SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
JULY 18, 2003
Date of Report (Date of earliest event reported)
UNIFAB INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 0-29416 72-1382998
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
5007 PORT ROAD
NEW IBERIA, LOUISIANA 70560
(Address of principal executive offices) (Zip Code)
(337) 367-8291
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name or former address, if changed since last report)
ITEM 5.
I. SEGMENT DISCLOSURE
Effective January 1, 2003, as a result of the Midland Recapitalization and
Investment transaction, management has evaluated the changed organizational and
reporting structure of the Company and has concluded that the Company operates
three reportable segments: platform fabrication, process systems and drilling
rig fabrication. The Company's Quarterly Report on Form 10-Q for the three-month
period ended March 31, 2003 included disclosure of these reportable segments.
This Form 8-K amends the financial statements for Unifab International, Inc. as
filed in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 to include segment disclosure in Note 16. Industry Segments,
and amends Management's Discussion and Analysis for the related segment
disclosure. The amended financial statements are to be distributed with the
Company's proxy materials related to the 2003 annual meeting of the
shareholders.
II. 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 Tony Freeman & 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. Mr. Freeman's appointment was
ratified by Unifab International, Inc. (the "Company"), the sole shareholder of
APS Limited. 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 to the consolidated financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
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, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2002 and 2001 and for the Nine Months Ended December 31, 2000 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
2002 and 2001 and for the Nine Months Ended December 31, 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and
2001 and for the Nine Months Ended December 31, 2000 F-6
Notes to Consolidated Financial Statements F-7
1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
UNIFAB International, Inc.
We have audited the accompanying consolidated balance sheet of UNIFAB
International, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended December 31, 2002. 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 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 audit provides 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, 2002, and the results of their operations and
their cash flows for the year ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
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 28, 2003
(July 3, 2003 as to Note 16)
F-1
Report of Independent Auditors
The Board of Directors and Shareholders
UNIFAB International, Inc.
We have audited the accompanying consolidated balance sheet of UNIFAB
International, Inc. as of December 31, 2001, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year ended
December 31, 2001 and the nine-month period ended December 31, 2000. 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. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of UNIFAB
International, Inc. at December 31, 2001, and the consolidated results of its
operations and its cash flows for the year ended December 31, 2001 and the
nine-month period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that 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 classification 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
F-2
UNIFAB International, Inc.
Consolidated Balance Sheets
DECEMBER 31,
2002 2001
------------- -------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 80 $ 754
Accounts receivable, net 7,517 15,362
Costs and estimated earnings in excess of billings on uncompleted contracts 2,297 5,769
Income tax receivable 305 4,112
Prepaid expenses and other assets 1,873 2,442
------------- -------------
Total current assets 12,072 28,439
Property, plant and equipment, net 26,221 34,125
Goodwill, net 260 260
Other assets 726 383
------------- -------------
Total assets $ 39,279 $ 63,207
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,056 $ 15,123
Billings in excess of costs and estimated earnings on uncompleted contracts 14 1,343
Accrued liabilities 2,163 3,750
Contract loss reserves 1,148 490
Current maturities of long-term debt 850 23,246
------------- -------------
Total current liabilities 9,231 43,952
Long-term debt, less current maturities 2,090 122
Secured, subordinated notes payable 6,848 --
Secured, subordinated convertible debenture, net of unamortized discount of
$3,452 in 2002 7,200 --
------------- -------------
Total liabilities 25,369 44,074
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized, 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, 20,000,000 shares authorized, 8,189,972 and
8,127,283 shares outstanding in 2002 and 2001, respectively 82 82
Additional paid-in capital 62,076 46,830
Accumulated deficit (48,212) (27,695)
Accumulated other comprehensive loss (36) (84)
------------- -------------
Total shareholders' equity 13,910 19,133
------------- -------------
Total liabilities and shareholders' equity $ 39,279 $ 63,207
============= =============
See accompanying notes.
F-3
UNIFAB International, Inc.
