10-Q 1 b314779_10q.txt QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number 0-29796 MARINE SHUTTLE OPERATIONS INC. ------------------------------ (Exact name of Registrant as Specified in Its Charter) Nevada 91-1913992 --------------------------------- --------------------------------- (State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization) Identification No.) Luramyrveien 29, Sandnes, Norway 4391 --------------------------------- --------------------------------- (Address of Principal (Zip Code) Executive Offices) Registrant's Telephone Number, Including Area Code (47) 51962300 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _ The number of outstanding shares of the issuer's common stock at November 14, 2001 was 58,304,346. SECURITIES AND EXCHANGE COMMISSION FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION.................................................................... 3 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)......................................................... 3 CONSOLIDATED BALANCE SHEETS.............................................................. 3 CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS................................... 4 CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................... 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS........................................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................................... 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 15 PART II. OTHER INFORMATION........................................................................ 16 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................................ 16 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................................................... 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................... 16 SIGNATURES............................................................................................... 17

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MARINE SHUTTLE OPERATIONS INC. (A development stage company) CONSOLIDATED BALANCE SHEETS (U.S. Dollars)

See accompanying notes to consolidated financial statements. 3 MARINE SHUTTLE OPERATIONS INC. (A development stage company) CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (U.S. Dollars) (unaudited)

See accompanying notes to consolidated financial statements. 4 MARINE SHUTTLE OPERATIONS INC. (A development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. Dollars) (unaudited)

See accompanying notes to consolidated financial statements. 5 MARINE SHUTTLE OPERATIONS INC. (A development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted auditing principles for complete financial statements. In connection with the preparation of these financial statements, management was required to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues, expenses and disclosure of contingent liabilities. Actual results could differ from such estimates. These financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 2. NATURE OF OPERATIONS Marine Shuttle Operations Inc. (the "Company"), through its wholly-owned Norwegian subsidiary, Marine Shuttle Operations AS ("MSOAS"), is seeking to become a leading player in the market for installing, decommissioning, and transporting offshore oil and gas structures. The Company, being in the development stage, has not generated any significant revenues from operations and does not expect to generate any significant revenues from operations until the year 2005, at the earliest. There can be no assurance, however, that the Company will ever achieve commercially significant sales. To date, the Company has not entered into any contracts for the use of its proposed services, and no assurance can be given that any such contracts will materialize. 3. GOING CONCERN The Company's ability to continue as a going concern is dependent on its ability to obtain significant additional financing. As shown in the financial statements, the Company is in the development stage and at September 30, 2001 had accumulated losses from operations amounting to $23,306,877 and a working capital deficit of $5,271,618, with no operating assets presently generating cash to fund its operating and capital requirements. