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 September 30, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From ____________to______________
Commission file number 0-29416
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UNIFAB International, Inc.
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(Exact name of registrant as specified in its charter)
Louisiana 72-1382998
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(State or other jurisdiction 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 ---- 8,201,899 shares outstanding as of November
7, 2003.
UNIFAB INTERNATIONAL, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- September 30, 2003 and
December 31, 2002....................................................... 1
Condensed Consolidated Statements of Operations -- Three Months Ended
September 30, 2003 and 2002; Nine Months Ended September 30, 2003
and 2002................................................................ 2
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 2003 and 2002............................................. 3
Notes to Condensed Consolidated Financial Statements....................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 14
Item 3. Quantitative and Qualitative Disclosure of Market Risk..................... 18
Item 4. Controls and Procedures.................................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 19
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)
SEPTEMBER 30 DECEMBER 31
2003 2002
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 226 $ 80
Accounts receivable, net of allowance for doubtful accounts
of $297 and $763, respectively 11,004 7,517
Costs and estimated earnings in excess of billings on uncompleted contracts 2,142 2,297
Income tax receivable 147 305
Prepaid expenses and other assets 532 1,873
-------- --------
Total current assets 14,051 12,072
Property, plant and equipment, net 25,753 26,221
Other assets 810 986
-------- --------
Total assets $ 40,614 $ 39,279
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,558 $ 5,056
Billings in excess of costs and estimated earnings on uncompleted contracts 2,385 14
Accrued liabilities 2,011 2,163
Contract loss reserves 1,594 1,148
Current maturities of long-term debt 7,944 850
-------- --------
Total current liabilities 18,492 9,231
Long-term debt, less current maturities -- 2,090
Secured, subordinated notes payable 6,848 6,848
Secured, subordinated, convertible debenture, net of unamortized discount of
$3,061 and $3,452, respectively 7,591 7,200
-------- --------
Total liabilities 32,931 25,369
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized, no shares outstanding
at September 30, 2003, 738 shares outstanding at December 31, 2002, each
share has voting rights equivalent to and is convertible into 10,000 shares
of common stock on a post-reverse split basis -- --
Common stock, $0.01 par value, 150,000,000 shares authorized, 8,201,899 shares
outstanding at September 30, 2003 and 20,000,000 shares authorized and
8,189,972 shares outstanding at December 31, 2002 82 82
Additional paid-in capital 62,076 62,076
Accumulated deficit (54,475) (48,212)
Accumulated other comprehensive loss -- (36)
-------- --------
Total shareholders' equity 7,683 13,910
-------- --------
Total liabilities and shareholders' equity $ 40,614 $ 39,279
======== ========
See accompanying notes.
1
UNIFAB INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
-------------------------------- -------------------------------
2003 2002 2003 2002
-------- --------- ------- --------
(In thousands except per share data)
Revenue ............................ $ 15,855 $ 5,837 $ 39,861 $ 24,073
Cost of revenue .................... 18,038 7,447 41,341 26,749
-------- -------- -------- --------
Gross profit (loss) ................ (2,183) (1,610) (1,480) (2,676)
Loss on disposal of equipment and
closure of facilities ............ -- -- -- 351
Selling, general and administrative
expense .......................... 974 1,432 3,338 4,679
-------- -------- -------- --------
Loss from operations ............... (3,157) (3,042) (4,818) (7,706)
Other income (expense):
Interest expense ................. (489) (488) (1,454) (1,418)
Interest income .................. 4 5 9 7
-------- -------- -------- --------
Loss before income taxes ........... (3,642) (3,525) (6,263) (9,117)
Income tax benefit ................ -- -- -- --
-------- -------- -------- --------
Net loss .......................... $ (3,642) $ (3,525) $ (6,263) (9,117)
======== ======== ======== ========
Basic and diluted loss per share (a) $ (0.44) $ (0.74) $ (0.76) $ (4.25)
======== ======== ======== ========
Basic and diluted weighted average
shares outstanding (a) ........... 8,193 4,750 8,193 2,144
======== ======== ======== ========
(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)
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
2003 2002
------- -------
(IN THOUSANDS)
Net cash provided by (used in) operating activities $(3,668) $ 1,757
Investing activities:
Proceeds from sale of equipment -- 139
Purchases of equipment (1,244) (46)
Collections on notes receivable 54 --
------- -------
Net cash provided by (used in) investing activities (1,190) 93
------- -------
Financing activities:
Net change in short term borrowings from Midland -- --
Net change in other borrowings 5,004 (2,636)
Loans from Midland -- 2,815
------- -------
Net cash provided by financing activities 5,004 179
------- -------
Net change in cash and cash equivalents 146 2,029
Cash and cash equivalents at beginning of period 80 754
------- -------
Cash and cash equivalents at end of period $ 226 $ 2,783
======= =======
Supplemental disclosure of cash flow information:
Income taxes (refunded), net $ (200) $(3,436)
======= =======
Interest paid, net of capitalized interest $ 765 $ 968
======= =======
See accompanying notes.
