SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[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 1-12289
-------------------------------------------------------
SEACOR SMIT Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3542736
- ------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11200 Westheimer, Suite 850, Houston Texas 77042
- -------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(713) 782-5990
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(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 total number of shares of Common Stock, par value $.01 per share,
outstanding as of November 4, 1998 was 12,674,789. The Registrant has no other
class of Common Stock outstanding.
<PAGE>
SEACOR SMIT INC. AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997.....................................................1
Condensed Consolidated Statements of Operations For the
Three and Nine-Month Periods Ended September 30, 1998 and 1997...............................2
Condensed Consolidated Statements of Cash Flows
For the Nine-Month Periods Ended September 30, 1998 and 1997.................................3
Notes to Condensed Consolidated Financial Statements............................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................................9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................................................22
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SEACOR SMIT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data, unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents, including restricted cash of
$11,061 at September 30, 1998................................... $ 115,129 $ 175,381
Held-to-maturity securities........................................ - 33,020
Trade and other receivables, net of allowance for
doubtful accounts of $2,151 and $1,626, respectively............ 86,794 84,087
Inventories........................................................ 1,655 2,149
Prepaid expenses and other......................................... 2,014 1,422
-------------------- ------------------
Total current assets......................................... 205,592 296,059
-------------------- ------------------
Investments in, at Equity, and Receivables from 50%
or Less Owned Companies............................................ 53,031 38,370
Available-for-Sale Securities......................................... 187,873 127,420
Property and Equipment................................................ 676,174 592,883
Less--Accumulated depreciation...................................... (105,307) (109,949)
-------------------- ------------------
Net property and equipment................................... 570,867 482,934
-------------------- ------------------
Restricted Cash....................................................... 164,366 46,983
Other Assets.......................................................... 38,104 28,035
-------------------- ------------------
$ 1,219,833 $ 1,019,801
==================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and current portion of long-term debt............. $ 26,748 $ 36,229
Other current liabilities.......................................... 21,956 23,292
-------------------- ------------------
Total current liabilities.................................... 48,704 59,521
-------------------- ------------------
Long-Term Debt........................................................ 484,321 358,714
Deferred Income Taxes................................................. 70,256 59,681
Deferred Gain and Other Liabilities................................... 58,182 34,168
Minority Interest in Subsidiaries..................................... 35,516 33,703
Stockholders' Equity:
Common stock, $.01 par value, 14,146,457 and
14,064,221 shares issued, respectively.......................... 141 140
Additional paid-in capital......................................... 272,018 268,728
Retained earnings.................................................. 307,840 211,159
Less 1,263,168 and 166,968 shares held in treasury,
respectively, at cost........................................... (57,833) (5,365)
Less unamortized restricted stock compensation..................... (1,317) (986)
Accumulated other comprehensive income............................. 2,005 338
-------------------- ------------------
Total stockholders' equity................................... 522,854 474,014
-------------------- ------------------
$ 1,219,833 $ 1,019,801
==================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
and should be read in conjunction herewith.
1
<PAGE>
SEACOR SMIT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenue:
Marine..................................................... $ 93,984 $ 82,599 $ 274,754 $ 237,547
Environmental -
Oil spill response........................................ 840 1,595 3,481 3,232
Retainer fees and other services.......................... 5,219 4,065 14,765 11,907
------------- ------------- ------------- -------------
100,043 88,259 293,000 252,686
------------- ------------- ------------- -------------
Costs and Expenses:
Cost of oil spill response................................. 716 1,351 2,702 2,913
Operating expenses -
Marine.................................................... 46,969 42,261 133,161 117,140
Environmental............................................. 1,601 1,373 4,250 3,911
Administrative and general................................. 9,705 6,186 27,340 20,301
Depreciation and amortization............................. 8,341 8,555 26,461 26,176
------------- ------------- ------------- -------------
67,332 59,726 193,914 170,441
------------- ------------- ------------- -------------
Operating Income.............................................. 32,711 28,533 99,086 82,245
------------- ------------- ------------- -------------
Other (Expense) Income:
Interest on debt........................................... (6,134) (2,966) (16,802) (8,607)
Interest income............................................ 6,898 2,927 18,682 7,488
Gain from equipment sales, net............................. 3,756 10,292 34,338 57,302
Other...................................................... 333 121 259 564
------------- ------------- ------------- -------------
4,853 10,374 36,477 56,747
------------- ------------- ------------- -------------
Income Before Income Taxes, Minority Interest, Equity in
Earnings of 50% or Less Owned Companies and
Extraordinary Item......................................... 37,564 38,907 135,563 138,992
Income Tax Expense............................................ 13,045 13,263 47,067 48,466
------------- ------------- ------------- -------------
Income Before Minority Interest, Equity in Earnings of
50% or Less Owned Companies and Extraordinary Item......... 24,519 25,644 88,496 90,526
Minority Interest in (Income) Loss of Subsidiaries............ (642) (71) (1,345) 74
Equity in Earnings of 50% or Less Owned Companies............. 2,484 1,880 9,530 4,039
------------- ------------- ------------- -------------
Income Before Extraordinary Item.............................. 26,361 27,453 96,681 94,639
Extraordinary Item - Extinguishment of Debt, net of tax....... - - - (325)
------------- ------------- ------------- -------------
Net Income.................................................... $ 26,361 $ 27,453 $ 96,681 $ 94,314
============= ============= ============= =============
Basic Earnings Per Common Share:
Income Before Extraordinary Item.......................... $ 2.02 $ 1.99 $ 7.27 $ 6.84
Extraordinary Item........................................ - - - (0.02)
------------- ------------- ------------- -------------
Net Income............................................... $ 2.02 $ 1.99 $ 7.27 $ 6.82
============= ============= ============= =============
Diluted Earnings Per Common Share:
Income Before Extraordinary Item.......................... $ 1.75 $ 1.74 $ 6.25 $ 5.92
Extraordinary Item........................................ - - - (0.02)
------------- ------------- ------------- -------------
Net Income............................................... $ 1.75 $ 1.74 $ 6.25 $ 5.90
============= ============= ============= =============
Weighted Average Common Shares:
Basic..................................................... 13,071,676 13,795,146 13,293,876 13,837,977
Diluted................................................... 16,046,362 16,808,449 16,285,898 16,846,330
</TABLE>
The accompanying notes are an integral part of these financial statements
and should be read in conjunction herewith.
2
<PAGE>
SEACOR SMIT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
----------------- ------------------
<S> <C> <C>
Net Cash Provided by Operating Activities............................ $ 61,966 $ 69,179
----------------- ------------------
Cash Flows from Investing Activities:
Purchase of property and equipment................................ (155,844) (85,623)
Proceeds from property and equipment sales........................ 134,937 86,500
Purchase of available-for-sale securities......................... (141,575) -
Proceeds from sale of available-for-sale securities............... 84,757 311
Proceeds from held-to-maturity securities......................... 33,020 -
Investments in and advances to 50% or less owned companies........ (6,153) (27,685)
Purchase of other investments..................................... (7,000) -
Principal payments on notes due from 50% or less owned
Companies........................................................ 1,392 527
Principal payments received under a sale-type lease............... 193 160
Restricted cash...................................................... (117,383) (32,289)
Dividends received from 50% or less owned companies.................. 120 -
----------------- ------------------
Net cash used in investing activities......................... (173,536) (58,099)
----------------- ------------------
Cash Flows from Financing Activities:
Payments on long-term debt........................................ (4,955) (1,351)
Payments on capital lease obligations............................. (1,123) (987)
Payments on stockholders' loans................................... (223) -
Proceeds from sale of minority interest........................... - 4,080
Proceeds from issuance of long-term debt.......................... 110,000 149,261
Proceeds from exercise of stock options........................... 757 316
Common stock acquired for treasury................................ (52,468) (4,581)
----------------- ------------------
Net cash provided by financing activities..................... 51,988 146,738
----------------- ------------------
Effect of Exchange Rate Changes
on Cash and Cash Equivalents...................................... (670) (101)
----------------- ------------------
Net Increase (Decrease) in Cash and Cash Equivalents................. (60,252) 157,717
Cash and Cash Equivalents, Beginning of Period....................... 175,381 149,053
================= ==================
Cash and Cash Equivalents, End of Period............................. $ 115,129 $ 306,770
================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
and should be read in conjunction herewith.
