<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-23225
---------------------
TRANSCOASTAL MARINE SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 72-1353528
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
2925 BRIARPARK DRIVE, SUITE 930, HOUSTON, TEXAS 77042
(Address of principal executive offices)
(Zip Code)
(713) 784-7429
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock of the registrant, par value $.001 per
share, outstanding at November 13, 1998 was 10,198,441.
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<PAGE> 2
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1 -- FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998..................................... 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1997 and 1998...... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1998...................... 5
Notes to Consolidated Financial Statements................ 6
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 10
PART II
OTHER INFORMATION
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS......... 16
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.................. 16
SIGNATURE................................................... 17
</TABLE>
2
<PAGE> 3
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,416 $ 1,851
Restricted cash........................................... -- 1,379
Contracts and accounts receivable......................... 19,214 35,154
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 3,272 5,269
Other current assets...................................... 2,964 2,821
-------- --------
Total current assets.............................. 27,866 46,474
PROPERTY AND EQUIPMENT, net................................. 66,907 102,073
GOODWILL, net............................................... 70,757 79,070
OTHER NONCURRENT ASSETS..................................... 6,287 6,094
-------- --------
Total assets...................................... $171,817 $233,711
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 2,520 $ 291
Notes payable............................................. -- 521
Accounts payable.......................................... 12,105 18,729
Accrued expenses.......................................... 7,860 10,476
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 1,651 4,557
Deferred income taxes payable............................. 291 242
-------- --------
Total current liabilities......................... 24,427 34,816
LONG-TERM DEBT, net of current maturities................... 13,471 57,500
DEFERRED INCOME TAXES....................................... 18,774 19,956
COMMITMENTS AND CONTINGENCIES
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, 8,898,441 and 10,198,441 shares issued and
outstanding in 1997 and 1998, respectively............. 9 10
Restricted common stock, $.001 par value, 3,000,000 shares
authorized, 250,000 shares issued and outstanding...... -- --
Additional paid-in capital................................ 128,375 133,899
Retained deficit.......................................... (13,277) (12,508)
Net unrealized gain on available-for-sale securities...... 38 38
-------- --------
Total stockholders' equity........................ 115,145 121,439
-------- --------
Total liabilities and stockholders' equity........ $171,817 $233,711
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1998 1997 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
REVENUES.............................................. $13,885 $44,912 $31,989 $124,081
COSTS AND EXPENSES:
Cost of revenues.................................... 10,715 36,854 26,162 97,578
Selling, general and administrative expenses........ 656 3,989 1,887 10,108
Depreciation and amortization....................... 262 2,403 717 7,086
------- ------- ------- --------
Operating income...................................... 2,252 1,666 3,223 9,309
OTHER INCOME (EXPENSE), net:
Interest income (expense), net...................... (11) (1,194) 8 (2,856)
Other income (expense), net......................... (28) (75) 468 (76)
------- ------- ------- --------
INCOME BEFORE INCOME TAXES............................ 2,213 397 3,699 6,377
PROVISION (BENEFIT) FOR INCOME TAXES.................. 164 (567) 354 2,423
------- ------- ------- --------
NET INCOME............................................ $ 2,049 $ 964 $ 3,345 $ 3,954
======= ======= ======= ========
PRO FORMA INFORMATION (Note 1):
Income before income taxes.......................... $ 2,213 $ 3,699
Pro forma income tax................................ 885 1,479
------- -------
Pro forma net income................................ $ 1,328 $ 2,219
======= =======
EARNINGS PER SHARE (Notes 1 and 3):
Basic............................................... $ 0.58 $ 0.10 $ 1.01 $ 0.43
======= ======= ======= ========
Diluted............................................. $ 0.57 $ 0.10 $ 1.00 $ 0.43
======= ======= ======= ========
NUMBER OF SHARES USED IN PER SHARE
COMPUTATIONS:
Basic............................................... 2,287 9,572 2,196 9,291
======= ======= ======= ========
Diluted............................................. 2,315 9,572 2,215 9,297
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,345 $ 3,954
Adjustments to reconcile net income to net cash provided
by (used in) operating activities --
Depreciation and amortization.......................... 717 7,086
Deferred income taxes.................................. (354) (867)
Other.................................................. (531) 1,180
Changes in operating assets and liabilities --
(Increase) decrease in --
Restricted cash................................... -- 1,525
Contracts and accounts receivable................. (4,446) (11,689)
Cost and estimated earnings in excess of billings
on uncompleted contracts......................... (2,440) 59
Inventory......................................... (217) (212)
Other current assets.............................. 217 1,723
Other non current assets.......................... 422 (949)
Increase (decrease) in --
Accounts payable and accrued expenses............. 2,596 1,312
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 54 3
------- --------
Net cash provided by (used in) operating
