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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT OF 1934
Commission file number 333-38157
First Wave Marine, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 76-0461352
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2102 Broadway
Houston, Texas 77012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 847-4600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding as of November 12, 1998: 11,756,955
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FIRST WAVE MARINE, INC.
INDEX TO FORM 10-Q
FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1998
Page
----
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 1
Consolidated Statements of Operations for the Three Month
and Nine Month Periods Ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1998 and 1997 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II: Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE> 3
Item 1. FINANCIAL STATEMENTS
FIRST WAVE MARINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
ASSETS
September 30, December 31,
1998 1997
--------------- ------------
<S> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents $ 4,804 $ 378
Investments available-for-sale 2,067 ---
Investments held-to-maturity 6,179 ---
Accounts receivable, less allowance of $232 in 1998
and $37 in 1997 23,910 8,488
Inventories 750 792
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,559 793
Prepaids and other 389 341
Income tax receivable 503 773
Deferred income taxes 320 281
-------- ---------
Total current assets 42,481 11,846
Property and equipment, net 65,921 23,326
Financing costs, net 4,157 1,438
Goodwill and other intangibles, net 16,531 2,726
Deposits and other 831 210
-------- ---------
$129,921 $ 39,546
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,068 $ 1,354
Accrued liabilities 7,719 3,319
Billings in excess of costs and estimated earnings on
uncompleted contracts 489 ---
Accrued interest payable 1,650 637
Notes payable 203 215
-------- ---------
Total current liabilities 14,129 5,525
Long-term obligations 3,209 17,781
Subordinated debt 6,328 6,876
Senior notes 90,000 ---
Deferred income taxes 5,618 632
Other liabilities 1,745 678
Commitments and contingencies --- ---
Stockholders' equity:
Preferred stock, $.01 par value, 2,000 shares
authorized, no shares issued --- ---
Common stock, $.01 par value, 21,000 shares
authorized, 11,757 shares issued and outstanding
at September 30, 1998 and December 31, 1997 118 118
Additional paid-in capital 3,490 3,490
Retained earnings 5,284 4,446
-------- ---------
Total stockholders' equity 8,892 8,054
-------- ---------
$129,921 $ 39,546
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
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FIRST WAVE MARINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Month Periods Ended September 30,
(In thousands, except per share data)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Repair and upgrade $18,401 $ 6,296 $49,097 $19,801
New construction 5,830 --- 9,572 881
Environmental services 1,229 1,229 3,937 3,784
------- ------- ------- -------
25,460 7,525 62,606 24,466
Cost of revenues 17,297 4,837 41,228 14,330
------- ------- ------- -------
Gross profit 8,163 2,688 21,378 10,136
General and administrative expenses 4,467 1,136 11,906 3,943
------- ------- ------- -------
Income from operations 3,696 1,552 9,472 6,193
Interest expense - net 2,400 438 6,464 1,280
Minority interest in net earnings of subsidiary -- 133 -- 536
------- ------- ------- -------
Income before income taxes and extraordinary item 1,296 981 3,008 4,377
Income tax expense 508 473 1,237 1,837
------- ------- ------- -------
Income before extraordinary item 788 508 1,771 2,540
Extraordinary item - loss on extinguishment of debt, net
of income tax benefit of $559 --- --- (933) ---
------- ------- ------- -------
Net income $ 788 $ 508 $ 838 $ 2,540
======= ======= ======= =======
Basic and diluted earnings per share:
Before extraordinary item $ 0.07 $ 0.05 $ 0.15 $ 0.24
Extraordinary item --- --- (0.08) ---
------- ------- ------- -------
Net income $ 0.07 $ 0.05 $ 0.07 $ 0.24
======= ======= ======= =======
Weighted-averaged shares:
Basic and diluted 11,757 10,651 11,757 10,650
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
2
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FIRST WAVE MARINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended September 30,
(In thousands)
(Unaudited)
<TABLE>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 838 $ 2,540
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,956 1,037
Accretion of discounts on investments held-to-maturity (403) ---
Minority interest on earnings --- 536
Provision for doubtful accounts 159 ---
Gain on sale of property and equipment (8) ---
Write-off of property and equipment 124 ---
Write-off of financing costs 469 ---
Deferred income tax provision 354 270
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable (11,953) (1,046)
Inventories 72 (86)
Costs and estimated earnings in excess of billings on uncompleted (2,069) 90
contracts
Other assets 713 40
Income tax receivable (955) 139
Deposits and other (479) 32
Due to bank --- (88)
Accounts payable 1,614 (85)
