Item 1. Business
General Information
We are an integrated provider of subsea services, subsea trenching and protection services and towing and supply vessels to oil and natural gas exploration and production companies that operate in major offshore producing regions around the world. We were formed as a Delaware holding company in 1993. Historically, we provided only towing and supply services. We acquired Active Subsea ASA (“Active Subsea”) and DeepOcean ASA (“DeepOcean”), including its subsidiary CTC Marine Projects Ltd. (“CTC Marine”), during 2007 and 2008, respectively, for aggregate consideration of approximately $1.1 billion (approximately $900 million in cash and $200 million of assumed debt). As a result of these acquisitions, our subsea operations, including technologically advanced and often proprietary services performed in demanding subsea environments, represented approximately 80% of our revenues in 2009. We operate primarily in international markets, including the North Sea, West Africa, Mexico, Brazil, and the Asia Pacific Region. We provide all of our services through our direct and indirect subsidiaries in each of the markets in which we operate and utilize three operating segments: (i) subsea services; (ii) subsea trenching and protection; and (iii) towing and supply. We operate internationally through a number of foreign subsidiaries, including DeepOcean AS, through which we manage our subsea services segment; CTC Marine, through which we manage our subsea trenching and protection segment; and Trico Shipping AS, which owns our vessels based primarily in the North Sea. These three subsidiaries and their operations comprise the Trico Supply Group. The remainder of our operations are remotely operated through subsidiaries in the U.S., Mexico, Brazil, West Africa, and the Asia Pacific Region. These subsidiaries and their operations largely comprise Trico Other (“Trico Other”).
In addition to our international subsidiaries, the Company owns 30 offshore supply vessels (“OSVs”), seven subsea platform supply vessels (“SPSVs”), five anchor handling, towing and supply vessels (“AHTSs”), five platform supply vessels (“PSVs”), three multi-purpose service vessels (“MSVs”), one multi-purpose platform supply vessel (“MPSV”) and one Crew / Line Handler. These vessels are primarily deployed in the North Sea, West Africa, Mexico, Brazil, and the Asia Pacific Region. Our principal customers are major international oil and natural gas exploration, development and production companies, national oil companies (“NOCs”) and telecommunications companies.
Operating Segments
Subsea Services
Our 2008 acquisition of DeepOcean added to our operations a substantial presence in subsea services, which, together with our subsea trenching and protection segment, currently forms the primary focus of our business operations. Today we perform our subsea services under the brand name DeepOcean and primarily through our DeepOcean subsidiaries, which are all part of the Trico Supply Group. Our subsea services management team is seasoned and offers specialized service offerings with a fleet of modern subsea capable equipment and vessels. The subsea services segment is highly dependent on DeepOcean’s engineering and technical knowledge.
Subsea services span the life-cycle of a well which typically lasts 20 to 25 years, consisting of one to two years of exploration, three to five years of construction and installation, 15 years of production, and one to three years of decommissioning and abandonment. Subsea services are required at the beginning of the development of an offshore field. The initial survey of the seabed floor includes a topographical map and/or a soil sampling to determine what preparation work is necessary for the installation of subsea infrastructure. Construction and installation of subsea infrastructure often requires the use of work-class and observation-class remotely-operated vehicles (“ROVs”). Once subsea infrastructure is in-service, we perform mandated inspection, maintenance and repair (“IMR”) services. After a well is depleted, production infrastructure from the platform to the subsea wellhead must be disassembled and returned to shore, and the seabed must be returned to its original condition. Trico provides state-of-the-art vessels, engineering solutions and equipment to complete all of these services throughout the life-cycle of the well, including the initial installation of subsea trees (subsea wellheads) and other subsea infrastructure.
Customers depend on us for our expertise and track record of reliable service in harsh conditions, such as those in the North Sea. For example, we have multiple long term IMR contracts ranging up to five years in duration with Statoil, which has one of the largest installed bases of subsea wellheads in the world and has high technology specifications for its service providers.
We provide our subsea services from six vessels owned by subsidiaries belonging to the Trico Supply Group (Trico Supply AS, and its subsidiaries, including Trico Shipping AS, DeepOcean AS and CTC Marine), four vessels owned by subsidiaries belonging to Trico Other, and five vessels leased under multi-year contracts. We are also constructing three new MPSVs, the Trico Star, Trico Service, and Trico Sea, which are expected to be delivered in the first and fourth quarters of 2010 and the first quarter of 2011, respectively, and will be assets of the Trico Supply Group. In addition, we operate a state-of-the-art ROV fleet and survey and module handling systems that are installed on the multi-purpose vessels. The multi-purpose vessels can also carry saturation diving systems.
Our subsea services business operates primarily in international markets, with operations in the North Sea, West Africa, the Mediterranean, Mexico, the Asia Pacific Region and Brazil. We are pursuing additional subsea service awards in Brazil, West Africa and the United States. We continually evaluate our vessel composition and subsea services activity level in each of these regions as well as other market areas for possible future strategic development.
Subsea Trenching and Protection
Our 2008 acquisition of CTC Marine added to our operations a substantial presence in subsea trenching and protection. Today we provide our subsea trenching and protection services under the brand name CTC Marine and primarily through CTC Marine, our subsidiary, which is part of the Trico Supply Group. Subsea trenching and protection services include the utilization of state-of-the-art subsea trenching assets and engineering solutions for the burial of subsea transmission systems, including pipelines, flowlines and cables, and the installation of subsea infrastructure and subsea flexible products, including umbilicals and integrated service umbilicals (“ISUs”). Our customers are comprised of offshore oil and gas exploration and production companies, including large engineering, procurement, installation and construction (“EPIC”) contractors who do not have our specialized capabilities, as well as power (electricity transmission systems) and telecommunications (intercontinental and regional systems) companies. We entered into joint projects with the subsea services segment for decommissioning services in 2008 and 2009 and expect to continue joint projects in 2010. Like our subsea services segment, we have a seasoned subsea trenching and protection management team that offers specialized service offerings with a fleet of modern subsea capable equipment and vessels. Generally, our subsea trenching and protection projects are between one to twelve months in duration.
Our subsea trenching and protection business offers customers a comprehensive solution to a subsea burial project. Our solution includes providing customers with geotechnical analysis and engineering solutions including burial techniques and equipment specification, and performing the burial of the subsea transmission systems or infrastructure.
We own and operate a sophisticated fleet of subsea trenching equipment including the RT-1, the largest rock trencher in the world, and the UT-1, the most powerful jetting trencher in the world. Our fleet of ploughs, jetters, and tractors is capable of performing subsea burials in a wide variety of subsea soil and rock conditions and many of our assets offer highly efficient, simultaneous digging, burial and covering of subsea transmission systems. Given that our focus is on designing engineering solutions, operating our specialized equipment, and continuous project improvements, we charter all of the vessels from which our trenching services are performed, including five vessels leased under multi-year agreements. All of the vessels we currently utilize are leased under time charter agreements.
The assets we use to provide our subsea trenching and protection services consist of ploughs, jetters and tractors and are described below.
Ploughs. We make use of two principal types of ploughing assets: 1) pipeline and backfill ploughs and 2) cable and ISU ploughs. Pipeline and backfill ploughs are the latest generation pipeline ploughs, utilized to bury large diameter rigid pipelines, with an 8.2 feet trench depth capability. Cable and ISU ploughs are used to bury flexible products such as flowlines, cables and umbilicals, with trench depths up to 9.8 feet.
Jetters. We work with two types of jetters: 1) heavy jetters and 2) light jetters. Heavy jetters are powerful jetting ROVs, delivering 2 mega-watts of power, enabling the burial of flexible pipes, umbilicals, and cables up to trench depths of 8.2 feet. Light jetters are tracked or free swimming jetting ROVs, delivering up to 300 kilowatts of power which enables cable burial and maintenance operations up to trench depths of 4.9 feet.
Tractors. The tractors we use can be characterized as rock tractors and cutters. Rock tractors are powerful track-based trenchers with a 2.35 megawatts power base specifically developed for trenching large diameter pipelines in hard ground regions. Cutters are track-based trenchers with 520 kilowatts of power used primarily to lay rigid pipeline and flowlines in hard soil conditions.
The subsea trenching and protection and subsea services segments are seasonally driven as calmer sea conditions are required to deploy subsea trenching assets to complete these highly specialized projects, which tends to result in stronger operating results in the second and third quarters of the year. Our historical seasonality is expected to be lessened with the introduction of vessels into the fleet that are designed for operations in severe weather conditions and the continued expansion of our global presence in areas outside of the North Sea (predominantly in Australia, Brazil, the Asia Pacific Region, and the Mediterranean), providing an opportunity for improved operating results outside of our traditional peak seasons.
Towing and Supply
We provide marine support services to the oil and gas industry through the use of our diversified fleet of vessels. Our services include: the transportation of drilling materials, supplies and crews to drilling rigs and other offshore facilities; towing support for drilling rigs and equipment; and support for the construction, installation, repair and maintenance of offshore facilities. Since 2004, we have successfully increased the international diversification of our fleet and reduced our towing and supply revenues from our United States operations from 31% in 2004 to 5% in 2009. We no longer have any marine support vessels operating in the United States but continue to focus our efforts on securing subsea services projects in this region which would require the use of such support vessels to assist in the provision of our services.
Our marine support services are primarily provided through PSVs, AHTSs, OSVs, and Crew / Line Handlers. We currently operate our North Sea towing and supply vessels through the Trico Supply Group.
Trico Shipping AS, a subsidiary within the Trico Supply Group, owns six towing and supply vessels (excluding the Northern Corona, which is held for sale): two AHTSs and four PSVs. All of these vessels are North Sea class vessels, which means they can operate in the harsh environments of the North Sea, and therefore are capable of operating in most offshore markets around the world.
Through our subsidiaries outside of the Trico Supply Group, we own 30 towing and supply vessels (excluding four OSVs, which are held for sale): 26 OSVs, two AHTSs, one PSV and one Crew / Line Handler. These vessels are primarily deployed in the Asia Pacific Region, West Africa, and Mexico.
We operate our towing and supply business primarily in international markets, with operations in the North Sea, West Africa, the Asia Pacific Region, Mexico, and Brazil. We continually evaluate our vessel composition and towing and supply activity level in each of these regions as well as other market areas for possible future strategic development.
Operating Segment Summary
The following chart summarizes our three business segments.
(1)
Excludes the vessels, Stones River, which is held for sale, and VOS Satisfaction, for which the lease was terminated after December 31, 2009. Of the ten owned vessels, one is held by Eastern Marine Services Limited (“EMSL”), our joint venture with China Oilfield Services Limited (“COSL”). We hold a 49% equity interest in EMSL.
(2)
Of these vessels, 12 are held by EMSL. Excludes the vessels, Northern Corona, Pecos River, Kings River, Wolf River, and Southern River, which are held for sale, and three leased vessels.
For a discussion of our results of operations by segment and geography, please see Note 18 (Segment and Geographic Information) to our consolidated financial statements included herein.
Operations by Region
North Sea
The North Sea market area consists of offshore Norway, Great Britain, Denmark, the Netherlands, Germany, Ireland, the area west of the Shetland Islands and the Barents Sea. The North Sea has strict vessel requirements which prevent many vessels from migrating to the area. The operating environment in the North Sea is demanding due to a strict regulatory environment, demanding engineering requirements, harsh weather, erratic sea conditions and water depth. Contracts in the region for subsea services, subsea trenching and protection services and towing and supply services are of both short-term and long-term duration, and can have terms up to five years in length.
Independent oil companies, national oil companies (“NOCs”), and major international oil companies have historically predominated in drilling and production activities in the North Sea; however, over the past few years, an increasing number of new, smaller entrants have purchased existing properties from the traditional participants or acquired leases, leading to an increase in subsea completions, drilling and construction. We believe decommissioning activity in the North Sea market will increase as several of the North Sea fields have been in existence for over 20 years.
As of December 31, 2009, we had five MSVs actively marketed in the North Sea, of which three are under term contracts with a NOC for IMR and survey work projects. We also had three large capacity PSVs, three large AHTSs, two SPSVs and two trenching vessels actively marketed in the North Sea.
West Africa
West Africa has become an area of increasing importance for new offshore exploration for the major international oil companies and large independents due to the discovery and development of large oil fields in the region. Several operators have scheduled additional large scale offshore and subsea projects, and we believe that demand for our services in this market will grow.
We operate from several ports in West Africa that are managed from our office in Lagos, Nigeria. In West Africa, we currently have vessels operating in Nigeria and Cameroon. Several operators have scheduled large scale offshore projects, and we believe that vessel demand in this market will continue to grow. As of December 31, 2009, we had one crew vessel, one SPSV and nine OSVs actively marketed in West Africa. We are actively marketing our subsea vessels for operation in Angola, Congo, Cameroon, Gabon, Ghana and Nigeria through our towing and supply operations in the region.
Mediterranean
This market consists of the Mediterranean Sea, the Black Sea and portions of the Middle East region. The fields and pipelines are being operated by both national and major international oil companies. Historically we have primarily targeted pipeline inspection, equipment installations and survey projects in this area as the region has a significant amount of existing offshore infrastructure. The Mediterranean subsea market is dominated by term contracts in relation to the regular inspection campaigns. We see an increasing demand for these services as well as an increase in demand for IMR services. As of December 31, 2009, we had one trenching vessel chartered in the Arabian Sea.
Mexico
The Mexican constitution requires that Mexico operates all hydrocarbon resource activity in the country through its national oil company, Pemex. The Mexican market is characterized primarily by term work with most oil fields located in shallow water. We principally serve the construction and maintenance market with services to Pemex through its first tier contractors. We are seeking to increase our services directly to Pemex and to expand our range of services as the Mexican oil and gas industry moves into deeper waters and attempts to recover from the rate of production decline over the last few years. We believe that vessel demand in this market will continue to grow in shallow waters and also in relation to ROV services as the field developments move into deeper waters.
We currently conduct operations from two ports in Mexico that are managed from our office in Ciudad del Carmen. As of December 31, 2009, we had a total of ten actively marketed towing and supply vessels in Mexico, including eight supply vessels and two crew vessels. We also had a total of two MSVs and two SPSVs marketed in Mexico, of which two are on long-term contracts.
Brazil
Offshore exploration and production activity in Brazil is concentrated in the deepwater Campos Basin, located 60 to 100 miles from the Brazilian coast. As of December 31, 2009, we had one MSV, one SPSV, one Line Handler and one PSV on long-term contracts to Petrobras, the state-owned oil company and the largest operator in Brazil. The vessels are being operated from our office in Macae. Significant deepwater field developments are being planned in Brazil over the coming years, and we expect the market demand for subsea services and towing and supply vessels to increase.
Asia Pacific Region
This region consists of the coastal regions of China and countries geographically south of China including Australia, Indonesia, Thailand, Vietnam, Malaysia and Singapore. The Asia Pacific Region market has experienced rapid economic growth and in the long-term is projected to continue to increase its energy consumption. At the current time, a majority of our activities in the area are concentrated in the offshore area of China including the Bohai Bay, Nanhai East and Nanhai West. During 2009, we also completed contracts in Vietnam, Thailand, Singapore, Indonesia, Australia and Malaysia.
In 2006, we entered into an agreement with COSL to form EMSL. EMSL’s commercial office is located in Shanghai, China. EMSL provides marine transportation services for offshore oil and gas exploration, production and related construction and pipeline projects in China, Australia, and Southeast Asia. We contributed 14 vessels to EMSL of which five were mobilized during 2007 with an additional five vessels in 2008 and one additional vessel in 2009. One of the remaining three vessels was sold. Of the remaining two vessels, one vessel is operated by us under a management agreement with EMSL and one is mobilizing in the first quarter of 2010 to Southeast Asia. Expansion into this geographic region is an integral part of our continued international growth strategy.
We hold a 49% equity interest in EMSL, a Hong Kong limited liability company in which COSL holds a 51% equity interest. EMSL provides towing and supply vessels to the oil and gas industry in China and other countries within Southeast Asia and Australia. Our interest in EMSL is held through a subsidiary of Trico Marine Assets Inc. As of December 31, 2009, we had nine OSVs, one AHTS, one PSV, one MPSV, one MSV and two trenching vessels in the Asia Pacific Region.
For more details on the risks of operating internationally, refer to Item 1A.
Item 1A. Risk Factors
All phases of our operations are subject to a number of uncertainties, risks and other influences, many of which are beyond our ability to control or predict. Any one of such influences, or a combination, could materially affect the results of our operations and the accuracy of forward-looking statements made by us. Some important risk factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements includes the following:
Risks Relating to our Businesses
We have a significant amount of debt and our business is highly cyclical in nature due to our dependency on the levels of offshore oil and gas drilling and subsea construction activity. Our forecasted cash and available credit capacity are not expected to be sufficient (i) to meet our commitments as they come due over the next twelve months and (ii) remain in compliance with our debt covenants unless we are able to successfully sell additional assets, access cash in certain of our subsidiaries, minimize our capital expenditures, effectively manage our working capital, obtain waivers or amendments from our lenders and improve our cash flows from operations.
In depressed markets, our ability to pay debt service and other contractual obligations will depend upon us improving our cash flow generation, which in turn will be affected by prevailing economic and industry conditions and financial, business and other factors, many of which are beyond our control. If we have difficulty providing for debt service or other contractual obligations in the future, we will be forced to take actions such as reducing or delaying capital expenditures, reducing or delaying non-regulatory maintenance expenditures and other operating and administrative costs, selling assets, refinancing or reorganizing our debt or other obligations and seeking additional equity capital, or any combination of the above. Reducing or delaying capital expenditures or selling assets would delay or reduce future cash flows. We may not be able to undertake any of these actions on satisfactory terms, or at all.
The failure to successfully complete construction or conversion of our vessels on schedule, on budget, or at all without a corresponding reduction in capital expenditures, or to successfully utilize such vessels and the other vessels in our fleet at profitable levels could adversely affect our financial position, results of operations and cash flows.
We have three MPSVs currently under construction. Our fleet upgrade program may result in additional vessel construction projects and/or the conversion or retrofitting of some of our existing vessels. Our construction and conversion projects may be delayed, incur cost overruns or fail to be completed as a result of factors inherent in any large construction project, including, among other things, shortages of equipment, lack of shipyard availability, shipyard bankruptcy, unforeseen engineering problems, work stoppages, weather interference, unanticipated cost increases, inability to obtain necessary certifications and approvals and shortages of materials or skilled labor.
Shortages of raw materials and components resulting in significant delays for vessels under construction, conversion, or retrofit could adversely affect our financial position, results of operations and cash flows if such delays exceed the liquidated damages provisions in our contracts or any vessel delivery insurance we may have. In addition, customer demand for vessels currently under construction or conversion may not be as strong as we presently anticipate, and our inability to obtain contracts on anticipated terms or at all may have an adverse effect on our revenues and profitability.
We may not be able to continue as a going concern.
Absent completion of certain actions that are not solely within our control, we do not expect our forecasted cash and credit availability to be sufficient to meet our commitments as they come due over the next twelve months. As a result, there is substantial doubt we can continue as a going concern. The accompanying financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might result from the uncertainty associated with our ability to meet our obligations as they come due. In order to continue as a going concern, we will need to (i) sell additional assets, (ii) access cash in certain of our subsidiaries, (iii) minimize our capital expenditures, (iv) obtain waivers or amendments from our lenders, (v) effectively manage our working capital and (vi) improve our cash flows from operations. Completion of the foregoing actions is not solely within our control and we may be unable to successfully complete one or all of these actions. Our consolidated financial statements have been prepared on the basis of a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business. If we become unable to continue as a going concern, we will need to liquidate our assets and we might receive significantly less than the values at which they are carried on our consolidated financial statements. See Note 2 (Risks, Uncertainties, and Going Concern) to our consolidated financial statements included herein.
Our failure to retain key employees and attract additional qualified personnel could prevent us from implementing our business strategy or operating our business effectively.
We depend on the technical and other experience of management and employees in our subsea services and subsea trenching and protection business segments to fully implement our strategy. Although we have employment agreements in place with certain of our current executive officers, we may not be able to retain the services of these individuals and the loss of their services, in the absence of adequate replacements, would harm our ability to implement our business strategy and operate our business effectively.
Increased competitive forces in the subsea services and subsea trenching and protection services markets could adversely affect our business.
The markets for subsea services and subsea trenching and protection services are highly competitive. While price is the main competitive factor, the ability to acquire specialized vessels and equipment, to attract and retain skilled personnel, and to demonstrate a good safety record are also important. Several of our competitors in both the subsea services and subsea trenching and protection services market have greater financial and other resources and more experience operating in international areas than we have. We believe that other vessel owners are beginning to offer subsea services and subsea trenching and protection services to their customers. If other companies acquire vessels or equipment, or begin to offer integrated subsea services to customers, levels of competition may increase and our business could be adversely affected. In addition, any reduction in rates offered by our competitors or growing disparity in fuel efficiency between our fleet and those of our competitors may cause us to reduce our rates and may negatively impact the utilization of our vessels, which will negatively impact our results of operations and cash flows.
Time chartering of our subsea services and subsea trenching and protection vessels require us to make payments absent revenue generation which could adversely affect our operations.
Many of our subsea services and subsea trenching and protection vessels are under time charter contracts. Should we not have work for such vessels, we are still required to make time charter payments and such payments absent revenue generation could have an adverse affect on our financial position, results of operations and cash flows.
Our towing and supply fleet includes many older vessels that may require increased levels of maintenance and capital expenditures to be maintained in good operating condition, are less efficient than newer vessels, and may be subject to a higher likelihood of mechanical failure, an inability to economically return to service or requirement to be scrapped. If we are unable to manage the aging of our fleet efficiently and find profitable market opportunities for our vessels, our results will deteriorate and our financial position and cash flows could be materially adversely affected.
As of December 31, 2009, the average age of our towing and supply vessels was approximately 21 years. The average age of many of our competitors’ fleets is substantially younger than ours. Our older towing and supply fleet is generally less technologically advanced than many newer fleets, is not capable of serving all markets, may require additional maintenance and capital expenditures to be kept in good operating condition and as a consequence may be subject to longer or more frequent periods of unavailability. Prolonged periods of unavailability of one or more of our older vessels could have a material adverse effect on our financial position, results of operations and cash flows. In addition, we expect that our fleet is less fuel efficient than our competitors’ newer fleets, putting us at a competitive disadvantage because our customers are responsible for the fuel costs they incur. Our ability to continue to upgrade our fleet depends on our ability to commission the construction of new vessels as well as the availability in the market of newer, more technologically advanced vessels with the capabilities to meet our customers’ increasing requirements. If we are unable to manage the aging of our fleet efficiently and find profitable market opportunities for our vessels, our results will deteriorate and our financial position and cash flows could be materially adversely affected.
Increases in size, quality and quantity of the offshore vessel fleet in areas where we operate could increase competition for charters and lower day rates and/or utilization, which would adversely affect our revenues and profitability.
Charter rates for marine support vessels in our market areas depend on the supply of and demand for vessels. Excess vessel capacity in the offshore support vessel industry is primarily the result of either construction of new vessels or the mobilization of existing vessels into fully saturated markets along with lower demand. There are a large number of vessels currently under construction and our competitors have new vessels to be delivered over the next few years. In recent years, we have been subject to increased competition from both new vessel construction, particularly in the North Sea and the Gulf of Mexico, as well as vessels mobilizing into regions in which we operate. Any increase in the supply of offshore supply vessels, whether through new construction, refurbishment or conversion of vessels from other uses, remobilization or changes in the law or its application, could increase competition for charters and lower day rates and/or utilization, which would adversely affect our financial position, results of operations and cash flows.
If we are unable to maintain our Jones Act status, we could be disadvantaged in the U.S. subsea market, which would adversely affect our future revenues and profitability.
We operate in a number of markets around the world, and our plans contemplate entering certain subsea services markets, including in the United States. Coastwise maritime trade in the U.S. is subject to U.S. laws commonly referred collectively to as the
Jones Act, and together with the Shipping Act, 1916, the Shipping Acts. In the third quarter of 2009, we exited this segment of business in the United States. However, we expect decommissioning and deep water projects in the Gulf of Mexico to comprise an important part of our subsea strategy, which may require continued compliance with the Jones Act. We were recently awarded our first subsea services contract in the U.S. The Shipping Acts require that vessels engaged in the U.S. coastwise trade and other services generally be owned by U.S. citizens and built in the U.S. For a corporation engaged in the U.S. coastwise trade to be deemed a U.S. citizen: (i) the corporation must be organized under the laws of the U.S. or of a state, territory or possession thereof, (ii) each of the president or other chief executive officer and the chairman of the board of directors of such corporation must be a U.S. citizen, (iii) no more than 25% of the directors of such corporation necessary to the transaction of business can be non-U.S. citizens and (iv) at least 75% of the interest in such corporation must be owned by U.S. “citizens” (as defined in the Shipping Acts). The Jones Act also treats as a prohibited “controlling interest” any (i) contract or understanding by which more than 25% of the voting power in the corporation may be exercised, directly or indirectly, on behalf of a non-U.S. citizen and (ii) the existence of any other means by which control of more than 25% of any interest in the corporation is given to or permitted to be exercised by a non-U.S. citizen. Our charter contains provisions that limit non-U.S. citizen ownership of our stock and the status of certain officers and directors in the same manner as the Jones Act and authorizes us and our board of directors to take actions designed to effectuate the purpose of permitting us to remain eligible to engage in the U.S. coastwise maritime trade. Should we fail to comply with the U.S. citizenship requirements of the Shipping Acts, we would be prohibited from operating our vessels in the U.S. coastwise trade during the period of such non-compliance, and under certain circumstances would be deemed to have undertaken an unapproved foreign transfer, resulting in severe penalties, including permanent loss of U.S. coast wide trading rights for our U.S.-flag vessels, fines or forfeiture of the vessels. If we are unable to maintain our Jones Act status, it could be harder for us to sustain operations in the U.S. subsea market, which would adversely affect our future revenues and profitability. In the absence of continuing to qualify to conduct business under the Jones Act, we believe that we could become less competitive when competing against foreign providers of subsea services who regularly provide such services in the United States.
If a stockholder conducts another proxy contest in connection with a meeting of our stockholders, it could be costly and disruptive.
Kistefos AS, a holder of approximately 18.1% of our outstanding common stock, made nine proposals to be voted on by our stockholders at our 2009 annual meeting of stockholders, including proposals to elect two of Kistefos’ employees to our board of directors. Our board opposed eight of Kistefos’s proposals. In connection with the meeting, Kistefos also filed a lawsuit against us regarding the legality of one of Kistefos’s proposals. As a result of these events, the costs associated with our 2009 annual meeting were significantly higher than normal. Our expenses related to the solicitation (in excess of those normally spent for an annual meeting with an uncontested director election and excluding salaries and wages of our regular employees and officers) were approximately $1.6 million during the year ending December 31, 2009. We believe Kistefos still wishes to have two of its employees elected to our Board. If Kistefos or other stockholder(s) conduct a proxy contest or submit proposals to be considered at a meeting of stockholders and we oppose such actions, we may incur significant expenses above the amounts normally spent for an annual meeting. Any such contest could also be a distraction to our management who may be required to devote a significant portion of their time to the contest instead of the operation of our business.
Our U.S. employees are covered by federal laws that may subject us to job-related claims in addition to those provided by state laws.
Some of our employees are covered by provisions of the Jones Act, the Death on the High Seas Act, and general maritime law. These laws preempt state workers’ compensation laws and permit these employees and their representatives to pursue actions against employers for job-related incidents in federal courts. Because we are not generally protected by the limits imposed by state workers’ compensation statutes, we may have greater exposure for any claims made by these employees or their representatives.
Unionization efforts could increase our costs, limit our flexibility or increase the risk of a work stoppage.
On December 31, 2009, approximately 40.6% of our employees worldwide were working under collective bargaining agreements, all of whom were working in Norway, the United Kingdom or Brazil, where such agreements are required to exist. Efforts have been made from time to time to unionize other portions of our workforce. Any such unionization could increase our costs, limit our flexibility or increase the risk of a work stoppage.
The removal or reduction of the reimbursement of labor costs by the Norwegian government may adversely affect our costs to operate our vessels in the North Sea.
During July 2003, the Norwegian government began partially reimbursing us for labor costs associated with the operation of our vessels. These reimbursements totaled $5.7 million in 2009. If this benefit is reduced or removed entirely, our direct operating costs will increase substantially and negatively impact our profitability.
Certain management decisions needed to successfully operate EMSL, our 49% partnership, are subject to the majority owner’s approval. The inability of our management representatives to reach a consensus with the majority owner may negatively affect our results of operations.
We hold a 49% equity interest in EMSL and COSL holds the remaining equity interest of 51%. Although our management representatives from time to time may want to explore business opportunities and enter into material agreements which they believe are beneficial for EMSL, all decisions with respect to any material actions on the part of EMSL also require the approval of the representatives of COSL. A failure of COSL and our management representatives to reach a consensus on managing EMSL could materially hinder our ability to successfully operate the partnership.
Our business plan involves establishing joint ventures with partners in targeted foreign markets. We are subject to the Foreign Corrupt Practices Act, or FCPA. Our business may suffer because our efforts to comply with U.S. laws could restrict our ability to do business in foreign markets relative to our competitors who are not subject to U.S. law and a determination that we violated the FCPA, including actions taken by our foreign agents or joint venture partners, may adversely affect our business and operations.
As we are a Delaware corporation, we are subject to the anti-bribery restrictions of the FCPA, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We may be subject to competitive disadvantages to the extent that our competitors are able to secure business, licenses or other preferential treatment by making payments to government officials and others in positions of influence or using other methods that United States law and regulations prohibit us from using.
In order to effectively compete in foreign jurisdictions, such as Nigeria and Mexico, we utilize local agents and seek to establish joint ventures with local operator or strategic partners. Although we have procedures and controls in place to monitor internal and external compliance, if we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others, including actions taken by our agents and our strategic or local partners, even though our agents and partners are not subject to the FCPA), we could suffer from civil and criminal penalties or other sanctions, which could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our marine operations are seasonal and depend, in part, on weather conditions. As a result, our results of operations will vary throughout the year.
In the North Sea, adverse weather conditions during the winter months impact offshore development operations. Activity in the Gulf of Mexico may also be subject to stoppages for hurricanes, particularly during the period ranging from June to November. Accordingly, the results of any one quarter are not necessarily indicative of annual results or continuing trends.
If the operating results of our subsea services or subsea trenching and protection segments is adversely affected, an impairment of intangibles could result in a write down.
We have certain intangible assets consisting of trade names and customer relationships which we acquired in connection with the DeepOcean acquisition in 2008 with carrying values of $31.3 million and $85.2 million, respectively. Based on factors and circumstances impacting our subsea services and subsea trenching and protection segments and the business climate in which we operate, we may determine that it is necessary to perform an impairment assessment prior to the fourth quarter of 2010 to re-evaluate the carrying value of our unamortized trade name intangible assets, and we may need to perform an assessment of the carrying value of our amortized intangible customer relationship assets. If changes in the industry, market conditions, or government regulation negatively impact our subsea services or subsea trenching and protection segments, resulting in lower operating income, if assets are damaged, or if any circumstance occurs which results in the fair value of any segment declining below its carrying value, our intangible assets would be impaired.
Our operations are subject to federal, state, local and other laws and regulations that could require us to make substantial expenditures.
We must comply with federal, state and local regulations, as well as certain international conventions, the rules and regulations of certain private industry organizations and agencies, and laws and regulations in jurisdictions in which our vessels operate and are registered. These regulations govern, among other things, worker health and safety and the manning, construction, and operation of vessels. These organizations establish safety criteria and are authorized to investigate vessel accidents and recommend approved safety standards. If we fail to comply with the requirements of any of these laws or the rules or regulations of these agencies and organizations, we could be subject to substantial administrative, civil and criminal penalties, the imposition of remedial obligations, and the issuance of injunctive relief. Norwegian authorities have announced they are considering modifying safety regulations applicable to our fleet in the North Sea. If these modifications are implemented, we may incur substantial compliance costs.
Our operations also are subject to federal, state and local laws and regulations that control the discharge of pollutants into the environment and that otherwise relate to environmental protection. While our insurance policies provide coverage for accidental occurrence of seepage and pollution or clean up and containment of the foregoing, pollution and similar environmental risks generally are not fully insurable. We may incur substantial costs in complying with such laws and regulations, and noncompliance can subject us to substantial liabilities. The laws and regulations applicable to us and our operations may change. If we violate any such laws or regulations, this could result in significant liability to us. In addition, any amendment to such laws or regulations that mandates more
stringent compliance standards would likely cause an increase in our vessel operating expenses.
The loss of a key customer could have an adverse impact on our financial results.
Our operations, particularly in the North Sea, China, West Africa, Mexico, and Brazil, depend on the continuing business of a limited number of key customers. Two of our customers, Statoil and Blue Whale Offshore Engineering Technology Company, or Blue Whale, each represented more than 10% of our consolidated revenues during 2009. Our results of operations, cash flows and financial position could be materially adversely affected if any of our key customers in these regions terminates its contracts with us, fails to renew our existing contracts, or refuses to award new contracts to us.
The early termination of contracts on our vessels could have an adverse effect on our operations.
