10-Q 1 e10-q.txt FIRST WAVE MARINE, INC. - DATED JUNE 30, 2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q ----------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 Commission file number 333-38157 FIRST WAVE MARINE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 76-0461352 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2102 BROADWAY (Zip Code) HOUSTON, TEXAS 77012 (Address of principal executive offices) Registrant's telephone number, including area code: (713) 847-4600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [ ] No Number of shares of common stock outstanding as of August 11, 2000: 11,756,955. ================================================================================ 2 FIRST WAVE MARINE, INC. INDEX TO FORM 10-Q FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2000

3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRST WAVE MARINE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these statements. 1 4 FIRST WAVE MARINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Six Month Periods Ended June 30, (In thousands, except per share data) (Unaudited)

The accompanying notes are an integral part of these statements. 2 5 FIRST WAVE MARINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Month Periods Ended June 30, (In thousands) (Unaudited)

The accompanying notes are an integral part of these statements. 3 6 FIRST WAVE MARINE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) Note 1 In the opinion of management the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly the financial position of First Wave Marine, Inc. ("First Wave" or the "Company") as of June 30, 2000, the results of operations for the three and six month periods ended June 30, 2000 and 1999, and cash flows for the six month periods ended June 30, 2000 and 1999. All such adjustments are of a normal recurring nature. These interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Note 2 The consolidated financial statements include the accounts of First Wave and its wholly-owned subsidiaries. All material intercompany transactions are eliminated in consolidation. Note 3 The results of operations for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results to be expected for the entire year. 4 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-Q, including statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as statements as may be made by management, orally or in writing related thereto, are forward-looking statements. Forward-looking statements generally are accompanied by words such as "anticipate", "believe", "estimate", "expect" or similar statements. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including (i) risks of reduced levels of demand for the Company's services resulting from reduced levels of capital expenditures of the Company's customers in the offshore drilling rig, offshore support vessel, offshore barge, ship and inland marine industries, (ii) risks related to the expansion of operations, (iii) operating risks relating to conversion and repair of drilling rigs, offshore support vessels, offshore barges, ships and inland marine vessels, (iv) contract bidding risks, (v) risks related to dependence on significant customers, (vi) risks related to the highly leveraged posture of the Company, and (vii) risks related to regulatory and environmental matters. Additionally, the Company's Report on Form 10-K for the year ended December 31, 1999 should be consulted for an expanded discussion of risk factors. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. The following discussion of the Company's financial condition, results of operations, liquidity and capital resources should be read in conjunction with the Company's Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included elsewhere in this report. GENERAL The Company's business is primarily derived from providing repair and upgrade services to inland and offshore marine vessels, including barges, boats, drilling rigs and ships. To a lesser extent the Company engages in new construction of such inland and offshore marine vessels. First Wave currently operates three shipyards in the Houston, Texas area (Brady Island, Greens Bayou and Pasadena) and three in the Galveston, Texas area (East Pelican Island, West Pelican Island and Galveston Island). The Company also provides related environmental services, including cleaning, degassing and wastewater treatment. The Company currently employs approximately 950 employees at its six shipyards. RESULTS OF OPERATIONS Comparison of the three months ended June 30, 2000 to the three months ended June 30, 1999. Revenues decreased 5% to $17.1 million in the 2000 period, compared with $18.1 million in the 1999 period, primarily as a result of an approximate $3.0 million decrease in new construction activity due to the completion of a barge construction contract at our Galveston Island facility. The decrease in new construction activity was partially offset by an approximate $2.2 