Accrued liabilities 2,796 673
Billings in excess of costs and estimated earnings on uncompleted
contracts 489 ---
Accrued interest payable 1,013 ---
Other liabilities 767 384
--------- ---------
Net cash (used in) provided by operating activities: (3,503) 4,436
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (16,863) (1,890)
Acquisition of businesses, net of cash acquired (19,399) ---
Purchase of investments held-to-maturity (10,792) ---
Purchase of investments available-for-sale (2,000) ---
Proceeds from maturity of investments held-to-maturity 4,950 ---
Proceeds from sales of property and equipment 31 ---
Asset acquisition costs (58) (118)
--------- ---------
Net cash used in investing activities (44,131) (2,008)
Cash flows from financing activities: --------- ---------
Proceeds from issuance of debt 90,000 1,130
Payments on long-term debt and notes payable (33,411) (951)
Net payments on revolving lines of credit (1,027) (1,530)
Financing costs (3,502) ---
Issuance of common stock --- 2
--------- ---------
Net cash provided by (used in) financing activities 52,060 (1,349)
--------- ---------
Net increase in cash and cash equivalents 4,426 1,079
Cash and cash equivalents at beginning of period 378 ---
--------- ---------
Cash and cash equivalents at end of period $ 4,804 $ 1,079
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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FIRST WAVE MARINE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Note 1 In the opinion of management the accompanying unaudited
consolidated financial statements reflect all adjustments necessary
to present fairly the financial position of First Wave Marine, Inc.
("First Wave" or the "Company") as of September 30, 1998, and the
results of operations for the three and nine month periods ended
September 30, 1998 and 1997 and cash flows for the nine month
periods ended September 30, 1998 and 1997. All such adjustments are
of a normal recurring nature. These interim financial statements
should be read in conjunction with the audited financial statements
and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
Note 2 The consolidated financial statements include the accounts of First
Wave and its wholly-owned subsidiaries. All material intercompany
transactions are eliminated in consolidation.
Note 3 The results of operations for the nine month period ended
September 30, 1998 are not necessarily indicative of the results to
be expected for the entire year.
Note 4 11% Senior Notes Offering - On February 2, 1998, the Company
completed a registered offering of $90,000 aggregate principal
amount of senior notes. The senior notes bear interest at the rate
of 11% per annum; principal is due at maturity in February 2008.
The senior notes are fully and unconditionally guaranteed, jointly
and severally, by all of the Company's direct and indirect
subsidiaries. Each subsidiary guarantor is 100% owned by the
Company.
The Company is subject to restrictive covenants under the related
trust indenture. The indenture contains covenants that, among other
things, limit the ability of the Company and its subsidiaries to
incur additional indebtedness, make certain investments, create
some types of liens, enter into certain transactions with
affiliates, sell assets, enter into some types of mergers and
consolidations, allow subsidiaries to create certain dividend and
other payment restrictions, enter into sale and leaseback
transactions, and issue or sell capital stock of subsidiaries.
Separate financial statements and other disclosures concerning the
subsidiary guarantors are not presented because management has
determined such financial statements and other disclosures are not
material to investors. The combined
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condensed income statement information for the Company's subsidiary
guarantors is the same as the Company's. The combined condensed
balance sheet information of the Company's subsidiary guarantors is
as follows:
<TABLE>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ -- $ 373
Accounts receivable 23,886 8,425
Other 5,062 2,269
---------- -----------
28,948 11,067
Property and equipment 65,292 23,304
Intangible assets 14,185 1,105
Other 386 1,141
---------- -----------
Total assets $ 108,811 $ 36,617
========== ===========
Current liabilities $ 12,033 $ 4,228
Non-current liabilities 74,123 25,565
Stockholders' equity 22,655 6,824
---------- -----------
Total liabilities and stockholders' equity $ 108,811 $ 36,617
========== ===========
</TABLE>
Note 5 Acquisitions - On February 2, 1998, the Company completed the
acquisition of all of the outstanding capital stock of John
Bludworth Marine, Inc., ("John Bludworth Marine") a company that
owns and operates shipyard facilities in Pasadena, Texas and
Galveston, Texas. The Company paid $15,000 in cash and issued a
promissory note in the amount of $4,000. The Company used a portion
of the proceeds from its $90,000 senior notes offering (discussed
above) to fund the cash portion of the acquisition. The promissory
note was adjustable upward or downward based upon outstanding debt
and a final calculation of earnings before interest, taxes,
depreciation and amortization ("EBITDA") of the acquired company.