Some long-term contracts for our vessels contain early termination options in favor of the customer. While some of these contracts have early termination penalties or other provisions designed to discourage the customers from exercising such options, we cannot assure you that our customers would not choose to exercise their termination rights in spite of such penalties. Additionally, customers without contractual termination rights may choose to terminate their contacts despite the threat of litigation from us. Until replacement of such business with other customers, any termination of long-term contracts could temporarily disrupt our business or otherwise adversely affect our financial position, results of operations and cash flows. We might not be able to replace such business on economically equivalent terms.
Certain deferred taxes could be accelerated and the effective tax rate on certain Norwegian guarantors’ income could be increased if Trico Shipping and certain of the Norwegian guarantors failed to comply with the Norwegian tonnage tax regime.
Some of the Norwegian entities within the Trico Supply Group have untaxed shipping income under the Norwegian tonnage tax regime. To comply with the Norwegian tonnage tax regime, certain conditions must be fulfilled and the failure to comply with any such condition, even if the failure is unintentional, may lead to adverse tax consequences. In order to comply with tonnage tax requirements, a Norwegian tonnage tax entity cannot own shares in a non-publicly listed entity except for other Norwegian tonnage tax entities. Subsequent to the acquisition of DeepOcean ASA by Trico, Trico completed a corporate restructuring to comply with this and other requirements. Trico had until January 31, 2009 to transfer its ownership interest in DeepOcean AS and the non-tonnage tax entities. Failure to comply with this deadline would have resulted in the income of Trico Shipping AS being subject to a 28% tax rate and an exit tax liability, currently payable over a ten-year period, becoming due and payable immediately. In connection with the corporate restructuring completed in January 2009, the ownership of DeepOcean AS and its non-tonnage tax related subsidiaries were transferred to Trico Supply AS and the tonnage tax related entities owned by DeepOcean AS became subsidiaries of Trico Shipping AS.
If it is determined by the assessment authorities that this restructuring, including the transfer of ownership interest in DeepOcean AS, did not comply with the requirements of the tonnage tax regime, or if some other failure to comply with the provisions is found to have occurred, all of the accumulated untaxed income of Trico Shipping AS would be subject to a 28% tax rate. Furthermore, if other failures to comply were found to have occurred with respect to Trico Shipping or the Norwegian guarantors within the Norwegian tonnage tax regime, the income of the company in question would be subject to a 28% tax rate in the year of such failure to comply and each year thereafter if not cured within the required time frame or the company in question does not reinstate its tonnage eligibility in future years. Any such outcome could adversely affect our financial position. See Note 19 to our consolidated financial statements.
Our refund guarantees may not be valid or cover all of our losses in the event of a termination of our newbuild vessel construction contracts.
Trico Subsea AS currently has seven contracts for construction of vessels at the Tebma shipyard in India. Currently Trico Subsea AS has agreed with the shipyard that it is entitled to suspend construction of four of these vessels (Hulls No. 120, 121, 128 and 129), while three vessels (Hulls No. 117, 118 and 119) will be completed. Under the construction contracts, Trico Subsea AS is entitled to receive refunds of certain of the sums paid to Tebma under certain provisions of the construction contracts (including interest at a rate of 6% per annum from the date of payment to the date of refund) if the contracts are lawfully terminated by Trico Subsea AS. Trico Subsea AS has refund guarantees covering approximately $21.0 million with respect to the four suspended vessels, a portion of which covers certain equipment paid for by Trico Subsea AS. With regard to the three vessels being completed Trico Subsea AS has refund guarantees covering approximately $29.3 million. If the shipyard is not able to satisfy its obligation to refund the sums paid for any of the seven vessels, Trico Subsea AS will be entitled to draw on the refund guarantees, or in the case of the suspended vessels, access a
combination of the refund guarantees and the equipment paid for by Trico Subsea AS. In the case of the suspended vessels, there can be no assurance that the total value of the refund guarantees and the value of the equipment totals $21.0 million. In the case of the three vessels to be completed, we do not have refund guarantees for approximately $10 million of payments related to certain vessel modifications.
The refund guarantees have expiration dates and need to be periodically renewed. To date, we have been able to obtain renewals of these refund guarantees. However, there can be no assurance that the current refund guarantees will be renewed by the existing financial institutions or, if not renewed, replacement refund guarantees can be obtained.
We are exposed to the credit risks of our key customers and certain other third parties, and nonpayment by our customers could adversely affect our financial position, results of operations and cash flows.
We are subject to risks of loss resulting from nonpayment or nonperformance by our customers. Any material nonpayment or nonperformance by our key customers and certain other third parties or the failure by the shipyard to build or timely deliver the MPSVs currently on order, could adversely affect our financial position, results of operations and cash flows, which in turn could reduce our ability to pay interest on, or the principal of, our credit facilities. If any of our key customers defaults on its obligations to us, our financial results could be adversely affected. Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory risks.
Our inability to recruit, retain and train crew members may affect our ability to offer services, reduce operational efficiency and increase our labor rates.
The delivery of all of our new vessels will require the addition of a significant number of new crew members. Operating these vessels will also require us to increase the level of training for certain crew members. In addition, in each of the markets in which we operate, we are vulnerable to crew member departures. Our inability to retain crew members or recruit and train new crew members in a timely manner may adversely affect our ability to provide certain services, reduce our operational efficiency and increase our crew labor rates. Should we experience a significant number of crew member departures and a resulting increase in our labor rates and interruptions in our operations, our results of operations would be negatively affected.
Our operations are subject to operating hazards and unforeseen interruptions for which we may not be adequately insured.
Marine support vessels are subject to operating risks such as catastrophic marine disasters, natural disasters (including hurricanes), adverse weather conditions, mechanical failure, crew negligence, collisions, oil and hazardous substance spills and navigation errors. Some of these operating risks may increase as we provide subsea services jointly with our partners in the subsea market, and our vessels serve as platforms for subsea work. The occurrence of any of these events may result in damage to, or loss of, our vessels and our vessels’ tow or cargo or other property and may result in injury to passengers and personnel, including employees of our partners in the subsea market. Such occurrences may also result in a significant increase in operating costs or liability to third parties. We maintain insurance coverage against certain of these risks, which our management considers to be customary in the industry. We can make no assurances that we can renew our existing insurance coverage at commercially reasonable rates or that such coverage will be adequate to cover future claims that may arise. In addition, concerns about terrorist attacks, as well as other factors, have caused significant increases in the cost of our insurance coverage.
The cost and availability of drydock services may impede our ability to return vessels to the market in a timely manner.
From time to time our vessels undergo routine drydock inspection, maintenance and repair as required under U.S. Coast Guard regulations and in order to maintain American Bureau of Shipping, Det Norske Veritas or other vessel certifications for our vessels. If the cost to drydock, repair, or maintain our vessels should continue to increase, or if the availability of shipyards to perform such services should decline, then our ability to return vessels to work at sustained day rates, or at all, could be materially affected, and our financial position, results of operations and cash flows may be adversely impacted.
We may face material tax consequences or assessments in countries in which we operate. If we are required to pay material tax assessments, our financial position, results of operations and cash flows may be materially adversely affected.
We conduct business globally and, as a result, one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities worldwide, including such major jurisdictions as Norway, Mexico, Brazil, Nigeria, Angola, Hong Kong, China, and the United States.
During the past three years, our Brazilian subsidiary received non-income related tax assessments from Brazilian state tax authorities totaling approximately 56.8 million Brazilian Reais ($32.8 million at December 31, 2009) in the aggregate and may receive additional assessments in the future. The tax assessments are based on the premise that certain services provided in Brazilian federal waters are considered taxable as transportation services. If the courts in these jurisdictions uphold the assessments, it would have a material adverse effect on our net income, liquidity and operating results. We do not believe any liability in connection with these matters is probable and, accordingly, have not accrued for these assessments or any potential interest charges for the potential liabilities.
Currency fluctuations and economic and political developments could adversely affect our financial position, results of operations and cash flows.
Due to the size of our international operations, a significant percentage of our business is conducted in currencies other than the U.S. Dollar. We primarily are exposed to fluctuations in the foreign currency exchange rates of the Norwegian Kroner, the British Pound, the Euro, the Brazilian Real, and the Nigerian Naira. Changes in the value of these currencies relative to the U.S. Dollar could result in translation adjustments reflected as a component of other comprehensive income or losses in shareholders’ equity on our balance sheet. To the extent we owe obligations to our creditors in foreign currencies, exchange rate fluctuations may magnify such risks. In addition, translation gains and losses could contribute to fluctuations or movements in our income. The majority of the debt at Trico Supply is denominated in U.S. Dollars while a significant portion of our operating revenues and expenses are denominated in other currencies. The strengthening of the U.S. Dollar against these currencies could have a negative impact of our ability to service this U.S. Dollar denominated debt.
We are also exposed to risks involving political and economic developments, royalty and tax increases, changes in laws or policies affecting our operating activities, and changes in the policies of the United States affecting trade, taxation, and investment in other countries.
The rights of Trico Subsea AS under the vessel construction contracts for the Trico Star, Trico Service and Trico Sea with the Tebma Shipyard in India may be impaired if it is determined that there was not a proper novation of such contracts.
Construction contracts for the Trico Star, Trico Service and Trico Sea were transferred from the previous owner to Trico Subsea AS (formerly, Active Subsea AS) under Norwegian laws. The construction contracts, however, are governed by English law; consequently, an arbitration tribunal could determine that there was not a proper novation of the construction contracts under English law.
Operating internationally subjects us to significant risks inherent in operating in foreign countries.
Our international operations are subject to a number of risks inherent to any business operating in foreign countries, and especially those with emerging markets, such as West Africa. As we continue to increase our presence in such countries, our operations will encounter the following risks, among others:
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increasing trends in certain countries that favor or require that vessels operating in its waters carry the flag of that country, be owned by a local entity and /or be manufactured in that country. This may negatively impact our ability to win and maintain contracts in these countries;
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government instability, which may cause investment in capital projects by our potential customers to be withdrawn or delayed, reducing or eliminating the viability of some markets for our services;
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potential vessel seizure or confiscation, or the expropriation, nationalization or detention of assets;
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imposition of additional withholding taxes or other tax on our foreign income, imposition of tariffs or adoption of other restrictions on foreign trade or investment, including currency exchange controls and currency repatriation limitations;
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exchange rate fluctuations, which may reduce the purchasing power of local currencies and cause our costs to exceed our budget, reducing our operating margin in the affected country;
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difficulty in collecting accounts receivable;
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civil uprisings, riots, and war, which may make it unsafe to continue operations, adversely affect both budgets and schedules, and expose us to losses;
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availability of suitable personnel and equipment, which can be affected by government policy, or changes in policy, which limit the importation of qualified crew members or specialized equipment in areas where local resources are insufficient;
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decrees, laws, regulations, interpretations and court decisions under legal systems, which are not always fully developed and which may be retroactively applied and cause us to incur unanticipated and/or unrecoverable costs as well as delays which may result in real or opportunity costs; and
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acts or piracy or terrorism, including kidnappings of our crew members or onshore personnel.
We cannot predict the nature and the likelihood of any such events. However, if any of these or other similar events should occur, it could have a material adverse effect on our financial position, results of operations and cash flows.
Risks Relating to our Capital Structure
To meet our commitments and remain in compliance with debt covenants over the next twelve months requires us to generate additional cash flows by accomplishing certain items that are not within our sole control.
We believe that our forecasted cash and available credit capacity are not expected to be sufficient to meet our commitments as they come due over the next twelve months and that we will not be able to remain in compliance with our debt covenants unless we are able to successfully sell additional assets, access cash in certain of our subsidiaries, minimize our capital expenditures, obtain waivers or amendments from our lenders, effectively manage our working capital and improve our cash flows from operations.
We may not be able to obtain funding or obtain funding on acceptable terms because of the deterioration of the credit and capital markets. We may also not be able to seek amendments or waivers on existing credit covenants on terms that are favorable to us. This may hinder or prevent us from meeting our future capital needs.
Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. The debt and equity capital markets have been exceedingly distressed. The re-pricing of credit risk and the current weak economic conditions have made, and will likely continue to make, it difficult to obtain funding on acceptable terms, if at all. In particular, the cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets has diminished significantly. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity at all or on terms similar to our current debt and reduced and, in some cases, ceased to provide funding to borrowers.
If our business does not generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs, then, as a consequence of these changes in the credit markets, we cannot assure you that future borrowings will be available to us under our credit facilities in sufficient amounts, either because our lending counterparties may be unwilling or unable to meet their funding obligations or because our borrowing base may decrease as a result of lower asset valuations, operating difficulties, lending requirements or regulations, or for any other reason. Moreover, even if lenders and institutional investors are willing and able to provide adequate funding, interest rates may rise in the future and therefore increase the cost of borrowing we incur on any of our floating rate debt. Finally, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures, seek additional equity financing or seek third-party financing to satisfy such obligations. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. There can be no assurance that our business, liquidity, financial condition, or results of operations will not be materially and adversely impacted in the future as a result of the existing or future credit market conditions.
Our holding company structure and the terms of the Senior Secured Notes may adversely affect our ability to meet our obligations.
Substantially all of our consolidated assets are held by our subsidiaries and a majority of our profits are generated by Trico Supply and its subsidiaries. Accordingly, our ability to meet our obligations depends on the results of operations of our subsidiaries and upon
the ability of such subsidiaries to provide us with cash, whether in the form of management fees, dividends, loans or otherwise, and to pay amounts due on our obligations. Dividends, loans and other distributions to us from such subsidiaries may be subject to contractual and other restrictions. For example, under the terms of the Senior Secured Notes, our business has been effectively split into two groups: (i) Trico Supply, where substantially all of our subsea services business and all of our subsea protection business resides along with our North Sea towing and supply business and (ii) Trico Other, whose business is comprised primarily of our non North Sea towing and supply businesses. Trico Other has the obligation, among other things, to pay the debt service related to the 8.125% Debentures and the 3% Debentures and to pay the majority of corporate related expenses while Trico Supply has the obligation to make debt service payments related to the Senior Secured Notes. Under the terms of the Senior Secured Notes, the ability of Trico Supply to provide cash and other funding on an ongoing basis to Trico Other is limited by restrictions on Trico Supply’s ability to pay dividends and interest on intercompany debt unless certain financial measures are met. Because of these restrictions, our ability to meet our obligations at each of Trico Supply and Trico Other depends on the results of operations of our businesses included within these groups.
The ability of each of Trico Supply, Trico Other, and the Company overall to obtain minimum levels of operating cash flows and liquidity to fund their operations, meet their debt service requirements, and remain in compliance with their debt covenants, is dependent on its ability to accomplish the following: (i) secure profitable contracts through a balance of spot exposure and term contracts, (ii) achieve certain levels of vessel and service spread utilization, (iii) deploy its vessels to the most profitable markets, and (iv) invest in a technologically advanced subsea fleet. The forecasted cash flows and liquidity for each of Trico Supply, Trico Other, and the Company are dependent on each meeting certain assumptions regarding fleet utilization, average day rates, operating and general and administrative expenses, and in the case of Trico Supply, new vessel deliveries, which could prove to be inaccurate. A material deviation from one or more of these estimates or assumptions by either Trico Supply or Trico Other could result in a violation of one or more of our contractual covenants which could result in all or a portion of our outstanding debt becoming immediately due and payable.
We have a substantial amount of indebtedness which may adversely affect our cash flow and our ability to operate our business, to comply with debt covenants and to make payments on our indebtedness.
We are highly leveraged. As of December 31, 2009, our total indebtedness was $733.9 million, which represents approximately 88.1% of our capitalization. Our interest expense in 2009 was $50.1 million and will increase in 2010 as certain lower rate bank debt has been replaced with the Senior Secured Notes that have a higher coupon rate. Our substantial level of indebtedness may adversely affect our flexibility in responding to adverse changes in economic, business or market conditions, which could have a material adverse effect on our results of operations.
The substantial level of our indebtedness may have important consequences, including the following:
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making it more difficult to pay interest and satisfy debt obligations;
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requiring dedication of a substantial portion of cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash for working capital, capital expenditures and other general corporate purposes;
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limiting flexibility in planning for, or responding to, adverse changes in the business and the industry in which we operate;
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increasing vulnerability to general economic downturns and adverse developments in business;
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placing us at a competitive disadvantage compared to any less leveraged competitors; and
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limiting our ability to raise additional financing on satisfactory terms or at all.
In addition, substantially all of the material assets of the Trico Supply Group secure the Senior Secured Notes, the guarantees and the Trico Shipping Working Capital Facility (“Working Capital Facility”), which may limit the ability of the Trico Supply Group to generate liquidity by selling assets.
In the past two years, we have amended several of our credit facilities and received waivers prior to the completion of some of the amendments in order to comply with the covenants contained in our credit facilities. In December 2009, we amended certain financial covenants related to our $50 million U.S. Revolving Credit Facility (“U.S. Credit Facility”). The calculation of the minimum net worth covenant was amended to permanently eliminate the effect of the impairment charge taken at December 31, 2009 related to the cancellation of certain shipbuilding contracts. The consolidated leverage ratio covenant was also amended for each of the quarters
ending between December 31, 2009 and September 30, 2010 to increase the maximum allowable level. In conjunction with these changes, the availability under the facility was reduced to $15 million until our consolidated leverage ratio levels are less than those in effect prior to this amendment. Continued compliance with our debt covenants is dependent upon us obtaining a minimum level of EBITDA, as defined in our credit agreement, and liquidity for the remainder of 2010. Our forecasted EBITDA contains certain estimates and assumptions regarding new vessel deliveries, fleet utilization, average day rates, and operating and general and administrative expenses, which could prove to be inaccurate. A deviation from one or more of these estimates or assumptions could result in a violation of one or more of our covenants. If a violation were to occur, there are no assurances that we could obtain additional waivers or amendments to these covenants. Failure to obtain the necessary waivers or amendments would result in all or a portion of our debt becoming immediately due and payable. Currently, we do not expect to be in compliance with the consolidated leverage ratio covenant as of each of March 31, 2010, June 30, 2010, and September 30, 2010 in the U.S. Credit Facility which will require us to obtain waivers or amendments from our lender. There can be no assurance that these additional waivers or amendments can be obtained or that additional amendments and waivers will not be required. Due to this expectation that we will need further amendments and / or waivers and the fact that we have required previous amendments to remain in compliance with certain debt covenants, the U.S. Credit Facility and the Working Capital Facility, because of the cross default provision, have been classified as current as of December 31, 2009.
Holders of our 8.125% Debentures have the right to convert their debentures into our common stock. Additionally, if they convert after May 1, 2011, they have the right to receive a make-whole interest payment. As of the date hereof, there are approximately $202.8 million principal amount of the 8.125% Debentures outstanding. Should the remaining holders of such debentures convert after May 1, 2011, we would be required to pay approximately $23.3 million in cash related to the interest make-whole provision and issue approximately 11.6 million shares of our common stock based on the initial conversion rate of 71.43 shares of common stock per $1,000 principal amount of debentures. At that time, such conversions could significantly impact our liquidity and we may not have sufficient funds to make the required cash payments.
Our failure to convert or pay the make-whole interest payment under the terms of the debentures or to pay amounts outstanding under our debt agreements when due would constitute events of default under the terms of the debt, which in turn, could constitute an event of default under all of our outstanding debt agreements.
Our business is cyclical in nature due to dependency on the levels of offshore oil and gas drilling and subsea construction activity, and our ability to generate cash depends on many factors beyond our control. Our ability to make scheduled payments on and/or to refinance indebtedness depends on our ability to generate cash in the future, which will be affected by, among other things, general economic, financial, competitive, legislative, regulatory and other factors, many of which are beyond our control. We cannot assure you that our businesses will generate sufficient cash flows from operations, such that currently anticipated business opportunities will be realized on schedule or at all or that future borrowings will be available in amounts sufficient to enable us to service our indebtedness. If we cannot service our debt, we will have to take actions such as reducing or delaying capital investments, reducing or delaying non-regulatory maintenance expenditures and other operating and administrative costs, selling assets, restructuring or refinancing debt or seeking additional equity capital, or any combination of the foregoing. We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. Reducing or delaying capital expenditures or selling assets would delay or reduce future cash flows. In addition, the indenture for the Senior Secured Notes and the credit agreement governing the Working Capital Facility, as well as credit agreements governing various debt incurred by us may restrict us from adopting some or all of these alternatives. Similarly, the indentures and credit agreements governing various debt incurred by us may restrict us and our subsidiaries from adopting some or all of these alternatives. Because of these and other factors beyond our control, we may be unable to pay the principal, premium, if any, interest or other amounts due on our indebtedness.
Our inability to repay our outstanding debt would have a material adverse effect on us. We do not expect that our forecasted cash flows and available credit capacity, absent the completion of certain liquidity related events, will be sufficient to meet our commitments and remain in compliance with our debt covenants.
For a complete description of our indebtedness, please read Note 5 to our consolidated financial statements included herein.
Our indentures and credit agreements impose significant restrictions that may limit our operating and financial flexibility.
The indentures and credit agreement governing our indebtedness contain a number of significant restrictions and covenants that limit our ability to, among other things:
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incur or guarantee additional indebtedness or issue certain types of equity or equity linked securities;
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pay distributions on, purchase or redeem capital stock or purchase or redeem subordinated indebtedness;
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make loans and investments;
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create or permit certain liens;
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sell or lease assets, including vessels and other collateral;
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engage in sale leaseback transactions;
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consolidate or merge with or into other companies or sell all or substantially all of their assets;
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engage in transactions with affiliates;
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reflag vessels outside of certain jurisdictions;
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engage in certain business activities not related to or incidental to the provision of subsea and marine support services, subsea trenching and protection services or towing and supply services;
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materially impair any security interest with respect to the collateral; and
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restrict distributions or other payments to us or other subsidiaries.
These restrictions could limit our ability to repay existing indebtedness, finance future operations or capital needs, make acquisitions or pursue available business opportunities. In addition, the U.S. Credit Facility requires maintenance of specified financial ratios and satisfaction of certain financial covenants. We will need to negotiate a waiver or amendment to our consolidated leverage ratio debt covenant on this facility as we do not expect to be in compliance with it beginning with the quarter ending March 31, 2010. There can be no assurance that the lenders will agree to this amendment / waiver and / or, if required, other amendments / waivers on acceptable terms. A failure to do so would provide the lenders the opportunity to declare the associated debt, together with accrued interest and other fees, to be immediately due and payable and proceed against the collateral securing that debt. If the debt is declared due and payable, this would result in a default under other debt agreements, and we may be unable to pay amounts due on our debt. We cannot assure you that we will meet these financial ratios or satisfy these covenants and events beyond our control, including changes in the economic and business conditions in the markets in which we operate, may ultimately affect our ability to do so. Additionally, we may be required to take action to reduce debt or to act in a manner contrary to business objectives to maintain compliance with these covenants or to obtain required amendments or waivers.
Our ability to utilize certain net operating loss carryforwards or foreign tax credits may be limited by certain events which could have an adverse impact on our financial condition.
At December 31, 2009, we had estimated net operating loss carryforwards (“NOLs”) of $67.4 million for federal income tax purposes that are set to expire beginning in 2023 through 2028. Any future change in our ownership may limit the ultimate utilization of our NOLs pursuant to Section 382 of the Internal Revenue Code (“Section 382”). An ownership change may result from, among other things, transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If we cannot utilize these NOLs, then our liquidity position could be materially and adversely affected.
Our charter documents include provisions limiting the rights of foreign owners of our capital stock.
Our certificate of incorporation provides that no shares held by or for the benefit of persons who are non-U.S. citizens that are determined, collectively with all other shares so held, to be in excess of 24.99% of our outstanding capital stock (or any class thereof) are entitled to vote or to receive or accrue rights to any dividends or other distributions of assets paid or payable to the other holders of our capital stock. Those shares determined to be in excess of 24.99% shall be the shares determined by our board of directors to have become so owned most recently. In addition, our certificate of incorporation provides that, at the option of our board, we may redeem such excess shares for cash or for promissory notes with maturities not to exceed ten years and bearing interest at the then-applicable rate for U.S. treasury instruments of the same tenor. U.S. law currently requires that no more than 25% of our capital stock (or of any other provider of domestic maritime support vessels) may be owned directly or indirectly by persons who are non-U.S. citizens.
Similarly, the limitations on voting power of the corporation also limit the percentage of non-U.S. citizens that may serve on our board of directors. Currently, our charter limits the number of non-U.S. citizen directors to no more than a minority of the quorum. Should that number increase such that the number of non-U.S. citizen directors would have more than 25% of the voting power of the corporation, we could lose our ability to engage in coastwise trade. If this charter provision is ineffective, then ownership of 25% or more of our capital stock by non-U.S. citizens could result in the loss of our ability to engage in coastwise trade, which would negatively affect our towing and supply business, and possibly result in the imposition of fines and other penalties. As of December 31, 2009, we estimate that approximately 18.4% of our capital stock was held by non-U.S. citizens.
Our charter and bylaws may discourage unsolicited takeover proposals and could prevent shareholders from realizing a premium on their common stock.
Our certificate of incorporation and bylaws contain provisions dividing our board of directors into classes of directors, granting our board of directors the ability to designate the terms of and issue new series of preferred stock, requiring advance notice for nominations for election to our board of directors and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders. These provisions may have the effect of deterring hostile takeovers and preventing you from getting a premium for your shares that would have otherwise been offered or delaying, deferring or preventing a change in control.
Provisions of our debentures could discourage an acquisition of us by a third party.
Certain provisions of our 8.125% Debentures, 3% Debentures, and Senior Secured Notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, holders of our debentures will have the right, at their option, to require us to repurchase all of their debentures or any portion of the principal amount of such debentures in integral multiples of $1,000. We may also be required either to pay an interest make-whole payment or to issue additional shares upon conversion, or to provide for conversion into the acquirer’s capital stock in the event that a holder converts his debentures prior to and in connection with certain fundamental changes, which may have the effect of making an acquisition of us less attractive. The Senior Secured Notes entitle the holders to be repaid an amount greater than the par amount.
We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
Our certificate of incorporation authorizes us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such preferences, powers and relative, participating, optional and other rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events, or on the happening of specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.
A substantial number of shares of our common stock will be eligible for future sale upon conversion of the 8.125% Debentures, certain amortization payments relating to the 8.125% Debentures and exercise of the phantom stock units, and the sale of those shares could adversely affect our stock price.
The 8.125% Debentures are convertible into 14,486,572 shares of common stock based on a conversion price of $14.00. The 8.125% Debentures also amortize on a quarterly basis beginning on August 1, 2010. These amortization payments, at our election, may be made in cash or stock. If paid in stock, the amount of shares issued is determined by the market price of the stock at the time of the amortization payment and the resulting number of shares may be substantially greater than 14,486,572. In addition, pursuant to the terms of the registration rights agreement that we entered into with West Supply IV, we registered 1,352,558 shares of our common stock issuable, in certain circumstances, to West Supply IV upon the exercise of the phantom stock units for resale. Consequently, a substantial number of shares of our common stock will be eligible for public sale upon conversion of the debentures, the payment of certain amortization payments in stock and exercise of the phantom stock units. If a significant portion of these shares were to be offered for sale at any given time, the public market for our common stock and the value of our common stock owned by our stockholders could be adversely affected.
Our stockholders will experience substantial dilution if the 8.125% Debentures are converted, amortization payments relating to the 8.125% Debentures are paid in stock and the phantom stock units are exercised for shares of our common stock.
The 8.125% Debentures are convertible into shares of our common stock at an initial conversion rate of 71.43 shares per $1,000 principal amount of debentures. The 8.125% Debentures also amortize on a quarterly basis beginning on August 1, 2010. These amortization payments, at our election, may be made in cash or stock. If paid in stock, the amount of shares issued is determined by the market price of the stock at the time of the amortization payment which could be significantly less than $14.00 and result in additional shares being issued. In addition, the phantom stock units issued to West Supply IV and certain members of DeepOcean management represent the right to receive an aggregate of up to 1,581,902 shares of our common stock of which 226,109 shares were exercised in 2009. If shares of our common stock are issued upon conversion of the debentures, amortization payments relating to the 8.125% Debentures are paid in stock and holders exercise the phantom stock units, the result would be a substantial dilution to our existing stockholders of both their ownership percentages and voting power. Due to our expected liquidity position and limitations in the U.S. Credit Facility, we expect to make the amortization payments of approximately $10 million due on the 8.125% Debentures on each of August 1, 2010 and November 1, 2010 in common stock.
We will need shareholder approval to pay certain amortization payments for the 8.125% Debentures in stock.
Without shareholder approval, we may not be able to make as many amortization payments in stock as we would like. This would require payments in cash which would negatively impact our liquidity position.
We may be required to repurchase our debentures for cash upon specified events, which include a fundamental change, or pay cash upon conversion of our debentures.
Holders have the right to require us to repurchase the 3% Debentures on each of January 15, 2014, January 15, 2017 and January 15, 2022. In addition, holders of the 3% Debentures and 8.125% Debentures may require us to purchase all or a portion of their debentures upon the occurrence of a fundamental change prior to maturity. In addition, upon conversion of the 3% Debentures and 8.125% Debentures, under certain circumstances holders may receive a cash payment. The terms of the Senior Secured Notes allow the holders the right to put the notes back to us at 101% of par value in the event of a change of control. Such conversions could significantly impact liquidity, and we may not have sufficient funds to make the required repurchase in cash or cash payments at such time or the ability to arrange necessary financing on acceptable terms. In addition, our ability to repurchase the debentures or notes in cash or to pay cash upon conversion of the debentures or notes may be limited by law or the terms of other agreements relating to our debt outstanding at the time restricting our ability to purchase the debentures or notes for cash or pay cash upon conversion of your debentures or notes. If we fail to repurchase the debentures or notes in cash or pay cash upon conversion of our debentures under circumstances where such payment would be required by the indenture governing the debentures, it would constitute an event of default under the indenture governing the debentures or notes, which, in turn, could constitute an event of default under the agreements relating to our debt outstanding at such time.
Under certain debt agreements, an event of default will be deemed to have occurred if we or certain subsidiaries have a change of control. Additionally, certain of our debt agreements contain cross-default and cross-acceleration provisions that trigger defaults under our other debt agreements. Under cross-default provisions in several agreements governing our indebtedness, a default or acceleration of one debt agreement will result in the default and acceleration of our other debt agreements (regardless of whether we were in compliance with the terms of such other debt agreements). A default, whether by us or any of our subsidiaries, could result in all or a portion of our outstanding debt becoming immediately due and payable and, in such an event, we might not be able to obtain alternative financing to satisfy all of our outstanding obligations simultaneously or, if we are able to obtain such financing, we might not be able to obtain it on terms acceptable to us. Such cross-defaults could have a material adverse effect on our business, financial position, results of operations and cash flows, prospects and ability to satisfy our obligations under our credit facilities. For additional information about our debt facilities and cross-default provisions, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
Risks Related to Our Industry
Changes in the level of exploration and production expenditures, in oil and gas prices or industry perceptions about future oil and gas prices could materially decrease our cash flows and reduce our ability to meet our financial obligations.
Our revenues are primarily generated from entities operating in the oil and gas industry in the North Sea, the Asia Pacific Region, West Africa, Brazil, Mexico and the Gulf of Mexico. As of December 31, 2009, our international operations account for approximately 99% of our revenues and are subject to a number of risks inherent to international operations, including exchange rate fluctuations, unanticipated assessments from tax or regulatory authorities, and changes in laws or regulations. These factors could have a material adverse affect on our financial position, results of operations and cash flows.
Because our revenues are generated primarily from customers having similar economic interests, our operations are susceptible to market volatility resulting from economic or other changes to the oil and gas industry (including the impact of hurricanes). Changes in the level of exploration and production expenditures, in oil and gas prices, or industry perceptions about future oil and gas prices could materially decrease our cash flows and reduce our ability to meet our financial obligations.
Demand for our services depends heavily on activity in offshore oil and gas exploration, development and production. The offshore rig count is ultimately the driving force behind the day rates and utilization in any given period. Depending on when we enter into long-term contracts, and their duration, the positive impact on us of an increase in day rates could be mitigated or delayed, and the negative impact on us of a decrease in day rates could be exacerbated or prolonged. This is particularly relevant to the North Sea market, where contracts tend to be longer in duration. A decrease in activity in the areas in which we operate could adversely affect the demand for our marine support services and may reduce our revenues and negatively impact our cash flows. A decline in demand for our services could also prevent us from securing long-term contracts for the vessels we have on order. If market conditions were to decline in market areas in which we operate, it could require us to evaluate the recoverability of our long-lived assets, which may result in write-offs or write-downs on our vessels that may be material individually or in the aggregate. Moreover, increases in oil and natural gas prices and higher levels of expenditure by oil and gas companies for exploration, development and production may not necessarily result in increased demand for our services or vessels.
If our competitors are able to supply services to our customers at a lower price, then we may have to reduce our day rates, which would reduce our revenues.
Certain of our competitors have significantly greater financial resources and more experience operating in international areas than we have. Competition in the subsea and marine support services businesses primarily involves factors such as:
•
price, service, safety record and reputation of vessel operators and crews;
•
fuel efficiency of vessels; and
•
quality and availability of equipment and vessels of the type, capability and size required by the customer.
