TCMS"), pursuant to which all
the outstanding shares of common stock and limited liability company interests
in the Companies will be acquired for cash and shares of TCMS common stock
concurrently with the consummation of the initial public offering of the common
stock of TCMS.
Vessel Acquisition
In March 1997, the Companies purchased a marine vessel for $3.5 million
financed with a $3.5 million term note bearing interest at 10.7 percent. The
note is secured by a mortgage on the marine vessel and a personal guarantee of
an officer and shareholder of the Companies, is due in 59 monthly installments
of $59,000 and matures in 2002 with a $1,318,000 balloon payment on maturity.
The vessel was purchased for the purpose of expanding the capabilities of the
Companies' offshore pipeline testing operations.
F-47
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
Board of Directors
HBH, Inc.
Belle Chasse, Louisiana
We have audited the accompanying balance sheets of HBH, Inc. as of December
31, 1995 and 1996, and the related statements of operations, shareholder's
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HBH, Inc. as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New Orleans, Louisiana
March 27, 1997
(May 7, 1997 as to Note 6)
F-48
<PAGE> 108
HBH, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------ JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 24 $ 44 $ 59
Accounts receivable, net.................................. 6,044 8,553 10,225
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. -- -- 1,539
Prepaid expenses.......................................... 180 405 519
Current portion of notes receivable from shareholder...... 218 -- 37
Other current assets...................................... 45 252 8
------- ------- -------
Total current assets.............................. 6,511 9,254 12,387
PROPERTY, PLANT AND EQUIPMENT, net.......................... 9,293 8,748 8,328
OTHER ASSETS:
Notes receivable from shareholder......................... 885 194 157
------- ------- -------
Total assets...................................... $16,689 $18,196 $20,872
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving line of credit.................................. $ 2,200 $ 1,476 $ 500
Current maturities of long-term debt...................... 812 940 977
Accounts payable.......................................... 7,215 7,986 8,942
Accrued expenses.......................................... 1,087 908 2,199
Billings in excess of costs and estimated losses on
uncompleted contracts.................................. 306 1,397 --
------- ------- -------
Total current liabilities......................... 11,620 12,707 12,618
LONG-TERM DEBT, less current maturities..................... 5,521 5,060 4,632
SUBORDINATED DEBT........................................... -- 635 635
DEFERRED GAIN ON SALE OF PROPERTY AND EQUIPMENT............. 508 -- --
------- ------- -------
Total liabilities................................. 17,649 18,402 17,885
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock, no par value, 3,000 shares authorized, 882
shares issued and outstanding at stated value.......... 66 66 66
Additional paid-in capital................................ 8 308 808
Retained earnings (accumulated deficit)................... (1,034) (580) 2,113
------- ------- -------
Total shareholder's equity (deficit).............. (960) (206) 2,987
------- ------- -------
Total liabilities and shareholder's equity
(deficit)....................................... $16,689 $18,196 $20,872
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 109
HBH, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE.......................................... $15,261 $14,771 $36,873 $19,062 $23,850
COSTS AND EXPENSES:
Cost of revenue................................ 12,585 16,803 33,727 16,343 19,394
Selling, general and administrative expense.... 929 867 1,000 484 671
Depreciation................................... 503 871 1,482 719 750
------- ------- ------- ------- -------
14,017 18,541 36,209 17,546 20,815
------- ------- ------- ------- -------
Operating income (loss)..................... 1,244 (3,770) 664 1,516 3,035
OTHER INCOME (EXPENSE):
Interest income................................ 132 113 45 28 7
Interest expense............................... (85) (288) (853) (436) (368)
Gain on sale of property, plant and
equipment................................... 37 33 601 517 19
------- ------- ------- ------- -------
Total other income (expense)........... 84 (142) (207) 109 (342)
------- ------- ------- ------- -------