The final calculation of the applicable outstanding debt of John
Bludworth Marine resulted in an increase to the purchase price of
approximately $5,157. The final calculation of EBITDA resulted in
an increase to the purchase price of approximately $1,480. The
promissory note bore interest at 8.5% per annum and was payable on
or before July 31, 1998.
On May 27, 1998, $5,157 of the promissory note was paid. The
balance of the note, approximately $5,500, was paid on July 30,
1998.
The acquisition has been accounted for as a purchase and the
results of John Bludworth Marine have been included in the
accompanying consolidated financial statements since the date of
the acquisition. The allocation of the purchase price
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resulted in intangibles, primarily goodwill, of approximately
$14,081 which are being amortized on a straight-line basis over a
forty year period.
On May 15, 1998, the Company completed the acquisition of certain
assets of the Barge Building Division of Galveston Shipbuilding
Company ("BBD - GSC"). The Company acquired the fixed assets,
including land, a contract to build four tank barges and up to five
barge covers, and the name "Galveston Shipbuilding Company" for
$5,500, subject to a final purchase price adjustment based upon the
performance of the business. The acquisition has been accounted for
as a purchase and the results of BBD - GSC have been included in
the accompanying consolidated financial statements since the date
of the acquisition.
The following unaudited pro forma consolidated results of
operations have been prepared as if John Bludworth Marine and
BBD-GSC had been acquired as of January 1 of fiscal 1998 and 1997.
This pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisitions
been made on those dates or of results which may occur in the
future.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 25,460 $18,963 $70,588 $57,297
Income before extraordinary item 788 1,525 2,698 5,074
Net income 788 1,525 1,765 5,074
Basic and diluted earnings per share:
Before extraordinary item $ 0.07 $ 0.14 $ 0.23 $ 0.48
Net income 0.07 0.14 0.15 0.48
</TABLE>
Note 6 Shareholder Line of Credit - In February 1998, the board of
directors of the Company approved a maximum $1,000 line of credit
available to three employee director shareholders of the Company.
The line of credit allows borrowings of up to $600 to one of the
shareholders and up to $200 to each of the other two shareholders.
Any borrowings under the line of credit will bear an interest rate
of 6% per annum with interest payable annually and principal to be
amortized over a ten year period through the pro rata reduction of
the line of credit commencing March 2001.
Note 7 Cash and Cash Equivalents - The Company maintains cash and cash
equivalents with various financial institutions. At times, the
balances in these accounts could exceed the FDIC insured balance
limit of $100 per bank.
At September 30, 1998, the Company had $4,167 invested in money
market funds. The funds seek to pay income monthly and to maintain
a constant value of $1 per share. The funds invest in high quality
money market instruments which consist primarily of U.S. Treasury
obligations, obligations issued or guaranteed by U.S.
6
<PAGE> 9
agencies or instrumentalities, mortgage-backed securities,
commercial paper, bank obligations and deposit notes.
Note 8 Investments Available-for-Sale - Included in investments
available-for-sale at September 30, 1998 is an investment in a
mutual fund which invests in another portfolio that invests
primarily in "loan interest" - portions of senior, floating-rate
loans made by U.S. banks and other financial institutions to large
corporate customers. The fund seeks to achieve a high level of
current income while minimizing fluctuations in net asset values.
The carrying value and estimated fair value of the investment at
September 30, 1998 were substantially the same.
Note 9 Investments Held-to-Maturity - As a result of the 11% Senior Notes
offering, the Company was required to deposit funds into a trust
account to pay the first and second semi-annual interest payments
on the notes. Two securities were purchased with maturity dates as
near as possible to the interest payment dates. At maturity, the
value of both securities will approximate the amount of the
semi-annual interest payment, which is $4,950. A Fannie Mae
Discount Note which matured on July 27, 1998 was purchased for
approximately $4,824 to cover the August 1, 1998 interest payment.