Any reduction in rates offered by our competitors or growing disparity in fuel efficiency between our fleet and those of our competitors may cause us to reduce our rates and may negatively impact the utilization of our vessels, which will negatively impact our results of operations and cash flows.
The recent worldwide financial and credit crisis could lead to an extended worldwide economic recession and have a material adverse effect on our financial position, results of operations and cash flows.
During the past year, there has been substantial volatility and uncertainty in worldwide equity and credit markets that could lead to an extended worldwide economic recession. Due to this economic condition, there has been a reduction in demand for energy products that has resulted in declines in oil and gas prices, which is a significant part of most of our customers’ business. In addition, due to the substantial uncertainty in the global economy, there has been deterioration in the credit and capital markets and access to financing is uncertain. These conditions could have an adverse effect on our industry and our business, including our future operating results and the ability to recover our assets at their stated values. Our customers may curtail their capital and operating expenditure programs, which could result in a decrease in demand for our vessels and a reduction in day rates and/or utilization. In addition, certain of our customers could experience an inability to pay suppliers, including us, in the event they are unable to access the capital markets to fund their business operations. Likewise, our suppliers may be unable to sustain their current level of operations, fulfill their commitments and/or fund future operations and obligations, each of which could adversely affect our operations.
Due to these factors, we cannot be certain that funding will be available if needed, and to the extent required, on acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Our principal executives operate from our leased headquarters office in The Woodlands, Texas.
Our subsea services segment is supported from offices in Haugesund, Norway. Our subsea trenching and protection segment is supported from offices in Darlington in the United Kingdom. These segments support their overseas operations through leased facilities primarily located in Aberdeen and Norwich in the United Kingdom, Den Helder in the Netherlands, Ciudad del Carmen in Mexico, Perth, Australia and Singapore.
Our North Sea towing and supply operations are supported from leased offices in Aberdeen, Scotland. We lease offices in Lagos, Nigeria that serve as our West Africa regional office supporting all corporate functions with a technical support base in Port Harcourt, Nigeria. We also have leased sales and operational offices in Ciudad del Carmen, Mexico. Our Brazilian operations are supported from an owned maintenance and administrative facility in Macae, Brazil. The Asia Pacific Region operations are supported by our leased offices in Singapore and Shanghai, China.
Item 3.
Item 3. Legal Proceedings
In the ordinary course of business, we are involved in certain personal injury, pollution and property damage claims and related threatened or pending legal proceedings. Additionally, from time to time, we are involved as both a plaintiff and a defendant in other civil litigation, including contractual disputes. We do not believe that any of these proceedings, if adversely determined, would have a material adverse effect on our financial position, results of operations or cash flows. Additionally, certain claims would be covered under our insurance policies. Our management, after review with legal counsel and insurance representatives, is of the opinion these claims and legal proceedings will be resolved within the limits of our insurance coverage. At December 31, 2009 and 2008, we accrued for liabilities in the amount of approximately $3.3 million and $2.3 million, respectively, based upon the gross amount that we believe we may be responsible for paying in connection with these matters. The amounts we will ultimately be responsible for paying in connection with these matters could differ materially from amounts accrued.
Item 4.
Item 4. Reserved
PART II
Item 5.
Item 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Prices and Dividends
Our stock trades through the NASDAQ Global Select Market System under the symbol “TRMA.” The following table sets forth the high and low sales prices per share of our common stock for each quarter of the last two years.
As of March 12, 2010, there were 19,538,017 shares of the Company’s common stock outstanding held by 46 shareholders of record. The closing price per share of common stock on December 31, 2009, the last trading day of our fiscal year, was $4.54.
We have not paid any cash dividends on our common stock during the past two years and have no immediate plans to pay dividends in the future. Because the Company is a holding company that conducts substantially all of its operations through subsidiaries, our ability to pay cash dividends on our common stock is also dependent upon the ability of our subsidiaries to pay cash dividends or to otherwise distribute or advance funds to us. See Note 5 (Long Term Debt) to our consolidated financial statements included in Item 8 herein for a description of our indebtedness.
Issuer Repurchases of Equity Securities
In July 2007, our board of directors authorized the repurchase of up to $100.0 million of our common stock in open-market transactions, including block purchases, or in privately negotiated transactions (the “Repurchase Program”). We did not acquire any shares of our common stock under the Repurchase Program during 2008 and 2009. We had $82.4 million of remaining capacity under the Repurchase Program which expired in 2009.
All of the shares repurchased in the Repurchase Program are held as treasury stock. We recorded treasury stock repurchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.
Performance Graph
The graph below compares the cumulative five year total return of holders of Trico Marine Services, Inc.’s common stock with the cumulative total returns of the S&P 500 index and the PHLX Oil Service Sector index. The graph assumes that the value of the investment in the company’s common stock and in each of the indexes (including reinvestment of dividends) was $100 on March 22, 2005 and tracks it through December 31, 2009. The information in the graph that follows is not “soliciting material” nor is it being “filed” with the Commission or subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Exchange Act.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Trico Marine Services, Inc., The S&P 500 Index
And The PHLX Oil Service Sector Index
Item 6.
Item 6. Selected Financial Data
The selected financial data for all prior periods has been adjusted for the retrospective application of (i) changes in accounting for convertible debt instruments that permit cash settlement upon conversion which did have an effect on the financial statements and (ii) noncontrolling interests which only required a change in presentation of noncontrolling interests and its inclusion in equity for all prior years.
(1)
We exited bankruptcy protection on March 15, 2005. In accordance with accounting guidance for entities that have filed petitions with the Bankruptcy Court and expect to reorganize as a going concern under Chapter 11 of the Bankruptcy Code, we adopted “fresh-start” accounting as of March 15, 2005. Fresh-start accounting is required upon a substantive change in control and requires that the reporting entity allocate the reorganization value to our assets and liabilities in a manner similar to that which is required under accounting guidance for business combinations. Under the provisions of fresh-start accounting, a new entity has been deemed created for financial reporting purposes.
(2)
We acquired DeepOcean and CTC Marine on May 15, 2008. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Significant Events” for the contributions of DeepOcean and CTC Marine to our operating results for 2008, and Note 4 in our accompanying consolidated financial statements for pro forma results from this acquisition.
(3)
During 2009, we recorded impairments and penalties on early termination of contracts related to our investment in a partnership for the construction of a new vessel, the Deep Cygnus, of $14.0 million, the cancellation of a contract for equipment of $1.2 million, the termination of the VOS Satisfaction lease of $2.8 million, the impairment on an acquired asset from CTC of $2.0 million, the exit costs on the Fosnavag lease of $1.2 million and the expectation that we are likely to exercise the termination option for the last four Tebma vessels of $116.1 million. In 2008, we had an impairment of goodwill of $169.7 million and tradenames of $3.1 million based on our annual impairment analysis under accounting guidance for goodwill and other intangibles acquired in a business combination at acquisition.
(4)
We have an embedded derivative within our 8.125% Debentures and prior 6.5% Debentures that requires bifurcation and valuation under accounting guidance for derivative instruments and hedging activities. The estimate of fair value of the embedded derivative will fluctuate based upon various factors that include our common stock closing price, volatility, United States Treasury bond rates, and the time value of options. The calculation of the fair value of the derivative requires the use of a Monte Carlo simulation lattice option-pricing model. On December 31,
Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measures. We measure operating performance based on EBITDA, a non-GAAP financial measure, which is calculated as operating income or loss before depreciation and amortization, impairments and penalties on early termination of contracts, gain/loss on sale of assets, stock-based compensation and provision for doubtful accounts in respect of revenues earned in prior periods. In 2009, $2.2 million was provided in respect of revenues earned in prior periods. Our measure of EBITDA may not be comparable to similarly titled measures presented by other companies. Other companies may calculate EBITDA differently than we do, which may limit its usefulness as a comparative measure.
We believe that the GAAP financial measure that EBITDA most directly compares to is operating income or loss. Because EBITDA is not a measure of financial performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flows statement data prepared in accordance with GAAP.
EBITDA is a financial metric used by management (i) to monitor and evaluate the performance of our business operations, (ii) to facilitate management’s internal comparison of our historical operating performance of our business operations, (iii) to facilitate management’s external comparisons of the results of our overall business to the historical operating performance of our competitors, (iv) to analyze and evaluate financial and strategic planning decisions regarding future operating investments and acquisitions, which may be more easily evaluated in terms of EBITDA, (v) as a key metric in the calculation of awards under the Incentive Bonus Plan and (vi) to plan and evaluate future operating budgets and determine appropriate levels of operating investments.
The following table reconciles EBITDA to operating income (loss) (in thousands):
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion is intended to assist in understanding our financial position and results of operations in 2009. Our financial statements and the notes thereto, which are included elsewhere in this Annual Report on Form 10-K, contain detailed information that should be referred to in conjunction with the following discussion.
Overview
We are an integrated provider of subsea services, subsea trenching and protection services and OSVs to oil and natural gas exploration and production companies that operate in major offshore producing regions around the world. We acquired Active Subsea in 2007 and DeepOcean and CTC Marine in 2008. As a result of these acquisitions, our subsea operations, including technologically advanced and often proprietary services performed in demanding subsea environments, represented approximately 80% of our revenues for the year ended 2009. The remainder of our revenue is attributable to our legacy towing and supply business. We operate through three business segments: (i) subsea services, (ii) subsea trenching and protection and (iii) towing and supply.
Our Outlook
Our results of operations are highly dependent on the level of operating and capital spending for exploration and development by the energy industry, among other things. The energy industry’s level of operating and capital spending is substantially related to the demand for natural resources, the prevailing commodity price of natural gas and crude oil, and expectations for such prices. During periods of low commodity prices, our customers may reduce their capital spending budgets which could result in reduced demand for our services. Other factors that influence the level of capital spending by our customers which are beyond our control include: worldwide demand for crude oil and natural gas and the cost of exploring for and producing oil and natural gas which can be affected by environmental regulations, significant weather conditions, maintenance requirements and technological advances that affect energy and its usage.
For 2010, we will continue to focus on the following key areas:
Reduce our debt level and carefully manage liquidity and cash flow. Our substantial amount of indebtedness requires us to manage our cash flow to maintain compliance under our debt covenants and to meet our capital expenditure and debt service requirements. We have a centralized and disciplined approach to marketing and contracting our vessels and equipment to achieve less spot market exposure in favor of long-term contracts. The expansion of our subsea services activities is intended to have a stabilizing influence on our cash flow. We will also work towards deleveraging our balance sheet as we manage cash flow and liquidity throughout the year.
Maximize our vessel utilization and our service spreads. We continue to increase our combined subsea services and subsea trenching and protection fleet primarily through chartering of third-party vessels. We offer our customers a variety of subsea installation, construction, trenching and protection services using combinations of our equipment and personnel to maximize the
earnings per vessel and to increase the opportunity to offer a differentiated technology service package.
Expand our presence in additional subsea services markets. In contrast to the overall market served by our traditional towing and supply business, we believe the subsea market is growing and will provide a higher rate of return on our services. We have increased our marketing efforts to expand our subsea services business in West Africa, the Asia Pacific Region, Brazil, the Middle East, the United States and Mexico. For the year ended 2009, our aggregate revenues in these markets represented 35% of our revenue in subsea operations. Through our legacy towing and supply business, we have strong relationships with important customers, such as a contractor of Pemex, Statoil and CNOOC, and an in-depth understanding of their bidding procedures, technical requirements and needs. We are leveraging this infrastructure to expand our subsea services and subsea trenching and protection businesses around the world.
Invest in growth of our subsea fleet. We continually aim to improve our fleet’s capabilities in the subsea services area by focusing on more sophisticated next generation subsea vessels that will be attractive to a broad range of customers and can be deployed worldwide. We have contracted for the building of three new MPSVs (the Trico Star, Trico Service and Trico Sea), which are expected to be delivered in the first and fourth quarters of 2010 and the first quarter of 2011, respectively. Our remaining committed capital expenditures related to these vessels is approximately $38 million. We also lease many of the vessels used in our subsea services and subsea trenching and protection businesses. This gives us the opportunity to expand our business without large incremental capital expenditures, to match vessel capabilities with project requirements, and to benefit from periods of oversupply of vessels. We believe having an up-to-date and technologically advanced fleet is critical to our being competitive within the subsea services and subsea trenching and protection businesses. Finally, we invest in ROVs and subsea trenching and protection equipment. We have recently completed the construction of the RT-1 and the UT-1 further enhancing our capabilities. We view our future expenditures for such assets as discretionary in nature, and we will only undertake them to the extent we believe they are economically justified.
Reduce exposure to a declining offshore towing and supply vessel business. Over time, we believe transitioning away from a low growth, commoditized towing and supply business toward specialized subsea services will result in improved operating results. In 2009, we sold eight OSVs, two PSVs, and one AHTS for aggregate proceeds of approximately $73 million. As of December 31, 2009, we had signed agreements for the sale of six additional vessels, including one AHTS, for a total of approximately $20 million. Three of these vessel sales have been completed so far in 2010. We will continue to look for opportunities to divest non-core or underperforming towing and supply assets. We will also continue to position our towing and supply vessels in markets where we believe we have a competitive advantage or that have positive fundamentals.
Market Outlook - Demand for our Vessels and Services
Each of our operating segments experiences different impacts from the current overall economic slowdown, crisis in the credit markets, and decline in oil prices. In all segments, however, we have seen increased exploration and production spending in Brazil, Mexico and the Asia Pacific Region and will continue to focus our efforts on increasing our market presence in those regions in 2010. For 2010, we expect in general no change from 2009 in exploration and production spending, offshore drilling worldwide, and construction spending, but we anticipate overall subsea spending to increase based on unit growth in new subsea installation and a large base of installed units.
Subsea Services. Although some projects were postponed as a result of low commodity prices, we did not have any contracts canceled in 2009. Some of these postponed projects will take place in 2010. Given that a majority of our subsea services work includes inspection, maintenance and repair required to maintain existing pipelines, and such services are covered by operating expenditures rather than capital expenditures, we believe that the outlook for our subsea services will remain consistent with the levels of subsea spending occurring in 2009 as we have seen no material decline in pricing for subsea services contracts.
Subsea Protection and Trenching. In 2010, we expect demand for our subsea protection and trenching services to be similarly driven by the increase in overall spending on subsea services. However, we believe that certain markets may be softer due to seasonality in this area and therefore are mitigating such seasonality by mobilizing our assets to regions less susceptible to seasonality. We generally expect a weak market in the North Sea but we believe there is an opportunity to develop a meaningful presence in emerging growth areas for this segment including the Asia Pacific Region, Australia, the Middle East, the Mediterranean and Brazil.
Towing and Supply. During 2009, we experienced significant declines in utilization and day rates in the Gulf of Mexico and North Sea driven by reduced exploration and production spending as a result of low commodity prices in addition to seasonality for our AHTS vessels in the North Sea. We have started to take appropriate measures to reduce our cost structure accordingly and to mobilize
vessels in these regions to regions with increased activity. Our current view of the worldwide OSV market is that the combination of reduced customer spending on offshore drilling coupled with the likely level of newly built vessels to be delivered in 2010 will cause prices and utilization in most markets, including the North Sea, Gulf of Mexico and West Africa, to remain very weak.
Market Outlook - Credit Environment
Through 2009, we continued to see lenders take steps to initiate procedures to reduce their overall exposure to one company (which will limit our ability to seek new financing from existing lenders), increase margins and improve their collateral position. Should we desire to further refinance existing debt or access capital markets for new financing during 2010, we expect terms and conditions of such refinancing or access to capital markets to be challenging.
Significant Events
Senior Secured Notes and Other Debt. Our wholly-owned subsidiary, Trico Shipping AS (“Trico Shipping”), successfully completed the issuance of $400.0 million aggregate principal amount of Senior Secured Notes due 2014 through an offering to qualified institutional buyers within the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States pursuant to Regulation S under the Securities Act. The Senior Secured Notes were issued at a price of $96.393 per $100 in face value, yielding gross proceeds of $385.6 million. Debt related fees and costs were approximately $15 million, yielding net proceeds of approximately $370 million which were primarily used to repay debt. The Senior Secured Notes will mature on November 1, 2014 and interest, payable on May 1 and November 1, will accrue at a rate of 11.875%. The Senior Secured Notes are not callable for three years and are subject to a declining prepayment premium until November 2013 after which they can be repaid at par. The Senior Secured Notes are secured by the assets and earnings of the Trico Supply Group. The Senior Secured Notes will be guaranteed by the Company’s wholly owned subsidiary, Trico Supply AS, and by Trico Supply’s direct and indirect subsidiaries (other than Trico Shipping) and Trico Marine Services, Inc.
We used the net proceeds from the sale of the Senior Secured Notes to repay approximately $368 million of debt of Trico Supply and its subsidiaries outstanding at May 14, 2009. See Note 5 to our consolidated financial statements included herein. Because the Senior Secured Notes are not registered under the Securities Act or applicable state securities laws, the Senior Secured Notes may not be offered or sold in the United States absent registration or an applicable exemption from such registration requirements.
In conjunction with the closing of the Senior Secured Notes, we amended the terms of the U.S. Credit Facility. The maturity date was extended to December 31, 2011 and the amount available decreased from $35 million to $25 million with quarterly amortizations beginning July 1, 2010 upon application of the sales proceeds from the Northern Clipper. The covenants were modified to (i) increase the Consolidated Leverage Ratio for the periods beginning December 31, 2009, (ii) amend the calculation of EBITDA for the Consolidated Leverage Ratio to exclude the effect of changes in the value of the embedded derivative associated with the 8.125% Debentures, (iii) change the definition of Free Liquidity to exclude cash and cash equivalents held by Trico Supply and its subsidiaries, and (iv) add a collateral coverage requirement. The amendment also added certain limitations on our ability to pay amortization payments in cash on the 8.125% Debentures, the first payment of which is due August 1, 2010. On December 22, 2009, the U.S. Credit Facility was further amended to increase the maximum consolidated leverage ratios for the quarterly periods ending December 31, 2009 to September 30, 2010. The net worth calculation was also amended to permanently eliminate the effect of any impairment charge related to the cancellation of the construction contracts related to four subsea vessels. As part of this amendment, the availability under the facility was temporarily reduced to $15.0 million until the consolidated leverage ratio becomes less than or equal to the maximum consolidated leverage ratio allowed in the prior amendment. In January 2010, we entered into an amendment to the U.S. Credit Facility to change the definition of Free Liquidity such that any amounts that were committed under the facility, whether available to be drawn or not, would be included for the purposes of calculating the free liquidity covenant. In March 2010, we received a waiver of the requirement that the annual financial statements be filed with an unqualified option without an explanatory paragraph in relation to going concern.
We also entered into a new $33 million Working Capital Facility with Trico Shipping AS as the borrower. This facility will expire on December 31, 2011 and quarterly amortizations begin January 1, 2010. Up to $10 million of the facility may be used for letters of credit and replaces existing letter of credit facilities currently used by CTC and DeepOcean. This facility shares in the collateral with the Senior Secured Notes and does not have any financial covenants. In March 2010, we received a waiver of the requirement that the annual financial statements be filed with an unqualified option without an explanatory paragraph in relation to going concern. In conjunction with this amendment, the availability of the facility, including amounts available for letters of credit, was reduced from $29.7 million to $26.0 million.
Acquisition of DeepOcean and CTC Marine. On May 15, 2008, we initiated a series of events and transactions that resulted in our acquiring 100% of DeepOcean and its wholly-owned subsidiary, CTC Marine. The acquisition price for DeepOcean and CTC Marine was approximately $700 million. To fund the transactions we used available cash, borrowings under new, existing and amended revolving lines of credit, proceeds from the issuance of $300 million of 6.5% Debentures and the issuance of phantom stock units. DeepOcean’s and CTC Marine’s results are included in our results of operations from the date of acquisition, and significantly affected every component of our 2008 and 2009 operating income as compared with our prior year-to-date results.
The following table provides the amounts included in our 2008 results from the operations of DeepOcean and CTC Marine for the period from May 16, 2008 to December 31, 2008 (in thousands):
(1)
Please see Note 4 to our consolidated financial statements included herein for pro forma results from this acquisition.
Proxy Contest. The costs associated with our 2009 annual meeting were significantly higher than prior annual meetings due to the fact that Kistefos AS, a private investment company in Norway, made nine proposals (eight of which Trico opposed) and filed a related lawsuit in Delaware. Our expenses related to the solicitation (in excess of those normally spent for an annual meeting with an uncontested director election and excluding salaries and wages of our regular employees and officers) were approximately $1.6 million, which were recognized in 2009.
6.5% Convertible Notes Exchange. In the first six months of 2009, various holders of our 6.5% Debentures converted $24.5 million principal amount of the debentures, collectively, for a combination of $6.9 million in cash related to an interest make-whole provision and 605,759 shares of our common stock based on the conversion rate of 24.74023 shares of common stock per $1,000 principal amount of debentures. On May 11, 2009, we entered into exchange agreements, or the Exchange Agreements, with all remaining holders of the 6.5% Debentures. Pursuant to the Exchange Agreements, holders exchanged each $1,000 in principal amount of the 6.5% Debentures for $800 in principal amount of 8.125% Debentures, $50 in cash and 12 shares of our common stock (or warrants to purchase shares at $0.01 per share in lieu thereof). At closing, we exchanged $253.5 million in aggregate principal amount of the 6.5% Debentures and accrued but unpaid interest thereon for $12.7 million in cash, 360,696 shares of common stock, warrants exercisable for 2,681,484 shares of common stock and $202.8 million in aggregate principal amount of 8.125% Debentures. The exchange reduced the principal amount of our outstanding debt by $50.7 million. The 8.125% Debentures are governed by an indenture, dated as of May 14, 2009, between us and Wells Fargo Bank, National Association, as trustee. Under the terms of the indenture, if the holders elect to convert prior to May 2011, they would not be entitled to an interest make-whole provision. The 8.125% Debentures are our senior secured obligations and are secured by a second lien on certain of the assets that serve as security for our $50 million U.S. credit facility. The 8.125% Debentures are effectively subordinated to all of our other existing and future secured indebtedness to the extent of the value of our assets collateralizing this indebtedness and any liabilities of our subsidiaries.
Volstad Impairment. In July 2007, DeepOcean AS, established a limited partnership under Norwegian law with Volstad Maritime AS for the sole purpose of creating an entity that would finance the construction of a new vessel. This entity was fully consolidated by DeepOcean. According to the terms of the partnership agreement, neither party to the partnership was obligated to fund more than its committed capital contribution with the remaining portion to be financed through third party financings. Given the global economic turmoil and resulting difficulties in obtaining financing, the purpose of the partnership has been frustrated due to the fact that the partnership has been unable to fulfill its commitment to obtain financing for the remaining amount necessary to purchase the new vessel. As a result, on April 27, 2009, DeepOcean AS served notice to Volstad of its formal withdrawal from the partnership, effective
immediately, thereby eliminating its continuing obligations therein. As a result, our total vessel construction commitments were reduced by $41.6 million. On June 26, 2009, we reached an agreement with Volstad in which DeepOcean AS withdrew from the partnership, CTC Marine was relieved of obligations under the time charter with the partnership and we were indemnified in full against claims of either Volstad or the shipyard building the vessel. Our sole obligation to pay NOK 7.0 million ($1.1 million) against an invoice for work done to the vessel was completed in July 2009. Based on the outcome of those negotiations, we recorded a $14.0 million asset and investment impairment in 2009, which is reflected in the accompanying Statement of Operations under “Impairments and penalties on early termination of contracts”. No remaining assets or investments associated with this partnership are on our books.
Asset Sales. On April 28, 2009, we sold a platform supply vessel for $26.2 million in proceeds. The sale of this vessel required a prepayment of approximately $14.9 million for our $200 million Revolving Credit Facility as the vessel served as security for that facility. During June 2009, we sold five supply vessels for a total of $3.8 million. The sale of these vessels did not require a debt prepayment. In October 2009, we sold a platform supply vessel for $20.4 million in proceeds and an anchor handling, towing and supply vessel for $18.5 million in proceeds. The net proceeds of these transactions were used to repay debt. In December 2009, we sold three supply vessels for combined proceeds of approximately $4.4 million with approximately half of the proceeds used to repay debt.
Tebma Impairment. We also completed negotiations with Tebma which provides us the option to cancel the final four (the Trico Surge, the Trico Sovereign, Trico Seeker, and Trico Searcher) of the seven vessels currently under construction. This option can be exercised by us after July 15, 2010 and would reduce the remaining capital expenditures related to the three remaining vessels under construction to approximately $38 million. Due to our expectation that we are likely to exercise the termination option for the last four vessels, we incurred a non-cash impairment charge of $116.1 million in the fourth quarter of 2009. This represents the excess of carrying costs over the fair value of the asset upon termination.
Factors that Affect Our Results
We have three operating segments: subsea services, represented primarily by the operations of DeepOcean and seven SPSVs from our historic operations; subsea trenching and protection, represented by the operations of CTC Marine; and towing and supply, represented primarily by our historical operation of marine supply vessels.
The revenues and costs for our subsea services segment primarily are determined by the scope of individual projects and in certain cases by multi-year contracts. Subsea services projects may utilize any combination of vessels, both owned and leased, and components of our non-fleet equipment consisting of ROVs, installation handling equipment, and survey equipment. The scope of work, complexity, and area of operation for our projects will determine what assets will be deployed to service each respective project. Rates for our subsea services typically include a composite day rate for the utilization of a vessel and/or the appropriate equipment for the project, as well as the crew. These day rates can be fixed or variable and are primarily influenced by the specific technical requirements of the project, the availability of the required vessels and equipment and the project’s geographic location and competition. Occasionally, projects are based on unit-rate contracts (based on units of work performed, such as miles of pipeline inspected per day) and occasionally through lump-sum contractual arrangements. In addition, we generate revenues for onshore engineering work, post processing of survey data, and associated reporting. The operating costs for the subsea services segment primarily reflect the rental or ownership costs for our leased vessels and equipment, crew compensation costs, supplies and marine insurance. Our customers are typically responsible for mobilization expenses and fuel costs. Variables that may affect our subsea services segment include the scope and complexity of each project, weather or environmental downtime, and water depth. Delays or acceleration of projects will result in fluctuations of when revenues are earned and costs are incurred but generally they will not materially affect the total amount of costs.
The revenues and costs for our subsea trenching and protection segment are also primarily determined by the scope of individual projects. Based on the overall scale of the respective projects, we may utilize any combination of engineering services, assets and personnel, consisting of a vessel that deploys a subsea trenching asset, ROV and survey equipment, and supporting offshore crew and management. Our asset and personnel deployment is also dependent on various other factors such as subsea soil conditions, the type and size of our customer’s product and water depth. Revenues for our subsea trenching and protection segment include a composite daily rate for the utilization of vessels and assets plus fees for engineering services, project management services and equipment mobilization. These daily rates will vary in accordance with the complexity of the project, existing framework agreements with clients, competition and geographic location. The operating costs for this segment predominately reflect the rental of its leased vessels, the hiring of third party equipment (principally ROVs and survey equipment which we sometimes hire from our subsea services segment), engineering personnel, crew compensation and depreciation on subsea assets. The delay or acceleration of the commencement of customer offshore projects will result in fluctuations in the timing of recognition of revenues and related costs, but
generally will not materially affect total project revenues and costs.
The revenues for our towing and supply segment are impacted primarily by fleet size and capabilities, day rates and vessel utilization. Day rates and vessel utilization are primarily driven by demand for our vessels, supply of new vessels, our vessel availability, customer requirements, competition and weather conditions. The operating costs for the towing and supply segment are primarily a function of the active fleet size. The most significant of our normal direct operating costs include crew compensation, maintenance and repairs, marine inspection costs, supplies and marine insurance. We are typically responsible for normal operating expenses, while our contracts provide that customers are typically responsible for mobilization expenses and fuel costs.
Risks, Uncertainties, and Going Concern
Our liquidity outlook has changed since December 31, 2008 primarily as a result of rates and utilization in the towing and supply business deteriorating more than anticipated, the further weakening of the U.S. Dollar relative to the Norwegian Kroner during the second quarter which resulted in additional cash payments required to bring our Kroner based credit facility within its contractual credit limit, the weaknesses in the North Sea and the Asia Pacific Region for subsea services which began in the fourth quarter of 2009 and has persisted in the first quarter of 2010 along with certain one-time related issues associated with a longer than expected drydock on a high yielding subsea construction vessel and the cash costs associated with the early termination of a low utilization vessel charter. This has resulted in significantly lower EBITDA than forecasted for both the fourth quarter of 2009 and the first quarter of 2010 and sharply lower levels of liquidity.
As a result of the events described above, we believe that our forecasted cash and available credit capacity are not expected to be sufficient to meet our commitments as they come due over the next twelve months and that we will not be able to remain in compliance with our debt covenants. In order to increase our liquidity to levels sufficient to meet our commitments, we are currently pursuing a number of actions including (i) selling additional assets, (ii) accessing cash in certain of our subsidiaries, (iii) minimizing our capital expenditures, (iv) obtaining waivers or amendments from our lenders, (v) effectively managing our working capital and (vi) improving our cash flows from operations. There can be no assurance that sufficient liquidity can be raised from one or more of these transactions and / or that these transactions can be consummated within the period needed to meet certain obligations. Our interest payment obligations are concentrated in the months of May and November with approximately $24 million of interest due on the Senior Secured Notes on each of May 1 and November 1 and approximately $8 million of interest due on the 8.125% Debentures on each of May 15 and November 15. Additionally, the terms of our credit agreements require that some or all of the proceeds from certain asset sales be used to permanently reduce outstanding debt which could substantially reduce the amount of proceeds we retain. We are currently restricted by the terms of each of the 8.125% Debentures and the Senior Secured Notes from incurring additional indebtedness due to our leverage ratio exceeding the limit at which additional indebtedness could be incurred. Additionally, our ability to refinance any of our existing indebtedness on commercially reasonable terms may be materially and adversely impacted by the current credit market conditions and our financial condition. If we are unable to complete the above mentioned actions, we will be in default under our credit agreements, which in turn, could potentially constitute an event of default under all of our outstanding debt agreements. If this were to occur, all of our outstanding debt could become callable by our creditors and would be reclassified as a current liability on our balance sheet. The uncertainty associated with our ability to meet our commitments as they come due or to repay our outstanding debt raises substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might result from the uncertainty associated with our ability to meet our obligations as they come due.
Due to our expected liquidity position and limitations in the U.S. Revolving Credit Facility, we expect to make the amortization payments of approximately $10 million due on the 8.125% Convertible Debentures due 2013 (the “8.125% Debentures”) on each of August 1, 2010 and November 1, 2010 in common stock. The number of shares issued will be determined by the stock price at the time of each of the amortization payments and may lead to significantly more shares being issued than if the debentures were converted at the stated conversion rate which is equivalent to $14 per share. We will need to negotiate a waiver or amendment to our consolidated leverage ratio debt covenant on the $50 million U.S. Revolving Credit Facility that we do not expect to be in compliance with beginning with the quarter ending March 31, 2010. There can be no assurance that the lenders will agree to this amendment / waiver and / or additional amendments/ waivers on acceptable terms and a failure to do so would provide the lenders the opportunity to accelerate the remaining amounts outstanding under these facilities.
At December 31, 2009, we had available cash of $53.0 million. This amount and other amounts in this section reflecting U.S. Dollar equivalents for foreign denominated debt amounts are translated at currency rates in effect at December 31, 2009. As of December 31, 2009, payments due on our contractual obligations during the next twelve months were approximately $293 million. This includes $53 million of principal payments of debt as of December 31, 2009, some of which can be paid in cash or stock at the
our option, $127 million of time charter obligations, $34 million of vessel construction obligations, $70 million of estimated interest expense, and approximately $9 million of other operating expenses such as taxes, operating leases, and pension obligations. We expect we will need to complete certain transactions, including additional asset sales, to have sufficient liquidity to satisfy these obligations. To improve liquidity, we canceled delivery in the second quarter of 2009 of the Deep Cygnus, a large newbuild vessel, thereby terminating our obligation to fund $41.6 million in capital expenditures. We also completed negotiations with Tebma to suspend construction of the remaining four newbuild MPSVs (the Trico Surge, Trico Sovereign, Trico Seeker and Trico Searcher). We hold the option to cancel construction by Tebma of the four newbuild MPSVs after July 15, 2010, which would reduce our committed future capital expenditures to approximately $38 million on the three remaining MPSVs, of which we expect to take delivery of by the first and fourth quarters of 2010 and the first quarter of 2011. Due to the expectation that we are likely to exercise the termination option for the last four vessels, we incurred a non-cash impairment charge of $116.1 million in the fourth quarter of 2009. This represents the excess of carrying costs over the fair value of the asset upon termination.