activities.................................... (638) 3,125
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of capital assets...................... 243 1,012
Capital expenditures...................................... (2,051) (33,461)
Payment for acquisition of Dickson Group, net of cash
acquired............................................... -- (8,744)
Distribution to stockholders.............................. -- (3,185)
Proceeds from sale of investments......................... 2,005 --
Change in unrealized gain................................. (283) --
------- --------
Net cash used in investing activities........... (86) (44,378)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 1,855 --
Net borrowings on Credit Agreement........................ -- 43,646
Principal payments on notes payable....................... (685) --
Principal payments on long-term debt...................... (450) (2,958)
------- --------
Net cash provided by financing activities....... 720 40,688
------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (4) (565)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,117 2,416
------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,113 $ 1,851
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest.................................................. $ 83 $ 1,809
======= ========
Non-cash investing and financing activities:
Purchase of assets through assumption of debt.......... $ 1,093 $ --
======= ========
Common stock issued in connection with Dickson Group
acquisition............................................ $ -- $ 5,525
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION
TransCoastal Marine Services, Inc. ("TCMS") was organized in April 1996 to
create a fully integrated marine construction company focusing on transition
zone and shallow water regions of the U.S. Gulf Coast. On November 4, 1997,
simultaneously with the closing of its initial public offering (the "Offering"),
TCMS acquired four privately owned marine construction businesses (the "Founding
Companies") and certain real properties used in the businesses of the Founding
Companies in exchange for consideration consisting of cash, common stock of TCMS
(the "Common Stock") and debt assumption. Unless otherwise indicated, all
references herein to the "Company" and "TransCoastal" include the Founding
Companies, and references to "TCMS" mean TransCoastal Marine Services, Inc.,
prior to the consummation of the acquisitions of the Founding Companies.
The Woodson Companies ("Woodson"), one of the Founding Companies, has been
identified as the "accounting acquiror" for financial statement presentation
purposes. The acquisitions of the remaining Founding Companies were accounted
for using the purchase method of accounting, with the results of operations
included from October 31, 1997, the effective closing date of the acquisitions
for accounting purposes. The allocation of purchase price to the assets acquired
and liabilities assumed has been initially assigned and recorded based on
preliminary estimates of fair value and may be revised as additional information
concerning the valuation of such assets and liabilities becomes available.
The consolidated financial statements herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission that permit certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles to be condensed or omitted. The Company believes
the presentation and disclosures herein are adequate to make the information not
misleading, and the financial statements reflect all elimination entries and
normal recurring adjustments that are necessary for a fair presentation of the
results for the three months ended and nine months ended September 30, 1997 and
1998.
Operating results for interim periods are not necessarily indicative of the
results for a full year. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements of
the Company and the related notes thereto included in TransCoastal's Annual
Report on Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission.
Pro forma net income for the three months ended and nine months ended
September 30, 1997 consists of the historical net income of Woodson, including
two S Corporations, adjusted for income taxes that would have been recorded had
each company operated as a C Corporation. Pro forma earnings per share for the
1997 periods reflect the pro forma adjustment to adjust for income taxes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the accounting policies of the
Company during the periods presented. For a description of these policies, see
Note 2 of the Notes to Consolidated Financial Statements of the Company in
TransCoastal's Annual Report on Form 10-K for the year ended December 31, 1997.
6
<PAGE> 7
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EARNINGS PER SHARE
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Shares issued in the acquisition of Woodson.............. 1,031 1,031 1,031 1,031
Shares issued in the formation of TCMS................... 975 975 975 975
Shares issued to the stockholders of the remaining
Founding Companies..................................... -- 1,111 -- 1,111
Shares sold to certain employees......................... 275 275 187 275
Shares issued to consultants............................. 6 6 3 6
Shares issued in the acquisition of Dickson Group........ -- 424 -- 143
Shares sold in the Offering.............................. -- 5,750 -- 5,750
----- ----- ----- -----
Weighted average shares outstanding for basic earnings
per share calculation.................................. 2,287 9,572 2,196 9,291
===== ===== ===== =====
</TABLE>
The calculation of diluted earnings per share is similar to basic earnings
per share except that the denominator includes dilutive common stock equivalents
such as stock options and warrants. Weighted average shares outstanding for
calculation of diluted earnings per share totaled 2,315,000 and 9,572,000 for
the three months ended September 30, 1997 and 1998, respectively. Weighted
average shares outstanding for calculation of diluted earnings per share totaled
2,215,000 and 9,297,000 for the nine months ended September 30, 1997 and 1998,
respectively.