INCOME (LOSS).................................... $ 1,328 $(3,912) $ 457 $ 1,625 $ 2,693
======= ======= ======= ======= =======
PRO FORMA INFORMATION (UNAUDITED) (Note 2)
Historical net income (loss)................... $ 1,328 $(3,912) $ 457 $ 1,625 $ 2,693
Pro forma income tax provision (benefit)....... 500 (1,460) 170 600 1,000
------- ------- ------- ------- -------
Pro forma net income (loss).................... $ 828 $(2,452) $ 287 $ 1,025 $ 1,693
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 110
HBH, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994.......................... 882 $66 $ 8 $ 2,430 $ 2,504
DIVIDENDS........................................... -- -- -- (599) (599)
NET INCOME.......................................... -- -- -- 1,328 1,328
--- --- ---- ------- -------
BALANCE AT DECEMBER 31, 1994........................ 882 66 8 3,159 3,233
DIVIDENDS........................................... -- -- -- (281) (281)
NET LOSS............................................ -- -- -- (3,912) (3,912)
--- --- ---- ------- -------
BALANCE AT DECEMBER 31, 1995........................ 882 66 8 (1,034) (960)
CAPITAL CONTRIBUTIONS............................... -- -- 300 -- 300
DIVIDENDS........................................... -- -- -- (3) (3)
NET INCOME.......................................... -- -- -- 457 457
--- --- ---- ------- -------
BALANCE AT DECEMBER 31, 1996........................ 882 66 308 (580) (206)
CAPITAL CONTRIBUTIONS (Unaudited)................... -- -- 500 -- 500
NET INCOME (Unaudited).............................. -- -- -- 2,693 2,693
--- --- ---- ------- -------
BALANCE AT JUNE 30, 1997 (Unaudited)................ 882 $66 $808 $ 2,113 $ 2,987
=== === ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 111
HBH, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
---------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 1,328 $(3,912) $ 457 $ 1,625 $ 2,693
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 503 871 1,482 719 750
(Gain) on sale of property, plant and
equipment................................. (37) (33) (601) (517) (19)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable..................... (3,797) (1,401) (2,509) (178) (1,672)
Costs and estimated earnings (losses) in
excess of billings on uncompleted
contracts............................. 155 -- -- (169) (1,539)
Other current assets.................... (20) (52) (432) 64 130
Increase (decrease) in:
Accounts payable and accrued expenses... 2,130 4,872 594 (147) 2,247
Billings in excess of costs and
estimated earnings (losses) on
uncompleted
contracts............................. -- 306 1,090 (306) (1,397)
------- ------- -------- ------- -------
Net cash provided by (used in) operating
activities............................ 262 651 81 1,091 1,193
------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and
equipment.................................... 8 11 221 49 34
Additions of property, plant and equipment..... (971) (7,859) (1,066) (575) (345)
Collection of notes receivable from
shareholder.................................. 181 201 909 657 --
------- ------- -------- ------- -------
Net cash provided by (used in) investing
activities............................ (782) (7,647) 64 131 (311)
------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit................... 875 2,900 28,958 10,707 20,175
Payments on line of credit..................... (725) (850) (29,682) (10,626) (21,151)
Proceeds from subordinated debt................ -- -- 635 635 --
Proceeds from notes payable to others.......... 219 5,534 532 500 82
Principal payments on notes payable to
others....................................... (267) (371) (865) (429) (473)
Capital contributions.......................... -- -- 300 300 500
Payment of dividends to shareholder............ (599) (281) (3) (3) --
------- ------- -------- ------- -------
Net cash provided by (used in) financing
activities............................ (497) 6,932 (125) 1,084 (867)
------- ------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH.................. (1,017) (64) 20 2,306 15
CASH, beginning of period........................ 1,105 88 24 24 44
------- ------- -------- ------- -------
CASH, end of period.............................. $ 88 $ 24 $ 44 $ 2,330 $ 59
======= ======= ======== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest..................................... $ 84 $ 286 $ 842 $ 429 $ 378
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 112
HBH, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
HBH, Inc. (the "Company"), is wholly owned by the Estate of H.D. Hughes.