Consolidated Statements of Operations
NINE-MONTHS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------- ------------- -----------------
(In thousands, except per share amounts)
Revenue $ 33,286 $ 81,733 $ 60,385
Cost of revenue 39,260 79,244 63,387
------------- ------------- -------------
Gross profit (loss) (5,974) 2,489 (3,002)
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 7,242 7,417 6,685
------------- ------------- -------------
Loss from operations (18,641) (25,204) (9,687)
Other income (expense):
Interest expense (1,894) (2,794) (1,807)
Interest income 18 33 180
------------- ------------- -------------
Loss before income taxes (20,517) (27,965) (11,314)
Income tax provision (benefit) -- 1,316 (4,048)
------------- ------------- -------------
Net loss $ (20,517) $ (29,281) $ (7,266)
============= ============= =============
Basic and diluted loss per share $ (0.56) $ (3.60) $ (1.00)
============= ============= =============
Basic and diluted weighted average shares outstanding 36,699 8,142 7,270
============= ============= =============
See accompanying notes.
F-4
UNIFAB International, Inc.
Consolidated Statements of Shareholders' Equity
ACCUMULATED
COMMON STOCK PREFERRED STOCK ADDITIONAL OTHER COMPREHENSIVE
-------------- --------------- PAID-IN ACCUMULATED COMPREHENSIVE INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) TOTAL (LOSS)
------ ------ ------ ------ ---------- ------------ ------------ -------- -------------
(In thousands)
Balance at March 31, 2000 6,820 $ 68 -- $ -- $35,395 $ 8,852 $ (47) $ 44,268
Stock issued:
Stock awards 6 -- -- -- 36 -- -- 36
Private placement of stock 1,300 13 -- -- 11,272 -- -- 11,285
Stock options exercised 1 -- -- -- 10 -- -- 10
Net loss -- -- -- -- -- (7,266) -- (7,266) $ (7,266)
Currency translation
adjustment -- -- -- -- -- -- (343) (343) (343)
------------
Comprehensive loss -- -- -- -- -- -- -- -- $ (7,609)
------ ------ ------ ------ ------- ------------ ------------ -------- ============
Balance at December 31, 2000 8,127 81 -- -- 46,713 1,586 (390) 47,990
Stock issued:
Stock awards 56 1 -- -- 66 -- -- 67
Stock options exercised 7 -- -- -- 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 8,190 82 -- -- 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 8,190 $ 82 1 $ -- $62,076 $ (48,212) $ (36) $13,910
====== ====== ====== ====== ======= ============ ============ ========
See accompanying notes.
F-5
UNIFAB International Inc.
Consolidated Statements of Cash Flows
NINE-MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------- ------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (20,517) $ (29,281) $ (7,266)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 2,700 2,604 1,727
Amortization -- 450 631
Provision for doubtful accounts 913 33 886
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 (3,252)
Changes in operating assets and liabilities:
Accounts receivable 6,169 169 1,807
Net costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings on
uncompleted contracts 2,143 (4,086) 3,577
Prepaid expenses and other assets 5,164 6,688 (2,524)
Accounts payable and accrued liabilities (4,673) 7,227 2,471
------------- ------------- -------------
Net cash used in operating activities (2,676) (94) (1,943)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (1,194) (2,293) (4,688)
Proceeds from sale of equipment 130 90 178
Collections on notes receivable 27 -- --
------------- ------------- -------------
Net cash used in investing activities (1,037) (2,203) (4,510)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances from Midland 2,815 -- --
Net change in short-term borrowings 224 1,996 (4,427)
Exercise of stock options -- 51 10
Proceeds from issuance of common stock -- 11,685
------------- ------------- -------------
Net cash provided by financing activities 3,039 2,047 7,268
Net change in cash and cash equivalents (674) (250) 815
Cash and cash equivalents at beginning of year 754 1,004 189
------------- ------------- -------------
Cash and cash equivalents at end of year $ 80 $ 754 $ 1,004
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Income taxes $ (3,766) $ -- $ --
============= ============= =============
Interest $ 1,668 $ 1,944 $ 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, 2002
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 wholly owned subsidiary, Allen Process Systems, Ltd.,
headquartered in London, England, the Company provides engineering and project
management services primarily in Europe and the Middle East and the Far East.
The Company, as of December 31, 2002, operates in the facilities obtained
with the acquisition of each operating subsidiary. These facilities are similar
in nature and provide the physical environment necessary for the Company to
provide its custom fabrication services to the oil and gas industry. Management
has concluded that the operating facilities are operating segments that qualify
to be aggregated under SFAS 131 in these financial statements. Management has
considered that that nature of the products and services provided by the Company
and the nature of the production processes are similar for each operating
segment. The types or class of customers, and our methods of distributing our
products and providing our services are similar for all operating segments. (See
Note 16 Industry Segments). The tables below summarize revenues from external
customers for our products.
