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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________TO________
Commission file number 0-29416
UNIFAB International, Inc.
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(Exact name of registrant as specified in its charter)
Louisiana 72-1382998
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5007 Port Road
New Iberia, LA 70562
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(Address of principal executive offices) (Zip Code)
(337) 367-8291
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
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(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
The aggregate market value of the voting common equity held by nonaffiliates of
the registrant as of June 30, 2003 was approximately $2.7 million based on the
closing price of the registrant's common stock on the Nasdaq SmallCap Market on
such date of $0.35 per share.
The number of shares outstanding of the registrant's common stock, $0.01 par
value per share, as of March 18, 2004 was 8,201,913.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2004 Annual Meeting of the
Stockholders, which will be filed within 120 days after the end of the fiscal
year, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PAGE
----
PART I
Items 1 and 2. Business and Properties............................................... 1
Item 3. Legal Proceedings..................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................... 17
Executive Officers of the Registrant.................................. 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 18
Item 6. Selected Financial Data............................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............ 31
Item 8. Financial Statements and Supplementary Data........................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 31
Item 9A. Controls and Procedures............................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant.................... 32
Item 11. Executive Compensation................................................ 32
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................... 32
Item 13. Certain Relationships and Related Transactions........................ 32
Item 14. Principal Accountant Fees and Services................................ 32
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 33
FINANCIAL STATEMENTS.......................................................................... F-1
SIGNATURES.................................................................................... S-1
EXHIBIT INDEX................................................................................. E-1
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
UNIFAB International, Inc. (together with its subsidiaries "the Company")
provides custom fabrication of decks and modules of drilling and production
equipment for offshore oil and gas platforms. The Company is capable of
producing equipment weighing up to 7,500 tons, and has special expertise in the
fabrication of decks with complex piping requirements and process equipment
using special materials. The Company also designs and fabricates production
process systems under ASME and ISO 9001 quality certifications.
Decks and modules fabricated by the Company can be installed on fixed and
floating platforms regardless of water depth. The Company also fabricates
jackets for fixed platforms, pilings and other rolled tubular steel sections,
compressor and generator packages, platform living quarters, subsea templates,
bridges for connecting offshore platforms, wellhead protectors and modules for
the onshore petrochemical and refining industries. In addition, the Company
refurbishes and retrofits existing jackets and decks. Allen Process Systems,
LLC, a wholly owned subsidiary, designs and manufactures specialized process
systems and provides engineering and field commissioning services related to
production systems. The Company's main fabrication facilities are located at the
Port of Iberia in New Iberia, Louisiana. Structures fabricated by the Company
are installed in oil and gas producing waters around the world, primarily the
U.S. Gulf of Mexico (the "Gulf of Mexico") and offshore West Africa. The
Company's ability to provide high quality fabrication services and maintain
control over costs has contributed to its reputation for efficient, timely and
quality production.
Demand for the Company's services is primarily a function of worldwide
offshore oil and gas activity. An indication of that activity is measured by
drilling rig utilization rates, which have increased to approximately 66% in
January 2004 from approximately 61% in February 2003 for the Gulf of Mexico and
have decreased to approximately 75% from 79% over the same period worldwide.
These are the overall rates applicable to jack-up rigs, drill ships and
semi-submersible rigs. An increase or decrease in drilling activity is usually
consistent with an increase or decrease in the price of crude oil and natural
gas, although changes in drilling activity usually lag behind changes in oil and
gas prices at uncertain intervals. The price of west Texas intermediate crude
oil decreased to approximately $34.20 per barrel in January 2004 from over
$36.90 per barrel in February 2003, and the price per million cubic feet of
natural gas has decreased to approximately $5.53 in February 2004 from $6.01 in
February 2003.
Due to the time required to drill an exploratory offshore well, formulate a
development plan and design offshore platforms, the fabrication and installation
of such platforms usually lag the start of exploratory drilling by one to three
years. The Company operates in a highly competitive bidding environment, and the
low number of major projects for which bids have been requested over the last
four years caused the Company to adjust downward the price it could obtain for
its fabrication services, to reduce the number of fabrication facilities it
operates, and to critically evaluate recovery of investments made in acquired
companies and developing facilities over the last five years.
In 1998 and 1999, the Company acquired additional capacity by acquiring
companies near its original facilities at the Port of Iberia in New Iberia,
Louisiana and by developing a deepwater facility near Lake Charles, Louisiana.
However, while the Company was acquiring these companies and developing this
additional capacity, the price of oil and gas decreased and drilling activity
decreased, which resulted in a decrease in the demand for the Company's
fabrication services. The current revenue level of the acquired companies is
approximately one half of the historical revenue level at which they operated in
1997 and 1998. The Company believes that, as a result of its capital investment
in acquisitions and facilities coupled with the decrease in demand, the Company
currently has excess capacity. Accordingly, during 2001 the Company ceased
operating two of its facilities at the Port of Iberia, and during 2002
relinquished its leases at those facilities. By closing the recapitalization and
investment transaction with Midland Fabricators and Process Systems, LLC
("Midland") in August 2002, as described below, the Company was able to
stabilize its overall financial condition and add experienced management. In
June 2003, the Company was awarded a
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fixed price contract to fabricate drilling rig components, which required the
capabilities of its Lake Charles site and reopened the facility. At this time,
the Company does not have a project to place at the facility when the current
project has been completed, and expects to close the facility upon completion of
the project. The Company continues to evaluate alternatives and seek
opportunities for this facility. In the event the Company is unable to operate
the facility profitably or to complete another arrangement whereby the facility
can be operated profitably, the Company may sell the facility. In evaluating the
recoverability of the investment in the Lake Charles facility, the Company
estimated net undiscounted cash flows under both operating alternatives and
disposal scenarios, and concluded the carrying value of the facility, which had
been written down to its estimated fair value of $5.4 million in 2002, was not
impaired any further at December 31, 2003.
ACQUISITIONS. The Company expanded its operations through the acquisition of
the assets and business of Professional Industrial Maintenance, LLC effective
January 1, 1998, which provided industrial plant maintenance and construction
services to the southwest Louisiana area. As part of this acquisition, the
Company also acquired lease rights to a 60-acre fabrication yard on an
industrial canal, 12 miles southwest of Lake Charles, Louisiana. This facility
has 40-foot water depth and access to the Gulf of Mexico through the Calcasieu
Ship Channel, which is maintained by the U.S. Army Corp of Engineers. In June
2002, the Company stopped providing industrial plant maintenance services and
sold the related assets. The Company is focusing on developing drilling rig
repair and other structural fabrication business for its deepwater facility.
Effective July 24, 1998, the Company acquired all of the outstanding common
stock of Allen Tank, Inc. ("Allen Tank"), in exchange for 819,000 shares of the
Company's common stock, plus $1.2 million in cash and notes paid to a dissenting
shareholder. Allen Tank (which was converted to a limited liability company and
renamed Allen Process Systems, LLC) is located in New Iberia, Louisiana on
property near the Company's Port of Iberia facilities. Allen Process Systems,
LLC designs and manufactures specialized process systems related to the
development of oil and gas reserves. This acquisition expanded the Company's
ability to offer quality services and products in its core competencies and
further strengthened its technological base.
On June 24, 1999, the Company acquired the assets of Compression Engineering
Services, Inc. ("CESI") for 60,000 shares of the Company's common stock. CESI
provides compressor project engineering from inception through commissioning,
including project studies and performance evaluation of new and existing
systems, on-site supervision of package installation and equipment sourcing and
inspection. CESI operates as a division of Allen Process Systems, LLC.
MIDLAND RECAPITALIZATION AND INVESTMENT TRANSACTION. In April 2002 the
Company entered into an agreement with Midland Fabricators and Process Systems,
LLC as a result of which, among other things, Midland acquired the rights of the
Company's lenders under the Company's Senior Secured Credit Agreement. On August
13, 2002, pursuant to the agreement with Midland, Midland exchanged $24.1
million outstanding under the Company's Senior Secured Credit Agreement and $5.6
million in acquired claims of unsecured creditors for 738 shares of our
preferred stock, a secured subordinated convertible debenture in the amount of
$10.7 million and two secured subordinated notes which total $6.8 million. On
August 1, 2003, the Company's shareholders approved a one-for-ten reverse stock
split of the outstanding shares of the Company's common stock, to be effective
immediately after the conversion of Midland's Series A preferred shares.
Accordingly, on August 3, 2003, each share of series A preferred stock was
converted into 100,000 shares of Unifab common stock and the one-for-ten reverse
stock split was effected, resulting in Midland holding a total of 7,380,000
common shares after the reverse stock split. Midland's debenture is convertible
into the Company's common stock at a price of $3.50 per share, after giving
effect to the one-for-ten reverse stock split. The Company also recorded
additional paid in capital on the transaction of $3.7 million, resulting from
the discount recorded on the secured subordinated convertible debenture, capital
contributions of $680,000, resulting from forgiveness by Midland of penalties
accrued under the Senior Secured Credit Agreement and $914,000 resulting from
partial forgiveness of the unsecured creditor claims acquired by Midland.
Further, $675,000 of the amount the Company owed Midland under the Company's
Senior Secured Credit Agreement, was cancelled in exchange for the assignment to
Midland of certain accounts receivable.
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DESCRIPTION OF OPERATIONS
The Company's primary activity is the fabrication of decks and modules for
offshore oil and gas drilling and production platforms, including the design and
manufacturing of production processing systems for application throughout the
world. The Company has extensive experience in the fabrication of decks and
modules with complex piping requirements and believes that its reputation for
efficient, timely and high quality production of these structures has
historically given it a competitive advantage in obtaining projects of this
type. The Company also fabricates jackets for fixed production platforms for use
in up to 450 feet of water. Other structures fabricated by the Company include
buoyancy cans for deep water oil and gas production facilities, pilings and
other rolled tubular steel sections, modules of drilling and production
equipment, compressor and generator packages, platform living quarters, subsea
templates, bridges for connecting offshore platforms, wellhead protectors, other
structures used in production and development activities and production
processing systems and other modules for the onshore petrochemical and refining
industries. The Company can construct, and has in the past constructed, platform
drilling rigs, posted drilling rigs and barges, and liftboats.
OPERATING SEGMENTS. Effective January 1, 2003, as a result of the Midland
Recapitalization and Investment transaction, management has evaluated the
changed organizational and reporting structure and has concluded that the
Company operates three reportable segments: the platform fabrication segment,
the process systems segment and the drilling rig fabrication segment. The
platform fabrication segment fabricates and assembles platforms and platform
components for installation and use offshore in the production, processing and
storage of oil and gas. The process systems segment designs and manufactures
specialized process systems and equipment related to the development and
production of oil and gas reserves. The drilling rig fabrication segment
provides fabrication services for new construction and repair of drilling rigs.
See Note 16 to the consolidated financial statements for certain financial
information by business segment.
FABRICATION OF DECKS, PROCESS EQUIPMENT AND OTHER OFFSHORE PLATFORM
COMPONENTS. The Company fabricates decks and modules for fixed and floating
offshore platforms as well as jackets for fixed offshore platforms. A fixed
platform is the traditional type of platform used for the offshore drilling and
production of oil and gas. Most fixed platforms currently in use are of the
traditional jacket-type design. Recently there has been an increase in the use
of floating platforms as a result of increased drilling and production
activities in deeper waters. Floating platforms are of three basic types:
tension-leg platforms, spar platforms and floating production facilities. Fixed
platforms are generally better suited for shallower water depths, whereas
floating platforms, although they can be used in any water depth, are primarily
used in water depths greater than 1,000 feet. Because they are mobile (and can
therefore be reused), floating platforms are sometimes used in water depths that
could accommodate fixed platforms, particularly where the petroleum reservoir
has a relatively short production life.
The Company also fabricates subsea templates that often form a part of a
subsea production system. Subsea production systems, which are systems that
contain primary well control equipment and rest directly on the ocean floor, are
becoming more prevalent in very deep water, in areas subject to severe weather
conditions and in smaller fields with relatively short production lives that are
located near existing pipelines and infrastructures. These systems are generally
connected to existing surface facilities, which augment subsea hydrocarbon
processing and transportation operations.
The most common type of fixed platform consists of a deck structure located
above the level of the storm waves and supported by a jacket. A jacket is a
tubular steel, braced structure extending from the mudline on the seabed to a
point above the water surface which is in turn supported on tubular steel
pilings driven deep into the seabed. The deck structure is designed to
accommodate multiple functions including drilling, production, separating,
gathering, piping, compression, well support and crew quartering. Most fixed
platforms built today can accommodate both drilling and production operations.
These combination platforms are generally larger and more costly than
single-purpose structures. However, because directional drilling techniques
permit a number of wells to be drilled from a single platform and because
drilling and production can take place simultaneously, combination platforms are
often more cost effective.
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Decks are built as either a single structure or in modular units. The
composition and quantity of petroleum in the well stream generally determine the
design of the production deck on a processing platform. Typical deck production
equipment includes crude oil pumps, gas and oil separators, gas compressors and
electricity generators. Much of this equipment involves the use of complex
piping and electrical components. The equipment, piping and controls associated
with major process subsystems are often joined together in modules which can
then be installed on the deck as a unit either on land or offshore. Platforms
can be joined by bridges to form complexes of platforms to service very large
projects and to improve safety by dividing functions among specialized
platforms. Floating platforms, like fixed platforms, support decks or modules
with equipment to perform oil and gas processing and may support drilling
operations as well.
Most of the structural steel used in the Company's operations arrives at the
Company's fabrication yards as standard steel shapes and steel plate. The
standard shapes and plate are cut to appropriate sizes or shapes and, in some
cases, rolled into tubular sections by the Company's rolling mill. These
sections are welded together into structures that become part of decks, modules,
jackets and other platform structures.
Through its wholly owned subsidiary, Allen Process Systems, LLC in New
Iberia, Louisiana, the Company designs and manufacturers pressure vessels and
other production process equipment for use primarily on offshore production
platforms. Production process systems include oil and gas separation systems,
dehydrators and desalters, glycol dehydrators and the associated mechanical,
structural and electrical instrumentation and components of these systems. The
Company can fabricate these systems at its facility in New Iberia, Louisiana,
using a wide range of alloys as well as carbon steel. The design process
utilizes state-of-the-art, computer-aided design and drafting technology to
deliver high quality, accurate design and fabrication drawings. In some
instances, the customer may supply equipment and pressure vessels. Compression
Engineering Services, a division of Allen Process Systems, provides compressor
project engineering from inception through commissioning, including project
studies and performance evaluation of new and existing systems, on-site
supervision of package installation and equipment sourcing and inspection.
While the structural portion of a deck or module is being assembled, process
piping is fabricated in the Company's pipe shop. Piping is made into spools by
fitting and welding together pipe and pipe fittings. To the extent possible,
pipe supports and pipe spools are installed onto the various structural
subassemblies of a deck or module before final assembly. The completed
structural subassemblies are then lifted, positioned and welded together.
Finally, the oil and gas process equipment along with the remaining pipe
supports and pipe spools, valves and electrical and instrumentation components
are installed and connected. The Company has installed both carbon and alloy
steel piping and has also installed process piping for sour gas service, which
requires adherence to more stringent industry code requirements. The Company
typically procures most of the piping, pipe fittings, valves, instrumentation
and electrical materials in accordance with the customer's specifications as set
forth in the fabrication contract.
The Company performs a wide range of testing and commissioning activities.
Virtually every contract requires, at a minimum, nondestructive testing of
structural and piping welds, piping hydrostatic pressure testing and loop
testing of instrumentation and electrical systems. The Company also commonly
performs commissioning of certain process subsystems. A series of protective
coatings is applied to the critical areas of the deck or module to resist the
extremely corrosive conditions in an offshore environment. The Company generally
subcontracts certain parts of the work to qualified subcontractors, particularly
electrical and instrumentation and painting.
Jackets are generally built in sections so that, to the extent possible,
much of their fabrication is done on the ground. As each section of legs and
bracing is completed, it is lifted by a crawler crane and then joined to another
upright section. When a deck, module or jacket is complete and ready for load
out, it is moved along a skidway and loaded onto a cargo barge. Using
ocean-going tugs, the barge and its cargo are transported to the offshore site
for installation by a marine construction contractor.
PLATFORM REFURBISHMENT. The Company is active in the market for the
refurbishment of existing jackets and decks. Platform operators occasionally
remove platforms previously installed in the Gulf of
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Mexico and return the platforms to a fabricator for refurbishment, which usually
consists of general repairs and maintenance work and, in some cases,
modification. There are a substantial number of structures stored by customers
on Company premises, pending instructions from the customer to commence
refurbishment. Refurbishment work is most often conducted on a time and
materials basis because generally the scope of the work to be done on the
platform being refurbished is refined as the refurbishment is performed and
cannot be predicted with 100% accuracy. As a result, a contract to refurbish a
deck has a lower effect on the Company's measured backlog at a given date than a
contract for a new build deck of the same size.
DRILLING RIG REPAIR AND REFURBISHMENT. The Company performs maintenance,
refurbishment and upgrade services on deep-water, semi submersible drilling rigs
and jack up rigs at its deep-water facility near Lake Charles, Louisiana. Water
channel depth limits access to the Port of Iberia, and as a result equipment and
vessels that draw more than 12 ft. cannot be brought into the Port of Iberia. At
the Company's Lake Charles facilities, which have no such restrictions, the
Company has developed the physical capabilities to support refurbishment
upgrades of jack up and semi submersible drilling rigs for deep water use and,
as required by customer demand, to support new construction and conversion
activities for drilling rigs. The Lake Charles facility also has fabrication
shops, super-stabilized yard area and load out capabilities to support
fabrication of new platforms and platform components that are larger and heavier
than those that can be loaded out at the Company's facilities in New Iberia,
Louisiana. At December 31, 2003, the project being constructed at the facility
was near completion and there was no backlog of business for the facility
following this project. The Company believes that its deepwater facility in Lake
Charles has the potential to develop revenue-producing capacity that is equal to
that of the New Iberia operations. By closing the Midland transaction in August
2002, the Company was able to stabilize its overall financial condition and add
experienced management to evaluate alternatives with respect to the Lake Charles
facility. Discussions continue in an effort to develop operations at the
facility, including partnering, subletting, and management arrangements. In the
event the Company is unable to complete an arrangement whereby the facility can
be operated profitably, the Company may sell the facility. In evaluating the
recoverability of the investment in the Lake Charles facility, the Company
estimated net undiscounted cash flows under both operating alternatives and
disposal scenarios and concluded that at December 31, 2002 the facility was
impaired. The Company then estimated the fair value of the facility based on the
related discounted estimated cash flows, and based on this analysis, recorded an
impairment loss of $5.1 million in the year ended December 31, 2002, which
reduced the recorded net value of the facility to its estimated fair value of
$5.4 million based on discounted cash flows. The Company determined that no
further impairment of the facility had occurred at December 31, 2003.
FIELD SERVICE AND COMMISSIONING. The Company maintains a staff of
experienced, highly trained technicians to provide 24-hour services for trouble
shooting and commissioning of oil and gas production facilities around the
world. These services are mainly performed on a time and material basis.
FACILITIES AND EQUIPMENT
FACILITIES. The Company's corporate headquarters and main fabrication
facilities are located at the Port of Iberia in New Iberia, Louisiana,
approximately 20 miles southeast of Lafayette, Louisiana and 30 miles north of
the Gulf of Mexico. These fabrication facilities include approximately 171 acres
developed for fabrication, one 12,000 square-foot office building that houses
administrative staff, approximately 292,000 square feet of covered fabrication
area, and approximately 100,000 square feet of warehouse and other storage area.
The facilities also have approximately 8,000 linear feet of water frontage, of
which 3,000 feet is steel bulkhead that permits outloading of heavy structures.
The structures that the Company fabricates are transported from the New
Iberia facilities by barge to the Gulf of Mexico and other offshore locations by
offshore construction companies. The slip, bulkhead and loadout facilities of
the Company enable it to produce decks and deck components weighing up to 6,500
tons at its Port of Iberia facilities. Due to the limitations of the various
access routes from the Port of Iberia to the Gulf of Mexico, however, a barge
carrying a structure weighing over approximately 4,000 tons could not currently
move from the Company's Port of Iberia facilities to the Gulf of Mexico without
special efforts, including dredging, which would add costs to the project that
the customer may be unwilling to bear. One main route to the Gulf of Mexico from
the Port of Iberia, the Freshwater Bayou Channel, has
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locks that prevent the passage of structures more than 80 feet in width. A
by-pass channel around these locks has been dredged by the State of Louisiana to
remove silt build-up and currently permits passage around the locks without any
significant width restrictions. Traffic through the by-pass has permitted the
by-pass to remain passable for several years without additional dredging.
Additional dredging of the by-pass may be required, however, and the State of
Louisiana may not continue to provide it. If the by-pass were not maintained,
the Company would be unable to deliver from its Port of Iberia facilities
structures weighing over 4,000 tons unless it incurred substantial additional
dredging costs. This would reduce the capacity of the Company and decrease its
ability to obtain profitable projects. The Port of Iberia and the Army Corps of
Engineers are currently studying the feasibility of deepening the channel across
Vermillion Bay and deepening the Port of Iberia to a depth of 20 ft.
The Company's facility in Lake Charles, Louisiana is located on an
industrial canal at the intersection of the Intracoastal Canal and the Calcasieu
Ship Channel, 12 miles south of Lake Charles and 20 miles from the Gulf of
Mexico. The industrial canal is dredged to a 40-foot water depth with a bottom
width of 400 feet. The facility is currently being leased from the Lake Charles
Harbor & Terminal District under a lease with 12 years remaining, including
option periods, and with options to lease up to an additional 68 acres. The
facility has 67,400 square feet of covered fabrication area, approximately 9,500
square feet of covered warehouse area and administrative support facilities on
the site. The facility has 1,100 linear feet of steel bulkhead water frontage.