The Company is engaged in the marine pipeline and oilfield construction business
in the central area of the Gulf of Mexico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
original maturities of three months or less.
Accounts Receivable
The Company provides its services to a limited number of customers. At
December 31, 1996, five customers accounted for approximately 19%, 18%, 14%, 14%
and 13% of accounts receivable, respectively.
Accounts receivable are reduced by any allowance for doubtful accounts as
considered necessary. The need for an allowance is determined by management
based on an evaluation of individual accounts. Historical chargeoffs have not
been significant.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method based on
the estimated useful lives of the assets, which range from 3 to 10 years for
machinery and equipment and other assets. Additions, improvements and renewals
significantly adding to the asset value or extending the life of the asset are
capitalized. Ordinary maintenance and repairs not extending the physical or
economic lives of the plant or equipment are charged to expense as incurred.
Revenue Recognition
The Company follows the percentage-of-completion method of accounting for
major (generally over $100,000) construction contracts which are typically of
short duration. Under this method, the percentage of completion is determined by
comparing contract costs incurred to date with total estimated contract costs.
Income is recognized by applying the percentage complete to the projected total
income for each contract in progress. Contract costs include all direct
material, labor and subcontract costs and those indirect costs related to
contract performance, such as indirect labor, supplies and tools. Revisions in
cost and income estimates are reflected in the accounting period in which the
facts requiring the revision become known. In addition, anticipated losses to be
incurred on contracts in progress are charged to income as soon as losses can be
determined.
Revenue is recognized on minor construction contracts using the
completed-contract method whereby billings and costs are accumulated during the
period of construction but profits are not recorded until completion of the
contracts. This method approximates the percentage of completion method because
of the short-term nature of the minor contracts.
Revenues from day-rate contracts are recognized currently as the work is
performed.
F-53
<PAGE> 113
HBH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company considers the fair value of all financial instruments to be a
reasonable approximation of their carrying values since financial instruments
such as cash, accounts receivable, accounts payable and accrued expenses have a
short duration and interest on debt is generally either at a floating rate or at
a rate which approximates current market.
Income Taxes
The Company has elected to be taxed for federal and state income tax
purposes under Subchapter S of the Internal Revenue Code. Any current taxable
income or loss of the Company is allocated to the shareholder who is responsible
for the taxes thereon.
The Company generally has paid dividends to its shareholder at the same
time that he was required to make income tax payments based on his taxable
income which included the results of the Company's operations.
Pro forma net income (loss) consists of the Company's historical income
(loss) as an S Corporation, adjusted for income taxes that would have been
recorded had the Company operated as a C Corporation.
Impairment of Long-Lived Assets
In March 1995, the Financing Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company adopted SFAS No. 121 on January 1, 1996. The impact of
adopting this standard did not have a material impact on the Company's results
of operations.
Interim Financial Information
The interim financial statements as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 are unaudited, and certain information and footnote
disclosures, normally included in annual financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
3. ACCOUNTS AND CONTRACTS RECEIVABLE
Amounts due on contracts as of the dates shown are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996
------ ------
<S> <C> <C>
Completed contracts......................................... $1,430 $5,366
Contracts in progress:
Current................................................... 4,045 2,929
Retainage due within one year............................. 569 258
Less -- allowance for doubtful accounts..................... -- --
------ ------
$6,044 $8,553
====== ======
</TABLE>
F-54
<PAGE> 114
HBH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The portion of the retainage due in excess of one year is not significant.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of the date shown is
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 8,848 $ 2,688
Estimated losses on uncompleted contracts................... (3,548) (898)
------- -------
5,300 1,790
Less -- Billings to date.................................... (5,606) (3,187)
------- -------
$ (306) $(1,397)
======= =======
</TABLE>
The above amounts are included in the accompanying balance sheets under the
caption of billings in excess of costs and estimated losses on uncompleted
contracts.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the dates shown
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- -------
<S> <C> <C>
Buildings................................................... $ 32 $ 32
Machinery and equipment..................................... 15,396 16,129
Furniture and fixtures...................................... 80 93
Transportation equipment.................................... 736 710
------- -------
16,244 16,964
Less -- Accumulated depreciation and amortization........... (6,951) (8,216)
------- -------
$ 9,293 $ 8,748
======= =======
</TABLE>
6. SUMMARY OF FINANCING ARRANGEMENTS
The Company's revolving line of credit is payable to a bank and bears
interest at prime plus 0.75% (9% at December 31, 1996) and is due April 17,
1997. The agreement provides for maximum borrowings of $3,000,000. The Company's
agreement in connection with the line of credit payable to a bank contains
certain covenants with respect to the minimum amount of tangible net worth, the
maximum ratio of debt to equity and a minimum quarterly amount of net earnings.