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company is seeking to raise additional capital. There can be no assurance that the Company will be able to raise additional capital on reasonable terms, if at all, or that any financing transaction will not be dilutive to current shareholders. If the Company is not able to raise additional capital, it may be required to significantly curtail or cease its operating activities. The financial statements have been prepared assuming that the Company will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 6 MARINE SHUTTLE OPERATIONS INC. (A development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 4. EXTERNAL FINANCING The Company is seeking to obtain additional capital. In October 1998, the Company entered into an engagement letter with MFC Merchant Bank S.A. pursuant to which MFC shall act, on a best-efforts basis, as agent for the Company in raising additional capital. As consideration for its services, MFC shall receive a success fee equal to five percent of the capital raised plus DM 100,000 (approximately $47,350) per month until the completion or termination of the MFC financing. In addition, all of MFC's out-of-pocket expenses shall be reimbursed, and if the Company raises the necessary funds through another source, MFC shall receive a break-up fee equal to the greater of $1,200,000 or 350,000 shares of common stock. MFC agreed to defer the monthly fee obligation from May 1, 2000 through December 1, 2000. In return for granting this deferral, the deferred fees were increased by 10%. This 10% premium may be paid with shares of common stock. Effective April 1, 2001, MFC will no longer receive a monthly fee, but will invoice the Company for services rendered at the request of the Company. On March 1, 1999, the Company entered into a loan agreement with ValorInvest Ltd., an investment company, pursuant to which ValorInvest agreed to lend the Company an aggregate of up to $6,000,000. The loan agreement was amended and restated as of December 31, 1999, and was further amended as of December 31, 2000. The loan agreement provides that advances shall be made in increments of $250,000 and shall not exceed $500,000 in any single month unless agreed to by ValorInvest. Any monies advanced under the loan agreement shall bear interest at the rate of 7.5% per annum and shall be due and payable on June 30, 2001, except that if the Company raises, in the aggregate, in excess of $5,000,000 from equity or long term debt financings after January 1, 2000, then the loan shall be due to the extent of 25% of such excess. As of September 30, 2001, $3,875,000 had been advanced under the loan agreement, and $2,550,000 was outstanding under the loan agreement. The Company currently is in default on this loan, and is in discussions with ValorInvest Ltd. to extend the maturity date of the loan. In August 1999, the Company entered into a loan agreement with Statens naerings og distriktsutviklingsfond (the Norwegian Industrial and Regional Development Fund, "SND"), pursuant to which SND agreed to lend the Company an aggregate of up to NOK 4,000,000, (approximately $450,350) to finance specific tasks within the Offshore Shuttle project. As of September 30, 2001, NOK 4,000,000 had been advanced under the loan agreement. The principal is repayable over the five year period commencing two years after disbursement, in semi-annually installments, each in the amount of NOK 400,000. The first installment is due in February 2002. In September 1999, the Board of Westdeutsche Landesbank Girozentrale (WestLB) of Dusseldorf issued its conditional approval to underwrite a U.S. $157.5 million loan facility for the first Offshore Shuttle. Based on such approval, the Company has mandated WestLB to act as sole arranger and underwriter for the financing. WestLB's commitment is subject to several material conditions, including satisfactorily completing its due diligence, the Company's obtaining European government guarantees to secure a significant portion of the loan facility, and its completing of an additional equity financing. The Company is seeking to fulfil these conditions. The Company has deferred debt issue costs related to the financing. In February 2000, the Company entered into a loan agreement with MFC Merchant Bank S.A. pursuant to which MFC agreed to lend an aggregate of up to $2,000,000, provided that advances shall not exceed $350,000 in any single month. Any monies advanced under this loan agreement shall bear interest at the rate of LIBOR plus 3.5% per annum and shall be due and payable in full on June 30, 2001. As of September 30, 2001, $900,000 was outstanding under this agreement. The Company currently is in default on the loan, and is in discussions with MFC to extend the maturity date of the loan. 7 MARINE SHUTTLE OPERATIONS INC. (A development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 4. EXTERNAL FINANCING (continued) In July 2000, the Company entered into a loan agreement with Mr. Holger Timm pursuant to which Mr. Timm agreed to lend the Company an aggregate of up to $1,500,000, provided that advances shall not exceed $500,000 in any single month. In January 2001, the $1,450,000 that had been advanced under the loan agreement plus $42,396 in interest thereon was converted into 3,730,990 shares of the Company's common stock at $0.40 per share. In January 2001, the Company sold 1,000,000 shares of common stock for gross proceeds of $200,000. In February and March 2001, the Company sold 5,000,000 shares, and warrants to purchase 5,000,000 shares exercisable at $0.10 per