The access from this facility to the Gulf of Mexico imposes no weight or size
limitations on any structure fabricated or refurbished at the facility, but the
facility does not currently have equipment and personnel with capabilities as
extensive as those at the Company's New Iberia facilities.
The Company also leases a sales office in Houston, Texas.
EQUIPMENT. The Company's main fabrication facilities house its Bertsch steel
plate bending rolls with capacities to roll up to 4" steel plate into structural
components. These plate rolls allow the Company to provide 100% of its rolling
needs and enable the Company to reduce the risk of cost overruns and delays in
project completion. In addition, the Company sells rolled steel goods to other
fabricators on a subcontracting basis. The Company also uses a Huber oven for
stress relief and heat treatment of high-pressure vessels. This oven allows the
Company to bend steel plate up to 5 1/2" thickness. The Company owns a grit
blast system that can blast steel at a rate approximately ten times faster than
conventional sandblasting. This greatly reduces labor costs and also decreases
the Company's use of conventional sandblasting, which is considered to be a more
hazardous and slower method of preparing steel for painting.
The Company also has an automatic plate-cutting machine used for cutting
steel in complex geometric sections, as well as various other equipment used in
the Company's fabrication business. The Company currently owns eleven crawler
cranes, which range in tonnage capacity from 50 to 250 tons. The Company
performs routine maintenance on all of its equipment.
As part of an ongoing program, equipment is evaluated against expected
operating volume and specific needs in the foreseeable future. Equipment that is
no longer useful to the Company, or equipment that will not be utilized to
capacity, is marketed for disposal.
MATERIALS
The principal materials used by the Company in its fabrication business --
standard steel shapes, steel plate, piping, pipe fittings, valves, welding
gases, fuel oil, gasoline and paint -- are currently available in adequate
supply from many sources. The Company does not depend upon any single supplier
or source. Significant increases in the costs of these items that cannot be
passed on to the customer will adversely impact operating results.
SAFETY AND QUALITY ASSURANCE
Management is concerned with the safety and health of the Company's
employees and maintains a safety assurance program to reduce the possibility of
costly accidents. The Company's safety department establishes guidelines to
ensure compliance with all applicable state and federal safety regulations. The
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Company provides training and safety education through orientations for new
employees and subcontractors, daily crew safety meetings and training programs
as required by OSHA regulations. The Company also employs several safety
technicians. The Company has a comprehensive drug-testing program and conducts
periodic random employee health screenings. In its ongoing commitment to a safe
and healthy work environment, the Company from time to time contracts with a
third-party safety consultant to provide training and suggestions from a
licensed emergency medical technician. The Company believes that its safety
program and commitment to quality are vital to attracting and retaining
customers and high-quality employees.
The Company fabricates to the standards of the American Petroleum Institute,
the American Welding Society, the American Society of Mechanical Engineers, the
American Bureau of Shipping and specific customer specifications. The Company
uses welding and fabrication procedures in accordance with the latest technology
and industry requirements. Training programs are conducted to upgrade skilled
personnel and maintain high quality standards. In addition, the Company
maintains on-site facilities for the x-ray of all pipe welds, which process is
performed by an independent contractor. Management believes that these programs
generally enhance the quality of its products and reduce related repair rates.
Allen Process Systems, LLC is certified as an ISO 9001 fabricator. ISO 9001
is an internationally recognized verification system for quality management
overseen by the International Standards Organization based in Geneva,
Switzerland. The certification is based on a review of the Company's programs
and procedures designed to maintain and enhance quality production. The
certification is subject to annual review and recertification.
CUSTOMERS AND CONTRACTING
The Company's customers are primarily major and independent oil and gas
companies and offshore marine construction contractors. Fixed platforms and
other structures fabricated by the Company are used primarily in the Gulf of
Mexico and offshore West Africa. Process equipment manufactured by the Company
is in use worldwide. See Note 12 to the consolidated financial statements for
certain financial information about geographic areas and international sales.
A few customers have historically generated a large portion of the Company's
revenue, although not necessarily the same customers from year-to-year. The
following table provides information with respect to customers who accounted for
more than 10% of the Company's revenue for the years ended December 31, 2003,
2002 and 2001:
% OF
CUSTOMER REVENUE
------------------------------------------ -------
Year ended December 31, 2003 BP Amoco, Pride Offshore, Ridgelake Energy 50
Year ended December 31, 2002 Dominion Offshore 17
Year ended December 31, 2001 BP Amoco 19
Although the Company's direct customers on many projects are installation
contractors, each project is ultimately fabricated for use either directly or
indirectly by an oil and gas company. The Company, from time to time, contracts
with multiple installation contractors who may be supplying structures to the
same oil and gas company and, in some instances, contracts directly with the oil
and gas companies. Thus, concentration among the Company's customers may be
greater when the customer is viewed as the oil and gas company rather than the
installation contractor.
The level of fabrication that the Company may provide, directly or
indirectly, to any particular oil and gas company depends, among other things,
on the size of that company's capital expenditure budget devoted to platform
construction in a particular year and the Company's ability to meet the
customer's delivery schedule. Similarly, the level of fabrication that the
Company may provide as a subcontractor to an offshore construction company
depends, among other things, on the ability of that company to successfully
obtain prime contracts with oil and gas companies and the ability of the Company
to meet the delivery schedule of the prime contractor. For these reasons, the
oil and gas companies and the prime contractors who account for a significant
portion of revenue in one fiscal year may represent an immaterial portion of
7
revenue in subsequent years. However, the loss of any significant customer
(whether an oil and gas company with which the Company directly contracts or a
prime contractor for which the Company has provided services on a subcontract
basis) for any reason, including a sustained decline in an oil and gas company's
capital expenditure budget or the prime contractor's inability to successfully
obtain contracts, or other competitive factors, could result in a substantial
loss of revenue and have a material adverse effect on the Company's operating
performance.
Historically, the Company's customers in awarding contracts have considered
such factors as the availability, capability, reputation and safety record of a
contractor, but price and the ability to meet a customer's delivery schedule
have been the principal factors on which the Company is awarded contracts.
During 2001 and most of 2002, the Company was impeded in obtaining contracts by
customer concerns as to the Company's potential insolvency. The Company believes
that the financial restructuring that occurred on August 13, 2002 in connection
with the transactions with Midland, as discussed in "Management's Discussion and
Analysis", has eliminated those concerns. The Company's contracts generally vary
in length from one to 18 months depending on the size and complexity of the
project.
Most of the Company's fabrication work is performed pursuant to fixed-price
contracts, although some projects are performed on a time and materials basis.
Under fixed-price contracts, the Company receives the price fixed in the
contract, subject to adjustment only for change orders placed by the customer.
As a result, with respect to fixed-price contracts, the Company retains all cost
savings but is also responsible for all cost overruns. Under time and materials
arrangements, the Company receives a specified hourly rate for direct labor
hours worked and a specified percentage mark-up over its cost for materials. As
a result, under time and materials contracts, the Company is protected against
cost overruns but does not benefit directly from cost savings. As the Company is
typically able to obtain prices for materials in excess of its costs, the cost
and productivity of the Company's labor force are the key factors affecting the
Company's operating results. Consequently, it is essential that the Company
control its costs and maximize the productivity of its workforce.
The following table sets forth for the periods presented the percentage of
the Company's revenue derived from each type of contract used by the Company:
YEAR ENDED DECEMBER 31,
TYPE OF CONTRACT (1) 2003 2002 2001
- -------------------- ------ ------ ------
Fixed-Price......... 90.2% 67.0% 62.5%
Time and Materials.. 9.0% 31.4% 37.5%
- -----------------
(1) Remaining revenues were derived from platform storage and compressor leasing
activities
SEASONALITY
The Company's operations are subject to seasonal variations in weather
conditions and daylight hours. Because most of the Company's construction
activities take place outdoors, the number of direct labor hours worked
generally declines in winter months due to an increase in rainy and cold
conditions and a decrease in daylight hours. Operations may also be affected by
the rainy weather, hurricanes and other storms prevalent along the United States
Gulf Coast throughout the year. As a result, the Company's revenue, gross profit
and net income during the quarter ending December 31 are subject to being
disproportionately low as compared to the quarters ending June 30 and September
30, and full year results may not in all cases be a direct multiple of any
particular quarter or combination of quarters. In particular, during 2002, the
financial condition of the Company and the lack of bonding capacity prevented
the Company from bidding and reduced the number of projects that the Company was
able to perform. This impacted the normal seasonal trends that had been
experienced in the past. The Midland recapitalization and investment transaction
that closed on August 13, 2002 provided the Company with the capability to again
qualify for bonds, and stabilized the financial condition of the Company. The
table below indicates for each quarter of fiscal years ended December 31, 2003,
2002 and 2001 the percentage of annual revenue and net income earned and the
number of direct labor hours worked in each quarter.
8
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------------------- --------------------------------- ---------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Revenue.................. 17% 26% 28% 29% 30% 25% 17% 28% 27% 28% 24% 21%
Net income (loss)........ (12%) (10%) (31%) (47%) (10%) (17%) (17%) (56%) (5%) (2%) (79%) (14%)
Direct labor hours worked
(in thousands).......... 131 190 231 288 160 120 106 94 315 382 302 177
Recent reductions in industry activity levels may tend to increase the effects
of seasonality on the Company's operations.
COMPETITION
The offshore platform fabrication industry is highly competitive and
influenced by events largely outside of the control of offshore platform
fabrication companies. Projects are generally awarded on a competitive bid basis
with customers usually requesting bids on projects one to three months or more
prior to commencement. Since 1992, there has been consolidation in the industry
as several marine fabrication companies have combined with other companies or
ceased operations altogether. The domestic fabricators that operate in the
custom fabrication market, several of which are substantially larger and have
greater resources and capabilities than the Company, compete intensely for
available projects. For international projects, the Company competes with many
of the same domestic fabricators, as well as with numerous foreign fabricators,
most of which are substantially larger and have greater financial resources and
capabilities than the Company.
The Company's marketing staff contacts offshore construction contractors and
oil and gas companies to obtain information as to upcoming projects so that the
Company will be well positioned to bid for the projects. Price and the
contractor's ability to meet a customer's delivery schedule are the principal
factors in determining which qualified fabricator is awarded a contract for a
project. Customers also consider, among other things, the availability of
technically capable personnel and facility space, a fabricator's efficiency,
condition of equipment, reputation, safety record and customer relations. The
Company believes that the limited availability of experienced supervisory and
management personnel, as well as skilled laborers, presents the greatest barrier
to entry to new companies trying to enter the fabrication industry.
The Company's competitive pricing, expertise in fabrication of offshore
marine structures, expertise in design and manufacture of production process
systems and its long-term relationships with international customers have
enabled it in the past to compete effectively for projects destined for
international waters. The Company recognizes, however, that foreign governments
often use subsidies and incentives to create jobs where oil and gas production
is being developed. The additional transportation costs incurred when exporting
structures from the U.S. to foreign locations may hinder the Company's ability
to successfully bid for projects against foreign competitors. Because of
subsidies, import duties and fees, taxes on foreign operators, lower wage rates
in foreign countries, fluctuations in the value of the U.S. dollar, collection
risks on projects payable in a foreign currency and other factors, the Company
may find it increasingly difficult to remain competitive with foreign
contractors for projects designed for use in international waters.
Because of its poor financial condition, the Company was severely affected
by competition in 2002 and 2001. In some cases, the Company was not asked to bid
on long-term projects. In other cases, the Company did not have the resources to
provide financial bonds for its performance and was therefore not able to submit
bids on significant projects. The Midland recapitalization and investment
transaction on August 13, 2002 provided the Company with the capability to again
qualify for bonds, stabilized the financial condition of the Company, and added
experienced management personnel who are well recognized in the industry. As a
result of this transaction, the Company expects to again compete effectively for
projects in the coming year.
9
BACKLOG
As of December 31, 2003, the Company's backlog was approximately $7.6
million, substantially all of which management expects to be performed before
December 31, 2004. At December 31, 2002, the Company's backlog was approximately
$22.5 million.
The Company's backlog is based on management's estimate of the remaining
labor, material and subcontracting costs to be incurred with respect to those
projects as to which a customer has authorized the Company to begin work or
purchase materials pursuant to written contracts, letters of intent or other
forms of authorization. Often, however, original contract prices are based on
incomplete engineering and design specifications. As engineering and design
plans are finalized or changes to existing plans are made, the total contract
price to complete such projects is likely to change. In addition, most projects
currently included in the Company's backlog are subject to termination at the
option of the customer, in which case the customer is generally required to pay
the Company for work performed and materials purchased through the date of
termination and, in some instances, pay the Company termination fees.
GOVERNMENT AND ENVIRONMENTAL REGULATION
Many aspects of the Company's operations and properties are materially
affected by federal, state and local regulation, as well as certain
international conventions and private industry organizations. The exploration
and development of oil and gas properties located on the outer continental shelf
of the United States is regulated primarily by the Mineral Management Services
("MMS"). The MMS has promulgated federal regulations under the Outer Continental
Shelf Lands Act requiring the construction of offshore structures located on the
outer continental shelf to meet stringent engineering and construction
specifications. The Company is not directly affected by regulations applicable
to offshore construction operations as are its customers that install and
operate the structures fabricated by the Company, but the Company is required to
construct these structures in accordance with customer design that must comply
with applicable regulations; to the extent such regulations detrimentally affect
customer activities, the operations of the Company may be adversely affected.
Violations of the laws and related regulations directly affecting the Company's
operations can result in substantial civil and criminal penalties as well as
injunctions curtailing operations. The Company believes that its operations are
in compliance with these and all other laws and related regulations affecting
the fabrication of structures for delivery to the outer continental shelf of the
United States and the laws and related regulations governing other areas of the
world. In addition, the Company depends on the demand for its services from the
oil and gas industry and, therefore, is affected by changing taxes, price
controls and other laws and regulations relating to the oil and gas industry. In
addition, offshore construction and drilling in certain areas has been opposed
by environmental groups and, in certain areas, has been restricted or
prohibited. To the extent laws or regulations are enacted or other governmental
actions are taken that prohibit or restrict offshore construction and drilling
or impose environmental protection requirements that result in increased costs
to the oil and gas industry in general and the offshore construction industry in
particular, the business and prospects of the Company could be adversely
affected. Such restrictions in the areas where the Company's products are used
have not been substantial to date. The Company cannot determine to what extent
future operations and earnings of the Company may be affected by new
legislation, new regulations or changes in existing laws or regulations.
The Company's operations and properties are subject to a wide variety of
increasingly complex and stringent federal, state and local environmental laws
and regulations, including those governing discharges into the air and water,
the handling and disposal of solid and hazardous wastes, the remediation of soil
and groundwater contaminated by hazardous substances and the health and safety
of employees. These laws may provide for "strict liability" for damages to
natural resources and threats to public health and safety, rendering a party
liable for environmental damage without regard to negligence or fault on the
part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, cease and desist orders, administrative or
civil penalties and criminal prosecution. Certain environmental laws provide for
strict, joint and several liability, without regard to fault or negligence, for
remediation of spills and other releases of hazardous substances. In addition,
the Company may be subject to claims alleging personal injury, property damage
or natural resource damage as a result of the handling of hazardous substances.
10
Such laws and regulations may also expose the Company to liability for the
conduct of or conditions caused by others, or for acts of the Company that were
in compliance with all applicable laws at the time such acts were performed.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, and similar laws provide for responses to and liability for
releases of hazardous substances into the environment. Additionally, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Safe Drinking Water Act, the Emergency Planning and Community Right to Know Act,
each as amended, and similar state or local counterparts to these federal laws,
regulate air emissions, water discharges, hazardous substances and wastes and
require public disclosure related to the use of various hazardous substances.
Compliance with such environmental laws and regulations requires the acquisition
of permits and other authorizations for certain activities and compliance with
various standards and procedural requirements. The Company believes that its
facilities are in substantial compliance with current regulatory standards.
In addition to the Company's operations, other industrial operations have
been conducted in the past by other entities on the properties now used by the
Company. Although the Company does not believe that there is any material
remediation requirements on its properties, it is possible that these past
operations may have caused unknown environmental conditions that might require
future remediation.
The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, primarily the Occupational Safety and
Health Act and regulations promulgated thereunder. In addition, various other
governmental and quasi-governmental agencies require the Company to obtain
certain miscellaneous permits, licenses and certificates with respect to its
operations. The kind of permits, licenses and certificates required in the
Company's operations depend upon a number of factors. The Company believes that
it has all such miscellaneous permits, licenses and certificates that are
material to the conduct of its existing business.
The Company's compliance with the laws and regulations discussed in this
section have entailed certain additional expenses and changes in operating
procedures. These expenses have not been substantial over the past 10 years, and
the Company believes that compliance with these laws and regulations will not
have a material adverse effect on the Company's business or financial condition
for the near future. However, future events, such as changes in existing laws
and regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies, stricter or different interpretations of existing laws and
regulations or adoption of new laws and regulations, may require additional
expenditures by the Company, which expenditures may be material.
The Company also has employees engaged in offshore operations that are
covered by provisions of the Jones Act, the Death on the High Seas Act and
general maritime law, which laws operate to make the liability limits
established under state workers' compensation laws (which are applicable to the
Company's other employees) inapplicable to these employees and, instead, permit
them or their representatives to pursue actions against the Company for damages
or job related injuries, with generally no limitations on the Company's
potential liability.
In addition to government regulation, various private industry
organizations, such as the International Standards Organization, the American
Bureau of Shipping, the American Petroleum Institute, the American Society of
Mechanical Engineers and the American Welding Society, promulgate technical
standards that must be adhered to in the fabrication process.
INSURANCE
The Company maintains insurance against property damage caused by fire,
flood, explosion and similar catastrophic events that may result in physical
damage or destruction to the Company's facilities. The Company also maintains
general liability insurance, workers' compensation liability and maritime
employer's liability insurance. All policies are subject to deductibles and
other coverage limitations. Although management believes that the Company's
insurance protection is adequate, we cannot be sure that
11
the Company will be able to maintain adequate insurance at rates which are
commercially reasonable, nor that coverage is adequate to cover all claims that
may arise. The insurance policies that are currently in place do not cover
claims arising from acts of terrorism. Management has evaluated the risk of such
acts to the Company and believes it to be low.
EMPLOYEES
The Company's workforce varies based on the level of ongoing operating
activity at any particular time. As of December 31, 2003, the Company employed
approximately 425 full-time production employees at its three operating
facilities, two of which are located in New Iberia, Louisiana and one in Lake
Charles, Louisiana. The Company also engages the services of subcontractors to
perform specific tasks in connection with certain projects. Management estimates
these subcontractors have in the past provided over 350 workers depending on the
volume and nature of Company projects. None of the Company's employees is
employed pursuant to a collective bargaining agreement, and the Company believes
that it has positive working relationships with its employees.
The Company's ability to compete depends substantially on its ability to
attract and retain skilled construction workers, primarily welders, fitters and
equipment operators. In addition, the Company's ability to expand its operations
depends, among other things, on its ability to increase its workforce. While the
supply of production workers has been historically limited, the recent reduced
demand for the Company's products and services has stabilized the demand for
such services. While the Company believes its relationship with its skilled
labor force is good, a significant increase in the wages paid by competing
employers could result in a reduction in the Company's skilled labor force,
increases in the wage rates paid by the Company, or both. If either of these
occurs in the near-term, the profits expected by the Company from work in
progress could be reduced or eliminated and, in the long-term, to the extent
such wage increases could not be passed on to the Company's customers, the
production capacity of the Company could be diminished and the growth potential
of the Company could be impaired.
CAUTIONARY STATEMENTS
Certain statements included in this report and in oral statements made from
time to time by management of the Company that are not statements of historical
fact are forward-looking statements. In this report, forward-looking statements
are included primarily in the sections entitled "Business and Properties,"
"Legal Proceedings," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The words "expect," "believe,"
"anticipate," "project," "plan," "estimate," "predict," and similar expressions
often identify forward-looking statements. Such statements may involve risks and
uncertainties and include, among other things, information as to possible future
increases in oil and gas prices and drilling activity and the effect of current
and future levels of prices and drilling activity on demand for products and
services of the Company, on the prices the Company can obtain for its products
and services and on the profitability of the Company. All such statements are
subject to factors that could cause actual results and outcomes to differ
materially from the results and outcomes predicted in the statements, and
investors are cautioned not to place undue reliance upon them. Those factors
include, but are not limited to, the risks described immediately below and
elsewhere in this report.
THE COMPANY RELIES ON THE FINANCIAL SUPPORT FROM MIDLAND, WITHOUT WHICH WE MAY
NOT BE ABLE TO MEET FINANCIAL OBLIGATIONS WHEN THEY BECOME DUE.
Midland has provided substantial financial support to the Company since the
Midland Transaction. At December 31, 2003, the Company had $5.9 million in
advances from Midland, which the Company used for working capital. The Company
has no control over whether Midland will provide additional funding in the
future and does not know whether such additional funding will be available from
Midland as the Company requires it. If Midland does not provide such additional
funding in the future as the Company requires it, the Company could be unable to
meet its obligations, including obligations under the Credit Agreement, in the
ordinary course of business. The Company requires the continued support from
Midland until such time as it has sustained profitable operations and its
financial condition is stable and no longer requires this support. Accordingly,
there can be no assurance that the Company will continue as a going concern
through fiscal
12
2004.
THE COMPANY'S WORKING CAPITAL DECREASED SUBSTANTIALLY DURING 2003.
