United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 2004
[ ] 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
------------------------------- -------------------
(State or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
5007 Port Road
New Iberia, LA 70560
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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)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 periods 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934) Yes[ ] No [X]
Common Stock, $0.01 Par Value ---- 8,226,913 shares outstanding as of May 14,
2004.
UNIFAB INTERNATIONAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- March 31, 2004 and
December 31, 2003...................................................... 1
Condensed Consolidated Statements of Operations -- Three Months Ended
March 31, 2004 and 2003................................................. 2
Condensed Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 2004 and 2003................................................. 3
Notes to Condensed Consolidated Financial Statements......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 13
Item 3. Quantitative and Qualitative Disclosure of Market Risk....................... 18
Item 4. Controls and Procedures...................................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 20
Item 5. Other Information............................................................ 20
Item 6. Exhibits and Reports on Form 8-K............................................. 20
Signatures................................................................................... 21
UNIFAB INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31 DECEMBER 31
2004 2003
--------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Assets
Current assets:
Cash and cash equivalents $ 5 $ 10
Accounts receivable, net 8,981 11,411
Costs and estimated earnings in excess of billings on uncompleted contracts 489 1,287
Income tax receivable 126 147
Prepaid expenses and other assets 932 1,441
-------- --------
Total current assets 10,533 14,296
Property, plant and equipment, net 24,678 25,223
Other assets 438 700
-------- --------
Total assets $ 35,649 $ 40,219
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,730 $ 4,782
Billings in excess of costs and estimated earnings on uncompleted contracts 526 875
Accrued liabilities 2,294 2,454
Contract loss reserves 64 697
Notes payable to Midland 6,500 5,900
Current maturities of long-term debt 8,388 929
-------- --------
Total current liabilities 20,502 15,637
Long-term debt, less current maturities -- 7,902
Secured, subordinated notes payable 6,848 6,848
Secured, subordinated, convertible debenture, net of unamortized discount of $2,800 and
$2,931, respectively 7,852 7,721
-------- --------
Total liabilities 35,202 38,108
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized, no shares outstanding -- --
Common stock, $0.01 par value, 150,000,000 shares authorized, 8,201,899 shares outstanding
82 82
Additional paid-in capital 62,076 62,076
Accumulated deficit (61,711) (60,047)
-------- --------
Total shareholders' equity 447 2,111
-------- --------
Total liabilities and shareholders' equity $ 35,649 $ 40,219
======== ========
See accompanying notes.
1
UNIFAB INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
2004 2003
----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue ................................... $ 13,840 $ 9,523
Cost of revenue ........................... 13,744 9,338
-------- --------
Gross profit (loss) ....................... 96 185
Selling, general and administrative
expense ................................. 964 1,158
Impairment of goodwill .................... 260 --
-------- --------
Loss from operations ...................... (1,128) (973)
Other income (expense):
Interest expense ........................ (539) (461)
Interest income ......................... 3 4
-------- --------
Loss before income taxes .................. (1,664) (1,430)
Provision for income tax .................. -- --
-------- --------
Net loss .................................. $ (1,664) $ (1,430)
======== ========
Basic and diluted loss per share (a) ...... $ (0.20) $ (0.17)
======== ========
Basic and diluted weighted average
shares outstanding (a) .................. 8,202 8,199
======== ========
(a) All earnings (loss) per share amounts and weighted average number of
shares outstanding have been restated to give effect to a one-for-ten
reverse stock split effected on August 3, 2003
See accompanying notes.
2
UNIFAB INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-----------------------
2004 2003
-------- -------
(IN THOUSANDS)
Net cash (used in) provided by operating activities $ (155) $(2,794)
Investing activities:
Purchases of equipment (24) (407)
Collections on notes receivable 17 19
------- -------
Net cash used in investing activities (7) (388)
------- -------
Financing activities:
Proceeds from notes payable to Midland 6,100 --
Payments of notes payable to Midland (5,500) --
Net change in other borrowings (443) 3,280
------- -------
Net cash provided by (used in) financing activities 157 3,280
------- -------
Net change in cash and cash equivalents (5) 98
Cash and cash equivalents at beginning of period 10 80
------- -------
Cash and cash equivalents at end of period $ 5 $ 178
------- -------
Supplemental disclosure of cash flow information:
Income taxes (refunded), net $ (21) $ (33)
------- -------
Interest paid, net of capitalized interest $ 376 $ 40
======= =======
See accompanying notes.