share, for aggregate gross proceeds of $505,000. In May 2001, warrants to purchase 1,000,000 shares were exercised for gross proceeds of $100,000, and in July 2001, warrants to purchase 1,500,000 shares were exercised for gross proceeds of $150,000. The remaining warrants expired on October 1, 2001. In February and March 2001, the Company sold a total of 650,000 shares to various of its officers, directors and employees for aggregate gross proceeds of $65,000. In April 2001, the Company sold a total of 200,000 shares to an employee for aggregate gross proceeds of $20,000. In May 2001, the Company sold 760,000 shares to a foreign person as consideration for waiving certain rights associated with the Intellectual Property Right Agreement between the Company and such person. The market value of the shares were $159,600 and were part of the total payment of $219,875. The total cost of $219,875 has been capitalized as intangible assets and will be amortized over 10 years. In September 2001, the Company entered into a note purchase agreement with Ventegis Capital AG, a German corporation, pursuant to which Ventegis Capital AG purchased from the Company a promissory note in the principal amount of $175,000. The note bears interest at the rate of 5.5% per annum, and may be converted at the option of the lender into the Company's common stock at $0.10 per share. Subject to earlier conversion or prepayment, the note shall be due and payable in full on August 30, 2002. In September 2001, the Company entered into a note purchase agreement with a foreign individual pursuant to which he purchased from the Company a promissory note in the principal amount of $50,000. The note bears interest at the rate of 5.5% per annum, and may be converted at the option of the lender into the Company's common stock at $0.10 per share. Subject to earlier conversion or prepayment, the note shall be due and payable in full on August 30, 2002. 8 MARINE SHUTTLE OPERATIONS INC. (A development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 5. INCOME TAXES The Company has not provided for an income tax liability due to the availability of operating loss carry-forwards. The Company has net operating losses which may give rise to future tax benefits of approximately $4.5 million as of September 30, 2001. To the extent not used, net operating loss carry-forwards expire in varying amounts beginning in the year 2007. Based on available evidence, including the Company's history of operating losses, the uncertainty of future profitability and the impact of tax laws which may limit the Company's ability to utilize such loss carry-forwards, management has recorded a full valuation allowance against the realization of the net deferred tax assets. 6. RECENT PRONOUNCEMENT In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $3,412,792 ($0.06 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect will be on the earnings and financial position of the Company. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto which appear elsewhere in this quarterly report and in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. General The Company, through its wholly-owned Norwegian subsidiary, Marine Shuttle Operations AS ("MSOAS"), is seeking to become a leading player in the market for installing, decommissioning, and transporting offshore oil and gas structures. The Company has designed a vessel, the "Offshore Shuttle," which it believes will be capable of lifting and carrying large offshore oil and gas structures, eliminating the need for extensive cutting prior to decommissioning and permitting onshore assembly prior to installation. The Company anticipates that construction of the first Offshore Shuttle will commence shortly after the receipt of sufficient capital and that it will be operational 24 months thereafter. Construction of a second Offshore Shuttle is intended to commence one year after construction of the first Offshore Shuttle begins, and construction of a third and a fourth Offshore Shuttle is intended to commence one year after construction of the second begins. The Company was incorporated in Nevada in May 1997 under the name Geoteck International, Inc. On May 29, 1998, the Company changed its name to Marine Shuttle Operations Inc. In 1998, the Company acquired all of the outstanding stock of MSOAS in exchange for 7,600,000 shares of common stock. The Company also acquired approximately 68% of the outstanding stock of Offshore Shuttle AS ("OSAS"), the holder of the licensing and marketing rights to the Offshore Shuttle design, in exchange for 4,937,607 shares of common stock. This transaction was accounted for using the purchase method. To benefit from a more rational and cost efficient use of the resources in MSOAS and OSAS, the Board of Directors of the two companies proposed to merge the two companies. The proposed merger plan was approved by the shareholders of both companies on May 30, 1999, and the merger