4. BUSINESS COMBINATIONS
On November 4, 1997, TCMS acquired in separate transactions (collectively,
the "Acquisitions"), simultaneously with the closing of the Offering, the
Founding Companies and certain real properties used in the businesses of the
Founding Companies. Set forth below are unaudited pro forma combined revenues
and income data reflecting the pro forma effect of the Acquisitions on the
Company's results from operations for the three months ended and nine months
ended September 30, 1997. The unaudited pro forma data presented below consists
of the income statement data from the operations of Woodson as presented in
these consolidated financial statements plus the income statement data from the
operations of the remaining Founding Companies for the three months ended and
nine months ended September 30, 1997 (in thousands, except per share amounts).
These pro forma results are not necessarily indicative of the actual results
which would have occurred if the Acquisitions had taken place at the beginning
of the period presented, nor are they necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
<S> <C> <C>
Pro forma revenues........................................ $32,012 $86,918
Pro forma net income...................................... $ 2,022 $ 3,953
Basic and diluted earnings per share...................... $ 0.22 $ 0.43
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to:
(a) the issuance of Common Stock as of the beginning of the year presented for
the Offering, the Acquisitions, and for certain of its executive officers and
consultants, (b) adjustment for pro forma goodwill amortization expense using
40-year
7
<PAGE> 8
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated life, (c) elimination of historical interest expense related to
certain obligations which were repaid by the Company and reduced by interest
expense on borrowed funds used to pay the cash portion of the Acquisitions, and
(d) adjustment to the federal and state income tax provisions based on pro forma
results.
5. DICKSON GROUP ACQUISITION
On August 2, 1998, the Company entered into a Stock Purchase and Merger
Agreement (the "Agreement") to acquire Dickson GMP International, Inc. and four
affiliated companies (the "Dickson Group") which specialize in the fabrication
of production systems that incorporate sophisticated piping, electrical and
instrumentation components used in the oil and gas, refinery, petrochemical and
chemical industries. Under the terms of the Agreement, TransCoastal acquired all
outstanding stock of the Dickson Group for $10 million in cash and approximately
1.3 million shares of TransCoastal common stock. The Agreement provides the
potential for Dickson Group to receive an additional $7.3 million in cash and
approximately 0.3 million shares if it achieves certain financial targets by the
third quarter of 1999. The Company financed the acquisition with borrowings
available under its existing credit facilities. The Dickson Group acquisition
has been accounted for as a purchase, therefore, the accompanying statements of
operations reflect the results of operations of the Dickson Group since the date
of acquisition.
The unaudited pro forma data for 1997 presented below consists of the
income statement data from the operations of Woodson as presented in these
consolidated financial statements plus the income statement data from the
operations of the remaining Founding Companies and the Dickson Group for the
nine months ended September 30, 1997. The unaudited pro forma consolidated
results of operations for the nine months ended September 30, 1998 are prepared
as though the Dickson Group had been acquired as of January 1, 1998. These pro
forma results are not necessarily indicative of the actual results which would
have occurred if the Acquisitions had taken place at the beginning of the
periods presented, nor are they necessarily indicative of future results
(amounts in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Pro forma revenues.......................................... $115,198 $153,900
Pro forma net income........................................ $ 4,083 $ 4,293
Basic and diluted earnings per share........................ $ 0.39 $ 0.41
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to:
(a) the issuance of Common Stock as of the beginning of the year presented for
the Offering, the Acquisitions, and to certain of its executive officers and
consultants, (b) adjustment for pro forma goodwill amortization expense using
40-year estimated life, (c) elimination of historical interest expense related
to certain obligations which were repaid by the Company and reduced by interest
expense on borrowed funds used to pay the cash portion of the Acquisitions, and
(d) adjustment to the federal and state income tax provisions based on pro forma
results.
