Kistefos AS, the largest stockholder of Trico Marine Services,
Inc. (NASDAQ:TRMA), sent a letter to Trico Lead Director Richard A.
Bachmann today advising the Board that it intends to vote its
3,535,959 shares against the company’s three incumbent directors up
for election at Trico’s 2010 Annual Meeting. Kistefos said it also
intends to vote against Trico’s proposals to adopt an incentive
plan, authorize additional shares of common stock and stagger and
delay declassifying the Board.
In the letter to Mr. Bachmann, Kistefos Chairman Christen Sveaas
said the decision to vote against the three directors – Edward C.
Hutcheson, Jr., Myles W. Scoggins and Per Staehr – is a direct
result of Kistefos having lost all confidence in Trico Chairman and
CEO Joseph Compofelice.
Kistefos had expressly called on the Board last October to
remove Mr. Compofelice from his executive positions, citing the
overwhelming loss of stockholder value and enormous financial
losses that have occurred on his watch. Given the Board’s
continuing refusal to respond to the concerns of the stockholders
and its continuing support for Mr. Compofelice and his failed
strategy, Kistefos said it was left with no choice other than to
vote for change in the Board’s composition. Kistefos said that it
believes that much of the crisis which exists today could have been
avoided had the Board listened to the stockholders last year when
it had the opportunity.
Kistefos believes that removing Mr. Compofelice now is critical
to restoring Trico’s credibility among its constituents and saving
the company. In its letter, Kistefos cited the following examples
of Trico’s poor performance and extraordinary destruction of
shareholder value since Mr. Compofelice’s appointment as CEO on
July 9, 2007:
- Trico has suffered a devastating
96% drop in share price from a high of over $42 per share in June,
2007 to $1.63 per share on May 7, 2010, resulting in the
destruction of over $600 million in market value. That includes a
53% stock price drop since last year’s Annual Meeting, an
unmistakable vote of “no confidence” in current management in
Kistefos’ opinion.
- Trico has ranked at the bottom
of its peer group for the last two years in nearly every important
metric, including profit margin, return on equity and total
shareholder return.
- As a result of two ill-timed,
misguided and reckless acquisitions, Trico incurred more than $1
billion in debt in 2008, resulting in total indebtedness of more
than ten times its then anticipated 2008 EBITDA. The consequences
of such deliberate overleveraging have been, in Kistefos’ opinion,
devastating to the company.
- Furthermore, in 2008 and 2009
Trico reported operating losses of $128 million and $125 million,
respectively, none of which were foreseen by Trico at the time of
the DeepOcean acquisition.
- Trico has reported that it has
insufficient cash to make required principal payments under its
loan agreements later this year and that it does not expect to be
in compliance with certain debt covenants under its loan
agreements.
- The company’s liquidity crisis
is so acute that it has been forced to sell vessels at fire sale
prices, further weakening the company.
In the letter, Kistefos also said it will vote against Trico’s
proposals to adopt an incentive plan, to authorize additional
shares of common stock and to stagger and delay declassifying the
Board. It said that until the Board removes Mr. Compofelice,
installs fresh management and develops a coherent strategy to
resolve the crisis it is in, Kistefos simply cannot vote for plans
to further compensate management or to authorize additional shares
of common stock. In addition, while it is strongly in favor of
declassifying the Board, it cannot support Trico's proposal to do
so gradually over a four year period.
THIS IS NOT, NOR SHALL IT BE DEEMED TO BE, A SOLICITATION OF
PROXIES FOR THE COMPANY’S UPCOMING ANNUAL MEETING.
Investors with questions about the process of voting their
shares held in Trico may contact Okapi Partners LLC, our
information agent, at (212) 297 0720.
The full text of Kistefos’ letter to Trico Marine’s Board of
Directors follows:
May 10, 2010 Richard A. Bachmann Lead Director Trico
Marine Services, Inc. 10001 Woodloch Forest Drive, Suite 610 The
Woodlands, Texas 77380
Dear Mr. Bachmann:
As we have previously stated, we are extremely disappointed with
the disastrous and destructive reign of Joseph Compofelice as
Trico’s Chairman and CEO.
Most significantly, since Mr. Compofelice’s appointment as CEO
on July 9, 2007:
- Trico has suffered a devastating
96% drop in share price from a closing high of $42.96 per share on
June 18, 2007 to $1.63 per share on May 7, 2010, resulting in the
destruction of over $600 million in market value.
- Since last year’s Annual Meeting
through May 7, Trico’s stock price has fallen by an additional 53%,
representing an unmistakable vote of “no confidence” in current
management.
- While the stock prices of the
company's peers have recovered from 2009 lows, Trico’s, virtually
alone among its peers, has fallen further.
- As a result of two ill-timed,
misguided and reckless acquisitions, Trico incurred more than $1
billion in debt in 2008, resulting in total indebtedness of more
than ten times its then anticipated 2008 EBITDA. The consequences
of such deliberate overleveraging have been, in Kistefos’ opinion,
devastating to the company.
- Furthermore, in 2008 and 2009
Trico reported operating losses of $128 million and $125 million,
respectively, none of which were foreseen by Trico at the time of
the DeepOcean acquisition.