became effective in September 1999. The OSAS shareholders received 1.5 MSOAS shares for each of their OSAS shares. As a result of the merger, the Company owned approximately 81% of MSOAS, and MSOAS acquired the licensing and marketing rights to the Offshore Shuttle. In April 2000, the Company acquired an additional 8.4% of the outstanding shares of MSOAS from two individuals in exchange for an aggregate of 1,030,002 shares of common stock. In June 2000, the Company acquired an additional 9.7% of the outstanding shares of MSOAS in exchange for an aggregate of 1,186,283 shares of its common stock, and the Company acquired the remaining 1% of the MSOAS shares for cash. These acquisitions were accounted for as purchases. The Company now owns all of the outstanding shares of MSOAS. Results of Operations The Company is in the development stage and has generated revenues to date only from study work. Since the merger of OSAS into MSOAS, the Company's main operations have been conducted through MSOAS. Three months ended September 30, 2001 and 2000: Personnel costs. Personnel costs include costs for both employees and hired personnel and were $236,233 for the three month period ended September 30, 2001, and $492,338 for the three month period ended September 30, 2000. The decrease in costs of $256,105 was mainly due to less personnel costs related to client studies. Legal, audit and advisory services. Legal, audit and advisory services for the three month period ended September 30, 2001 were approximately $18,255 a decrease of $40,946 compared to legal, audit and advisory services of $59,201 for the same period in 2000. The decrease was mainly due to reduced use of legal and financial services as a result of the slowdown in activities. 10 General and administrative expenses. General and administrative expenses were $73,328 and $170,023 for the three month periods ended September 30, 2001 and 2000, respectively. The decrease in costs of $96,695 was mainly due to a slowdown of spending by the Company to conserve capital. Marketing. Marketing expenses for the three month period ended September 30, 2001 were $19,322, a decrease of $18,302 from the marketing expenses of $37,624 for the same period in 2000. The decrease in costs was mainly due to the purchase of fewer marketing materials and services in the current period. Nine months ended September, 2001 and 2000: Personnel costs. Personnel costs include costs for both employees and hired personnel and were $802,382 for the nine month period ended September 30, 2001, a decrease of $226,931 from the personnel costs of $1,029,313 for the nine month period ended September 30, 2000. The decrease in costs was mainly due to less personnel costs related to client studies. Legal, audit and advisory services. Legal, audit and advisory services for the nine month period ended September 30, 2001 were approximately $188,276, a decrease of $101,542 compared to legal, audit and advisory services of $289,818 for the same period in 2000. The decrease was mainly due to reduced use of legal and financial services as a result of the slowdown in activities. General and administrative expenses. General and administrative expenses for the nine month period ended September 30, 2001 were $232,125, a decrease of $315,754 from the general and administrative expenses of $547,879 for the same period in 2000. The decrease in costs was mainly due to a slowdown of spending by the Company to conserve capital. Marketing. Marketing expenses for the nine month period ended September 30, 2001 were $77,013, a decrease of $65,163 from the marketing expenses of $142,176 for same period in 2000. The decrease in costs was mainly due to the purchase of fewer marketing materials and services in the current period. Technical Development. The Company did not have any technical development costs for the nine month period ended September 30, 2001, mainly due to a slowdown of spending by the Company to conserve capital. The technical development costs for the same period in 2000 were $29,197. Interest expense. Interest expense for the nine month period ended September 30, 2001 was $36,207, an increase of $11,713 compared to interest expense of $24,494 for the same period in 2000. The reason for the increase was that the Company has had higher interest bearing debt in the current period compared to the same period in 2000. Currency exchange loss/gain. For the nine month period ended September 30, 2001, the Company had a currency exchange loss of $848, compared to a gain of $14,655 for same period in 2000. The difference of $15,503 was a result of weakening of the Norwegian kroner against the U.S. dollar during the period in 2001. Liquidity and Capital Resources The Company's ability to continue as a going concern is dependent on its ability to obtain significant additional financing. As of September 30, 2001, the Company had cash and cash equivalents of $51,150, a deficit accumulated during the development stage of $23,306,877 and a working capital deficit of $5,271,618. The Company is in the development stage with no operating assets presently generating cash to fund its operating and capital requirements. Net cash used in operating activities was $1,126,811 for the nine month period ended September 30, 2001, a decrease of $168,677 compared to $1,295,488 used for the nine month period ended September 30, 2000. The decrease was the result of the Company's efforts to reduce spending until the Company can raise additional funds. 