3
<PAGE>
SEACOR SMIT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation --
The condensed consolidated financial information for the three and
nine-month periods ended September 30, 1998 and 1997 has been prepared by the
Company and was not audited by its independent public accountants. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows at September 30, 1998, and for all periods presented
have been made. Results of operations for the interim periods presented are not
necessarily indicative of the operating results for the full year or any future
periods.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and related notes thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
Unless the context otherwise indicates, any references in this
Quarterly Report on Form 10-Q to the "Company" refer to SEACOR SMIT Inc. and its
consolidated subsidiaries, and any references in this Quarterly Report on Form
10-Q to "SEACOR" refer to SEACOR SMIT Inc.
2. Recent Accounting Pronouncements --
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair market value. SFAS 133 requires that changes in the derivative's fair
market value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. SFAS 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement SFAS 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS 133 must be applied to derivative instruments and certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantially modified after December 31, 1997. The Company has not yet
quantified the impact of adopting SFAS 133 on its financial statements and has
not determined the timing or method of its adoption of SFAS 133.
3. Restricted Cash --
At September 30, 1998, restricted cash totaled $175,427,000, and of
such balance $92,150,000 and $83,277,000 are intended for use in defraying the
costs of constructing offshore marine vessels for the Company and two premium
offshore jackup drilling rigs ("Rigs") and other related matters for Chiles
Offshore LLC ("Chiles"), a majority owned subsidiary, respectively. At September
30, 1998, the Company has funded approximately $41,182,000 in offshore marine
vessel construction costs from unrestricted cash balances, and subject to the
Maritime Administration's approval, the Company expects such amounts to be
reimbursed from construction reserve fund restricted cash accounts, see
discussion below.
4
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Proceeds from the sale of certain offshore marine vessels have been
deposited into escrow and construction reserve fund bank accounts for purposes
of acquiring newly constructed U.S.-flag vessels and qualifying for the
Company's temporary deferral of taxable gains realized from the sale of the
vessels. Escrow accounts were established pursuant to certain exchange and
escrow agreements and restrict the use of funds deposited therein for a period
of six months. Should replacement offshore marine vessels not be delivered prior
to expiration of the applicable six-month escrow period, funds then remaining in
the escrow accounts will be released to the Company for general use. In 1998,
the Company also established, pursuant to Section 511 of the Merchant Marine
Act, 1936, as amended, joint depository construction reserve fund accounts with
the Maritime Administration. From date of deposit, withdrawals from these
accounts are subject to prior written approval of the Maritime Administration,
and funds must be committed for expenditure within three years or they will be
released for the Company's general use.
Net proceeds from the sale by Chiles in April 1998 of $110,000,000
aggregate principal amount of its 10.0% Senior Notes Due 2008 (the "Chiles 10.0%
Notes") were deposited into escrow accounts in accordance with certain escrow
agreements between Chiles and U.S. Bank Trust National Association, as Escrow
Agent. These funds may be used to (i) partially fund the construction of Rigs,
(ii) pay interest on the Chiles 10.0% Notes through the first two semi-annual
interest payment dates, and (iii) provide working capital. Upon receipt by the
Escrow Agent of an Officer's Certificate of Chiles that Chiles has made the
final installment of the Rigs' purchase price in accordance with the related
construction contracts, any funds remaining in escrow will be released by the
Escrow Agent to Chiles.
4. Reporting of Comprehensive Income --
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting comprehensive income (defined
as net income and all other non-owner changes in equity) in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997 and the reclassification of financial statements for earlier periods
presented for comparative purposes is required. For the three-month periods
ended September 30, 1998 and 1997, total comprehensive income was $28,203,000
and $33,853,000, respectively. For the nine-month periods ended September 30,
1998 and 1997, total comprehensive income was $98,348,000 and $93,864,000,
respectively. Other comprehensive income or losses in 1998 and 1997 primarily
resulted from net currency translation adjustments. Unrealized holding gains on
securities were also included in 1998 comprehensive income.
5. Securities Repurchase Program --
SEACOR's Board of Directors increased its previously announced
securities repurchase authority by $25,000,000. The securities covered by the
repurchase program include the Company's common stock, par value $0.01 per share
(the "Common Stock"), its 5 3/8% Convertible Subordinated Notes Due 2006, its
7.2% Senior Notes Due 2009, and the Chiles 10.0% Notes (collectively, the
"SEACOR Securities"). The repurchase of any SEACOR Securities will be effected
from time to time through open market purchases, privately negotiated
transactions, or otherwise, depending on market conditions.
5
<PAGE>
As of September 30, 1998, the Company had approximately $53,000,000
available for the repurchase of SEACOR Securities. During the nine-month period
ending September 30, 1998, the Company acquired or committed to the acquisition
of SEACOR Securities totaling $57,300,000 that primarily included shares of
Common Stock.
6. Earnings Per Share --
<TABLE>
<CAPTION>
For the Three-Month Periods For the Nine-Month Periods
September 30, September 30,
---------------------------------- ---------------------------------
Per Per
Income Shares Share Income Shares Share
------------- ------------ ------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
1998
- ----
Basic Earnings Per Share:
Income Before Extraordinary Item.......$ 26,361,000 13,071,676 $ 2.02 $96,681,000 13,293,876$ 7.27
====== ======
Effect of Dilutive Securities:
Options and Restricted Stock........... - 145,142 - 162,478
Convertible Securities....................1,691,000 2,829,544 5,071,000 2,829,544
----------- ----------- ----------- -----------
Diluted Earnings Per Share:
Income Available to Common Stockholders
Plus Assumed Conversions.............$ 28,052,000 16,046,362 $ 1.75 $101,752,000 16,285,898 $ 6.25
=========== ============ ====== ============ =========== ======
1997
- ----
Basic Earnings Per Share:
Income Before Extraordinary Item.......$ 27,453,000 13,795,146 $ 1.99 $94,639,000 13,837,977 $ 6.84
====== ======
Effect of Dilutive Securities:
Options and Restricted Stock........... - 168,773 - 163,713
Convertible Securities................. 1,711,000 2,844,530 5,080,000 2,844,640
----------- ----------- ----------- -----------
Diluted Earnings Per Share:
Income Available to Common Stockholders
Plus Assumed Conversions.............$ 29,164,000 16,808,449 $ 1.74 $99,719,000 16,846,330 $ 5.92
=========== =========== ====== =========== =========== ======
</TABLE>
7. Long-term Debt --
On April 29, 1998, a majority owned subsidiary of the Company, Chiles,
completed the sale of the Chiles 10.0% Notes. The offering was made to qualified
institutional buyers and to certain persons in offshore transactions exempt from
registration under U.S. federal securities laws. Pursuant to an exchange offer
that was consummated on September 28, 1998, all holders of the Chiles 10% Notes
exchanged such notes for new notes identical in form and terms, that were
registered under the Securities Act of 1933, as amended. Interest on the Chiles
10.0% Notes is payable semiannually on May 1 and November 1 of each year
commencing November 1, 1998. The Chiles 10.0% Notes are not redeemable at the
option of Chiles prior to May 1, 2003, except that until May 1, 2001, Chiles may
redeem, at its option, in the aggregate up to 35% of the original principal
amount of the Chiles 10.0% Notes, on a pro rata basis, with the net proceeds of
one or more Public Equity Offerings (as defined), at a redemption price of 110%
plus accrued interest to the redemption date; provided, however, that at least
$71,500,000 aggregate principal amount of the Chiles 10.0% Notes remains
outstanding after each such redemption. On and after May 1, 2003, the Chiles
10.0% Notes may be redeemed at the option of Chiles, in whole or in part,
initially at 105.0% of the principal amount thereof and declining by 1.67% each
year thereafter to 100.0% of the principal amount on and after May 1, 2006, plus
accrued interest to the date of redemption. The proceeds from the issuance of
the Chiles 10.0% Notes were placed in escrow to be used to (a) partially fund
the construction of Rigs, (b) pay interest on the Chiles 10.0% Notes through the
first two semi-annual interest payment dates, and (c) provide working capital.