We are highly leveraged and our debt imposes significant restrictions on us and increases our vulnerability to adverse economic and industry conditions. While our current maturities of debt have been reduced significantly as a result of the recent issuance of the Senior Secured Notes to approximately $53 million as of December 31, 2009, our annual interest expense has increased significantly and the Senior Secured Notes impose new restrictions on us. Under the terms of the Senior Secured Notes, our business has been effectively split into two groups: (i) Trico Supply, where substantially all of its subsea services business and all of its subsea protection business resides along with its North Sea towing and supply business and (ii) Trico Other, whose business is comprised primarily of its non North Sea towing and supply businesses. Trico Other has the obligation, among other things, to pay the debt service related to the 8.125% and 3% Convertible Debentures, the $50 million U.S. Revolving Credit Facility, and the 6.11% Notes and to pay the majority of corporate related expenses while Trico Supply has the obligation to make debt service payments related to the Senior Secured Notes and the Trico Shipping Working Capital Facility. Under the terms of these Senior Secured Notes, the ability of Trico Supply to provide funding on an ongoing basis to Trico Other is limited by restrictions on Trico Supply’s ability to pay dividends and principal and interest on intercompany debt unless certain financial measures are met. Other than an annual reimbursement of up to $5 million related to the reimbursement of corporate expenses, a one-time $5 million restricted payment basket, and certain carve outs related to the sale of one vessel and the proceeds from refund guarantees associated with four construction vessel contracts that are expected to be cancelled, we do not expect Trico Supply to be able to transfer additional funds to Trico Other. The refund guarantees have expiration dates and need to be periodically renewed. To date, we have been able to obtain renewals of these refund guarantees. However, there can be no assurance that the current refund guarantees will be renewed by the existing financial institutions or, if not renewed, replacement refund guarantees can be obtained.
In addition to the previously mentioned actions being taken to increase our liquidity, the ability of each of Trico Supply, Trico Other, and the Company overall to obtain minimum levels of operating cash flows and liquidity to fund their operations, meet their debt service requirements, and remain in compliance with their debt covenants, is dependent on its ability to accomplish the following: (i) secure profitable contracts through a balance of spot exposure and term contracts, (ii) achieve certain levels of vessel and service spread utilization, (iii) deploy its vessels to the most profitable markets, and (iv) invest in technologically advanced subsea fleet. The forecasted cash flows and liquidity for each of Trico Supply, Trico Other, and the Company are dependent on each meeting certain assumptions regarding fleet utilization, average day rates, operating and general and administrative expenses, and in the case of Trico Supply, new vessel deliveries, which could prove to be inaccurate. Within certain constraints, we can conserve capital by reducing or delaying capital expenditures, deferring non-regulatory maintenance expenditures and further reducing operating and administrative costs through various measures including stacking certain vessels.
Our inability to satisfy any of the obligations under our debt agreements would constitute an event of default. Under cross default provisions in several agreements governing our indebtedness, a default or acceleration of one debt agreement will result in the default and acceleration of our other debt agreements and under our Master Charter lease agreement. A default, whether by us or any of our subsidiaries, could result in all or a portion of our outstanding debt becoming immediately due and payable and would provide certain other remedies to the counterparty to the Master Charter. These events could have a material adverse effect our business, financial position, results of operations, cash flows and ability to satisfy obligations under our debt agreements. Also see Note 5 to our consolidated financial statements included herein.
Our revenues are primarily generated from entities operating in the oil and gas industry in the North Sea, the Asia Pacific Region, West Africa, Brazil, the Mexican Gulf of Mexico (“Mexico”) and the U.S. Gulf of Mexico (“Gulf of Mexico”). Our international operations for the year ended December 31, 2009 account currently for 99% of revenues and are subject to a number of risks inherent to international operations including exchange rate fluctuations, unanticipated assessments from tax or regulatory authorities, and changes in laws or regulations. In addition, because of our corporate structure, we may not be able to repatriate funds from our Norwegian subsidiaries without adverse tax or debt compliance consequences. These factors could have a material adverse affect on our financial position, results of operations and cash flows.
Because our revenues are generated primarily from customers who have similar economic interests, our operations are also susceptible to market volatility resulting from economic, cyclical, weather or other factors related to the energy industry. Changes in the level of operating and capital spending in the industry, decreases in oil or gas prices, or industry perceptions about future oil and gas prices could materially decrease the demand for our services, adversely affecting our financial position, results of operations and cash flows.
Our operations, particularly in the North Sea, China, West Africa, Mexico, and Brazil, depend on the continuing business of a limited number of key customers and some of our long-term contracts contain early termination options in favor of our customers. If any of these customers terminate their contracts with us, fail to renew an existing contract, refuse to award new contracts to us or choose to exercise their termination rights, our financial position, results of operations and cash flows could be adversely affected.
Our certificate of incorporation effectively requires that we remain eligible under the Merchant Marine Act of 1920, as amended, or the Jones Act, and together with the Shipping Act, 1916, the Shipping Acts. The Shipping Acts require that vessels engaged in the U.S. coastwise trade and other services generally be owned by U.S. citizens and built in the U.S. For a corporation engaged in the U.S. coastwise trade to be deemed a U.S. citizen: (i) the corporation must be organized under the laws of the U.S. or of a state, territory or possession thereof, (ii) each of the president or other chief executive officer and the chairman of the board of directors of such corporation must be a U.S. citizen, (iii) no more than 25% of the directors of such corporation necessary to the transaction of business can be non-U.S. citizens and (iv) at least 75% of the interest in such corporation must be owned by U.S. “citizens” (as defined in the Shipping Acts). The Jones Act also treats as a prohibited “controlling interest” any (i) contract or understanding by which more than 25% of the voting power in the corporation may be exercised, directly or indirectly, on behalf of a non-U.S. citizen and (ii) the existence of any other means by which control of more than 25% of any interest in the corporation is given to or permitted to be exercised by a non-U.S. citizen. We expect decommissioning and deep water projects in the Gulf of Mexico to comprise an important part of our subsea strategy, which may require continued compliance with the Jones Act. Any action that risks our status under the Jones Act could have a material adverse effect on our business, financial position, results of operations and cash flows.
The holders of our 3% Convertible Debentures due 2027 and the 8.125% Debentures have the right to require us to repurchase the debentures upon the occurrence of a “Fundamental Change” in our business. The holders of the Senior Secured Notes have the ability to require us to repurchase the Notes at 101% of par value in the event of a Change of Control. See Note 5 to our consolidated financial statements included herein.
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Results of Operations
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
The following table summarizes our consolidated results of operations for the years ended December 31, 2009 and 2008:
The following information on day rate, utilization and average number of vessels is relevant to our revenues and are the primary drivers of our revenue fluctuations. Our consolidated fleet’s average day rates, utilization, and average number of vessels by vessel class, is as follows:
Segment Results
Subsea Services
Revenues increased $61.7 million for the year ended December 31, 2009 compared to the prior year. The increase is primarily due to the acquisition of DeepOcean in May 2008, which contributed incremental revenues of $62.2 million. This segment also includes revenues from SPSVs that were previously part of our towing and supply segment of $36.4 million for the year ended December 31, 2009, a decrease of $0.5 million compared to prior year. The increase is also due to incremental revenues from two newbuild vessels delivered in the second half of 2008.
This segment reported an operating loss of $147.9 million for the year ended December 31, 2009 compared to an operating loss of $114.6 million in 2008. Increases in 2009 to direct operating, general and administrative and depreciation and amortization expenses reflect a full twelve months of activity from the 2008 DeepOcean acquisition. The 2009 loss also includes impairments and penalties on early termination of contracts of $134 million primarily related to (i) our expectation of exercising our termination option for the last four Tebma vessels, of $116.1 million, (ii) withdrawing from a partnership for the construction of a new vessel, the Deep Cygnus, of $14.0 million, (iii) terminating the VOS Satisfaction lease of $2.8 million and (iv) cancelling an equipment contract of $1.2 million. In the second quarter of 2009, we withdrew from the partnership for the construction of the Deep Cygnus as it had been unable to fulfill its commitment of obtaining financing for the remaining amount necessary to purchase the new vessel. For the year ended December 31, 2009, operating loss increased compared to 2008 as this segment was adversely affected by the loss of revenue days on two subsea vessels that are time chartered from a third-party vessel owner due to mechanical issues. Additionally, one of our large subsea vessels, the Atlantic Challenger, completed an extensive regulatory dry docking after working for five years in Mexico, which negatively affected our operating results in the first part of the year as it was brought back into service. We made the decision to expand the service offerings on the Atlantic Challenger and market the vessel outside of Mexico. In April 2009, as previously announced, the Atlantic Challenger was awarded a term contract in China at approximately $135,000 per day. For the previous five years, the vessel was on contract in Mexico at an average day rate of approximately $40,000 per day. In 2009, the average day rate for our DeepOcean MSVs was $80,609 and utilization was 81%.
Subsea Trenching and Protection
For the year ended December 31, 2009, revenues increased $109.5 million and operating income increased $63.3 million compared to the year ended December 31, 2008. The increase in operating income is primarily due to an increase in vessel count compared to 2008 partially offset by lower rates. The increase also reflects a full twelve months of activity in this segment which was established upon the acquisition of CTC Marine, a wholly-owned subsidiary of DeepOcean, in May 2008. Three additional vessels were utilized in 2009 as compared to 2008. CTC utilized the Atlantic Challenger, which was reflected in DeepOcean’s operations in 2008, along with the Trico Sabre and Deep Cygnus (for Ekofisk Lofs project) for additional revenues of approximately $39.0 million. Increases in direct operating, general and administrative, and depreciation and amortization expenses are largely due to the full twelve months of activity in 2009. Direct operating expenses also included a $5.6 million bad debt expense for a customer that is currently in liquidation. In 2009, we impaired an acquired asset in the amount of $2.0 million, which was related to a receivable due to CTC Marine for work performed in May 2008, prior to the acquisition. Impairment charges of $39.7 million incurred in 2008 were based on our annual impairment analysis under accounting guidance for goodwill and other intangibles which determined the implied fair value of goodwill and intangibles was less than carrying value. In 2009, CTC was awarded term contracts in excess of $234 million, $184 million of which were completed in 2009.
Towing and Supply
Revenues decreased $85.1 million for the year ended December 31, 2009 and operating income decreased $25.0 million compared to the prior year. The decreases in revenues and operating income are due to weaknesses in the North Sea and West Africa regions as a consequence of declines in the overall markets coupled with newbuild vessels entering the North Sea market. We also exited the Gulf of Mexico region during 2009. The annual operating income decrease was partially offset by gains on asset sales of approximately
$31 million primarily related to the sales of two platform supply vessels and one anchor handling, towing and supply vessel in the North Sea, one supply boat in EMSL, and seven Gulf of Mexico supply boats.
In this operating segment, a significant amount of the operating costs are fixed and therefore require longer lead times to implement cost structure changes, such as stacking vessels and reducing the work force. We initiated these types of changes starting in the second quarter of 2009, with full realization in the third quarter of 2009 as reflected in the higher reduction in direct operating expenses of 22%. General and administrative costs decreased by 12% as part of the savings were offset by higher professional fees in Brazil and the North Sea as well as increased labor costs in Brazil. The North Sea also recorded a $1.2 million expense in impairments and penalties on early termination of contracts for exit costs on the Fosnavag lease as operations were transferred to another location in 2009.
Corporate
Corporate expenses were $26.3 million for the year ended December 31, 2009 as compared to $23.6 million for the same prior year period. The increase in expenses primarily reflects legal costs related to the proxy contest and increased personnel and other operating costs to support a substantially larger company due to the acquisition of DeepOcean in May 2008.
Other Items
Interest income. Interest income for 2009 was $2.9 million, a decrease of $7.0 million compared to 2008, reflecting our use of available cash to partially fund the acquisition of DeepOcean in May 2008 and lower interest rates in the current year.
Interest expense. Interest expense increased $14.3 million in the year ended December 31, 2009, compared to the same period in 2008. The increase for 2009 is primarily attributed to twelve months of interest expense in 2009 versus approximately eight in 2008 on the debt incurred and assumed when we acquired DeepOcean and CTC Marine in May 2008. Additionally, in October of 2009, we completed the issuance of $400.0 million aggregate principal amount of Senior Secured Notes due 2014 at a higher rate of interest of 11.875%. We capitalize interest related to vessels currently under construction. Capitalized interest for the year ended December 31, 2009 totaled $18.5 million and $18.8 million for the same period in 2008.
Unrealized gain (loss) on mark-to-market of embedded derivative. The authoritative guidance for derivative instruments and hedging activities requires valuations for our embedded derivatives within our previous 6.5% Debentures and our new 8.125% Debentures. The estimated fair value of the embedded derivatives will fluctuate based upon various factors that include our common stock closing price, volatility, United States Treasury bond rates and the time value of options. The fair value for the 8.125% Debentures will also fluctuate due to the passage of time. The calculation of the fair value of the derivatives requires the use of a Monte Carlo simulation lattice option-pricing model. On the date of the exchange, the fair value of the embedded derivative associated with our new 8.125% Debentures was $4.7 million. On December 31, 2009, the estimated fair value of the 8.125% Debenture derivative was $6.0 million resulting in a $1.2 million non-cash unrealized loss for the year ended December 31, 2009. The embedded derivative on our previous 6.5% Debentures was revalued on the date of the exchange. The unrealized gains for the years ended December 31, 2009 and 2008 were $0.4 million and $52.7 million, respectively. Any increase in our stock price will result in non-cash unrealized losses being recognized in future periods and such amounts could be material.
Gain on conversion of debt. During 2009, various holders of our previous 6.5% Debentures converted $24.5 million principal amount of the debentures, collectively, for a combination of $6.9 million in cash related to the interest make-whole provision and 605,759 shares of our common stock based on an initial conversion rate of 24.74023 shares of common stock per $1,000 principal amount of debentures. We recognized gains on conversions of $11.3 million for the year ended December 31, 2009.
Refinancing costs. In connection with the exchange of our 6.5% Debentures for the 8.125% Debentures, we incurred refinancing costs primarily related to investment banker and legal costs that are expensed as incurred under modification accounting which totaled $6.2 million for the year ended December 31, 2009.
Foreign exchange gain. Foreign exchange gain for the year ended December 31, 2009 was $26.4 million and resulted in an increase of $25.0 million compared to 2008 primarily due to the U.S. Dollar weakening in relation to the NOK by 22% compared to 2008. The foreign exchange gain was primarily generated from (i) a change in our $200 million Revolving Credit Facility from a NOK denominated loan to a U.S. Dollar denominated loan which was repaid in October 2009, (ii) an intercompany notes receivable held by DeepOcean that is denominated in a currency other than the functional currency and is expected to be repaid in the future, and (iii) the $400 million Senior Secured Notes that are U.S. Dollar denominated on NOK functional currency books. Please see Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our market risk exposures primarily include interest rate and exchange rate fluctuations on financial instruments as detailed below. The following sections address the significant market risks associated with our financial activities. Our exposure to market risk as discussed below includes “forward-looking statements” and represents estimates of possible changes in fair values, future earnings or cash flows that would occur assuming hypothetical future movements in foreign currency exchange rates or interest rates. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based upon actual fluctuations in foreign currency exchange rates, interest rates and the timing of transactions.
Interest Rate Risk
The table below provides information about our market-sensitive debt instruments. Our fixed-rate debt has no earnings exposure from changes in interest rates.
Foreign Currency Exchange Rate Risk
Our consolidated reporting currency is the U.S. Dollar although most of our operations are located outside the United States. We are primarily exposed to fluctuations in the foreign currency exchange rates of the Norwegian Kroner, the British Pound, the Euro, the Brazilian Real and the Nigerian Naira. A number of our subsidiaries use a different functional currency than the U.S. Dollar. The functional currencies of these subsidiaries include the Norwegian Kroner, the British Pound, the Brazilian Real, and the Nigerian Naira. As a result, the reported amount of our assets and liabilities related to our non-U.S. operations and, therefore, our consolidated financial statements will fluctuate based upon changes in currency exchange rates.
We manage foreign currency risk by attempting to contract as much foreign revenues as possible in U.S. Dollars. To the extent that our foreign subsidiaries revenues are denominated in U.S. Dollars, changes in foreign currency exchange rates impact our earnings. This is somewhat mitigated by the amount of foreign subsidiary expenses that are also denominated in U.S. Dollars. In order to further mitigate this risk, we may utilize foreign currency forward contracts to better match the currency of our revenues and associated costs. We do not use foreign currency forward contracts for trading or speculative purposes. The counterparties to these contracts would be limited to major financial institutions, which would minimize counterparty credit risk. There were no foreign exchange forward contracts outstanding during 2009.
Foreign exchange gain (loss) for the years ended December 31, 2009, 2008, and 2007 was $26.4 million, $1.4 million and $(2.3) million, respectively. The significant increase from prior years is due to the change of our $200 million Revolving Credit Facility from a NOK denominated loan in June 2009 to a U.S. Dollar denominated loan and an intercompany notes receivable held by DeepOcean that is denominated in a currency other than the functional currency and is expected to be repaid in the future.
In connection with our refinancing in October 2009, the $200 million Revolving Credit Facility was repaid. The Senior Secured Notes is U.S. Dollar denominated debt recorded on Norwegian Kroner functional books. A 10% change in the exchange rate between the U.S. Dollar and the Norwegian Kroner could cause approximately a $40 million increase or decrease to our foreign exchange gain (loss) in the statements of operations related to the Senior Secured Notes. Additionally, we are required to pay the interest on the $400 million Senior Secured Notes in U.S. Dollars. A 10% change in the exchange rate between the U.S. Dollar and the Norwegian Kroner could cause a $5 million increase or decrease to our foreign exchange gain (loss) in the statements of operations related to the interest expense on the $400 million Senior Secured Notes.
We do establish intercompany loans from time to time in order to facilitate the movement of cash between subsidiaries. Only intercompany loans that are expected to be repaid in the future and are denominated in a currency other than the functional currency of the books where they are recorded generate foreign currency gains and losses. When establishing such loans, we try to structure them in order to mitigate any potential foreign currency exposure. Most of our foreign currency exposure relates to intercompany Norwegian Kroner loans on U.S. Dollar books or intercompany loans denominated in U.S. Dollar on Norwegian Kroner books that are expected to be repaid in the future. A 10% change in the exchange rate between the U.S. Dollar and the Norwegian Kroner could cause a $10 million increase or decrease to our foreign exchange gain (loss) in the statements of operations related to certain of our intercompany loans. We also have some intercompany loans between the U.S. Dollar and the British Pound which could cause an increase or decrease to our foreign exchange gain (loss) of $4 million.
Embedded Derivative Risk
As discussed in Note 5 (Long Term Debt) and Note 6 (Derivative Instruments) to our consolidated financial statements included herein in Item 8, the conversion feature contained in our 8.125% Debentures and the prior 6.5% Debentures is required to be accounted for separately and recorded as a derivative financial instrument measured at fair value. The estimate of fair value was determined through the use of a Monte Carlo simulation lattice option-pricing model. The assumptions used in the valuation model for the 8.125% Debentures include our December 31, 2009 stock closing price of $4.54 per share, expected volatility of 60%, a discount rate of 18.0% and a United States Treasury Bond Rate of 1.70% for the time value of options. At December 31, 2009, we estimate that a 10% and 30% increase in the price of our stock (keeping other assumptions constant) would increase the fair value of the conversion feature by approximately $1.6 million and $5.7 million, respectively. The reduction in our stock price, coupled with the passage of time, are the primary factors influencing the change in value of this derivative and its impact on our net income (loss) attributable to Trico Marine Services, Inc. Any increase in our stock price will result in unrealized losses being recognized in future periods and such amounts could be material.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
As of December 31, 2009 and as of December 31, 2008
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Equity
Years Ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Trico Marine Services, Inc.:
In our opinion, the consolidated financial statements listed in Item 8 of the accompanying index present fairly, in all material respects, the financial position of Trico Marine Services, Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to the control environment, period-end financial reporting account reconciliations, period-end financial reporting journal entries, the general controls over our information technology systems, and the remeasurement and/or translation of intercompany notes existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2009 consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the risk the Company may not successfully obtain amendments or waivers to financial covenants, and / or the risk the Company may not have adequate liquidity to fund its operations or service its debt raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for certain convertible debt instruments and the manner in which it accounts for noncontrolling interests effective January 1, 2009. As discussed in Note 11 to the consolidated financial statements, on January 1, 2007, the Company changed the manner in which it accounts for uncertain tax positions in connection with its adoption of accounting for uncertainty in income taxes.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Houston, Texas
March 16, 2010
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Trico Marine Services, Inc. (the “Company”) is an integrated provider of subsea and marine support vessels and services, including subsea trenching and protection services, that was formed as a Delaware holding company in 1993. The Company maintains a global presence with operations primarily in international markets including the North Sea, West Africa, Mexico, the Mediterranean, Brazil and the Asia Pacific Region as well as its domestic presence in the U.S. Gulf of Mexico (“Gulf of Mexico”).
In May 2008, the Company expanded its presence in the subsea services market by acquiring DeepOcean ASA (“DeepOcean”). DeepOcean provides subsea services, including inspection, maintenance and repair (“IMR”), survey and light construction support, subsea intervention and decommissioning. CTC Marine Projects LTD (“CTC Marine”), a wholly-owned subsidiary of DeepOcean, provides marine trenching, sea floor cable laying and subsea installation services. DeepOcean and CTC Marine operate a well equipped combined fleet of 14 vessels utilizing modern remotely-operated vehicles (“ROVs”) and subsea trenching and protection, survey and cable laying equipment.
The Company operates internationally through a number of foreign subsidiaries, including DeepOcean AS, through which it manages the subsea services segment, CTC Marine, which manages the subsea trenching and protection segment, and Trico Shipping AS, which owns vessels based primarily in the North Sea. In addition to international operations, domestic subsidiaries include Trico Marine Assets, Inc., which owns the majority of the Company’s towing and supply vessels operating in the Gulf of Mexico and other international regions excluding the North Sea, and Trico Marine Operators, Inc., which operates all vessels in the Gulf of Mexico. The Company’s principal customers are major oil and natural gas exploration, development and production companies and foreign government-owned or controlled organizations and telecommunications companies. Due to the acquisition of DeepOcean and CTC Marine, the Company now operates utilizing three operating segments: (i) subsea services; (ii) subsea trenching and protection; and (iii) towing and supply.
In November 2007, the Company acquired all of the outstanding equity interests of Active Subsea ASA, a Norwegian public limited liability company (“Active Subsea”). Active Subsea has three multi-purpose service vessels (“MPSVs”) currently under construction and scheduled for delivery in 2010 and 2011. These vessels are designed to support subsea services, including performing inspection, maintenance and repair work using ROVs, dive and seismic support and light construction activities.
As of December 31, 2009, the Company’s fleet, together with vessels held in joint ventures, consisted of 66 vessels, including seven subsea platform supply vessels (“SPSVs”), nine multi-purpose service vessels (“MSVs”), five large-capacity platform supply vessels (“PSVs”), five large anchor handling towing and supply vessels (“AHTSs”), 30 offshore supply vessels (“OSVs”), three crew boats, five trenching vessels, one multi-purpose platform supply vessel (“MPSV”) and one line handling (utility) vessel. Additionally, the Company has three MPSVs on order for delivery in 2010 from the Active Subsea acquisition.
2. Risks, Uncertainties, and Going Concern
The Company’s liquidity outlook has changed since December 31, 2008 primarily as a result of rates and utilization in the towing and supply business deteriorating more than anticipated, the further weakening of the U.S. Dollar relative to the Norwegian Kroner during the second quarter which resulted in additional cash payments required to bring its Kroner based credit facility within its contractual credit limit, the weaknesses in the North Sea and the Asia Pacific Region for subsea services which began in the fourth quarter of 2009 and has persisted in the first quarter of 2010 along with certain one-time related issues associated with a longer than expected drydock on a high yielding subsea construction vessel and the cash costs associated with the early termination of a low utilization vessel charter. This has resulted in significantly lower EBITDA than forecasted for both the fourth quarter of 2009 and the first quarter of 2010 and sharply lower levels of liquidity.
As a result of the events described above, the Company believes that its forecasted cash and available credit capacity are not expected to be sufficient to meet its commitments as they come due over the next twelve months and that it will not be able to remain in compliance with its debt covenants. In order to increase its liquidity to levels sufficient to meet its commitments, the Company is currently pursuing a number of actions including (i) selling additional assets, (ii) accessing cash in certain of its subsidiaries, (iii) minimizing capital expenditures, (iv) obtaining waivers or amendments from its lenders, (v) managing working capital and (vi) improving cash flows from operations. There can be no assurance that sufficient liquidity can be raised from one or more of these transactions and / or that these transactions can be consummated within the period needed to meet certain obligations. The Company’s interest payment obligations are concentrated in the months of May and November with approximately $24 million of interest due on the Senior Secured Notes on
each of May 1 and November 1 and approximately $8 million of interest due on the 8.125% Debentures on each of May 15 and November 15. Additionally, the terms of the Company’s credit agreements require that some or all of the proceeds from certain asset sales be used to permanently reduce outstanding debt which could substantially reduce the amount of proceeds it retains. The Company is currently restricted by the terms of each of the 8.125% Debentures and the Senior Secured Notes from incurring additional indebtedness due to its leverage ratio exceeding the limit at which additional indebtedness could be incurred. Additionally, the Company’s ability to refinance any of its existing indebtedness on commercially reasonable terms may be materially and adversely impacted by the current credit market conditions and the Company’s financial condition. If the Company is unable to complete the above mentioned actions, it will be in default under its credit agreements, which in turn, could potentially constitute an event of default under all of its outstanding debt agreements. If this were to occur, all of its outstanding debt could become callable by its creditors and would be reclassified as a current liability on its balance sheet. The uncertainty associated with the Company’s ability to meet its commitments as they come due or to repay its outstanding debt raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might result from the uncertainty associated with the Company’s ability to meet its obligations as they come due.
Due to the Company’s expected liquidity position and limitations in the U.S. Revolving Credit Facility, it expects to make the amortization payments of approximately $10 million due on the 8.125% Convertible Debentures due 2013 (the “8.125% Debentures”) on each of August 1, 2010 and November 1, 2010 in common stock. The number of shares issued will be determined by the stock price at the time of each of the amortization payments and may lead to significantly more shares being issued than if the debentures were converted at the stated conversion rate which is equivalent to $14 per share. The Company will need to negotiate a waiver or amendment to its consolidated leverage ratio debt covenant on the $50 million U.S. Revolving Credit Facility that it does not expect to be in compliance with beginning with the quarter ending March 31, 2010. There can be no assurance that the lenders will agree to this amendment / waiver and / or additional amendments/ waivers on acceptable terms and a failure to do so would provide the lenders the opportunity to accelerate the remaining amounts outstanding under these facilities.
At December 31, 2009, the Company had available cash of $53.0 million. This amount and other amounts in this section reflecting U.S. Dollar equivalents for foreign denominated debt amounts are translated at currency rates in effect at December 31, 2009. As of December 31, 2009, payments due on the Company’s contractual obligations during the next twelve months were approximately $293 million. This includes $53 million of principal payments of debt as of December 31, 2009, $20 million of which can be paid in cash or stock at the Company’s option, $127 million of time charter obligations, $34 million of vessel construction obligations, $70 million of estimated interest expense, and approximately $9 million of other operating expenses such as taxes, operating leases, and pension obligations. The Company expects it will need to complete additional asset sales to have sufficient liquidity to satisfy these obligations. To improve liquidity, it canceled delivery in the second quarter of 2009 of the Deep Cygnus, a large newbuild vessel, thereby terminating its obligation to fund $41.6 million in capital expenditures. It also completed negotiations with Tebma to suspend construction of the remaining four newbuild MPSVs (the Trico Surge, Trico Sovereign, Trico Seeker and Trico Searcher). The Company holds the option to cancel construction by Tebma of the four newbuild MPSVs after July 15, 2010, which would reduce its committed future capital expenditures to approximately $38 million on the three remaining MPSVs, of which it expects to take delivery of by the first and fourth quarters of 2010 and the first quarter of 2011. Due to the expectation that the Company is likely to exercise the termination option for the last four vessels, it incurred a non-cash impairment charge of $116.1 million in the fourth quarter of 2009. This represents the excess of carrying costs over the fair value of the asset upon termination.
The Company is highly leveraged and its debt imposes significant restrictions on it and increases its vulnerability to adverse economic and industry conditions. While the Company’s current maturities of debt have been reduced significantly as a result of the recent issuance of the Senior Secured Notes to approximately $53 million as of December 31, 2009, the Company’s annual interest expense has increased significantly and the Senior Secured Notes impose new restrictions on the Company. Under the terms of the Senior Secured Notes, the Company’s business has been effectively split into two groups: (i) Trico Supply, where substantially all of its subsea services business and all of its subsea protection business resides along with its North Sea towing and supply business and (ii) Trico Other, whose business is comprised primarily of its non North Sea towing and supply businesses. Trico Other has the obligation, among other things, to pay the debt service related to the 8.125% and 3% Convertible Debentures, the $50 million U.S. Revolving Credit Facility, and the 6.11% Notes and to pay the majority of corporate related expenses while Trico Supply has the obligation to make debt service payments related to the Senior Secured Notes and the Trico Shipping Working Capital Facility. Under the terms of these Senior Secured Notes, the ability of Trico Supply to provide funding on an ongoing basis to Trico Other is limited by restrictions on Trico Supply’s ability to pay dividends and principal and interest on intercompany debt unless certain financial measures are met. Other than an annual reimbursement of up to $5 million related to the reimbursement of corporate expenses, a one-time $5 million restricted payment basket, and certain carve outs related to the sale of one vessel and the proceeds from refund
guarantees associated with four construction vessel contracts that are expected to be cancelled, the Company does not expect Trico Supply to be able to transfer additional funds to Trico Other. The refund guarantees have expiration dates and need to be periodically renewed. $21 million of refund guarantees expire prior to the contractual refund date. To date, the Company has been able to obtain renewals of these refund guarantees. However, there can be no assurance that the current refund guarantees will be renewed by the existing financial institutions or, if not renewed, replacement refund guarantees can be obtained.
In addition to the previously mentioned actions being taken to increase its liquidity, the ability of each of Trico Supply, Trico Other, and the Company overall to obtain minimum levels of operating cash flows and liquidity to fund their operations, meet their debt service requirements, and remain in compliance with their debt covenants, is dependent on its ability to accomplish the following: (i) secure profitable contracts through a balance of spot exposure and term contracts, (ii) achieve certain levels of vessel and service spread utilization, (iii) deploy its vessels to the most profitable markets, and (iv) invest in technologically advanced subsea fleet. The forecasted cash flows and liquidity for each of Trico Supply, Trico Other, and the Company are dependent on each meeting certain assumptions regarding fleet utilization, average day rates, operating and general and administrative expenses, and in the case of Trico Supply, new vessel deliveries, which could prove to be inaccurate. Within certain constraints, the Company can conserve capital by reducing or delaying capital expenditures, deferring non-regulatory maintenance expenditures and further reducing operating and administrative costs through various measures including stacking certain vessels.
The Company’s inability to satisfy any of the obligations under its debt agreements would constitute an event of default. Under cross default provisions in several agreements governing its indebtedness, a default or acceleration of one debt agreement will result in the default and acceleration of its other debt agreements and under its Master Charter lease agreement. A default, whether by the Company or any of its subsidiaries, could result in all or a portion of its outstanding debt becoming immediately due and payable and would provide certain other remedies to the counterparty to the Master Charter. These events could have a material adverse effect on the Company’s business, financial position, results of operations, cash flows and ability to satisfy obligations under its debt agreements (Also see Note 5).
The Company’s revenues are primarily generated from entities operating in the oil and gas industry in the North Sea, the Asia Pacific Region, West Africa, Brazil, the Mexican Gulf of Mexico (“Mexico”) and the U.S. Gulf of Mexico (“Gulf of Mexico”). The Company’s international operations for the year ended December 31, 2009 account currently for 99% of revenues and are subject to a number of risks inherent to international operations including exchange rate fluctuations, unanticipated assessments from tax or regulatory authorities, and changes in laws or regulations. In addition, because of the Company’s corporate structure, it may not be able to repatriate funds from its Norwegian subsidiaries without adverse tax or debt compliance consequences. These factors could have a material adverse affect on the Company’s financial position, results of operations and cash flows.
Because the Company’s revenues are generated primarily from customers who have similar economic interests, its operations are also susceptible to market volatility resulting from economic, cyclical, weather or other factors related to the energy industry. Changes in the level of operating and capital spending in the industry, decreases in oil or gas prices, or industry perceptions about future oil and gas prices could materially decrease the demand for the Company’s services, adversely affecting its financial position, results of operations and cash flows.
The Company’s operations, particularly in the North Sea, China, West Africa, Mexico, and Brazil, depend on the continuing business of a limited number of key customers and some of its long-term contracts contain early termination options in favor of its customers. If any of these customers terminate their contracts with the Company, fail to renew an existing contract, refuse to award new contracts to it or choose to exercise their termination rights, the Company’s financial position, results of operations and cash flows could be adversely affected.