The Company was not in compliance with these covenants at December 31, 1996.
These requirements were waived through the new maturity date of the note which
has been extended until June 16, 1997 (see Note 9).
F-55
<PAGE> 115
HBH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996
------ ------
<S> <C> <C>
Note payable to a bank, bearing interest at 9.25%, payable
in monthly installments of principal and interest of
approximately $74,000 with the unpaid balance due October
31, 2000.................................................. $5,358 $4,952
Note payable to a finance company, bearing interest at 6.79%
to 8.55%, due at various dates through 1998 and 2001...... 691 847
Various installment notes payable, bearing interest rates
ranging from 9.0% to 11.2%, due at various dates through
1998...................................................... 130 104
Note payable to a finance company, bearing interest at
6.63%, payable in monthly installments through July
1998...................................................... 153 97
------ ------
6,332 6,000
Less current portion........................................ (811) (940)
------ ------
$5,521 $5,060
====== ======
</TABLE>
Substantially all of the Company's assets are pledged as collateral on the
long-term debt. The notes payable to the banks are guaranteed by the Company's
shareholder.
As of December 31, 1996, aggregate annual principal payments on the
revolving line of credit and long-term debt are payable as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- ------------------------
<S> <C> <C>
1997............................................................... $2,416
1998............................................................... 788
1999............................................................... 659
2000............................................................... 3,583
2001............................................................... 30
------
$7,476
======
</TABLE>
7. RELATED-PARTY TRANSACTIONS
Amounts due from the Company's sole shareholder in the form of notes
receivable amounted to $194,000 at December 31, 1996 and $1,103,000 at December
31, 1995, at various interest rates ranging up to 9%. Interest income on these
notes was approximately $44,000 for the year ended December 31, 1996, $101,000
for the year ended December 31, 1995 and $117,000 for the year ended December
31, 1994.
Land and buildings were sold to the Company's sole shareholder in October
1983. The excess of the sales price over the carrying value of the property was
deferred and was being recognized as payments were received on the note. During
1996, the remaining balance of the note was collected and the remaining gain of
$508,000 was recognized as income. The Company is leasing this property from the
shareholder on a month-to-month basis. Rent expense amounted to $167,000 for
each of 1996, 1995 and 1994.
The subordinated debt is due to the shareholder and is subordinate to the
revolving line of credit. The note bears interest at 9.45 percent, and interest
only is due in monthly installments through June 11, 2001, at which time the
terms of repayment of interest and principal are to be renegotiated.
The Company has guaranteed a note payable to a bank by the Company's sole
shareholder with a balance of $1,104,000 at December 31, 1996.
F-56
<PAGE> 116
HBH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company paid consulting, debt guarantee and other fees to the Company's
sole shareholder through December 31, 1996. These fees aggregated $233,000 for
each of 1996, 1995 and 1994.
8. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings arising in the ordinary
course of business and is not aware of any litigation threatened against it that
could have a material effect on the financial statements.