Also on April 29, 1998, Chiles executed a commitment letter that
provides for a $25,000,000 revolving credit facility (the "Chiles Bank
Facility") maturing December 31, 2004. Borrowings under the Chiles Bank Facility
may be repaid and reborrowed during the term thereof and bear interest at a per
6
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annum rate equal to LIBOR plus a margin of 1.25%. Subject to satisfaction of
customary conditions precedent, including that there shall have occurred no
material adverse change with respect to Chiles or its business, assets,
properties or prospects since the date of execution of the Chiles Bank Facility,
availability under the Chiles Bank Facility will commence upon delivery of the
first of two Rigs being constructed under contract with Chiles. Until the
commencement of availability, Chiles will be required to pay quarterly in
arrears a commitment fee equal to 0.25% per annum on the undrawn amount of the
Chiles Bank Facility, thereafter increased to 0.50% per annum.
The Chiles Bank Facility will be guaranteed by wholly owned
subsidiaries of Chiles that own the Rigs (the "Rig Owners") and such guarantees
will be secured by first priority mortgages on the Rigs, assignment of earnings
of the Rigs (which may continue to be collected by Chiles unless there occurs an
event of default) and assignments of insurance proceeds.
The Chiles Bank Facility is expected to contain customary affirmative
covenants, representations, and warranties and will be cross-defaulted to the
related promissory notes; provided, however, should there occur an event of
default under the Chiles Bank Facility (other than arising from enforcement
actions undertaken by a holder of other indebtedness of Chiles, enforcement
actions arising from in rem claims against either of the Rigs or bankruptcy
events with respect to Chiles or a Rig Owner), the lenders under the Chiles Bank
Facility have agreed on a one-time basis not to enforce remedies for a period of
60 days during which the Noteholders or the Company may cure such event of
default or prepay all of the indebtedness outstanding under the Chiles Bank
Facility. In addition, the Chiles Bank Facility requires that the fair market
value of the Rigs, as determined by appraisers appointed by the lenders
thereunder, at all times equals or exceeds an amount equal to 130% of
outstanding indebtedness under the Chiles Bank Facility.
The Company has received a commitment from Den norske Bank ASA ("DnB")
for a six-year reducing revolving credit facility (the "New Facility") under
which the Company will be able to borrow up to $100,000,000. The New Facility
when executed will replace an existing reducing revolving credit facility with
DnB (the "DnB Facility") and will contain covenants substantially similar to
those under the existing DnB Facility.
8. Commodity Swaps --
The rates that the Company receives for its fleet of offshore marine
vessels and those that it expects to receive from the Rigs under construction
and, consequently, the earnings and cash flows from such operations, are in
large part dependent upon natural gas prices. In an effort to achieve greater
predictability with respect to such cash flows and earnings and to mitigate the
effects that the volatility of the price of natural gas will have on the
Company's operations, the Company has in the past and may in the future hedge
against the risks associated with movements in natural gas prices through the
use of commodity futures, options, swap agreements and other hedge devices. The
use of these hedging arrangements is intended to limit the downside risk of a
decline in rates for offshore marine vessels and Rigs, which typically follow a
decline in natural gas prices. These arrangements, however, may also mitigate
the favorable effect on earnings and cash flows of increased rates, which
typically follow an increase in natural gas prices.
The Company has entered into commodity price swap agreements pursuant
to which, on each applicable settlement date, the Company receives the amount,
if any, by which the contract price for the notional quantity of natural gas
under contract exceeds the settlement price quoted on the New York Mercantile
Exchange ("NYMEX") or pays the amount, if any, by which the settlement price
7
<PAGE>
quoted on the NYMEX exceeds such contract price. As of September 30, 1998, the
Company was contractually obligated for 12,580 million British thermal units
("MMbtu") of natural gas per day at an average price of $2.26 per MMbtu under
commodity swap transactions that expire at various dates through September 1999.
For accounting purposes, the gains and losses resulting from these agreements
are recorded in the Company's profit and loss accounts monthly; gains and losses
from these transactions have not been material through September, 1998.
9. Vessel Dispositions --
During the three and nine-month periods ended September 30, 1998, the
Company completed the sale of 5 and 31 offshore marine vessels, respectively.
Net pre-tax gains realized from the sale of these vessels and other equipment
totaled $3,756,000 and $34,338,000 in the respective three and nine-month
periods. Eleven of the vessels sold during the year have subsequently been
bareboat chartered-in by the Company under operating leases that range in
duration from 2 to 4 years. Certain of the gains realized from these 11 vessel
sales have been deferred and are being credited to income as reductions in
rental expense over the lease terms.
10. Commitment and Contingency --
As of September 30, 1998, the Company has contracted for the
construction of 19 offshore marine vessels for an approximate aggregate cost of
$159,000,000 of which $55,000,000 has been funded. During the third quarter, the
Company terminated a contract for the construction of one offshore marine
vessel, and contract cancellation fees and other related expenses, totaling
$1,300,000, have been charged to operations. In addition, the Company's majority
owned subsidiary, Chiles, has commitments to construct Rigs for an approximate
aggregate cost of $172,000,000 of which $81,000,000 has been funded. Completion
of these construction projects is expected during the next two years.
The Company and Transportacion Maritima Mexicana S.A. de C.V. ("TMM")
recently terminated an agreement to form two joint venture corporations for the
acquisition of two new offshore marine vessels, both of which were recently
delivered to the Company. TMM, through a subsidiary, would have acquired a
minority equity interest in those joint venture corporations.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When included in this Quarterly Report on Form 10-Q or in documents incorporated
herein by reference, the words "expects," "intends," "anticipates," "believes,"
"estimates," and analogous expressions are intended to identify forward-looking
statements. Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, industry fleet capacity, changes in foreign and
domestic oil and gas exploration and production activity, competition, changes
in foreign political, social and economic conditions, regulatory initiatives and
compliance with governmental regulations, customer preferences and various other
matters, many of which are beyond the Company's control. These forward-looking
statements speak only as of the date of this Quarterly Report on Form 10-Q. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or any change in the Company's expectations with regard thereto or
any change in events, conditions, or circumstances on which any statement is
based.
Offshore Marine Services
The Company provides marine transportation and related services largely
dedicated to supporting offshore oil and gas exploration and production through
the operation, domestically and internationally, of offshore support vessels.