3
UNIFAB INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
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, rents compressors. The
Company's main fabrication facilities are located at the Port of Iberia in New
Iberia, Louisiana. Through a 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 March
31, 2004, it was anticipated that substantially all contracts in progress, and
receivables associated therewith, would be completed and collected within a
12-month period.
The accompanying unaudited condensed 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.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.
These financial statements should be read in conjunction with the
financial statements and footnotes thereto for the year ended December 31, 2003
included in the Company's Annual Report on Form 10-K.
Certain amounts previously reported have been reclassified to conform to
the presentation at March 31, 2004.
2. 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 three-month period ended March 31, 2004, the
Company incurred a net loss of $1.7 million, including $374,000 related to the
Company's process systems fabrication facility, which was underutilized, and a
charge of $260,000 related to goodwill associated with the Company's Compression
Engineering business unit. During the first quarter of 2004 and as part of the
Company's ongoing evaluation and reorganization of operations, the
4
Company decided to suspend engineering and maintenance operations related to
compressors, including compressors being rented from the Company. Operating
results for these operations are included in the Process Systems segment and are
not significant to the historical operations of the Company. Also included in
the net loss for the three month period ended March 31, 2004 are selling,
general and administrative expenses of $964,000 and interest expense of
$539,000. 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.
Revenue and gross profit produced at the Company's fabrication facility in
Lake Charles, Louisiana were $3.4 million and $0.6 million in the quarter ended
March 31, 2004. Nearly all of the operating results relate to one significant
project being performed at the facility. Upon the completion of this project in
April 2004 and considering the lack of current backlog for this facility,
management decided to temporarily idle this facility. Management is currently
evaluating various business alternatives relating to this facility and the
impact, if any, these alternatives would have on the carrying value of the
long-lived assets (approximately $6.2 million at March 31, 2004) related to this
facility.
The Company continues to bid and win contracts and invest capital in
facilities and equipment. The Company continues to review operations,
facilities, costs and business opportunities in an attempt to return to
profitability.
The Company renewed the Credit Agreement in November 2003, with Midland's
continuing guarantee, and extended the maturity to January 31, 2005. As a
result, the amounts outstanding under the Credit Agreement were classified as
noncurrent in the December 31, 2003 balance sheet and are classified as current
in the March 31, 2004 balance sheet. Later this year, the Company expects to
renew the Credit Agreement, with Midland's continuing guarantee, and extend the
maturity so that the liability again can be classified as noncurrent. 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. At March 31, 2004, $6.5 million was
outstanding and owed to Midland related to this informal arrangement, which was
classified as a current liability. As a result of classifying the amounts
outstanding related to the Credit Agreement and the informal arrangement with
Midland, the Company has working capital deficits of $10.0 million at March 31,
2004 and $1.3 million at December 31, 2003. The liquidity afforded by these
advances from Midland was necessary for the Company to meet its obligations and
fund operations. At December 31, 2002, Midland provided a standby letter of
credit to a customer in support of a contract, which was completed during the
March 2004 quarter. The letter of credit expired in March 2004. Since that time,
the Company has been awarded contracts totaling $13.1 million, which have
required a financial guarantee or letter of credit from Midland. 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 and that guarantees from
Midland are necessary to win contract awards. However, the Company has no
control over whether Midland will provide additional funding or financial
guarantees in the future and does not know whether such additional funding or
financial guarantees will be available from Midland as the Company requires
them. If Midland does not provide such additional funding or financial
guarantees to the Company when needed in the future, the Company will not be
unable to satisfy its working capital requirements and meet its obligations,
including obligations under the Credit Agreement, in the ordinary course of
business, or could be unable to qualify for contract awards. 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 will 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.
5
3. MIDLAND RECAPITALIZATION AND INVESTMENT TRANSACTION
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 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 7,380,000 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.