The Company has $7.9 million outstanding on its $8.0 million Credit
Agreement at December 31, 2003. Liquidity beyond the Credit Agreement has been
provided by advances obtained from Midland as needed from time to time. These
advances are classified as current liabilities at December 31, 2003 and as a
result, the Company has a working capital deficit of $1,341,000 at December 31,
2003. If the Company's working capital position does not improve during 2004,
the Company may be forced to cease its operations.
THE DEMAND FOR OUR SERVICES IS CYCLICAL AND DEPENDS ON THE LEVEL OF ACTIVITY IN
THE OIL AND GAS INDUSTRY; DECREASES IN OIL AND GAS ACTIVITY COULD REDUCE DEMAND
FOR OUR SERVICES AND RESULT IN LOWER REVENUE.
We fabricate decks, jackets and modules of drilling and production
equipment, and design and fabricate production process equipment for offshore
oil and gas platforms. We also repair and refurbish drilling rigs. The
purchasers of our products and services are oil and gas companies and
installation contractors for oil and gas companies. Thus, the demand for our
services depends on the condition of the oil and gas industry and, in
particular, the level of capital expenditures of oil and gas companies that
operate in offshore oil and gas producing areas throughout the world.
A prolonged reduction in oil or natural gas prices in the future or
expectations of such a reduction would likely depress offshore drilling and
development activity. A substantial reduction of this activity could reduce
demand for our services and could substantially reduce our revenues.
OUR FINANCIAL CONDITION DETERIORATED SIGNIFICANTLY DURING 2001 AND 2002, AND WE
SUSTAINED MATERIAL OPERATING LOSSES IN 2003. OIL AND GAS COMPANIES MAY BE
RELUCTANT TO USE OUR SERVICES.
Customers may not permit the Company to bid on long-term construction
projects due to the financial condition of the Company and the substantial
deterioration in that condition experienced since 2001. We have applied
substantial efforts and resources to reestablish our good name and acquaint the
market and our customers with the recapitalization and investment transaction
with Midland, but this process is slow. To date, our Company has not been able
to secure credit for working capital without the financial guarantee of Midland.
OUR BUSINESS REQUIRES A STEADY SUPPLY OF SKILLED WORKERS, AND WE MAY NOT BE ABLE
TO RETAIN AND ATTRACT ENOUGH OF THEM, IN WHICH CASE OUR RESULTS WILL LIKELY BE
IMPAIRED.
Our financial results depend substantially on our ability to retain and
attract skilled construction workers, primarily welders, fitters and equipment
operators. We currently employ approximately 425 skilled workers, which is
significantly lower than the number we employed in fiscal 1999, Transition 2000
and in the first half of 2001 during periods of greater activity. We may not be
successful in increasing our workforce to meet any future increases in demand
for our services, in which case we may lose contracts and, for contracts we
obtain, our profit margins may be reduced as a result of the need to pay
overtime rates to a limited workforce. The demand for skilled workers in south
Louisiana is high and the supply of skilled workers is extremely limited, and we
may not succeed in increasing the size of our workforce through acquisitions,
training, or new hiring programs. Although we believe that a large number of
trainable workers reside reasonably close to our facilities, we may not be
successful in recruiting and training them due to a variety of factors,
including the current skill levels of workers, the potential inability or lack
of desire by workers to commute to our facilities or to relocate to areas closer
to them, and competition for workers from other industries. While we believe
that our wage rates are competitive and that our relationship with our skilled
workforce is good, a significant increase in the wages paid by competing
employers could result in a reduction in our skilled workforce, increases in the
wage rates paid, or both. If either of these events occurs, in the near term our
profits from work in progress would be reduced or eliminated and, in the long
term our production capacity and revenues could be diminished and our growth
potential could be impaired.
13
IF CUSTOMERS TERMINATE PROJECTS OUR REPORTED BACKLOG COULD DECREASE, WHICH COULD
SUBSTANTIALLY REDUCE OUR REVENUE.
Our backlog is based on our estimate of the remaining labor, material and
subcontracting costs to be incurred for projects on which a customer has
authorized us to begin work or purchase materials pursuant to written contracts,
letters of intent, or other forms of authorization. Our customers retain the
right to change or to terminate most projects in our backlog, either of which
could substantially change the amount of backlog currently reported. In the case
of a termination, the customer is generally required to pay for our work
performed and materials purchased through the date of termination, and in some
cases, pay us termination fees. Due to the large dollar amounts of backlog
estimated for each of a small number of projects, however, amounts included in
our backlog could decrease substantially if one or more of these projects were
to be terminated by our customers. Approximately 87% of our backlog at December
31, 2003 was attributable to three projects. Termination of one or more of these
large projects could have a material adverse effect on our revenue for 2004.
OUR OPERATIONS ARE HAZARDOUS TO PERSONS AND PROPERTY, AND OUR LIABILITY FOR
INJURIES OR DAMAGES COULD RESULT IN SUBSTANTIAL LOSSES TO US.
Our operations involve a high degree of risk, particularly of personal
injury or loss of life, severe damage to and destruction of property and
equipment and suspension of operations. The failure of our structures during and
after installation can result in similar injuries and damages for which we could
be liable. We also have employees engaged in offshore operations that are
covered by provisions of the Jones Act, the Death on the High Seas Act and
general maritime law. These laws operate to make the liability limits
established by state workers' compensation laws (which cover our other
employees) inapplicable to these employees and, instead, permit them or their
representatives to pursue actions against us for damages for job-related
injuries, with generally no limitations on our potential liability. In addition,
due to their proximity to the Gulf of Mexico, our facilities are subject to the
possibility of physical damage caused by hurricanes or flooding. Although we
maintain the level of insurance protection that we consider economically
prudent, our insurance may not be sufficient under all circumstances or against
all claims or hazards, nor do we carry insurance for the loss of profits that
may result from these hazards. A successful claim or damage resulting from a
hazard for which we are not fully insured could result in substantial losses to
us. Moreover, we may not be able to maintain adequate insurance in the future at
rates that we consider economically prudent.
WE COULD INCUR LOSSES UNDER OUR FIXED-PRICE CONTRACTS AS A RESULT OF COST
OVERRUNS OR DELAYS IN DELIVERY.
Most of our projects are performed pursuant to fixed-price contracts,
although some projects are performed on a time and materials basis. Under
fixed-price contracts, we receive the price fixed in the contract, subject to
adjustment only for change orders placed by the customer. We are responsible for
all cost overruns, which could occur for various reasons, including errors in
estimates or bidding, changes in the availability and cost of labor and material
and variations in productivity from the original estimates. This could result in
reduced profitability or losses on projects and, depending on the size of a
project, could significantly reduce our earnings in any fiscal quarter or year.
Most of our fixed-price contracts also provide for liquidated damages for late
delivery. If we were to miss the delivery date specified by any of our
contracts, whether due to equipment problems, labor shortages, adverse weather
conditions or other causes, we could be subject to liquidated damages that could
significantly reduce our profitability.
Under time and materials arrangements, we receive a specified hourly rate
for direct labor hours (which exceeds our direct labor costs) and a specified
percentage mark-up over our cost for materials. Under these contracts, we are
protected against cost overruns but do not benefit directly from cost savings.
14
INACCURATE ESTIMATES MADE IN OUR PERCENTAGE-OF-COMPLETION ACCOUNTING COULD
RESULT IN A REDUCTION OF PREVIOUSLY REPORTED PROFITS.
Most of our revenue and expenses are recognized on a
percentage-of-completion basis determined by the ratio that labor hours incurred
to date bear to the total estimated labor hours required for completion. We
review expected labor hours, costs and profits monthly as the work progresses,
and make adjustments proportionate to the percentage of completion in revenue
for the period when the estimates are revised. To the extent that these
adjustments result in a reduction of previously reported profits, we must
recognize a charge against current earnings, which may be significant depending
on the size of the project or the adjustment.
OUR REVENUE FOR ANY FISCAL QUARTER CAN DECLINE AS A RESULT OF INCLEMENT WEATHER
AND SEASONAL DECREASES IN DAYLIGHT HOURS.
Our operations are subject to seasonal variations in weather conditions and
daylight hours. Because most of our construction activities take place outdoors,
the average number of direct labor hours worked per day generally declines in
winter months due to an increase in rainy and cold conditions and a decrease in
daylight hours. Operations may also be affected by the rainy weather, hurricanes
and other storms prevalent along the Gulf Coast throughout the year. As a
result, our revenue during the quarter ending December 31 is subject to being
disproportionately low as compared to the quarters ending June 30 and September
30, and full year results may not in all cases be a direct multiple of any
particular quarter or combination of quarters.
THE LOSS OF A SIGNIFICANT CUSTOMER COULD RESULT IN A SUBSTANTIAL LOSS OF
REVENUE.
A few customers have historically generated a large portion of our revenue,
although not necessarily the same customers from year to year. For example,
customers individually accounting for more than 10% of our annual revenue
accounted as a group for 50% (three customers), 17% (one customer), and 19% (one
customer), of revenue for the years ended December 31, 2003, 2002 and 2001.
Although our direct customers on many projects are installation contractors,
an oil and gas company ultimately fabricates each project for use. Thus,
concentration among our customers may be greater when the customer is viewed as
the oil and gas company rather than the installation contractor. We contract
from time to time with multiple installation contractors who may be supplying
structures to the same oil and gas company and in some instances contract
directly with the oil and gas company.
The prime contractors who account for a significant portion of revenue in
one fiscal year may represent an immaterial portion of revenue in subsequent
years. The loss, however, of any significant customer (whether an oil and gas
company with which we directly contract or a prime contractor for which we have
provided services on a subcontract basis) could result in a substantial loss of
revenue.
Recent consolidation in the oil and gas industry may tend to increase the
concentration of our work with significant customers and may also increase the
power of some important customers to obtain price concessions from us.
OUR BUSINESS IS VERY COMPETITIVE, AND LOW LEVELS OF DEMAND FOR OUR SERVICES HAVE
FORCED US TO REDUCE PRICES FOR OUR PRODUCTS. THIS HAS INCREASED OUR OPERATING
LOSSES AND, BECAUSE OF WORKFORCE REDUCTIONS, OUR ABILITY TO BENEFIT FROM FUTURE
INCREASES IN DEMAND MAY BE DIMINISHED.
The offshore platform fabrication industry is highly competitive and
influenced by events largely outside the control of offshore platform
fabrication companies. Contracts for our services are generally awarded on a
competitive bid basis with customers usually requesting bids on projects from
one to three months prior to commencement. Price and the contractor's ability to
meet a customer's delivery schedule are the principal factors in determining
which qualified contractor is awarded a contract for a project. We compete with
both large and small companies, and some of them have greater financial and
other resources than we do. Small companies that can perform some of the kinds
of fabrication work that we do have entered the market over
15
the last few years. Thus, the number of companies that perform fabrication
services to the oil and gas industry has increased. The intense competition we
face in our industry, especially in periods of low demand, keeps us from raising
our prices and can limit or decrease our revenue. Until bidding activity by oil
and gas companies results in the awarding of new fabrication contracts,
particularly contracts for larger structures, the bidding on smaller projects
will remain very competitive. In order to obtain sufficient work to maintain a
productive workforce, we must reduce prices on these smaller projects. These
prices can be below our cost and, if demand for our fabrication services remains
low, we may be required to make further reductions in the number of skilled
craftsmen and supervisors we employ and other cost reductions. After we reduce
our workforce, we may not be able to replace them in sufficient numbers to
respond to increased demand.
OUR OPERATIONS ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, COMPLIANCE WITH
WHICH IS EXPENSIVE; CHANGES IN THE REGULATORY ENVIRONMENT CAN OCCUR AT ANY TIME
AND GENERALLY INCREASE OUR COSTS.
Our operations and properties are subject to and affected by various types
of governmental regulation, including numerous federal, state and local
environmental protection laws and regulations, compliance with which is becoming
increasingly complex, stringent and expensive. Some of these laws provide for
"strict liability" for damages to natural resources or threats to public health
and safety, rendering a party liable for environmental damage without regard to
its negligence or fault. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties and
criminal prosecution. We are subject to claims for personal injury or property
damage as a result of alleged exposure to hazardous substances.
The laws and regulations that affect our operations most extensively are
primarily the Occupational Safety and Health Act and to a lesser extent the
federal and state laws and regulations enforced by the Environmental Protection
Agency and the Louisiana Department of Environmental Quality. Those
environmental laws include the Comprehensive Environmental Response,
Compensation, and Liability Act, the Resource Conservation and Recovery Act, the
Clean Air Act, the Clean Water Act, and the Safe Drinking Water Act. We incur
costs as a result of safety procedures and inspections made necessary by the
Occupational Safety and Health Act and for environmental license and permit
fees, and containment and disposal of wastes, including sand from sand blasting,
lead from paint and paint thinners, oil leaked from machinery and vehicles, and
storm and drain runoff water. Although these costs have not been material, any
significant change in, or in the enforcement of, these laws and regulations
could increase our expenses and thus render more difficult our ability to
compete. We anticipate that environmental control and protection laws and
regulations will become increasingly stringent and result in more compliance
costs for us.
Because we depend on the demand for our services from the oil and gas
industry, the adoption of laws and regulations curtailing exploration and
developmental drilling for oil and gas for economic, environmental and other
policy reasons could reduce the demand for our services and, ultimately, our
revenue. For example, if oil and gas drilling is restricted or forbidden in
additional areas in the waters offshore the U. S. Gulf of Mexico or elsewhere,
the activities of our customers in those areas would be reduced and our revenues
would likely decline.
WE ARE DEPENDENT ON KEY PERSONNEL; THE LOSS OF THEIR SERVICES COULD RESULT IN
INEFFICIENCIES IN OUR OPERATIONS, LOST BUSINESS OPPORTUNITIES, OR THE LOSS OF
ONE OR MORE OF OUR CUSTOMERS.
Our success depends on, among other things, the continued active
participation of our officers and key operating personnel. We currently have no
employment contracts with our key employees. The loss of the services of any of
our key employees could result in inefficiencies in our operations, lost
business opportunities, or the loss of one or more of our customers.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE NEAR FUTURE; THUS, AN INVESTOR IN OUR
COMMON STOCK SHOULD NOT EXPECT TO RECEIVE PERIODIC INCOME ON AN INVESTMENT IN
OUR COMMON STOCK.
16
We currently intend to retain earnings, if any, to meet our working capital
requirements and to finance the future operation and growth of our business and,
therefore, do not plan to pay cash dividends to holders of our common stock in
the near future. An investor in our common stock should not expect to receive
periodic income on an investment in our common stock.
ITEM 3. LEGAL PROCEEDINGS.
In addition to the matters described below, the Company is a party to
various routine legal proceedings primarily involving commercial claims,
workers' compensation claims, and claims for personal injury under the General
Maritime Laws of the United States. A number of the Company's vendors have sued
the Company to collect amounts of money allegedly due to them. These vendors
are, in each case, unsecured creditors of the Company. While the outcome of
these lawsuits, legal proceedings and claims cannot be predicted with certainty,
management believes that the outcome of such proceedings is not likely to have a
material adverse effect on the Company's consolidated financial statements.
In a lawsuit filed against the Company on September 29, 1998, in the 14th
Judicial Court in the Parish of Calcasieu, State of Louisiana, Professional
Industrial Maintenance, L.L.C., Don E. Spano and Kimberly Spano alleged multiple
claims for breach of contract, breach of specific performance, a request for
injunction, request for damages, and a request for treble damages and attorney
fees for violations of the Louisiana Unfair Trade Practices Act. Mr. Spano was
the managing member of Professional Industrial Maintenance, LLC, the company
whose assets we acquired in January 1998. The Company filed a counterclaim for
recovery of certain amounts paid on behalf of Professional Industrial
Maintenance, LLC and Mr. Spano as a result of the transaction. In January, 2004
the parties agreed to settle the disputes subject of the lawsuit with full and
final releases for all claims in exchange for a cash payment to the plaintiffs
in the amount of $300,000; however, as of the filing of this report, the details
of the settlement agreement and release have not been finalized.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
EXECUTIVE OFFICERS OF THE REGISTRANT
All executive officers serve the Company at the discretion of the Board of
Directors. Listed below are the names, ages and offices of each of the executive
officers of the Company as of December 31, 2003:
NAME AGE POSITION
- ------------------------- ----- ---------------------------------------
William A. Hines......... 67 Principal Executive Officer
Larry J. Verzwyvelt...... 56 President, Universal Fabricators, LLC and Allen
Process Systems, LLC
Martin K. Bech........... 35 Vice President, Secretary and General Counsel
Peter J. Roman........... 53 Vice President and Chief Financial Officer
Allen C. Porter.......... 71 President and Chief Executive Officer *
William A. Downey........ 57 Executive Vice President and Chief
Operating Officer **
William A. Hines became the Principal Executive Officer of the Company in
March 2003. Mr. Hines also serves as our Chairman of the Board. Mr. Hines is
also the Chairman of the Board and President of Nassau Holding Corporation, the
parent company of several oilfield-related companies, including Midland, and a
director of Whitney Holding Corporation, a publicly traded regional bank holding
company. Mr. Hines previously served as a director of our company from July 1998
through March 2001.
Larry J. Verzwyvelt was named President of Universal Fabricators, LLC, a
wholly-owned subsidiary of the Company in September 2003 and was named President
of Allen Process Systems, LLC, a wholly-owned subsidiary of the Company in
October 2003. Prior to joining Universal Fabricators, Mr. Verzwyvelt was the
Operations Manager, Fabrication - North America, for J. Ray McDermott, Inc., a
position he held since 1999. Before joining J. Ray McDermott in 1995, Mr.
Verzwyvelt was the Fabrication Division Manager
17
for OPI International, Inc., where he was responsible for all domestic and
international fabrication operations. He also held various operational and
project management positions with OPI, Gulf Marine Fabricators, Inc. and Service
Marine Group, Inc.
Martin K. Bech was hired as General Counsel of the Company on April 16, 2001
and was appointed Secretary of the Company on June 1, 2001 and Vice President of
the Company on August 2, 2001. Mr. Bech earned two bachelor's degrees from
Louisiana State University in 1990 and his Juris Doctorate from Loyola
University School of Law in New Orleans in 1996. Prior to joining the Company,
Mr. Bech was an associate in the New Orleans office of the regional law firm of
Phelps Dunbar LLP from March 1997 until March 2001.
Peter J. Roman was appointed Vice President and Chief Financial Officer of
the Company on June 30, 1997 and served as Secretary of the Company from May 1,
1998 until June 1, 2001. From June 1984 until June 1997, Mr. Roman was a
certified public accountant with the international accounting firm of Ernst &
Young LLP, attaining the level of senior manager. Mr. Roman earned a Bachelor of
Sciences degree from Louisiana State University in 1984 and is a member of the
Louisiana State Society of Certified Public Accountants and the American
Institute of Certified Public Accountants.
* Allen C. Porter, Jr. served as President and Chief Executive Officer from
August 13, 2002 through October 2003. Mr. Porter also served for the same period
as the President of Allen Process Systems, LLC, a wholly owned subsidiary of our
Company, and was the founder and President of Allen Tank, Inc., the predecessor
of Allen Process Systems, LLC. From 1998 to 2000, Mr. Porter was a construction
manager for Versatruss Americas LLC, a designer and manufacturer of offshore
heavy lift systems. From 2000 through his joining our company in August 2002,
Mr. Porter was the Executive Vice President of Yarbrough Cable Co., a Versabar
company.
** William A. Downey served as Executive Vice President and Chief Operating
Officer from August 13, 2002 through August 2003. Mr. Downey also served for the
same period as the President of Universal Fabricators, LLC, a wholly owned
subsidiary of our company. From May 1985 through January 2000, Mr. Downey served
as Vice President of Operations for Gulf Island Fabrication, Inc., a publicly
traded company engaged in the fabrication of platforms and structures used in
the development and production of oil and gas. Mr. Downey was also the President
of Gulf Island, LLC, a subsidiary of Gulf Island Fabrication, Inc., from January
2000 through June 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, $.01 par value per share (the "Common Stock"),
is traded on the Nasdaq SmallCap Market under the symbol "UFAB." At March 15,
2004, the Company had approximately 1,121 holders of record of its Common Stock.
Effective June 12, 2002, the Company transferred its common stock listing to the
Nasdaq SmallCap Market. The transfer to the Nasdaq SmallCap Market resulted in a
more favorable cost structure and less stringent listing requirements than that
of the Nasdaq National Market.
On August 1, 2003, the Company's shareholders approved a one-for-ten reverse
stock split of the outstanding shares of the Company's common stock, to be
effective immediately after the conversion of Midland's Series A preferred
shares. Accordingly, on August 1, 2003, each share of series A preferred stock
was converted into 100,000 shares of Unifab common stock and the one-for-ten
reverse stock split was effected resulting in Midland holding a total of
7,380,000 common shares after the reverse stock split.
The following table sets forth the high and low bid prices per share of the
Common Stock, as reported by the Nasdaq SmallCap and National Markets, for each
fiscal quarter in the years ended December 31, 2003 and 2002, giving effect to
the one-for-ten reverse stock split:
18
HIGH LOW
------ ------
December 31, 2003
First Quarter $ 3.80 $ 0.05
Second Quarter 3.90 2.20
Third Quarter 3.60 1.10
Fourth Quarter 2.10 0.90
December 31, 2002
First Quarter $ 8.40 $ 1.60
Second Quarter 13.00 2.00
Third Quarter 9.40 2.00
Fourth Quarter 3.90 1.60
The Company has not paid cash dividends in the two most recent fiscal years.
The Company intends to retain earnings, if any, to meet its working capital
requirements and to finance the future operations and growth of its business
and, therefore, does not plan to pay any cash dividends to holders of its Common
Stock in the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about shares of our Common Stock
that may be issued upon the exercise of options, warrants and rights under all
of our existing equity compensation plans as of December 31, 2003.