The Company's vessels deliver cargo and personnel to offshore installations, tow
and handle the anchors of drilling rigs and other marine equipment, support
offshore construction and maintenance work, and provide standby safety support.
The Company's vessels also are used for special projects, such as well
stimulation, freight hauling, line handling, seismic data gathering, salvage,
and oil spill emergencies.
Operating revenues are affected primarily by the number of vessels
owned, average rates per day worked, utilization of the Company's fleet and the
number of vessels bareboat and time chartered-in.
Opportunities to buy and sell vessels are actively monitored by the
Company to maximize overall fleet utility and flexibility. Since 1994, certain
acquisition transactions and investments in joint ventures have added over 235
vessels to the Company's fleet. During this same time period, over 90 vessels
were sold of which 19 have been subsequently chartered-in. The Company is also
presently committed to the construction of 19 vessels over the next two years.
9
<PAGE>
Rates per day worked and utilization of the Company's fleet are a
function of demand for and availability of marine vessels that is closely
aligned with the level of exploration and development of offshore areas. The
level of exploration and development of offshore areas is affected by both
short-term and long-term trends in oil and gas prices which, in turn, are
related to the demand for petroleum products and the current availability of oil
and gas resources. The table below sets forth rates per day worked and
utilization data for the Company during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Rates Per Day Worked ($): (1) (2)
Supply and Towing Supply................... 6,296 6,357 6,712 6,161
Anchor Handling Towing Supply.............. 12,724 10,686 12,151 10,068
Crew....................................... 2,726 2,389 2,711 2,206
Standby Safety............................. 6,700 6,290 6,561 5,883
Utility and Line Handling.................. 1,991 1,426 1,908 1,360
Geophysical, Freight and Other............. 7,288 4,411 6,109 4,610
Overall Fleet........................... 4,374 3,698 4,264 3,514
Overall Utilization (%): (1)
Supply and Towing Supply................... 89.4 88.4 90.7 91.5
Anchor Handling Towing Supply.............. 90.3 80.7 87.4 81.9
Crew....................................... 90.7 96.1 95.0 97.0
Standby Safety............................. 100.0 94.6 99.4 92.6
Utility and Line Handling.................. 90.5 98.1 94.1 97.7
Geophysical, Freight and Other............. 99.9 100.0 100.0 97.0
Overall Fleet........................... 90.9 93.7 93.4 94.5
</TABLE>
- -------------------------
(1) Rates per day worked is the ratio of total charter revenue to the total
number of vessel days worked. Rates per day worked and overall utilization
figures exclude owned vessels that are bareboat chartered-out, vessels
owned by corporations that participate in pooling arrangements with the
Company, joint venture vessels and managed/operated vessels and include
vessels bareboat and time chartered-in by the Company.
(2) Certain of the Company's vessels earn revenue in foreign currencies which
have been converted to U.S. dollars for reporting purposes at the weighted
average exchange rates of those foreign currencies for the periods
indicated.
From time-to-time, the Company bareboats or time charters-in vessels. A
bareboat charter is a vessel lease under which the lessee ("charterer") is
responsible for all crewing, insurance, and other operating expenses, as well as
the payment of bareboat charter hire to the providing entity. A time charter is
a lease under which the entity providing the vessel is responsible for all
crewing, insurance, and other operating expenses and the charterer only pays a
time charter hire fee to the providing entity. Operating revenues for vessels
owned and bareboat or time chartered-in are incurred at similar rates. However,
operating expenses associated with vessels bareboat and time chartered-in
include charter hire expenses that, in turn, are included in vessel expenses,
but exclude depreciation expense.
The Company also bareboat charters-out vessels. Operating revenues for
these vessels are lower than for vessels owned and operated or bareboat
chartered-in by the Company because vessel expenses, normally recovered through
charter revenue, are the burden of the charterer. Operating expenses include
depreciation expense if the vessels which are chartered-out are owned. At
September 30, 1998 and 1997, the Company bareboat chartered-out five and seven
vessels, respectively.
10
<PAGE>
The table below sets forth the Company's marine fleet structure at the dates
indicated:
Fleet Structure At September 30,
------------------------
1998 1997
------------------------
Owned...................................... 224 257
Bareboat and Time Chartered-In............. 25 4
Managed.................................... 6 -
Joint Ventured (1)......................... 41 34
Pooled (2)................................. 12 12
------------------------
Overall Fleet.......................... 308 307
========================
- ----------------------------
(1) Through a joint venture between the Company and Transportacion Maritima
Mexicana S.A. de C.V. ("TMM") (the "TMM Joint Venture"), 18 and 12 vessels
were owned or chartered-in during 1998 and 1997, respectively. Eighteen and
22 vessels in 1998 and 1997, respectively, were owned by corporations in
which the Company acquired an equity interest pursuant to a transaction
with Smit Internationale N.V. ("Smit") in December 1996 (the "Smit Joint
Ventures"). During 1998, the Company also acquired equity interest in
several additional corporations that owned 5 vessels.
(2) 1998 and 1997 include five vessels owned by Toisa Ltd. which participate in
a pool with ten Company owned North Sea standby safety vessels.
Additionally, 1998 and 1997 includes seven standby safety vessels in which
the Company shares net operating profits after certain adjustments with
Toisa and owners of the vessels (the "Saint Fleet Pool").
Vessel operating expenses are primarily a function of fleet size and
utilization levels. The most significant vessel operating expense items are
wages paid to marine personnel, maintenance and repairs, and marine insurance.
In addition to variable vessel operating expenses, the offshore marine segment
also incurs fixed charges related to the depreciation of property and equipment.
Depreciation is a significant operating cost, and the amount related to vessels
is the most significant component.
A portion of the Company's revenues and expenses are paid in foreign
currencies. For financial statement reporting purposes, these amounts are
translated into U.S. dollars at the weighted average exchange rates during the
relevant period. The foregoing applies primarily to the Company's North Sea
operations. Overall, the percentage of the Company's offshore marine operating
revenues derived from foreign operations whether in U.S. dollars or foreign
currencies approximated 41% during each of the nine-month periods ended
September 30, 1998 and 1997, respectively.
The Company's foreign offshore marine operations are subject to various
risks inherent in conducting business in foreign nations. These risks include,
among others, political instability, potential vessel seizure, nationalization
of assets, currency restrictions and exchange rate fluctuations, import-export
quotas and other forms of public and governmental regulation, all of which are
beyond the control of the Company. Although, historically, the Company's
operations have not been affected materially by such conditions or events, it is
not possible to predict whether any such conditions or events might develop in
the future. The occurrence of any one or more of such conditions or events could
have a material adverse effect on the Company's financial condition and results
of operations.
Regulatory drydockings, which are a substantial component of marine
maintenance and repair costs, are expensed when incurred. Under applicable
maritime regulations, operating vessels must be drydocked twice in a five-year
period for inspection and routine maintenance and repair. Should the Company
undertake a large number of drydockings in a particular fiscal quarter or put
through survey a disproportionate number of older or larger vessels, which
typically have higher drydocking cost, comparative results may be adversely
affected. For the nine-month periods ended September 30, 1998 and 1997,
drydocking costs totaled $8.7 million and $7.6 million, respectively. During
these periods the Company completed the drydocking of 76 and 79 vessels,
respectively.