3
UNIFAB INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2003
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, provides compressor project
engineering from inception through commissioning, including project studies and
performance evaluation of new and existing systems, on-site supervision of
package installation, and equipment sourcing and inspection. The Company's main
fabrication facilities are located at the Port of Iberia in New Iberia,
Louisiana. Through a newly-formed, wholly-owned subsidiary, Rig Port Services,
LLC, the Company provides repair, refurbishment and conversion services for oil
and gas drilling rigs at its deep-water facility in Lake Charles, Louisiana.
The operating cycle of the Company's contracts is typically less than one
year, although some large contracts may exceed one year's duration. Assets and
liabilities have been classified as current and noncurrent under the operating
cycle concept whereby all contract-related items are regarded as current
regardless of whether cash will be received within a 12-month period. At
September 30, 2003, 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 and nine-month periods ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
These financial statements should be read in conjunction with the financial
statements and footnotes thereto for the year ended December 31, 2002 included
in the Company's Annual Report on Form 10-K.
Certain amounts previously reported have been reclassified to conform to the
presentation at September 30, 2003.
2. 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 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
4
$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.
3. CURRENT MATTERS
At September 30, 2003 the Company has negative working capital of $4.4
million resulting from the classification as a current liability of the $7.8
million outstanding under the Company's Credit Agreement due to its maturity on
May 26, 2004. Prior to and since the initiation of the Midland Recapitalization
and Investment Transaction in April 2002, 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 September 30, 2003, the Company incurred a net loss of
$3.5 million, including $855,000 related to drilling rig fabrication start up
operations at Rig Port Services, LLC in Lake Charles, Louisiana, $1.4 million
related to a contract to fabricate buoyancy cans, and $262,000 related to the
Company's process systems fabrication facility which is underutilized. In the
nine-month period ended September 30, 2003, the Company incurred a net loss of
$6.1 million, including $956,000 related to drilling rig fabrication start up
operations in Lake Charles, $1.0 million related to a contract to fabricate
buoyancy cans, $466,000 related to the winding down of non core operations, and
$229,000 related to the Company's process systems fabrication facility which is
underutilized. Also included in the net losses for the three and nine-month
periods ended September 30, 2003 are selling, general and administrative
expenses of $1.0 million and $3.3 million, respectively, and interest expense of
$489,000 and $1.5 million, respectively. 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 in either period.
The Company continues to bid and win contracts and invest capital in
facilities and equipment. In June 2003 the Company added new management at its
drilling rig fabrication facility. In November 2003, the Company changed
management at its platform fabrication and process systems facilities, and
organized them both under one president. These new managers are restructuring
the project management processes and controls throughout the Company and are
revising the responsibility and reporting channels.
Negotiations to renew the Credit Agreement will begin shortly and 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 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 September 30, 2003, Midland advanced $2,300,000 to the Company for working
capital. At September 30, 2003 these advances had been repaid in full.
Management believes that its available funds, cash generated by operating
activities and funds available from Midland and under the Credit Agreement will
be sufficient to fund its working capital needs and planned capital expenditures
for the next 12 months. However, if Midland does not make available such
additional funding to the Company when needed in the future, the Company could
be unable to meet its obligations, including obligations under the Credit
Agreement, in the ordinary course of business. The Company requires the
continued support from Midland until such time as it has sustained profitable
operations and its financial condition is stable and no longer requires this
support
5
4. CONTRACTS IN PROGRESS
Information pertaining to contracts in progress at September 30, 2003 and
December 31, 2002 consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------- --------
(In thousands)
Costs incurred on uncompleted contracts $ 36,915 $ 10,919
Estimated earnings 1,267 50
-------- --------
38,182 10,969
Less billings to date (38,425) (8,686)
-------- --------
$ (243) $ 2,283
======== ========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 2,142 $ 2,297
Billings in excess of costs and estimated earnings on
uncompleted contracts (2,385) (14)
-------- --------
$ (243) $ 2,283
======== ========
Accounts receivable includes retainages and unbilled receivables,
respectively, of $10,000 and $238,000 at September 30, 2003, and of $775,000 and
$36,000 at December 31, 2002. Unbilled receivables relate primarily to time and
material contracts.