The Company’s certificate of incorporation effectively requires that it remain eligible under the Merchant Marine Act of 1920, as amended, or the Jones Act, and together with the Shipping Act, 1916, the Shipping Acts. The Shipping Acts require that vessels engaged in the U.S. coastwise trade and other services generally be owned by U.S. citizens and built in the U.S. For a corporation engaged in the U.S. coastwise trade to be deemed a U.S. citizen: (i) the corporation must be organized under the laws of the U.S. or of a state, territory or possession thereof, (ii) each of the president or other chief executive officer and the chairman of the board of directors of such corporation must be a U.S. citizen, (iii) no more than 25% of the directors of such corporation necessary to the transaction of business can be non-U.S. citizens and (iv) at least 75% of the interest in such corporation must be owned by U.S. “citizens” (as defined in the Shipping Acts). The Jones Act also treats as a prohibited “controlling interest” any (i) contract or understanding by which more than 25% of the voting power in the corporation may be exercised, directly or indirectly, on behalf of a non-U.S. citizen and (ii) the existence of any other means by which control of more than 25% of any interest in the corporation is given to or permitted to be exercised by a non-U.S. citizen. The Company expects decommissioning and deep water projects in the Gulf of Mexico to comprise an important part of its subsea strategy, which may require continued compliance with the Jones Act. Any action that risks its status under the Jones Act could have a material adverse effect on its business, financial position, results of operations and cash flows.
The holders of the Company’s 3% Convertible Debentures due 2027 and the 8.125% Debentures have the right to require the Company to repurchase the debentures upon the occurrence of a “Fundamental Change” in its business. The holders of the Senior Secured Notes have the ability to require the Company to repurchase the Notes at 101% of par value in the event of a Change of Control. See Note 5 for more information.
3. Summary of Significant Accounting Policies
Consolidation Policy. The consolidated financial statements of the Company include the accounts of those subsidiaries where the Company directly or indirectly has more than 50% of the ownership rights and/or for which the right to participate in significant management decisions is not shared with the other shareholders. At December 31, 2009, the Company consolidated a 49% equity interest in Eastern Marine Services Limited (“EMSL”), a Hong Kong limited liability company that develops and provides international marine support services for the oil and gas industry in China, other countries within Southeast Asia and Australia. Prior to 2008, the Company consolidated a 49% variable interest in a Mexican subsidiary, Naviera Mexicana de Servicios, S. de R.L de CV (“NAMESE”) and effective January 1, 2008 the Company owned 100%. See Note 16 for further discussion. The noncontrolling interests of the above mentioned subsidiaries are included in the Consolidated Balance Sheets and Statements of Operations as “Noncontrolling interest”.
All intercompany balances and transactions have been eliminated in consolidation. For comparative purposes, certain amounts in 2008 have been adjusted to conform to the current period’s presentation. The Company adopted the following new accounting standards in 2009: noncontrolling interests (which had no effect on net loss or operating cash flows as discussed in Note 16); and changes in accounting for the 3% convertible debt instruments that permit cash settlement upon conversion which did have an effect on the financial statements as discussed in Note 5.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and those differences could be material.
Revenue Recognition. The Company earns and recognizes revenues primarily from the time and bareboat chartering of vessels to customers based upon daily rates of hire and by providing other subsea services. A time charter is a lease arrangement under which the Company provides a vessel to a customer and the Company is responsible for all crewing, insurance and other operating expenses. In a bareboat charter, the Company provides only the vessel to the customer, and the customer assumes responsibility to provide for all of the vessel’s operating expenses and generally assumes all risk of operation. Vessel charters may range from several days to several years. Other vessel income is generally related to billings for fuel, bunks, meals and other services provided to customers.
Other subsea services revenue, primarily derived from the hiring of equipment and operators to provide subsea services to its customers, consists primarily of revenue from billings that provide for a specific time for operators, material and equipment charges, which accrue daily and are billed periodically for the delivery of subsea services over a contractual term. Service revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the service has been provided, the fee is fixed or determinable and collection of resulting receivables is reasonably assured.
In addition, revenue for certain subsea contracts related to trenching of subsea pipelines, flowlines and cables and installation of subsea cables (umbilicals, ISUs, power and telecommunications) and flexible flowlines is recognized based on the percentage-of-completion method measured by the percentage of costs incurred to date to estimated total costs for each contract. The revenue is recognized in accordance with the accounting guidance for the performance of contracts for which specifications are provided by the customer for the construction of facilities or the production of goods or for the provision of related services. Cost estimates are reviewed monthly as the work progresses and adjustments proportionate to the percentage-of-completion are reflected in revenue for the period when such estimates are revised. Claims for extra work or changes in scope of work are included in revenue when the amount can be reliably estimated and collection is probable. Losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined.
Cash and Cash Equivalents. All investments with original maturity dates of three months or less are considered to be cash equivalents.
Restricted Cash. The Company segregates restricted cash due to legal or other restrictions regarding its use. At December 31, 2009 and 2008, the total restricted cash balance of $7.6 million and $3.6 million, respectively, is primarily related to the following:
Accounts Receivable. In the normal course of business, the Company extends credit to its customers on a short-term basis, generally 60 days or less. The Company’s principal customers are major integrated oil companies and large independent oil and gas companies as well as foreign government-owned or controlled companies that provide logistics, construction and other services to such oil companies and foreign government organizations. Although credit risks associated with the Company’s customers are considered minimal, the Company routinely reviews its accounts receivable balances and makes provisions for doubtful accounts as necessary. The Company estimates its allowance for doubtful accounts based on historical collection trends, type of customer, the age of outstanding receivables and any specific customer collection issues that it has identified. At December 31, 2009 and 2008, allowance for doubtful accounts totaled $6.7 million and $2.3 million, respectively.
The Company is exposed to risks related to the Company’s insurance and reinsurance contracts with various insurance entities. The reinsurance recoverable amount can vary depending on the size of a loss. The exact amount of the reinsurance recoverable is not known until all losses are settled. The Company records the reinsurance recoverable amount when the claim has been communicated to the insurance provider, accepted in writing by the insurance provider as a valid claim and the Company believes it is probable amounts will be received. The Company monitors its reinsurance recoverable balances regularly for possible reinsurance exposure and makes adequate provisions as necessary for doubtful reinsurance receivables.
Goodwill and Intangible Assets.
Goodwill
The Company’s goodwill represented the purchase price in excess of the net amounts assigned to assets acquired and liabilities assumed by the Company in connection with the May 16, 2008 acquisition of DeepOcean (see Note 4 for further discussion). The Company’s reporting units follow its operating segments under accounting guidance for segments. Goodwill has been recorded related to the acquisition in two reporting units - (i) subsea services and (ii) subsea trenching and protection.
Accounting guidance for goodwill requires that it be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with accounting guidance for business combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
At December 31, 2008, the measurement date, the Company performed the first step of the two-step impairment test proscribed by accounting guidance for goodwill, and compared the fair value of the reporting units to its carrying value. In assessing the fair value of the reporting unit, the Company used a market approach that incorporated the Company Specific Stock Price method and the Guideline Public Company method, each receiving a 50% weighting. Due to current market conditions, the Company concluded that the market approach would be most appropriate in arriving at the fair value of the reporting units. Key assumptions included the Company’s publicly traded stock price, using a 30-day average price of $3.98 per share, an implied control premium of 9%, and a fair value of debt based primarily on the price for the Company’s publicly traded debentures. In step one of the impairment test, the fair value of both the subsea services and subsea trenching and protection reporting units were less than the carrying value of the net assets of the respective reporting units, and thus the Company performed step two of the impairment test.
In step two of the impairment test, the Company determined the implied fair value of goodwill and compared it to the carrying value of the goodwill for each reporting unit. The Company allocated the fair value of the reporting units to all of the assets and liabilities of the respective units as if the reporting unit had been acquired in a business combination. The Company’s step two analysis resulted in no implied fair value of goodwill for either reporting unit, and therefore, the Company recognized an impairment charge of $169.7 million in the fourth quarter of 2008, representing a write-off of the entire amount of the Company’s previously recorded goodwill. This impairment is based on a combination of factors including the current global economic environment, higher costs of equity and debt capital and the decline in market capitalization of the Company and comparable subsea services companies. The following table provides information relating to the Company’s goodwill (in thousands):
Intangible Assets
Intangible assets consist primarily of trade names and customer relationships, all of which were acquired in connection with the DeepOcean acquisition in 2008. The Company did not incur costs to renew or extend the term of acquired intangible assets during the period ending December 31, 2009.
The Company classified trade names as indefinite lived assets. Under authoritative guidance for goodwill and other intangibles, indefinite lived assets are not amortized but instead are reviewed for impairment annually and more frequently if events or circumstances indicate that the asset may be impaired. At December 31, 2009 and 2008, the Company performed an impairment analysis of its trade name assets utilizing a form of the income approach known as the relief-from-royalty method. The Company did not recognize an impairment in 2009. During the 2008 assessment, the Company recognized an impairment of $3.1 million on trade name assets which is reflected in the accompanying Statements of Operations under “Impairments and penalties on early termination of contracts”.
The authoritative guidance requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairments in accordance with accounting guidance for long lived assets. The following table provides information relating to the Company’s intangible assets as of December 31, 2009 and 2008 (in thousands):
The intangible assets subject to amortization are amortized using the straight-line method over estimated useful lives of 11 to 13 years for the customer relationships. Amortization expense was $7.4 million and $7.6 million for the years ended December 31, 2009 and 2008, respectively, and the estimated amortization expense for each of the next five years beginning 2010 is $8.0 million per year.
The Company assessed the fair values of its customer relationships in accordance with accounting guidance for long lived assets and concluded there was no impairment as of December 31, 2009 or 2008.
Accounting for Long-Lived Assets. Long-lived assets are recorded at the original cost and reduced by the amount of depreciation and impairments, if any. In addition to the original cost of the asset, the recorded value is impacted by a number of policy elections, including the estimation of useful lives and residual values.
Depreciation for equipment commences once the asset is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for their intended use. Depreciable lives and salvage values are determined through economic analysis, reviewing existing fleet plans and comparison to similar vessels. Depreciation for financial statement purposes is provided on the straight-line method depending on the type of vessel. Residual values are estimated based on our historical experience with regards to the sale of both vessels and spare parts and are established in conjunction with the estimated useful lives of the vessel. Marine vessels are depreciated over useful lives ranging from 15 to 35 years from the date of original acquisition, based on historical experience for the particular vessel type. Major modifications, which extend the useful life of marine vessels, are capitalized and amortized over the adjusted remaining useful life of the vessel. Transportation and other equipment are depreciated over a useful life of five to 15 years. Depreciation expense was $69.6 million, $53.9 million and $24.4 million for the years ended December 31, 2009, 2008 and 2007.
When management decides to sell an asset, the Company ceases to depreciate the asset and reclassifies the asset as “Assets Held for Sale”.
When assets are retired or disposed, the cost and accumulated depreciation thereon are removed, and any resultant gains or losses are recognized in current operations. The Company utilizes judgment in (i) determining whether an expenditure is a maintenance expense or a capital asset; (ii) determining the estimated useful lives of assets; (iii) determining the residual values to be assigned to assets; and (iv) determining if or when an asset has been impaired.
Interest is capitalized in connection with the construction or major modification of vessels. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life, once it is placed into operation. The Company capitalized interest of $18.5 million and $18.8 million at December 31, 2009 and 2008, respectively.
Impairment of Long-Lived Assets. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired as defined by accounting guidance for long-lived assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
In 2009, 2008, and 2007, the Company also assessed the current fair values of its significant assets including marine vessels and other marine equipment. If market conditions were to decline in market areas in which the Company operates, it could require the Company to evaluate the recoverability of its long-lived assets in future periods, which may result in write-offs or write-downs on its vessels that may be material individually or in the aggregate. In 2009, since the Company completed negotiations with Tebma which provides it the option to cancel the final four (the Trico Surge, the Trico Sovereign, Trico Seeker, and Trico Searcher) of the seven vessels currently under construction and it expects that it is likely to exercise the termination option for the last four vessels, it incurred a non-cash impairment charge of $116.1 million which represents the excess of carrying costs over the fair value of the asset upon termination. No impairment existed at December 31, 2008. The Company recognized a $0.1 million impairment for the year ended December 31, 2007 on its vessels.
Marine Vessel Spare Parts. Marine vessel spare parts are stated at the lower of average cost or market and are included in “Other assets” in the Consolidated Balance Sheet.
Marine Inspection Costs. Marine inspection costs are expensed in the period incurred. Non-regulatory drydocking expenditures are either capitalized as major modifications or expensed, depending on the work being performed. Total marine inspection and drydocking cost totaled $6.4 million, $17.6 million and $16.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Deferred Financing Costs. Deferred financing costs include costs associated with the issuance of debt and are amortized using the effective-interest rate method of amortization over the expected life of the related debt agreement or on a straight-line basis over the expected life of the related debt agreement if the straight-line method approximates the effective-interest rate method of amortization.
Income Taxes. Deferred income taxes are provided at the currently enacted income tax rates for the difference between the financial statement and income tax bases of assets and liabilities and carryforward items. The Company provides valuation allowances against net deferred tax assets for amounts which are not considered “more likely than not” to be realized.
On January 1, 2007, the Company adopted the provisions of “Accounting for Uncertainty in Income Taxes”. The guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.
Direct Operating Expenses. Direct operating expenses (or direct operating costs) principally include crew costs, marine inspection costs, insurance, repairs and maintenance, supplies and casualty losses. Direct operating costs are charged to expense as incurred. Direct operating costs are reduced by the amount of partial reimbursements of labor costs received from the Norwegian government. The labor reimbursements totaled $5.7 million, $7.8 million and $7.7 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Losses on Insured Claims. The Company limits its exposure to casualty losses by maintaining stop-loss and aggregate liability deductibles. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon the Company’s historical loss experience. To the extent that estimated self-insurance losses differ from actual losses realized, the Company’s insurance reserves could differ significantly and may result in either higher or lower insurance expense in future periods.
Foreign Currency Translation. The functional currency for the majority of the Company’s international operations is the local currency. Adjustments resulting from the translation of the local functional currency financial statements into the U.S. Dollar, which is primarily based on current exchange rates, are included in the Consolidated Statements of Equity as a separate component of “Accumulated other comprehensive income (loss)” in the current period. The functional currency of certain foreign locations is the U.S. Dollar, which includes Mexico and certain Norwegian subsidiaries. Adjustments resulting from the remeasurement of the local currency financial statements into the U.S Dollar functional currency, which uses a combination of current and historical exchange rates, are included in the Consolidated Statements of Operations in “Foreign Currency Exchange Gain (Loss)” in the current period. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign currency receivables or payables, are also included in “Foreign Currency Exchange Gain (Loss)”.
Stock-based Compensation. The Company accounts for stock-based employee compensation plans using the fair-value based method of accounting in accordance with the accounting guidance as it relates to Share Based Payments (Revised 2004). The Company’s results of operations reflect compensation expense for all employee stock-based compensation, which is included in “General and Administrative”.
Accumulated Other Comprehensive Income (Loss). Accumulated other comprehensive income (loss), which is included as a component of stockholders’ equity, is comprised of currency translation adjustments in foreign subsidiaries and unrecognized pension gain (loss). The balance at December 31, 2009 primarily reflects currency translation related to translating Norwegian Kroner books into the U.S. Dollar, the Company’s reporting currency.
Recent Accounting Standards. In January 2010, the Financial Accounting Standards Board (“FASB”) issued an amendment to the disclosure requirements for fair value measurements. The update requires entities to disclose the amounts of and reasons for significant transfers between Level 1 and Level 2, the reasons for any transfers into or out of Level 3, and information about recurring Level 3 measurements of purchases, sales, issuances and settlements on a gross basis. The update also clarifies that entities must provide (i) fair value measurement disclosures for each class of assets and liabilities and (ii) information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, the update is effective for interim and annual periods beginning after December 15, 2009. The requirement to separately disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements is effective for interim and annual periods beginning after December 15, 2010. The Company does not expect that its adoption will have a material effect on the disclosures contained in its notes to the consolidated financial statements.
In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification will become the single source for all authoritative GAAP recognized by the FASB to be applied to financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and will not have an effect on the Company’s financial position, results of operations or liquidity.
In June 2009, the FASB also issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a qualifying special-purpose entity (“QSPE”), removes the exception from applying the consolidation guidance within this amendment. This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. The impact of adopting the new accounting guidance as of January 1, 2010 is expected to result in the deconsolidation of EMSL
which has total assets of $39.4 million, equity of $28.6 million, revenues of $25.0 million and net income of $1.0 million in 2009.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, this amendment eliminates the concept of a QSPE, as discussed above. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. This amendment will not have a material effect on the Company’s financial position, results of operations or liquidity.
In May 2009, the FASB issued an amendment to the accounting and disclosure requirements to re-map the auditing guidance on subsequent events to the accounting standards with some terminology changes. The amendment also requires additional disclosures which includes the date through which the entity has evaluated subsequent events and whether that evaluation date is the date of issuance or the date the financial statements were available to be issued. The amendment is effective for interim or annual financial periods ending after June 15, 2009 and should be applied prospectively. In February 2010, the FASB amended the guidance on subsequent events to remove the requirement for SEC filers which alleviates potential conflicts with current SEC guidance. The prior guidance will still be in effect for revised financial statements that are issued due to (i) a correction of an error or (ii) retrospective application of U.S. generally accepted accounting principles. The Company has adopted the updated standard as of December 31, 2009 with no material effect on its financial statements.
In April 2009, the FASB issued an amendment to provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This amendment also includes guidance on identifying circumstances that indicate a transaction is not orderly. The amendment is effective for periods ending after June 15, 2009. The Company has adopted the amendment as of June 30, 2009 with no material effect on its financial statements.
In April 2009, the FASB issued authoritative guidance which changes the method for determining whether an other-than-temporary impairment exists for debt securities, and also requires additional disclosures regarding other-than-temporary impairments. The guidance is effective for interim and annual periods ending after June 15, 2009. The Company has adopted the standard as of June 30, 2009 with no material effect on its financial statements.
In April 2009, the FASB issued authoritative guidance which requires disclosures about fair value of financial instruments in interim as well as in annual financial statements. The guidance is effective for periods ending after June 15, 2009. The Company has adopted the standard for those assets and liabilities as of June 30, 2009 with no material impact on its financial statements. See Note 8 “Fair Value Measurements”.
On May 9, 2008, the FASB issued new authoritative guidance that changed the accounting and required further disclosures for convertible debt instruments that permit cash settlement upon conversion. This guidance was applied to the Company’s 3% Debentures. Effective January 1, 2009, the Company adopted the provisions of this new accounting guidance and applied it, on a retrospective basis, to its consolidated financial statements. The accounting guidance required the Company to separately account for the liability and equity components of its senior convertible notes in a manner intended to reflect its nonconvertible debt borrowing rate. The Company determined the carrying amount of the senior convertible note liability by measuring the fair value as of the
issuance date of a similar note without a conversion feature. The difference between the proceeds from the sale of the senior convertible notes and the amount reflected as the senior convertible note liability was recorded as additional paid-in capital. Effectively, the convertible debt was recorded at a discount to reflect its below market coupon interest rate. The excess of the principal amount of the senior convertible notes over their initial fair value (the “discount”) is accreted to interest expense over the expected life of the senior convertible notes. Interest expense is recorded for the coupon interest payments on the senior convertible notes as well as the accretion of the discount. The adoption did not have an impact on the Company’s cash flows. See Note 5, “Debt”.
In February 2008, the FASB issued authoritative guidance, which allows for the delay of the effective date of the authoritative guidance for fair value measurements for one year for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company has adopted the standard for those assets and liabilities as of January 1, 2009 with no material impact on its financial statements.
In December 2007, the FASB revised the authoritative guidance for business combinations, which establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will be effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with an exception related to the accounting for valuation allowances on deferred taxes and acquired contingencies related to acquisitions completed before the effective date. The Company adopted the standards as of January 1, 2009.
In December 2007, the FASB issued a newly issued accounting standard for its noncontrolling interests. The accounting guidance states that accounting and reporting for noncontrolling interests (previously referred to as minority interests) will be recharacterized as noncontrolling interests and classified as a component of equity. The newly issued accounting standard applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The provisions of the standard were applied to all noncontrolling interests prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented and have been disclosed as such in the Company’s consolidated financial statements contained herein.
4. Acquisitions
DeepOcean and CTC Marine
On May 15, 2008, the Company initiated a series of transactions that resulted in the acquisition of all the equity ownership of DeepOcean ASA, a Norwegian public limited liability company (“DeepOcean”). The Company began consolidating DeepOcean’s results on May 16, 2008, the date it obtained constructive control of DeepOcean. The Company’s ownership of DeepOcean ranged from 54% on May 16, 2008 to in excess of 99% by June 30, 2008. At December 31, 2008, the Company had a 100% interest in DeepOcean.
The Company, through its subsidiary, Trico Shipping AS (“Trico Shipping”), acquired all of the outstanding common stock of DeepOcean for Norwegian Kroner (NOK) 32 per share. Trico Shipping acquired the DeepOcean shares as follows:
On May 16, 2008, Trico Shipping acquired an aggregate 55,728,955 shares of DeepOcean’s common stock, representing 51.5% of the fully diluted capital stock of DeepOcean, pursuant to the following agreements and arrangements:
the fully diluted capital stock of DeepOcean. Trico Shipping acquired these DeepOcean shares in exchange for a combination of cash and phantom stock units issued by the Company with a combined value of NOK 32 per share (approximately $116.4 million).
Subsequent to May 16, 2008, Trico Shipping purchased an additional 2,700,000 DeepOcean shares in the open market at a price of NOK 32 per share (approximately $17.2 million), representing approximately 2.5% of the fully diluted capital stock of DeepOcean. As a result of the transactions described above, and in accordance with the Norwegian Securities Trading Act, on May 30, 2008 Trico Shipping initiated a mandatory cash offer for all the remaining DeepOcean shares it did not own. The aggregate value of the mandatory offer price was NOK 32 per share, including a previously announced NOK 0.50 per share dividend amount. On June 13, 2008, Trico Shipping acquired an aggregate of 39,270,000 DeepOcean shares, consisting of all the shares owned by DOF ASA (DOF), a significant DeepOcean shareholder, as well as an additional 4,050,000 shares purchased in the open market for NOK 32 per share (approximately $246.7 million). These acquisitions represented approximately 36.3% of DeepOcean’s fully diluted shares of capital stock, with the DOF shares representing approximately 32.6% of the fully diluted capital stock of DeepOcean. Following these transactions the Company owned 90.4% of DeepOcean’s fully diluted capital stock. The mandatory cash offer period ended on June 30, 2008, at which time the Company’s ownership of DeepOcean’s fully diluted capital stock increased to 99.7%. On August 29, 2008, DeepOcean delisted from the Oslo Bors exchange. The Company acquired the remaining 284,965 shares of DeepOcean outstanding at a purchase price of 32 NOK per share.
The acquisition has been accounted for by using the purchase method of accounting. To fund the acquisition, the Company used a combination of its available cash, borrowings under its existing, new and/or amended revolving credit facilities (Note 5), the proceeds from the issuance of $300 million of 6.5% Convertible Debentures (Note 5) and the issuance of the Company’s equity instruments in the form of phantom stock units (Note 7).
Below is a summary of the acquisition costs (in thousands):
In accordance with the purchase method of accounting, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition dates. In valuing acquired assets and assumed liabilities, fair values were based on, but were not limited to: quoted market prices, where available; expected cash flows; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; and appropriate discount and growth rates. The excess of purchase price over the estimated fair value of the net assets acquired at the date of acquisition was recorded as goodwill.
The operations of DeepOcean are reflected in the Company’s subsea services segment and the operations of CTC Marine are reflected in the Company’s subsea trenching and protection segment.
Below is a summary of the allocation of the purchase price (in thousands):
(1)
Reflects the estimated fair value of the tangible assets of DeepOcean and CTC Marine. The subsea equipment acquired from DeepOcean and CTC Marine has estimated depreciable lives ranging from two to 15 years. The marine vessels acquired have estimated useful lives approximating 20 to 25 years.
(2)
Goodwill recorded in the subsea services and subsea trenching and protection segments was $181.1 million and $52.9 million, respectively. See Note 3 for discussion of impairment.
(3)
Primarily reflects value associated with the customer relationships of DeepOcean and CTC Marine. Accumulated amortization related to the intangible assets for the period from May 16, 2008 to December 31, 2008 totaled $7.6 million. The estimated useful lives of the customer relationships ranges from 11 to 13 years and is being amortized using the straight-line method. See Note 3 for discussion of impairment.
(4)
Includes $59.5 million of short-term and current maturities of debt assumed in the acquisition.
(5)
Primarily includes pension liabilities. The Norwegian companies of DeepOcean are required to maintain occupational pension plans.
Active Subsea
On November 23, 2007, the Company acquired all of the outstanding equity interests of Active Subsea ASA, a Norwegian public limited liability company (“Active Subsea”), for approximately $247.6 million, and changed its name to Trico Subsea. The Company used available cash to fund this acquisition. Active Subsea originally had eight MPSVs that were under construction. Due to the expectation that the Company is likely to exercise the termination option for the last four vessels, it incurred a non-cash impairment charge of $116.1 million in the fourth quarter of 2009. This represents the excess of carrying costs over the fair value of the asset upon termination. The remaining three vessels that are currently under construction are scheduled for delivery in 2010 and 2011. The vessels were designed to support subsea services, including performing inspection, maintenance and repair work using ROVs, dive and seismic support and light construction activities. The Company assumed Active Subsea’s construction commitments for these vessels in the acquisition. The acquisition included long-term contracts for three of these MPSVs with contract periods ranging from two to four years. Two of these contracts also provide for multi-year extensions. At the time, this acquisition more than doubled the number of vessels in the Company’s fleet with subsea capabilities and allowed the Company to further leverage its global footprint and broaden its customer base to include subsea services and subsea construction companies.
The following table summarizes the allocation of the purchase price (in thousands):
Pro forma Information
The following unaudited pro forma information assumes that the Company acquired DeepOcean and CTC Marine effective January 1, 2008 and January 1, 2007. The pro forma information also assumes that the Company acquired Active Subsea January 1, 2007 (in thousands, except per share data).
At December 31, 2008, the purchase price and purchase price allocation were finalized.
5. Debt
Unless otherwise specified, amounts in these footnotes disclosing U.S. Dollar equivalents for foreign denominated debt amounts are translated at currency rates in effect at December 31, 2009. The Company’s debt at December 31, 2009 and 2008 consisted of the following (in thousands):
Maturities of debt during the next five years and thereafter based on debt amounts outstanding as of December 31, 2009 are as follows (in thousands):
Outstanding Debt:
Obligations of Parent Company (Trico Other):
$50 million U.S. Revolving Credit Facility. In January 2008, the Company entered into a $50 million three-year credit facility (as amended and restated, the “U.S. Credit Facility”) secured by an equity interest in direct material domestic subsidiaries, first preferred mortgage on vessels owned by Trico Marine Assets, Inc. and a pledge on the intercompany note due from Trico Supply AS to Trico Marine Operators, Inc. A voluntary prepayment of $15 million was made on January 14, 2009 which permanently reduced the commitment to $35 million. In October 2009, $10 million of the proceeds from the sale of the Northern Challenger were used to permanently reduce the commitment under the facility to $25 million. The remaining commitment is reduced by $0.5 million on July 1, 2010 and by $3.5 million for each quarter beginning September 1, 2010 with the debt having a final maturity on December 31, 2011. Interest is payable on the unpaid principal amount outstanding at the Eurodollar rate designated by the British Bankers Association plus 5.0% and is subject to an additional utilization fee of 3.0% paid quarterly in arrears if the facility is more than 50% drawn.
In August 2009 the Company received an amendment to the U.S. Credit Facility whereby the maximum consolidated leverage ratio, net debt to EBITDA, was increased from 4.5:1 to 5.0:1 for the fiscal quarter ending September 30, 2009. The consolidated leverage ratios for the remaining periods were subsequently amended in October 2009 to increase the consolidated leverage ratio to 8:50:1 for each of the fiscal quarters ending between December 31, 2009 and September 30, 2010. The ratio decreases to 8.00:1 for the fiscal quarter ending December 31, 2010, and subsequently decreases to 7.00:1 for the fiscal quarter ending March 31, 2011, 6.00:1 for the fiscal quarter ending June 30, 2011, and to 5.00:1 for any fiscal quarters ending thereafter.
In October of 2009, the definition of EBITDA used to calculate the Consolidated Leverage Ratio was amended to exclude any gains or losses related to the embedded derivative associated with the Company’s 8.125% Senior Convertible Debentures. The change to this definition was made retroactive to September 30, 2009. Additionally in October 2009, the facility was amended to change the definition of Free Liquidity to exclude cash and cash equivalents held by Trico Supply and its subsidiaries, and added a collateral coverage requirement. The amendment also added certain limitations on our ability to pay amortization payments in cash on the 8.125% Senior Convertible Debentures, the first payment of which is due August 1, 2010 such that the company cannot pay the amortizations in cash unless the amount of Free Liquidity (which includes any amounts available under this facility) after giving effect to the payment was at least $25 million prior to the amortization payment.
In December 2009, the Company entered into an amendment that excluded the impact on the minimum net worth covenant of the impairment charge related to four construction vessels. This amendment also increased the consolidated leverage ratio to 11.0:1 for the quarters ending December 31, 2009, March 31, 2010, and June 30, 2010 and to 10.0:1 for the quarter ending September 30, 2010 while leaving the ratio levels for December 31, 2010 and beyond unchanged. In conjunction with this amendment, the current availability under the facility was reduced to $15 million with the reduced availability being restored when the Company is below the consolidated ratio levels that were in effect prior to this amendment.
The Company was in compliance with all covenants as of December 31, 2009. Due to the recent amendments and the expectation that the Company, absent a waiver or amendment, does not expect to be in compliance with the consolidated leverage ratio at March 31, 2010, the full amount outstanding is classified as current as of December 31, 2009.
On January 15, 2010, the U.S. Credit Facility was amended to change the definition of Free Liquidity such that any amounts that were committed under the facility, whether available to be drawn or not, would be included for the purposes of calculating the free liquidity covenant. In March 2010, the Company received waivers related to the requirement that an unqualified auditors’ opinion without an explanatory paragraph in relation to going concern accompany its annual financial statements. Separate waivers were received for each of the U.S. Credit Facility and the Trico Shipping Working Capital Facility. The Company also amended the Trico Shipping Working Capital Facility to provide that the aggregate amount of loans thereunder shall not exceed $26.0 million at any time during the fiscal quarter ending March 31, 2010.
The availability under the facility can also be used for the issuance of up to $5 million in letters of credit. As of December 31, 2009, the Company had outstanding letters of credit under the U.S. Credit Facility totaling $3.5 million with various expiration dates through December 2010 for (i) securing certain payment under vessel operating leases and for (ii) payment of certain taxes in Trinidad and Tobago. The amount available under the facility at December 31, 2009 was less than $0.2 million.
The U.S. Credit Facility subjects the Company’s subsidiaries that are parties to the credit agreement to certain financial and other covenants including, but not limited to, affirmative and negative covenants with respect to indebtedness, minimum liquidity, liens, declaration or payment of dividends, sales of assets, investments, consolidated leverage ratio, consolidated net worth and collateral coverage. Payment under the U.S. Credit Facility may be accelerated following certain events of default including, but not limited to, failure to make payments when due, noncompliance with covenants, breaches of representations and warranties, commencement of insolvency proceedings, entry of judgment in excess of $5 million, defaults by any of the credit parties under the credit agreement or certain other indebtedness in excess of $10 million and occurrence of certain changes of control.
8.125% Convertible Debentures. On May 11, 2009, the Company entered into exchange agreements (the “Exchange Agreements”) with existing holders of its 6.5% Senior Convertible Debentures due 2028 (the “6.5% Debentures”) party thereto as investors (the “Investors”). In accordance with the exchange (the “Exchange”) contemplated by the Exchange Agreements, on May 14, 2009 the Company exchanged $253.5 million in aggregate principal amount of its 6.5% Debentures (representing all of the outstanding 6.5% Debentures) for, in the aggregate, approximately $12.7 million in cash, 3,042,180 shares of the Company’s common stock (or warrants exercisable for $0.01 per share in lieu thereof) and $202.8 million in aggregate principal amount of the Company’s new secured 8.125% Convertible Debentures due 2013 (the “8.125% Debentures”).
This Exchange is accounted for under modification accounting which requires the Company to defer and amortize any change in value exchanged. The amount deferred was approximately $10 million and is reflected as a discount to the 8.125% Debentures, which will be amortized under the effective interest method over the life of the 8.125% Debentures. This discount represents the fair value of the warrants and common shares of stock that were tendered in the Exchange. The warrants issued in the Exchange are required to be recorded as a liability due to the net-cash settlement terms included in the Exchange document. As of December 31, 2009, all of the warrants were exercised and no liability is recorded. Additionally, the debt issue costs previously recorded for the 6.5% Debentures
continue to be amortized over the life of the 8.125% Debentures and any new debt issue costs were expensed as incurred. Debt issue costs of $6.2 million were expensed during 2009 and are reflected in the Statements of Operations as “Refinancing costs”.
The 8.125% Debentures are governed by an indenture (the “Indenture”) between the Company and Wells Fargo Bank, National Association, as trustee (the “Trustee”), entered into on May 14, 2009. The 8.125% Debentures were issued in an aggregate principal amount of $202.8 million and are secured by a second priority lien on substantially all of the collateral that is pledged to secure the lenders under the Company’s U.S. Credit Facility.