11
<PAGE>
Operating results are also affected by the Company's participation in
(i) a joint venture arrangement with Vector Offshore Limited, a U.K.
corporation, which owns a 9% equity interest in the Company's subsidiary (the
"Veesea Joint Venture") that operates 10 standby safety vessels in the North
Sea, (ii) the SEAVEC and Saint Fleet Pools, which coordinate the marketing of 22
standby safety vessels in the North Sea, of which 10 are owned by the Veesea
Joint Venture, (iii) the TMM Joint Venture which operates 18 vessels offshore
Mexico, (iv) the Smit Joint Ventures which operated 18 vessels in the Far East,
Latin America, the Middle East, the Mediterranean and offshore West Africa, and
(v) other joint ventures that operate 5 vessels.
Environmental Services
The Company's environmental services business provides contractual oil
spill response and other related training and consulting services. The Company's
clients include tank vessel owner/operators, refiners and terminal operators,
exploration and production facility operators and pipeline operators. The
Company charges a retainer fee to its customers for ensuring by contract the
availability (at predetermined rates) of its response services and equipment.
Retainer services include employing a staff to supervise response to an oil
spill emergency and maintaining specialized equipment, including marine
equipment, in a ready state for emergency and spill response as contemplated by
response plans filed by the Company's customers in accordance with Oil Pollution
Act of 1990, as amended, and various state regulations. The Company maintains
relationships with numerous environmental sub-contractors to assist with
response operations and equipment maintenance and provide trained personnel for
deploying equipment in a spill response.
Pursuant to retainer agreements entered into with the Company, certain
vessel owners pay in advance to the Company an annual retainer fee based upon
the number and size of vessels in each such owner's fleet and in some
circumstances pay the Company additional fees based upon the level of each
vessel owner's voyage activity in the U.S. The Company recognizes the greater of
revenue earned by voyage activity or the portion of the retainer earned in each
accounting period. Certain vessel and facility owners pay a fixed fee or a fee
based on volume of petroleum product transported for the Company's retainer
services and such fee is recognized ratably throughout the year. The Company's
retainer agreements with vessel owners generally range from one to three years
while retainer arrangements with facility owners are as long as seven years.
Spill response revenue is dependent on the magnitude of any one spill
response and the number of spill responses within a given fiscal period.
Consequently, spill response revenue can vary greatly between comparable periods
and the revenue from any one period is not indicative of a trend or of
anticipated results in future periods. Costs of oil spill response activities
relate primarily to (i) payments to sub-contractors for labor, equipment and
materials, (ii) direct charges to the Company for equipment and materials, (iii)
participation interests of others in gross profits from oil spill response, and
(iv) training and exercises related to spill response preparedness.
The principal components of the Company's environmental service
business operating costs are salaries and related benefits for operating
personnel, payments to sub-contractors, equipment maintenance and depreciation.
These expenses are primarily a function of regulatory requirements and the level
12
<PAGE>
of retainer business. Operating results are also affected by the Company's
participation in Clean Pacific Alliance on the West Coast of the United States.
Drilling Services
Through certain investment transactions in August and December 1997,
the Company acquired a 55.4% membership interest in Chiles Offshore LLC
("Chiles"), a joint venture and strategic alliance created to construct, own,
and operate two premium offshore jackup drilling rigs ("Rigs"). Prior to
December 1997, the Company did not own a controlling interest in Chiles and
therefore accounted for its investment under the equity method. Beginning after
the Company's acquisition of a controlling interest in Chiles, the financial
position and results of operations of Chiles were included in the consolidated
financial statements of the Company. Prior to the second quarter of 1998, the
results of operations for Chiles were not material. At present, Chiles has no
operating assets; the first Rig is expected to enter service in April 1999.
Results of Operations
The following table sets forth operating revenue and operating profit
by business segment for the periods indicated. The offshore marine business
segment's data is provided by geographic area of operation. The environmental
business segment's principal operations are in the United States. The drilling
business segment is currently constructing Rigs in the United States that are
expected to enter operation in 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Operating Revenue --
Marine:
United States...................................... $ 50,746 $ 48,155 $ 162,078 $ 140,336
North Sea.......................................... 9,827 13,291 29,170 44,179
West Africa........................................ 18,159 11,777 47,756 33,125
Other Foreign(1)................................... 15,252 9,376 35,750 19,907
------------- ------------- -------------- -------------
93,984 82,599 274,754 237,547
Environmental ....................................... 6,059 5,660 18,246 15,139
Drilling............................................. - - - -
============= ============= ============== =============
100,043 88,259 293,000 252,686
============= ============= ============== =============
Operating Profit --
Marine:
United States...................................... 18,702 22,211 89,793 102,631
North Sea.......................................... 2,818 9,005 10,371 18,855
West Africa........................................ 6,085 3,000 17,006 11,602
Other Foreign(1)................................... 9,679 5,141 18,094 8,898
------------- ------------- -------------- -------------
37,284 39,357 135,264 141,986
Environmental ....................................... 1,153 448 2,830 1,278
Drilling............................................. (279) - (660) -
------------- ------------- -------------- -------------
38,158 39,805 137,434 143,264
Other income (expense)(2).............................. (9) - 50 (3)
General corporate administration....................... (1,349) (859) (3,801) (3,150)
Net interest (expense) income.......................... 764 (39) 1,880 (1,119)
Minority interest in loss (income) of subsidiaries..... (642) (71) (1,345) 74
Equity in net earnings of 50% or less owned companies.. 2,484 1,880 9,530 4,039
Income tax expense..................................... (13,045) (13,263) (47,067) (48,466)
============= ============= ============== =============
Income before extraordinary item....................... $ 26,361 $ 27,453 $ 96,681 $ 94,639
============= ============= ============== =============
</TABLE>
(1) Other Foreign results include certain of the Company's vessels operating
primarily in the Far East, Latin America, and the Mediterranean.
(2) Excludes gains from equipment sales and certain other expenses that were
reclassified to operating profit of the applicable business segment in
the applicable period.
13
<PAGE>
The marine business segment's operating revenue increased $11.4 million
and $37.2 million in the three and nine-month periods ended September 30, 1998,
respectively, compared to the three and nine-month periods ended September 30,
1997. The increase was due primarily to higher day rates earned by many of the
Company's vessels operating domestically and in other countries and the entry
into domestic service of the Company's newly constructed equipment that included
three premium anchor handling towing supply vessels. The increase was partially
offset by a decline in the Company's revenue earned between comparable periods
due primarily to (i) the sale of vessels that operated in the U.S. Gulf of
Mexico, North Sea, and offshore West Africa, (ii) a decline in supply/towing
supply, crew, and utility vessels' utilization in the U.S. Gulf of Mexico, and
(iii) a decline in supply/towing supply vessels' utilization in the North Sea.
Since September 30, 1997, the Company has relocated vessels from the U.S. Gulf
of Mexico and North Sea to West Africa and Other Foreign regions.
The environmental business segment's operating revenue increased $0.4
million and $3.1 million in the three and nine-month periods ended September 30,
1998 compared to the three and nine-month periods ended September 30, 1997. Oil
spill, retainer, and other service revenues earned in 1998 include the results
of ERST/O'Brien's Inc. ("ERST"), an entity acquired by the Company in October
1997. Excluding the effect of ERST, the environmental business segment's revenue
declined between comparable quarters and nine-month periods. This decrease was
primarily due to a decline in the number and severity of oil spills managed by
the Company and retainer services.