6. INCOME TAXES
The results for the third quarter of 1998 include the effects of a net tax
benefit of $567,000 or $0.06 per share, primarily resulting from the Company
making a federal income tax election associated with the acquisition of one of
the Woodson Companies. The election required the consent of certain founding
stockholders and allowed the Company to adjust to a year-to-date effective
income tax rate of approximately 38 percent.
8
<PAGE> 9
TRANSCOASTAL MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NEW PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for the Company's year ending December 31, 1998.
SFAS No. 130 establishes standards for the reporting and displaying of
comprehensive income and its components. Comprehensive income equaled net income
for the three and nine month periods ending September 30, 1997 and 1998.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 1 of this
Report and the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The Company's revenues are primarily derived from providing services
related to pipeline installation and repair, hydrostatic testing and
commissioning of pipelines, and fabrication and refurbishment of offshore
drilling rigs, barge drilling rigs and structural components of fixed platforms.
To a lesser extent, the Company generates revenues from (1) the manufacture and
sale of amphibious undercarriages for marine construction equipment used in
stump-studded swamp terrain and (2) 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. The balance of the Company's revenues are generated under
cost plus or time and material contracts. Under these contracts revenues are
recognized as the services are performed. Cost of revenues consists of direct
material, labor and subcontracting costs and indirect costs related to contract
performance, such as indirect labor, supplies and tools. Cost of revenues 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.
This discussion includes certain forward-looking statements, which are
identified by the use of the words "believes", "expects" and similar expressions
that contemplate future events. Numerous important factors, risks and
uncertainties affect the Company's operating results and could cause the
Company's actual results to differ materially from the results implied by these
or any other forward-looking statements made by, or on behalf of the Company.
There can be no assurance that future results will meet expectations.
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 revenues, gross 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. During the third quarter of 1998, there were five (5) named storms in
the Gulf of Mexico, that resulted in significant delays on three pipeline
construction projects in process in the region.
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. With the decline in oil prices over the previous three
quarters, and with oil prices continuing to fluctuate below $16.00 per barrel in
the third quarter of 1998, the Company has seen a slowdown in the rate at which
pipeline installation projects that cross the transition zone in the Gulf of
Mexico are moving forward. To date the decline in oil prices has had little or
no
10
<PAGE> 11
impact on the fabrication division revenues due to the fact that its major
contracts are for vessels and components that are scheduled to be working in
international waters outside the Gulf of Mexico.
Certain risks are inherent under contracts that are based on a fixed-price
basis. The revenues, 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 revenues and gross profits different from those originally estimated and can
result in reduced profitability or losses on projects.
In accordance with the applicable accounting rules of the Commission,
Woodson Construction Company (collectively with three affiliated companies,
"Woodson") has been identified as the "accounting acquiror" for financial
statement presentation purposes. Consequently, the Company's historical
financial statements for periods ended on or before October 31, 1997, the
effective date of the Acquisitions of the Founding Companies for accounting
purposes, are the consolidated historical financial statements of Woodson. As
used in this discussion, the "Company" means (i) Woodson prior to October 31,
1997 and (ii) TCMS and its consolidated subsidiaries on that date and
thereafter.
RESULTS OF OPERATIONS
Revenues, cost of revenues and selling, general and administrative expense
levels were significantly higher for the three month and nine month periods
ended September 30, 1998 as compared to the same periods in 1997. The operating
results for the three month and nine month periods ended September 30, 1997 are
the results of operations of Woodson, whereas 1998 operating results reflect the
Company's results of operations including all Founding companies operations for
the entire periods shown and Dickson Group for two months in the third quarter.
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C> <C> <C>
Revenues.......................................... $13,885 100.0% $44,912 100.0%
Cost of revenues.................................. 10,715 77.2% 36,854 82.0%
Selling, general and administrative expenses...... 656 4.7% 3,989 8.9%
Depreciation and amortization..................... 262 1.9% 2,403 5.4%
------- ----- ------- -----
Operating income.................................. 2,252 16.2% 1,666 3.7%
Interest income (expense), net.................... (11) (0.1)% (1,194) (2.6)%
Other income, net................................. (28) (0.2)% (75) (0.2)%
------- ----- ------- -----
Income before income taxes........................ 2,213 15.9% 397 0.9%
Provision (benefit) for income taxes(1)........... 885 6.3% (567) (1.2)%
------- ----- ------- -----
Net income........................................ $ 1,328 9.6% $ 964 2.1%
======= ===== ======= =====
</TABLE>
- ---------------------
(1) Represents pro forma income tax for the third quarter of 1997. See Note 3 to
the consolidated financial statements at December 31, 1997.