The Company had contract loss reserves of $1,594,000 at September 30, 2003
and $1,148,000 at December 31, 2002. Included in contract loss reserves at
September 30, 2003 is $1.2 million related to six fixed price contracts for
platform fabrication, substantially all of which was recorded in the September
2003 quarter. These contract loss reserves were recorded to recognize increased
estimated costs at completion on fixed price platform fabrication contracts and
to increase estimated costs on a contract to fabricate buoyancy cans based on
the evaluation of productivity and progress to date. The Company expects to
complete the fixed price platform fabrication contracts in the fourth quarter of
2003. The contract to fabricate buoyancy cans was approximately sixty percent
complete at September 30, 2003, and the Company expects to complete it in early
2004. The contract to fabricate buoyancy cans provides for liquidated damages of
approximately $38,000 per day up to a maximum of $1.5 million if the Company
does not deliver the completed buoyancy cans by February 17, 2004. The contract
loss reserve recorded on this contract does not include any liquidated damages
because the Company has taken steps, including adding fabrication stations and
personnel, making certain fabrication procedures more efficient and improving
material handling procedures and coordination with the coatings subcontractor,
which in the Company's estimation will allow the buoyancy cans to be delivered
on schedule. If these steps do not result in delivery of the buoyancy cans on
schedule and the Company is unable to get the schedule extended, the Company may
incur the liquidated damages called for in the contract.
The remaining $356,000 contract loss reserve at September 30, 2003 relates
to contracts to provide process equipment. The reserves on these contracts were
increased $297,000 in the September 2003 quarter. The reserves on these
contracts reflect current competitive market conditions and increased estimated
shop overhead costs due to low utilization of the Company's process system
fabrication facilities. At December 31, 2002, contract loss reserves included
$441,000 related to two fixed price platform fabrication contracts and $707,000
on three contracts to manufacture process equipment overseas. As more fully
described in Note 12 below, the Company is in the process of liquidating and
winding up operations of its process systems operations based in London,
England, which includes winding up the three contracts to manufacture process
equipment overseas referred to above.
6
5. CREDIT AGREEMENT
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 September 30,
2003, the Company had $7.8 million in borrowings and no letters of credit
outstanding under the Credit Agreement. Borrowings under the Credit Agreement
bear interest at Libor plus 1.75% or the Prime rate (2.9% at September 30,
2003), at the Company's discretion. The Credit Agreement matures May 26, 2004.
The Company intends to renew the terms of the Credit Agreement and to extend the
maturity date for one year. The last such extension was made in May 2003 and
extended the maturity to May 26, 2004. The Company anticipates the next request
for renewal and extension of the Credit Agreement will take place before the end
of the first quarter of 2004. The Company expects that the continuing guarantee
by Nassau Holding Company will be required to be successful in obtaining a
renewal and extension of the Credit Agreement. Management believes that its
available funds, cash generated by operating activities and funds available from
Midland and under the Credit Agreement will be sufficient to fund its working
capital needs and planned capital expenditures for the next 12 months. However,
if Midland does not make available such additional funding to the Company when
needed in the future, the Company could be unable to meet its obligations,
including obligations under the Credit Agreement, in the ordinary course of
business. The Company requires the continued support from Midland until such
time as it has sustained profitable operations and its financial condition is
stable and no longer requires this support.
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 September 30, 2003, the Company recorded deferred tax
assets of $18.3 million, including $14.3 million related to net operating loss
carryforwards which, if not used, expire in years 2020 through 2023. The ability
of the Company to utilize net operating loss carryforwards is limited on an
annual basis because the Midland transaction resulted in a change in control
under the current tax regulations. The Company has recorded a valuation
allowance of $15.7 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 (LOSS) 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.