The marine business segment's operating profit decreased $2.1 million
and $6.7 million in the three and nine-month periods ended September 30, 1998,
respectively, compared to the three and nine-month periods ended September 30,
1997. Excluding the effect of gains from the sale of equipment in each period,
operating profit increased $4.5 million and $16.2 million in the three and
nine-month periods ended September 30, 1998, respectively, compared to the three
and nine-month periods ended September 30, 1997. This increase was due to
factors affecting operating revenue as outlined above offset by higher cost of
(i) wages and related benefits, (ii) bareboat and time charters, (iii)
administration (see discussion below), (iv) repairs and maintenance, and (v)
canceling a construction contract. Crew wages and related benefits increased
domestically, in West Africa, and in Other Foreign regions in response to
competition for qualified personnel due to active market conditions. Bareboat
and time charter expenses rose due to vessel sales and bareboat charter-in
transactions domestically and the addition of time chartered-in vessels in West
Africa and Other Foreign regions. Although drydocking expense declined between
comparable quarters, the Company's nine-month costs rose due primarily to an
increase in the number and cost of larger vessels repaired in Other Foreign
regions. Certain fees and expenses were incurred domestically pursuant to the
cancellation of a contract for the construction of a supply vessel.
In the three and nine-month periods ended September 30, 1998, the
Company sold 5 and 31 vessels, respectively, and other equipment resulting in
pre-tax gains of $3.8 million and $34.3 million, respectively. In the comparable
periods of 1997, the Company sold 4 and 26 vessels, respectively, and other
equipment resulting in gains of $10.3 million and $57.3 million, respectively.
Sales during the nine-month period ending September 30, 1998 included: 13
supply/towing supply, 7 anchor handling towing supply, 6 utility, and 5 crew
vessels. Sales during the nine-month period ending September 30, 1997 included:
13 supply/towing supply, 6 utility, 4 anchor handling towing supply, 2 crew, and
1 freight vessel. In both years, the majority of these vessels operated from
U.S. ports. Profits from vessel sales declined in 1998 due primarily to the
14
<PAGE>
deferral of certain gains associated with the sale and subsequent bareboat
charter-in of 11 vessels. These deferred gains are being credited to income as
reductions in rental expense over the applicable charter terms.
Declining oil prices have recently resulted in reduced drilling
activities in the U.S. Gulf of Mexico. As a result, day rates earned by the
Company's supply/towing supply vessels and utilization of its supply/towing
supply, crew, and utility vessels have declined in the U.S. Gulf of Mexico. For
the Company's remaining domestic fleet, day rates have generally remained steady
and utilization has been relatively high. Should the cutback in U.S. Gulf of
Mexico drilling activities continue or increase, the Company's domestic
operating profits may be adversely affected. Declining oil prices have not
materially affected the day rates or utilization of the Company's foreign
offshore marine fleet. Should oil price declines result in reduced foreign
drilling activities, the Company's foreign operating profits may also be
adversely affected.
The environmental business segment's operating profit increased $0.7
million and $1.6 million in the three and nine-month periods ended September 30,
1998 compared to the three and nine-month periods ended September 30, 1997. In
addition to including the results of ERST, operating profits rose due to reduced
operating costs.
The Company's overall administrative and general expenses, relating
primarily to operating activities, increased $3.5 million and $7.0 million in
the three and nine-month periods ended September 30, 1998, respectively,
compared to the three and nine-month periods ended September 30, 1997. The
increase was primarily due to (i) higher marine business segment costs, (ii) the
acquisition of ERST, and (iii) the acquisition of a majority equity interest in
Chiles. During 1998, the marine business segment added staff in support of the
Company's operations in the North Sea, offshore West Africa, and in Other
Foreign regions and experienced increases in wage and benefit costs commensurate
with competition for personnel in the domestic labor market. The marine business
segment also increased its provision for doubtful trade accounts receivable in
the West Africa region. Corporate administrative expenses also rose between
comparable three and nine-month periods due to higher wage and related benefit
and legal costs. Administrative and general expenses primarily include costs
associated with personnel, professional services, travel, communications,
facility rental and maintenance, general insurance, and franchise taxes.
The Company's overall depreciation and amortization expense, relating
primarily to operating activities, did not change significantly between the
comparable three and nine-month periods ended September 30, 1998 and 1997. A
decline in depreciation expense due to offshore marine vessel sales was offset
primarily by higher costs associated with depreciating certain capitalized
additional purchase consideration attributable to the acquisition of offshore
marine vessels from SMIT International Overseas B.V. ("SMIT Overseas") pursuant
to a December 19, 1996 transaction (the "SMIT Additional Consideration
Transaction") that was paid during the first quarter of 1998 and newly
constructed offshore marine vessels.
Net interest income rose $0.8 million and $3.0 million in the three and
nine-month periods ended September 30, 1998 compared to the three and nine-month
periods ended September 30, 1997. Interest income rose between comparable
periods due primarily to greater invested cash balances that primarily resulted
from (i) the sale in September 1997 of $150.0 million aggregate principal amount
of the Company's 7.2% Senior Notes Due 2009 (the "7.2% Notes"), (ii) the sale of
offshore marine vessels, (iii) the sale in April 1998 of $110.0 million
aggregate principal amount of Chiles' 10.0% Senior Notes Due 2008 (the "Chiles
10.0% Notes"), and (iv) the continuing strong results of operations. Interest
expense also rose between comparable periods. An increase in the Company's
15
<PAGE>
interest expense due to the (i) sale of the 7.2% Notes, (ii) sale of the Chiles
10.0% Notes, and (iii) amortization of debt discount recognized on indebtedness
issued pursuant to the SMIT Additional Consideration Transaction was partially
offset by an increase in capitalized interest costs associated with the offshore
marine vessel and premium offshore jackup drilling rig construction programs.
Minority interest in income of the Company's subsidiaries increased
$0.6 million and $1.4 million in the three and nine-month periods ended
September 30, 1998, respectively, compared to the three and nine-month periods
ended September 30, 1997. The increase was due primarily to the commencement of
operations in June 1997 of a marine business segment subsidiary that owns a
recently constructed anchor handling towing supply vessel and the acquisition in
December 1997 of a majority ownership interest in Chiles.
Equity earnings from 50% or less owned companies increased $0.6 million
and $5.5 million in the three and nine-month periods ended September 30, 1998
compared to the three and nine-month periods ended September 30, 1997. The
increase in equity earnings between comparable quarters primarily related to
improved operating results of the Company's Mexican Joint Venture. Equity
earnings between comparable nine-month periods also rose due primarily to the
improved operating results of both the Smit Joint Ventures (that included an
approximate $1.4 million gain from a vessel sale) and Mexican Joint Venture. The
improved operating results of comparable periods were partially offset by an
increase in a bad debt provision for trade accounts receivable in Mexico.
Liquidity and Capital Resources
The Company's ongoing liquidity requirements arise primarily from its
need to service debt, fund working capital, acquire, construct, or improve
equipment and make other investments. Management believes that cash flow from
operations will provide sufficient working capital to fund the Company's
operating needs. The Company may, from time to time, issue shares of its common
stock, debt or a combination thereof, or sell vessels to finance the acquisition
of equipment and businesses or make improvements to existing equipment.
The Company's cash flow levels and operating revenues are determined
primarily by the size of the Company's fleet, vessels' rates per day worked,
overall vessel utilization, and the level of spill response activity. Factors
relating to the marine service business are affected directly by the volatility
of oil and gas prices, the level of offshore production and exploration activity
and other factors beyond the Company's control.
During the nine-month period ended September 30, 1998, the Company had
a net use of cash in investing activities resulting primarily from (i)
expenditures associated with the construction of offshore marine vessels and
Rigs, (ii) purchases of marketable securities, (iii) additional funds set aside
into restricted cash accounts to be used toward the purchase of offshore marine
vessels and Rigs, and (iv) the satisfaction of a cash obligation pursuant to the
SMIT Additional Consideration Transaction. The use of cash was offset
principally by cash generated from the sale of offshore marine vessels and
certain marketable securities.