4. CONTRACTS IN PROGRESS
Information pertaining to contracts in progress at March 31, 2004 and
December 31, 2003 consisted of the following:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
(In thousands)
Costs incurred on uncompleted contracts $ 38,540 $ 48,876
Estimated loss (2,402) (2,866)
-------- --------
36,138 46,010
Less billings to date (36,175) (45,598)
-------- --------
$ 37 $ 412
======== ========
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 489 $ 1,287
Billings in excess of costs and estimated earnings on
uncompleted contracts (526) (875)
-------- --------
$ 37 $ 412
======== ========
Accounts receivable includes unbilled receivables and retainages,
respectively, of $356,000 and $10,000 at March 31, 2004, and of $138,000 and
$10,000 at December 31, 2003.
The Company had contract loss reserves of $64,000 at March 31, 2004 and
$697,000 at December 31, 2003. Included in contract loss reserves at March 31,
2004 is $46,000 related to platform fabrication contracts, including $16,000
recorded in the three-month period ended March 31, 2004 related to a new fixed
price platform fabrication contract. The contract is 84% complete and the
expected delivery is in the June 2004 quarter. The remaining reserves for
platform fabrication contracts relate to contracts that were substantially
complete at March 31, 2004. The reserves for these contracts at December 31,
2003 was $688,000, substantially all of which was realized in the three-month
period ended March 31, 2004.
The remaining contract loss reserve at March 31, 2004 and at December 31,
2003 relates to contracts to provide process equipment. The reserves on these
contracts reflect current competitive market conditions
6
and increased estimated shop overhead costs due to low utilization of the
Company's process system fabrication facilities. All of these contracts are
expected to be completed during the June quarter of 2004.
5. CREDIT FACILITY
On November 18, 2002, the Company entered into a Commercial Business Loan
Agreement 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. The
Credit Agreement is guaranteed by Nassau Holding Company (an affiliate of
Midland), the subsidiaries of Unifab, and the principle members of Midland, and
is secured by the assets of Universal Fabricators, LLC and Allen Process
Systems, LLC, both wholly-owned subsidiaries of the Company. At March 31, 2004,
the Company had $7.9 million in borrowings and letters of credit totaling $3,000
outstanding under the Credit Agreement. Borrowings under the Credit Agreement
bear interest at Libor plus 1.75% or the Prime rate (2.85% at March 31, 2004),
at the Company's discretion. The Credit Agreement matures January 31, 2005.
6. INCOME TAXES
The Company provides for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. As of March 31, 2004, the Company recorded 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 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 of $16.3 million 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.
7. SHAREHOLDERS' EQUITY
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 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 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
7
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:
THREE MONTHS ENDED MARCH 31,
2004 2003
----------- -------------
Numerator:
Net loss $(1,664) $(1,430)
======= =======
Denominator:
Weighted average shares of common stock
outstanding 8,202 819
Effect of issuance of convertible
preferred stock on weighted average
shares of common stock -- 7,380
------- -------
Denominator for basic and diluted
earnings per share - weighted
average shares 8,202 8,199
======= =======
Basic and diluted loss per share $ (0.20) $ (0.17)
======= =======
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 period
ended March 31, 2004, 75,000 options and 6,000 warrants outstanding were
anti-dilutive due to the net loss incurred by the Company. During the period
ended March 31, 2003, 133,500 options and 6,000 warrants outstanding were
anti-dilutive due to the net loss incurred by the Company.
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 earnings and earnings per
share as if the fair value method of accounting prescribed by SFAS No. 123 had
been applied.
8
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):
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ---------
Net loss, as reported $ (1,664) $ (1,430)
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 -- (8)
--------- ---------
Pro forma net loss $ (1,664) $ (1,438)
========= =========
Loss per share
Basic and diluted, as reported $ (0.20) $ (0.17)
========= =========
Basic and diluted, pro forma $ (0.20) $ (0.18)
========= =========
Weighted average fair value of grants $ -- $ --
========= =========
Black-Scholes option pricing model assumptions:
THREE MONTHS ENDED MARCH 31,
2004 2003
---- ----
Risk-free interest rate N/A 1.82%
Volatility factor of the expected market price
of UNIFAB stock N/A 1.072
Weighted average expected life of the option
N/A 2 years
Expected dividend yield -- --
8. 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;
9
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 March 31, 2004, cash
deposits totaling $115,000 secured outstanding letters of credit totaling
$110,000. In addition, at March 31, 2004, letters of credit totaling $3,000 were
outstanding under the Credit Agreement.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with one of its former officers.