A U.S. Treasury Bill with a maturity date of January 7, 1999 was
purchased for approximately $4,718 to cover the February 1, 1999
interest payment. The approximate fair value of the U.S. Treasury
Bill at September 30, 1998 was $4,913.
Also included in "Investments held-to-maturity" are a certificate
of deposit with a financial institution in the amount of $1,000
with a maturity date of February 4, 1999, and another certificate
of deposit with another financial institution in the amount of $250
with a maturity date of February 3, 1999. The balances of both
certificates of deposit exceed the FDIC insured balance limit of
$100 per bank.
Note 10 Line of Credit - On June 9, 1998, the Company entered into a credit
agreement to obtain a $10,000 revolving line of credit facility
with a financial institution. The facility is collateralized by
accounts receivable. Borrowings on the line of credit bear interest
at the Wall Street Journal Prime Rate plus one-half percent. There
were no borrowings outstanding on the line of credit at
September 30, 1998.
Note 11 On August 13, 1998, one of the Company's subsidiaries, Newpark
Shipbuilding-Brady Island, Inc., was the subject of a search
warrant executed by a multi-agency environmental task force. The
government's search warrant was primarily directed at the
facility's wastewater treatment plant. The Board of Directors of
the Company has authorized outside legal counsel to conduct an
internal corporate investigation of the matters raised by the
agencies in their investigation. The investigation has not been
completed at this time. Therefore, the Company cannot now estimate
the impact that may result from enforcement action, if any, related
to the government's investigation, or any other issues that may be
raised in connection with the company's internal investigation.
7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements other than statements of historical fact contained
in this Form 10-Q, including statements in this "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", as well as statements as may be made by management,
orally or in writing, concerning results of operations, future
expansion plans, future earnings, capital expenditures,
environmental and other expenditures, are forward-looking
statements. Forward-looking statements generally are accompanied by
words such as "anticipate," "believe," estimate" or "expect" or
similar statements. Although the Company believes that the
expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will
prove correct. Factors that could cause the Company's results to
differ materially from the results discussed in such
forward-looking statements include risks such as the difficulties
related to managing growth in operations, the dependence on
significant customers, competition, the risks associated with
contractual pricing, the success of the recent expansion into the
offshore drilling rig segment, the dependence of that segment on
the oil and gas industry, and labor, operating, regulatory and
other risks in the shipbuilding industry as well as risks relating
to any reductions in the capital expenditure budgets of the
Company's customers in the offshore support vessel, offshore
drilling rig, offshore barge, ships, and inland marine industries.
All forward-looking statements made herein and as may be made by
management, orally or in writing, are expressly qualified in their
entirety by the cautionary statements in this paragraph.
The following discussion of the Company's financial condition,
results of operations, liquidity and capital resources should be
read in conjunction with the Company's Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements
included elsewhere in this report.
General
The Company's business is primarily derived from providing repair
and upgrade services to inland and offshore marine vessels,
including barges, boats, drilling rigs and ships. To a lesser
extent the Company engages in new construction of such inland and
offshore marine vessels. The Company believes the demand for repair
and upgrade services is generally more stable than the demand for
new construction, but recognizes the need to continually monitor
the mix of new construction and repair and upgrade services. While
trends in oil and natural gas prices can affect the demand for
offshore support vessels and drilling rigs, the Company anticipates
demand will exist for repair activity even with a short-term
downturn in oil and gas prices. While any prolonged depression in
oil and natural gas prices could have an adverse effect on the
Company's results of operations if a significant number of offshore
support vessels and drilling rigs were taken out of active service
in the Gulf of Mexico, the declines in oil and gas prices in 1998
have not significantly affected the Company's operations to date.
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On May 15, 1998, the Company acquired its Galveston Island shipyard
with its completion of the acquisition of certain assets of the
Barge Building Division of Galveston Shipbuilding Company ("BBD -
GSC"). The Company acquired the fixed assets, including land, a
contract to build four tank barges and up to five barge covers, and
the name "Galveston Shipbuilding Company" for $5.5 million, subject
to a final purchase price adjustment based upon the performance of
the business. The acquisition has been accounted for as a purchase
and the results of BBD - GSC have been included in the accompanying
consolidated financial statements since the date of acquisition.