Number of securities Number of securities
to be issued upon remaining available for
exercise of Weighted-average future issuance under equity
outstanding options, exercise price of compensation plans
warrants and outstanding options, (excluding securities
rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- ----------------------- -------------------- -------------------- ----------------------------
Equity compensation
plans approved by
security holders(1) 43,233 $ 34.24 2,456,767(3)
Equity compensation
plans not approved
by security holders(2) 6,740 $ 71.20 558,260(3)
- ----------------------- -------------------- -------------------- ----------------------------
Total 49,973 $ 34.24 3,015,027
==================== ==================== ============================
- --------------
(1) Reflects options granted under our company's long-term incentive plan.
(2) Reflects options granted under our company's employee long-term
incentive plan.
(3) All of the referenced shares may be issued to participants through
incentive stock options, nonqualified stock options, restricted stock
or "other stock-based awards" (which are based in whole or in part on
the value of our Common Stock).
EMPLOYEE LONG-TERM INCENTIVE PLAN
19
In 2000, our board of directors adopted our employee long-term
incentive plan (the "2000 plan") to provide long-term incentives to our
key employees who are not officers or directors of our company. The 2000
plan has not been approved by our shareholders. Under the 2000 plan, which
is administered by the chairman of our board and our chief executive
officer, our company may grant incentive stock options, nonqualified
stock options, restricted stock, other stock-based awards or any
combination thereof to our key employees. The committee reviews and
approves awards made under the 2000 plan and approves the exercise
price of any stock options granted under the 2000 plan. The exercise
price may not be less than the fair market value of our common stock on
the date of grant.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the past five fiscal
periods should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included elsewhere in
this Annual Report. Effective December 31, 2000, the Company changed its fiscal
accounting year end to December 31, each year. The table below also presents
comparative information for the twelve months ended December 31, 2000.
Nine Months
Year ended December 31, ended Year ended
----------------------------------------------- December 31, March 31,
2003 2002 2001 2000(2) 2000 2000
--------- --------- ---------- ---------- ------------ ----------
(Dollars in thousands, except per share data)
Statement of Operations Data:
Revenue $ 55,774 $ 33,286 $ 81,733 $ 77,692 $ 60,385 $ 73,124
Cost of revenue 60,618 39,260 79,244 80,876 63,387 66,431
--------- --------- ---------- ---------- ------------ ----------
Gross profit (loss) (4,844) (5,974) 2,489 (3,184) (3,002) 6,693
Other operating expenses(3) -- -- 5,425 20,276 -- --
General and administrative expense 5,051 7,242 7,417 8,704 6,685 8,160
--------- --------- ---------- ---------- ------------ ----------
Operating income (loss) (9,985) (18,641) (25,204) (11,888) (9,687) (1,467)
Other income (expense), net (1,940) (1,876) (2,761) (2,070) (1,627) (1,289)
--------- --------- ---------- ---------- ------------ ----------
Income (loss) before income taxes (11,835) (20,517) (27,965) (13,958) (11,314) (2,756)
Income tax expense (benefit) -- -- 1,316 (4,832) (4,048) (685)
--------- --------- ---------- ---------- ------------ ----------
Net income (loss) $ (11,835) $ (20,517) $ (29,281) $ (9,126) $ (7,266) $ (2,071)
========= ========= ========== ========== ============ ==========
Earnings (loss) per share(4)
Basic $ (1.44) $ (5.59) $ (36.02) $ (12.76) $ (9.99) $ (3.08)
========= ========= ========== ========== ============ ==========
Diluted $ (1.44) $ (5.59) $ (36.02) $ (12.76) $ (9.99) $ (3.08)
========= ========= ========== ========== ============ ==========
Weighted average shares outstanding(4) ,(5)
Basic 8,200 3,670 814 715 727 672
Diluted 8,200 3,670 814 715 727 672
Cash dividends declared per common shares(1) $ -- $ -- $ -- $ -- $ -- $ --
Other financial data:
Depreciation and amortization $ 2,214 $ 2,700 $ 3,054 $ 2,965 $ 2,358 $ 2,757
Capital expenditures 1,306 1,194 2,293 7,308 4,688 7,557
Net cash (used in) operating activities (10,625) (2,676) (94) (4,089) (1,943) (678)
Net cash (used in) investing activities (1,236) (1,037) (2,203) (7,130) (4,510) (7,358)
Net cash provided by financing activities 11,791 3,039 2,047 10,492 7,268 7,100
Other operating data:
Direct labor hours worked 839,000 479,000 1,176,000 1,166,000 934,000 1,040,000
Number of employees (at end of period) 425 317 450 674 674 600
Backlog (at end of period) $ 7,617 $ 22,487 $ 8,333 $ 27,000 $ 27,000 $ 19,231
20
AS OF
AS OF DECEMBER 31, MARCH 31,
--------------------------------------------- ---------
2003 2002 2001 2000 2000
-------- -------- --------- -------- ---------
Balance Sheet Data:
Working capital (deficit) $ (1,341) $ 2,841 $ (15,513) $ 11,813 $ (3,789)
Property, plant and equipment, net 25,223 26,221 34,125 34,549 31,708
Total assets 40,219 39,279 63,207 82,654 84,651
Debt 29,300 16,988 23,368 20,303 24,720
Shareholders' equity 2,111 13,910 19,133 47,990 44,268
(1) The Company intends to retain earnings, if any, to meet its working
capital requirements and to finance the future operation and growth of
its business, and therefore, does not plan to pay cash dividends to
holders of its common stock in the foreseeable future.
(2) Information for the year ended December 31, 2000 is derived from
unaudited financial information and presented for comparison purposes
only.
(3) Includes primarily asset impairments. See Note 1 to the Consolidated
Financial Statements.
(4) Earnings (loss) per share and weighted average share amounts have been
restated to give effect to the one-for-ten reverse stock split on
August 3, 2003.
(5) For the year ended December 31, 2002, basic and diluted weighted
average shares include the effect of the conversion of the preferred
stock issued on August 13, 2002 in connection with the Midland
Recapitalization and Investment Transaction.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion presents management's discussion and analysis of
the Company's financial condition and results of operations and should be read
in conjunction with the Consolidated Financial Statements.
SUMMARY
During the year ended December 31, 2003:
- Since the Midland Transaction, Midland has provided financial,
operational, and management support to the Company. During 2003, the
Company funded operations and capital expenditures through advances
from Midland and draws against its line of credit. At December 31,
2003, the Company had $5.9 million in advances from Midland and $7.9
million outstanding under its line of credit, which is guaranteed by
Midland. The liquidity afforded by these advances from Midland was
necessary for the Company to meet its obligations and fund
operations. However, the Company has no control over whether Midland
will provide additional funding in the future and does not know
whether such additional funding will be available from Midland as
the Company requires it. If Midland does not provide such additional
funding in the future as the Company requires it, the Company could
be unable to meet its obligations, including obligations under its
line of credit, in the ordinary course of business.
- Revenue increased over last year by 68% to $55.8 million. This was
largely due to the stability afforded the Company by the Midland
Investment and Recapitalization transaction, which was completed on
August 13, 2002;
- Cost of sales exceeded revenue by $4.8 million for the year ended
December 31, 2003 caused primarily by two loss contracts and costs
of reopening the Lake Charles facility, which had been closed since
2001. The loss contracts are expected to be complete in the first
quarter of 2004.
21
- Selling, general and administrative expenses were reduced by
approximately 30% in 2003. This was achieved mainly by reducing
administrative costs in 2003 and resulted from the Company closing
several facilities in 2002, which were considered excess.
- On August 1, 2003 the shareholders of the Company approved the
increase in the number of shares of authorized common stock to
150,000,000 shares. This increase allowed Midland to convert the 738
shares of preferred stock issued in relation to the Midland
Investment and Recapitalization transaction into 73,800,000 shares
of common stock. The shareholders also approved a one-for-ten
reverse stock split, which was effected on August 3, 2003. After
giving effect to the one-for-ten reverse stock split, the number of
shares of common stock held by Midland was 7,380,000.
MIDLAND SUPPORT
Since the Midland Transaction, Midland has provided financial, operational,
and management support to the Company. Nassau Holding Company (an affiliate of
Midland) has guaranteed the Company's Senior Secured Credit Agreement with the
Whitney National Bank. Midland has provided a standby letter of credit to a
customer of the Company in support of a contract included in the Company's
backlog at December 31, 2003. The letter of credit is in the amount of $3.1
million and expires on March 31, 2004. Under an informal arrangement with the
Company, Midland has agreed to provide financial support and funding for working
capital or other needs at Midland's discretion, from time to time. During the
year ended December 31, 2003, Midland advanced $5,900,000 to the Company for
working capital, all of which was outstanding at December 31, 2003. Midland
provides accounting information system and reporting services to the Company,
including maintaining computer hardware and software to process financial
information and produce management reports, processing data associated with
those reports, assisting in report design and preparation, processing operating
and payroll checks, consulting assistance with the design and implementation of
financial reporting systems, and other related services. Included in general and
administrative expenses for the year ended December 31, 2003 is $180,000 related
to these services. This support was necessary to stabilize the financial
position and operations of the Company. The Company requires the continued
support from Midland until such time as it has sustained profitable operations
and its financial condition is stable and no longer requires this support.
IDENTIFICATION OF OPERATING SEGMENTS
Effective January 1, 2003, as a result of the Midland Recapitalization and
Investment transaction, management has evaluated the changed organizational and
reporting structure and has concluded that the Company operates three reportable
segments: the platform fabrication segment, the process systems segment and the
drilling rig fabrication segment. The platform fabrication segment fabricates
and assembles platforms and platform components for installation and use
offshore in the production, processing and storage of oil and gas. The process
systems segment designs and manufactures specialized process systems and
equipment related to the development and production of oil and gas reserves. The
drilling rig fabrication segment provides fabrication services for new
construction and repair of drilling rigs.
THE MIDLAND TRANSACTION
On August 13, 2002, the Company and Midland Fabricators and Process Systems,
LLC closed a transaction under which Midland exchanged $24.1 million outstanding
under the Company's Senior Secured Credit Agreement and $5.6 million in claims
of unsecured creditors for 738 shares of preferred stock, a secured subordinated
debenture and two secured subordinated notes in the aggregate amount of $17.5
million. The debenture, valued at $10.7 million, is convertible into the
Company's common stock at a price of $3.50 per share on a post-reverse split
basis. Midland's preferred stock was converted into a total of 7,380,000 shares
of the Company's common stock on August 1, 2003. The Company also recorded
additional capital contributions on the transaction of $3.7 million resulting
from the discount recorded on the convertible debenture, $680,000 resulting from
forgiveness by Midland of penalties accrued under the Senior Secured Credit
Agreement, and $914,000 resulting from partial forgiveness of unsecured creditor
claims acquired by Midland. On November 18, 2002, the Company entered into a
Senior Secured Credit'
22
Agreement with the Whitney National Bank, which is guaranteed by Nassau Holding
Company (an affiliate of Midland), the subsidiaries of Unifab, and the principle
members of Midland, in accordance with the terms of the Midland transaction.
RESULTS OF OPERATIONS
Overview
The Company's results of operations depend primarily on (i) the level of oil
and gas exploration and development activity of oil and gas companies in the
Gulf of Mexico, offshore West Africa, South and Central America and the Middle
East; (ii) the Company's ability to win contracts through competitive bidding or
alliance/partnering arrangements; and (iii) the Company's ability to manage
those contracts to successful completion. The level of exploration and
development activity is related to several factors, including trends of oil and
gas prices, exploration and production companies' expectations of future oil and
gas prices and changes in technology which reduce costs and improve expected
returns on investment. In addition, improvements in three-dimensional seismic,
directional drilling, production techniques and other advances in technology
have increased drilling success rates and reduced costs. Although we believe our
operations depend on these indicators, the correlation of those measures with
our revenue is not direct as to timing and level.
During the years ended December 31, 2003, 2002 and 2001, 2%, 24%, and 21%,
respectively, of the Company's revenue was derived from projects fabricated for
installation in international areas, with the remainder designed for
installation in the Gulf of Mexico.
Comparison of the Year Ended December 31, 2003 and Year Ended December 31, 2002
Revenue for the year ended December 31, 2003 increased 68% to $55.8 million
from $33.3 million for the year ended December 31 2002. Revenue increased for
the Company's platform fabrication segment and drilling rig fabrication segment
in the current year, compared to last year. This overall increase was partially
offset by decreased revenue in the process systems segment. Additionally,
decreased revenues from plant maintenance and derrick fabrication services in
the current year partially offset this increase; the Company no longer provides
these services. Backlog was approximately $7.6 million and $22.5 million at
December 31, 2003 and 2002, respectively. Throughout 2003, the level of bidding
activity was approximately 60% of the level experienced at the end of 2002.
Additionally, because of the financial difficulties experienced by the Company
prior to the Midland investment and recapitalization transaction, the Company
was not being allowed to bid on all projects. This lower level of bidding
activity increases competition for the projects being bid, which results in
lower profit expectations for those projects when they are awarded. Since the
beginning of 2004, the level of bidding activity has increased, and the Company
is again competing on bids for larger projects, which generally have fewer
qualifying bidders and offer greater opportunities for the Company to generate
profitable operating results.
Total direct labor hours worked through December 31, 2003 increased 75%
overall from the levels experienced last year. Nearly 40% of this overall
increase was attributable to the drilling rig fabrication segment, which
resulted from the reopening of the Company's facility in Lake Charles, Louisiana
in June 2003. Furthermore, direct labor hours worked at the Company's platform
fabrication and process system facilities increased by nearly 74% from the same
period last year. This increase was offset by a reduction of approximately
84,000 direct labor hours incurred in the year ended December 31, 2002 on plant
maintenance, derrick fabrication and drilling rig repair. No labor hours were
incurred associated with these types of projects in the year ended December 31,
2003.
Cost of revenue was $60.6 million and exceeded revenue by $4.8 million for
the year ended December 31, 2003. Cost of revenue was $39.3 million and exceeded
revenue by $6.0 million for the year ended December 31, 2002. Cost of revenue
consists of costs associated with the fabrication process, including direct
costs (such as direct labor costs and raw materials) and indirect costs that can
be specifically allocated to projects (such as supervisory labor, utilities,
welding supplies and equipment costs). This increase in costs of revenue
relative to revenue includes $2.2 million cost in excess of revenue on a
contract
23
to fabricate buoyancy cans and $1.4 million related to a contract to fabricate
drilling rig components. Additionally, underutilization at the Company's process
systems manufacturing facility and costs related to start up operations at the
Company's drilling rig fabrication facility increased costs per manhour, which
could not be recovered at the current pricing levels.
Gross profit (loss) for the year ended December 31, 2003 decreased to a loss
of $4.8 million from a loss of $6.0 million last year.
Selling, general and administrative expense decreased to $5.1 million in the
year ended December 31, 2003 compared to $7.2 million in the year ended December
31, 2002. This decrease is mainly due to reduced general and administrative
expenses associated with overall reductions in administrative overhead and
number of employees. Included in selling, general and administrative expense in
the year ended December 31, 2003 is $284,000 related to operations that were
shut down in 2003 and $300,000 related to the settlement of a lawsuit against
the Company. The Company's selling, general and administrative expense as a
percentage of revenue decreased to 9% in the year ended December 31, 2003 from
22% in last year.
Interest expense for the year ended December 31, 2003 was approximately the
same as last year. Lower effective interest rates in 2003 compared to 2002
reduced interest expense. This reduction was offset due to the Company
increasing outstanding debt during the year. Additionally, interest expense
includes amortization of the discount on the secured, subordinated debenture
issued to Midland of $522,000 and $200,000 in the years ended December 31, 2003
and 2002, respectively, which is being recorded as interest expense.
No net income tax benefit was recognized on the net loss recorded in the
years ended December 31, 2003 and 2002. In accordance with FAS 109, the Company
considered that it had a cumulative pre-tax loss for recent years, which must be
carried forward and used to offset future taxable income. The ability of the
Company to utilize net operating loss carryforwards is also limited on an annual
basis because the transaction with Midland resulted in a change in control under
tax regulations. At December 31, 2003, the Company has deferred tax assets of
$19.6 million, including $19.0 million related to net operating loss
carryforwards, which, if not used expire in years 2020 through 2024. The Company
has recorded a valuation allowance of $16.3 million to offset the deferred tax
asset related to the net operating loss carryforwards and other deferred tax
assets that exceed net deferred tax liabilities of the Company at December 31,
2003. The valuation allowance reflects the Company's judgment that it is more
likely than not that these deferred tax assets will not be realized. Management
will continue to assess the adequacy of the valuation allowance on a quarterly
basis.
SEGMENT INFORMATION
The Company has identified three reportable segments as required by SFAS No.
131. The following discusses the results of operations for each of those
reportable segments.
PLATFORM FABRICATION SEGMENT
Revenue for the platform fabrication segment increased $17.4 million to
$34.8 million for the year ended December 31, 2003 from $17.4 million for the
year ended December 31, 2002. Fabrication activity has increased over last year,
although bidding for projects in this segment has remained competitive, causing
lower profit margins. Direct manhours in the year ended December 31, 2003
increased 92% over last year. Segment loss was $2.9 million in the year ended
December 31, 2003 compared to a loss of $1.9 million in the year ended December
31, 2002. In the year ended December 31, 2003 a loss of $2.2 million was
recorded on a contract to fabricate buoyancy cans, which is expected to be
complete in the first quarter of 2004. Segment loss for the year ended December
31, 2003 includes $489,000 related to the repair of the roof on the Company's
main fabrication building. Savings from the reduction of administrative staff
and the consolidation of general and administrative functions reduced segment
loss in the year ended December 31, 2003.
24
PROCESS SYSTEMS SEGMENT
Revenue for the process systems segment decreased to $11.8 million in the
year ended December 31, 2003 from $12.1 million last year. The primary cause of
the decrease was the shut down of the Company's foreign subsidiary in London,
England. Revenue from this subsidiary decreased $3.6 million in the year ended
December 31, 2003 from $4.0 million in the year ended December 31, 2002. In the
year ended December 31, 2003, direct manhours at the Company's facility in New
Iberia, Louisiana increased 19% over 2002. However, revenue remained
approximately the same in both years. Segment loss decreased to $889,000 in the
year ended December 31, 2003 from $4.2 million in 2002. The reduction in segment
loss relates to the shut down of the Company's foreign subsidiary, the higher
manhour levels at the Company's facility in New Iberia in 2003, and the higher
profitability in the Company's process system contracts in 2003. Savings from
the reduction of administrative staff and the consolidation of general and
administrative functions reduced segment loss in the year ended December 31,
2003.
DRILLING RIG FABRICATION SEGMENT
Revenue for the drilling rig fabrication segment was $9.2 million in the
year ended December 31, 2003 and was $498,000 in last year. Segment loss was
$3.0 million in the year ended December 31, 2003 and $7.4 million in the year
ended December 31, 2002. The Company suspended operations in this segment prior
to the Midland investment and recapitalization transaction. In June 2003, the
Company was awarded a fixed price contract to fabricate drilling rig components,
which required the capabilities of its Lake Charles site and reopened the
facility. The Company recorded a $1.4 million loss on the contract to recognize
estimated cost overruns related primarily to inefficiencies caused by starting
up the facility and low productivity at the facility during the construction of
this initial project. At this time, the Company does not have a project to place
at the facility when the drilling rig components have been completed, and
expects to close the facility upon completion of the project.
Comparison of the Year Ended December 31, 2002 and Year Ended December 31, 2001
Revenue for the year ended December 31, 2002 decreased 59% to $33.3 million
from $81.7 million for the year ended December 31, 2001. This decrease is
primarily due to reduced barge and jack up rig repair operations and reduced
newbuild liftboat activities resulting from the closure of the Company's OBI
facilities at the Port of Iberia and the suspension of operations at its
deepwater facility in Lake Charles. Revenue levels for the Company's platform
fabrication and process system segments for the year ended December 31, 2002 are
approximately one third of revenue in those segments in the year ended December
31, 2001. Throughout the year ended December 31, 2002, the Company has
experienced reduced opportunities to bid on projects and was eliminated from
bidding on various projects as a result of the substantial deterioration of the
Company's financial condition and results of operations experienced during the
2001 fiscal year. Further, the Company was unable to post sufficient collateral
to secure performance bonds and as a result was unable to qualify to bid on
various contracts. At September 30, 2002, backlog was approximately $4.2
million. On August 13, 2002 the Company completed a debt restructuring and
recapitalization transaction with Midland significantly improving the financial
position, working capital and liquidity of the Company. Additionally, Midland
added key management personnel, who are well known and respected throughout our
industry. Since August 13, 2002, there has been a substantial increase in
bidding activity in the Company's main fabrication and process equipment
markets. In addition, the Company's capacity to provide performance bonds on
projects has improved significantly. As a result, backlog at December 31, 2002
increased to approximately $22.4 million.
Total direct labor hours worked decreased 60% overall during 2002 from the
levels experienced in 2001. Direct labor hours worked at the Company's platform
fabrication and process system fabrication facilities during 2002 decreased by
nearly 50% from 2001. Direct labor hours at the Company's drilling rig
fabrication facilities were eliminated with the suspension of operations at the
Lake Charles facility.