The Company pays interest on the unpaid principal amount of the 8.125% Debentures at a rate of 8.125 percent per annum. The Company will pay interest semiannually on May 15 and November 15 of each year commencing on November 15, 2009. Interest on the 8.125% Debentures will accrue from the most recent date to which interest has been paid. This interest can only be paid in cash.
Payment Options:
The Debentures are subject to quarterly principal amortizing payments beginning August 1, 2010 of 5% of the aggregate principal amount per quarter, increasing to 14% of the aggregate principal amount per quarter beginning February 1, 2012 until the final payment on February 1, 2013 (the “Maturity Date”). The Company has the right to elect at each payment date whether to pay principal installments in common stock, subject to certain limitations, or cash. If paid in stock, the number of shares to be issued is calculated by dividing the principal installment amount then due by a price equal to 95% of the value weighted average price of the stock for the ten trading days ending on the fifth trading date prior to the payment due date. Separate from and prior to the Company’s election, a majority of the holders of the 8.125% Debentures can elect to have the payment of all or any portion of an installment of principal deferred until the Maturity Date. The 8.125% Debentures are also subject to mandatory prepayments, applied on a pro-rata basis, related to net cash proceeds of asset sales.
Investor Options to Convert, Redeem or Repurchase:
The holders of the 8.125% Debentures have the option at any time to convert the debentures into the requisite number of shares of common stock. Holders who convert after May 1, 2011 are entitled to receive, in addition to the shares due upon conversion, a cash payment equal to the present value of remaining interest payments until final maturity. Holders of the 8.125% Debentures are entitled to require the Company to repurchase the debentures at par plus accrued interest in the event of certain fundamental change transactions.
A fundamental change is defined as the occurrence of any of the following:
(a)
the consummation of any transaction that is disclosed in a Schedule 13D (or successor form) by any “person” and the result of which is that such “person” has become the “beneficial owner” (as these terms are defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the Company’s Capital Stock that is at the time entitled to vote by the holder thereof in the election of the Board of Directors (or comparable body); or
(b)
the first day on which a majority of the members of the Board of Directors are not continuing directors of the Board; or
(c)
the adoption of a plan relating to the liquidation or dissolution of the Company; or
(d)
the consolidation or merger of the Company with or into any other Person, or the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the Company’s assets and those of its subsidiaries taken as a whole to any “person” (as this term is used in Section 13(d)(3) of the Exchange Act), other than:
(i)
any transaction pursuant to which the holders of 50% or more of the total voting power of all shares of the Company’s capital stock entitled to vote generally in elections of directors of the Company immediately prior to such transaction have the right to exercise, directly or indirectly, 50% or more of the total voting power of all shares of the Company’s capital stock entitled to vote generally in elections of directors of the continuing or surviving Person (or any parent thereof) immediately after giving effect to such transaction; or
(ii)
any merger primarily for the purpose of changing the Company’s jurisdiction of incorporation and resulting in a reclassification, conversion or exchange of outstanding shares of common stock solely into shares of common stock of the surviving entity.
(e)
the termination of trading of the common stock, which will be deemed to have occurred if the common stock or other common equity interests into which the 8.125% Debentures are convertible is neither listed for trading on a United States national securities exchange nor approved for listing on any United States system of automated dissemination of quotations of securities prices, and no American Depositary Shares or similar instruments for such common equity interests are so listed or approved for listing in the United States.
However, a Fundamental Change will be deemed not to have occurred if more than 90% of the consideration in the transaction or transactions (other than cash payments for fractional shares and cash payments made in respect of dissenters’ appraisal rights) which otherwise would constitute a Fundamental Change under clauses (a) or (d) above consists of shares of common stock, depositary receipts or other certificates representing common equity interests traded or to be traded immediately following such transaction on a U.S. national securities exchange or approved for listing on any United States system on automated dissemination of quotations of securities prices, and, as a result of the transaction or transactions, the 8.125% Debentures become convertible into such common stock, depositary receipts or other certificates representing common equity interests. Such repurchases could significantly impact liquidity, and it may not have sufficient funds to make the required cash payments should a majority of the holders require the Company to repurchase the 8.125% Debentures. The Company’s failure to repurchase the 8.125% Debentures would constitute an event of default, which in turn, could constitute an event of default under all of its outstanding debt agreements.
Company’s Ability to Repurchase or Redeem:
The Company has the option to redeem the 8.125% Debentures at par plus accrued interest on or after May 1, 2011, if the trading price of the common stock exceeds 135% of the conversion price (currently $14.00 per share), subject to adjustment, for 20 consecutive tracking days.
The conversion feature associated with the debentures is considered an embedded derivative as defined in the derivative instrument and hedging activities authoritative guidance. Under this guidance, the Company is required to bifurcate the conversion option as its fair value is not “clearly and closely” related to the debt host as the make-whole interest is based on the treasury bond rate. This embedded derivative is recorded at fair value on the date of issuance. The estimated fair value of the derivative on the date of issuance was $4.7 million, which was recorded as a non-current derivative liability on the balance sheet with the offset recorded as a discount on the 8.125% Debentures. The derivative liability must be marked-to-market each reporting period with changes to its fair value recorded in the consolidated statements of operations as other income (expense) and the discount being accreted through an additional non-cash charge to interest expense over the term of the debt. See Note 8 for further discussion on the derivative liability.
The Indenture restricts the Company’s ability and the ability of its subsidiaries to, among other things: (i) incur additional debt, (ii) incur additional liens; (iii) make certain transfers of interests in any ownership interest in Trico Marine Assets, Inc. and Trico Marine Operators, Inc; and (iv) make certain asset sales.
The Indenture provides that each of the following is an event of default (“Event of Default”): (i) default for 30 days in the payment when due of interest on the 8.125% Debentures; (ii) default in the payment when due of the principal of the 8.125% Debentures; (iii) failure to deliver when due cash, shares of common stock or any interest make-whole payment upon conversion of the 8.125% Debentures and the failure continues for five calendar days; (iv) failure to provide notice of the anticipated effective date or actual effective date of a fundamental change on a timely basis as required by the Indenture; (v) failure to comply with certain agreements contained in the Indenture, the 8.125% Debentures or any Security Document (as defined in the Indenture) and such failure continues for 60 calendar days after notice (or 30 calendar days in the case of the covenant relating to indebtedness); (vi) indebtedness for borrowed money of the Company or any significant subsidiary is not paid within any applicable grace period after final maturity or the acceleration of any such indebtedness by the holders thereof because of a default and the total principal amount of such indebtedness unpaid or accelerated exceeds $30 million or its foreign currency equivalent at the time and such failure continues for 30 calendar days after notice; (vii) certain events of bankruptcy or insolvency described in the Indenture with respect to the Company or any significant subsidiary and (viii) any Security Document (other than the Intercreditor Agreement) fails to create or maintain a valid perfected second lien in favor of the Trustee for the benefit of the holders of the 8.125% Debentures on the collateral purported to be covered thereby, with certain exclusions. In the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or a Guarantor (as defined in the Indenture) all outstanding 8.125% Debentures will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding 8.125% Debentures may declare all of the 8.125% Debentures to be due and payable immediately.
The 8.125% Debentures and the shares of common stock issuable upon the conversion of the 8.125% Debentures have not been registered because the Company sold the 8.125% Debentures to the investors in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
The 8.125% Debentures are senior secured obligations of the Company, rank senior to all other indebtedness of the Company with respect to the collateral (other than indebtedness secured by permitted liens on the collateral), rank on parity in right of payment with all other senior indebtedness of the Company, and rank senior in right of payment to all subordinated indebtedness of the Company. The 8.125% Debentures shall rank senior to all future indebtedness of the Company to the extent the future indebtedness is expressly subordinated to the 8.125% Debentures. The 8.125% Debentures are secured by a perfected security interest in certain assets of the Company and its subsidiaries.
The following table outlines the conversion options related to the 8.125% Senior Convertible Debentures due 2013:
3% Senior Convertible Debentures. In February 2007, the Company issued $150.0 million of 3% Senior Convertible Debentures due in 2027 (the 3% Debentures). The Company received net proceeds of approximately $145.2 million after deducting commissions and offering costs of approximately $4.8 million. Net proceeds of the offering were for the acquisition of Active Subsea ASA, financing of the Company’s fleet renewal program and for general corporate purposes. Interest on the 3% Debentures is payable semiannually in arrears on January 15 and July 15 of each year. The 3% Debentures will mature on January 15, 2027, unless earlier converted, redeemed or repurchased.
The 3% Debentures are senior unsecured obligations of the Company and rank equally in right of payment to all of the Company’s other existing and future senior indebtedness. The 3% Debentures are effectively subordinated to all of the Company’s existing and future secured indebtedness to the extent of the value of its assets collateralizing such indebtedness and any liabilities of its subsidiaries. The 3% Debentures and shares of the common stock issuable upon the conversion of the debentures have been registered under the Securities Act of 1933.
The 3% Debentures are convertible into cash and, if applicable, shares of the Company’s common stock, par value $0.01 per share, based on an initial conversion rate of 23.0216 shares of common stock per $1,000 principal amount of the 3% Debentures (which is equal to an initial conversion price of approximately $43.44 per share), subject to adjustment and certain limitations. If converted, holders will receive cash up to the principal amount, and, if applicable, excess conversion value will be delivered in common shares up to a maximum of 19.7571 shares for each $1,000 in principal amount held. Holders may convert their 3% Debentures at their
option at any time prior to the close of business on the business day immediately preceding the maturity date only under the following circumstances: (i) prior to January 15, 2025, on any date during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our common stock is greater than or equal to $54.30 (subject to adjustment) for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (ii) during the five business-day period after any 10 consecutive trading-day period (the “measurement period”) in which the trading price of $1,000 principal amount of 3% Debentures for each trading day in the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; (iii) if the 3% Debentures have been called for redemption; or (iv) upon the occurrence of specified corporate transactions set forth in the indenture governing the 3% Debentures (the “Indenture”). Holders may also convert their 3% Debentures at their option at any time beginning on January 15, 2025, and ending at the close of business on the business day immediately preceding the maturity date. The conversion rate will be subject to adjustments in certain circumstances. In addition, following certain corporate transactions that also constitute a fundamental change, we will increase the conversion rate for a holder who elects to convert its 3% Debentures in connection with such corporate transactions in certain circumstances. None of these conditions have been met at December 31, 2009.
Payment Options:
Upon voluntary conversion by the holders of the Company’s 3% Senior Convertible Debentures, the Company will satisfy its conversion obligation in cash up to the principal amount of the 3% Debentures to be converted, with any remaining amount to be satisfied in shares of its common stock. If the holders put the 3% Debentures to the Company on the requisite put dates or upon a “fundamental change of control”, these amounts are paid in cash. The Company may redeem the 3% Debentures beginning January 15, 2012 for a price equal to the redemption price. This amount is payable in cash. In this circumstance, the holders have the ability to convert prior to the redemption date and receive a combination of cash and common stock if the common stock price is greater than the conversion price.
Investor Options to Convert, Redeem, or Repurchase:
The provisions in the 3% Debentures include a put right of the holder at January 15, 2014, January 15, 2017, and January 15, 2022. This provision provides the holder the opportunity at various points (approximately years 7, 10, and 15) to receive back the principal amount of the Debentures. There is also a “fundamental change of control” put.
Company’s Ability to Repurchase or Redeem Notes:
In the 3% Debentures, the Company has the right to redeem the 3% Debentures for a slight premium to par beginning in January of 2012 (approximately five years after issue). This premium amount declines to zero in January of 2014. Additionally, the Company has the right to redeem the 3% Debentures if they trade at 125% of the then relevant conversion price for a minimum period of time.
The conversion feature associated with these debentures has not been accounted for as a separate derivative instrument under accounting guidance for derivative instruments and hedging activities as the conversion option can only be settled in the Company’s stock and therefore is not required to be separately accounted for as a derivative.
Impact of Change in Accounting:
Effective January 1, 2009, the 3% Debentures were subject to new authoritative guidance that changed the accounting and required further disclosures for convertible debt instruments that permit cash settlement upon conversion. The new guidance required retrospective application to all periods as a result of a change in accounting principle. This adoption did not impact the Company’s cash flows. The new guidance required the Company to separately account for the liability and equity components of its senior convertible notes in a manner intended to reflect its nonconvertible debt borrowing rate. The discount on the liability component of the 3% Debentures will be amortized until the first quarter of 2014.
The information below reflects the impact of adopting the new authoritative guidance for the twelve months ended December 31, 2009 (in thousands, except per share data).
The impact of adopting the new guidance for the period ending December 31, 2009 resulted in a $0.4 million increase in assets of which capitalized interest increased $1.3 million and capitalized debt issuance costs decreased $0.9 million, a $30 million decrease in long-term debt and a net increase in total equity of $30.4 million ($39.2 million increase in additional paid in capital net of $8.8 million decrease in retained earnings) due to the increase in interest expense.
The tables below reflect the Company’s retrospective adoption of the effect of the accounting principle change related to the Company’s convertible notes. These selected financial captions summarize the adjustments for the consolidated balance sheets as of December 31, 2008 (in thousands):
The tables below reflect the Company’s retrospective adoption of the effect of the accounting principle change related to the Company’s convertible notes. These selected financial captions summarize the adjustments for the consolidated statements of income as of December 31, 2008 and 2007, respectively (in thousands, except per share data).
The amount of interest expense recognized for the years ending December 31, 2009, 2008, and 2007 relating to both the contractual interest coupon and amortization of the discount on the liability component of the 3% Debentures is $10.3 million, $9.8 million and $8.6 million, respectively. The coupon and the amortization of the discount on the debt yield an effective interest rate of approximately 8.9% on these convertible notes.
The following table outlines the conversion options related to the 3% Senior Convertible Debentures due 2027:
Obligations of Trico Supply and Subsidiaries:
Senior Secured Notes. On October 30, 2009, our wholly-owned subsidiary Trico Shipping AS (“Trico Shipping”) issued $400.0 million aggregate principal amount of Senior Secured Notes due 2014. These notes have a final bullet maturity of November 1, 2014 with no scheduled amortization payments. Interest is payable on May 1 and November 1 and accrues at a rate of 11.875%. The Senior Secured Notes are not callable for three years and are subject to a declining prepayment premium until November 2013 after which they can be repaid at par. The Senior Secured Notes are secured by the assets and earnings of the Trico Supply Group (Trico Supply AS, and its subsidiaries, including Trico Shipping AS, DeepOcean AS and CTC Marine) and the proceeds from the sale of these assets. The Senior Secured Notes are guaranteed by the Company’s wholly owned subsidiary, Trico Supply AS and by Trico Supply’s direct and indirect subsidiaries (other than Trico Shipping) and Trico Marine Services, Inc. (the “Guarantors”) The Notes are pari passu in right of payment with all existing and future senior debt of Trico Shipping and Guarantors (excluding Trico Marine Services) and senior to all existing and future subordinated debt of the Issuer and Guarantors (excluding Trico Marine Services), including any Intercompany Debt; except that debt under the Parent Credit Facility will be senior in right of payment to the Parent’s guarantee of the Notes. The Notes are subject to certain prepayment provisions related to sale of assets if the proceeds from these sales are not reinvested within six months. The Notes may be put to the Company at 101% of face value in the event of a Change of Control as defined in the Indenture. The Indenture was filed on Form 8-K with the SEC on November 5, 2009.
The Notes restrict Trico Supply and its direct and indirect subsidiaries from incurring additional indebtedness or paying dividends to the parent of Trico Supply unless the consolidated leverage ratio, which includes certain intercompany indebtedness, is less than 3.0:1 subsequent to the incurrence of the additional indebtedness. The Notes also limit the ability of Trico Supply and its subsidiaries from paying interest on existing intercompany debt agreements to Trico Marine Services and certain of its subsidiaries unless the Fixed Charge Coverage Ratio is less than 2.5:1. However, payments of up to $5 million per year to Trico Marine Services may be made for payment of general corporate, overhead and other expenses. These provisions do not prohibit the payment of any dividend or distribution to Trico Marine Services in an amount equal to any guarantee refunds received by the Company for the last four VS470 vessels currently under construction and the net cash proceeds received from the sale of the Northern Challenger, the Northern Clipper or the Northern Corona.
The Indenture provides that each of the following is an Event of Default: default for 30 days in the payment when due of interest; default in the payment when due (at maturity, upon redemption or otherwise) of the principal of, or premium, if any, on, the Notes; failure for 60 days after notice to the Company by the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding voting as a single class to comply with any of the other agreements in the Indenture or any Security Document or the occurrence of any event of default under any Mortgage, Equipment Pledge or other Security Document; default under any mortgage, Indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness, if that default: is caused by a failure to make any payment when due at the final maturity of such Indebtedness; or results in the acceleration of such Indebtedness prior to its express maturity, and, in each case, the principal (or face) amount of any such Indebtedness, together with the principal (or face) amount of any other Indebtedness with respect to which an event described herein has occurred, aggregates $20.0 million or more; a default under the Trico Shipping Working Capital Facility which is caused by a failure to make any payment when due at maturity or results in the acceleration of such Indebtedness prior to its express maturity; if certain significant subsidiaries within the meaning of Bankruptcy Law commences a voluntary case, consents in writing to the entry of an order for relief against it in an involuntary case, consents in writing to the appointment of a Custodian of it or for all or substantially all of its property, makes a general assignment for the benefit of its creditors, or admits in writing it generally is not paying its debts as they become due; or any entity that is organized under the laws of Norway will have failed to duly file its audited financial statements for the fiscal year 2008 in accordance with the laws of the Kingdom of Norway prior to January 15, 2010. (All of these reports were filed prior to January 15, 2010.)
If any Event of Default occurs and is continuing, the Trustee, by notice to the Company, or the Holders of at least 25% in principal amount of the then outstanding Notes, by notice to the Company and the Trustee, may declare all the Notes to be due and payable immediately.
Within 270 days of the issuance date of the Notes (October 30, 2009), the Company is to file a registration statement with the SEC to effect the exchange of the issued notes for replacement notes covered by the registration statement and not subject to restrictions on transfer. If the registration statement is not effective within 270 days of the original issuance date of the Senior Secured Notes, which may be extended in certain circumstances, the Company will be required to pay additional interest on the Senior Secured Notes of 0.25% per annum initially up to a maximum of 0.50% per annum.
Trico Shipping Working Capital Facility. In conjunction with the issuance of the Senior Secured Notes, the Company entered into a new $33 million facility with Trico Shipping AS as the borrower. This facility will expire on December 31, 2011 with quarterly amortizations of $3.3 million beginning January 1, 2010. Interest is payable on the outstanding principal amount at the Eurodollar rate designated by the British Bankers Association plus 5.0% and is subject to an additional utilization fee of 3.0%, payable quarterly in arrears, if the facility is more than 50% drawn. Up to $10 million of the facility may be used for letters of credit and replaced existing letters of credit facilities previously used by CTC and DeepOcean. This facility shares in the collateral with the Senior Secured Notes and does not have financial covenants. This facility cross-defaults to both the Senior Secured Notes and the U.S. Credit Facility.
As of December 31, 2009, the Company had outstanding letters of credit under the Trico Shipping Working Capital Facility of $3.0 million with various expiration dates through October 2010 for securing performance under certain subsea services contracts.
The Trico Shipping Working Capital Facility subjects the Company’s subsidiaries that are parties to the agreement to certain customary non-financial covenants including, but not limited to, affirmative and negative covenants. Payments under the Trico Shipping Working Capital Facility may be accelerated following certain events of default, including, but not limited to, failure to make payments when due, noncompliance with covenants, branches of representation and warranties, commencement of insolvency proceedings, occurrence of certain changes of control, and defaults under other debt agreements which permit the holders to declare the indebtedness due and payable prior to stated maturity provided the aggregate amount of indebtedness affected is at least $10 million. The Trico Shipping Working Capital Facility also cross defaults to the U.S. Credit Facility. In March 2010, the Company received a waiver of the requirement that its annual financial statements contain an unqualified auditors’ opinion without an explanatory paragraph in regards to going concern. The waiver limited the aggregate amount of loans to $26.0 million. The amount available under the facility as of December 31, 2009 was approximately $9.8 million.
Obligations of Non-Guarantor Subsidiaries:
6.11% Notes. In 1999, Trico Marine International issued $18.9 million of notes due 2014 to finance construction of two supply vessels, of which $5.7 million is outstanding at December 31, 2009. The notes are guaranteed by the Company and the U.S Maritime Administration and secured by first preferred mortgages on two vessels. Failure to maintain the Company’s status as a Jones Act company would constitute an event of default under such notes.
Debt Paid and Refinanced:
6.5% Convertible Debentures. On May 14, 2008, the Company issued $300.0 million of the 6.5% Debentures. The Company received net proceeds of approximately $287 million, after deducting offering costs of approximately $13 million, which were capitalized as debt issuance costs and were being amortized over the life of the 6.5% Debentures. Net proceeds of the offering were used to partially fund the acquisition of DeepOcean.
During 2009, various holders of the Company’s 6.5% Debentures converted $24.5 million principal amount of the debentures, collectively, for a combination of $6.9 million in cash related to the interest make-whole provision and 605,759 shares of our common stock based on an initial conversion rate of 24.74023 shares of common stock per $1,000 principal amount of debentures. In May 2009, the Company entered into the Exchange Agreements with all of the holders of the 6.5% Debentures and none of the 6.5% Debentures remain outstanding. See “8.125% Convertible Debentures” for more information on the Exchange Agreements.
NOK 260 million Short Term Credit Facility. In May 2008, Trico Shipping entered into a credit facility agreement with Carnegie Investment Bank AB Norway Branch, as lender (the “Short Term Credit Facility”). The Short Term Credit Facility provided for a NOK 260 million short term credit facility that Trico Shipping used for general corporate purposes. The facility was scheduled to
mature on November 1, 2008, but the facility agreement was amended to extend the term of the facility until February 1, 2009. Interest on the facility accrued at an average 9.05% per annum rate until November 1, 2008, at which time the interest rate increased to 9.9%. This facility was repaid in full at maturity on February 2, 2009.
The following facilities were repaid in full with proceeds of the Senior Secured Notes offering and certain asset sales proceeds. The Company has no remaining obligations under these facilities.
NOK 350 million Revolving Credit Facility. In December 2007, in connection with the financing of the vessel Deep Endeavour, DeepOcean entered into a Norwegian Kroner (NOK) 350 million credit facility. The facility was drawn in U.S. Dollars and at the option of the lenders, they may require a partial repayment if the portion of the loan denominated in U.S. Dollars reached 105% of the available NOK amount. The loan was guaranteed by DeepOcean and was secured with a mortgage on the Deep Endeavour, a portion of DeepOcean’s inventory and other security documents. The commitment under the facility decreased semi-annually by NOK 10 million with a balloon payment at its maturity. Interest accrued on the facility at the 3-month NIBOR rate plus 2.75% for NOK borrowings and the LIBOR rate plus 2.75% for U.S. Dollar borrowings.
NOK 230 million Revolving Credit Facility. In July 2007, DeepOcean entered into a NOK 230 million revolving credit facility. This facility was part of a larger composite credit facility that once had capacity of approximately NOK 1.0 billion but was subsequently reduced to NOK 585 million. This NOK 230 million credit facility was secured with inventory up to NOK 1.0 billion and other security documents including the pledge of shares in certain DeepOcean subsidiaries. The facility’s commitment was subject to semi-annual reductions of NOK 8 million with a final NOK 150.7 million balloon payment due at the maturity date. Interest on this facility was at the 3-month NIBOR rate plus 2.75%.
NOK 150 million Additional Term Loan. DeepOcean entered into this agreement in December 2006. Like the NOK 230 million facility discussed above, this NOK 150 million term loan was part of a larger composite credit facility that once had capacity of approximately NOK 1.0 billion but was subsequently reduced to NOK 585 million. The borrowings under this facility partially funded the acquisition of CTC Marine. This term loan was secured with inventory up to NOK 1.0 billion and other security documents, including the pledge of shares in certain DeepOcean subsidiaries. The term loan was subject to mandatory NOK 15 million semi-annual payments until the debt matured. Interest on the debt accrued at LIBOR plus 2.75%.
NOK 200 million Overdraft Facility. DeepOcean entered into a multi-currency cash pool system agreement in July 2007. In conjunction with the cash pool system, DeepOcean had a multi-currency cash pool credit of up to NOK 200 million. This facility was part of a larger composite credit facility that once had capacity of approximately NOK 1.0 billion but was subsequently reduced to NOK 585 million. This NOK 200 million cash pool credit was secured with inventory up to NOK 1.0 billion and other security documents including the pledge of shares in certain DeepOcean subsidiaries. Interest on this facility was at the 3-month NIBOR rate plus 2.75%.
Regarding the NOK 350 million revolving credit facility, NOK 230 million revolving credit facility, NOK 150 million additional term loan and NOK 200 million overdraft facility, the Company and the principal lender entered into an amendment to these facilities, to, among other things, shorten the maturity dates for all facilities to January 1, 2010, waive the requirement that DeepOcean AS be listed on the Oslo Stock Exchange, consent to the tonnage tax related corporate reorganization, waive a financial covenant for the period ended March 31, 2009 and increase certain fees and margins. In conjunction with this amendment, the Company made a prepayment of NOK 50 million ($7.2 million) on November 1, 2008, an additional prepayment of NOK 25 million ($3.9 million) on June 30, 2009 and agreed to a retroactive increase in fees and margins to November 1, 2008.
DeepOcean had finance leases to finance certain of its equipment including ROVs. These leases had terms of up to seven years. A default under these leases would cause a cross-default on the NOK 350 million revolving credit facility, NOK 230 revolving credit facility, NOK 150 million additional term loan and the NOK 200 million overdraft facility.
23.3 million Euro Revolving Credit Facility. In October 2001, a subsidiary of DeepOcean entered into this multi-currency facility, which provided for Euro and U.S. Dollar borrowings. The purpose of this facility was to fund the construction of the vessel Arbol Grande. The facility was secured by a first priority lien on the Arbol Grande. Interest on the loan was payable quarterly at LIBOR plus 3.25%. The facility’s maturity date was March 31, 2010.
$200 million Revolving Credit Facility. In May 2008, in connection with financing the acquisition of DeepOcean, Trico Shipping AS and certain other subsidiaries of the Company entered into a credit agreement (as amended, the “$200 Million Credit Agreement”) with various lenders. The $200 Million Credit Agreement provided the Company with a $200 million, or equivalent in foreign
currency, revolving credit facility, which was guaranteed by certain of the Company’s subsidiaries, and was collateralized by vessel mortgages and other security documents. The final $10 million of availability was contingent on delivery of the Sapphire vessel, which was subsequently cancelled and limited the maximum availability to $190 million. Additionally, on April 28, 2009, the Company sold a platform supply vessel which required a prepayment on this facility of $14.9 million. The prepayment changed the commitment reductions to $9.1 million each quarter through the quarter ended June 30, 2010, at which time the facility would be reduced by $5.4 million per quarter until March 31, 2013. The commitment under the facility was changed to $145 million. The facility was previously drawn in NOK and the amount outstanding was subject to adjustment monthly for changes in the NOK-U.S. Dollar exchange rate. On April 7, 2009, the Company repaid NOK 51.2 million ($7.7 million) of the NOK 1.1 billion outstanding based on an exchange rate of 6.68 NOK per U.S. Dollar. The Company made additional repayments in May and June 2009 for NOK 21.6 million ($3.3 million) and NOK 14.5 million ($2.3 million), respectively. As of June 2, 2009, the loan was changed from a NOK denominated loan to a U.S. Dollar denominated loan and was no longer subject to prepayments due to changes on the NOK-U.S. Dollar exchange rate. Interest was payable on the unpaid principal amount outstanding at a rate applicable to the currency in which the funds were borrowed (the Eurodollar rate designated by the British Bankers Association for U.S. Dollar denominated loans, or Euro LIBOR, NOK LIBOR or Sterling LIBOR for loans denominated in Euro, NOK or Sterling, respectively) plus 3.25%.
$100 million Revolving Credit Facility. In April 2008, Trico Subsea AS entered into an eight-year multi-currency revolving credit facility (as amended, the “$100 Million Credit Agreement”) in the amount of $100 million or equivalent in foreign currency, secured by first preferred mortgages on Trico Subsea AS vessels, refund guarantees related thereto, certain additional vessel-related collateral, and guarantees from Trico Supply AS, Trico Subsea Holding AS and each subsidiary of Trico Subsea AS that acquires a vessel. The commitment under this multi-currency revolving facility matured on the earlier of the eighth anniversary of the delivery of the final vessel or December 31, 2017. The commitment under this facility was reduced in equal quarterly installments of $3.125 million commencing on the earlier of the date three months after the delivery of the eighth and final vessel or June 30, 2010. On May 13, 2009, an additional $11.5 million was drawn subsequent to the delivery of the Trico Sabre. Interest was payable on the unpaid principal amount outstanding at a rate applicable to the currency in which the funds were borrowed (the Eurodollar rate designated by the British Bankers Association for U.S. Dollar denominated loans, or Euro LIBOR, NOK LIBOR or Sterling LIBOR for loans denominated in Euro, NOK or Sterling, respectively) plus 3.25%.
Regarding the $200 Million Credit Agreement and the $100 Million Credit Agreement, the Company and the various lenders entered into an amendment to these facilities on September 30, 2009. The amended Credit Agreement, among other things provided for the following: (i) reduced the total commitments under the Credit Agreements to an aggregate of $172.6 million, subject to certain adjustments, (ii) required loans to be made in U.S. Dollars, (iii) deferred a principal payment for the third quarter of 2009, (iv) restructured the amortization such that scheduled principal payments were reduced, resulting in a larger bullet payment at maturity, (v) changed the maturity date of the amounts due under the $100 million Credit Agreement to May 13, 2013 from December 31, 2017 such that the amounts due under the Credit Agreements will mature on the same date, (vi) added Trico Marine Services, Inc. as a guarantor of the obligations of the Trico Parties under the Credit Agreements, (vii) secured the amounts owed under each of the Credit Agreements with the collateral securing the other Credit Agreement (viii) effectively expanded the collateral package and (ix) updated the collateral package.
$18 million Revolving Credit Facility. In November 2007, DeepOcean entered into this $18 million revolving credit facility to refinance the original loan used to acquire and upgrade the vessel, Atlantic Challenger. This facility was secured with a first priority lien on the Atlantic Challenger. This facility was subject to a mandatory $0.5 million per quarter payment. Interest under the facility accrued at LIBOR plus 3.25%.
8 million Sterling Overdraft Facilities. CTC Marine used these short term overdraft facilities in its normal business operations. The total facilities had a gross capacity of 12 million Sterling and a net capacity, after taking into account CTC Marine’s cash accounts, of 8 million Sterling. The availability under the facilities may be further limited by the requirement that the total amount drawn under the overdraft facilities plus the amount of bank guarantees issued in total must not exceed 2.0 times third party accounts receivable. The first 4 million Sterling was in the form of a Money Market Loan and the remainder was in the form of a Business Overdraft Facility with a net capacity of 4 million Sterling. Both facilities were on-demand facilities that may be terminated at any time by the lender. Interest on the Money Market Loan accrued at LIBOR plus 2.75% and interest on the Business Overdraft Facility accrued at the Bank’s Base Rate plus 3.25%.
24.2 million Sterling Asset Financing Facilities. CTC Marine had two asset facilities totaling 24.2 million Sterling to finance new and existing assets. The Asset Finance Loan Facility (“Existing Assets Facility”) had a commitment of 8.3 million Sterling, matured on various dates through 2012 and accrued interest at the 3-month Sterling LIBOR rate plus a margin of between 1.65% and 2.55%. The Asset Finance Loan Facility (“New Assets Facility”) had a commitment of 15.9 million Sterling, matured on various dates that
were six years from the delivery of the financed assets and accrued interest at the 3-month Sterling LIBOR rate plus 1.65%. The final asset to be financed under the New Assets Facility was delivered in the fourth quarter of 2008. These asset finance facilities were secured by mortgages on the assets financed and the property and equipment of CTC Marine and were partially guaranteed by DeepOcean.
The Company’s capitalized interest totaled $18.5 million, $18.8 million and $1.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.
6. Derivative Instruments
As discussed in Note 5, the Company’s 8.125% Debentures provide the holder with a conversion option, which if exercised after May 15, 2011, entitles the holder to a make-whole interest premium that is indexed to the U.S. Treasury Rate. Because the terms of this embedded option are not clearly and closely related to the debt instrument, it represents an embedded derivative that must be accounted for separately. Under authoritative guidance for derivative instruments and hedging activities, the Company is required to bifurcate the embedded derivative from the host debt instrument and record it at fair value on the date of issuance, with subsequent changes in its fair value recorded in the consolidated statements of operations. The conversion option in the Company’s 3% Debentures is settled in cash and potentially stock and therefore is not required to be separately accounted for as a derivative as the value of the consideration is determined solely by the price of the stock. The warrants issued in the Exchange were also derivative instruments and required to be recorded as a liability due to the net-cash settlement terms included in the Exchange document. Changes in fair value were re-measured in each subsequent period based upon the Company’s stock price each quarter the warrants were outstanding. As of December 31, 2009, all of the warrants were exercised and are no longer outstanding.