9. SUBSEQUENT EVENTS (UNAUDITED)
In June 1997, the maturity date of the revolving line of credit was
extended until June 16, 1998.
The Company and its shareholder have entered into a definitive agreement
(being held in escrow subject to the satisfaction of certain conditions) with
TransCoastal Marine Services, Inc. ("TCMS"), pursuant to which all the
outstanding shares of the Company's common stock will be sold to TCMS for cash
and shares of TCMS common stock concurrently with the consummation of the
initial public offering (the "Offering") of the common stock of TCMS.
A sale of the stock as described above would automatically terminate the
Company's status as an S corporation. Under the terms of the definitive
agreement, the Company has agreed to restrictions upon dividends or S
corporation distributions.
10. SALES TO MAJOR CUSTOMERS
The customer base for the Company is primarily concentrated in the oil and
gas industry. The revenue earned from each customer varies from year to year
based on the contracts awarded. Sales to customers comprising 10 percent or more
of the Company's total revenue are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Customer A................................................ $ -- $2,155 $17,862
Customer B................................................ 6,440 3,434 5,533
Customer C................................................ -- 3,194 --
Customer D................................................ -- 1,981 --
Customer E................................................ 3,030 -- --
</TABLE>
******
F-57
<PAGE> 117
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Red Fox Companies of New Iberia, Inc.:
We have audited the accompanying balance sheets of The Red Fox Companies of
New Iberia, Inc., as of December 31, 1995 and 1996, and the related statements
of operations, shareholder's equity and cash flows for the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Red Fox Companies of New
Iberia, Inc., as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
DARNALL, SIKES & FREDERICK
Lafayette, Louisiana
June 6, 1997
F-58
<PAGE> 118
THE RED FOX COMPANIES OF NEW IBERIA, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 752 $ 89 $ 707
Contracts receivable...................................... 511 910 1,242
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 345 243 358
Deferred tax asset........................................ -- -- 22
Other current assets...................................... 37 82 106
------ ------ ------
Total current assets.............................. 1,645 1,324 2,435
PROPERTY, PLANT AND EQUIPMENT, net.......................... 59 38 44
AMOUNTS DUE FROM OFFICERS................................... 78 -- 34
------ ------ ------
Total assets...................................... $1,782 $1,362 $2,513
====== ====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $1,040 $ 570 $ 302
Accrued expenses.......................................... 216 130 1,206
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. -- 5 422
Deferred income taxes..................................... 66 81 --
------ ------ ------
Total current liabilities......................... 1,322 786 1,930
LOANS PAYABLE TO RELATED PARTIES............................ 43 -- --
DEFERRED INCOME TAXES....................................... 3 8 8
------ ------ ------
Total liabilities................................. 1,368 794 1,938
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 1 1 1
Retained earnings......................................... 413 567 574
------ ------ ------
Total shareholder's equity........................ 414 568 575
------ ------ ------
Total liabilities and shareholder's equity........ $1,782 $1,362 $2,513
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 119
THE RED FOX COMPANIES OF NEW IBERIA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------- ---------------
1994 1995 1996 1996 1997
------ ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE.............................................. $5,611 $10,497 $9,730 $3,159 $4,536
COSTS AND EXPENSES:
Cost of revenue.................................... 4,715 9,426 8,260 2,708 3,825
Selling, general and administrative expenses....... 650 698 885 363 674
Depreciation and amortization...................... 16 15 12 8 8
------ ------- ------ ------ ------
Operating income (loss) 230 358 573 80 29
OTHER INCOME (EXPENSE):
Interest expense................................... (70) (8) (30) (20) (7)
Other.............................................. (32) (80) (60) (21) (13)
------ ------- ------ ------ ------
Total other expense........................ (102) (88) (90) (41) (20)
------ ------- ------ ------ ------
INCOME BEFORE INCOME TAXES........................... 128 270 483 39 9
PROVISION FOR INCOME TAXES........................... 50 117 197 9 2
------ ------- ------ ------ ------
NET INCOME........................................... $ 78 $ 153 $ 286 $ 30 $ 7
====== ======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 120