Cost of revenue was $39.3 million for the year ended December 31, 2002
compared to $79.2 million for the year ended December 31, 2001. Cost of revenue
consists of costs associated with the fabrication process, including direct
costs (such as direct labor costs and raw materials) and indirect costs that can
be
25
specifically allocated to projects (such as supervisory labor, utilities,
welding supplies and equipment costs). This increase in costs as a percentage of
revenue in 2002 includes a $778,000 adjustment to workers comp insurance expense
related to increased costs of claims incurred, $603,000 depreciation of
facilities and equipment at the Lake Charles facility at which operations have
been suspended and the very low level of activity at the Company's process
equipment facility which did not generate sufficient profit margin to recover
fixed operating costs. In December 2002 the Company executed contracts to
fabricate two offshore platforms and recorded estimated loss reserves on those
contracts of $441,000. These contracts were negotiated and executed during the
time when the Company's backlog was critically low. Management determined that
the severely low level of fabrication work in backlog without these contracts
would not support maintaining the skilled labor force in place, and losing that
labor force would further delay any recovery for the Company. These contracts
were completed in 2003 and are being stored at the Company's fabrication
facility. Cost of revenue for the year ended December 31, 2002 also includes a
loss provision of $194,000 recorded on a fixed price contract to fabricate power
plant components. The contract for power plant components was completed and
delivered in December 2002. Cost of revenue for the year ended December 31, 2002
also includes losses of $772,000 on contracts to provide process equipment
overseas. The contracts are expected to be completed in the second quarter of
2003. Included in cost of revenue for the year ended December 31, 2002 is an
adjustment of $550,000 related to disputed billings on two contracts to
manufacture derricks. The Company also recorded in cost of revenue a charge of
$510,000 to write off uncompleted waste water tanks.
Gross profit (loss) for the year ended December 31, 2002 decreased to a loss
of $6.0 million from a profit of $2.5 million for the year ended December 31,
2001. In addition to the adjustments to increase cost of revenue described
above, the decrease in gross profit is also due to costs in excess of revenue
for the Company's process system fabrication facility and at the Company's deep
water facility in Lake Charles. Additionally, decreased man hour levels in 2002
at the Company's facilities compared to 2001 caused hourly fixed overhead rates
to increase and resulted in increased costs relative to revenue. The effect of
these factors reducing gross profit in the year ended December 31, 2002 compared
to 2001 was offset in part by a $1.1 million contract loss reserve recorded in
2001.
Other operating expenses in the year ended December 31, 2002 include an
impairment loss of $5.1 million on the Lake Charles facility. Operating losses
incurred at the facility and the business outlook resulted in the Company
actively seeking alternative sources of capital to sustain development and
operations at the facility. By closing the Midland transaction in August 2002,
the Company was able to stabilize its overall financial condition and add
experienced management to evaluate alternatives with respect to the Lake Charles
facility. Since that time negotiations with possible joint venture partners that
would operate the facility have been continuing. In the event the Company is
unable to complete an arrangement whereby the facility can be operated, the
Company may sell the facility. In evaluating the recoverability of the
investment in the Lake Charles facility, the Company estimated net undiscounted
cash flows under both operating alternatives and disposal scenarios, and
concluded the carrying value of the facility was impaired. The Company then
estimated the fair value of the facility based on the related discounted
estimated cash flows and based on this analysis recorded an impairment loss of
$5.1 million. The impairment loss reduced the recorded net value of the facility
to its estimated fair value of $5.4 million.
Other operating expenses also include $477,000 related to the transfer of
ownership of the buildings and other leasehold improvements on the Company's
drilling rig repair facilities at the Port of Iberia in exchange for termination
of the leases and cancellation of all amounts owed under those leases. These
losses were offset in part by a $126,000 gain recorded on the sale of assets
used to provide maintenance and construction services to the chemical plant
industry in the Lake Charles area.
In the year ended December 31, 2001 other operating expenses included the
recording of $14.8 million impairment charge on goodwill, $4.8 million loss on
the disposal of equipment and the shut down of the Company's barge repair
facility in New Iberia, and the recording of $700,000 of commitment fees
associated with the Waiver and Amendment to the Company's Secured Credit
Agreement, which was executed April 2, 2001. These monthly fees were incurred as
a result of the Company being out of compliance with the terms of the Waiver and
Amendment.
26
Selling, general and administrative expense decreased to $7.2 million in the
year ended December 31, 2002 compared to $7.4 million in the year ended December
31, 2001. This decrease is mainly due to reduced general and administrative
expenses associated with closing the barge repair facilities in New Iberia and
the suspension of operations at the Lake Charles facility. These cost reductions
are offset in part with increased legal and other professional services due to
the negotiations and documentation of the Midland transaction and related
regulatory issues. In addition, the Company has had to defend several lawsuits
brought by unsecured creditors for amounts past due. Included in selling,
general and administrative expenses for the year ended December 31, 2002 is
$150,000 related to the termination and settlement of the employment contracts
of two former executive officers of the Company. The Company's selling, general
and administrative expense as a percentage of revenue increased to 21.8% in the
year ended December 31, 2002 from 9.1% in 2001, due mainly to the significant
decrease in revenue levels relative to those periods.
Interest expense for the year ended December 31, 2002 was lower than in 2001
due to reduced effective interest rates. Additionally, $10.0 million outstanding
under the Company's previous senior secured credit agreement was exchanged for
preferred stock under the terms of the Midland agreement, reducing the principal
bearing interest. This was offset in part by amortizing the discount recorded on
the secured, subordinated debenture recorded on the Midland transaction. The
Company has recorded a $3.7 million discount on the face value of the
convertible debenture, which represents the intrinsic value of the beneficial
conversion feature of the debenture and equals the difference between $0.35, the
conversion price per share, and $0.47, the closing price per share of Unifab
International, Inc. common stock on August 13, 2002, the date of issuance of the
convertible debenture. This discount is being amortized as interest expense from
August 13, 2002 to August 13, 2010, the maturity date of the debenture. In the
year ended December 31, 2002, the Company recorded $200,000 interest expense
related to amortization of this discount.
No income tax expense was recognized in the year ended December 31, 2002
compared to income tax expense of $1.3 million in the year ended December 31,
2001. In accordance with FAS 109, the Company considered that it had a
cumulative pre-tax loss for recent years, to be carried forward and used to
offset future taxable income. The ability of the Company to utilize net
operating loss carryforwards is also limited on an annual basis because the
transaction with Midland described above results in a change in control under
the current tax regulations. The Company has recorded a valuation allowance to
fully offset deferred tax assets in excess of deferred tax liabilities,
including fully reserving the deferred tax asset related to operating loss
carryforwards. The valuation allowance reflects the Company's judgment that it
is more likely than not that a portion of the deferred tax assets will not be
realized. The Company believes that the remaining deferred tax assets at
December 31, 2002 are realizable. Management will continue to assess the
adequacy of the valuation allowance.
SEGMENT INFORMATION
The following discusses the results of operations for the Company's
reportable segments.
PLATFORM FABRICATION SEGMENT
Revenue for the platform fabrication segment decreased 53%, or $19.3
million, to $17.4 million in the year ended December 31, 2002 from $36.7 million
in the year ended December 31, 2001. Segment income decreased to a loss of $1.9
million for the year ended December 31, 2002 from segment income of $1.9 million
in 2001. Segment income was reduced by $441,000 in 2002 due to loss reserves on
two structural fabrication contracts signed in December 2002, and $194,000 on a
fixed price contract to fabricate components for a power plant, described above.
Direct manhours in the year ended December 31, 2002 decreased to 50% of the
direct manhours in 2001. This decrease in manhours and the low profitability in
the Company's platform fabrication contracts resulted in the Company being
unable to cover fixed costs at the fabrication facility in the 2002 period,
which increased the segment loss.
PROCESS SYSTEMS SEGMENT
Revenue for the process systems segment was $12.1 million for the year ended
December 31, 2002, a decrease of $14.2 million or 54% from the year ended
December 31, 2001. Segment loss increased from
27
$4.1 million in the year ended December 31, 2001 to $4.2 million in the year
ended December 31, 2002. Segment loss increased in the year ended December 31,
2002 from contract losses of $772,000 on contracts to provide process equipment
overseas. Direct manhours decreased in the year ended December 31, 2002 to 51%
of the direct manhours in 2001. This decrease in manhours and the low
profitability in the Company's process systems contracts resulted in the Company
being unable to cover fixed costs at the fabrication facility in the 2002
period, which increased the segment loss. In the year ended December 31, 2001,
the process system segment loss increased due to an impairment charge on
goodwill of $3.1 million.
DRILLING RIG FABRICATION SEGMENT
Revenue for the drilling rig fabrication segment decreased to $498,000 in
the year ended December 31, 2002 from $5.3 million in 2001. The decrease in
segment revenue was due to the Company suspending operations in this segment
prior to the Midland investment and recapitalization transaction. Segment loss
increased to a loss of $7.4 million for the year ended December 31, 2002 from a
loss of $5.1 million in 2001. Segment loss in the year ended December 31, 2002
increased from an impairment loss of $5.1 million on the Lake Charles facility,
described above, and from $578,000 depreciation expense related to the closed
facility in Lake Charles. In the year ended December 31, 2001, the drilling rig
fabrication segment loss increased due to an impairment charge on goodwill of
$5.6 million. The Company is currently developing plans to reenter this market.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company has funded its business activities through funds
generated from operations, short-term borrowings on its revolving credit
facilities for working capital needs and individual financing arrangements for
equipment, facilities improvements, insurance premiums, and long-term needs.
During the year ended December 31, 2003, the Company's available funds and $11.8
million generated from financing activities together funded cash used in
operations of $10.6 million and investing activities of $1.2 million, primarily
capital expenditures.
Under an informal arrangement with the Company, Midland has agreed to
provide financial support and funding for working capital or other needs at
Midland's discretion, from time to time. During the year ended December 31,
2003, Midland advanced $5.9 million, which the Company used for working capital
during the period. At December 31, 2003 these advances were outstanding. The
liquidity afforded by these advances from Midland was necessary for the Company
to meet its obligations and fund operations. However, the Company has no control
over whether Midland will provide additional funding in the future and does not
know whether such additional funding will be available from Midland as the
Company requires it. If Midland does not provide such additional funding in the
future as the Company requires it, the Company could be unable to meet its
obligations, including obligations under the Credit Agreement, in the ordinary
course of business. The Company requires the continued support from Midland
until such time as it has sustained profitable operations and its financial
condition is stable and no longer requires this support
On November 18, 2002, the Company entered into a Commercial Business Loan
with Whitney National Bank (the "Credit Agreement"), guaranteed by Nassau
Holding Company, an affiliate of Midland, the subsidiaries of Unifab, and the
principle members of Midland and secured by all of the assets of the Company,
which provides for up to $8.0 million in borrowings for working capital
purposes, including up to $2.0 million in letters of credit under a revolving
credit facility. At December 31, 2003, the Company had $7.9 million in
borrowings and $3,000 letters of credit outstanding under the revolving credit
facility. Borrowings under the Credit Agreement bear interest at Libor plus
1.75% or the Prime rate (2.9% at December 31, 2003), at the Company's
discretion. The Credit Agreement matures January 31, 2005. At December 31, 2003,
the Company had other letters of credit outstanding totaling $110,000, which
were secured by cash deposits totaling $115,000.
The table below sets out the cash contractual obligations of the Company.
The operating leases are not recorded as liabilities on the balance sheet, but
payments are treated as an expense as incurred. Each contractual obligation
included in the table contains various terms, conditions, and covenants which,
if violated, accelerate the payment of that obligation. The operating lease
obligations primarily relate to the
28
Company's operating facilities:
Payment due by year
---------------------------------------------------------------
Beyond
Total 2004 2005 2006 2007 2008 2008
--------- -------- -------- -------- -------- -------- --------
(In thousands)
Operating lease
obligations $ 9,981 $ 692 $ 692 $ 692 $ 692 $ 692 $ 6,521
Long-term debt 14,731 6,829 7,902 -- -- -- --
Secured, subordinated
notes payable 6,848 -- 2,139 4,709 -- -- --
Secured, subordinated,
convertible debenture 10,652 -- -- -- 2,130 2,130 6,392
--------- -------- -------- -------- -------- -------- --------
$ 42,212 $ 7,521 $ 10,733 $ 5,401 $ 2,822 $ 2,822 $ 12,913
========= ======== ======== ======== ======== ======== ========
Capital expenditures for the year ended December 31, 2003 included $677,000
related to machinery, equipment and other assets used at the fabrication yard in
Lake Charles, which was reopened in June 2003, $297,000 related to compressors
being fabricated by the Company, which will be leased upon completion. The
remaining capital expenditures related to facility improvements, yard equipment
and computer equipment.
In the normal course of its business activities, the Company is required to
provide letters of credit to secure performance. At December 31, 2003, cash
deposits totaling $115,000 secured outstanding letters of credit totaling
$110,000. In addition, at December 31, 2003 the Company had letters of credit
totaling $3,000 outstanding, which were issued under its Credit Agreement.
Management believes that additional funds available from Midland under the
informal arrangement described above are necessary to fund its working capital
needs and planned capital expenditures for the next 12 months. However,
Management has no control over whether Midland will provide additional funding
in the future and does not know whether such additional funding will be
available from Midland as the Company requires it. If Midland does not provide
such additional funding in the future as the Company requires it, the Company
could be unable to meet its obligations, including obligations under the Credit
Agreement, in the ordinary course of business.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations," requires the recording of liabilities for all
legal obligations associated with the retirement of long-lived assets that
result from the normal operation of those assets. These liabilities are required
to be recorded at their fair values (which are likely to be the present values
of the estimated future cash flows) in the period in which they are incurred.
SFAS No. 143 requires the associated asset retirement costs to be capitalized as
part of the carrying amount of the long-lived asset. The asset retirement
obligation will be accreted each year through a charge to expense. The amounts
added to the carrying amounts of the assets will be depreciated over the useful
lives of the assets. The implementation of SFAS No. 143 did not have a material
impact on the Company's consolidated financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized at fair value
when the liability is incurred rather than at the date a plan is committed to.
The provisions of this statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The implementation of SFAS No. 146
did not have a material impact on the Company's consolidated financial position
or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires that companies that control another entity through interests
other than voting interests should consolidate the controlled entity. FIN 46
29
applies to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. The adoption of FIN 46 did not have a material impact on the Company's
consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is effective for contracts entered into or modified after September 30,
2003. The adoption of FAS No. 149 did not have a significant effect on the
Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 also addresses questions about the classification of certain financial
instruments that embody obligations to issue equity shares. The provisions of
SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003. The adoption of FAS No. 150 did not have a significant
effect on the Company's consolidated financial position or results of
operations.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers'
Disclosures About Pension and Other Postretirement Benefits." SFAS No. 132
replaces the original SFAS No. 132 and revises employers' disclosure about
pension plans and other postretirement benefit plans to require more information
about the economic resources and obligations of such plans. SFAS No. 132
(Revised 2003) is effective for financial statements of public companies for
fiscal years ending after December 15, 2003. The Company does not expect the
adoption of SFAS No. 132 (Revised 2003) will have a material impact on its
consolidated financial position or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to revenue recognition and
long-lived assets. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its consolidated financial statements.
Revenue from construction contracts, which are typically of short duration,
are recognized on the percentage-of-completion method, measured by relating
actual labor hours for work performed to date to the estimated total labor hours
of the respective contract. Contract costs include all direct material and labor
costs and those indirect costs related to contract performance, such as indirect
labor, supplies, and repairs. Provisions for estimated losses, if any, on
uncompleted contracts are made in the period in which such losses are
determined. Significant changes in cost estimates due to adverse market
conditions or poor contract performance could affect estimated gross profit,
possibly resulting in a contract loss.
The Company's customers are principally major and large independent oil and
gas companies and drilling companies. These concentrations of customers may
impact our overall exposure to credit risk, either positively or negatively, in
that our customers may be similarly affected by changes in economic or other
conditions. Reserves for uncollectible accounts receivable are evaluated
periodically against specific accounts that are known to be uncollectible.
Increases in the reserves for uncollectible accounts are charged
30
to operating results in the period they are identified. Receivables are
generally not collateralized. Significant adverse changes in the economic
environment of the oil and gas industry could result in materially lower
collectibility of recorded receivables and could require a charge for
uncollectible accounts in the future.
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company assesses the recoverability of
long- lived assets by determining whether the carrying values can be recovered
through projected net cash flows undiscounted, based on expected operating
results over their remaining lives. If impairment is indicated, the asset is
written down to its fair market value, or if fair market value is not readily
determinable, to its estimated discounted net cash flows. Future adverse market
conditions or poor operating results could result in the inability to recover
the current carrying value of the long-lived asset, thereby possibly requiring
an impairment charge in the future.
Income taxes have been provided using the liability method. Deferred income
taxes reflect the net effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The amount of future income tax assets
recognized is limited to the amount of benefit that is more likely than not to
be realized. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or the entire
deferred tax asset will not be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversals of deferred tax liabilities, the
likelihood of future taxable income and tax planning strategies when making this
assessment. Based on this assessment, the Company records a valuation allowance
against deferred tax assets that are more likely than not unrealizable. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the future if taxable income is not available to allow for the
deduction of the deferred tax assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the risk of changing interest rates and foreign
currency exchange rate risks. The Company does not use derivative financial
instruments to hedge the interest or currency risks. Interest on approximately
$29.3 million, substantially all of the Company's debt, was variable, based on
short-term interest rates. A general increase of 1.0% short-term market interest
rates would result in additional interest cost of $293,000 per year if the
Company were to maintain the same debt level and structure.
The Company has a subsidiary located in the United Kingdom for which the
functional currency is the British Pound. The subsidiary is being liquidated,
and therefore there are no operations at December 31, 2003. However, the
liquidation proceeds are held in British Pounds pending the resolution of the
liquidation and final distribution of the proceeds, if any. The Company
typically does not hedge its foreign currency exposure. Historically,
fluctuations in British Pound/US Dollar exchange rates have not had a material
effect on the Company. Future changes in the exchange rate of the US Dollar to
the British Pound may positively or negatively impact the final amount
distributed; however, the Company does not anticipate its exposure to foreign
currency rate fluctuations to be material in 2003.
While the Company does not currently use derivative financial instruments,
it may use them in the future if deemed appropriate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In this report, the consolidated financial statements and supplementary data
of the Company appear on pages F-1 through F-28 and are incorporated herein by
reference. See Index to Consolidated Financial Statements on Page 33.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out
an evaluation under the supervision of and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and implementation of its
disclosure controls and procedures. Based on and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company, including its
consolidated subsidiaries, required to be included in reports the Company files
with or submits to the Securities and Exchange Commission under the Securities
Act of 1934.
There have been no significant changes in the Company's internal control
over financial reporting or in other factors during the fourth quarter of fiscal
year 2003 that have materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information concerning the Company's directors and executive
officers in response to Item 10 will be included in the Company's definitive
Proxy Statement for its 2004 annual meeting of shareholders and is incorporated
herein by reference. For additional information regarding executive officers of
the Company, see "Executive Officers of the Registrant" in Part I of this
report. For additional information regarding executive officers of the Company,
see "Executive Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation of the Company in response to
Item 11 will be included in the Company's definitive Proxy Statement for its
2004 annual meeting of shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information concerning security ownership of certain beneficial owners and
management in response to Item 12 will be included in the Company's definitive
Proxy Statement for its 2004 annual meeting of shareholders and is incorporated
herein by reference. For equity compensation plan information, see Item 5 of
this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions in
response to Item 13 will be included in the Company's definitive Proxy Statement
for its 2004 annual meeting of shareholders and is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information concerning principal accountant fees and services in response to
Item 14 will be included in the Company's definitive Proxy Statement for its
2004 annual meeting of shareholders and is incorporated herein by reference.
32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following financial statements, financial statement schedules and
exhibits are filed as part of this report:
(i) Financial Statements
PAGE
------
Reports of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2003,
2002 and 2001 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December
31, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003,
2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7
(ii) Financial Statements
Other financial statement schedules have not been included because they
are not required, not applicable, immaterial or the information required has
been included elsewhere.
(iii) Exhibits
The Exhibit Index on page E-1 is incorporated herein. The Company will
furnish to any eligible shareholder, upon written request, a copy of any exhibit
listed upon payment of a reasonable fee equal to the Company's expenses in
furnishing such exhibit. Such requests should be addressed to Mr. Martin Bech,
UNIFAB International, Inc., P.O. Box 11308, New Iberia, LA 70562.
(b) Reports on Form 8-K.
On March 4, 2004, we filed a current report on Form 8-K dated March 3,
2004. The report included Item 5 and was filed regarding the trading activity in
the Company's common stock.
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
UNIFAB International, Inc.
New Iberia, Louisiana
We have audited the accompanying consolidated balance sheets of UNIFAB
International, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of UNIFAB International, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is experiencing difficulty in generating
sufficient cash flow to meet its obligations and sustain its operations. The
Company's recurring losses from operations, negative working capital position,
and difficulties in meeting its financial obligations and funding its operations
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" in 2002.
/s/ DELOITTE & TOUCHE LLP
New Orleans, Louisiana
March 29, 2004
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
UNIFAB International, Inc.