7
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 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 SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2003 2002 2003 2002
------- ------- ------- -------
(In thousands, except per share data)
Numerator:
Net loss $(3,642) $(3,525) $(6,263) $(9,117)
Denominator:
Weighted average shares of common
stock outstanding 8,193 819 813 819
Effect of issuance of convertible
preferred stock on weighted
average shares of common stock -- 3,931 7,380 1,325
------- ------- ------- -------
Denominator for basic and diluted
earnings per share -- weighted
average shares 8,193 4,750 8,193 2,144
======= ======= ======= =======
Basic and diluted loss per share $ (0.44) $ (0.74) $ (0.76) $ (4.25)
======= ======= ======= =======
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 September
30, 2003, 133,500 options and 6,000 warrants outstanding were anti-dilutive due
to the net loss incurred by the Company. During the period ended September 30,
2002, 83,500 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 giving effect to the one-for-ten
reverse stock split (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2003 2002 2003 2002
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss, as reported $(3,642) $(3,525) $(6,263) $(9,117)
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 (4) (139) (18) (291)
------- ------- ------- -------
Pro forma net loss $(3,646) $(3,664) $(6,281) $(9,408)
======= ======= ======= =======
Loss per share
Basic and diluted, as reported $ (0.44) $ (0.74) $ (0.76) $ (4.25)
======= ======= ======= =======
Basic and diluted, pro forma $ (0.45) $ (0.77) $ (0.77) $ (4.39)
======= ======= ======= =======
Weighted average fair value of grants $ -- $ -- $ 0.16 $ --
======= ======= ======= =======
Black-Scholes option pricing model assumptions:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
---------- -----------
Risk-free interest rate 1.82% N/A
Volatility factor of the expected market price
of UNIFAB stock 1.072 N/A
Weighted average expected life of the option
2 years N/A
Expected dividend yield -- N/A
There were no option grants in the three-month periods ended September 30,
2003 and 2002.
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 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 it is not reasonably possible that they will
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 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
9
bank at the time of the asset acquisition were not conveyed as part of the
transaction, 2) certain accounting adjustments should have 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 8) 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 $2,775,000
paid on behalf of Professional Industrial Maintenance, LLC and Mr. Spano as a
result of the transaction. This matter is scheduled to go to trial during the
first quarter of 2004. While the outcome of this litigation cannot be predicted
with certainty, management believes that it is not reasonably possible that the
outcome of this proceeding will have a material adverse effect on the Company's
consolidated financial statements and the Company has 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 engaged a qualified environmental inspection
company to perform a phase one study of the premises, which was completed in the
first week of April 2003 and did not result in any material findings. The
Company met with Port officials in July 2003 and resolved the allegations of non
compliance without any further implications to the Company.
LETTERS OF CREDIT
In the normal course of its business activities, the Company is required to
provide letters of credit to secure performance. At September 30, 2003, cash
deposits totaling $115,000 secured outstanding letters of credit totaling
$110,000.
EMPLOYMENT AGREEMENT
The Company has an employment agreement with one of its officers. This
agreement terminates on August 18, 2006. The minimum annual compensation
commitment by the Company under this agreement is $60,000.
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. At September 30,
2003, the Company had approximately $10.0 million in aggregate lease commitments
under operating leases, of which $0.6 million is payable during the next twelve
months.
9. RELATED PARTY TRANSACTIONS
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. This
insurance coverage began on November 1, 2002. In the three and nine-month
periods ended September 30, 2003, the Company incurred costs of approximately
$512,000 and $1,319,000, respectively, 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 three and nine-month
periods ended
10
September 30, 2003 is $45,000 and $135,000, respectively, related to these
services, which had been paid in full at September 30, 2003.
At September 30, 2003, accrued and unpaid interest owed to Midland related
to the secured, subordinated notes payable and convertible debenture was
$297,000. At December 31, 2002, there was no accrued and unpaid interest owed to
Midland.
Under an informal arrangement with the Company, Midland has agreed to
provide financial support and funding for working capital or other needs at
Midland's discretion, from time to time. At December 31, 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 September 30, 2003. The letter of credit is
in the amount of $3.1 million and expires on March 31, 2004. The Company
reimbursed $12,600 to Midland for the cost of the letter of credit. During the
three-month period ended September 30, 2003, Midland advanced $2,300,000 to the
Company for working capital. At September 30, 2003 these advances had been
repaid in full.
In the nine-month period ended September 30, 2003, the Company executed
several contracts with Ridgelake Energy, Inc. to fabricate a platform and design
and manufacture process equipment. The total value of these contracts is $6.9
million, which were substantially complete at September 30, 2003. In the three
and nine-month periods ended September 30, 2003, $1,716,000 and $6,872,000,
respectively, in revenue, and $278,000 and $920,000, respectively, in gross
profit was recognized related to these contracts. At September 30, 2003, the
Company had $579,000 receivable from Ridgelake Energy, Inc. related to these
contracts. Ridgelake Energy, Inc. is owned and controlled by Mr. William A.
Hines, Chairman of our Board of Directors, and his family. Two of the contracts
were completed in May 2003.
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.