On February 2, 1998, the Company completed an offering of $90
million of senior notes. The senior notes bear interest at the rate
of 11% per annum with principal due at maturity in February 2008.
The senior notes are fully guaranteed, jointly and severally, by
all of the Company's direct and indirect subsidiaries.
Simultaneously with closing the senior notes offering, the Company
completed the acquisition of all of the outstanding shares of John
Bludworth Marine, Inc. ("John Bludworth Marine"). The John
Bludworth Marine acquisition provided the Company with the Pasadena
facility near Houston, Texas and the West Pelican Island facility
in Galveston, Texas. The Company paid $15.0 million in cash and
issued a promissory note in the amount of $4.0 million. The
promissory note was adjustable upward or downward based upon
outstanding debt and a final calculation of earnings before
interest, taxes, depreciation and amortization ("EBITDA") of the
acquired company. The final calculation of the applicable
outstanding debt of John Bludworth Marine resulted in an increase
to the purchase price of approximately $5.2 million. The final
calculation of EBITDA resulted in an increase to the purchase price
of approximately $1.5 million. The promissory note as adjusted for
outstanding debt and EBITDA bore interest at 8.5% per annum and was
payable on or before July 31, 1998. On May 27, 1998, the Company
paid approximately $5.2 million of the promissory note. The balance
of the promissory note, approximately $5.5 million, was paid on
July 30, 1998.
First Wave currently operates three shipyards in the Houston, Texas
area (Brady Island, Greens Bayou and Pasadena) and three in the
Galveston, Texas area (East Pelican Island, West Pelican Island and
Galveston Island). The Company currently employs approximately
1,200 employees at its six shipyards.
The Company also provides related environmental services, including
cleaning, degassing and wastewater treatment. Although this
business comprises a small percentage of the Company's total
revenues, it generates high margins and enhances the Company's
strategy to be the only one-stop source of all shipyard services
for all segments of the offshore and inland marine markets in
Texas.
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Recent Developments
On August 13, 1998, one of the Company's subsidiaries, Newpark
Shipbuilding-Brady Island, Inc., was the subject of a search
warrant executed by a multi-agency environmental task force. The
government's search warrant was primarily directed at the
facility's wastewater treatment plant. The Company's stated policy
is to comply with all government laws and regulations and to
operate with the highest degree of integrity. The Board of
Directors of the Company has authorized outside legal counsel to
conduct an internal corporate investigation of the matters raised
by the agencies in their investigation. The investigation has not
been completed at this time. Therefore, the Company cannot now
estimate the impact that may result from enforcement action, if
any, related to the government's investigation, or any other issues
that may be raised in connection with the company's internal
investigation.
Results of Operations
Comparison of the three months ended September 30, 1998 to the
three months ended September 30, 1997.
Revenues increased 238% to $25.5 million in the 1998 period,
compared with $7.5 million in the 1997 period, primarily due to
five additional shipyards in operation during the 1998 period as
compared to only one shipyard in operation during the full 1997
period. The Greens Bayou facility, a start-up, began generating
revenues in the third quarter of 1997. The East Pelican Island
facility, another start-up, began generating revenues in the first
quarter of 1998. As discussed above, the Pasadena and West Pelican
Island facilities were acquired on February 2, 1998. The Galveston
Island facility was acquired on May 15, 1998 as a result of the
BBD-GSC acquisition.
Cost of revenues rose 258% to $17.3 million in the 1998 period from
$4.8 million in the 1997 period, primarily due to the additional
shipyards in operation during the 1998 period.
Gross profit increased 204% to $8.2 million in the 1998 period from
$2.7 million in the 1997 period, primarily due to the additional
shipyards in operation during the 1998 period. The gross profit
margin decreased to 32% in the 1998 period from 36% in the 1997
period, due in part to the increase in lower margin new
construction work as a percentage of total revenue and the decrease
in higher margin environmental services revenue as a percentage of
total revenue.