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of UNIFAB International, Inc. for the year ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of its operations and its cash
flows for the year ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming UNIFAB
International, Inc. will continue as a going concern. As more fully described in
Note 2, the Company has incurred recurring operating losses and has a working
capital deficiency. These conditions 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 financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
New Orleans, Louisiana
April 9, 2002, except for Note 16, as to which the date is July 3, 2003, and
except for Note 7, as to which the date is August 3, 2003
F-2
UNIFAB INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2003 2002
-------- --------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 10 $ 80
Accounts receivable, net 11,411 7,517
Costs and estimated earnings in excess of billings on uncompleted contracts 1,287 2,297
Income tax receivable 147 305
Prepaid expenses and other assets 1,441 1,873
-------- --------
Total current assets 14,296 12,072
Property, plant and equipment, net 25,223 26,221
Other assets 700 986
-------- --------
Total assets $ 40,219 $ 39,279
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,782 $ 5,056
Billings in excess of costs and estimated earnings on uncompleted contracts 875 14
Accrued liabilities 2,454 2,163
Contract loss reserves 697 1,148
Notes payable to Midland 5,900 --
Current maturities of long-term debt 929 850
-------- --------
Total current liabilities 15,637 9,231
Long-term debt, less current maturities 7,902 2,090
Secured, subordinated notes payable 6,848 6,848
Secured, subordinated convertible debenture, net of unamortized discount of
$2,931 and $3,452 in 2003 and 2002, respectively 7,721 7,200
-------- --------
Total liabilities 38,108 25,369
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized, no shares outstanding
in 2003, 738 shares outstanding in 2002, each share has voting rights
equivalent to and is convertible into 100,000 shares of common stock -- --
Common stock, $0.01 par value, 150,000,000 shares authorized, 8,201,899 shares
outstanding at December 31, 2003 and 20,000,000 shares authorized and 82 82
8,189,972 shares outstanding at December 31, 2002
Additional paid-in capital 62,076 62,076
Accumulated deficit (60,047) (48,212)
Accumulated other comprehensive loss -- (36)
-------- --------
Total shareholders' equity 2,111 13,910
-------- --------
Total liabilities and shareholders' equity $ 40,219 $ 39,279
======== ========
See accompanying notes.
F-3
UNIFAB INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
Revenue $ 55,774 $ 33,286 $ 81,733
Cost of revenue 60,618 39,260 79,244
-------- -------- --------
Gross profit (loss) (4,844) (5,974) 2,489
Impairment of Lake Charles facility - 5,074 -
Impairment of goodwill - - 14,786
Loss on disposal of equipment and closure of facilities - 351 4,790
Commitment fees - - 700
Selling, general and administrative expense 5,051 7,242 7,417
-------- -------- --------
Loss from operations (9,985) (18,641) (25,204)
Other income (expense):
Interest expense (1,951) (1,894) (2,794)
Interest income 11 18 33
-------- -------- --------
Loss before income taxes (11,835) (20,517) (27,965)
Income tax provision - - 1,316
-------- -------- --------
Net loss $(11,835) $(20,517) $(29,281)
======== ======== ========
Basic and diluted loss per share (a) $ (1.44) $ (5.59) $ (36.02)
======== ======== ========
Basic and diluted weighted average shares outstanding (a) 8,200 3,670 814
======== ======== ========
(a) All earnings (loss) per share and weighted average number of shares
outstanding have been restated to give effect to a one-for-ten reverse
stock split on August 3, 2003.
See accompanying notes.
F-4
UNIFAB INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK (a) PREFERRED STOCK ADDITIONAL OTHER COMPREHENSIVE
------------------- -------------------- PAID-IN ACCUMULATED COMPREHENSIVE INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) TOTAL (LOSS)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Balance at December 31,
2000 814 $ 8 - $ - $ 46,713 $ 1,586 $ (390) $ 47,990
Stock issued:
Stock awards 4 - - - 66 - - 67
Stock options exercised 1 - - - 51 - - 51
Net loss - - - - - (29,281) - (29,281) $(29,281)
Currency translation
adjustment - - - - - - 306 306 306
--------
Comprehensive loss - - - - - - - - $(28,975)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31,
2001 819 8 - - 46,830 (27,695) (84) 19,133
Midland investment
transaction: (see Note 2)
Issuance of convertible,
preferred stock - - 1 - 10,000 - - 10,000
Discount on secured,
subordinated debenture
for beneficial conversion
feature - - - - 3,652 - - 3,652
Forgiveness of accrued
penalties - - - - 680 - - 680
Forgiveness of unsecured
creditor claims - - - - 914 - - 914
Net loss - - - - - (20,517) - (20,517) $(20,517)
Currency translation
adjustment - - - - - - 48 48 48
--------
Comprehensive loss - - - - - - - - $(20,469)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31,
2002 819 8 1 - 62,076 (48,212) (36) 13,910
Conversion of preferred
stock 7,380 74 (1) - - - - -
One-for-ten reverse stock
split 1 - - - - - - -
Net loss - - - - - (11,835) - (11,835) $(11,835)
Currency translation
adjustment - - - - - - 36 36 36
--------
Comprehensive loss - - - - - - - - $(11,799)
-------- -------- -------- -------- -------- -------- -------- -------- --------
8,200 $ 82 - $ - $ 62,076 $(60,047) $ - $ 2, 111
======== ======== ======== ======== ======== ======== ======== ========
(a) All amounts related to common stock outstanding have been restated to
give effect to a one-for-ten reverse stock split on August 3, 2003.
See accompanying notes.
F-5
UNIFAB INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(11,835) $(20,517) $(29,281)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 2,214 2,700 2,604
Amortization of goodwill - - 450
Provision for doubtful accounts - 913 33
Amortization of discount on secured, subordinated convertible
debenture 521 200 -
Impairment charge on Lake Charles facility - 5,074 -
Impairment charge on goodwill - - 14,786
Loss on disposal of equipment and closure of facilities - 351 -
Deferred income taxes - - 1,316
Changes in operating assets and liabilities:
Accounts receivable (3,894) 6,169 169
Net costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings on
uncompleted contracts 1,871 2,143 (4,086)
Prepaid expenses and other assets 932 5,164 6,688
Accounts payable and accrued liabilities (434) (4,873) 7,227
-------- -------- --------
Net cash used in operating activities (10,625) (2,676) (94)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (1,306) (1,194) (2,293)
Proceeds from sale of equipment - 130 90
Collections on notes receivable 70 27 -
-------- -------- --------
Net cash used in investing activities (1,236) (1,037) (2,203)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable to Midland 11,800 2,815 -
Payments of notes payable to Midland (5,900)
Proceeds from advances on long-term debt 16,588
Payments of advances on long-term debt (10,776)
Net change in other short-term borrowings 79 224 1,996
Exercise of stock options - - 51
-------- -------- --------
Net cash provided by financing activities 11,791 3,039 2,047
-------- -------- --------
Net change in cash and cash equivalents (70) (674) (250)
Cash and cash equivalents at beginning of year 80 754 1,004
-------- -------- --------
Cash and cash equivalents at end of year $ 10 $ 80 $ 754
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Income taxes $ (158) $ (3,766) $ -
======== ======== ========
Interest $ 1,110 $ 1,668 $ 1,944
======== ======== ========
Non cash activities:
Midland Recapitalization and Investment Transaction (Note 2)
See accompanying notes.
F-6
UNIFAB INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
UNIFAB International, Inc. (the Company) fabricates and assembles jackets,
decks, topside facilities, quarters buildings, drilling rigs and equipment for
installation and use offshore in the production, processing and storage of oil
and gas. Through a wholly owned subsidiary, Allen Process Systems, LLC, the
Company designs and manufactures specialized process systems such as oil and gas
separation systems, gas dehydration and treatment systems, and oil dehydration
and desalting systems, and other production equipment related to the development
and production of oil and gas reserves. Compression Engineering Services, Inc.
(CESI), a division of Allen Process Systems, LLC, provides compressor project
engineering from inception through commissioning, including project studies and
performance evaluation of new and existing systems, on-site supervision of
package installation, and equipment sourcing and inspection. The Company's main
fabrication facilities are located at the Port of Iberia in New Iberia,
Louisiana. Through a newly-formed, wholly-owned subsidiary, Rig Port Services,
LLC, the Company provides repair, refurbishment and conversion services for oil
and gas drilling rigs at its deep-water facility in Lake Charles, Louisiana.
The operating cycle of the Company's contracts is typically less than one
year, although some large contracts may exceed one year's duration. Assets and
liabilities have been classified as current and noncurrent under the operating
cycle concept, whereby all contract-related items are regarded as current
regardless of whether cash will be received within a 12-month period. At
December 31, 2003 and 2002, it was anticipated that substantially all contracts
in progress, and receivables associated therewith, would be completed and
collected within a 12-month period.
THE MIDLAND RECAPITALIZATION AND INVESTMENT TRANSACTION
As more fully described in Note 2, below, on August 13, 2002 the Company and
Midland Fabricators and Process Systems, LLC ("Midland") closed a transaction
under which Midland exchanged $24.1 million outstanding under the Company's
Senior Secured Credit Agreement and $5.6 million in acquired claims of unsecured
creditors for 738 shares of our preferred stock, a secured subordinated
convertible debenture in the amount of $10.7 million and two secured
subordinated notes which total in the aggregate $6.8 million. The debenture is
convertible into the Company's common stock at a price of $3.50 per share on a
post reverse split basis. Midland's 738 shares of preferred stock was converted
into a total of 7,380,000 shares of the Company's common stock on August 3,
2003. The Company also recorded additional paid in capital on the transaction of
$3.7 million resulting from the discount recorded on the secured subordinated
convertible debenture, and capital contributions of $680,000 resulting from
forgiveness by Midland of penalties accrued under the Senior Secured Credit
Agreement and $914,000 resulting from partial forgiveness of the unsecured
creditor claims acquired by Midland. Further, $675,000 of the amount the Company
owed Midland under the Company's Senior Secured Credit Agreement was cancelled
in exchange for the assignment to Midland of certain accounts receivable. On
November 18, 2002, the Company entered into a commercial business loan with the
Whitney National Bank, as more fully described in Note 5 to the financial
statements. This loan is guaranteed by Nassau Holding Company, an affiliate of
Midland, the subsidiaries of Unifab, and the principle members of Midland, in
accordance with the terms of the Midland transaction.
F-7
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE AND COST RECOGNITION
Revenue from fixed-price contracts is recognized on the
percentage-of-completion method. In the case of long-term contracts extending
over one or more fiscal years, revisions of the cost and profit estimated during
the course of the work are reflected in the accounting period in which the facts
that require revision become known. At the time a loss on a contract becomes
known, the entire amount of the ultimate loss is accrued. Variations from
estimated contract performance could result in a material adjustment to
operating results for any fiscal year. Revenue from time and material contracts
and cost-plus-fee contracts are recognized on the basis of costs incurred during
the period plus mark up or fees earned.
The Company measures progress toward completion on fixed price contracts by
comparing labor hours to date against total estimated labor hours. The Company
believes this measure accurately reflects physical progress on contracts and is
an appropriate, objective measure of progress on contracts.
Contract costs include direct labor, material, subcontract costs and
allocated indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred.
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 amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated lives of the assets,
which range from 19 to 31 years for building and bulkhead and 3 to 12 years for
yard and other equipment, for financial statement purposes and by accelerated
methods for income tax purposes.
Amortization of leasehold improvements is provided using the straight-line
method over the estimated useful lives of the assets or over the terms of the
lease, whichever is shorter.
GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS ") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. In accordance with SFAS
No. 142, the Company discontinued the amortization of goodwill upon the adoption
of this statement on January 1, 2002. A reconciliation of previously reported
net loss and loss per share to the amounts adjusted for the exclusion of
goodwill amortization net of tax follows:
F-8
Year ended December 31,
2003 2002 2001
-------- -------- --------
Reported net loss $(11,835) $(20,517) $(29,281)
Add: Goodwill amortization, net of
tax - - 437
-------- -------- --------
Adjusted net loss $(11,835) $(20,517) $(28,844)
======== ======== ========
Reported net loss per share, basic
and diluted $ (1.44) $ (5.59) $ (36.02)
Add Goodwill amortization net of tax,
per basic and diluted share - - 0.54
-------- -------- --------
Adjusted loss per share, basic and
diluted $ (1.44) $ (5.59) $ (35.48)
======== ======== ========
Basic and diluted weighted average
shares outstanding 8,200 3,670 814
======== ======== ========
Prior to adopting SFAS 142, the Company assessed goodwill for impairment in
accordance with Financial Accounting Standards Board (FASB) Statement No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (SFAS 121). Under those rules, goodwill associated with assets
acquired in a purchase business combination is included in impairment
evaluations when events or circumstances exist that indicate the carrying
amounts of those assets may not be recoverable. Under this approach, the
carrying value of goodwill would be reduced if it is probable that management's
best estimate of future operating income before amortization would be less than
the carrying amount of goodwill over the remaining amortization period. In the
September 2001 quarter, the Company recorded a charge of $14.8 million
recognizing the impairment of substantially all of the goodwill on the
acquisitions of OBI, Unifab International West and Allen Process Systems
Limited. Due to the economic conditions in the oil and gas services industry,
the delay in the expected recovery to profitable operations and the decision to
close the Company's barge repair facility in New Iberia, the Company evaluated
the likelihood that goodwill would be recovered. Based on this evaluation, the
Company determined that goodwill was impaired and recorded an impairment charge
of $14.8 million. The Company's evaluation of the recovery of goodwill was based
on estimated future cash flows related to the associated businesses. The write
down was to fair value of the related businesses based on discounted cash flows
or the estimated fair value of certain facilities.
The carrying amount of goodwill, which is entirely attributable to the
Company's June 24, 1999 acquisition of Compression Engineering Services, Inc.,
is approximately $260,000 as of December 31, 2003 and 2002, and is included in
Other Assets on the balance sheet.
INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Deferred income taxes are provided for the tax effect of temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements at the enacted statutory rate to be in effect when the
taxes are paid.
STOCK BASED COMPENSATION
The Company uses the intrinsic value method of accounting for employee-based
compensation prescribed by Accounting Principles Board ("APB") Opinion No. 25
and, accordingly, follows the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages the use of fair value based method of
accounting for compensation expense associated with stock option and similar
plans. However, SFAS No. 123 permits the continued use of the intrinsic value
based method prescribed by Opinion No. 25 but requires additional disclosures,
including pro forma calculations of net
F-9
earnings and earnings per share as if the fair value method of accounting
prescribed by SFAS No. 123 had been applied.
Had compensation cost for the Company's stock plans been determined based on
the fair value at the grant dates consistent with the method of SFAS No. 123,
the Company's net income and net income per share amounts would have
approximated the following pro forma amounts (in thousands, except per share
data):
YEAR ENDED DECEMBER 31
2003 2002 2001
---------- ---------- ----------
Net loss, as reported $ (11,835) $ (20,517) $ (29,281)
Add: Total stock-based employee compensation
expense included in reported net loss, net of
related tax effects - - -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (22) (302) (586)
---------- ---------- ----------
Pro forma net loss $ (11,857) $ (20,819) $ (29,867)
========== ========== ==========
Loss per share
Basic and diluted, as reported $ (1.45) $ (5.59) $ (36.02)
========== ========== ==========
Basic and diluted, pro forma $ (1.45) $ (5.67) $ (36.74)
========== ========== ==========
Weighted average fair value of grants $ 2.05 $ 2.10 $ 8.22
========== ========== ==========
Black-Scholes option pricing model assumptions:
Year Ended December 31
2003 2002 2001
------------- ------- --------------
Risk-free interest rate 1.50% to 1.82% 2.22% 2.77% to 6.28%
Volatility factor of the expected market price
of UNIFAB stock 1.042-1.747 1.042 .722-.907
Weighted average expected life of the
option 2 years 2 years 2 years
Expected dividend yield - - -
LONG-LIVED ASSETS
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144). SFAS 144 promulgates standards for measuring and recording impairments of
long-lived assets. Additionally, this standard establishes requirements for
classifying an asset as held for sale, changes existing accounting and reporting
standards for discontinued operations and exchanges for long-lived assets. The
Company implemented SFAS No. 144 on January 1, 2002, as required.
During 2002 the Company recorded an impairment loss of $5.1 million on the
Lake Charles facility. Operating losses incurred at the facility and the outlook
of that business resulted in the Company actively seeking alternative sources of
capital to sustain development and operations at the facility. By closing the
Midland transaction in August 2002, the Company was able to stabilize its
overall financial condition and add experienced management to evaluate
alternatives with respect to the Lake Charles facility. In evaluating the
recoverability of the investment in the Lake Charles facility, the Company
estimated net undiscounted cash flows under both operating alternatives and
disposal scenarios, and concluded the carrying value of the facility was
impaired. The Company then estimated the fair value of the facility based on the
related discounted estimated cash flows and, based on this analysis, recorded an
F-10
impairment loss of $5.1 million. The impairment loss reduced the recorded net
value of the facility to its estimated fair value of $5.4 million. During 2003
the facility was reopened and operated. Through December 31, 2003, operations at
the facility had not generated a gross profit. Additionally, at December 31,
2003, the Company did not have a project to place at the facility when the
current project has been completed, and expects to close the facility upon
completion of the project. In the event the company is unable to operate the
facility profitably, the Company may again close the facility, sell the
facility, or seek a partner to operate the facility.
EARNINGS PER SHARE
Basic net income (loss) per share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net income per
share uses the weighted average number of common shares outstanding adjusted for
the incremental shares attributed to dilutive outstanding options and warrants
to purchase common stock and securities convertible into shares of common stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including cash,
receivables and payables approximate fair market value due to their short-term
nature. The Company's long-term debt at December 31, 2003 and 2002 consists
principally of a revolving credit agreement, secured subordinated notes payable,
and a secured subordinated convertible debenture. The terms of each of these
instruments were negotiated during the latter part of 2002 in arm's length
transactions and provide for variable interest rates. In addition the Company's
credit worthiness and common stock price have not changed significantly since
the instruments were issued. Accordingly, the carrying value of the Company's
long-term debt is considered to approximate fair value at December 31, 2003 and
2002.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," requires the recording of liabilities for all
legal obligations associated with the retirement of long-lived assets that
result from the normal operation of those assets. These liabilities are required
to be recorded at their fair values (which are likely to be the present values
of the estimated future cash flows) in the period in which they are incurred.
SFAS No. 143 requires the associated asset retirement costs to be capitalized as
part of the carrying amount of the long-lived asset. The asset retirement
obligation will be accreted each year through a charge to expense. The amounts
added to the carrying amounts of the assets will be depreciated over the useful
lives of the assets. The implementation of SFAS No. 143 did not have a material
impact on the Company's consolidated financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized at fair value
when the liability is incurred rather than at the date a plan is committed to.
The provisions of this statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The implementation of SFAS No. 146
did not have a material impact on the Company's consolidated financial position
or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires that companies that control another entity through interests
other than voting interests should consolidate the controlled entity. FIN 46
applies to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. The adoption of FIN 46 did not have a material impact on the Company's
consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is effective for contracts entered into or modified after September 30,
2003. The adoption of FAS No. 149 did not have a significant effect on the
Company's consolidated financial position or results of
F-11
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 also addresses questions about the classification of certain financial
instruments that embody obligations to issue equity shares. The provisions of
SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003. The adoption of FAS No. 150 did not have a significant
effect on the Company's consolidated financial position or results of
operations.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers'
Disclosures About Pension and Other Postretirement Benefits." SFAS No. 132
replaces the original SFAS No. 132 and revises employers' disclosure about
pension plans and other postretirement benefit plans to require more information
about the economic resources and obligations of such plans. SFAS No. 132
(Revised 2003) is effective for financial statements of public companies for
fiscal years ending after December 15, 2003. The Company does not expect the
adoption of SFAS No. 132 (Revised 2003) will have a material impact on its
consolidated financial position or results of operations.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform with
the presentation at December 31, 2003.
2. CURRENT MATTERS AND THE MIDLAND TRANSACTION
CURRENT MATTERS
Prior to and since the initiation of the Midland Recapitalization and
Investment Transaction in April 2002, described more fully below, the Company
has been incurring losses from operations. In response to this situation, the
Company has eliminated noncore businesses and excess facilities, reduced
overhead and restructured its management team and operations in an effort to
return to profitability. In the year ended December 31, 2003, the Company
incurred a net loss of $11.8 million, including $2.2 million related to drilling
rig fabrication start up operations in Lake Charles, $2.2 million related to a
contract to fabricate buoyancy cans, $270,000 related to the winding down of non
core operations, and $605,000 related to the Company's process systems
fabrication facility which was underutilized. Also included in the net loss for
the year ended December 31, 2003 are selling, general and administrative
expenses of $5.1 million and interest expense of $2.0 million. Current pricing
for the Company's services and the level of utilization of the Company's main
fabrication facilities have not resulted in operating profits sufficient to
cover these costs.
The Company continues to bid and win contracts and invest capital in
facilities and equipment. In June 2003 the Company added new management at its
drilling rig fabrication facility. In October 2003, the Company changed
management at its platform fabrication and process systems facilities, and
organized them both under one president. These new managers are restructuring
the project management processes and controls throughout the Company and are
revising the responsibility and reporting channels. The Company continues to
review operations, facilities, costs and business opportunities in an attempt to
return to profitability.
The Company has renewed the Credit Agreement, with Midland's continuing
guarantee, and has extended the maturity to January 31, 2005. As a result, the
liability has been classified as noncurrent at December 31, 2003. Under an
informal arrangement with the Company, Midland has agreed from time to time to
provide financial support and funding for working capital or other needs at
Midland's discretion. During the year ended December 31, 2003, Midland advanced
$5.9 million to the Company for working capital, which is classified as a
current liability at December 31, 2003. As a result of classifying these
advances from Midland as a current liability, the Company has a working capital
deficit of $1,341,000 at December 31, 2003. The liquidity afforded by these
advances from Midland was necessary for the Company to meet its obligations and
fund operations. Management believes that additional funds available from
Midland under the informal arrangement described above are necessary to fund its
working capital needs and planned capital expenditures for the next 12 months.
However, the Company has no control over whether Midland will provide additional
funding in the future and does not know whether such additional funding will be
available from Midland as the Company requires it.