NINE-MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------- ------------- -------------
Decks, jackets and module fabrication $ 16,490 $ 34,023 $ 25,655
Production process systems 9,570 20,679 14,209
Drilling rig fabrication 340 13,487 11,005
Other 6,886 13,544 9,516
------------- ------------- -------------
Total revenue $ 33,286 $ 81,733 $ 60,385
============= ============= =============
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, 2002 and 2001, 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
F-7
subordinated notes which total in the aggregate $6.8 million. The debenture is
convertible into the Company's common stock at a price of $0.35 per share.
Midland's 738 shares of preferred stock will be convertible into a total of
73,800,000 shares of the Company's common stock as soon as the shareholders
authorize 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 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.
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.
FISCAL YEAR
Effective December 31, 2000, the Company changed its fiscal year-end to
December 31 of each year. The consolidated statements of operations,
shareholders' equity and cash flows for the period from April 1, 2000 to
December 31, 2000 represent a transition period of nine months, which is
referred to as the nine months ended December 31, 2000.
The following is a comparative summary of the operating and cash flow
results for the nine-month periods ended December 31, 2000 and December 31,
1999:
NINE MONTHS ENDED
DECEMBER 31
2000 1999
------------- -------------
(Unaudited)
(In Thousands,
Except Per-Share Amounts)
Revenue $ 60,385 $ 55,817
Cost of revenue 63,387 48,942
------------- -------------
Gross profit (loss) (3,002) 6,875
Selling, general and administrative expense 6,685 6,141
------------- -------------
Income (loss) from operations (9,687) 734
Other income (expense):
Interest expense (1,807) (908)
Interest income 180 63
------------- -------------
Loss before income taxes (11,314) (111)
Income tax provision (benefit) (4,048) 97
------------- -------------
Net loss $ (7,266) $ (208)
============= =============
Basic and diluted loss per share $ (1.00) $ (0.03)
============= =============
Basic weighted average shares outstanding 7,270 6,697
============= =============
Diluted weighted average shares outstanding 7,270 6,697
============= =============
F-8
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,266) $ (208)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 1,727 1,535
Amortization 631 601
Provision for doubtful accounts 886 65
Deferred income taxes (3,252) 645
Changes in operating assets and
liabilities, net of effects from
acquisition of business:
Accounts receivable 1,807 5,353
Net costs and estimated earnings in
excess of billings and billings in
excess of costs and estimated earnings
on uncompleted contracts 3,577 (1,634)
Prepaid expenses and other assets (2,524) (2,483)
Accounts payable and accrued liabilities 2,471 (3,395)
------------- -------------
Net cash provided by (used in) operating
activities (1,943) 479
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash acquired -- 233
Purchases of equipment (4,688) (5,144)
Proceeds from sale of equipment 178 --
------------- -------------
Net cash used in investing activities (4,510) (4,911)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings 5,173 2,929
Proceeds from notes payable -- 10,000
Payments on note payable (9,600) (7,891)
Exercise of stock options 10 --
Proceeds from issuance of common stock 11,685 --
------------- -------------
Net cash provided by financing activities 7,268 5,038
Net change in cash and cash equivalents 815 606
Cash and cash equivalents at beginning of
period 189 1,125
------------- -------------
Cash and cash equivalents at end of year $ 1,004 $ 1,731
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes $ -- $ --
============= =============
Interest $ 1,944 $ 1,103
============= =============
F-9
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 in
a manner that we believe most accurately reflects the physical progress on the
contracts. Contracts to construct platforms are measured by comparing labor and
subcontract costs to date against total estimated labor and subcontract costs.
Contracts to design and to manufacture processing equipment, which include a
significant number of man-hours to design and to manufacture the equipment, are
measured by comparing labor hours to date against total estimated labor hours.
The Company believes this measure accurately represents progress on these
contracts. Both platform fabrication and process equipment design and
manufacture contracts typically include significant material costs at the start
of the contract, such as for steel and valves. The Company does not include
materials purchased pursuant to such contracts as a measure of completion
because it believes that would distort the reported progress on the contracts.