THE RED FOX COMPANIES OF NEW IBERIA, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- -----
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993................................ 100 $1 $ 182 $ 183
NET INCOME.................................................. -- -- 78 78
--- -- ----- -----
BALANCE AT DECEMBER 31, 1994................................ 100 1 260 261
NET INCOME.................................................. -- -- 153 153
--- -- ----- -----
BALANCE AT DECEMBER 31, 1995................................ 100 1 413 414
DIVIDENDS................................................... -- -- (132) (132)
NET INCOME.................................................. -- -- 286 286
--- -- ----- -----
BALANCE AT DECEMBER 31, 1996................................ 100 1 567 568
NET INCOME (Unaudited)...................................... -- -- 7 7
--- -- ----- -----
BALANCE AT June 30, 1997 (Unaudited)........................ 100 $1 $ 574 $ 575
=== == ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 121
THE RED FOX COMPANIES OF NEW IBERIA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------ -------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 78 $ 153 $ 286 $ 30 $ 7
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation.................................... 16 15 12 8 6
Loss on sale of property, plant and equipment... 4 -- -- -- --
Changes in operating assets and liabilities --
(Increase) decrease in --
Contracts receivable....................... 18 24 (399) (25) (332)
Costs and estimated earnings in excess of
billings on uncompleted contracts........ (169) (137) 102 162 (115)
Other current assets....................... -- (34) (45) (45) (24)
Increase (decrease) in --
Accounts payable and accrued expenses...... 211 852 (557) (816) 808
Billings in excess of costs and estimated
earnings on uncompleted contracts........ -- -- 5 -- 417
Deferred income taxes...................... 50 3 20 (3) (103)
----- ----- ----- ----- -----
Net cash provided by (used in) operating
activities............................... 208 876 (576) (689) 664
----- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and
equipment....................................... 2 -- -- -- --
Capital expenditures............................... (9) (35) (28) (4) (12)
Payments from shareholder and related parties...... -- -- 115 -- --
(Payments to) advances from shareholder and related
parties......................................... (57) (21) -- (14) (34)
----- ----- ----- ----- -----
Net cash provided by (used in) investing
activities............................... (64) (56) 87 (18) (46)
----- ----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to shareholder and
related parties................................. 221 -- -- -- --
Principal payments on notes payable to others...... (197) (28) -- -- --
Principal payments on notes payable to shareholder
and related parties............................. -- (208) (42) (4) --
Payment of dividends to shareholder................ -- -- (132) -- --
----- ----- ----- ----- -----
Net cash provided by (used in) financing
activities............................... 24 (236) (174) (4) --
----- ----- ----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 168 584 (663) (711) 618
CASH AND CASH EQUIVALENTS, beginning of period....... -- 168 752 752 89
----- ----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of period............. $ 168 $ 752 $ 89 $ 41 $ 707
===== ===== ===== ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used for --
Interest........................................ $ 70 $ 8 $ 30 $ 20 $ 7
Income taxes.................................... -- 98 140 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 122
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
The Red Fox Companies of New Iberia, Inc. (the "Company") is primarily
engaged in the fabrication and refurbishment of (i) structural components of
fixed platforms for use in the development of oil and gas, and (ii) structural
components, primarily deck structures, for offshore drilling rigs and barge
drilling rigs. RFCNI also fabricates marine sewage treatment units that are
installed on offshore platforms and drilling rigs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
original maturities of three months or less.
Contracts Receivable
The Company provides for doubtful accounts using the direct write-off
method. In the Company's case, use of this method does not result in a material
difference from the valuation method required by generally accepted accounting
principles.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation expense is
computed using the straight-line method based on the estimated useful lives of
the assets, which range from five to seven years. Additions, improvements and
renewals significantly adding to the asset value or extending the life of the
asset are capitalized. Ordinary maintenance and repairs not extending the
physical or economic lives of the plant or equipment are charged to expense as
incurred.