This agreement terminates on August 18, 2006. The minimum annual compensation
commitment by the Company under this agreement is $60,000.
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 2013 for the structural
fabrication facility with one 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. At March 31, 2004,
the Company had approximately $10.6 million in aggregate lease commitments under
operating leases, of which $0.7 million is payable during the next twelve
months.
9. 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. During the three month period ended
March 31, 2004, Midland advanced amounts to the Company for working capital,
which were repaid and readvanced from time to time as needed. At March 31, 2004,
$6,500,000 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 would not be able 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 Holding Company, an
affiliate of Midland ("Nassau"), including the employees of Nassau. In the
three-month period ended March 31, 2004, the Company incurred costs of
approximately $645,000 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 quarter ended March 31,
2004 and 2003 are $45,000, respectively, related to these services. At March 31,
2004, all amounts relative to these services had been paid.
In the three-month period ended March 31, 2004, the Company had no
contracts with any affiliates of Midland and had no uncollected receivables
related prior contract activity with any affiliates of Midland. In
10
the three-month period ended March 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 $3.0
million. Included in revenue and gross profit in the three-month period ended
March 31, 2003, are $1,949,000 and $302,000, respectively, related to these
contracts. At March 31, 2003, the Company had $1,166,000 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.
10. INDUSTRY SEGMENT INFORMATION
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 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 three-month periods ended
March 31, 2004 and 2003. 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.
THREE MONTHS ENDED MARCH 31,
2004 2003
---------- ----------
(IN THOUSANDS)
Segment revenue from external customers:
Platform fabrication $ 8,562 $ 5,727
Process systems 1,855 3,692
Drilling rig fabrication 3,423 104
Intersegment eliminations -- --
---------- ----------
$ 13,840 $ 9,523
========== ==========
Segment income (loss):
Platform fabrication $ (181) $ 8
Process systems (600) (189)
Drilling rig fabrication 300 (68)
Other -- --
---------- ----------
(481) (249)
Interest expense (540) (461)
Unallocated corporate overhead (643) (720)
---------- ----------
Loss before income tax $ (1,664) $ (1,430)
========== ==========
11
Total assets of the Company by segment is as follows as of March 31, 2004 and
December 31, 2003:
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
(IN THOUSANDS)
Segment assets at end of period:
Platform fabrication $ 21,539 $ 21,846
Process systems 5,764 6,742
Drilling rig fabrication 7,346 9,229
---------- ----------
34,649 37,817
Corporate 1,000 2,402
---------- ----------
$ 35,649 $ 40,219
========== ==========
11. COMPREHENSIVE INCOME
The following is a summary of the Company's comprehensive income (loss)
for the three months ended March 31, 2004 and 2003.
THREE MONTHS ENDED MARCH 31,
2004 2003
---------- ----------
(IN THOUSANDS)
Net loss $ (1,664) $ (1,430)
Currency translation adjustment -- (24)
---------- ----------
$ (1,664) $ (1,454)
========== ==========
12. 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.
13. NEW ACCOUNTING PRONOUNCEMENTS
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. In December 2003 the FASB issued modifications to FIN 46 ("FIN 46R")
resulting in multiple effective dates based on the nature as well as the
creation date of a variable interest entity. The adoption of FIN 46 did not have
a material impact on the Company's consolidated financial position or results of
operations because the Company does not believe that the Company has interests
that would be considered variable interest entities under FIN 46.
12
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 three month period ended March 31, 2004:
- Since the Midland Transaction, Midland has provided financial,
operational, and management support to the Company. During the
three month period ended March 31, 2004, the Company funded
operations and capital expenditures through advances from
Midland. At March 31, 2004, the Company had $6.5 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 will be unable to meet its obligations, including
obligations under its line of credit, in the ordinary course
of business.