11
<PAGE> 12
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1997 1998
--------------- ----------------
<S> <C> <C> <C> <C>
Revenues.......................................... $31,989 100.0% $124,081 100.0%
Cost of revenues.................................. 26,162 81.8% 97,578 78.7%
Selling, general and administrative expenses...... 1,887 5.9% 10,108 8.1%
Depreciation and amortization..................... 717 2.2% 7,086 5.7%
------- ----- -------- -----
Operating income.................................. 3,223 10.1% 9,309 7.5%
Interest income (expense), net.................... 8 0.0% (2,856) (2.3)%
Other income, net................................. 468 1.5% (76) (0.1)%
------- ----- -------- -----
Income before income taxes........................ 3,699 11.6% 6,377 5.1%
Provision for income taxes(1)..................... 1,583 5.0% 2,423 1.9%
------- ----- -------- -----
Net income........................................ $ 2,116 6.6% $ 3,954 3.2%
======= ===== ======== =====
</TABLE>
- ---------------------
(1) Represents pro forma income tax for the nine months of 1997. See Note 3 to
the consolidated financial statements at December 31, 1997.
RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998
Revenues. Revenues increased $31.0 million, or 223% for the three months
ended September 30, 1998 compared to the three months ended September 30, 1997.
The inclusion of revenues from the Founding Companies, other than Woodson, and
the Dickson Group accounted for the increase in revenues in 1998. The results of
operations of the Founding Companies, other than Woodson, and the Dickson Group
are included in the Company's consolidated results from the effective closing
date of the acquisitions for accounting purposes.
Cost of revenues. Cost of revenues increased $26.1 million, or 244%
reflecting increased costs associated with the higher level of revenues. Cost of
revenues, as a percentage of revenues, increased from 77.2% during the third
quarter of 1997 to 82.1% for the comparable period in 1998. The increase in
costs of revenues as a percentage of revenues was due primarily to two factors.
The first contributing factor was the significantly higher content of
fabrication work in the third quarter of 1998 as compared to the same quarter of
1997. Fabrication projects generally have lower gross margins than pipeline
construction projects. The second contributing factor was the weather delays
encountered during the quarter ended September 30, 1998 versus the same period
in 1997. Billings under weather clauses generally are structured to cover a
significant portion, if not all of the Company's standby costs during the period
in which equipment and personnel are waiting for the weather to improve.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3.3 million, or 509%, for the 1998 period as
compared to the 1997 period. As a percentage of revenues, selling, general and
administrative expenses were 8.9% during the third quarter of 1998, compared to
4.7% during the third quarter of 1997. The inclusion of selling, general and
administrative expenses from the Founding Companies, other than Woodson, and the
Dickson Group accounted for $2.1 million, or 63.6% of the increase in these
expenses in the third quarter of 1998 as compared to the same period in 1997.
The results of operations of the Founding Companies, other than Woodson, and the
Dickson Group are included in the Company's consolidated results from the
effective closing date of the Acquisitions for accounting purposes. The balance
of the increase in expenses is the result of costs associated with being a
public company and employing corporate and operating staff to manage the larger
combined entity.
Depreciation and amortization. Depreciation and amortization expenses
increased $2.1 million from $.3 million in 1997 to $2.4 million in 1998. The
increase was primarily due to: (1) additional property, plant and equipment
placed in service since the nine months of 1997, (2) the acquisition of
equipment owned by the Founding Companies, other than Woodson, effective
November 4, 1997 under the purchase method of accounting, and (3) amortization
of goodwill that originated with the consummation of the Acquisitions on
November 4, 1997. To a lesser extent the depreciation of equipment acquired and
amortization of goodwill
12
<PAGE> 13
recorded in connection with the acquisition of the Dickson Group during the
third quarter of 1998 also contributed to the increase.
Interest income (expense), net. Interest expense, net of interest income,
totaled $1.2 million during 1998 as compared to nominal net interest expense
during 1997. The significant increase was primarily due to: (1) higher average
debt levels resulting from draw downs on the corporate revolver after the
completion of the Offering, and (2) amortization of debt issuance costs related
to the credit agreement and common stock warrants.