General and administrative expenses increased 293% to $4.5 million
in the 1998 period from $1.1 million in the 1997 period. General
and administrative expenses as a percentage of revenues for the
1998 period represented 17.5% of total revenues, as
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<PAGE> 13
compared to 15.1% for the 1997 period. The increase in general and
administrative expenses as a percentage of revenues is due in large
part to several factors, including, the corporate staffing of First
Wave to provide oversight of current operations and prepare the
Company for future growth, the full staffing and certain overhead
expenses incurred at the start-up of the East Pelican Island and
Greens Bayou operations in advance of revenue generation, costs
associated with being a publicly reporting company, and additional
legal fees incurred of approximately $330,000 related to the
environmental investigation at the Brady Island facility.
Net interest expense rose to $2.4 million in the 1998 period from
$438,000 in the 1997 period primarily due to three months of
interest expense on the $90 million 11% Senior Notes reflected in
the 1998 period.
The elimination of minority interest in the 1998 period from
approximately $133,000 in the 1997 period is due to all minority
shareholders of this subsidiary exchanging their shares for shares
in First Wave effective December 31, 1997.
The increase in income tax expense from approximately $473,000 in
the 1997 period to $508,000 in the 1998 period is directly
attributable to the increase in income before income taxes and
extraordinary item.
The increase in net income from the 1997 period to the 1998 period
is primarily due to the increase in gross profit associated with
the additional shipyards in operation, which was substantially
offset by the additional interest expense related to the $90
million 11% Senior Notes, the additional corporate staffing, the
increase in general and administrative expenses related to the
start-up of the East Pelican Island and Greens Bayou shipyards, and
the increase in legal fees incurred in connection with the
environmental investigation at the Brady Island facility.
Comparison of the nine months ended September 30, 1998 to the nine
months ended September 30, 1997.
Revenues increased 156% to $62.6 million in the 1998 period,
compared with $24.5 million in the 1997 period, primarily due to
five additional shipyards in operation during the 1998 period as
compared to only one shipyard in operation during the full 1997
period. The Greens Bayou facility, a start-up, began generating
revenues in the third quarter of 1997. The East Pelican Island
facility, another start-up, began generating revenues in the first
quarter of 1998. As discussed above, the Pasadena and West Pelican
Island facilities were acquired on February 2, 1998 as a result of
the John Bludworth Marine acquisition. The Galveston Island
facility was acquired on May 15, 1998 as a result of the BBD-GSC
acquisition. Only the results of operations of John Bludworth
Marine and BBD-GSC subsequent to the date of acquisition are
included in the results of operations of the Company for the nine
month period ended September 30, 1998.
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Cost of revenues rose 188% to $41.2 million in the 1998 period from
$14.3 million in the 1997 period, primarily due to the additional
shipyards in operation during the 1998 period.
Gross profit increased 111% to $21.4 million in the 1998 period
from $10.1 million in the 1997 period due to the additional
shipyards in operation during the 1998 period. The gross profit
margin decreased to 34% in the 1998 period from 41% in the 1997
period, due in part to certain operational inefficiencies
associated with the start-up nature of the East Pelican Island
shipyard which affected early gross profit margins, and the
decrease in higher margin environmental services revenue as a
percentage of total revenue.
General and administrative expenses increased 202% to $11.9 million
in the 1998 period from $3.9 million in the 1997 period. General
and administrative expenses as a percentage of revenues for the
1998 period represented 19% of total revenues, as compared to 16%
for the 1997 period. The increase in general and administrative
expenses as a percentage of revenues is in large part due to
several factors, including, the corporate staffing of First Wave to
provide oversight of current operations and prepare the Company for
future growth, the full staffing and certain overhead expenses
incurred at the start-up operations in advance of revenue
generation, costs associated with being a publicly reporting
company, and additional legal fees incurred of approximately
$330,000 related to the environmental investigation at the Brady
Island facility.
Net interest expense rose to $6.5 million in the 1998 period from
$1.3 million in the 1997 period due to eight months of interest
expense on the $90 million 11% Senior Notes reflected in the 1998
period.
The elimination of minority interest in the 1998 period from
approximately $536,000 in the 1997 period is due to all minority
shareholders of this subsidiary exchanging their shares for shares
in First Wave effective December 31, 1997.
The decrease in income tax expense from approximately $1.8 million
in the 1997 period to $1.2 in the 1998 period is directly
attributable to the decrease in income before income taxes and the
extraordinary item.