million increase in repair and upgrade revenue. The increase in repair and upgrade revenues can be largely attributed to the upturn in exploration and production activity in the Gulf of Mexico resulting from increased oil prices in 1999. Cost of revenues as a percentage of total revenues was 84% in the 2000 period compared to 97% in the 1999 period. Gross Profit increased 412% to $2.8 million in the 2000 period from $541,000 in the 1999 period. The gross profit margin increased to 16% in the 2000 period from 3% in the 1999 period, due in part to the decrease in lower margin new construction work and an increase in higher margin repair and upgrade work. 5 8 General and administrative expenses decreased 27% to $2.6 million in the 2000 period from $3.5 million in the 1999 period. General and administrative expenses as a percentage of revenues for the 2000 period represented 15% of total revenues, as compared to 19% for the 1999 period. The decrease in general and administrative expenses was due to a decrease in unusual expenditures. During the 2000 period, the Company recognized an asset impairment loss of $115,000 related to the disposal of a dry-dock at the Pasadena facility. In the comparable period in 1999, the Company recorded approximately $813,000 of unusual items related to an unsuccessful acquisition attempt, an impairment loss on a specialized piece of equipment, an asset write-down on the cancellation of the purchase of a piece of equipment, and legal fees related to the environmental investigation at the Brady Island facility which was resolved in the first quarter of 2000. During the 2000 period, corporate expenses decreased approximately $300,000 from the comparable 1999 period as travel expenses related to acquisition attempts decreased, expenses related to the development of the marketing program decreased, and certain job functions were consolidated. During late 1999, the company undertook a study of its cost classification system. The study included an account by account analysis as well as a review of industry practices. Based on the results of the study, reclassifications have been made between general and administrative expenses and cost of revenues for all 1999 periods presented. Net interest expense increased to $2.8 million in the 2000 period from $2.5 million in the 1999 period primarily due to increased interest expense related to borrowings on the Company's revolving credit and term loan facility entered into in October 1999. During the 2000 period, the Company recognized an income tax benefit of approximately 22%, as compared to an income tax benefit during the 1999 period of approximately 36%. The benefit recognized in the current period reflects a projected effective tax rate to be applicable for the full fiscal year of 2000. Comparison of the six months ended June 30, 2000 to the six months ended June 30, 1999. Revenues increased 2% to $45.0 million in the 2000 period, compared with $44.0 million in the 1999 period. Though total revenues increased marginally, revenues derived from new construction and environmental services decreased a combined $1.2 million due primarily to the completion of a barge construction contract at the Company's Galveston Island facility in the first quarter of 2000. The approximate $2.2 million increase in repair and upgrade revenues can be largely attributed to the upturn in exploration and production activity in the Gulf of Mexico resulting from increased oil prices in 1999. Cost of revenues as a percentage of total revenues was 87% in the 2000 period compared to 89% in the 1999 period. The cost of revenue percentage decreased primarily due to the change in the mix of work. Gross profit increased 25% to $5.9 million in the 2000 period from $4.7 million in the 1999 period. The gross profit margin increased to 13% in the 2000 period from 11% in the 1999 period, due in part to the decrease in lower margin new construction revenue. General and administrative expenses decreased 18% to $5.0 million in the 2000 period from $6.1 million in the 1999 period. General and administrative expenses as a percentage of revenues for the 2000 period represented 11% of total revenues, as compared to 14% for the 1999 period. The decrease in general and administrative expenses was due to a decrease in unusual expenditures. In the 2000 period, the Company recognized an asset impairment loss of $115,000 related to the disposal of a dry-dock at the Pasadena facility and expensed $98,000 in legal fees related to the settlement of the environmental investigation at the Brady Island facility which was reached late in the first quarter of 2000. During the comparable period in 1999, the Company recognized unusual expenses of approximately $992,000 related to an unsuccessful acquisition attempt, an impairment loss on a specialized piece of equipment, an asset write-down on the cancellation of the purchase of a piece of equipment, and legal fees related to the environmental investigation at the Brady