Contracts to manufacture drilling rigs are measured by comparing total
costs to date against total estimated costs. These contracts generally do
require steel purchases as man-hours are applied and physical completion is
performed. The Company does not believe a significant distortion in the reported
progress on these contracts results when material costs are included in the
measure of progress.
As described above, these measures of progress are used consistently for
contracts that have similar characteristics. The Company believes that the use
of these measurements of progress results in 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.
F-10
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:
Nine-months ended
Year ended December 31, December 31,
2002 2001 2000
------------- ------------- -------------
Reported net loss $ (20,517) $ (29,281) $ (7,266)
Add: Goodwill amortization, net of tax -- 437 413
------------- ------------- -------------
Adjusted net loss $ (20,517) $ (28,844) $ (6,853)
============= ============= =============
Reported net loss per share, basic
and diluted $ (0.56) $ (3.60) $ (1.00)
Add Goodwill amortization net of tax,
per basic and diluted share -- 0.05 0.06
------------- ------------- -------------
Adjusted loss per share, basic and
diluted $ (0.56) $ (3.55) $ (0.94)
============= ============= =============
Basic and diluted weighted average
shares outstanding 36,699 8,142 7,270
============= ============= =============
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 as of December 31, 2002 and 2001, is
approximately $260,000 and is entirely attributable to the Company's June 24,
1999 acquisition of Compression Engineering Services, Inc.
INTEREST CAPITALIZATION
Interest costs for the construction of certain long-lived assets are
capitalized and amortized over the related assets' estimated useful lives.
During the nine months ended December 31, 2000 interest cost of $396,000 was
capitalized. No interest costs were capitalized during the years ended December
31, 2002 and 2001.
F-11
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 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):
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31
2002 2001 2000
------------- ------------- -------------
Net loss, as reported $ (20,517) $ (29,281) $ (7,266)
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 (302) (586) (546)
------------- ------------- -------------
Pro forma net loss $ (20,819) $ (29,867) $ (7,812)
============= ============= =============
Loss per share
Basic and diluted, as reported $ (0.56) $ (3.60) $ (1.00)
============= ============= =============
Basic and diluted, pro forma $ (0.57) $ (3.67) $ (1.07)
============= ============= =============
Weighted average fair value of grants $ 0.21 $ 0.82 $ 3.16
============= ============= =============
Black-Scholes option pricing model assumptions:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31
2002 2001 2000
-------------- -------------- -----------------
Risk-free interest rate 1.82% to 2.22% 2.77% to 6.28% 4.69% to 6.28%
Volatility factor of the expected market price
of UNIFAB stock 1.042-1.073 .722-.907 .722-.797
Weighted average expected life of the option
2 years 2 years 2 years
Expected dividend yield -- -- --
F-12
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. 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.
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, 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, 2002. The
carrying value of the Company's financial instruments at December 31, 2001,
primarily notes payable, closely approximates fair value.
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 Company is required to implement SFAS No. 143 on
January 1, 2003, and we have not determined the impact that this statement will
have on our consolidated financial position or results of operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS no. 145 eliminates SFAS No. 4
and as a result, gains and losses from extinguishments of debt should be
classified as extraordinary items only if they meet the criteria of APB Opinion
No. 30. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases" to eliminate an
inconsistency between the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 also updates and amends existing authoritative pronouncements to make
various
F-13
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The Company does not expect that the adoption of SFAS No.
145 will have a material impact on its 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 Company will implement the
provisions of this statement on a prospective basis.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation," to provide alternate methods of transition to SFAS No. 123's fair
value method of accounting for stock-based compensation. Statement No. 148 also
amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28,
"Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While SFAS No.
148 does not amend SFAS No. 123 to require companies to account for employee
stock options using the fair value method, the disclosure provisions of SFAS No.
148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB No. 25. As allowed
by SFAS No. 123, the Company has elected to continue to utilize the accounting
method prescribed by APB Opinion No. 25 and has adopted the disclosure
requirements of SFAS No. 148 as of December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. As required, the Company adopted the
disclosure requirements of FIN 45 as of December 31, 2002. See Note 13 to the
consolidated financial statements. The Company will adopt the initial
recognition and measurement provisions on a prospective basis for guarantees
issued or modified after December 31, 2002. The Company has not determined the
impact that the adoption of the recognition / measurement provisions will have
on its consolidated financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN46"). 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 Company does not expect that
the adoption of FIN 46 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, 2002.