11
The following tables show information about the revenue, profit or loss and
segment assets of each of the Company's reportable segments for the three and
nine-month periods ending September 30, 2003 and 2002. 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
Segment revenue:
Platform fabrication $ 10,312 $ 4,522 $ 27,101 $ 12,198
Process systems 3,068 1,168 10,018 8,203
Drilling rig fabrication 2,475 62 2,742 397
Other (a) -- 85 -- 3,639
Intersegment eliminations -- -- -- (364)
-------- -------- -------- --------
$ 15,855 $ 5,837 $ 39,861 $ 24,073
======== ======== ======== ========
Segment income (loss):
Platform fabrication $ (1,207) $ (412) $ (820) $ (496)
Process systems (351) (883) (763) (1,630)
Drilling rig fabrication (1,004) (411) (1,326) (1,196)
Other (a) -- (580) -- (2,284)
-------- -------- -------- --------
(2,562) (2,286) (2,909) (5,606)
Interest expense (489) (487) (1,454) (1,418)
Unallocated corporate overhead (591) (752) (1,900) (2,093)
-------- -------- -------- --------
Loss before income tax $ (3,642) $ (3,525) $ (6,263) $ (9,117)
======== ======== ======== ========
(a) Revenue and segment loss from operations related to derrick fabrication and
plant maintenance are included in Other. There are no operations related to
these products in 2003.
Total assets of the Company by segment is as follows as of September 30, 2003
and December 31, 2002:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------- -------
(IN THOUSANDS)
Segment assets at end of period:
Platform fabrication $22,355 $21,589
Process systems 7,490 10,020
Drilling rig fabrication 9,416 6,303
------- -------
39,261 37,912
Corporate 1,353 1,367
------- -------
$40,614 $39,279
======= =======
12
11. COMPREHENSIVE INCOME (LOSS)
The following is a summary of the Company's comprehensive income (loss) for
the three and nine months ended September 30, 2003 and 2002.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
2003 2002 2003 2002
------- ------- ------- -------
(IN THOUSANDS)
Net loss $(3,642) $(3,525) $(6,263) $(9,117)
Currency translation adjustment (5) (8) 36 (14)
------- ------- ------- -------
$(3,647) $(3,533) $(6,227) $(9,131)
======= ======= ======= =======
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 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. 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
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 implemented SFAS No. 143 on January 1, 2003, as
required, and it did not have a material effect 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 technical corrections, clarify meanings, or describe their applicability
under changed conditions. The Company implemented SFAS No. 145 on January 1,
2003, as required, and it did not have a material impact on our 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 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
13
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. The
Company adopted the initial recognition and measurement provisions on a
prospective basis for guarantees issued or modified after December 31, 2002.
In January 2003, the 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. FIN 46 is effective in the first
interim period ending after December 15, 2003. The Company does not expect the
implementation of this standard to have a material impact on its consolidated
financial position or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the related disclosures included elsewhere
herein and Management's Discussion and Analysis of Financial Condition and
Results of Operations included as part of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
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.
MIDLAND SUPPORT
Since the Midland Transaction, Midland has provided financial, operational,
and management support to the Company. Nassau Holding Company (an affiliate of
Midland) has guaranteed the Company's Senior Secured Credit Agreement with the
Whitney National Bank. Midland has provided a standby letter of credit to a
customer of the Company in support of a contract included in the Company's
backlog at September 30, 2003. The letter of credit is in the amount of $3.1
million and expires on March 31, 2004.Under an informal arrangement with the
Company, Midland has agreed to provide financial support and funding for working
capital or other needs at Midland's discretion, from time to time. During the
three-month period ended September 30, 2003, Midland advanced $2,300,000 to the
Company for working capital. At September 30, 2003 these advances had been
repaid in full. 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 and nine-month
periods ended September 30, 2003 is $45,000 and $135,000, 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.
14
RESULTS OF OPERATIONS
Revenue for the three months ended September 30, 2003 increased 174% to
$15.9 million from $5.8 million for the three months ended September 30, 2002.
For the nine months ended September 30, 2003, revenue increased 66% to $39.9
million from $24.1 million for the nine months ended September 30, 2002. Revenue
increased for the Company's platform fabrication segment, process system segment
and drilling rig fabrication segment in both the three and nine-month periods
ended September 30, 2003 compared to the same periods last year. Decreased
revenues from plant maintenance and derrick fabrication services in the current
year partially offset this increase; the Company no longer provides these
services. Backlog was approximately $14.3 million and $22.5 million at September
30, 2003 and December 31, 2002, respectively. At the present time, the level of
bidding activity is approximately 60% of the level experienced at the end of
2002. This lower level of bidding activity increases competition for the
projects being bid, which results in lower profit expectations for those
projects when they are awarded. The Company does not expect bidding activity to
increase before the beginning of 2004, at the earliest.