Revenue Recognition
Revenue from construction contracts, which are typically of short duration,
are recognized on the percentage-of-completion method. Under this method, the
percentage of completion is determined by comparing contract costs incurred to
date with total estimated contract costs. Income is recognized by applying the
percentage complete to the projected total income for each contract in progress.
Contract costs include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as indirect labor,
supplies and tools. Revisions in cost and income estimates are reflected in the
accounting period in which the facts that require revision become known. In
addition, anticipated losses to be incurred on contracts in progress are charged
to income as soon as such losses can be determined.
The asset caption entitled "Costs and estimated earnings in excess of
billings on uncompleted contracts" represents revenue recognized in excess of
amounts billed. The liability caption entitled "Billings in excess of costs and
estimated earnings on uncompleted contracts" represents billings in excess of
revenue recognized.
Fair Value of Financial Instruments
The Company considers the fair value of all financial instruments to not be
materially different from their carrying values at December 31, 1995 and 1996.
F-63
<PAGE> 123
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the Company recognized deferred tax liabilities and assets
for the expected future tax consequences of events that have been recognized
differently in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax basis of assets and
liabilities using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse. Deferred tax assets are evaluated for
realization based on a more-likely-than-not criteria in determining if a
valuation allowance should be provided. Income tax expense is the tax payable
for the year and the change during the year in deferred tax assets and
liabilities.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted SFAS No.
121 on January 1, 1996. The impact of adopting this standard did not have a
material impact on the results of operations.
Interim Financial Information
The interim balance sheet as of June 30, 1997 and statements of operations
for the six months ended June 30, 1996 and 1997 are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
3. ACCOUNTS AND CONTRACTS RECEIVABLE
Amounts due on contracts as of the dates shown are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1995 1996
---- ----
<S> <C> <C>
Completed contracts......................................... $487 $616
Contracts in progress....................................... 24 294
---- ----
$511 $910
==== ====
</TABLE>
F-64
<PAGE> 124
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of the dates shown is
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
----- ------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 654 $3,508
Estimated profit earned to date............................. 114 266
Accrued loss on uncompleted contracts....................... (152) --
----- ------
616 3,774
Less -- Billings to date.................................... 271 3,536
----- ------
$ 345 $ 238
===== ======
</TABLE>
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------
1995 1996
---- ----
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $345 $243
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... -- (5)
---- ----
$345 $238
==== ====
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the dates shown
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------
1995 1996
---- ----
<S> <C> <C>
Buildings................................................... $-- $ 4
Machinery and equipment..................................... 15 29
Transportation equipment.................................... 75 28
--- ---
90 61
Less -- Accumulated depreciation............................ (31) (23)
--- ---
$59 $38
=== ===
</TABLE>
6. INCOME TAXES
Federal income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal --
Current................................................... $-- $101 $155
Deferred.................................................. 50 3 20
</TABLE>
F-65
<PAGE> 125
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Provision at the statutory rate............................. $44 $92 $164
Increase resulting from state income tax, net............... 5 11 22
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
----- ----
<S> <C> <C>
Accrued losses on uncompleted contracts..................... $ 51 $ --
Uncompleted contracts....................................... (117) (81)
Basis differences on property, plant and equipment.......... (3) (8)
----- ----
Net deferred tax liabilities...................... $ (69) $(89)
===== ====
</TABLE>
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets, current................................ $ 51 $ --
---- ----
Deferred tax liabilities --
Current................................................... 117 81
Long-term................................................. 3 8
---- ----
Total............................................. 120 89
---- ----
Net deferred income tax liabilities............... $(69) $(89)
==== ====
</TABLE>
7. RELATED-PARTY TRANSACTIONS
The following transactions occurred between the Company and certain related
parties:
a. Loans receivable from Company officers at December 31, 1995 and 1996
were $78,000 and $--, respectively. These loans were unsecured and
provided no set repayment terms.
b. Loans due from or payable to a party related to the Company's president
at December 31, 1995 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
LOANS LOANS
RECEIVABLE PAYABLE
---------- -------
<S> <C> <C>
December 31, 1995........................................... $-- $43
December 31, 1996........................................... 17 --
</TABLE>
These loans were unsecured and noninterest-bearing. There were also no set
repayment terms.