- Revenue for the three-month period ended March 31, 2004
increased over the same period last year by 45% to $13.8
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 for the three-month period ended March 31, 2004
increased over the same period last year by 47% to $13.7
million and as a percentage of revenue was 99% in the March
2004 quarter and 98% in the March 2003 quarter.
- Selling, general and administrative expenses were reduced by
approximately 22% in 2004. This was achieved mainly by
reducing administrative personnel and other administrative
costs over the period.
- The Company recorded a charge of $260,000 related to goodwill
associated with the Company's Compression Engineering business
unit. During the first quarter of 2004 and as part of the
Company's ongoing evaluation and reorganization of operations,
the Company decided to suspend engineering and maintenance
operations related to compressors, including compressors being
rented from the Company.
- 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. All earnings (loss) per share
amounts and weighted average number of shares outstanding have
been restated to give effect to the one-for-ten reverse stock
split effected on August 3, 2003.
13
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. 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. Through March
31, 2004, Midland advanced $6.5 million to the Company for working capital,
which was outstanding at March 31, 2004. From time to time an needed, Midland
provides financial guarantees, including letters of credit, in support of
contract awards to the Company. 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 three-month
periods ended March 31, 2004 and 2003 are $45,000, respectively, 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 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
Revenue for the three months ended March 31, 2004 increased 45% to $13.8
million from $9.5 million for the three months ended March 31, 2003. Revenue
increased for the Company's platform fabrication segment and drilling rig
fabrication segment. Decreased revenues from the Company's process systems
segment in part offset this increase. Backlog was approximately $1.6 million and
$7.6 million at March 31, 2004 and December 31, 2003, respectively. Since March
31, 2004, the Company has been awarded contracts totaling approximately $13.1
million, which are expected to be completed in the next 12 months. Midland has
provided financial guarantees on many of these contracts.
14
Total direct labor hours worked increased 69% overall from the levels
experienced in the same period last year. Direct labor hours worked at the
Company's platform fabrication and drilling rig fabrication facilities increased
by 107% from the same period last year. This increase was partially offset by a
reduction of approximately 41% to direct labor hours incurred at the Company's
process systems facility.
Cost of revenue was $13.7 million for the three months ended March 31,
2004, compared to $9.3 million for the same period last year. 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). These costs were approximately the same
relative to revenue in both periods.
Gross profit (loss) for the three months ended March 31, 2004 was $96,000
compared to $185,000 for the same period last year. Gross profit generated at
the Company's drilling rig fabrication facility was offset in part by increased
costs per manhour at the Company's platform fabrication facility and process
system fabrication facility. During the quarter ended March 31, 2004,
approximately 42% of the manhours incurred on platform fabrication projects
related to the buoyancy can project and did not generate any gross profit to the
March 31, 2004 quarter.
Selling, general and administrative expense decreased to $0.9 million in
the three months ended March 31, 2004, compared to $1.2 million in the three
months ended March 31, 2003. This decrease is mainly due to reduced general and
administrative expenses associated with closing underutilized facilities and
overall reductions in administrative overhead and employees. The Company's
selling, general and administrative expense as a percentage of revenue decreased
to 7% in the three months ended March 31, 2004 from 12% in the same period last
year.
In the three-month period ended March 31, 2004 the Company recorded an
impairment charge of $260,000 related to goodwill associated with the Company's
Compression Engineering business unit. During the first quarter of 2004 and as
part of the Company's ongoing evaluation and reorganization of operations, the
Company decided to suspend engineering and maintenance operations related to
compressors, including compressors being rented from the Company. Operating
results for these operations are included in the Process Systems segment and are
not significant to the historical operations of the Company.
Interest expense for the three months ended March 31, 2004 was 17% higher
than the same period in 2003 due to the higher levels of indebtedness maintained
during 2004. Amortization of the discount on the secured, subordinated
debenture, is being recorded as interest expense. In each of the three-month
periods ended March 31, 2004 and 2003, the Company recorded $130,000 interest
expense related to amortization of the discount on the secured subordinated
debenture.