- Trico has fared far worse than
its peer group. Trico has ranked at the bottom of its peer group
for the last two years in nearly every important metric, including
profit margin, return on equity and total shareholder return.
Today, almost three years later, Trico faces a significant
on-going financial crisis which threatens its viability. It has
disclosed that it has insufficient cash to make required principal
payments under its loan agreements later this year and that it
expects to be in breach of certain debt covenants under these
agreements. We are concerned that the company’s liquidity crisis is
so acute that it may be forced to sell additional vessels and/or
other assets at fire sale prices, further weakening the company,
and will likely be forced to issue additional common stock, if
market conditions permit, to generate funds to meet its
obligations, thereby further significantly diluting stockholders.
We feel much of the crisis today could have been mitigated had the
Board listened to the stockholders last year when it had the
opportunity.
Last October, we expressly called upon the Trico Board of
Directors to remove Mr. Compofelice as Chairman and CEO. In light
of your unwillingness to take this action, we have no choice but to
hold the Board responsible and vote against the re-election of the
class of three incumbent directors, Edward C. Hutcheson, Jr., Myles
W. Scoggins and Per Staehr, at the 2010 Annual Meeting. We also
will vote against Trico’s proposals to adopt an incentive plan, to
authorize additional shares of common stock and to delay
declassifying the Board. Until the Board removes Mr. Compofelice
and develops a coherent strategy to resolve the crisis it is in,
Kistefos simply cannot vote for plans to further compensate
management or to authorize additional shares of common stock. In
addition, while it is strongly in favor of declassifying the Board,
it cannot support Trico's proposal to do so gradually over a four
year period.
We believe that our opposition to these proposals gives the
Board the message it needs to hear: Replace Mr. Compofelice now and
start rebuilding the company in the best interests of all of its
constituents, including its customers, employees and
stockholders.
Here is how we have come to the position we take today.
Background. We have been
Trico's largest stockholder since 2005. Despite our large position,
we have never been insiders and have counted on the Board and
company management to be prudent stewards of our investment. While
we have had our differences, we have supported management and the
Board from the time of the company's emergence from bankruptcy in
2005 through the 2008 Annual Meeting.
In December 2008, we first communicated to the independent
directors our grave concerns regarding the direction and management
of the company and asked you to expand the Board to admit two
Kistefos representatives as additional members. You refused to
accept representatives of the company’s largest stockholder as
members of the Board. As a result, we felt we had no choice but to
bring the matter directly to our fellow stockholders, which we did
in last year’s proxy contest.
In the contest, we won over 77% of the vote for my election to
the Board, and a clear majority of votes cast for both of our
candidates, but under the company’s pro-management bylaws, we were
not seated as directors. One would think the election results would
have nonetheless sent a clear message to the Board that the
stockholders were dissatisfied with the status quo. Since then we
have asked you to heed the voice of the stockholders and add us to
the Board but you have repeatedly refused. As the condition of the
company has continued to deteriorate we have asked you to remove
Mr. Compofelice and install fresh and capable new leadership and
you have also repeatedly refused to do this.
As we will show, your refusal is absolutely indefensible.
Overwhelming Destruction of
Stockholder Value. Shortly before Mr. Compofelice took over
as CEO in July 2007, Trico common stock was at a high of $42.96 per
share and the market value of the company exceeded $640 million.
Since Mr. Compofelice's appointment, the stock has plummeted by 96%
to $1.63 per share on May 7, 2010. This amounts to a loss of over
$600 million in total market value during the nearly three year
period. While some of this fall could have been attributed to the
overall stock market decline in 2008 and early 2009, the stock
prices of the company’s peers have recovered from 2009 lows while
Trico’s stock price has fallen further.
From the date of the Annual Meeting last year to May 7, 2010,
the price of Trico stock has in fact fallen by an additional 53%,
an unmistakable vote of continuing “no confidence” in current
management. Notwithstanding, the Board sits idly by as the owners
of the company continue to watch the value of their investments
erode.
Lagging its Peers. Trico’s
operating and financial performance since Mr. Compofelice took over
has been atrocious. Trico has failed to earn a profit since 2008
and has finished at the bottom of its peer group for the last two
years in nearly every performance metric, including profit margin,
return on equity and total shareholder return.
Disastrous Acquisition
Strategy. The loss of stockholder value and abysmal peer
ranking can be directly attributed to Mr. Compofelice’s misguided,
ill-timed and disastrous acquisition strategy. Shortly after taking
office, Mr. Compofelice embarked on a wildly irresponsible “bet the
company” acquisition agenda to transform Trico from a traditional
offshore supply company to a “next generation” subsea services
company. While we think investing in the subsea sector was not
necessarily a bad idea if done prudently, the execution of the
strategy has been reckless and incompetent to the extreme. To
acquire two companies, Mr. Compofelice has overleveraged the
company, incurring and assuming in excess of $1 billion in
additional indebtedness, amounting to more than ten times its then
anticipated 2008 EBITDA, and raising not a penny of common stock to
mitigate the leverage. In effect, he has recklessly bet the common
stockholder’s equity that he could transform the business fast
enough to pay off the debt. But he was wrong about the direction of
the market and, irresponsibly, he left no margin for error. This
bet could not have gone more terribly wrong.