F-12
If Midland does not make available such additional funding to the Company when
needed in the future, the Company could be unable to satisfy its working capital
requirements and meet its obligations, including obligations under the Credit
Agreement, in the ordinary course of business. The Company requires the
continued support from Midland until such time as it has sustained profitable
operations and its financial condition is stable and no longer requires this
support.
If the Company is unsuccessful in its efforts to return to profitability or
obtain necessary capital from Midland as needed, it may not be able to meet its
obligations in the ordinary course of business. The Company must experience a
marked improvement in 2004 in order to remain a going concern. The financial
statements 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.
MIDLAND RECAPITALIZATION AND INVESTMENT TRANSACTION
During 2001, the Company's results of operation and financial condition
deteriorated dramatically. In significant ways, the Company's declining
financial condition impacted its ability to compete for contracts and labor, two
important ingredients in the Company's historic profitability. At December 31,
2001, the Company had a working capital deficit caused by the reclassification
of $22.6 million outstanding under the Company's Senior Secured Credit Facility
to current liabilities, which was caused by the Company's inability to make the
scheduled payments without raising capital. As a result, management developed
plans to seek additional capital and improve liquidity.
In April 2002, the Company entered into a preferred stock purchase, debt
exchange and modification agreement with Midland. William A. Hines, who is now
the chairman of the board of directors of the Company, is a manager of, and the
owner of a 45.5% membership interest in, Midland. The remaining membership
interest in Midland is owned by members of Mr. Hines' family and his former
spouse. The terms of the Midland agreement were determined by arm's length
negotiation between the Company's senior management team and its
representatives, and Mr. Hines and his representatives. Mr. Hines had been the
principal shareholder of Allen Tank, Inc., which was acquired by the Company in
1998. From the time of that acquisition in 1998 until March 2001, Mr. Hines
served as a director of the Company. At the time of negotiating and entering
into the Midland agreement, Mr. Hines held no position with the Company. Upon
consummating the Midland agreement in August 2002, Mr. Hines became Chairman of
the Board of Directors.
Pursuant to the Midland agreement and prior to its consummation on
August 13, 2002:
- The Company consented to Midland's acquisition of the rights of the
lenders under the Company's credit agreement dated November 30, 1999, as
amended, with Bank One, Louisiana, N.A. and three other commercial
banks. On May 1, 2002, Midland acquired the rights of those lenders
under the credit agreement for $13.9 million in cash, the source of
which was capital contributions from its members. On that date, the
total amount of principal, accrued interest and penalties owing under
the credit agreement was $21.3 million. Thereafter, and prior to the
consummation of the Midland agreement, Midland advanced the Company $2.8
million for working capital needs and to establish a cash collateral
account with Bank One to secure outstanding letters of credit.
- Midland acquired unsecured creditor claims in the amount of $5.6
million. Midland's acquisition cost for these claims was an aggregate of
$2.9 million, including payments made to the unsecured creditors, fees
paid to a collection agent and attorneys' fees. Midland's source of
these payments was capital contributions from its members.
- Midland agreed to guarantee a line of credit. On November 18, 2002
the Company established an $8.0 million line of credit with a commercial
bank. Nassau Holding Company, an affiliate of Midland, the subsidiaries
of Unifab, and the principle members of Midland guarantee the Company's
obligations under it.
- The Company entered into agreements, effective April 2002,
terminating the employment agreement of Dailey J. Berard, who was then a
director of the Company and was formerly chairman of the board,
president and chief executive officer of the Company, and the consulting
agreement of Jerome E.
F-13
Chojnacki, who was then the chairman of the board, president and chief
executive officer; in exchange for the termination of their agreements,
the Company made one-time cash payments of $75,000 to each of Messrs.
Berard and Chojnacki. Also effective April 2002, the Company obtained
the resignation of Mr. Berard as a director, and the resignation of Mr.
Chojnacki as Chairman of the Board, President and Chief Executive
Officer.
- Midland agreed to use its best efforts to continue the listing of
the Company's common stock on the Nasdaq Stock Market for a period of at
least two years following consummation of the Midland agreement.
- Midland agreed to cause its designees to the board of directors to
approve the calling of a meeting of shareholders for the purpose of
voting on an increase in the authorized number of shares of the
Company's common stock, and to approve a rights offering. Midland also
agreed to vote its shares in favor of the proposed increase in the
authorized number of the Company's shares.
Upon consummation of the Midland agreement on August 13, 2002:
- $10.0 million owed Midland under the credit agreement was cancelled
in exchange for 738 shares of the Company's series A preferred stock.
Each share of this preferred stock has voting rights equal to 100,000
shares of the Company's common stock, and will convert into 100,000
shares of the Company's common stock when the authorized number of the
Company's unissued and unreserved common shares is at least 100 million,
as will occur when approved by the Company's shareholders.
- $12.8 million owed Midland under the credit agreement was converted
into the following, which continue to constitute secured indebtedness
under the credit agreement: (i) a convertible debenture in the principal
amount of $10.6 million payable in five equal annual installments,
bearing interest at Wall Street Journal Prime (that is, the prime rate
of interest reported in the Wall Street Journal in its daily table of
"Money Rates") plus 2.5 percentage points (6.5% at December 31, 2003)
and convertible into shares of the Company's common stock at $3.50 per
share, adjusted for the one-for-ten reverse stock split on August 3,
2003 (the closing price of the Company's common stock on the Nasdaq
National Market on March 6, 2002, the date the negotiations on the
expected terms of the convertible debenture and the rights were
concluded); and (ii) a promissory note in the principal amount of $2.1
million (the amount of the advances made by Midland to the Company after
entering into the Midland agreement), which is payable August 13, 2005
and bears interest at the rate of Wall Street Journal Prime plus 3.0
percentage points (7.0% at December 31, 2003). The Company has recorded
$3.7 million discount on the face value of the convertible debenture,
which represents the intrinsic value of the beneficial conversion
feature of the debenture and equals the difference between $3.50, the
conversion price per share, and $4.70, the closing price per share of
Unifab International, Inc. common stock on August 13, 2002, the date of
issuance of the convertible debenture, adjusted for the one-for-ten
reverse stock split on August 3, 2003. This discount is being amortized
as interest expense from August 13, 2002 and August 13, 2010, the
maturity date of the debenture. Included in interest expense for the
years ended December 31, 2003 and 2002 is $521,000 and $200,000,
respectively, related to amortization of this discount.
- Midland transferred to the Company the claims it had acquired from
the Company's unsecured creditors in the amount of $5.6 million. In
exchange for these claims, the Company delivered to Midland a promissory
note in the principal amount of $4.7 million, and recorded a
contribution to additional paid in capital of $914,000, which represents
claims of unsecured creditors acquired by Midland which were forgiven by
Midland. The promissory note is payable August 13, 2006, and bears
interest at the rate of Wall Street Journal Prime plus 3.0 percentage
points (7.0% at December 31, 2003). This promissory note also
constitutes secured indebtedness under the Company's credit agreement
with Midland.
- $675,000 of the amount the Company owed Midland under the credit
agreement was cancelled in exchange for the assignment to Midland of
certain accounts receivable in the amount of $1,191,000 against which
the Company had established reserves of approximately $516,000. The
Company has recorded a $675,000 reduction in the indebtedness under the
credit agreement.
- $680,000 of the amount the Company owed Midland under the credit
agreement (substantially all of which consisted of penalties accrued
under the terms of the amended credit agreement) was forgiven by
Midland, resulting in a contribution to additional paid in capital of
$680,000. Midland waived all defaults under the credit agreement.
F-14
- Charles E. Broussard resigned from the Company's board of directors,
and the remaining directors, Perry Segura and George C. Yax, appointed
Mr. Hines, Frank J. Cangelosi, Jr., William A. Downey, Daniel R.
Gaubert, Donald L. Moore and Allen C. Porter, Jr., all designated by
Midland, as members of the board.
3. CONTRACTS IN PROGRESS
Information pertaining to contracts in progress at December 31, 2003 and
2002 consisted of the following:
DECEMBER 31
2003 2002
-------- --------
(In thousands)
Costs incurred on uncompleted contracts $ 48,876 $ 10,919
Estimated earnings (losses), net (2,866) 50
-------- --------
46,010 10,969
Less billings to date (45,598) (8,686)
-------- --------
$ 412 $ 2,283
======== ========
Included in the accompanying balance sheets under
the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,287 $ 2,297
Billings in excess of costs and estimated
earnings on uncompleted contracts (875) (14)
-------- --------
$ 412 $ 2,283
======== ========
Accounts receivable includes retainages and unbilled receivables,
respectively, of $138,000 and $10,000 at December 31, 2003 and $775,000 and
$36,000 at December 31, 2002. The unbilled receivables relate primarily to time
and material contracts.
The Company has contract loss reserves of $697,000 and $1,148,000 at
December 31, 2003 and December 31, 2002, respectively. Included in contract loss
reserves at December 31, 2003 is $688,000 related to three fixed price contracts
for platform fabrication. These contract loss reserves were recorded to
recognize increased estimated costs at completion on two fixed price platform
fabrication contracts and to increase estimated costs on a contract to fabricate
buoyancy cans based on the evaluation of productivity and progress to date. The
contract loss reserve at December 31, 2002 related to the two fixed price
platform fabrication contracts was $441,000. The platforms have been completed
during 2003 and are being stored at the Company's fabrication facility.
Substantially all of the reserve related to these two contracts has been
realized at December 31, 2003.
The contract to fabricate buoyancy cans was approximately eighty percent
complete at December 31, 2003, and the Company expects to complete it in early
2004. The contract to fabricate buoyancy cans provides for liquidated damages of
approximately $38,000 per day up to a maximum of $1.5 million compensating the
customer for his cost of delay if the Company does not deliver the completed
buoyancy cans by March 15, 2004. The contract loss reserve recorded on this
contract does not include any liquidated damages because the Company has taken
steps, including adding fabrication stations and personnel, making certain
fabrication procedures more efficient and improving material handling procedures
and coordination with the coatings subcontractor, which in the Company's
estimation will allow the buoyancy cans to be delivered on schedule. If these
steps do not result in delivery of the buoyancy cans on schedule and the Company
is unable to get the schedule extended, the Company may incur the liquidated
damages called for in the contract.
In the December 2003 quarter, the Company recorded a loss of $1.4 million
related to a fixed price contract to fabricate drilling rig components.
Substantially all of this contract loss reserve has been realized at December
31, 2003. This contract is being completed at the Company's deep-water facility
in Lake Charles, which was reopened to perform this project. The contract loss
reserves were recorded to recognize increased estimated costs at completion
caused primarily to inefficiencies related to starting up the facility and low
productivity at the facility in performing this initial contract. In December
2003, the Company negotiated a change in the contract terms whereby work
F-15
performed subsequent to December 31, 2003 is to be performed on a time and
materials basis. The Company estimates that no loss reserve is necessary for the
work performed after December 31, 2003.
The remaining contract loss reserve at December 31, 2003 relates to
contracts to provide process equipment. The reserves on these contracts reflect
current competitive market conditions and increased estimated shop overhead
costs due to low utilization of the Company's process system fabrication
facilities.
At December 31, 2002, contract loss reserves included $441,000 related to
two fixed price platform fabrication contracts, described above, and $707,000 on
three contracts to manufacture process equipment overseas. As more fully
described in Note 17 below, the Company is in the process of liquidating and
winding up operations of its process systems operations based in London,
England, which includes winding up the three contracts to manufacture process
equipment overseas referred to above.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
2003 and 2002:
DECEMBER 31,
2003 2002
-------- --------
(In thousands)
Land $ 2,089 $ 2,089
Building and bulkhead, including leasehold
improvements 12,740 12,540
Yard equipment 25,874 24,412
Vehicles and other equipment 1,632 1,552
Construction in progress 54 730
-------- --------
42,389 41,323
Less accumulated depreciation (17,166) (15,102)
-------- --------
$ 25,223 $ 26,221
======== ========
F-16
5. LONG-TERM DEBT
Long-term debt at December 31, 2003 and 2002 consisted of the following:
DECEMBER 31,
2003 2002
-------- --------
(In thousands)
Revolving credit agreement with Whitney National Bank, interest payable monthly
at variable rates (2.9% at December 31, 2003), maturing January 31, 2005
secured by the assets of the Company, guaranteed by Nassau Holding Company,
an affiliate of Midland, the subsidiaries of the Company, and the principle
members of Midland $ 7,902 $ 2,090
Notes payable to Midland, payable on demand at variable rates (2.9%
at December 31, 2003), secured by the assets of the
Company 5,900 -
Note payable to finance company, payable in monthly installments of
$141,000, including interest at 5.5%, maturing July 2004 826 -
Other notes payable 102 850
-------- --------
Total long-term debt 14,731 2,940
Less current maturities (6,829) (850)
-------- --------
Long-term debt, less current maturities $ 7,902 $ 2,090
======== ========
On November 18, 2002, the Company entered into a Commercial Business Loan
with Whitney National Bank (the "Credit Agreement") which provides for up to
$8.0 million in borrowings for working capital purposes, including up to $2.0
million in letters of credit, under a revolving credit facility. At December 31,
2003, letters of credit totaling $3,000 were outstanding under the Credit
Agreement. At December 31, 2002, the Company had no letters of credit
outstanding under the Credit Agreement.
Maturities of long-term debt, discussed above, secured subordinated notes
payable and the secured subordinated convertible debenture, discussed in Note 2,
are as follows (in thousands):
2004 $ 6,829
2005 10,041
2006 4,709
2007 2,130
2008 2,130
Thereafter 6,392
-----------
Total $ 32,231
===========
F-17
6. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 2003 and
2002 were as follows:
DECEMBER 31,
2003 2002
-------- --------
(In thousands)
Deferred tax liabilities:
Excess book value over tax basis of property, plant
and equipment $ 3,312 $ 2,427
Long term contracts 7
Goodwill 11
-------- --------
Total deferred tax liabilities 3,330 2,427
Deferred tax assets:
Reserves not currently deductible 628 1,317
Goodwill - 2,846
Long term construction contracts - 15
Operating loss carryforward 18,960 12,052
-------- --------
Total deferred tax assets 19,588 16,230
Valuation allowance for deferred tax assets (16,258) (13,803)
-------- --------
Deferred tax assets 3,330 2,427
-------- --------
Net deferred tax liabilities $ - $ -
======== ========
At December 31, 2003, the Company has an available net operating loss
carryforward of approximately $49.98 million for U.S. Federal income tax
purposes, which, if not used will expire between 2020 and 2023. The ability of
the Company to utilize net operating loss carryforwards is limited on an annual
basis because the Midland transaction resulted in a change in control under the
current tax regulations. The Company has recorded a valuation allowance to
offset the deferred tax asset related to the net operating loss carryforward and
other deferred tax assets that exceed deferred tax liabilities because the
Company believes that it is more likely than not that these deferred tax assets
will not be utilized.
The income tax provision is comprised of the following:
YEAR ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
(In thousands)
Current $ - $- $ -
Deferred - - 1,316
---- ---- ------
$ - $- $1,316
==== ==== ======
F-18
The reconciliation of income tax computed at the federal statutory rates to
income tax expense is:
YEAR ENDED DECEMBER 31
2003 2002 2001
------- ------- -------
Tax at federal statutory rates $(4,142) $(7,181) $(9,508)
Valuation reserve on deferred tax assets 3,211 6,469 6,942
Non deductible loss on goodwill impairment - - 3,174
Other, primarily permanent differences and state
income taxes 931 712 708
------- ------- -------
$ - $ - $ 1,316
======= ======= =======
7. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company has authorized 150,000,000 shares of $0.01 par value common
stock.
PREFERRED STOCK
The Company has authorized 5,000 shares of no par value preferred stock. On
April 23, 2002, the Board of Directors adopted Articles of Amendment to the
Company's Articles of Incorporation which authorized that 750 shares of
preferred stock are designated Series A Participating Preferred Stock (the
"Series A Shares"). Each Series A Share shall entitle the holder to vote as
100,000 shares of common stock, shall have no preference to the common shares on
the payment of dividends or the liquidation or winding up of the Company. If the
Company pays a dividend to the holders of its common shares, each Series A Share
shall entitle the holder to a dividend equal to 100,000 times the dividend paid
on each share of common stock. In any liquidation or winding up of the Company,
will entitle the holder to 100,000 times the amount paid on each share of common
stock. In all other ways, each series A Share shall be treated like 100,000
shares of common stock. If at any time the Company has authorized at least
100,000,000 shares of common stock that have not been issued or reserved for
issuance pursuant to an outstanding obligation of the Company, then each Series
A Share will be converted into 100,000 shares of common stock. On August 13,
2002 under the terms of the Midland Transaction, the Company issued 738 Series A
Shares. On August 1, 2003, each share of series A preferred stock was converted
into 100,000 shares of Unifab common stock, as more fully described below.
EARNINGS PER SHARE
In April 2002, the Company entered into an agreement with Midland
Fabricators and Process Systems, LLC ("Midland") as a result of which, among
other things, Midland acquired the rights of the Company's lenders under the
Company's Senior Secured Credit Agreement. On August 13, 2002, pursuant to the
agreement with Midland, Midland exchanged $24.1 million outstanding under the
Company's Senior Secured Credit Agreement and $5.6 million in acquired claims of
unsecured creditors for 738 shares of our preferred stock, a secured
subordinated convertible debenture in the amount of $10.7 million and two
secured subordinated notes which total in the aggregate $6.8 million. The
debenture is convertible into the Company's common stock at a price of $3.50 per
share on a post reverse split basis. Midland's 738 shares of preferred stock
converted automatically into a total of 73,800,000 shares of the Company's
common stock on August 1, 2003, the date the shareholders authorized additional
shares of common stock. The Company also recorded additional paid in capital on
the transaction of $3.7 million resulting from the discount recorded on the
secured subordinated convertible debenture, and capital contributions of
$680,000 resulting from forgiveness by Midland of penalties accrued under the
Senior Secured Credit Agreement and $914,000 resulting from partial forgiveness
of the unsecured creditor claims acquired by Midland. Further, $675,000 of the
amount the Company owed Midland under the Company's Senior Secured Credit
Agreement was cancelled in exchange for the assignment to Midland of certain
accounts.
On August 1, 2003, the Company's shareholders approved a one-for-ten reverse
stock split of the outstanding shares of the Company's common stock, to be
effective immediately after the conversion of Midland's Series A preferred
shares. Accordingly, on August 3, 2003, each share of series A preferred stock
was converted into 100,000
F-19
shares of Unifab common stock and the one-for-ten reverse stock split was
effected resulting in Midland holding a total of 7,380,000 common shares after
the reverse stock split.
The denominator in the table below includes the common shares related to
these Series A Preferred Shares as if they had been converted into shares of
common stock on August 13, 2002, the date of the Midland Investment and
Recapitalization Transaction. All prior periods weighted average share and
option amounts have been restated for the effect of the reverse stock split.
Midland's $10,652,000 convertible debenture is convertible into Unifab common
stock at a conversion price of $3.50 per share on a post reverse split basis,
for a total of 3,043,400 shares of common stock. Since the conversion price is
"out-of-the-money," these shares are anti-dilutive and are not included in the
computation of diluted earnings per share during periods when the Company incurs
a loss.
The following table sets forth the computation of basic and diluted earnings
per share giving retroactive effect to the assumed conversion of Midland's 738
shares as of August 13, 2002 and giving effect to the one-for-ten reverse stock
split:
YEAR ENDED DECEMBER 31
2003 2002 2001
-------- -------- --------
(In thousands, except per share amounts)
Numerator:
Net loss $(11,835) $(20,517) $(29,281)
-------- -------- --------
Denominator:
Weighted average shares of common stock
outstanding 3,873 813 814
Effect of issuance of convertible
preferred stock on weighted average
shares of common stock 4,327 2,857 -
-------- -------- --------
Denominator for basic and diluted
earnings per share - weighted
average shares 8,200 3,670 814
-------- -------- --------
Basic and diluted loss per share $ (1.44) $ (5.59) $ (36.02)
======== ======== ========
Options with an exercise price greater than the average market price of the
Company's common stock for the year and options outstanding during years where
the Company incurs a net loss are anti-dilutive and, therefore, not included in
the computation of diluted earnings per share. During the year ended December
31, 2003, 50,000 options and 6,000 warrants outstanding were anti-dilutive due
to the net loss incurred by the Company. During the year ended December 31,
2002, 82,000 options and 6,000 warrants outstanding were anti-dilutive due to
the net loss incurred by the Company. During the year ended December 31, 2001,
86,000 options and 6,000 warrants outstanding were anti-dilutive due to the net
loss incurred by the Company.
8. CONCENTRATION OF CREDIT RISK
The Company's customers are principally major and large independent oil and
gas companies and drilling companies. These concentrations of customers may
impact our overall exposure to credit risk, either positively or negatively, in
that our customers may be similarly affected by changes in economic or other
conditions. Management believes that the allowance for doubtful accounts is
adequate to absorb probable credit losses. Receivables are generally not
collateralized.
At December 31, 2003 and 2002, the allowance for doubtful accounts deducted
from accounts receivable on the accompanying balance sheets was $267,000 and
$763,000, respectively.
9. LONG-TERM INCENTIVE PLANS
In July 1997, the Company adopted and its shareholders approved the
Long-Term Incentive Plan (the "1997 Plan") to provide long-term incentives to
its key employees, including officers and directors who are employees of the
Company (the "Eligible Employees"). Under the 1997 Plan, which is administered
by the Compensation Committee of the Board of Directors, the Company may grant
incentive stock options, nonqualified stock options,
F-20
restricted stock, other stock-based awards or any combination thereof (the
"Incentives") to Eligible Employees. The Compensation Committee determines who
receives Incentives and establishes the exercise price of any stock options
granted under the Incentive Plan, provided that the exercise price may not be
less than the fair market value of the Common Stock on the date of grant. At the
Company's Annual Meeting of Shareholders held on December 27, 2002, the
shareholders approved an amendment to the 1997 Plan to increase the number of
shares of common stock subject to issuance under the plan to 2,500,000 from
460,000, and to increase the shares of common stock that can be granted to a
single participant in a calendar year through awards under the plan to 250,000
from 200,000.