No net income tax benefit was recognized on the net loss recorded in the
three-month periods ended March 31, 2004 and 2003. 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. 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 net deferred tax
liabilities of the Company at March 31, 2004. 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 during the quarters ended March 31, 2004 and 2003.
15
PLATFORM FABRICATION SEGMENT
Revenue for the platform fabrication segment increased 50%, or $2.8
million, to $8.6 million in the quarter ended March 31, 2004 from $5.7 million
in the same quarter in 2003. Direct manhours in the March 2004 quarter increased
40% over the March 2003 quarter. Segment income (loss) decreased to a loss of
$181,000 in the March 31, 2004 quarter from $8,000 in the March 31, 2003
quarter. Fabrication activity has increased over last year, although bidding for
projects in this segment has remained competitive, causing lower profit margins.
Approximately 42% of the manhours incurred in this segment related to the
completion of a buoyancy can project and generated no gross profit. In the March
2003 quarter, segment income was reduced by $292,000 related to the repair of
the roof on the Company's main fabrication building. Savings from the reduction
of administrative staff and the shifting of general and administrative functions
to corporate reduced segment loss in the March 2004 quarter.
PROCESS SYSTEMS SEGMENT
Revenue for the process systems segment was $1.9 million in the
three-month period ended March 31, 2004 compared to $3.7 million in the same
quarter last year. In the quarter ended March 31, 2004, direct manhours
decreased 41% from the March 2003 quarter. Due to this low level of activity and
the increase in cost per manhour that resulted from it, segment loss increased
in the March 31, 2004 quarter to $0.6 million from $0.2 million in the same
quarter in 2003. Savings from the reduction of administrative staff and the
shifting of general and administrative functions to corporate decreased the
segment loss in the March 31, 2004 but were offset by a charge of $0.3 related
to goodwill associated with the Company's Compression Engineering business unit.
Included in segment loss for the March 31, 2003 quarter were contract loss
reserves of $170,000, including $117,000 recorded because of delays encountered
on contracts to provide process equipment that are being manufactured overseas.
DRILLING RIG FABRICATION SEGMENT
Revenue for the drilling rig fabrication segment increased to $3.4 million
in the quarter ended March 31, 2004 from $104,000 in the quarter ended March 31,
2003. In the March 31, 2004 quarter, the segment produced income of $300,000
compared to a segment loss of $68,000 for the quarter ended March 31, 2003.
Nearly all of the operating results in this segment relate to one significant
project being performed at the Company's fabrication facility in Lake Charles,
Louisiana. Upon the completion of this project in April 2004 and considering the
lack of current backlog for this facility, management decided to temporarily
idle this facility. Management is currently evaluating various business
alternatives relating to this facility and the impact, if any, these
alternatives would have on the carrying value of the long-lived assets
(approximately $6.2 million at March 31, 2004) related to this facility.
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 three-month period ended March 31, 2004, the Company's available
funds and $157,000 generated from financing activities together funded cash used
in operations of $155,000 and investing activities of $7,000, primarily capital
expenditures.
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 three-month period ended March
31, 2004, Midland advanced $600,000, which the Company used for working capital
during the period. At March 31, 2004, $6.5 million was outstanding and owed to
Midland related to this informal arrangement. The liquidity afforded by these
advances from Midland was necessary for the Company to meet its obligations and
fund operations. At December 31, 2002, Midland provided a standby letter of
credit to a customer in support of a contract, which was completed during the
March 2004 quarter. The letter of credit expired in March 2004. Since that time,
the Company has been awarded contracts totaling $13.1 million, which have
required a financial guarantee or letter of credit from Midland. Management
believes that additional funds available from Midland under the informal
arrangement
16
described above are necessary to fund its working capital needs and planned
capital expenditures for the next 12 months and that guarantees from Midland are
necessary to win contract awards. However, the Company has no control over
whether Midland will provide additional funding or financial guarantees in the
future and does not know whether such additional funding or financial guarantees
will be available from Midland as the Company requires them. If Midland does not
provide such additional funding or financial guarantees when needed in the
future, the Company will not be able 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
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 letters of credit totaling $3,000 outstanding under the revolving
credit facility. Borrowings under the Credit Agreement bear interest at Libor
plus 1.75% or the Prime rate (2.85% at March 31, 2004), at the Company's
discretion. The Credit Agreement matures January 31, 2005. At March 31, 2004,
the Company had other letters of credit outstanding totaling $110,000, which
were secured by cash deposits totaling $115,000.