F-66
<PAGE> 126
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
c. Lease agreements between the Company and related parties as of December
31, 1994, 1995 and 1996 consisted of the following:
(1) The Company leases real estate from a party related to the
Company's president. The annual rent paid by the Company for 1994, 1995 and
1996 was $30,000, $30,000 and $30,000, respectively. In addition, rent for
the year ending December 31, 1997 in the amount of $27,000 was prepaid.
(2) The Company leases vehicles from a party related to the Company's
president. Rental amounts paid for vehicles in 1994, 1995 and 1996 were
$--, $7,000 and $25,000, respectively.
(3) The Company leases a vehicle from its president. The associated
rental amounts paid by the Company for 1994, 1995 and 1996 were $20,000,
$44,000 and $38,000, respectively.
d. The Company had sales to a company owned by a party related to the
Company's president during the year ended December 31, 1996 totaling $162,000.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain equipment used in the normal course of its
operations under month-to-month lease agreements cancelable only by the Company.
The Company leases automobiles under operating leases which are
noncancelable for the first 24 months and, in certain cases, the first 48
months. Thereafter, the leases are on a month-to-month basis.
The Company leases office space under an operating lease which is
noncancelable for the first 120 months.
Approximate annual minimum lease payments under operating leases as of
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 45
1998........................................................ 45
1999........................................................ 38
2000........................................................ 31
2001........................................................ 30
Thereafter.................................................. 135
----
$324
====
</TABLE>
The Company expensed amounts related to these leases as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Building.................................................... $ 34 $ 38 $ 48
Vehicles.................................................... 12 28 49
Equipment................................................... 205 291 273
</TABLE>
F-67
<PAGE> 127
THE RED FOX COMPANIES OF NEW IBERIA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
9. SALES TO MAJOR CUSTOMERS
The customer base for the Company is primarily concentrated in the oil and
gas industry. The revenue earned from each customer varies from year to year
based on the contracts awarded. Sales to customers comprising 10 percent or more
of the Company's total revenue are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Customer A.................................................. 25.0% 76.3% --%
Customer B.................................................. 11.8 -- 10.9
Customer C.................................................. 11.5 -- --
Customer D.................................................. -- -- 49.4
</TABLE>
10. SUBSEQUENT EVENTS
The Company expects to enter into a definitive agreement with TransCoastal
Marine Services, Inc. ("TCMS"), pursuant to which all the outstanding shares of
the Company's common stock will be acquired for notes and shares of TCMS common
stock concurrently with the closing of the initial public offering of the common
stock of TCMS.
F-68
<PAGE> 128
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION, IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 9
The Company............................... 14
Use of Proceeds........................... 16
Dividend Policy........................... 16
Capitalization............................ 17
Dilution.................................. 18
Selected Financial Information............ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
Business.................................. 33
Management................................ 43
Security Ownership of Certain Beneficial
Owners and Management................... 48
Certain Transactions...................... 49
Description of Capital Stock.............. 53
Shares Eligible for Future Sale........... 55
Underwriting.............................. 57
Legal Matters............................. 58
Experts................................... 58
Additional Information.................... 59
Index to Financial Statements............. F-1
</TABLE>
UNTIL NOVEMBER 24, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
5,000,000 SHARES
COMMON STOCK
[TRANSCOASTAL MARINE SERVICES, INC. LOGO]
PROSPECTUS
JEFFERIES & COMPANY, INC.
JOHNSON RICE &
COMPANY L.L.C.
October 30, 1997