For the debentures, the estimate of fair value was determined through the use of a Monte Carlo simulation lattice option-pricing model that included various assumptions (see Note 8 for further discussion). The 6.5% Debentures were exchanged for the 8.125% Debentures in May 2009. See Note 5 for more information. The coupon and the amortization of the discount on the debt will yield an effective interest rate of approximately 11.1% on the 8.125% Debentures and yielded approximately 11.2% on the 6.5% Debentures. The reduction in the Company’s stock price as well as the passage of time are the primary factors influencing the change in value of the derivatives and their impact on the Company’s net income (loss) attributable to Trico Marine Services, Inc. Any increase in the Company’s stock price for the debentures will result in non-cash unrealized losses being recognized in future periods and such amounts could be material.
On January 1, 2009, the Company adopted a newly issued accounting standard regarding disclosure of derivative instruments and hedging activities. The new standard requires entities that use derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. It also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of derivative instruments and hedging activities have been applied, and the impact that hedges have on an entity’s financial position, financial performance and cash flows. The tables below reflect (i) Fair Values of Derivative Instruments in the Balance Sheets and (ii) the Effect of Derivative Instruments on the Statements of Operations (in thousands).
Separately, in June 2008, the Company settled a foreign currency hedge it assumed in its acquisition of DeepOcean. Upon settlement, the Company received net proceeds of $8.2 million, which was approximately $2.5 million less than the swap instruments fair value recorded in purchase accounting on May 16, 2008. This $2.5 million loss was recorded in “Other expense, net” in the Consolidated Statements of Operations for the year ended December 31, 2008.
7. Phantom Stock Units
In connection with the acquisition of DeepOcean, West Supply IV AS (“West Supply”), a significant DeepOcean shareholder, and certain members of DeepOcean’s management and their controlled entities were paid cash and issued phantom stock units (“PSUs”) by the Company as payment for their DeepOcean shares at NOK 32 per share. Each phantom stock unit permits the holder to acquire one share of the Company’s common stock for no additional consideration upon exercise, subject to certain vesting restrictions described below, or, at the Company’s option, it may pay the holder the cash equivalent of such shares of common stock, based on the weighted average trading price of the Company’s common stock during the last three trading days prior to each respective exercise date. West Supply received 50% of its sale consideration in PSUs, while certain DeepOcean management members received 40% of their sales proceeds in the form of PSUs.
In connection with the Company’s acquisition of West Supply’s shares of DeepOcean, a PSU agreement between the entities resulted in the Company issuing 1,352,558 PSUs to West Supply. The PSUs were exercisable on January 11, 2009, which was 181 days after the completion and settlement of the mandatory tender offer (July 11, 2008) and expires on July 11, 2013, which is the fifth anniversary of the completion and settlement of the mandatory tender offer. The PSUs issued to West Supply are subject to certain U.S. legal restrictions on foreign ownership of U.S. maritime companies, which are included in the phantom stock unit agreements. The shares of common stock that would be issued upon the exercise of the PSUs have been registered with the Securities and Exchange Commission. No shares have been exercised as of December 31, 2009.
In May 2008, the Company also entered into PSU agreements with certain members of DeepOcean’s management and their controlled entities. Pursuant to these management PSU agreements, the Company issued an aggregate of 229,344 PSUs.
The PSUs issued to DeepOcean’s management and their controlled entities are subject to certain vesting and exercise periods. Generally, half of the PSUs granted to the members of DeepOcean’s management and their controlled entities vested on July 11, 2009, and the other half will vest and may be exercised on July 11, 2010, the second anniversary of the completion and settlement of the mandatory tender offer. These vested PSUs are exercisable from such dates until July 11, 2013. All such PSUs fully vest and become exercisable upon certain change of control of the Company or if DeepOcean’s earnings before interest, taxes, depreciation and amortization for its fiscal year ended December 31, 2008 is greater than NOK 489 million ($70.1 million), which DeepOcean did not achieve at December 31, 2008. There are certain other non-service related vesting provisions for certain senior members of DeepOcean’s management upon their retirement from the Company. As of December 31, 2009, 226,109 shares have been exercised.
The value of the PSUs issued to West Supply and certain members of DeepOcean’s management and their controlled entities was $35.14 per share calculated based upon the average trading price of the Company’s stock around the acquisition date. The total amount recorded as a component of equity for the issuance of PSUs in connection with the acquisition was $55.6 million.
8. Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting standard established a fair value hierarchy which requires an entity to maximize
the use of observable inputs, where available. The following summarizes the three levels of inputs required as well as the assets and liabilities that the Company values using those levels of inputs.
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Level 1 - Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
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Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
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Level 3 - Unobservable inputs that reflect the reporting entity’s own assumptions.
Financial liabilities subject to fair value measurements on a recurring basis are as follows (in thousands):
The estimated fair values of financial instruments have been determined by the Company using available market information and valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
Cash, cash equivalents, accounts receivable and accounts payable. The carrying amounts approximate fair value due to the short-term nature of these instruments.
Debt. The fair value of the Company’s fixed rate debt is based partially on quoted market prices as well as prices for similar debt based on recent market transactions.
The carrying amounts and fair values of debt were as follows (in thousands):
As discussed in Note 6, the Company’s conversion feature contained in the 8.125% and the prior 6.5% Debentures is required to be accounted for separately and recorded as a derivative financial instrument measured at fair value. The estimate of fair value was determined through the use of a Monte Carlo simulation lattice option-pricing model. The assumptions used in the valuation model for the 8.125% Debentures as of December 31, 2009 include the Company’s stock closing price of $4.54, expected volatility of 60%, a discount rate of 18.0% and a United States Treasury Bond Rate of 1.70% for the time value of options. As the 8.125% Debentures
were exchanged for the 6.5% Debentures, there were no assumptions used in the valuation model for the 6.5% Debentures as of December 31, 2009. The following table sets forth a reconciliation of changes in the fair value of the Company’s derivative liability as classified as Level 3 in the fair value hierarchy (in thousands).
On January 1, 2009, the Company adopted a newly issued accounting standard for fair value measurements of all non-financial assets and liabilities. We had no required fair value measurements for non-financial liabilities in 2009. We did have fair value measurements for some non-financial assets and as a result recognized impairments related to those items. These items are recognized under “Impairments and penalties on early termination of contracts” in the Statements of Operations and are measured at Level 3. The 2009 impairments are as follows: (i) since the Company completed negotiations with Tebma which provides it the option to cancel the final four (the Trico Surge, Trico Sovereign, Trico Seeker and Trico Searcher) of the seven vessels currently under construction and it expects that it is likely to exercise the termination option for the last four vessels, it incurred a non-cash impairment charge, (ii) since the partnership was unable to obtain financing for the remaining amount necessary to complete the construction of the Deep Cygnus, the Company reached an agreement with Volstad where DeepOcean AS withdrew from the partnership, (iii) the Company impaired an acquired asset which was related to a receivable due to CTC Marine for work performed in May 2008, and (iv) when the Company closed the Fosnavag office and moved the operations to another location, it was unable to sublease the facility or terminate the lease.
Fair value determinations for impairments are as follows: (i) cancellation of vessel construction and the acquired asset at CTC Marine noted above were determined based on the Company’s estimated value of certain equipment paid for by Trico Subsea AS, covered under refund guarantees, and reassessment of the value of the acquired asset, (ii) withdrawal from the Volstad partnership was determined to represent a full impairment since the Company has no further rights or obligations under the partnership, and (iii) the Fosnavag lease was determined based on the present value of the remaining rental payments. Fair values as of December 31, 2009 are $21.0 million for the cancellation of vessel construction, $10.0 million for the acquired asset at CTC Marine, no remaining value for the Volstad partnership and $1.2 million for the Fosnavag lease.
9. Asset Sales
Asset Sales. On April 28, 2009, the Company sold a platform supply vessel for $26.2 million in proceeds and recognized a gain on sale of $14.8 million. The sale of this vessel required a prepayment of approximately $14.9 million for the $200 million Revolving Credit Facility as the vessel served as security for that facility. During June 2009, the Company sold five supply vessels for a total of $3.8 million, resulting in a gain of $2.5 million. The sale of these vessels did not require a debt prepayment. In October 2009, the Company sold a platform supply vessel for $20.4 million in proceeds with a gain of $6.8 million and an anchor handling, towing and supply vessel for approximately $18.5 million in proceeds, which generated a $6.3 million gain. These sales were used to prepay debt. Three additional supply vessels were sold for approximately $4.4 million in the fourth quarter of 2009 with a net gain of $0.6 million with approximately half of the proceeds used to repay debt.
During 2008, the Company sold a supply boat for $0.7 million in January 2008 and sold three vessels in April 2008 for net proceeds of $1.7 million. The sale price of these marine vessels sold in 2008 approximated their carrying value. The Houma facility sale was completed in February 2008 for net proceeds of $4.6 million, resulting in a $2.9 million gain on sale.
During 2007, three supply vessels and one crew boat were sold for $4.5 million in net proceeds with a corresponding aggregate gain of $2.8 million.
Assets Held for Sale. All assets held for sale are primarily vessels. Marine vessels held for sale at December 31, 2009 included one AHTS, one SPSV and four supply vessels. These vessels are included in the Company’s towing and supply segment.
10. Other Assets
The Company’s other assets consist of the following (in thousands):
11. Income Taxes
Income (loss) before income taxes derived from U.S. and international operations are as follows (in thousands):
The components of income tax expense from operations are as follows (in thousands):
The Company’s deferred income taxes represent the tax effect of the following temporary differences between the financial reporting and income tax accounting bases of its assets and liabilities, as follows (in thousands):
(1)
The deferred tax liability, net, includes a $2,681 current deferred tax asset, which is included in “prepaid expenses and other current assets” on our consolidated balance sheet. The remaining non-current net deferred tax liability of $5,104 is included in “deferred income taxes” on our consolidated balance sheet.
The provisions (benefits) for income taxes as reported are different from the provisions (benefits) computed by applying the statutory federal income tax rate. The differences are reconciled as follows:
A valuation allowance was provided against the Company’s U.S. net deferred tax asset as of the reorganization date. Fresh-start accounting rules require that a release of the valuation allowance recorded against pre-confirmation net deferred tax assets is reflected as an increase to additional paid-in capital. To date, the Company has released approximately $50.8 million of the valuation allowance related to the pre-confirmation net deferred tax asset, which has increased the Company’s additional paid-in-capital account. As of December 31, 2009, the remaining net operating loss was approximately $67.4 million which is fully reserved by a valuation allowance at the Company’s statutory tax rate. Any future change in our ownership may limit the ultimate utilization of our NOLs pursuant to Section 382 of the Internal Revenue Code (“Section 382”). An ownership change may result from, among other things, transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If we cannot utilize these NOLs, then our liquidity position could be materially and adversely affected.
In accordance with financial accounting and reporting for the effects of income taxes that result from an entity’s activities during the current and preceding years, a full valuation allowance has been recorded against the Company’s 2009 and 2008 U.S. net operating losses and net deferred tax assets, as management does not consider the benefit to be more likely than not to be realized.
Although the Company recorded a profit from operations in recent years from its U.S. operations, the history of negative earnings from these operations and the emphasis to expand the Company’s presence in growing international markets constitutes significant negative evidence substantiating the need for a full valuation allowance of $5.4 million against the U.S. net deferred tax assets, including the current deferred tax assets, as of December 31, 2009. The Company will use cumulative profitability and future income projections as key indicators to substantiate the release of the valuation allowance. This will result in an increase in additional paid-in-capital at the time the valuation allowance is reduced. If the Company’s future U.S. operations are profitable, it is possible we will release the valuation allowance at some future date.
As of December 31, 2009, we have remaining net operating losses in certain of our Norwegian, United Kingdom, Brazilian and Nigerian entities totaling $92.9 million, resulting in a deferred tax asset of $27.2 million. A valuation allowance of $17.5 million was provided against the financial losses generated in our Norwegian tonnage entities as the loss can only be utilized against future financial taxable profit and it is not possible to use group relief to offset taxable profits and losses for group companies subject to tonnage taxation.
Based on Norwegian legislation passed in 2009, the Company is able to carry back approximately $0.4 million of net operating losses generated by its tonnage entities which are not offset by a valuation allowance. Net operating losses of approximately $4.6 million generated within the Company’s non-tonnage Norwegian entities are eligible for group relief, have an indefinite carry forward and will not expire. As such, no valuation allowance has been provided against such losses. Valuation allowances of $0.6 million, $5.9 million and $1.5 million were provided against the losses generated in our United Kingdom, Brazilian and Nigerian entities, respectively, due to the history of negative earnings.
Uncertain Tax Positions. The Company conducts business globally and, as a result, it or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities worldwide, including such major jurisdictions as Norway, Mexico, Brazil, Nigeria,
Angola, Hong Kong, China, United Kingdom, Australia and the United States. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003.
Due to an adoption of accounting guidance for uncertainty in income taxes, the Company recognized approximately $0.1 million to the January 1, 2007 retained earnings balance. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follow (in thousands):
The entire balance of unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2009 and 2008, the Company recognized approximately $0.8 million and $0.1 million, respectively, in interest and penalties.
Norwegian Shipping Tax Regime - Norwegian Tonnage Tax legislation was enacted as part of the 2008 Norwegian budgetary process in essentially the same form as proposed in October 2007. This new tonnage tax regime is applied retroactively to January 1, 2007 forward and is similar to other EU tonnage tax regimes. As a result, all shipping and certain related income, but not financial income, is exempt from ordinary corporate income tax and subjected to a tonnage based tax. Unlike the current regime, where the taxation was only due upon a distribution of profits or an outright exit from the regime, the new regime provides for a tax exemption on profits earned after January 1, 2007.
As part of the legislation, the previous tonnage tax regime covering the period from 1996 through 2006 was repealed. Companies that are in the current regime, and enter into the new regime, will be subject to tax at 28% for all accumulated untaxed shipping profits generated between 1996 through December 31, 2006 in the tonnage tax company. Two-thirds of the liability (NOK 251 million, $43.2 million) is payable in equal installments over 10 years. The remaining one-third of the tax liability (NOK 126 million, $21.7 million) can be met through qualified environmental expenditures.
Under the initial legislation enacted, any remaining portion of the environmental part of the liability not expended at the end of ten years would be payable to the Norwegian tax authorities at that time. In 2008, the ten year limitation was extended to fifteen years. On March 31, 2009, the need to invest in environmental measures within fifteen years was abolished. As a result, the Company recognized a one-time tax benefit in first quarter earnings of $18.6 million related to the change. Although qualifying expenditures are still required, there is no time constraint to make these expenditures before it would become payable to the Norwegian tax authorities. As of December 31, 2009, the Company’s total tonnage tax liability was $36.5 million which is reflected in “Foreign taxes payable” under both the current and long term liabilities in the accompanying Consolidated Balance Sheets (please refer to the recent Norwegian Supreme Court decision in Note 19 to our consolidated financial statements).
Tonnage Tax Restructuring. Trico Shipping AS, as a Norwegian tonnage tax entity, cannot own shares in a non-publicly listed entity with the exception of other Norwegian tonnage tax entities. Subsequent to the acquisition of DeepOcean ASA by Trico Shipping AS, DeepOcean ASA was delisted from the Oslo Bors exchange in August 2008. Trico Shipping AS had until January 31, 2009, under a series of waivers provided by the Norwegian Central Tax Office, to transfer its ownership interest in DeepOcean AS and the non tonnage tax entities. Failure to comply with this deadline would have resulted in the income of Trico Shipping AS being subject to a 28% tax rate and an exit tax liability, payable over a ten year period, being due and payable immediately. In a series of steps completed in December of 2008 and January of 2009, the ownership of DeepOcean AS and its non tonnage tax related subsidiaries was transferred to Trico Supply AS and the tonnage tax related entities owned by DeepOcean AS became subsidiaries of Trico Shipping AS. Following completion of these steps on January 30, 2009, Trico satisfied the tonnage tax requirements.
12. Stockholders’ Equity
Authorized Shares. In August 2008, holders of shares of the Company’s common stock approved an amendment to the Company’s Second Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of the Company’s common stock from 25,000,000 to 50,000,000 shares.
Common Stock Repurchase Program. In July 2007, the Company’s Board of Directors authorized the repurchase of $100.0 million of the Company’s common stock in open-market transactions, including block purchases, or in privately negotiated transactions (the “Repurchase Program”). The Company expended $17.6 million for the repurchase of 570,207 common shares, at an average price paid per common share of $30.87 during 2007. There were no share purchases under the repurchase program in 2008 or 2009. Other than shares purchased pursuant to the agreement described below, all shares were repurchased in open market transactions.
On August 9, 2007, the Company entered into a stock purchase agreement (the “Agreement”) with Kistefos AS, a Norwegian stock company (“Kistefos”), pursuant to which the Company may purchase up to $20.0 million of shares of the Company’s common stock from Kistefos from time to time during the period beginning August 9, 2007 and ending on the earlier of (i) the date the Company has acquired $20.0 million of shares from Kistefos, (ii) the date the Company publicly announces the termination or expiration of the Company’s Repurchase Program or (iii) the date on which Kistefos ceases to hold any shares.
In accordance with the Agreement, upon the purchases of shares of its common stock from other stockholders, pursuant to the Repurchase Program, the Company will purchase from Kistefos an amount equal to the number of Kistefos’ shares which could be sold such that Kistefos’ percentage ownership of the Company’s common stock will remain unchanged. The purchase price that the Company will pay Kistefos for any such purchases will equal the volume weighted average price for all shares purchased in the other purchases on the applicable purchase date. This Agreement is subject to limitations and adjustments from time to time in order to comply with applicable regulations promulgated by the Securities and Exchange Commission.
According to amendment 12 to Schedule 13D filed by Kistefos on July 31, 2007, as of the date of the Agreement, Kistefos beneficially owned 3,000,000 shares of the Company’s outstanding shares of common stock or approximately 20.0% of the outstanding shares. Of the 570,207 common shares purchased pursuant to the Repurchase Program, 114,042 were purchased from Kistefos pursuant to the Agreement.
All of the shares repurchased in the Repurchase Program are held as treasury stock. The Company records treasury stock repurchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. The Repurchase Program expired in 2009.
Warrants to Purchase Common Stock. In 2005, the Company issued 499,429 Series A Warrants (representing the right to purchase one share of the Company’s new common stock for $18.75 expiring on March 15, 2010) and 499,429 Series B Warrants (representing the right to purchase one share of the Company’s new common stock for $25.00 expiring on March 15, 2008) to each holder of the Company’s old common stock. During 2008, 1,128 Series A Warrants and 471,747 Series B Warrants were exercised for aggregate proceeds of $11.8 million. On March 17, 2008, 24,241 Series B Warrants expired unexercised and no Series B warrants remain outstanding. As of December 31, 2009 and 2008, 494,074 Series A Warrants remain available for exercise.
Stockholder Rights Plan. In April 2007, the Company’s Board of Directors adopted a Stockholder Rights Plan, the (Rights Plan). Under the Rights Plan, the Company declared a dividend of one preferred share purchase right (a Right) for each outstanding share of common stock held by stockholders of record as of the close of business on April 19, 2007.
In April 2008, the Board of Directors of the Company approved the termination of the Rights Plan. The Board approved the acceleration of the final expiration date of the rights issued pursuant to the Rights Plan to April 28, 2008, at which date, at the close of business, the Rights Plan was terminated. The Rights have been de-registered and are no longer available for issuance under the Company’s amended by-laws.
13. Earnings (Loss) Per Share
Earnings (loss) per common share was computed based on the following (in thousands, except per share amounts):
The calculation of diluted earnings (loss) per share excludes equity awards representing rights to acquire 86 shares of common stock during 2007 because the effect was antidilutive. Typically, awards are antidilutive when the exercise price of the options is greater than the average market price of the common stock for the period or when the results from operations are a net loss.
In May 2009, the existing holders of the 6.5% Debentures entered into the Exchange Agreements exchanging their 6.5% Debentures for 8.125% Debentures. See Note 5 for more information.
Diluted earnings (loss) per share is computed using the if-converted method for the 8.125% Debentures and using the treasury stock method for the 3% Debentures and the 6.5% Debentures. The scheduled principal amortizations for the 8.125% Debentures can be paid either in stock or cash based upon the Company’s election. However, if the 8.125% Debentures are converted at the option of the holders prior to maturity, the bondholders will be paid in stock.
The Company’s 3% Debentures and 6.5% Debentures (for May 2008 through May 2009 only) were not dilutive as the average price of the Company’s common stock was less than the conversion price for each series of the debentures during the presented periods they were outstanding (Note 5). As the principal amount for the 3% Debentures can only be settled in cash, they are not considered in the diluted earnings (loss) per share. Although the Company had the option of settling the principal amount of 6.5% Debentures in either cash, stock or a combination of both, management’s intention was to settle the amounts when converted with available cash on hand, through borrowings under the Company’s existing lines of credit or other refinancing as necessary.
14. Stock-Based Compensation
The 2004 Stock Incentive Plan (the “2004 Plan”), which was approved by shareholders, provides for the grant of incentive stock options, non-qualified stock options, restricted stock and unrestricted stock awards to key employees and directors of the Company. There were 223,583 shares remaining available for issuance under the 2004 Plan as of December 31, 2009.
Stock options granted to date have an exercise price equal to the market value of the common stock on the date of grant and generally expire seven years from the date of grant. Grants of restricted stock are issued at the market value of the common stock on the date of grant. Stock appreciation awards (“SARs”) are cash awards and the fair value is remeasured each period based upon the Black-Scholes valuation model. Restricted stock, stock options, and SARs granted to the Company’s employees generally vest in annual increments over a three or four-year period beginning one year from the grant date and compensation expense is recognized on a straight line basis. Awards granted to directors generally vest after thirty days from the grant date.
Total stock-based compensation expense recognized was $2.9 million, $3.8 million and $3.2 million, for the years ended December 31, 2009, 2008 and 2007, respectively. The Company has not recognized any tax benefits in connection with stock-based compensation expense as a result of the valuation allowance recorded against its U.S. net deferred tax assets.
At December 31, 2009, there was $2.2 million of unrecognized compensation cost related to unvested stock option and restricted stock awards, as well as an estimate for cash-based stock appreciation awards. This cost is expected to be recognized over a weighted-average period of approximately 1.13 years.
Stock Options. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes model assumes that option exercises occur at the end of an option’s contractual term and that expected volatility, expected dividends, and risk-free interest rates are constant over the option’s term. The expected term represents the period of time that options granted are expected to be outstanding. The risk-free interest rate of the option is based on the U.S. Treasury zero-coupon with a remaining term equal to the expected term used in the assumption model. The fair value of options was estimated using the following assumptions:
A summary of changes in outstanding stock options as of December 31, 2009 is as follows:
The weighted average grant-date fair value of options granted during the years ended December 31, 2009, 2008 and 2007, was $1.19, $10.36, and $16.18, respectively. The total intrinsic value of options exercised during the years ended December 31, 2008 and 2007, was approximately $0.2 million and $2.8 million, respectively. There were no exercises of stock options during the year ended December 31, 2009.
Restricted Stock. The following summarizes the activity with respect to nonvested stock awards for the year ended December 31, 2009:
The weighted-average grant date fair value of nonvested stock awarded during the years ended December 31, 2009, 2008 and 2007, was $3.57, $28.85, and $37.81, respectively. The total fair value of stock that vested during the years ended December 31, 2009, 2008 and 2007, was $1.1 million, $0.9 million and $1.8 million, respectively.
Stock Appreciation Awards. On March 13, 2009, the Company granted 170,724 shares that will vest ratably over three years and 130,144 shares that will vest 100% on the third anniversary of the grant date. As SARs provide the participant the right to receive a cash payment only when they are exercised, they will be classified as liabilities ($0.1 million each in “Other current liabilities” and “Other liabilities” on the Company’s Consolidated Balance Sheets). The fair value will be measured in each subsequent reporting period using the Black-Scholes option valuation model with changes in fair value reflected as a component of stock-based compensation costs in the Company’s Consolidated Statements of Operations. The initial fair value was estimated using the following assumptions:
As of December 31, 2009, there are 163,018 shares that will vest ratably over three years and 125,977 shares that will vest 100% on the third anniversary of the grant date due to forfeitures in the current year. The following table shows the assumptions used in the calculation of fair value at December 31, 2009.
15. Employee Benefit Plans
Defined Contribution Plan
The Company has a defined contribution profit sharing plan under Section 401(k) of the Internal Revenue Code (the “Plan”) that covers substantially all U.S. employees meeting certain eligibility requirements. Employees may contribute any percentage of their eligible compensation on a pre-tax basis (subject to certain ERISA limitations). The Company will match 25% of the participants’ pre-tax contributions up to 5% of the participants’ taxable wages or salary. The Company may also make an additional matching contribution to the Plan at its discretion. For the years ended December 31, 2009, 2008 and 2007, the Company made contributions to the Plan of approximately $0.6 million, $0.1 million and $0.2 million, respectively.
The Company’s United Kingdom employees at CTC Marine, acquired in May 2008, participate in a defined contribution plan covering substantially all of its employees. The Company contributes 5% of eligible employees’ base salary annually and employee contributions are optional. For the years ended December 31, 2009 and 2008, the Company contributions totaled approximately $0.5 million and $0.3 million, respectively.
Defined Benefit Plans
United Kingdom Pension Plan - Certain of the Company’s United Kingdom employees are covered by the Merchant Navy Officers Pension Fund (the “MNOPF Plan”), a non-contributory, multiemployer defined benefit pension plan. Plan actuarial valuations are determined every three years. The most recent actuarial valuation was completed in 2006 which resulted in a funding deficit of approximately $1.6 million. An actuarial evaluation of the fund was also performed as of March 31, 2009 but the results have not been distributed to the plan companies. The trustees have informed the plan companies of their intention to invoice the companies for any shortfall in the plan after a meeting of the trustees on March 26, 2010, where formal decisions relating to the actuarial valuations will be taken. This will allow sufficient time for the apportionment of the deficit amongst employers, preparation of the invoices and the first deficit contributions to be collected in September 2010. The trustees have not given an estimate of the size of the shortfall that the actuarial valuations have revealed. During the years ended December 31, 2009, 2008 and 2007, the Company recognized costs of $0.2 million, $0.2 million, and $0.6 million, respectively, for the MNOPF Plan, representing assessments of current obligations to the MNOPF Plan.
Norwegian Pension Plans - Substantially all of the Company’s Norwegian employees are covered by two non-contributory, defined benefit pension plans. Benefits are based primarily on participants’ compensation and years of credited services. The Company’s policy is to fund contributions to the plans based upon actuarial computations.
The following is a comparison of the benefit obligation and plan assets for the Company’s Norwegian pension plans (in thousands):
The following table presents the funded status of the pension plans (in thousands):
The following table summarizes net periodic benefit costs for the Company’s Norwegian pension plans (in thousands):
The weighted average assumptions shown below were used for both the determination of net periodic benefit cost, and the determination of benefit obligations as of the measurement date. In determining the weighted average assumptions, the Company reviewed overall market performance and specific historical performance of the investments in the plan.
The Company’s investment strategy focuses on providing a stable return on plan assets using a diversified portfolio of investments. The Company’s asset allocations were as follows:
The following table sets forth the fair value of the plan assets by level within the fair value hierarchy as of December 31, 2009 (in thousands):
Cash equivalents consist primarily of money markets and commingled funds of short term securities that are considered Level 1 assets and valued at the net asset value of $1 per unit.
The equity investments in common stock and commingled funds are comprised of equity across multiple industries and regions of the world. Equity investments in common stock are actively traded on a public exchange and are therefore considered Level 1 assets. These equity investments are generally valued based on unadjusted prices in active markets for identical securities. Commingled funds are maintained by investment companies for large institutional investors and are not publicly traded. Commingled funds are comprised primarily of underlying equity securities that are publicly traded on exchanges, and price quotes for the assets held by these funds are readily observable and available. Therefore, these commingled funds are categorized as Level 2 assets.
Debt, property, and other investments included in the plan portfolio are assigned observable values pro-rated to customer ownership percentages of the total portfolio by the administrator. These are categorized as Level 1 and 2.
The Company expects to make contributions of $3.7 million in 2010 under the Norwegian plans. Based on the assumptions used to measure the Company’s Norwegian pension benefit obligations under the Norwegian plans, the Company expects that benefits to be paid over the next five years will be as follows (in thousands):
16. Noncontrolling Interests
On January 1, 2009, the Company adopted a newly issued accounting standard for its noncontrolling interests. In accordance with the accounting standard, the Company changed the accounting and reporting for its minority interests by recharacterizing them as noncontrolling interests and classifying them as a component of equity in its consolidated Balance Sheet. The newly issued accounting standard requires enhanced disclosures to clearly distinguish between the Company’s interests and the interests of noncontrolling owners. The Company’s primary noncontrolling interests relate to Eastern Marine Services Limited (“EMSL”) and DeepOcean Volstad (“Volstad”). See Note 17 for further discussion on the Company’s withdrawal from the Volstad partnership in June 2009. The presentation and disclosure requirements of the newly issued accounting standard were applied retrospectively and only change the presentation of noncontrolling interests and its inclusion in equity. There was no significant impact on the Company’s ability to comply with the financial covenants contained in its debt covenant agreements.
On June 30, 2006, the Company entered into a long-term shareholders agreement with a wholly-owned subsidiary of China Oilfield Services Limited (“COSL”) for the purpose of providing marine transportation services for offshore oil and gas exploration, production and related construction and pipeline projects mainly in Southeast Asia. As a result of this agreement, the companies formed a limited-liability company, Eastern Marine Services Limited (“EMSL”), located in Hong Kong. The Company owns a 49% interest in EMSL, and COSL owns a 51% interest.
EMSL is managed pursuant to the terms of its shareholders agreement which provides for equal representation for COSL and the Company on the board of directors and in management. In exchange for its 49% interest in EMSL, the Company agreed to contribute 14 vessels. COSL made a capital contribution to EMSL of approximately $20.9 million in cash in exchange for its 51% interest. In
exchange for the Company’s contribution of 14 vessels, EMSL paid the Company approximately $17.9 million, $3.5 million of which was held in escrow until the second closing which occurred on January 1, 2008. Of the 14 vessels contributed to EMSL, five were mobilized during 2007 with an additional five vessels in 2008 and one additional vessel in 2009. One of the remaining three vessels was sold in 2009. One is operated by us under a management agreement with EMSL and another one is mobilizing in the first quarter of 2010 to Southeast Asia.
There is potential for the Company to provide subordinated financial support as required per the shareholders agreement to fund, in proportion to the shareholders’ respective ownership percentages, project start-up costs associated with the development and establishment of EMSL to the extent they exceed the working capital of EMSL. Under accounting guidance for consolidation of variable interest entities, because of the potential for disproportionate economic return, the Company presents the financial position and results of operations of EMSL on a consolidated basis. During 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The Company evaluated the effects of this new accounting guidance. See Note 3.
For the years ended December 31, 2009 and 2008, the partner’s share of EMSL’s income was approximately $0.5 million and $6.8 million, respectively, which is recorded as a component of “Net (income) loss attributable to the noncontrolling interest” in the Company’s Consolidated Statements of Operations.
Presented below is EMSL’s condensed balance sheets (in thousands).
Presented below is EMSL’s condensed statements of income (in thousands).
At December 31, 2007, the Company consolidated its 49% variable interest in a Mexican subsidiary, Naviera Mexicana de Servicios, S. de R.L de CV (“NAMESE”). The remaining 51% interest is held by a Company incorporated in Mexico ( the “Partner”). Effective January 1, 2008, the Company executed an agreement with the Partner providing them with an agency fee that will pay them a per diem rate based on the number of vessels operating in Mexico. In conjunction with the execution of the agency agreement, the
shareholders of NAMESE also agreed to amend the by-laws, which among other things, granted a put option to the Partner enabling them to require Trico to purchase their equity interest in NAMESE at a specified strike price. Because the Partner could require Trico to purchase their shares in NAMESE at a specified price via their put option, an event outside of Trico’s control, the Partner’s shares were deemed to be mandatorily redeemable pursuant to the requirements of accounting guidance for certain financial instruments with characteristics of both liabilities and equity. Mandatorily redeemable financial instruments must be accounted for as liabilities at a value based on their estimated redemption amount. As a result, the Company originally recorded a liability of approximately $0.2 million reflecting the estimated redemption amount of the Partner’s equity interest, and eliminated the Partner’s noncontrolling interest in the net assets of NAMESE on the consolidated balance sheet. (In 2009, the liability was increased to $0.8 million.) The difference between the carrying value of the noncontrolling interest and the estimated redemption liability has been reflected as an adjustment to the carrying value of the assets in NAMESE, consistent with step acquisition accounting requirements. Additionally, because the Partner is no longer deemed to hold a residual equity interest in NAMESE, the Company recognizes 100% of the consolidated profit of NAMESE, with no adjustment for noncontrolling interest.
For the year ended December 31, 2007, the Partner’s share of NAMESE’s profits was approximately $0.8 million, which reduced “Net (income) loss attributable to the noncontrolling interest” in the Company’s Consolidated Statements of Operations.