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
will not be able to meet its obligations, including obligations under the Credit
Agreement, in the ordinary course of business.
NEW ACCOUNTING PRONOUNCEMENTS
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. In December 2003 the FASB issued modifications to FIN 46 ("FIN 46R")
resulting in multiple effective dates based on the nature as well as the
creation date of a variable interest entity. The adoption of FIN 46 did not have
a material impact on the Company's consolidated financial position or results of
operations because the Company does not believe that the Company has interests
that would be considered variable interest entities under FIN 46.
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
17
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 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 3. 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
$29.6 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 $296,000 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 March 31, 2004. 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 2004.
18
While the Company does not currently use derivative financial instruments,
it may use them in the future if deemed appropriate.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
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 "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, contingencies and uncertainties described immediately below:
- advances and financial guarantees from Midland have been necessary
for the Company to meet its obligations and fund operations and for
contract awards. However, the Company has no control over whether
Midland will provide additional funding or financial guarantees in
the future and does not know whether such additional funding or
financial guarantees will be available from Midland as the Company
requires them. If Midland does not provide such additional funding
or financial guarantees in the future as the Company requires it
them, the Company will not be able 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;
- general economic and business conditions and industry trends;
- the economic strength of our customers and potential customers;
- decisions about offshore developments to be made by oil and gas
companies;
- the highly competitive nature of our businesses;
- our future financial performance, including availability, terms and
deployment of capital;
- the continued availability of qualified personnel;
- changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory
proceedings;
- changes in existing environmental regulatory matters;
- rapid technological changes;
- realization of deferred tax assets;
- consequences of significant changes in interest rates and currency
exchange rates;
- difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions;
- social, political and economic situations in foreign countries where
we do business, including among others, countries in the Middle
East;
- effects of asserted and unasserted claims;
- our ability to obtain surety bonds and letters of credit; and
- our ability to maintain builder's risk, liability and property
insurance in amounts we consider adequate at rates that we consider
economical, particularly after the impact on the insurance industry
of the September 11, 2001 terrorist attacks.
ITEM 4. 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
19
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 first quarter of fiscal
year 2004 that have materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II
ITEM 1. 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 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 5. OTHER INFORMATION
This report on Form 10-Q is accompanied by a statement of the Principal
Executive Officer and the Chief Financial Officer of the registrant making
certain certifications as to the contents hereof, as required by Section 906 of
the Sarbanes-Oxley Act of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
31.1 Certification pursuant to Exchange Act 13a-15 and
15d-15(e) accompanying and furnished with this
quarterly report on Form 10-Q for the three-month
period ended March 31, 2004
31.2 Certification pursuant to Exchange Act 13a-15 and
15d-15(e) accompanying and furnished with this
quarterly report on Form 10-Q for the three-month
period ended March 31, 2004
20
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 quarterly report on Form 10-Q for the
three-month period ended March 31, 2004
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 quarterly report on Form 10-Q for the
three-month period ended March 31, 2004
(b) Reports on form 8-K
None
21
SIGNATURES
Pursuant to the requirements 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.
UNIFAB International, Inc.
Date May 14, 2004 /s/ Peter J. Roman
--------------------------------------------
Peter J. Roman
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
31.1 Certification pursuant to Exchange Act 13a-15 and 15d-15(e)
accompanying and furnished with this quarterly report on Form 10-Q
for the three-month period ended March 31, 2004
31.2 Certification pursuant to Exchange Act 13a-15 and 15d-15(e)
accompanying and furnished with this quarterly report on Form 10-Q
for the three-month period ended March 31, 2004
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 quarterly report on Form 10-Q for the
three-month period ended March 31, 2004
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 quarterly report on Form 10-Q for the
three-month period ended March 31, 2004