Total direct labor hours worked through September 30, 2003 increased 41%
overall from the levels experienced in the same period last year. Direct labor
hours worked at the Company's platform fabrication and process system facilities
increased by nearly 72% from the same period last year. This increase was offset
by a reduction of approximately 84,000 direct labor hours incurred in the
nine-month period ended September 30, 2002 on plant maintenance, derrick
fabrication and drilling rig repair. There were no labor hours incurred
associated with these types of projects in the nine-month period ended September
30, 2003.
Cost of revenue exceeded revenue by $2.2 million for the three months ended
September 30, 2003, compared to $1.6 million for the same period last year. For
the nine-month period ended September 30, 2003, cost of revenue exceeded revenue
by $1.5 million compared to $2.7 million for the nine-month period ended
September 30, 2002. Cost of revenue consists of costs associated with the
fabrication process, including direct costs (such as direct labor costs and raw
materials) and indirect costs that can be specifically allocated to projects
(such as supervisory labor, utilities, welding supplies and equipment costs).
Increased reserves on loss contracts recorded in the September 2003 quarter
resulted in costs of revenue exceeding revenue in these periods. Additionally,
underutilization at the Company's process systems manufacturing facility and
costs related to start up operations at the Company's drilling rig fabrication
facility increased costs per manhour.
Gross profit (loss) for the three months ended September 30, 2003 decreased
to a loss of $2.2 million from a loss of $1.6 million for the same period last
year. For the nine months ended September 30, 2003, gross profit (loss) was $1.5
million compared to a loss of $2.7 million in the same period last year.
Selling, general and administrative expense decreased to $974,000 in the
three months ended September 30, 2003, compared to $1.4 million in the three
months ended September 30, 2002. In the nine months ended September 30, 2003,
selling, general and administrative expense decreased to $3.3 million from $4.7
million in the same period last year. 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 6% in the three months ended September 30, 2003 from 25% in the
same period last year, and to 8% for the nine month period ended September 30,
2003 from 19% in the same period last year.
Interest expense for the three months ended September 30, 2003 includes
amortization of the discount on the secured, subordinated debenture issued to
Midland, which is being recorded as interest expense, and was approximately the
same as the same period in 2002, which is the result of lower effective interest
rates on the amounts outstanding under the Company's revolving credit facility
over the three months ended September 30, 2003. For the nine-month period ended
September 30, 2003, interest expense was higher than in the same period in 2002
due to amortization of the discount described above. This increase was offset by
lower overall debt and effective interest rates in the nine-month period ended
September 30, 2003 compared to the same period in 2002. In the three and nine
months ended September 30, 2003, the Company recorded $130,000 and $390,000
interest expense, respectively, 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 and nine month periods ended September 30, 2003 and 2002. In accordance
with FAS 109, the Company considered that it had a cumulative
15
pre-tax loss for recent years, which must be carried forward and used to offset
future taxable income. The ability of the Company to utilize net operating loss
carryforwards is also limited on an annual basis because the transaction with
Midland resulted in a change in control under tax regulations. At September 30,
2003, the Company has deferred tax assets of $18.3 million, including $14.3
million related to net operating loss carryforwards, which, if not used expire
in years 2020 through 2023. The Company has recorded a valuation allowance of
$15.7 million 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 September 30, 2003. The valuation allowance
reflects the Company's judgment that it is more likely than not that these
deferred tax assets will not be realized. Management will continue to assess the
adequacy of the valuation allowance on a quarterly basis.
SEGMENT INFORMATION
The Company has identified three reportable segments as required by SFAS
No. 131. The following discusses the results of operations for each of those
reportable segments during the three and nine-month periods ended September 30,
2003 and 2002.
PLATFORM FABRICATION SEGMENT
Revenue for the platform fabrication segment increased $5.8 million to
$10.3 million in the quarter ended September 30, 2003 from $4.5 million in the
same quarter in 2002. In the nine-month period ended September 30, 2003, revenue
for the platform fabrication segment was $27.1 million, an increase of $14.9
million over the same period in 2002. Fabrication activity has increased over
last year, although bidding for projects in this segment has remained
competitive, causing lower profit margins. Direct manhours in the three and
nine-month periods ended September 2003 increased 98% and 87%, respectively,
over the same periods last year. Segment loss was $1,207,000 in the three-month
period ended September 30, 2003 compared to a loss of $412,000 in the September
quarter last year. In the September 2003 quarter contract loss reserves
increased $1,358,000 related to expected cost overruns primarily on a contract
to fabricate buoyancy cans, which is expected to be completed in the first
quarter of 2004, and on five fixed-price platform fabrication contracts, all of
which are expected to be completed in the fourth quarter of 2003. In the
nine-month period ended September 30, 2003, segment loss was $820,000 compared
to a loss of $496,000 over the same period last year. Contracts to fabricate two
similar platforms were performed back to back, and the Company gained
efficiencies in construction. These efficiencies resulted in the Company
revising estimated loss reserves on the contracts and a net increase in segment
income in the nine-month period ended September 30, 2003 of $274,000. In the
nine month period ended September 30, 2003, segment loss was increased $489,000
related to the repair of the roof on the Company's main fabrication building.