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1998
Revenues. Revenues increased $92.1 million, or 288% for the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997.
Approximately $82.1 million of the increase resulted from the inclusion of
revenues from the Founding Companies, other than Woodson, and the Dickson Group
for which the results of operations are included in the Company's consolidated
results from the effective closing date of the acquisitions for accounting
purposes. The two primary factors contributing to the balance of the revenue
increase in 1998 were: (1) the acquisition of the Vermilion Bay which began
operating under a contract during the third quarter, and (2) improved
utilization of assets and facilities.
Cost of revenues. Reflecting increased costs associated with the higher
level of revenues, cost of revenues increased $71.4 million, or 273%. Cost of
revenues, as a percentage of revenues, declined from 81.8% during the first nine
months of 1997 to 78.7% for the comparable period in 1998. The decline was
primarily due to improved utilization of equipment and facilities and higher
average project margins during the nine months ended September 30, 1998 versus
the same period for 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.2 million, or 436%, for the 1998 period as
compared to the 1997 period. As a percentage of revenues, selling, general and
administrative expenses were 8.1% during the first nine months of 1998, compared
to 5.9% during the same period of 1997. The inclusion of selling, general and
administrative expenses from the Founding Companies, other than Woodson, and the
Dickson Group accounted for $7.1 million of the increase in these expenses for
the nine month period ended September 30, 1998 as compared to the same period
for 1997. The results of operations of the Founding Companies, other than
Woodson, and the Dickson Group are included in the Company's consolidated
results from the effective closing date of the acquisitions for accounting
purposes. The balance of the increase in selling, general and administrative
expenses is the result of costs associated with being a public company and
building an infrastructure to support a company capable of taking on larger
projects and generating higher revenues.
Depreciation and amortization. Depreciation and amortization expenses
increased $6.4 million from $0.7 million in 1997 to $7.1 million in 1998. The
increase was primarily due to: (1) additional property, plant and equipment
placed in service since the first half of 1997, (2) the acquisition of equipment
owned by the Founding Companies, other than Woodson, effective November 4, 1997
under the purchase method of accounting, and (3) amortization of goodwill that
originated with the consummation of the Acquisitions on November 4, 1997.
Interest income (expense), net. Interest expense, net of interest income,
totaled $2.9 million during 1998 as compared to nominal net interest income
during 1997. The significant increase in interest expense was primarily due to:
(1) higher average debt levels resulting from draw downs on the corporate
revolver after the completion of the Offering, and (2) amortization of debt
issuance costs related to the credit agreement and common stock warrants.
Other income, net. During 1997, other income consisted primarily of gains
recognized on the sale of available-for-sale securities.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital improved by $8.2 million during the first
nine months of 1998; increasing to $11.7 million at September 30, 1998 from $3.4
million at December 31, 1997. Net cash provided by operating activities during
the nine months ended September 30, 1998 was $3.1 million. Net cash used in
investing activities during the nine months ended September 30, 1998 was $44.4
million. Capital expenditures accounted for $33.5 million of the cash used in
investing activities during the period and included $21.7 million related to the
purchases and refurbishments of the LB-207 pipelay barge and the BB-356 bury
barge, renamed the Vermilion Bay and Atchafalaya Bay, respectively. Other
investing activities which required the use of cash were the Dickson Group
acquisitions ($8.7 million) and the federal income tax election associated with
the acquisition of one of the Woodson Companies ($3.2 million). Net cash
consumed by operating and investing activities was funded through additional
borrowings on the revolving credit facility. During the first nine months of
1998 net revolver and term loan borrowings were $43.6 million, resulting in an
outstanding revolver and term loan balance of $53.8 million at September 30,
1998. Additional borrowing capacity under the Company's revolver and term loan
facility at the end of September 30, 1998 totaled $6.2 million in the aggregate.
The Company intends to continue to pursue attractive asset and corporate
acquisition opportunities; however, the timing, size or success of any
acquisitions and the resulting additional capital commitments are unpredictable.
The Company expects to fund future acquisitions primarily through a combination
of issuance of additional equity, working capital, cash flow from operations and
borrowings, including the unused portion of the credit facility. There can be no
assurance that the Company can secure such additional financing if and when it
is needed or on terms deemed acceptable to the Company.