Also during the nine-month period ended September 30, 1998, cash
generated from financing activities resulted primarily from the sale of the
Chiles 10.0% Notes. This increase was primarily offset by the repurchase of
1,096,200 shares of the Company's common stock, 712,000 of which were
repurchased from a subsidiary of SMIT Overseas on March 3, 1998.
16
<PAGE>
Under the terms of a revolving credit facility (the "DnB Facility")
with Den norske Bank ASA ("DnB"), the Company may borrow up to $93.75 million.
At September 30, 1998, the Company had $93.65 million available for future
borrowings. The DnB Facility requires the Company, on a consolidated basis, to
maintain a minimum ratio of indebtedness to vessel value, as defined, a minimum
cash and cash equivalent level, a specified interest coverage ratio, specified
debt to capitalization ratios and a minimum net worth. The DnB Facility limits
the amount of secured indebtedness which the Company and its subsidiaries may
incur, provides for a negative pledge with respect to the Company's and its
subsidiaries' assets, and restricts the payment of dividends. The Company has
received a commitment from DnB for a six-year reducing revolving credit facility
(the "New Facility") under which the Company will be able to borrow up to $100
million. The New Facility when executed will replace the existing DnB Facility
and will contain covenants substantially similar to those under the existing DnB
Facility.
A majority owned subsidiary of the Company, Chiles, completed the sale
of the Chiles 10.0% Notes on April 29, 1998. The offering was made to qualified
institutional buyers and to certain persons in offshore transactions exempt from
registration under U.S. federal securities laws. Pursuant to an exchange offer
that was consummated on September 28, 1998, all holders of the Chiles 10% Notes
exchanged such notes for new notes identical in form and terms, that were
registered under the Securities Act of 1933, as amended. Interest on the Chiles
10.0% Notes is payable semiannually on May 1 and November 1 of each year
commencing November 1, 1998. The Chiles 10.0% Notes are not redeemable at the
option of Chiles prior to May 1, 2003, except that until May 1, 2001, Chiles may
redeem, at its option, in the aggregate up to 35% of the original principal
amount of the Chiles 10.0% Notes, on a pro rata basis, with the net proceeds of
one or more Public Equity Offerings (as defined), at a redemption price of 110%
plus accrued interest to the redemption date; provided, however, that at least
$71.5 million aggregate principal amount of the Chiles 10.0% Notes remains
outstanding after each such redemption. On and after May 1, 2003, the Chiles
10.0% Notes may be redeemed at the option of Chiles, in whole or in part,
initially at 105.0% of the principal amount thereof and declining by 1.67% each
year thereafter to 100.0% of the principal amount on and after May 1, 2006, plus
accrued interest to the date of redemption.
On April 29, 1998, Chiles also executed a commitment letter with
MeesPierson Capital Corporation and Nederlandse Scheepshypotheek Bank N.V. that
provides for a $25.0 million revolving credit facility (the "Chiles Bank
Facility") maturing December 31, 2004. Availability under the Chiles Bank
Facility will commence upon first delivery of one of the two Rigs being
constructed by Chiles that is expected to occur during the second quarter of
1999.
At September 30, 1998, the Company had restricted cash of approximately
$175.4 million, and of such balance $92.1 million and $83.3 million are intended
for use in defraying the costs of constructing offshore marine vessels for the
Company and Rigs for Chiles, respectively. At September 30, 1998, the Company
has funded approximately $41.2 million in offshore marine vessel construction
costs from unrestricted cash balances, and subject to the Maritime
Administration's approval, the Company expects such amount to be replenished
from construction reserve fund restricted cash accounts, see discussion below.
Proceeds from the sale of certain offshore marine vessels have been
deposited into escrow and construction reserve fund bank accounts for purposes
of acquiring newly constructed U.S.-flag vessels and qualifying for the
Company's temporary deferral of taxable gains realized from the sale of the
vessels. Escrow accounts were established in 1997 and 1998 pursuant to certain
17
<PAGE>
exchange and escrow agreements and restrict the use of funds deposited therein
for a period of six months. Should replacement offshore marine vessels not be
delivered prior to expiration of the applicable six-month escrow period, funds
then remaining in the escrow accounts will be released to the Company for
general use. In 1998, the Company also established, pursuant to Section 511 of
the Merchant Marine Act, 1936, as amended, joint depository construction reserve
fund accounts with the Maritime Administration. From date of deposit,
withdrawals from these accounts are subject to prior written approval of the
Maritime Administration, and funds must be committed for expenditure within
three years or they will be released for the Company's general use.
Net proceeds from the sale of the Chiles 10.0% Notes were deposited
into escrow accounts in accordance with certain escrow agreements between Chiles
and U.S. Bank Trust National Association, as Escrow Agent. These funds may be
used to (i) partially fund the construction of Rigs, (ii) pay interest on the
Chiles 10.0% Notes through the first two semi-annual interest payment dates, and
(iii) provide working capital. Upon receipt by the Escrow Agent of an Officer's
Certificate of Chiles that Chiles has made the final installment of the Rigs'
purchase price in accordance with the related construction contracts, any funds
remaining in escrow will be released by the Escrow Agent to Chiles.
The rates that the Company receives for its fleet of offshore marine
vessels and those that it expects to receive from the Rigs under construction
and, consequently, the earnings and cash flows from such operations, are in
large part dependent upon natural gas prices. In an effort to achieve greater
predictability with respect to such cash flows and earnings and to mitigate the
effects that the volatility of the price of natural gas will have on the
Company's operations, the Company has in the past and may in the future hedge
against the risks associated with movements in natural gas prices through the
use of commodity futures, options and swap agreements and other hedge devices.
The use of these hedging arrangements is intended to limit the downside risk of
a decline in rates for offshore marine vessels and Rigs, which typically follow
a decline in natural gas prices. These arrangements, however, may also mitigate
the favorable effect on earnings and cash flows of increased rates, which
typically follow an increase in natural gas prices.
The Company has entered into commodity price swap agreements pursuant
to which, on each applicable settlement dates, the Company receives the amount,
if any, by which the contract price for the notional quantity of natural gas
under contract exceeds the settlement price quoted on the New York Mercantile
Exchange ("NYMEX") or pays the amount, if any, by which the settlement price
quoted on the NYMEX exceeds such contract price. As of September 30, 1998, the
Company was contractually obligated for 12,580 million British thermal units
("MMbtu") of natural gas per day at an average price of $2.26 per MMbtu under
commodity swap transactions that expire at various dates through September 1999.
For accounting purposes, the gains and losses resulting from these arrangements
are recorded in the Company's profit and loss accounts monthly; gains and losses
from these transactions have not been material through September, 1998.
18
<PAGE>
SEACOR's Board of Directors has increased its previously announced
securities repurchase authority by $25.0 million. With this increase, the
Company has approximately $53.0 million available for such purposes. The
securities covered by the repurchase program include the Company's common stock,
par value $0.01 per share, its 5 3/8% Convertible Subordinated Notes due 2006,
its 7.2% Notes, and the Chiles 10.0% Notes. The repurchase of any such
securities will be effected from time to time through open market purchases,
privately negotiated transactions, or otherwise, depending on market conditions
Capital Expenditures
The Company may make selective acquisitions of marine vessels or fleets
of marine vessels and oil spill response equipment or expand the scope and
nature of its environmental services. The Company also may upgrade or enhance
its marine vessels or construct marine vessels to remain competitive in the
marketplace. Management anticipates that such expenditures would be funded
through a combination of existing cash balances, cash flow provided by
operations, sale of existing equipment and, potentially, through the issuance of
additional indebtedness or shares of its common stock.