Island facility. During the 2000 period, corporate expenses decreased approximately $300,000 from the comparable 1999 period as travel expenses related to acquisition 6 9 attempts decreased, expenses related to the development of the marketing program decreased, and certain job functions were consolidated. During late 1999, the company undertook a study of its cost classification system. The study included an account by account analysis as well as a review of industry practices. Based on the results of the study, reclassifications have been made between general and administrative expenses and cost of revenues for all 1999 periods presented. Net interest expense rose to $5.6 million in the 2000 period from $5.0 million in the 1999 period primarily due to a decrease in interest income from investments held to maturity, and an increase in interest expense related to borrowings on the Company's revolving credit and term loan facility entered into in October 1999. During the 2000 period, the Company recognized on income tax benefit of approximately 19%, as compared to an income tax benefit of approximately 35% during the 1999 period. The benefit recognized in the current period reflects an assumed tax rate for the full fiscal year of 2000. INFLATION AND CHANGING PRICES The Company does not believe that general price inflation has had a significant impact on the Company's results of operations during the periods presented. To the extent that the effects of inflation are not offset by improvements in manufacturing and purchasing efficiency and labor productivity, the Company generally has been able to take such effects into account in pricing its contracts with customers. There can be no assurance, however, that inflation will not have a material effect on the Company's business in the future. LIQUIDITY AND CAPITAL RESOURCES The Company's ongoing liquidity requirements arise primarily from its need to service debt, fund working capital, and make capital improvements to its facilities. Under its indenture entered into in 1998 in connection with the $90 million Senior Notes offering, the Company is permitted to borrow up to the greater of $20 million or 85% of its accounts receivable, plus up to an additional $5 million. In October 1999, the Company entered into a $20 million revolving credit and term loan facility (the "Facility") that matures on October 14, 2003. The revolving portion of the Facility, initially $16 million, is secured by accounts receivable of all but one of the Company's subsidiaries. The initial interest rate on the revolving portion of the Facility was 0.50% per annum in excess of The Wall Street Journal prime rate. The term portion of the Facility ("Term Loan"), $4 million, is secured by certain dry-docks and real estate. The initial interest rate on the Term Loan was 1.00% per annum in excess of The Wall Street Journal prime rate. The Term Loan requires monthly principal payments of $56,000, with the unpaid balance due at the maturity of the Facility. The Facility initially required that cumulative net losses of the Company as defined in the agreement after October 1, 1999 not exceed $3.0 million. The Company is required to pay a fee of 0.25% per annum on the unused portion of the total Facility, based on a minimum total loan amount of $5 million, and certain other administrative costs. In April 2000, the Company entered into an amendment to the Facility. The amendment provided for a 200 basis point adjustment to each of the Facility interest rates in exchange for an increase to $4.5 million of the cumulative net loss covenant commencing January 1, 2000. The increased interest rates will be reduced back to the original Facility rates upon the Company reporting a positive net income. The rates will adjust quarterly thereafter, remaining at the original rates for each quarter the Company reports a positive net income. The Company is engaged in discussions with the lender regarding additional changes to this Facility to add to the revolving portion of the Facility the receivables of the remaining subsidiary not originally included. 7 10 At June 30, 2000, the Company had no outstanding borrowings on the revolving portion of the Facility. As of August 11, 2000, the Company had outstanding borrowings of approximately $2.8 million on the revolving portion of the facility. In July 2000, one of the Company's subsidiaries, Newpark Shipbuilding-Pelican Island, Inc., entered into a 24 month Bareboat Charter with a purchase option for a liftbarge. The charter required an initial payment of $680,000, plus seven monthly payments of $40,000 beginning in the eighteenth month. If the purchase option is exercised a final payment of $420,000 is due. The company will account for this Bareboat Charter as a capital lease. Net cash (used in) provided by operating activities for the six month periods ended June 30, 2000 and 1999 was ($5.4) million and $245,000, respectively. The decrease in cash provided by operating activities was