Savings from the reduction of administrative staff and the consolidation of
general and administrative functions reduced segment loss in the three and
nine-month periods ended September 30, 2003 over the same periods in 2002.
PROCESS SYSTEMS SEGMENT
Revenue for the process systems segment increased to $3.1 million in the
three-month period ended September 30, 2003 from $1.2 million in the same period
last year. In the nine-month period ended September 30, 2003 revenue was$10.0
million, an increase of $1.8 million from the same period in 2002. In the
quarter ended September 30, 2003, direct manhours increased 44% over the
September 2002 quarter. Segment loss decreased in the September 30, 2003 quarter
to $351,000 from a loss of $883,000 in the same quarter in 2002. In the
nine-month period ended September 30, 2003 segment loss decreased to $763,000
from $1.6 million in the same period in 2002. The Company has encountered delays
in completion of fabrication and commissioning of contracts to provide process
equipment that are being manufactured overseas, which have resulted in cost
overruns. Included in segment loss for the nine-month period ended September 30,
2003, are contract loss reserves of $545,000, including $117,000 recorded on
these overseas contracts. Savings from the reduction of administrative staff and
the consolidation of general and administrative functions increased segment
income in the three and nine-month periods ended September 30, 2003 over the
same periods in 2002.
DRILLING RIG FABRICATION SEGMENT
The Company suspended operations in this segment prior to the Midland
investment and recapitalization transaction, and is currently reentering this
market. Revenue for the drilling rig fabrication segment was
16
$2,475,000 in the quarter ended September 30, 2003 and was $62,000 in the same
quarter last year. In the nine-month period ended September 30, 2003, revenue
for the drilling rig segment was $2,742,000 and was $397,000 in the same period
in 2002. Segment loss was $1,004,000 for the quarter ended September 30, 2003
and was $411,000 in the same quarter last year. In the nine-month period ended
September 30, 2003, segment loss was $1,326,000 and was $1,196,000 million in
the same period last year.
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 and advances from Midland for working capital needs and individual
financing arrangements for equipment, facilities, insurance premiums and
long-term needs. During the nine months ended September 30, 2003, the Company's
available funds and $5.0 million generated from financing activities together
funded cash used in operations and investing activities of $4.9 million.
Investing activities consisted mainly of capital expenditures of $1,244,000.
Capital expenditures for the nine-month period ended September 30, 2003
included $ 372,000 related to compressors being fabricated by the Company, which
will be leased upon completion. The remaining capital expenditures related to
facilities, yard equipment and computer software and equipment.
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 the Universal Fabricators, LLC and Allen Process
Systems, LLC, both wholly-owned subsidiaries of the Company. At September 30,
2003, the Company had $7.8 million in borrowings and no letters of credit
outstanding under the Credit Agreement. Borrowings under the Credit Agreement
bear interest at Libor plus 1.75% or the Prime rate (2.9% at September 30,
2003), at the Company's discretion. The Credit Agreement matures May 26, 2004.
The Company intends to renew the terms of the Credit Agreement and to extend the
maturity date for one year. The last such extension was made in May 2003 and
extended the maturity to May 26, 2004. The Company anticipates the next request
for renewal and extension of the Credit Agreement will take place before the end
of the first quarter of 2004. The Company expects that the continuing guarantee
by Nassau Holding Company will be required to be successful in obtaining a
renewal and extension of the Credit Agreement.
Management believes that its available funds, cash generated by operating
activities and funds available from Midland and under the Credit Agreement will
be sufficient to fund its working capital needs and planned capital expenditures
for the next 12 months. 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 months ended
September 30, 2003, Midland advanced $2.3 million, which the Company used for
working capital during the period. At September 30, 2003 these advances had been
repaid in full to Midland. The liquidity afforded by these advances from Midland
were necessary for the Company to meet its obligations and fund operations. If
Midland does not provide such additional funding in the future as the Company
requires it, the Company could be unable to meet its obligations, including
obligations under the Credit Agreement, in the ordinary course of business. The
Company requires the continued support from Midland until such time as it has
sustained profitable operations and its financial condition is stable and no
longer requires this support.