The extraordinary item reflected in the 1998 period of
approximately $933,000 relates to approximately $1.5 million in
loss on extinguishment of debt, net of income tax benefit of
approximately $559,000.
The decrease in net income from the 1997 period to the 1998 period
is primarily due to the following: the loss on the extinguishment
of debt; the additional interest expense related to the $90 million
11% Senior Notes; the additional corporate staffing; the increase
in general and administrative expenses incurred in connection with
the start-up of the East Pelican Island and Greens Bayou shipyards;
and the
12
<PAGE> 15
increase in legal fees incurred in connection with the
environmental investigation at the Brady Island facility.
Inflation and Changing Prices
The Company does not believe that general price inflation has had a
significant impact on the Company's results of operations during
the periods presented. To the extent that the effects of inflation
are not offset by improvements in manufacturing and purchasing
efficiency and labor productivity, the Company generally has been
able to take such effects into account in pricing its contracts
with customers. There can be no assurance, however, that inflation
will not have a material effect on the Company's business in the
future.
Liquidity and Capital Resources
The Company's ongoing liquidity requirements arise primarily from
its need to service debt, fund working capital, acquire additional
shipyard facilities and make capital improvements to its
facilities. Prior to the Company's senior notes offering discussed
below, bank financing and internally generated funds provided
funding for these activities.
The Company completed its $90 million 11% Senior Notes offering on
February 2, 1998. Simultaneous with the senior notes offering, the
Company used $15.0 million of the net proceeds of the offering to
complete the John Bludworth Marine acquisition. As a provision of
the senior notes offering, the Company was required to deposit
sufficient funds in a trust account to cover the first two
semi-annual interest payments on the senior notes. The expenses
incurred by the Company in connection with the senior notes
offering were approximately $4.4 million. Subsequent to the senior
notes offering and the John Bludworth Marine acquisition,
approximately $25.2 million was used to prepay indebtedness of the
Company. On May 15, 1998, $5.5 million of the net proceeds of the
offering was used to complete the BBD-GSC acquisition. On May 27,
1998, $5.2 million was used to paydown the promissory note to the
former owner of John Bludworth Marine. On July 30, 1998, $5.5
million was used to pay the balance of the promissory note.
Excluding the acquisition of the Pasadena facility, the West
Pelican Island facility and the Galveston Island facility, the
Company has used approximately $16.9 million of proceeds from the
senior notes offering on capital expenditures during the nine month
period ended September 30, 1998. The Company has budgeted
approximately $10 million of capital expenditures for the remainder
of 1998.
Under its indenture entered into in connection with the senior
notes offering, the Company is permitted to borrow up to the
greater of $20 million or 85% of its accounts receivable. On
June 9, 1998, the Company obtained a $10.0 million revolving line
of credit collateralized by accounts receivable. Additionally, the
13
<PAGE> 16
Company is renegotiating $4.0 million in borrowing capacity under
another revolving line of credit. There were no borrowings
outstanding on any of the lines of credit at September 30, 1998.
Net cash (used in) provided by operating activities for the nine
month periods ended September 30, 1998 and 1997 was $(3.5) million
and $4.4 million, respectively. The decrease in cash generated from
operations is primarily due to the lower earnings during the 1998
period (as discussed above), and the substantial growth in accounts
receivable, net of accounts receivable acquired in the John
Bludworth Marine acquisition.
Net cash used in investing activities was $44.1 million and $2.0
million for the nine month periods ended September 30, 1998 and
1997, respectively. During the 1998 period, cash used in investing
activities was for the completion of the John Bludworth Marine and
BBD-GSC acquisitions, capital improvements and the purchase of
investments.
Net cash provided by (used in) financing activities was $52.1
million and $(1.3) million for the nine month periods ended
September 30, 1998 and 1997, respectively. Cash provided by
financing activities resulted from the completion of the $90
million 11% Senior Notes offering during the current period. Cash
generated from the 11% Senior Notes offering was used to prepay
indebtedness of the Company, pay the promissory note to the former
owner of John Bludworth Marine, and pay the remainder of the
financing costs related to the 11% Senior Notes offering.
Management believes that with the remaining proceeds from the 11%
Senior Notes offering, cash generated from operations, and, if
necessary, borrowings under the Company's lines of credit, the
Company will have sufficient resources available to meet its
anticipated requirements for capital expenditures and working
capital needs through the remainder of fiscal year 1998.