YEAR 2000 ISSUES
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive data by the Company's computerized
information systems and equipment. The Year 2000 may be critical to these
systems as many computer programs were written and equipment manufactured using
two digits rather than four to define the applicable year. As a result, any of
the Company's computer applications or equipment that have date-sensitive
programs may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures in the fabrication area that could
cause serious production-related issues. In addition, miscalculations or system
failures could result in a temporary inability to process transactions, issue
invoices, remit payments, communicate with financial institutions and other
entities electronically and update internal accounting systems. If not corrected
in a timely manner, such business disruptions could be detrimental to the
continuing operations of the Company.
The Company has initiated a program to prepare its computer systems and
applications for the year 2000. Based on present information, management
believes that while many of the systems are already year 2000 compliant, other
systems will require modification or replacement with new programs. The Company
will utilize both internal and external resources to reprogram, replace and test
software for year 2000 compliance.
Beyond the computer hardware and software systems, the Company has a
variety of operating equipment that may be impacted by the year 2000 issue. This
equipment may have embedded microchips that use time and dates. The time and
date functions may control the equipment, provide time and date stamps of
records or data generated by the equipment, or may schedule events or actions.
The Company is currently inventorying its equipment, and with the manufacturer's
assistance, a plan is being developed to modify and test every date-related
function.
The Company plans to complete the year 2000 conversion tasks well in
advance of the end of 1999. The total project costs are presently estimated not
to exceed $750,000, to be funded through cash flows from operations, and such
costs will be expensed as incurred unless new software and computer hardware is
purchased in which case certain costs will be capitalized.
The Company is taking steps to identify year 2000 compliance issues that
may be created by key customers, suppliers, other service providers, and
financial institutions with which the Company does business.
14
<PAGE> 15
The loss of any key customer or the inability of any of the Company's key
vendors to provide its goods or services to the Company would have a negative
impact on the Company's operations until those entities return to normal
operations.
The anticipated future costs of the year 2000 conversion project and the
date on which the Company anticipates project completion are based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could vary significantly from
current estimates.
The Company will be developing a written contingency plan by early 1999 to
address the issues that could arise should the Company or any of its significant
suppliers, customers, service providers or financial institutions not be
prepared to accommodate year 2000 issues timely. The Company believes that in an
emergency situation it could revert to the use of manual systems that do not
rely on computers. Through these manual systems, the Company could perform the
minimum functions required to maintain the flow of goods and services and
provide a minimum level of information reporting to maintain a level of control
over the business cycle. Should the Company have to utilize manual systems, it
is uncertain that it could maintain current levels of operations and this could
have a material adverse impact on the business. The Company intends to maintain
constant surveillance on year 2000 issues and will adapt its plans as required.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 1, 1998, the Company issued 1,300,000 shares of common stock
to the former stockholders of the Dickson Group at a per share price equal to
$4.25 per share in partial consideration for all of the outstanding shares of
the Dickson Group. No underwriting commissions or discounts were paid with
respect to the issuance of the unregistered securities described above.
The above common stock was issued in reliance on Section 4(2) of the Act
for transactions not involving a public offering. With regard to the reliance by
the Company upon such exemption for registration, certain inquiries were made by
the Company to establish that such issuance qualified for such exemption from
the registration requirements. In particular, the Company confirmed that (i) the
certificates for the shares sold accordingly bear restrictive legends and (ii)
the shares were issued to a limited number of persons.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27. -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Filed on September 15, 1998 in connection with the acquisition of the
Dickson Group.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TransCoastal Marine Services, Inc.
By: /s/ JOHNNIE W. DOMINGUE
----------------------------------
Johnnie W. Domingue
Chief Financial Officer
Dated: November 13, 1998
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27. -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,230
<SECURITIES> 0
<RECEIVABLES> 35,154
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,474
<PP&E> 102,073
<DEPRECIATION> 0
<TOTAL-ASSETS> 233,711
<CURRENT-LIABILITIES> 34,816
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 121,429
<TOTAL-LIABILITY-AND-EQUITY> 233,711
<SALES> 124,081
<TOTAL-REVENUES> 124,081
<CGS> 97,578
<TOTAL-COSTS> 114,772
<OTHER-EXPENSES> 76
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,423
<INCOME-PRETAX> 6,377
<INCOME-TAX> 2,423
<INCOME-CONTINUING> 3,954
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,954
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