F-14
2. MIDLAND RECAPITALIZATION AND INVESTMENT TRANSACTION
During 2001, the Company's results of operation and financial condition
deteriorated dramatically. In significant ways, the Company 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:
o 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.
o 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.
o 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.
o 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. 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.
o 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.
o 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.
F-15
Upon consummation of the Midland agreement on August 13, 2002:
o $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.
o $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 $10.7 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 (6.75% at December 31, 2002)
and convertible into shares of the Company's common stock at $0.35 per
share (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 (7.25% at December 31, 2002). 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 $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.
o 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 (7.25% at December 31, 2002). This promissory note also
constitutes secured indebtedness under the Company's credit agreement
with Midland.
o $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.
o $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.
o 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.
There is no accrued and unpaid interest owed to Midland at December 31,
2002.
F-16
3. CONTRACTS IN PROGRESS
Information pertaining to contracts in progress at December 31, 2002 and
2001 consisted of the following:
DECEMBER 31
2002 2001
------------- -------------
(In thousands)
Costs incurred on uncompleted contracts $ 10,919 $ 26,912
Estimated earnings, net 50 2,738
------------- -------------
10,969 29,650
Less billings to date (8,686) (25,224)
------------- -------------
$ 2,283 $ 4,426
============= =============
Included in the accompanying balance sheets under
the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 2,297 $ 5,769
Billings in excess of costs and estimated
earnings on uncompleted contracts (14) (1,343)
------------- -------------
$ 2,283 $ 4,426
============= =============
Accounts receivable includes retainages and unbilled receivables,
respectively, of $775,000 and $36,000 at December 31, 2002 and $641,000 and
$2,018,000 at December 31, 2001. The unbilled receivables relate primarily to
time and material contracts.
The Company has contract loss reserves of $1,148,000 and $490,000 at
December 31, 2002 and December 31, 2001, respectively. Included in contract loss
reserves at December 31, 2002 is $441,000 related to two fixed price contracts
that were executed in December 31, 2002. The expected delivery date on each of
these contracts is March - April, 2003. The remaining contract loss reserve at
December 31, 2002 relates to contracts to provide process equipment, which is
being fabricated overseas. These contracts have encountered delays in completion
of fabrication and commissioning and have resulted in cost overruns to the
Company. These contracts are expected to be complete in April 2003. At December
31, 2001, the contract loss reserve relates to a fixed price contract that was
completed and delivered in February 2002. This reserve was recorded to increase
the estimated cost at completion on the contract and adjusted upward the reserve
that was recorded on this contract in the quarter ended September 30, 2001.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
2002 and 2001:
DECEMBER 31,
2002 2001
------------- -------------
(In thousands)
Land $ 2,089 $ 2,089
Building and bulkhead, including leasehold
improvements 12,540 18,903
Yard equipment 24,412 25,920
Vehicles and other equipment 1,552 1,977
Construction in progress 730 --
------------- -------------
41,323 48,889
Less accumulated depreciation (15,102) (14,764)
------------- -------------
$ 26,221 $ 34,125
============= =============
F-17
5. LONG-TERM DEBT
Long-term debt at December 31, 2002 and 2001 consisted of the following:
DECEMBER 31,
2002 2001
------------- -------------
(In thousands)
------------------------------
Revolving credit agreement with Whitney National Bank,
interest payable monthly at variable rates (3.2% at
December 31, 2002), maturing May 26, 2004, 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 $ 2,090 $ --
Note payable to finance company, payable in monthly installments
of $126,000, including interest at 5.9%, maturing July 2003 749 --
Note payable to finance company, payable in monthly installments
of $13,000, including interest at 7.75%, maturing March 2003 39 185
Revolving credit agreement with a bank group, interest payable monthly at
variable rates (7.5% at December 31, 2001), matures January 31, 2003,
secured by substantially all of the assets of the Company -- 22,605
Other notes payable 62 578
------------- -------------
Total long-term debt 2,940 23,368
Less current maturities (850) (23,246)
------------- -------------
Long-term debt, less current maturities $ 2,090 $ 122
============= =============
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,
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):
2003 $ 850
2004 2,090
2005 2,139
2006 4,709
2007 2,130
Thereafter 8,522
-----------
Total $ 20,440
===========
F-18
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, 2002 and
2001 were as follows:
DECEMBER 31,
2002 2001
------------- -------------
(In thousands)
Deferred tax liabilities:
Excess book value over tax basis of property,
plant and equipment $ 2,427 $ 4,650
------------- -------------
Total deferred tax liabilities 2,427 4,650
Deferred tax assets:
Reserves not currently deductible 1,317 234
Goodwill 2,846 3,132
Long term construction contracts 15 --
Operating loss carryforward 12,052 8,618
------------- -------------