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
17
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:
o general economic and business conditions and industry trends;
o the economic strength of our customers and potential customers;
o decisions about offshore developments to be made by oil and gas
companies;
o the highly competitive nature of our businesses;
o our future financial performance, including availability, terms and
deployment of capital;
o the continued availability of qualified personnel;
o changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory proceedings;
o changes in existing environmental regulatory matters;
o rapid technological changes;
o realization of deferred tax assets;
o consequences of significant changes in interest rates and currency
exchange rates;
o difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions;
o social, political and economic situations in foreign countries where we
do business, including among others, countries in the Middle East;
o effects of asserted and unasserted claims;
o our ability to obtain surety bonds and letters of credit; and
o 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 $22.4 million, including 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
$224,000 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 Company currently does not
hedge its foreign currency exposure. However, the Company may use derivative
financial instruments in the future, if deemed appropriate to hedge such risk
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
earnings; however, due to the size of its operations in the United Kingdom, the
Company does not anticipate its exposure to foreign currency rate fluctuations
to be material for the remainder of 2003.
While the Company does not currently use derivative financial instruments,
it may use them in the future if deemed appropriate.
18
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period immediately preceding the filing of this report,
an evaluation was carried out under the supervision and with the participation
of our management, including our Principal Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act). Based upon that evaluation, the Principal Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures were sufficient to ensure that material information relating to
the Company and its consolidated subsidiaries was made known to management,
including the Principal Executive Officer and Chief Financial Officer, during
the period in which this quarterly report was being prepared, in a timely manner
that allowed these officers to make appropriate decisions regarding required
disclosure in this Quarterly Report. Based upon this evaluation, the Company has
adopted a formal disclosure control policy. The new policy incorporates the
Company's previous informal policies, but with the significant change that a
formal Disclosure Committee has been formed to begin operations as of the second
fiscal quarter of 2003, and each person responsible for one of the operating
subsidiaries of the Company will participate as an active member of the
Disclosure Committee. The Committee is charged with determining when events,
developments or other facts involving the Company are material in nature and
require disclosure to the public. Beginning in the second fiscal quarter of
2003, each member of the Committee will also review all of the Company's public
filings to determine whether events or facts related to his or her area of
operations should be disclosed.
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 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 it is not reasonably possible that they will
result in 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 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 should
have 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 $2,775,000 paid on behalf of Professional Industrial
Maintenance, LLC and Mr. Spano as a result of the transaction. This matter is
scheduled to go to trial during the first quarter of 2004. While the outcome of
this litigation cannot be predicted with certainty, management believes that it
is not reasonably possible that the outcome of this proceeding will have a
material adverse effect on the Company's consolidated financial statements and
the Company has 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 engaged a qualified environmental inspection
company to perform a phase one study of the premises,
19
which was completed in the first week of April 2003 and did not result in any
material findings. The Company met with Port officials in July 2003 and resolved
the allegations of non-compliance without any further implications to the
Company.
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 Certificate pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002 -Principle
Executive Officer
31.2 Certificate pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002 -Chief Financial
Officer
32.1 Certificate pursuant to 18 U.S.C., Section 1350 as adopted
pursuant to section 906 of Sarbanes-Oxley Act of
2002-Principle Executive Officer
32.2 Certificate pursuant to 18 U.S.C., Section 1350 as adopted
pursuant to section 906 of Sarbanes-Oxley Act of 2002-Chief
Financial Officer
99.1 Press release issued by the Company on September 3, 2003
announcing that it has satisfied the $1.00 per share minimum
bid price requirement for continued listing on the Nasdaq
SmallCap Market
99.2 Press Release issued by the Company on September 11, 2003
announcing the appointment of Larry Verzwyvelt as president of
Universal Fabricators, LLC
(b) Reports on Form 8-K
None
20
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 November 12, 2003 /s/ Peter J. Roman
----------------------- ---------------------------------------------
Peter J. Roman
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21
Exhibit
Number Description
------ -----------
31.1 Certificate pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002 -Principle
Executive Officer
31.2 Certificate pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002 -Chief Financial
Officer
32.1 Certificate pursuant to 18 U.S.C., Section 1350 as adopted
pursuant to section 906 of Sarbanes-Oxley Act of 2002-Priciple
Executive Officer
32.2 Certificate pursuant to 18 U.S.C., Section 1350 as adopted
pursuant to section 906 of Sarbanes-Oxley Act of 2002-Chief
Financial Officer
99.1 Press release issued by the Company on September 3, 2003
announcing that it has satisfied the $1.00 per share minimum
bid price requirement for continued listing on the Nasdaq
SmallCap Market
99.2 Press Release issued by the Company on September 11, 2003
announcing the appointment of Larry Verzwyvelt as president of
Universal Fabricators, LLC
22