In June 2000, the Company adopted and the Board of Directors approved the
Employee Long-Term Incentive Plan (the "2000 Plan") to provide long-term
incentives to its key employees who are not officers or directors of the
Company. Under the 2000 Plan, which is administered by the Plan Administrator,
the Company may grant incentive stock options, nonqualified stock options,
restricted stock, other stock-based awards or any combination thereof to key
employees. The Compensation Committee reviews and approves awards made under the
2000 plan and approves the exercise price of any stock options granted under the
2000 Plan. The exercise price may not be less than the fair market value of the
Common Stock on the date of grant. A maximum total of 565,000 shares of Common
Stock are available for issuance under the 2000 Plan.
All of the options granted under the long-term incentive plans have a
10-year term. The Compensation Committee determines the vesting period of option
grants. The optionee will not realize any income for federal income tax
purposes, nor will the Company be entitled to any tax deduction, upon the grant
of a nonqualified stock option. Upon exercise, the optionee will realize
ordinary income measured by the difference between the aggregate fair market
value of the shares of Common Stock on the exercise date and the aggregate
exercise price, and the Company will be entitled to a tax deduction in the same
amount.
A summary of the Company's stock options activity and the related
information for the years ended December 31, 2003, 2002 and 2001 is as follows
(in thousands, except per share data):
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS
------ ------- ------ ------- ------ -------
Outstanding - beginning of period $34.25 82 $72.07 86 $86.16 84
Granted 1.65 2 3.90 50 17.74 20
Exercised - - - - 73.73 (1)
Forfeited 25.22 (34) 66.69 (54) 78.65 (17)
------ --- ------ --- ------ ---
Options outstanding at end of period $39.18 50 $34.25 82 $72.07 86
====== === ====== === ====== ===
Options exercisable at end of period $39.18 50 $34.12 82 $83.55 62
====== === ====== === ====== ===
F-21
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exerciseable
-------------------------------------------------------------------------------------------
EXERCISE PRICE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE PER SHARE OUTSTANDING REMAINING LIFE EXERCISE PRICE NUMBER EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ------------------ ----------------
$180.00 1,700 3.8 years $180.00 1,700 $180.00
113.10 500 6.8 113.10 500 113.10
71.20 - 87.50 12,533 5.3 75.07 12,533 75.07
47.50 - 56.50 1,500 7.4 49.17 1,500 49.17
2.50 - 3.90 27,000 8.7 3.73 27,000 3.73
10. EMPLOYEE BENEFIT PLAN
The Company sponsors incentive savings plans covering substantially all of
the employees of the Company and its subsidiaries, which allow participants to
make contributions by salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. Under these plans, employees with one year of service
with the Company are eligible to participate.
In November 2001, the Company suspended its policy of matching employee
contributions. Prior to that date, the Company contributed an amount equal to
50% of employee contributions up to 3% of their base compensation. Matching
contributions made by the Company were approximately $334,000 in the year ended
December 31, 2001. The Company made no matching contributions in the years ended
December 31, 2003 and 2002.
11. MAJOR CUSTOMERS
The Company is not dependent on any one customer, and the contract revenue
earned from each customer varies from year to year based on the contracts
awarded. Contract revenue earned comprising 10% or more of the Company's total
contract revenue earned for the year ended December 31, 2003, 2002 and 2001 is
summarized as follows (in thousands):
YEAR ENDED DECEMBER 31
2003 2002 2001
--------- ------- --------
Customer A $ 12,497 $ - $ 15,858
Customer B 8,769 - -
Customer C 6,872 - -
Customer D - 5,748 -
F-22
12. INTERNATIONAL SALES
The Company fabricates structures and equipment for use worldwide by U.S.
customers operating abroad and by foreign customers. During the years ended
December 31, 2003, 2002 and 2001, 2%, 24% and 21%, respectively, of the
Company's revenue was derived from projects fabricated for installation in
international areas, with the remainder designed for installation in the U.S.
Gulf of Mexico. The following table summarizes the Company's revenue by location
for the years ended December 31, 2003, 2002 and 2001 (in thousands):
Year Ended December 31
2003 2002 2001
------- ------- -------
Location:
U.S. Gulf of Mexico $54,646 $25,387 $64,235
International:
Africa 296 1,679 5,767
Europe 88 911 508
Other 744 5,309 11,233
------- ------- -------
Total International 1,128 7,899 17,498
------- ------- -------
Total $55,774 $33,286 $81,733
======= ======= =======
All of the assets of the Company are located in the United States of
America.
13. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
In addition to the matters described below, the Company is a party to
various routine legal proceedings primarily involving commercial claims,
workers' compensation claims, and claims for personal injury under the General
Maritime Laws of the United States. A number of the Company's vendors have sued
the Company to collect amounts of money allegedly due to them. These vendors
are, in each case, unsecured creditors of the Company. While the outcome of
these lawsuits, legal proceedings and claims cannot be predicted with certainty,
management believes that the outcome of such proceedings is not likely to have a
material adverse effect on the Company's consolidated financial statements.
In a lawsuit filed against the Company in the 14th Judicial Court in the
Parish of Calcasieu, State of Louisiana, Professional Industrial Maintenance,
L.L.C., Don E. Spano and Kimberly Spano alleged multiple claims for breach of
contract, breach of specific performance, a request for injunction, request for
damages, and a request for treble damages and attorney fees for violations of
the Louisiana Unfair Trade Practices Act. Mr. Spano was the managing member of
Professional Industrial Maintenance, LLC, the company whose assets we acquired
in January 1998. The Company filed a counterclaim for recovery of certain
amounts paid on behalf of Professional Industrial Maintenance, LLC and Mr. Spano
as a result of the transaction. In January 2004, the parties agreed to settle
the disputes subject of the lawsuit with full and final releases for all claims
in exchange for a cash payment to the plaintiffs in the amount of $300,000;
however, as of the filing of this report, the details of the settlement
agreement and release have not been finalized.
LETTERS OF CREDIT
In the normal course of its business activities, the Company is required to
provide letters of credit to secure performance. At December 31, 2003, cash
deposits totaling $115,000 secured outstanding letters of credit totaling
$110,000. In addition, at December 31, 2003 the Company had letters of credit
totaling $3,000 outstanding, which were issued under its Credit Agreement.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with one of its officers. This
agreement terminates on August 18, 2006. The minimum annual compensation
commitment by the Company under this agreement is $60,000.
F-23
LEASES
The Company leases land, upon which portions of its structural fabrication
and process equipment fabrication facilities in New Iberia are located, under
noncancelable operating leases. The leases expire in 2003 for the structural
fabrication facility with two 10-year renewal options and in 2009 for the
process equipment facilities with one 10-year renewal option. The Company also
leases its facility in Lake Charles under a noncancelable operating lease. The
lease expires in 2005 and has two five-year renewal options. Future minimum
payments, including option periods, under these leases are as follows (in
thousands):
2004 $ 692
2005 692
2006 692
2007 692
2008 692
2009 and after 6,521
--------
$ 9,981
========
Rent expense, which includes rent on cancelable equipment leases, during the
years ended December 31, 2003, 2002 and 2001 was $1,906,000, $1,553,000 and
$2,300,000, respectively.
14. RELATED PARTY TRANSACTIONS
Under an informal arrangement with the Company, Midland has agreed to
provide financial support and funding for working capital or other needs at
Midland's discretion, from time to time. At December 31, 2003, Midland provided
a standby letter of credit to a customer of the Company in support of a contract
included in the Company's backlog at December 31, 2003. The letter of credit is
in the amount of $3.1 million and expires on March 31, 2004. The Company
reimbursed $12,600 to Midland for the cost of the letter of credit. During the
year ended December 31, 2003, Midland advanced amounts to the Company for
working capital, which were repaid and readvanced from time to time as needed.
At December 31, 2003, $5,900,000 is outstanding and owed to Midland. The
liquidity afforded by these advances from Midland was necessary for the Company
to meet its obligations and fund operations. However, the Company has no control
over whether Midland will provide additional funding in the future and does not
know whether such additional funding will be available from Midland as the
Company requires it. If Midland does not make available such additional funding
to the Company when needed in the future, the Company could be unable to meet
its obligations, including obligations under the Credit Agreement, in the
ordinary course of business. The Company requires the continued support from
Midland until such time as it has sustained profitable operations and its
financial condition is stable and no longer requires this support.
The Company provides health care benefits to its employees under a plan that
covers the employees of companies owned by Nassau, including the employees of
Nassau. This insurance coverage began on November 1, 2002. In the year ended
December 31, 2003, the Company incurred costs of approximately $1,979,000 for
coverage under this plan.
Midland provides accounting information system and reporting services to the
Company, including maintaining computer hardware and software to process
financial information and produce management reports, processing data associated
with those reports, assisting in report design and preparation, processing
operating and payroll checks, consulting assistance with the design and
implementation of financial reporting systems, and other related services.
Included in general and administrative expenses for the year ended December 31,
2003 is $180,000 related to these services, which had been paid in full at
December 31, 2003.
At December 31, 2003, accrued and unpaid interest owed to Midland related to
the secured, subordinated notes payable, the convertible debenture and working
capital advances was $310,000. At December 31, 2002, there was no accrued and
unpaid interest owed to Midland.
In the year ended December 31, 2003, the Company executed several contracts
with Ridgelake Energy, Inc. to fabricate a platform and design and manufacture
process equipment. The total value of these contracts is $6.9
F-24
million, which were complete at December 31, 2003. Included in revenue and gross
profit for the year ended December 31, 2003 are $6,872,000 and $922,000,
respectively, related to these contracts. At December 31, 2003, the Company had
$41,000 receivable from Ridgelake Energy, Inc. related to these contracts.
Ridgelake Energy, Inc. is owned and controlled by Mr. William A. Hines, Chairman
of our Board of Directors, and his family. Two of the contracts were completed
in May 2003.
15. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly results of operations for the year ended December 31,
2003 and 2002 were as follows (in thousands, except per share data):
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2003 2003 2003 2003
-------- -------- -------- --------
Revenue $ 9,523 $ 14,483 $ 15,855 $ 15,913
Gross profit (loss) 185 519 (2,183) (3,365)
Net loss (1,430) (1,190) (3,642) (5,573)
Basic and diluted loss per share (0.17) (0.15) (0.44) (0.68)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
-------- -------- -------- --------
Revenue $ 9,856 $ 8,379 $ 5,837 $ 9,214
Gross profit (loss) (37) (1,030) (1,610) (3,297)
Net loss (2,142) (3,450) (3,525) (11,400)
Basic and diluted loss per share (0.26) (0.42) (0.07) (0.14)
On August 3, 2003, the shareholders authorized a one-for-ten reverse stock
split. All earnings (loss) per share and weighted average number of shares
outstanding have been restated to effect this one-for-ten reverse stock split.
On August 13, 2002, the Company issued 738 Series A shares of preferred
stock. Each share of Series A preferred stock is convertible into 100,000 shares
of Unifab common stock, or 73,800,000 total common shares. (See Notes 2 and 7).
The weighted average number of shares outstanding used in the basic and diluted
earnings per share calculations for the quarters ended September 30, 2002 and
December 31, 2002 are calculated giving effect to the conversion of these
preferred shares into common shares at August 13, 2002.
Pretax results for the quarter ended December 31, 2003 include:
- Loss reserves accrued on two fixed price contracts totaling
$2,091,000
Pretax results for the quarter ended December 31, 2002 include:
- Loss on impairment of Lake Charles facility of $5,074,000
- Loss reserves accrued on four fixed price contracts totaling
$1,213,000
16. INDUSTRY SEGMENTS
Effective January 1, 2003, as a result of the Midland Recapitalization and
Investment transaction, management has evaluated the changed organizational and
reporting structure and has concluded that the Company operates three reportable
segments: the platform fabrication segment, the process systems segment and the
drilling rig fabrication segment. The platform fabrication segment fabricates
and assembles platforms and platform components for installation and use
offshore in the production, processing and storage of oil and gas. The process
systems segment designs and manufactures specialized process systems and
equipment related to the development and production of oil and gas reserves. The
drilling rig fabrication segment provides fabrication services for new
construction and repair of drilling rigs. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies, except that income taxes are accounted for on a
consolidated basis and deferred tax assets are managed as corporate assets and
are not recorded in the operating segments. The Company evaluates
F-25
performance based on segment income, which is defined as revenue less cost of
revenue and selling, general and administrative expense allocated to the
operating segment. The Company does not allocate interest expense to the
operating segments. Unallocated overhead consists primarily of corporate general
and administrative costs that the Company does not allocate to the operating
segments. The Company accounts for intersegment sales at fixed labor rates and
at cost for materials and other costs. Intersegment sales are not intended to
represent current market prices for the services provided.
The following tables show information about the revenue, profit or loss,
depreciation and amortization, assets and expenditures for long-lived assets of
each of the Company's reportable segments for the years ended December 31, 2003,
2002 and 2001. Segment assets do not include intersegment receivable balances as
the Company believes inclusion of such assets would not be meaningful. Segment
assets are determined by their location at period end. Some assets that pertain
to the segment operations are recorded on corporate books, such as prepaid
insurance. These assets have been allocated to the segment in a manner that is
consistent with the methodology used in recording the segment's expense.
F-26
YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
(in thousands)
Revenue from external customers:
Platform fabrication $ 34,786 $ 17,384 $ 36,717
Process systems 11,794 12,124 26,299
Drilling rig fabrication 9,194 498 5,295
Other (a) - 3,280 13,937
Intersegment eliminations - - (515)
-------- -------- --------
$ 55,774 $ 33,286 $ 81,733
======== ======== ========
Segment income (loss):
Platform fabrication $ (2,927) $ (1,913) $ 1,859
Process systems (889) (4,231) (4,076)
Drilling rig fabrication (3,028) (7,354) (5,097)
Other (a) - (1,604) (15,795)
-------- -------- --------
(6,844) (15,102) (23,109)
Interest expense (1,951) (1,894) (2,794)
Unallocated corporate expense (3,040) (3,521) (2,062)
-------- -------- --------
Loss before income tax $(11,835) $(20,517) $(27,965)
======== ======== ========
Depreciation and amortization:
Platform fabrication $ 1,267 $ 1,196 $ 1,220
Process systems 396 465 648
Drilling rig fabrication 515 578 740
Other (a) - 460 446
-------- -------- --------
2,178 2,699 3,054
Corporate 36 1 -
-------- -------- --------
$ 2,214 $ 2,700 $ 3,054
======== ======== ========
Segment assets at end of period:
Platform fabrication $ 21,846 $ 21,589 $ 24,161
Process systems 6,742 10,020 13,909
Drilling rig fabrication 9,229 6,303 13,460
Other (a) - - 7,099
-------- -------- --------
37,817 37,912 58,629
Corporate 2,402 1,367 4,578
-------- -------- --------
$ 40,219 $ 39,279 $ 63,207
======== ======== ========
Expenditures for long-lived assets:
Platform fabrication $ 166 $ 121 $ 248
Process systems 355 1,050 1,141
Drilling rig fabrication 677 - 729
Other (a) - - 175
-------- -------- --------
1,198 1,171 2,293
Corporate 108 23 -
-------- -------- --------
$ 1,306 $ 1,194 $ 2,293
======== ======== ========
(a) Included in Other are the revenue, segment loss, depreciation and
amortization, assets and expenditures related to derrick fabrication, waste
water treatment, and plant maintenance operations. These operations ceased
prior to December 31, 2002.
F-27
17. SHUT DOWN OF ALLEN PROCESS SYSTEMS LIMITED
On June 12, 2003, at a meeting of the creditors of Allen Process Systems
Limited, Mr. Tony Freeman of TonyFreeman & Company, New Maxdov House,
Manchester, England was appointed as Liquidator of Allen Process Systems Limited
("APS Limited"), located in London, England, for the purposes of ceasing and
voluntarily winding up operations of that company. The Company, as the sole
shareholder of APS Limited, ratified Mr. Freeman's appointment. APS Limited was
acquired by the Company in June 1998 and has provided engineering and project
management services for process systems mainly to Europe and the Middle East.
Allen Process Systems, LLC, a wholly owned subsidiary of the Company will
provide these services in the future. The Company does not expect that ceasing
and winding up operations of APS Limited will have a material impact on the
consolidated financial statements of the Company.
F-28
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, on March 29, 2004.
UNIFAB International, Inc.
(Registrant)
By: /s/ William A Hines
------------------------------------
William A Hines
Principle Executive Officer
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.
SIGNATURE AND DATE TITLE
-------------------- -----
/s/ William A. Hines March 29, 2004 Chairman of the Board
- -------------------------
William A. Hines
/s/ Peter J. Roman March 29, 2004 Vice President and Chief Financial Officer
- ------------------------- (Principal Financial and Accounting Officer)
Peter J. Roman
/s/ Frank Cangelosi March 29, 2004 Director
- -------------------------
Frank Cangelosi
/s/ Daniel Gaubert March 29, 2004 Director
- -------------------------
Daniel Gaubert
/s/ William Downey March 29, 2004 Director
- -------------------------
William Downey
/s/ Don Moore March 29, 2004 Director
- -------------------------
Don Moore
/s/ Perry Segura March 29, 2004 Director
- -------------------------
Perry Segura
/s/ George C. Yax March 29, 2004 Director
- -------------------------
George C. Yax
S-1
UNIFAB INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Articles of Incorporation of the Company ***
3.2 By-laws of the Company ***
4.1 See Exhibits 3.1 and 3.2 for provisions of the Company's Articles of
Incorporation and By-laws defining the rights of holders of Common
Stock ***
4.3 Debenture****
4.2 Specimen Common Stock Certificate *
10.1 Form of Indemnity Agreement by and between the Company and each of its
directors and executive officers *
10.2 The Company's Long-Term Incentive Plan (Function)
10.3 The Company's Employee Long Term Incentive Plan (Function)
10.4 Form of Stock Option Agreement under the Company's Long-Term Incentive
Plan * (Function)
10.5 Form of Stock Option Agreement under the Company's Employee Long-Term
Incentive Plan (Function)
10.6 Employment Agreement between the Company and William A. Downey
***(Function)
10.7 Ground Lease Agreement dated as of September 1, 1998, between PIM,
L.L.C. (now UNIFAB International West, L.L.C. and a subsidiary of the
Company) and the Lake Charles Harbor & Terminal District **
10.8 Guaranty Agreement made as of September 1, 1998, by the Company in
favor of the Lake Charles Harbor & Terminal District **
10.9 Development Agreement among PIM, L.L.C., the Company, the Lake Charles
Harbor & Terminal District, and the Calcasieu Parish Police Jury **
10.10 Commercial Business Loan Agreement by and between the Company and
Whitney National Bank dated November 18, 2002***
10.11 Preferred Stock Purchase, Debt Exchange and Modification Agreement
dated April 26, 2002, by and between Midland Fabricators and Process
Systems, LLC and the Company (incorporated herein by reference to the
Company's report of Form 8-K filed with the Securities and Exchange
Commission on May 13, 2002)
10.12 Amended and Restated Credit Agreement dated as of October 19, 2000,
among the Company, Bank One, N.A., IberiaBank, Regions Bank and
Whitney National Bank**
10.13 Waiver and First Amendment to Amended and Restated Credit Agreement
dated as of March 31, 2001, among the Company, Bank One, NA,
IberiaBank, Regions Bank, and Whitney National Bank (incorporated by
reference to the Company's report on Form 10-K/A filed with the
Securities and Exchange Commission on June 15, 2001)
10.14 Waiver and Second Amendment to Amended and Restated Credit Agreement
dated as of March 5, 2002, among the Company, Bank One, Louisiana,
N.A., IberiaBank, Regions Bank and Whitney National Bank (incorporated
herein by reference to the Company's report of Form 8-K filed with the
Securities and Exchange Commission on March 12, 2002)
10.15 Act of Acknowledgment, modification, Receipt and Third Amendment to
Amended and Restated Credit Agreement dated August 13, 2002*****
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
31.1 Certification pursuant to Exchange Act 13a-15 and 15d-15(e)
accompanying and furnished with this annual report on Form 10-K for
the fiscal year ended December 31, 2003
31.2 Certification pursuant to Exchange Act 13a-15 and 15d-15(e)
accompanying and furnished with this annual report on Form 10-K for
the fiscal year ended December 31, 2003
E-1
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350, as adopted) accompanying and furnished
with this annual report on Form 10-K for the fiscal year ended
December 31, 2003
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350, as adopted) accompanying and furnished
with this annual report on Form 10-K for the fiscal year ended
December 31, 2003
99.1 Press release issued by the Company on March 4, 2004 regarding the
trading activity in the Company's common stock
99.2 Form 8-K filed with the Securities and Exchange Commission on March 3,
2004 (incorporated herein by reference)
- -----------------------
* Incorporated herein by reference to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange
Commission on September 18, 1997, as amended (Registration No.
333-31609).
** Incorporated herein by reference to the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on October 26, 2000, as amended (Registration No.
333-48710).
*** Incorporated herein by reference to the Company's report on Form 10-Q
for the quarter ended September 30, 2002, as filed with the
Securities and Exchange Commission on February 13, 2003.
**** Incorporated herein by reference to the Company's report on Form 8-K
filed with the Securities and Exchange Commission on August 22, 2002.
(Function) Management Contract or Compensatory Plan.
E-2