primarily due to the decrease in accounts payable and accrued liabilities. Net cash (used in) provided by investing activities was ($1.2) million and $4.6 million for the six month periods ended June 30, 2000 and 1999, respectively. During the 2000 period, cash used in investing activities was for asset additions. Net cash used in financing activities was $457,000 and $49,000 for the six month periods ended June 30, 2000 and 1999, respectively. Cash used in financing activities was for payments on long-term debt and notes payable. Management believes that with the cash generated from operations and borrowings under the Company's lines of credit, the Company will have sufficient resources available to meet its anticipated requirements for capital expenditures, working capital needs, and debt service for the remainder of fiscal year 2000. However, with recent increased borrowings under the revolving portion of the Facility, the Company has reduced its available borrowing capacity. Accordingly, if capital requirements or revenue vary materially from our current expectations, or if unforeseen circumstances occur, we will likely require additional equity sooner than we anticipated. There is no assurance that additional debt or equity financing will be available on terms acceptable to the Company, if at all. 8 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk in connection with its variable rate debt instruments. The Company does not enter into market risk sensitive instruments for trading purposes. The information below summarizes the Company's interest rate risk associated with its principal variable rate debt instruments outstanding at June 30, 2000, and should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Borrowings under the Company's Revolving Credit and Term Loan Facilities bear interest at variable rates equal to the prime rate as quoted in The Wall Street Journal plus the applicable margin. Because The Wall Street Journal rate may increase or decrease at any time, the Company is exposed to market risk as a result of the impact that changes in this rate may have on the interest rate applicable to borrowings under the Revolving Credit and Term Loan Facilities. Increases in the interest rate applicable to borrowings under the Revolving Credit and Term Loan Facilities would result in increased interest expense and a reduction in the Company's net income and after tax cash flow. At June 30, 2000, there was approximately $3.6 million indebtedness outstanding under the term portion and no outstanding indebtedness under the revolving portion of the Revolving Credit and Term Loan Facilities, or approximately 3% of the Company's outstanding long-term debt obligations on that date, bearing interest at variable rates. The Company attempts to mitigate the interest rate risk resulting from its variable interest rate long-term debt instruments by also issuing fixed rate long-term debt instruments and maintaining a balance over time between the amount of variable rate and fixed rate indebtedness. In the event of an increase in interest rates, the Company may take further actions to mitigate its exposure. The Company cannot guarantee, however, that actions that it may take to mitigate this risk will be feasible or that these actions, if taken, will be effective. 9 12 PART II: OTHER INFORMATION ITEM 1-5. NOT APPLICABLE. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits EXHIBIT NUMBER DESCRIPTION ------- ----------- **10.1 First Amendment to Loan and Security Agreement between First Wave Marine, Inc., Newpark Shipbuilding-Galveston Island, Inc., Newpark Shipbuilding-Pelican Island, Inc., Newpark Shipbuilding-Greens Bayou, Inc. and Newpark Shipbuilding-Pasadena, Inc., as Borrowers, and Banc of America Commercial Finance Corporation, as Lender, dated April 11, 2000. *27.1 Financial Data Schedule. * Filed herewith. ** Incorporated by reference from Exhibit 10.1 to Company's Quarterly Report on Form 10-Q for period ending March 31, 2000, filed May 15, 2000. (b) Reports on Form 8-K None 10 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST WAVE MARINE, INC. August 11, 2000 /s/ FRANK R. PIERCE ----------------------------------- Frank R. Pierce Vice President and Chief Financial Officer August 11, 2000 /s/ DALE E. SCHEXNAYDER ----------------------------------- Dale E. Schexnayder Corporate Controller 14 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- **10.1 First Amendment to Loan and Security Agreement between First Wave Marine, Inc., Newpark Shipbuilding-Galveston Island, Inc., Newpark Shipbuilding-Pelican Island, Inc., Newpark Shipbuilding-Greens Bayou, Inc. and Newpark Shipbuilding-Pasadena, Inc., as Borrowers, and Banc of America Commercial Finance Corporation, as Lender, dated April 11, 2000. *27.1 Financial Data Schedule. * Filed herewith. ** Incorporated by reference from Exhibit 10.1 to Company's Quarterly Report on Form 10-Q for period ending March 31, 2000, filed May 15, 2000.

FIRST WAVE MARINE INC 10-Q