17. Commitments and Contingencies
Commitments and Contingencies of Parent Company (Trico Other):
Plan of Reorganization Proceeding. Steven Salsberg and Gloria Salsberg were pursuing an appeal of a court’s finding that the Parent Company did not provide any inaccurate information in connection with its 2005 reorganization. That finding has already been affirmed by the U.S. District Court. On August 11, 2009, the U.S. Court of Appeals denied their appeal on all grounds.
Commitments and Contingencies of Trico Supply and Subsidiaries and Non-Guarantor Subsidiaries:
General. In the ordinary course of business, the Company is involved in certain personal injury, pollution and property damage claims and related threatened or pending legal proceedings. The Company does not believe that any of these proceedings, if adversely determined, would have a material adverse effect on its financial position, results of operations or cash flows. Additionally, the Company’s insurance policies may reimburse all or a portion of certain of these claims. At December 31, 2009 and December 31, 2008, the Company accrued for liabilities in the amount of approximately $3.3 million and $2.3 million, respectively, based upon the gross amount that management believes it may be responsible for paying in connection with these matters. Additionally, from time to time, the Company is involved as both a plaintiff and a defendant in other civil litigation, including contractual disputes. The Company does not believe that any of these proceedings, if adversely determined, would have a material adverse effect on its financial position, results of operations or cash flows. The amounts the Company will ultimately be responsible for paying in connection with these matters could differ materially from amounts accrued.
Volstad Impairment - Withdrawal from Partnership. In July 2007, DeepOcean AS, established a limited partnership under Norwegian law with Volstad Maritime AS, for the sole purpose of creating an entity that would finance the construction of a new vessel. This entity was fully consolidated by DeepOcean. According to the terms of the partnership agreement, neither party to the partnership was obligated to fund more than its committed capital contribution with the remaining portion to be financed through third party financings. Given the global economic turmoil and resulting difficulties in obtaining financing, the purpose of the partnership has been frustrated due to the fact that the partnership has been unable to fulfill its commitment of obtaining financing for the remaining amount necessary to purchase the new vessel. As a result, on April 27, 2009, DeepOcean AS served notice to Volstad of its formal withdrawal from the partnership, effective immediately, thereby eliminating its continuing obligations therein. As a result, the Company’s total vessel construction commitments have been reduced by $41.6 million. On June 26, 2009, the Company reached an agreement with Volstad where DeepOcean AS withdrew from the partnership, CTC Marine was relieved of obligations under the time charter with the partnership and the Company was indemnified in full against claims of either Volstad or the shipyard building the vessel. The Company’s sole obligation to pay NOK 7.0 million ($1.1 million) against an invoice for work done to the vessel was completed in July 2009. Based on the outcome of those negotiations, the Company recorded a $14.0 million asset and investment impairment in 2009, which is reflected in the accompanying Statement of Operations under “Impairments and penalties on early termination of contracts”. No remaining assets or investments associated with this partnership are on the Company’s books.
Saipem. CTC Marine entered into a sub-contract (“the Contract”) dated March 30, 2007 with Saipem S.p.A (“Saipem”), an Italian-registered company. Saipem had previously been contracted by oil and gas operator Terminale GNL Adriatico Srl (“ALNG”) to lay, trench and backfill an offshore pipeline in the northern Adriatic Sea. The Contract between Saipem and CTC Marine related to
the trenching and backfilling work. Work on location commenced on February 13, 2008 and was completed on May 5, 2008. The project took longer than originally anticipated and the target depth of cover for the pipeline was not met for the whole of the route due to CTC Marine encountering significantly different soils on the seabed to those which had been identified in the geotechnical survey documentation. In the summer of 2008, CTC Marine submitted a contractual claim to Saipem in relation to the different soils. Saipem in turn made submissions to ALNG. ALNG rejected Saipem’s submission and Saipem has, in turn, refused to pay CTC Marine the additional sums. The Contract is governed by English law and specifies that disputes that are incapable of resolution must be referred to Arbitration before three Arbitrators under the International Chamber of Commerce (“ICC”) rules. Arbitration is a commercial rather than a court remedy. The decision of the Arbitral Tribunal is enforceable in the courts of all major nations.
CTC Marine submitted a Claim to Arbitration on April 9, 2009 based upon the Contract for payment of 7.7 million Sterling plus interest and costs. Saipem sought an extension to the time for their answer and provided this on June 4, 2009, together with a Counterclaim for Liquidated Damages in terms of the Contract. CTC submitted its reply to the Counterclaim as well as amendments to the request. The Arbitration Tribunal of three, comprising one nomination from each side and an independent chairman has been convened and parties have agreed that the forum for the Arbitration be set in London. The Tribunal issued their schedule of the hearing to follow in August 2009 and both parties agreed. The timetable has been set with arbitration in July 2010. The amount owed is reflected in “Prepaid expenses and other current assets” in the accompanying Consolidated Balance Sheets. While there can be no assurances of full recovery in arbitration, the Company intends to vigorously defend its claim for payment for services rendered and believes its position to be favorable at this time.
Brazilian Tax Assessments. On March 22, 2002, the Company’s Brazilian subsidiary received a non-income tax assessment from a Brazilian state tax authority for approximately 52.0 million Reais ($30.0 million at December 31, 2009). The tax assessment is based on the premise that certain services provided in Brazilian federal waters are considered taxable by certain Brazilian states as transportation services. The Company filed a timely defense at the time of the assessment. In September 2003, an administrative court upheld the assessment. In response, the Company filed an administrative appeal in the Rio de Janeiro administrative tax court in October 2003. In November 2005, the Company’s appeal was submitted to the Brazilian state attorneys for their response. On December 8, 2008, the final hearing took place and the Higher Administrative Tax Court ruled in favor of the Company. On April 13, 2009, the State Attorney’s Office filed its appeal with the Special Court of the Higher Administrative Tax Court. The Company filed its response on June 9, 2009. The Company is under no obligation to pay the assessment unless and until such time as all appropriate appeals are exhausted. The Company intends to vigorously challenge the imposition of this tax. Many of our competitors in the marine industry have also received similar non-income tax assessments. Broader industry actions have been taken against the tax in the form of a suit filed at the Brazilian Federal Supreme Court seeking a declaration that the state statute attempting to tax the industry’s activities is unconstitutional. This assessment is not income tax based and is therefore not accounted for under authoritative accounting guidance for income taxes that prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The Company has not accrued any amounts for the assessment of the liability.
During the third quarter of 2004, the Company received a separate non-income tax assessment from the same Brazilian state tax authority for approximately 4.8 million Reais ($2.8 million at December 31, 2009). This tax assessment is based on the same premise as noted above. The Company filed a timely defense in October 2004. In January 2005, an administrative court upheld the assessment. In response, the Company filed an administrative appeal in the Rio de Janeiro administrative tax court in February 2006. On January 22, 2009, the Company filed a petition requesting for the connection of the two cases, and asking for the remittance of the case to the other Administrative Section that ruled favorably to the Company in the other case mentioned above. The President of the Higher Administrative Tax Court is analyzing this request. This assessment is not income tax based and is therefore not accounted for under authoritative accounting guidance for income taxes that prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The Company has not accrued any amounts for the assessment of the liability.
If the Company’s challenges to the imposition of these taxes (which may include litigation at the Rio de Janeiro state court) prove unsuccessful, current contract provisions and other factors could potentially mitigate the Company’s tax exposure. Nonetheless, an unfavorable outcome with respect to some or all of the Company’s Brazilian state tax assessments could have a material adverse affect on the Company’s financial position and results of operations if the potentially mitigating factors also prove unsuccessful.
Construction Commitments. At December 31, 2009, we had total construction commitments of $38 million for the construction of three vessels. Based on anticipated delivery schedules which are subject to potential delays, payments will be made in 2010 and 2011. The total purchase price for each vessel is subject to certain adjustments based on the timing of delivery and the vessel’s specifications upon delivery. If the Company does not exercise its option to cancel the last four Tebma vessels, its committed future capital expenditures would be increased approximately $4 million, $9 million, $35 million, $33 million, and $6 million for December 31, 2010, 2011, 2012, 2013, and 2014, respectively.
On October 22, 2008, Solstrand Shipyard AS (Solstrand), filed for bankruptcy in Norway. The Company had contracted Solstrand to construct and deliver one vessel to supplement its North Sea fleet. As a result of this bankruptcy, delivery of the vessel was uncertain and Solstrand Shipyard’s bankruptcy counsel had requested a significant increase in purchase price in order to complete the vessel construction. The Company had made a down payment of $5 million at time of execution of the construction contract in March 2006. On November 21, 2008, the Company entered into a termination agreement with Solstrand Shipyard cancelling the construction contract in exchange for Solstrand Shipyard returning to the Company its original investment plus interest, totaling $5.1 million. The Company had capitalized other costs in relation to the construction of the vessel, primarily capitalized interest, totaling $0.8 million which were expensed in connection with the cancellation. As a result, the Company has no further payment or other obligations with respect to such contract and will not be receiving the vessel when completed.
Operating Leases. On September 30, 2002, one of the Company’s primary U.S. subsidiaries, Trico Marine Operators, Inc., entered into a master bareboat charter agreement (the “Master Charter”) with General Electric Capital Corporation (“GECC”) for the sale-lease back of three crew boats. The lease agreements have various term dates with the latest term ending in 2015. All obligations under the Master Charter are guaranteed by Trico Marine Assets, Inc., the Company’s other primary U.S. subsidiary, and Trico Marine Services, Inc, the parent company. The Company has provided GECC with a pledge agreement (the “Pledge Agreement”) and $1.7 million cash deposit pursuant to the Master Charter. The deposit has been classified as “Other Assets” in the accompanying consolidated balance sheet.
The Master Charter also contains cross-default provisions, which could be triggered in the event of certain conditions, or the default and acceleration of the Company or certain subsidiaries with respect to any loan agreement which results in an acceleration of such loan agreement. Upon any event of default under the Master Charter, GECC could elect to, among other things, terminate the Master Charter, repossess and sell the vessels, and require the Company or certain subsidiaries to make up to a $9.7 million stipulated loss payment to GECC. If the conditions of the Master Charter requiring the Company to make a stipulated loss payment to GECC were met, such a payment could impair the Company’s liquidity.
In December 2004, the Company entered into a sale-leaseback transaction for its 14,000 square foot primary office in the North Sea to provide additional liquidity. The Company entered into a 10-year operating lease for the use of the facility, with annual rent payments of approximately $0.3 million. The lease contains options, at the Company’s discretion, to extend the lease for an additional six years, as well as a fair-value purchase option at the end of the lease term. During 2009, the operations were transferred to another location. As the Company was unable to sublease the Fosnavag facility or terminate the lease, it recognized exit costs in its towing and supply segment on the lease of $1.2 million in the year ended December 31, 2009 which is included in the accompanying Statement of Operations under “Impairments and penalties on early termination of contracts”.
Future minimum payments under non-cancelable operating leases, which primarily comprise of time charters for vessels due to the DeepOcean acquisition, with terms in excess of one year in effect at December 31, 2009, were $130.9 million, $71.9 million, $38.8 million, $31.8 million, $24.6 million and $23.5 million for the years ending December 31, 2010, 2011, 2012, 2013, and 2014, and subsequent years, respectively. Operating lease expense in 2009, 2008, and 2007 was $67.5 million, $63.7 million and $2.7 million, respectively.
18. Segment and Geographic Information
Following the Company’s acquisition of DeepOcean, consideration was given to how management reviews the results of the new combined organization. Generally, the Company believes its business is now segregated into three operational units or segments: (i) subsea services, (ii) subsea trenching and protection and (iii) towing and supply.
The subsea services segment is primarily represented by the DeepOcean operations and the subsea trenching and protection segment represents the operations of CTC Marine. The subsea services segment also includes seven subsea platform supply vessels (SPSVs) that the Company had in service prior to the acquisition of DeepOcean. The towing and supply segment is generally representative of the operations of the Company prior to its acquisition of DeepOcean.
The Company is a worldwide provider of vessels, services and engineering for the offshore energy and subsea services markets. The Company’s reportable business segments generate revenues in the following geographical areas (i) the North Sea, (ii) West Africa, (iii) Latin America (primarily comprising Mexico and Brazil), (iv) the Gulf of Mexico and (v) Other (including the Asia Pacific and Middle East / Mediterranean regions). The Company reports its tangible long-lived assets in the geographic region where the property and equipment is physically located and is available for conducting business operations.
Selected geographic information is as follows (in thousands):
The following table presents consolidated revenues by country based on the location of the use of the products or services:
The following table presents long-lived assets by country based on the location:
For the years ended December 31, 2009 and December 31, 2008, the schedule below quantifies the amount of revenues from customers that represent more than 10% of consolidated revenues and shows which segments record the revenues. No individual customer represented more than 10% of consolidated revenues for the year ended December 31, 2007. In the normal course of business, the Company extends credit to its customers on a short-term basis. Because the Company’s principal customers are national oil companies and major oil and natural gas exploration, development and production companies, credit risks associated with its customers are considered minimal. However, the Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts as it deems appropriate.
19. Subsequent Events
Amendment on $50 million U.S. Revolving Credit Facility. On January 15, 2010, the $50 million U.S. Revolving Credit Facility was amended to change the definition of Free Liquidity such that any amounts that were committed under the facility, whether available to be drawn or not, would be included for the purposes of calculating the free liquidity covenant.
In March 2010, the Company received waivers related to the requirement that an unqualified auditors’ opinion without an explanatory paragraph in relation to going concern accompany its annual financial statements. Separate waivers were received for each of the $50 million U.S. Revolving Credit Facility and the Trico Shipping Working Capital Facility. The Company also amended the Trico Shipping Working Capital Facility to provide that the aggregate amount of loans thereunder shall not exceed $26.0 million.
Sale of Vessels. As of December 31, 2009, the Company had signed agreements for the sale of six additional vessels, including one AHTS, for a total of approximately $20 million. Three of these vessel sales for approximately $3.0 million have been completed so far in 2010 with a gain of $0.5 million.
Norwegian Supreme Court ruling regarding constitutionality of transitional rules. Norwegian tonnage tax legislation was enacted as part of the 2008 Norwegian budgetary process and applied retroactively to January 1, 2007. Under the old tonnage tax regime, shipping income was not taxed unless distributed as dividends or upon exit from the system. Under the new tonnage tax regime, shipping income was tax exempt. Companies that were taxed under the old regime and entered into the new regime, were subject to tax at 28% on all accumulated untaxed shipping profits generated between 1996 through December 31, 2006 in the tonnage tax company. Two-thirds of the liability (NOK 251 million, $43.2 million) was payable in equal installments over 10 years. To date, the Company has made payments of approximately NOK 50 million ($8.6 million). The remaining one-third of the tax liability (NOK 126 million, $21.7 million) could be met through qualified environmental expenditures.
On February 12, 2010, the Norwegian Supreme Court concluded that the transitional rules, whereby the untaxed profits under the old regime became taxable upon entrance into the new regime, were unconstitutional. The Court has set aside the tax assessment without giving direction on how the untaxed profits from the old regime should be treated from 2007 and going forward. As a result of the ruling, the Company expects to recognize approximately $44 million in income in the first quarter of 2010, including approximately $4 million of cash savings that would have become due in 2010 and $8 million in cash refunds related to prior year tax payments. Going forward, the $36 million of payments over the next eight years will no longer be required. The Company will record any financial statement impact related to the ruling in the appropriate period.
20. Quarterly Financial Data (Unaudited)
The table below sets forth unaudited financial information for each quarter of the last two years (in thousands, except per share amounts):
21. Supplemental Condensed Consolidating Financial Information
On October 30, 2009, Trico Shipping issued the Senior Secured Notes. The Senior Secured Notes are unconditionally guaranteed on a senior basis by Trico Supply AS and each of the other direct and indirect parent companies of Trico Shipping (other than the Company) and by each direct and indirect subsidiary of Trico Supply AS other than Trico Shipping (collectively, the “Subsidiary Guarantors”). The Senior Secured Notes are also unconditionally guaranteed on a senior subordinated basis by the Company. The guarantees are full and unconditional, joint and several guarantees of the Senior Secured Notes. The Senior Secured Notes and the guarantees rank equally in right of payment with all of Trico Shipping’s and the Subsidiary Guarantors’ existing and future indebtedness and rank senior to all of the Trico Shipping’s and the Subsidiary Guarantors’ existing and future subordinated indebtedness. The Company’s guarantee rank junior in right of payment to up to $50 million principal amount of indebtedness under the Company’s $50 million U.S. Revolving Credit Facility. All other subsidiaries of the Company, either direct or indirect, have not guaranteed the Senior Secured Notes (collectively, the “Non-Guarantor Subsidiaries”). Trico Shipping and the Subsidiary Guarantors and their consolidated subsidiaries are 100% owned by the Company.
Under the terms of the indenture governing the Senior Secured Notes and Trico Shipping’s $33.0 million Working Capital Facility entered into concurrently with the closing of the Senior Secured Notes offering, Trico Supply AS is restricted from paying dividends to its parent, and Trico Supply AS and its restricted subsidiaries (including the Issuer) are restricted from making intercompany loans to the Company and its subsidiaries (other than Trico Supply AS and its restricted subsidiaries).
The following tables present the condensed consolidating balance sheets as of December 31, 2009 and 2008, and the condensed consolidating statements of operations and of cash flows for the years ended December 31, 2009, 2008, and 2007 of (i) the Parent Guarantor, (ii) the Issuer, (iii) the Subsidiary Guarantors, (iv) the Non-Guarantor Subsidiaries, and (v) consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions, (b) eliminate the investments in our subsidiaries and (c) record consolidating entries.
The additional tables represent consolidating information for Trico Supply Group as follows: the condensed consolidating balance sheets as of December 31, 2009 and 2008, and the condensed consolidating statements of income and of cash flows for the years ended December 31, 2009, 2008, and 2007 (i) the Issuer, Trico Shipping AS, (ii) the Subsidiary Guarantors, excluding the parent companies of Trico Supply AS, and (iii) consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions, (b) eliminate the investments in our subsidiaries and (c) record consolidating entries (collectively, the Trico Supply Group). The purpose of these tables is to provide the financial position, results of operations and cash flows of the group of entities which own substantially all of the collateral securing the Senior Secured Notes and are subject to the restrictions of the indenture. For purposes if this presentation, investments in consolidated subsidiaries are accounted for under the equity method.
Prior periods have been prepared to conform to the Company’s current organizational structure.
CONDENSED CONSOLIDATING BALANCE SHEET
YEAR ENDING DECEMBER 31, 2009
CONDENSED CONSOLIDATING BALANCE SHEET
YEAR ENDING DECEMBER 31, 2009 - (Continued)
(1)
All subsidiaries of the Parent that are providing guarantees, including Trico Holding LLC and Trico Marine Cayman L.P., Trico Supply AS, and all subsidiaries below Trico Supply AS and Issuer.
(2)
All subsidiaries of the Parent that are not providing guarantees including Trico Marine Assets, Inc., Trico Marine Operators, Inc., Trico Servicos Maritimos Ltda., Servicios de Apoyo Maritimo de Mexico, S. de R.L. de C.V.
(3)
Adjustments include Trico Marine Cayman L.P. and Trico Holding LLC that are not part of the Credit Group and investment in subsidiary balances between Issuer and Subsidiary Guarantors.
CONDENSED CONSOLIDATING BALANCE SHEET
YEAR ENDING DECEMBER 31, 2008
CONDENSED CONSOLIDATING BALANCE SHEET
YEAR ENDING DECEMBER 31, 2008 - (Continued)
(1)
All subsidiaries of the Parent that are providing guarantees, including Trico Holdco, LLC, Trico Marine Cayman L.P., Trico Supply AS and all subsidiaries of Trico Supply AS (other than Trico Shipping).
(2)
Adjustments include Trico Marine Cayman L.P. and Trico Holdco, LLC that are not part of the Trico Supply Group and investment in subsidiary balances between Trico Shipping and Subsidiary Guarantors.
(3)
Adjustments include Trico Marine Cayman L.P. and Trico Holding LLC that are not part of the Credit Group and investment in subsidiary balances between Issuer and Subsidiary Guarantors.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDING DECEMBER 31, 2009
(1)
All subsidiaries of the Company that are providing guarantees, including Trico Holdco, LLC, Trico Marine Cayman L.P., Trico Supply AS and all subsidiaries of Trico Supply AS (other than Trico Shipping).
(2)
All subsidiaries of the Company that are not providing guarantees.
(3)
Non-Guarantor Subsidiaries include a noncontrolling interest in Eastern Marine Service Limited (EMSL).
(4)
Adjustments include Trico Marine Cayman L.P. and Trico Holdco, LLC that are not part of the Trico Supply Group and equity income (loss) balances between Trico Shipping and Subsidiary Guarantors.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDING DECEMBER 31, 2008
(1)
All subsidiaries of the Company that are providing guarantees, including Trico Holdco, LLC, Trico Marine Cayman L.P., Trico Supply AS and all subsidiaries of Trico Supply AS (other than Trico Shipping).
(2)
All subsidiaries of the Company that are not providing guarantees.
(3)
Non-Guarantor Subsidiaries include a noncontrolling interest in EMSL.
(4)
Adjustments include Trico Marine Cayman L.P. and Trico Holdco, LLC that are not part of the Trico Supply Group and equity income (loss) balances between Trico Shipping and Subsidiary Guarantors.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDING DECEMBER 31, 2007
(1)
All subsidiaries of the Company that are providing guarantees, including Trico Holdco, LLC, Trico Marine Cayman L.P., Trico Supply AS and all subsidiaries of Trico Supply AS (other than Trico Shipping).
(2)
All subsidiaries of the Company that are not providing guarantees.
(3)
Non-Guarantor Subsidiaries include a noncontrolling interest in EMSL.
(4)
Adjustments include Trico Marine Cayman L.P. and Trico Holdco, LLC that are not part of the Trico Supply Group and equity income (loss) balances between Trico Shipping and Subsidiary Guarantors.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
YEAR ENDING DECEMBER 31, 2009
(1)
All subsidiaries of the Company that are providing guarantees, including Trico Holdco, LLC, Trico Marine Cayman L.P., Trico Supply AS and all subsidiaries of Trico Supply AS (other than Trico Shipping).
(2)
All subsidiaries of the Company that are not providing guarantees.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
YEAR ENDING DECEMBER 31, 2008
(1)
All subsidiaries of the Company that are providing guarantees, including Trico Holdco, LLC, Trico Marine Cayman L.P., Trico Supply AS and all subsidiaries of Trico Supply AS (other than Trico Shipping).
(2)
All subsidiaries of the Company that are not providing guarantees.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
YEAR ENDING DECEMBER 31, 2007
(1)
All subsidiaries of the Company that are providing guarantees, including Trico Holdco, LLC, Trico Marine Cayman L.P., Trico Supply AS and all subsidiaries of Trico Supply AS (other than Trico Shipping).
(2)
All subsidiaries of the Company that are not providing guarantees.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Trico Marine Services, Inc.’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2009. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2009, our disclosure controls and procedures were not effective, at the reasonable assurance level, because of the material weaknesses described in Management’s Report on Internal Control over Financial Reporting. We believe that the material weaknesses described below are attributable to factors caused by the substantial changes in our business recently, including the integration of our recent acquisitions, reorganization and consolidation of certain of our operating divisions, turnover of personnel, and our decentralized organizational structure.
In preparing our Exchange Act filings, including this Annual Report on Form 10-K, we implemented processes and procedures to provide reasonable assurance that the identified material weaknesses in our internal control over financial reporting were mitigated with respect to the information that we are required to disclose. As a result, we believe the Company’s consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented. Our Chief Executive Officer and Chief Financial Officer have certified to their knowledge that this Annual Report on Form 10-K does not contain any untrue statements of material fact or omit to state any material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered in this Annual Report.
Changes in Internal Control over Financial Reporting
The following changes in our internal control over financial reporting occurred during the fourth quarter of 2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. During the fourth quarter of 2009, we (a) continued the integration process of our previously excluded subsidiary, DeepOcean AS, and its wholly-owned subsidiary CTC Marine Projects Ltd., which were acquired in a purchase business combination in 2008, in our assessment of internal control over financial reporting, (b) replaced our Chief Accounting Officer with an interim Chief Accounting Officer, (c) implemented procedures for developing condensed consolidating financial information as required by Rule 3-10 of Regulation S-X pursuant to the issuance of our $400 million Senior Secured Notes, and (d) closed certain of our North Sea and Gulf of Mexico offices and consolidated their operations and processes into our Aberdeen and Corporate offices, respectively.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the interim or annual consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the evaluation performed, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2009. A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
We did not maintain an effective control environment. A control environment sets the tone of an organization, influences the control consciousness of its people, and is the foundation of all other components of internal control over financial reporting. Specifically, we did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training commensurate with our financial reporting requirements. Also, we did not maintain a sufficient complement of personnel to provide for the proper preparation and review over period end financial reporting process controls as discussed below. Accordingly, management has concluded that this control deficiency constituted a material weakness. This control environment material weakness contributed to the material weaknesses discussed below and also could contribute to additional control deficiencies arising.
We did not maintain effective controls over the period-end financial reporting process. Specifically, the following material weaknesses existed: (a) our controls over the preparation and review of account reconciliations were ineffective to provide reasonable assurance that account balances were complete and accurate and agreed to appropriate supporting detail and (b) our controls over journal entries, including consolidation, top-side and intercompany elimination entries, did not operate effectively to provide reasonable assurance that they were appropriately recorded and prepared with sufficient support and documentation or that they were properly reviewed and approved for validity, accuracy and completeness. These control deficiencies resulted in audit adjustments to cash and cash equivalents, property and equipment, accumulated depreciation and amortization, accounts payable, depreciation and amortization, general and administrative, and interest expense accounts in the 2009 consolidated financial statements and if not remediated, could result in a misstatement to substantially all accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that these control deficiencies constituted material weaknesses. The period-end financial reporting process material weaknesses contributed to the severity of the information technology general control deficiencies discussed below.
We did not maintain effective controls over our information technology general controls. Specifically, access to critical financial application programs and data was not reviewed on a regular basis to ensure that key personnel had appropriate access commensurate with their assigned roles and responsibilities. Also, appropriate policies and procedures were not in place with respect to program changes and system security. These control deficiencies could result in a misstatement to substantially all accounts and disclosures that would result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that these control deficiencies constituted a material weakness.
We did not maintain an effective control over the remeasurement and/or translation of our intercompany notes. Specifically, effective controls were not in place to ensure that foreign exchange gains and losses and/or cumulative translation adjustment were appropriately calculated and recorded in the respective accounts. This control deficiency resulted in an audit adjustment to the 2009 consolidated financial statements and could result in a material misstatement to the aforementioned accounts and disclosures that would result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constituted a material weakness.
Because of the above described material weaknesses in internal control over financial reporting, management concluded that our internal control over financial reporting was not effective as of December 31, 2009 based on the criteria set forth in Internal Control - Integrated Framework issued by the COSO.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2009, as stated in their report, which appears in Item 8.
Remediation Plan
In order to remediate the material weaknesses described above, we are undertaking the following activities. We will continue to evaluate the effectiveness of our internal controls and procedures on an ongoing basis and will take further action as appropriate.
•
We are reviewing the responsibilities and roles of staff in our accounting and finance department considering each individual’s accounting knowledge, experience and training. We are also hiring additional resources.
•
We are actively recruiting a chief accounting officer.
•
We are enhancing our period-end financial reporting by automating our consolidation process and remapping our consolidation entries to the appropriate entity level.
•
We are reviewing the overall account reconciliation and journal entry process for all locations, but in particular related to the consolidation and divisional level to establish appropriate procedures that ensure adequate support and review.
•
We are in the process of formulating the appropriate policies and procedures with respect to program changes and system security within our information technology general controls.
•
We are changing the process for the review of segregation of duties to be performed on a regular basis and to clearly document the process undertaken and the results.
•
As part of our enhancement in our period-end financial reporting, we are enhancing our process for accounting for foreign currency gains and losses to ensure that foreign exchange gains and losses and/or cumulative translation adjustment are appropriately calculated and recorded.
Item 9B.
Item 9B. Other Information.
Indemnification Agreements. On March 15, 2010, we entered into indemnification agreements with each of our directors and officers (each, an “Indemnitee”). The current directors of our board are Messrs. Staehr, Bachmann, Burke, Guill, Hutcheson, Compofelice and Scoggins. Consistent with the obligation under our bylaws, each indemnification agreement requires us to indemnify each Indemnitee to the fullest extent permitted by the Delaware General Corporation Law. This means, among other things, that we must indemnify the Indemnitee against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement that are actually and reasonably incurred in an action, suit or proceeding by reason of the fact that the person is or was a director or officer if the Indemnitee meets the standard of conduct provided under Delaware law. Also as permitted under Delaware law, the indemnification agreements require us to advance expenses in defending such an action provided that the director undertakes to repay the amounts if he ultimately is determined not to be entitled to indemnification from us. We will also make the Indemnitee whole for taxes imposed on the indemnification payments and for costs in any action to establish Indemnitee’s right to indemnification, whether or not wholly successful.
In general, the disinterested directors on our board or a committee of disinterested directors have the authority to determine an Indemnitee’s right to indemnification, but the Indemnitee can require that independent legal counsel make this determination if a change in control or potential change in control has occurred. The indemnification agreements also limit the period in which we can bring an action against the Indemnitee to three years for breaches of fiduciary duty and to one year for other types of claims.
Waivers. On March 15, 2010, we entered into the Waiver to Amended and Restated Credit Agreement (the “Waiver”) by and among Trico, as borrower, Trico Marine Assets, Inc. and Trico Marine Operators, Inc., as guarantors, Unicredit Bank AG (“Unicredit”) and Nordea Bank Norge ASA, Cayman Islands Branch, as lenders, and Nordea Bank Finland plc, New York Branch (“Nordea”), as administrative agent. The Waiver waives any Default or Event of Default (as such terms are defined in the U.S. Credit Facility) under the U.S. Credit Facility arising from the fact that our annual financial statements to be delivered thereunder will not be certified on an unqualified basis in regards to going concern for the fiscal year ending December 31, 2009. Nordea serves as administrative agent, book runner, joint lead arranger and a lender under the Trico Shipping Working Capital Facility. Unicredit serves as joint lead arranger and a lender under the Trico Shipping Working Capital Facility.
On March 15, 2010, Trico Shipping AS entered into the First Amendment and Waiver to Credit Agreement (the “Amendment”) by and among Trico Shipping AS, as borrower, Trico Marine Cayman, L.P., Trico Holdco LLC, Trico Supply AS and our other subsidiaries party thereto, as guarantors, Unicredit, as a lender, and Nordea, as administrative agent. The Amendment (i) waives any Default or Event of Default (as such terms are defined in the Trico Shipping Working Capital Facility) under the Trico Shipping Working Capital Facility arising from the fact that our annual financial statements to be delivered thereunder will not be certified on an unqualified basis in regards to going concern for the fiscal year ending December 31, 2009 and (ii) amends the Trico Shipping Working Capital Facility to provide that the aggregate amount of loans thereunder shall not exceed $26.0 million. Nordea serves as administrative agent, book runner and lead arranger under the U.S. Credit Facility. Unicredit serves as a lender under the U.S. Credit Facility.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Pursuant to Instruction G to Form 10-K, information concerning the Company’s directors and officers called for by this item will be included in the Company’s definitive Proxy Statement prepared in connection with the 2010 Annual Meeting of Stockholders and to be filed not later than 120 days after the end of the 2009 fiscal year is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Pursuant to Instruction G to Form 10-K, information concerning the compensation of the Company’s executives called for by this item will be included in the Company’s definitive Proxy Statement prepared in connection with the 2010 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the 2009 fiscal year and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Pursuant to Instruction G to Form 10-K, information concerning security ownership of certain beneficial owners and management called for by this item will be included in the Company’s definitive Proxy Statement prepared in connection with the 2010 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the 2009 fiscal year and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
Pursuant to Instruction G to Form 10-K, information concerning certain relationships and related transactions called for by this item will be included in the Company’s definitive Proxy Statement prepared in connection with the 2010 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the 2009 fiscal year and is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
Pursuant to Instruction G to Form 10-K, information concerning the fees and services of our principal accountants and certain of our audit committees’ policies and procedures called for by this item will be included in the Company’s definitive Proxy Statement prepared in connection with the 2010 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the 2009 fiscal year and is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to Part II, Item 8 hereof.
(2) Financial Statement Schedules
Valuation and Qualifying Accounts
(b) Exhibits
See Index to Exhibits on page 138. The Company will furnish to any eligible stockholder, upon written request of such stockholder, a copy of any exhibit listed upon the payment of a reasonable fee equal to the Company’s expenses in furnishing such exhibit.
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.
Trico Marine Services, Inc.
(Registrant)
By: /s/ Joseph S. Compofelice
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Date: March 16, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
TRICO MARINE SERVICES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 2009, 2008 and 2007
(in thousands)
TRICO MARINE SERVICES, INC.
EXHIBIT INDEX
*
Management Contract or Compensation Plan or Arrangement.
(1)
Filed herewith