Total deferred tax assets 16,230 11,984
Valuation allowance for deferred tax assets (13,803) (7,334)
------------- -------------
Deferred tax assets 2,427 4,650
------------- -------------
Net deferred tax liabilities $ -- $ --
============= =============
At December 31, 2002, the Company has an available net operating loss
carryforward of approximately $31.7 million for U.S. Federal income tax
purposes, which, if not used will expire between 2020 and 2022. The ability of
the Company to utilize net operating loss carryforwards is limited on an annual
basis because the Midland transaction results 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 (benefit) is comprised of the following:
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------- ------------- -------------
(In thousands)
Current $ -- $ -- $ (796)
Deferred -- 1,316 (3,252)
------------- ------------- -------------
$ -- $ 1,316 $ (4,048)
============= ============= =============
F-19
The reconciliation of income tax computed at the federal statutory rates to
income tax expense is:
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31
2002 2001 2000
------------- ------------- -------------
Tax at federal statutory rates $ (7,181) $ (9,508) $ (3,846)
Valuation reserve on deferred tax assets 6,469 6,942 134
Non deductible loss on goodwill impairment -- 3,174 --
Other, primarily permanent differences and state
income taxes 712 708 (336)
------------- ------------- -------------
$ -- $ 1,316 $ (4,048)
============= ============= =============
7. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company has authorized 20,000,000 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.
EARNINGS PER SHARE
Under the terms of the Midland agreement, the Company issued 738 Series A
Shares and a $10,652,000 convertible debenture. Each share of series A preferred
stock is convertible into 100,000 shares of Unifab common stock or 73,800,000
total common shares. However, at December 31, 2002, the total number of common
shares authorized is 20,000,000, therefore, there are insufficient authorized
common shares to effect the conversion of the preferred shares. Until converted,
each share of preferred stock enjoys all the rights and privileges of 100,000
shares of common stock, including voting rights. The denominator below gives
effect to the conversion of the shares of preferred stock. The $10,652,000
convertible debenture is convertible into Unifab common stock at a conversion
price of $0.35 per share, or 30,434,000 shares of common stock. These shares are
anti-dilutive and are not included in the computation of diluted earnings per
share during periods where the Company incurs a loss.
F-20
The following table sets forth the computation of basic and diluted earnings
per share giving effect to the conversion by Midland of 738 shares of preferred
stock on August 13, 2002:
NINE-MONTHS
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31
2002 2001 2000
------------- ------------- -------------
(In thousands, except per share amounts)
Numerator:
Net loss $ (20,517) $ (29,281) $ (7,266)
============= ============= =============
Denominator:
Weighted average shares of common stock
outstanding 8,190 8,142 7,270
Effect of issuance of convertible
preferred stock on weighted average
shares of common stock 28,509 -- --
------------- ------------- -------------
Denominator for basic and diluted
earnings per share - weighted
average shares 36,699 8,142 7,270
============= ============= =============
Basic and diluted loss per share $ (0.56) $ (3.60) $ (1.00)
============= ============= =============
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, 2002, 835,000 options and 60,000 warrants outstanding were anti-dilutive due
to the net loss incurred by the Company. During the year ended December 31,
2001, 862,000 options and 60,000 warrants outstanding were anti-dilutive due to
the net loss incurred by the Company. During the nine months ended December 31,
2000, 842,000 options and 60,000 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, 2002 and 2001, the allowance for doubtful accounts deducted
from accounts receivable on the accompanying balance sheets was $763,000 and
$528,000, 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, 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,
F-21
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, 2002 and 2001 and for the nine
months ended December 31, 2000 is as follows (in thousands, except per share
data):
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
-------------------------- -------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS
------------- ---------- ---------- ------------- ------------- -------------
Outstanding - beginning of period $ 7.21 862 $ 8.62 842 $ 10.08 412
Granted 0.39 500 1.78 198 7.22 434
Exercised -- -- 7.37 (7) 7.50 (1)
Forfeited 6.67 (537) 7.87 (171) 7.33 (3)
------------- ---------- ---------- ------------- ------------- -------------
Options outstanding at end of period $ 3.42 825 $ 7.21 862 $ 8.62 842
============= ========== ========== ============= ============= =============
Options exercisable at end of period $ 3.41 818 $ 8.36 623 $ 9.42 552
============= ========== ========== ============= ============= =============
The following table summarizes information about stock options outstanding at
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ---------------------------------
EXERCISE PRICE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE PER SHARE OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
$18.00 24,500 4.8 years $18.00 24,500 $18.00
11.31 10,000 7.8 11.31 10,000 11.31
7.12 - 8.75 257,933 6.7 7.41 257,933 7.41
4.75 - 5.65 32,500 8.2 5.04 25,833 5.05
0.39 500,000 9.7 0.39 500,000 0.39
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 and $331,000 in
the year ended December 31, 2001 and in the nine months ended December 31, 2000,
respectively. The Company made no matching contributions in the year ended
December 31, 2002.