Year 2000 Computer Issue
Many computer systems in use today were designed and developed
using two digits, rather than four, to specify the year. As a
result, such systems will recognize the year 2000 as "00". This
could cause many computer applications to fail completely or to
create erroneous results unless corrective measures are taken.
The Company currently believes that with recent upgrades made to
its existing software, the Year 2000 problem will not pose
significant operations problems for the Company's computer systems.
The Company has initiated discussions with its significant
suppliers, large customers, financial institutions and utilities to
assure that those parties have appropriate plans to remediate Year
2000 issues. The Company expects to have completed its
communications with those third parties by the end of the year so
that it will be in a position to work with them to minimize
disruption to the Company's operations as a result of others' Year
2000 problems.
14
<PAGE> 17
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
On August 13, 1998, one of the Company's subsidiaries, Newpark
Shipbuilding-Brady Island, Inc., was the subject of a search
warrant executed by a multi-agency environmental task force. The
government's search warrant was primarily directed at the
facility's wastewater treatment plant. The Company's stated policy
is to comply with all government laws and regulations and to
operate with the highest degree of integrity. The Board of
Directors of the Company has authorized outside legal counsel to
conduct an internal corporate investigation of the matters raised
by the agencies in their investigation. The investigation has not
been completed at this time. Therefore, at this time the Company
cannot now estimate the impact that may result from enforcement
action, if any, related to the government's investigation, or any
other issues that may be raised in connection with the company's
internal investigation.
Item 2. Use of Proceeds.
The Company completed an offering of $90 million of 11% Senior
Notes on February 2, 1998. The underwriter was Schroder & Co., Inc.
Expenses incurred by the Company in connection with the senior
notes offering were as follows (in thousands):
Underwriting discounts and commissions $ 3,150
Legal and accounting fees 637
Printing 252
Other 363
--------
$ 4,402
========
From February 2, 1998 through September 30, 1998, the Company used
offering proceeds as follows (in thousands):
John Bludworth Marine, Inc. acquisition $15,000
Pledged securities - first year's interest 9,542
Repayment of indebtedness, including
prepayment penalties 25,172
Payment of promissory note to former owner
of John Bludworth Marine, Inc. 10,853
BBD-GSC acquisition 5,503
Capital expenditures 16,863
Expenses of offering (see above) 4,402
-------
Total proceeds expended $87,335
=======
15
<PAGE> 18
The remaining proceeds of approximately $2.7 million are included
in cash and cash equivalents at September 30, 1998 and are
scheduled to be used to cover a portion of the budgeted capital
expenditures.
Item 3-5. Not applicable.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------- -----------
27.1 Financial Data Schedule.
* Filed herewith
(b) Reports on Form 8-K
On May 29, 1998, the Company filed a report on Form 8-K
relating to the acquisition of certain assets of the Barge
Building Division of Galveston Shipbuilding Company, as
amended by report on Form 8-K/A filed on July 29, 1998.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FIRST WAVE MARINE, INC.
November 13, 1998 By: /s/ DAVID B. AMMONS
------------------------
David B. Ammons
Executive Vice President and
Chief Financial Officer
November 13, 1998 By: /s/ DALE E. SCHEXNAYDER
-------------------------
Dale E. Schexnayder
Corporate Controller
17
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------
*27.1 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,804
<SECURITIES> 8,246
<RECEIVABLES> 24,142
<ALLOWANCES> 232
<INVENTORY> 750
<CURRENT-ASSETS> 42,481
<PP&E> 70,405
<DEPRECIATION> 4,484
<TOTAL-ASSETS> 129,921
<CURRENT-LIABILITIES> 14,129
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 8,774
<TOTAL-LIABILITY-AND-EQUITY> 129,921
<SALES> 62,606
<TOTAL-REVENUES> 62,606
<CGS> 41,228
<TOTAL-COSTS> 41,228
<OTHER-EXPENSES> 11,906
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,464
<INCOME-PRETAX> 3,008
<INCOME-TAX> 1,237
<INCOME-CONTINUING> 1,771
<DISCONTINUED> 0
<EXTRAORDINARY> 933
<CHANGES> 0
<NET-INCOME> 838
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