11 For the nine month period ended September 30, 2001 the Company incurred $244,961 on capital expenditures, a decrease of $668,909 from the capital expenditures of $913,870 for the same period in 2000. The decrease was the result of the Company's efforts to reduce engineering work for the Offshore Shuttle until the Company can raise additional funds. On March 1, 1999, the Company entered into a loan agreement with ValorInvest, Ltd., an investment company, pursuant to which ValorInvest agreed to lend the Company an aggregate of up to $6,000,000. The loan agreement was amended and restated as of December 31, 1999, and was further amended as of December 31, 2000. The loan agreement provides that advances shall be made in increments of $250,000 and shall not exceed $500,000 in any single month unless agreed to by ValorInvest. Any monies advanced under the loan agreement shall bear interest at the rate of 7.5% per annum and shall be due and payable on June 30, 2001; except that if the Company raises, in the aggregate, in excess of $5,000,000 from equity or long term debt financing after January 1, 2000, then the loan shall be due to the extent of 25% of such excess. As of September 30, 2001, $3,875,000 had been advanced under the loan agreement, and $2,550,000 was outstanding under the loan agreement. The Company currently is in default on the loan, and is in discussions with ValorInvest Ltd. to extend the maturity date of the loan. In August 1999, the Company entered into a loan agreement with Statens naerings og distriktsutviklingsfond (the Norwegian Industrial and Regional Development Fund, "SND"), pursuant to which SND agreed to lend the Company an aggregate of up to NOK 4,000,000, (approximately $450,350), to finance specific tasks within the Offshore Shuttle project. As of September 30, 2001, NOK 4,000,000 was outstanding under the loan agreement. The principal is repayable over the five year period commencing two years after disbursement, in semi-annual installments, each in the amount of NOK 400,000. The first installment is due in February 2002. In February 2000, the Company entered into a loan agreement with MFC Merchant Bank S.A, an investment company, pursuant to which MFC agreed to lend an aggregate of up to $2,000,000, provided that advances shall not exceed $350,000 in any single month. Any monies advanced under this loan agreement shall bear interest at the rate of LIBOR plus 3.5% per annum and shall be due and payable in full on June 30, 2001. As of September 30, 2001, $900,000 was outstanding under this agreement. The Company currently is in default on the loan, and is in discussions with MFC to extend the maturity date of the loan. In July 2000, the Company entered into a loan agreement with Mr. Holger Timm pursuant to which Mr. Timm agreed to lend the Company an aggregate of up to $1,500,000, provided that advances shall not exceed $500,000 in any single month. In January 2001, the $1,450,000 that had been advanced under the loan agreement plus $42,396 in interest thereon was converted into shares of the Company's common stock at $0.40 per share. In January 2001, the Company sold 1,000,000 shares of common stock for gross proceeds of $200,000. In February and March 2001, the Company sold 5,000,000 shares, and warrants to purchase 5,000,000 shares exercisable at $0.10 per share, for aggregate gross proceeds of $505,000. In May 2001, warrants to purchase 1,000,000 shares were exercised for gross proceeds of $100,000, and in July 2001, warrants to purchase 1,500,000 shares were exercised for gross proceeds of $150,000. The remaining warrants expired on October 1, 2001. In February and March 2001, the Company sold a total of 650,000 shares to various of its officers, directors and employees for aggregate gross proceeds of $65,000. In April 2001, the Company sold a total of 200,000 shares to an employee for aggregate gross proceeds of $20,000. In May 2001, the Company issued 760,000 shares to a foreign person as consideration for waiving certain rights associated with the Intellectual Property Right Agreement between the Company and such person. 