F-22
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, 2002 and 2001 and the
nine months ended December 31, 2000 is summarized as follows (in thousands):
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31
2002 2001 2000
-------- -------- -----------
Customer A $ 5,748 $ -- $ --
Customer B -- 15,858 6,617
Customer C -- -- 6,435
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, 2002 and 2001 and in the nine months ended December 31, 2000, 24%,
21% and 22%, 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, 2002 and 2001,
and for the nine months ended December 31, 2000 (in thousands):
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31
2002 2001 2000
------------- ------------- -------------
Location:
U.S. Gulf of Mexico $ 25,387 $ 64,235 $ 47,205
International:
Africa 1,679 5,767 1,023
Europe 911 508 4,143
Other 5,309 11,233 8,014
------------- ------------- -------------
Total International 7,899 17,498 13,180
------------- ------------- -------------
Total $ 33,286 $ 81,733 $ 60,385
============= ============= =============
Substantially 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 and the Jones Act. 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 are 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 allege multiple claims for breach of
contract, breach of specific performance, a request for injunction, request for
damages, and a request for treble damages and
F-23
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 plaintiffs more
specifically claim that 1) the accounts receivable and cash in the bank at the
time of the asset acquisition were not conveyed as part of the transaction, 2)
certain accounting adjustments resulted in a credit to Mr. Spano, 3) the Company
failed to timely deliver shares of common stock to Mr. Spano as required by the
sale documents, 4) the Company failed to pay a bonus of $1,000,000 to Mr. Spano,
5) the Company allowed the maintenance work in the petrochemical plants to
deteriorate under Mr. Spano's post transaction management, 6) the Company
defamed the Plaintiffs, 7) the Company wrongfully commingled funds belonging to
the Plaintiffs that resulted in seizure of taxes, interest and penalties, and 7)
the Company failed to pay certain debts on assets included in the transaction.
Total damages claimed by the Plaintiffs are approximately $5,000,000. The
Company intends to vigorously defend the lawsuit. The Company has filed a
counterclaim for recovery of approximately $400,000 paid on behalf of
Professional Industrial Maintenance, LLC and Mr. Spano as a result of the
transaction. We anticipate that this matter will go to trial during the second
half of 2003. At December 31, 2002 the Company had recorded no reserve with
respect to this lawsuit.
On March 14, 2003, the Lake Charles Harbor and Terminal District (the "Port")
sent a letter to the Company alleging that the Company was not in compliance
with certain environmental and workforce provisions of the lease agreement (the
"Lease") by and between the Company and the Port for the Lake Charles facility.
The Company has engaged a qualified environmental inspection company to perform
a phase one study of the premises, which should be completed in the first week
of April 2003. The Company intends to vigorously defend against any attempt to
place the Company in breach of the lease
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, 2002, cash
deposits totaling $231,000 secured outstanding letters of credit totaling
$433,000.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with two of its officers. These
agreements terminate on February 26, 2004 and August 18, 2006, respectively. The
minimum annual compensation commitment by the Company under these agreements is
$180,000.