As of September 30, 1998, the Company has contracted for the
construction of 19 offshore marine vessels for an approximate aggregate cost of
$159.0 million of which $55.0 million has been funded. During the third quarter,
the Company terminated a contract for the construction of one offshore marine
vessel, and contract cancellation fees and other related expenses, totaling $1.3
million, have been charged to operations. In addition, the Company's majority
owned subsidiary, Chiles, has commitments to construct Rigs for an approximate
aggregate cost of $172.0 million of which $81.0 million has been funded.
Completion of these construction projects is expected during the next two years.
The Company and Transportacion Maritima Mexicana S.A. de C.V. ("TMM")
recently terminated an agreement to form two joint venture corporations for the
acquisition of two new offshore marine vessels, both of which were recently
delivered to the Company. TMM, through a subsidiary, would have acquired a
minority equity interest in those joint venture corporations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. The Statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair market value. SFAS 133 requires that changes in the derivative's fair
market value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. SFAS 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement SFAS 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS 133 must be applied to derivative instruments and certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantially modified after December 31, 1997. The Company has not yet
quantified the impact of adopting SFAS 133 on its financial statements and has
not determined the timing or method of its adoption of SFAS 133.
19
<PAGE>
Year 2000
The Year 2000 ("Y2K") issue is the result of computerized systems being
written to store and process the year portion of dates using two digits rather
than four and that date sensitive systems may fail or produce erroneous results
on or before January 1, 2000 because the year 2000 will be interpreted
incorrectly. The Company has been pursuing a strategy to ensure that all of its
significant computer systems will be able to process dates from and after
January 1, 2000 without critical failure. Computerized systems are integral to
the Company's operations, particularly for accounting and office product
software applications used throughout the its many offices and, to a lesser
extent, for communication, navigational and other systems aboard certain of the
Company's vessels.
Most of the Company's computerized accounting and office product
software applications are licensed through commercial third party software
developers with whom the Company has maintenance contracts. Where necessary,
these software developers have already modified and released newer versions of
their product that are Y2K compliant. The Company has implemented or is in the
process of testing and evaluating these newer Y2K compliant versions. In
connection with the acquisition of accounting applications in prior years
unconnected with its Y2K planning, the Company has already upgraded materially
all of its computer hardware to systems that are Y2K compliant. The Company
expects to complete the implementation of both Y2K compliant accounting and
office product software and related hardware during the second quarter of 1999.
Substantially all Y2K compliant software upgrades have been provided under the
terms of the Company's maintenance contracts without additional cost and
upgrades required for related hardware are not expected to be significant.
The Company is currently in the process of upgrading existing software
applications and replacing certain computer hardware equipment to be year 2000
compliant. At present, the Company is still evaluating all areas of its
information technology infrastructure and anticipates that this assessment will
be completed during the first quarter of 1999. The Company does not expect that
the costs to modify its information technology infrastructure to be Y2K
compliant will be material to its financial condition or results of operations.
The Company is in the process of inventorying and preparing a risk
analysis of the date- aware systems that are used aboard its vessels with
completion expected during the fourth quarter of 1998. While the status of this
inventory and analysis does not yet permit management to forecast costs of
making all such systems Y2K compliant, estimates associated therewith are
expected to be complete in the first quarter of 1999.
The Company's computer systems are not widely integrated with the
systems of its suppliers and customers. A potential Y2K risk attributable to
third parties would be from a temporary disruption in certain materials and
services provided by third parties. Major suppliers have been contacted
regarding Y2K compliance, and recently, the Company added Y2K compliance
requirements to all of its purchasing contracts. An assessment of Y2K
third-party risk is under way and scheduled for completion during the fourth
quarter of 1998.
At present, the Company has not developed a contingency plan to address
all areas of risk associated with Y2K compliance but expects to develop a plan,
if needed, beginning in the first quarter of 1999. The Company is committed to
ensuring that it is fully Y2K ready and believes that, when completed, its plans
will adequately address the above-mentioned risks.
20
<PAGE>
Based upon the Y2K risk assessment work performed thus far, the Company
believes the most likely Y2K-related failures would be related to a disruption
of materials and services provided by third parties. Although the Company does
not expect that such disruptions would have a material adverse effect on the
Company's financial condition or results of operations, there can be no
assurance that the Company's belief is correct or that its risk assessments are,
in fact, accurate. The Company believes that the upgrades to its hardware and
software systems, in conjunction with any contingency plans developed prior to
January 1, 2000, will permit a transition through that date without significant
interruption in its business or operations, however, such assessment is
predicated on the timely completion of the above referenced software
modifications. Should these modifications and upgrades be delayed or the
Company's contingency plans fail, the Y2K issue could have a material impact on
the Company's financial condition or results of operations. In addition, there
can be no assurance that the Company's vendors, suppliers and other parties with
whom the Company does business will successfully resolve their Y2K problems. In
the event of any such failures or other Y2K failures, there can be no assurance
that, despite the Company's contingency plans, there will not be a material
adverse effect on the Company's financial condition or results of operations.
European Economic and Monetary Union
The Company conducts business in the Netherlands and France, which have
agreed to join the European Economic and Monetary Union (the "EMU"), member
nations of which, among other things, have agreed to adopt a single currency
called the Euro. On January 1, 1999, a three-year transition period for the Euro
will begin and the conversion rates between the Euro and national currencies
will be fixed. Business enterprises have the option of switching to the single
currency at any time prior to January 1, 2002. The software upgrades of the
Company's principal financial accounting system necessary to allow for the
conduct of business in Euros and national currencies during the transition
period and entirely in Euros thereafter have been provided under the terms of a
maintenance contract with its software provider without additional cost. There
may also be other costs relating to the conversion to the Euro that the Company
is unable to accurately estimate or segregate, but the Company does not
anticipate that such costs will be material. The Company does not anticipate
that the conversion to the Euro will have a material impact on its future
financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
21
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits:
27.1 Financial Data Schedule.
B. Reports on Form 8-K:
None.
22
<PAGE>
SIGNATURES
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.
SEACOR SMIT Inc.
(Registrant)
DATE: NOVEMBER 13, 1998 By: /s/ Charles Fabrikant
------------------------------------------
Charles Fabrikant, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: NOVEMBER 13, 1998 By: /s/ Randall Blank
------------------------------------------
Randall Blank, Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
23
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 115,129
<SECURITIES> 0
<RECEIVABLES> 88,945
<ALLOWANCES> 2,151
<INVENTORY> 1,655
<CURRENT-ASSETS> 205,592
<PP&E> 676,174
<DEPRECIATION> 105,307
<TOTAL-ASSETS> 1,219,833
<CURRENT-LIABILITIES> 48,704
<BONDS> 484,321
0
0
<COMMON> 141
<OTHER-SE> 522,713
<TOTAL-LIABILITY-AND-EQUITY> 1,219,833
<SALES> 0
<TOTAL-REVENUES> 293,000
<CGS> 0
<TOTAL-COSTS> 2,702
<OTHER-EXPENSES> 137,411
<LOSS-PROVISION> 590
<INTEREST-EXPENSE> 16,802
<INCOME-PRETAX> 135,563
<INCOME-TAX> 47,067
<INCOME-CONTINUING> 88,496
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,681
<EPS-PRIMARY> 7.27
<EPS-DILUTED> 6.25
</TABLE>