12 In September 2001, the Company entered into a note purchase agreement with Ventegis Capital AG, a German corporation, pursuant to which Ventegis Capital AG purchased from the Company a promissory note in the principal amount of $175,000. The note bears interest at the rate of 5.5% per annum, and may be converted at the option of the lender into the Company's common stock at $0.10 per share. Subject to earlier conversion or prepayment, the note shall be due and payable in full on August 30, 2002. In September 2001, the Company entered into a note purchase agreement with a foreign individual pursuant to which he purchased from the Company a promissory note in the principal amount of $50,000. The note bears interest at the rate of 5.5% per annum, and may be converted at the option of the lender into the Company's common stock at $0.10 per share. Subject to earlier conversion or prepayment, the note shall be due and payable in full on August 30, 2002. The Company is seeking to obtain additional capital. In October 1998, the Company entered into an engagement letter with MFC Merchant Bank S.A. pursuant to which MFC shall act, on a best-efforts basis, as agent for the Company in raising additional capital. As consideration for its services, MFC shall receive a success fee equal to five percent of the capital raised plus DM 100,000 (approximately $46,500) per month until the completion or termination of the MFC financing. In addition, all of MFC's out-of-pocket expenses shall be reimbursed, and if the Company raises the necessary funds through another source, MFC shall receive a break-up fee equal to the greater of $1,200,000 or 350,000 shares of common stock. MFC agreed to defer the monthly fee obligation from May 1, 2000 through December 1, 2000. In return for granting this deferral, the deferred fees were increased by 10%. This 10% premium may be paid with shares of common stock. Effective April 1, 2001, MFC will no longer receive a monthly fee, but will invoice the Company for services rendered at the request of the Company. In September 1999, the Board of Westdeutsche Landesbank Girozentrale (WestLB) of Dusseldorf issued its conditional approval to underwrite a U.S. $157.5 million loan facility for the first Offshore Shuttle. Based on such approval, the Company has mandated WestLB to act as sole arranger and underwriter for the financing. WestLB's commitment is subject to several material conditions, including satisfactorily completing its due diligence, the Company's obtaining European government guarantees to secure a significant portion of the loan facility, and its completing of an additional equity financing. The Company is seeking to fulfill these conditions. There can be no assurance that the conditions to the WestLB financing will be satisfied or, if satisfied, that the WestLB financing will be consummated on reasonable terms or at all. If the WestLB financing or any other substantial financing it is not completed, the Company may be required to significantly curtail or cease its proposed activities. Although the Company believes that the proceeds from the WestLB financing, if completed, will enable it to construct the first Offshore Shuttle, there can be no assurance in that regard. Moreover, even if the WestLB financing or another substantial financing is consummated, the Company's future capital requirements could vary significantly and will depend on certain factors, many of which are not within its control. Such factors include: o the need for cash to fund the construction of additional Offshore Shuttles; o greater than anticipated expenses; and o longer engineering, development, and construction times than now contemplated. If the Company is successful in completing the first Offshore Shuttle, it believes it will be able to fund the construction of additional Offshore Shuttles from its future operating cash flows and/or short or medium term debt financing. There can be no assurance, however, that the Company's beliefs will prove to be accurate. 13 International Operations The Company intends to market its services in international markets. International operations entail various risks, including: o political instability; o economic instability and recessions; o exposure to currency fluctuations; o difficulties of administering foreign operations generally; o reduced protection for intellectual property rights; o potentially adverse tax consequences; and o obligations to comply with a wide variety of foreign laws and other regulatory requirements. Forward-looking Statements The information set forth herein includes certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, without limitation, statements regarding the Company's anticipated operations, market size, the capabilities of the Offshore Shuttle, the dates on which construction of the Offshore Shuttles will commence and be completed, the number of Offshore Shuttles to be constructed, the WestLB financing and the Company's ability to satisfy the conditions precedent to the WestLB financing, and the Company's ability to fund the construction of additional Offshore Shuttles. Actual results could differ materially from those anticipated in such forward-looking statements as result of various known and unknown factors including, without limitation, future economic, competitive, regulatory and market conditions, future business decisions, the receipt of financing, construction delays, demand for the Company's services and those risks discussed in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 8, 2001, and in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Words such as "believes," "anticipates," "expects," "intends," "may," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Readers are cautioned not to put undue reliance on these forward-looking statements. The Company undertakes no obligation to revise any of these forward-looking statements. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company's exposure to market risk for changes in interest rates relates primarily to the Company's notes payable and long-term debt. The Company believes its exposure to interest rate risk is not material since its current notes payable consist of fixed rate indebtedness, and the long-term variable rate debt obligation is not material. The fair value of the fixed rate notes payable approximates its carrying value due to its short-term maturity. Interest rate risk may arise if the Company is successful in obtaining debt financing to finance the building of the first Offshore Shuttle. In such an event, the Company will assess the extent of its interest rate risk and may enter into hedging transactions to reduce its exposure and to ensure its ability to service its debt. Foreign Exchange Risk Foreign exchange risk may arise if the Company is required to use different currencies for various aspects of its operations. Although the principal currency used in the offshore decommissioning industry in the U.S. dollar, the local expenditures of MSOAS (e.g., rent, telephone, payroll, etc.) are likely to be paid in Norwegian kroner, and it is possible that the contract for construction of the first Offshore Shuttle will be denominated in a currency other than the U.S. dollar or the Norwegian kroner. The Company currently has no foreign exchange contracts. 15 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the quarter ended September 30, 2001, the Company completed the following transactions in reliance on Regulation S: In July 2001, the Company sold 1,500,000 shares to a foreign person pursuant to the exercise of warrants for gross proceeds of $150,000. In September 2001, the Company sold promissory notes in the aggregate principal amount of $225,000 to two foreign persons. ITEM 3. DEFAULTS UPON SENIOR SECURITIES On March 1, 1999, the Company entered into a loan agreement with ValorInvest Ltd., an investment company, pursuant to which ValorInvest agreed to lend the Company an aggregate of up to $6,000,000. Monies advanced under the loan agreement bear interest at the rate of 7.5% per annum, and were due and payable on June 30, 2001. As of September 30, 2001, $3,875,000 had been advanced under the loan agreement, and $2,550,000 was outstanding under the loan agreement. The Company currently is in default on the repayment of the amount outstanding, and is in discussions with ValorInvest to extend the maturity date of the loan. In February 2000, the Company entered into a loan agreement with MFC Merchant Bank S.A. pursuant to which MFC agreed to lend an aggregate of up to $2,000,000. Monies advanced under the loan agreement bear interest at the rate of LIBOR plus 3.5% per annum, and were due and payable in full on June 30, 2001. As of September 30, 2001, $900,000 was outstanding under this agreement. The Company currently is in default on the repayment of the amount outstanding, and is in discussions with MFC to extend the maturity date of the loan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits. (a) Exhibits The following exhibits are filed herewith: 10.1 Amended and Restated Note Purchase Agreement dated as of September 4, 2001 with Ventegis Capital AG (including amended and restated promissory note dated as of September 4, 2001). 10.2 Amended and Restated Note Purchase Agreement dated as of September 21, 2001 with a foreign individual (including amended and restated promissory note dated as of September 21, 2001). (b) Report on Form 8-K. The Company did not file any reports on Form 8-K during the three month period ended September 30, 2001. 16 SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 2001 MARINE SHUTTLE OPERATIONS INC. By: /s/ Iqbal Akram ------------------- Iqbal Akram, Chief Financial Officer (Principal Financial and Accounting Officer) 17 INDEX TO EXHIBITS Exhibit # Document Page 10.1 Amended and Restated Note Purchase Agreement dated as of September 4, 2001 with Ventegis Capital AG (including amended and restated promissory note dated as of September 4, 2001). 10.2 Amended and Restated Note Purchase Agreement dated as of September 21, 2001 with a foreign individual (including amended and restated promissory note dated as of September 21, 2001).

MARINE SHUTTLE OPERATIONS INC 10-Q