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 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):
2003 $ 640
2004 640
2005 640
2006 640
2007 640
2008 and after 6,959
--------
$ 10,159
========
Rent expense, which includes rent on cancelable equipment leases, during the
years ended December 31, 2002 and 2001 and the nine months ended December 31,
2000 was $1,553,000, $2,300,000 and $1,600,000, respectively.
F-24
14. RELATED PARTY TRANSACTIONS
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. Through December
31, 2002 the Company incurred monthly costs of approximately $111,000 for
coverage under this plan. Prior to participating in this plan, the Company was
self insured for health care benefits with an excess insurance policy covering
individual claims above $75,000 or claims in the aggregate above $1,125,000. The
monthly cost of this policy was $112,000, including administration and claim
expense.
Under an arrangement with the Company, Midland has agreed to provide
financial support and funding for working capital or other needs, as required.
At December 31, 2002, 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, 2002. 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.
15. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly results of operations for the year ended December 31,
2002 and 2001 were as follows (in thousands, except per share data):
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)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
---------- ---------- ------------- ------------
Revenue $ 21,703 $ 22,861 $ 19,957 $ 17,212
Gross profit (loss) 128 1,735 1,560 (934)
Net loss (1,603) (591) (23,034) (4,053)
Basic and diluted loss per share (0.20) (0.07) (2.83) (0.50)
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, 2002 include:
o Loss on impairment of Lake Charles facility of $5,074,000
o Loss reserves accrued on four fixed price contracts totaling
$1,213,000
Pretax results for the quarter ended December 31, 2001 include:
o Loss on the completion of the OBI contracts in progress of
$2,039,000
o Recovery of $1,680,000 on an account receivable which had been
written off in the September 2001 quarter
F-25
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 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, 2002
and 2001 and for the nine-month period ended December 31, 2000. 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
NINE-MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------- ------------- -------------
(in thousands)
Revenue from external customers:
Platform fabrication $ 17,384 $ 36,717 $ 28,439
Process systems 12,124 26,299 17,001
Drilling rig fabrication 498 5,295 2,556
Other (a) 3,280 13,937 13,078
Intersegment eliminations -- (515) (689)
------------- ------------- -------------
$ 33,286 $ 81,733 $ 60,385
============= ============= =============
Segment income (loss):
Platform fabrication $ (1,913) $ 1,859 $ (2,565)
Process systems (4,231) (4,076) (1,817)
Drilling rig fabrication (7,354) (5,097) (240)
Other (a) (1,604) (15,795) (4,207)
------------- ------------- -------------
(15,102) (23,109) (8,829)
Interest expense (1,894) (2,794) (1,807)
Unallocated corporate expense (3,521) (2,062) (678)
------------- ------------- -------------
Loss before income tax $ (20,517) $ (27,965) $ (11,314)
============= ============= =============
Depreciation and amortization:
Platform fabrication $ 1,196 $ 1,220 $ 956
Process systems 465 648 554
Drilling rig fabrication 578 740 442
Other (a) 460 446 406
------------- ------------- -------------
2,699 3,054 2,358
Corporate 1 -- --
------------- ------------- -------------
$ 2,700 $ 3,054 $ 2,358
============= ============= =============
Segment assets at end of period:
Platform fabrication $ 21,589 $ 24,161 $ 25,751
Process systems 10,020 13,909 14,409
Drilling rig fabrication 6,303 13,460 18,158
Other (a) -- 7,099 15,804
------------- ------------- -------------
37,912 58,629 74,122
Corporate 1,367 4,578 8,532
------------- ------------- -------------
$ 39,279 $ 63,207 $ 82,654
============= ============= =============
Expenditures for long-lived assets:
Platform fabrication $ 121 $ 248 $ 681
Process systems 1,050 1,141 220
Drilling rig fabrication -- 729 3,530
Other (a) -- 175 257
------------- ------------- -------------
1,171 2,293 4,688
Corporate 23 -- --
------------- ------------- -------------
$ 1,194 $ 2,293 $ 4,688
============= ============= =============
(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
(c) Exhibits.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
99.1 Management's Discussion and Analysis of Financial Condition
and Results of Operations
SIGNATURE
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 hereunto duly authorized.
By: /s/ William A. Hines
----------------------------
William A. Hines
Principal Executive Officer
Dated: July 18, 2003
S-1
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
99.1 Management's Discussion and Analysis of Financial Condition
and Results of Operations