In November 2007, Trico kicked off its acquisition strategy by
paying approximately $247 million in cash to acquire Active Subsea
ASA, a company with no revenues and no operations. Active Subsea’s
assets consisted of orders to purchase eight multi-purpose service
vessels, certain charters and approximately $125 million in
construction commitments for the completion and delivery of the
eight vessels. Then, in early 2008, Trico doubled down on its
subsea bet by acquiring another subsea company, DeepOcean ASA, and
its subsidiary, CTC Marine, for approximately $700 million, funded
almost entirely by additional borrowings.
As a result of the Active Subsea and DeepOcean acquisitions,
Trico’s balance sheet liabilities ballooned from approximately $289
million at September 30, 2007 to approximately $1.2 billion at June
30, 2008, most of which consisted of indebtedness and did not
include its off balance sheet construction obligations.
Nevertheless, Mr. Compofelice stated at the time that he was
confident he could manage these acquisitions and the related
obligations. He predicted to analysts shortly after the acquisition
that DeepOcean’s EBITDA would grow from $69 million in 2007 to $124
million by 2009, saying, “Growth in the subsea services market for
the foreseeable short and long-term future, I believe, is
significant and sustainable.” And, on a conference call with
analysts on July 24, 2008 he said, “We believe that [our] stock is
a shocking bargain, is the language I would use.”
Of course, he could not have been more wrong.
Since then, the company has taken delivery of only one vessel
ordered by Active Subsea, still awaits delivery of three vessels
and has written off the four remaining contracts, resulting in an
impairment charge in 2009 of $116 million.
The DeepOcean acquisition has been similarly disastrous. While
the DeepOcean business itself appears to have performed
satisfactorily “on the water”, Trico grossly overpaid for growth
and earnings which have not materialized and dangerously
overleveraged itself. At the end of 2008, Trico wrote off the $170
million in goodwill booked at the time of the acquisition. In
addition, Mr. Compofelice’s earnings prediction for DeepOcean
business was wildly overstated. DeepOcean itself generated negative
EBITDA in 2009 and the entire company, including the legacy supply
business, generated EBITDA of only $65 million, compared to the
$124 million that Mr. Compofelice had predicted DeepOcean alone
would earn in 2009. Rather than raise equity or sell vessels in
2008 when the market was strong and assets values were trading at
all time highs in order to finance the acquisition, Mr. Compofelice
relied totally on debt financings to fund the acquisitions.
And the company’s stock, which traded at what Mr. Compofelice
called the “bargain” price of $24.10 on July 24, 2008, has never
traded so high again.
The Situation Today.
Today, the company faces a significant financial crisis which
threatens its viability. It is grossly over leveraged and has
stated that it has insufficient cash to make required principal
payments under its loan agreements later this year and that it does
not expect to be in compliance with certain debt covenants under
its loan agreements. Its legacy supply business has shrunk
significantly since 2008, it has written off large portions of its
subsea acquisitions and it has failed to achieve the growth and
earnings necessary to sustain the company. It has been forced to
sell vessels at today’s fire sale prices to raise cash and will
likely be forced to sell additional vessels and issue additional
common stock at low prices, if market conditions permit, to
generate funds to meet its obligations, thereby further
significantly diluting stockholders.
Management concedes that these uncertainties raise a substantial
doubt about Trico’s ability to continue as a going concern. In
addition, in giving their opinion for 2009, the company’s auditors
have reported that the company failed to maintain effective
internal control over its financial reporting. Lastly, we believe
that there is reasonable grounds to believe that the company was in
violation of the Jones Act during all of 2009, as a result of which
statements in its SEC filings for 2009 were materially misleading
and the votes cast at the 2009 Annual Meeting may well have been
materially miscounted, all to the detriment of the company’s
stockholders.
Conclusion.
For all these reasons, removing Mr. Compofelice is now critical
to restoring Trico’s credibility and saving the company. We fear
that if action is not taken, there will be no company to save.
The overwhelming vote of no confidence by your stockholders –
the owners of the company – at last year's Annual Meeting
apparently has not been enough to spur the Board to take requisite
action to remedy the problem, nor has been the destruction of over
$600 million in market value.
Now is not the time to propose additional management incentive
plans or a check book of newly authorized common stock for
management to issue without further shareholder approval. Nor can
we endorse a proposal to grudgingly declassify the Board over a
four year period given the track record of this Board.
Accordingly, we have no choice but to hold the Board responsible
and vote against the re-election of the class of three incumbent
directors, Edward C. Hutcheson, Jr., Myles W. Scoggins and Per
Staehr, and against the proposals to adopt an incentive plan, to
authorize additional shares of common stock and to delay
declassifying the Board at the 2010 Annual Meeting.
Sincerely,
On behalf of Kistefos AS
Christen Sveaas
Chief Executive Chairman
cc: Joseph Compofelice, Chairman and CEO
Trico Marine Services (NASDAQ:TRMA)
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