United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 2002
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From to
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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
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Common Stock, $0.01 Par Value ---- 8,189,972 shares outstanding as of May 17,
2002.
UNIFAB INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- March 31, 2002 and
December 31, 2001......................................... 1
Condensed Consolidated Statements of Operations -- Three
Months Ended March 31, 2002 and 2001...................... 2
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 2002 and 2001...................... 3
Notes to Condensed Consolidated Financial Statements --
March 31, 2002............................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 6
Item 3. Quantitative and Qualitative Disclosure of Market Risk....... 8
PART II. OTHER INFORMATION
Item 5. Other Information............................................ 9
Item 6. Exhibits and Reports on Form 8-K............................. 9
i
UNIFAB INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31 DECEMBER 31
2002 2001
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(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 1,110 $ 754
Accounts receivable, net of allowance for doubtful accounts
of $534 and $528, respectively 9,991 15,362
Costs and estimated earnings in excess of billings on uncompleted contracts 2,477 5,769
Income tax receivable 2,803 4,112
Prepaid expenses and other assets 2,339 2,442
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Total current assets 18,720 28,439
Property, plant and equipment, net 33,489 34,125
Goodwill, net 260 260
Deferred income taxes -- --
Other assets 412 383
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Total assets $ 52,881 $ 63,207
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 10,882 $ 15,123
Billings in excess of costs and estimated earnings on uncompleted contracts 924 1,343
Accrued liabilities 2,880 4,240
Notes payable 21,223 23,246
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Total current liabilities 35,909 43,952
Deferred income taxes -- --
Noncurrent notes payable -- 122
Shareholders' equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,189,972 and 8,189,972
shares outstanding 82 82
Additional paid-in capital 46,830 46,830
Retained earnings (accumulated deficit) (29,837) (27,695)
Currency translation adjustment (103) (84)
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Total shareholders' equity 16,972 19,133
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Total liabilities and shareholders' equity $ 52,881 $ 63,207
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SEE ACCOMPANYING NOTES
1
UNIFAB INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
2002 2001
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(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenue................................. $ 9,856 $ 21,703
Cost of revenue......................... 9,893 21,575
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Gross profit (loss)..................... (37) 128
Selling, general and administrative
expense............................... 1,558 2,110
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Loss from operations.................... (1,595) (1,982)
Other income (expense):
Interest expense...................... (549) (569)
Interest income....................... 2 7
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Loss before income taxes. (2,142) (2,544)
Provision for income tax (benefit)...... - (941)
Net (loss).............................. $ (2,142) $ (1,603)
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Basic and diluted loss per share........ $ (0.26) $ (0.20)
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Basic and diluted weighted average
shares outstanding.................... 8,190 8,132
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SEE ACCOMPANYING NOTES.
2
UNIFAB INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
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2002 2001
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(IN THOUSANDS)
Net cash provided by (used in) operating activities $ 2,425 $ (3,233)
Investing activities:
Purchases of equipment (46) (734)
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(46) (734)
Financing activities:
Net change in borrowings (2,023) 3,062
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(2,023) 3,062
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Net change in cash and cash equivalents 356 (905)
Cash and cash equivalents at beginning of period 754 1,004
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Cash and cash equivalents at end of period $ 1,110 $ 99
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SEE ACCOMPANYING NOTES.
3
UNIFAB INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
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. Through a
wholly-owned subsidiary, Oil Barges, Inc., the Company designs and fabricates
drilling rigs, including first of a kind barges using proprietary designs. The
Company's main fabrication facilities are located at the Port of Iberia in New
Iberia, Louisiana. Through a wholly-owned subsidiary, UNIFAB International West,
LLC, the Company provides repair, refurbishment and conversion services for oil
and gas drilling rigs and industrial maintenance services primarily for the
petrochemical industry. 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 operating cycle of the Company's contracts is typically less than one
year, although some large contracts may exceed one year's duration. Assets and
liabilities have been classified as current and noncurrent under the operating
cycle concept, whereby all contract-related items are regarded as current
regardless of whether cash will be received within a 12-month period. At March
31, 2002, it was anticipated that substantially all contracts in progress, and
receivables associated therewith, would be completed and collected within a
12-month period.
2. BASIS OF PRESENTATION
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 only of normal recurring adjustments,
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
These financial statements should be read in conjunction with the
financial statements and footnotes thereto for the year ended December 31, 2001
included in the Company's Annual Report on Form 10-K.
4
3. GOING CONCERN ASSUMPTION AND WORKING CAPITAL DEFICIT
Throughout 2001 and during the first quarter of 2002, the Company's
results of operations and financial condition deteriorated dramatically. In
significant ways, the Company's declining financial condition impacted its
ability to compete for contracts and labor, two important factors in the
Company's historic profitability. Oil and gas prices have declined recently and
drilling activity has significantly declined in the Company's primary market,
the Gulf of Mexico. The Company does not expect recovery of fabrication prices
or substantial increases in fabrication projects in the near future. As more
fully described in Note 4, at March 31, 2002, the Company was in default of the
financial covenants of the Company's Secured Senior Credit Facility as amended
by the Waiver and Second Amendment to Amended and Restated Credit Agreement (the
"Amended Credit Agreement"). As a result of being in default, the Company has a
working capital deficit of $17,189,000 caused by the reclassification to current
liabilities of $20,652,000 outstanding under the Amended Credit Agreement. The
Amended Credit Agreement also requires a $6.1 million principal payment by June
30, 2002 to reduce the outstanding amounts under the Amended Credit Agreement.
The Company does not currently have the ability to make this payment. If the
Company is unable to make the payment by June 30, 2002, the Company will be in
default under the terms of the Amended Credit Agreement and the secured creditor
will be able to seek remedies under the terms of the Amended Credit Agreement,
including demanding payment on the entire balance outstanding under the Amended
Credit Agreement.
On April 26, 2002, the Company and Midland Fabricators and Process
Systems, L.L.C. ("Midland") jointly announced the execution of an agreement (the
"Midland Agreement") whereby Midland may, subject to certain conditions, acquire
a controlling interest in the Company. Under the Midland Agreement, shareholders
of the Company will retain a 10% ownership interest in the Company and will be
offered the right to purchase an additional 15% of the Company at a price that
was below the closing sale price of the Company's Common Stock on April 26,
2002. Consummation of the proposed transaction between the Company and Midland
is subject to various conditions. If the Company and Midland are unable to meet
those conditions, then the Company and Midland may be unable to consummate the
proposed transaction. Management is developing plans to seek additional capital
to meet the terms of the Amended Credit Agreement, including equity capital, new
debt financing or liquidation of operating assets or subsidiaries. If the
Company is unsuccessful in its efforts to renegotiate or replace the Amended
Credit Agreement, raise additional capital and return to profitability, it may
not be able to meet its obligations under the Amended Credit Agreement. The
Company must experience a marked improvement in 2002 in order to remain a going
concern and meet its obligations in the ordinary course of business. 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.
4. CREDIT FACILITY
AMENDED AND RESTATED CREDIT AGREEMENT. On March 5, 2002, the Company
entered into a Waiver and Second Amendment to Amended and Restated Credit
Agreement (the "Amendment"). The Senior Secured Credit Agreement was originally
entered into on November 30, 1999, and was amended and restated October 19, 2000
with the same syndicate of commercial banks led by Bank One, Louisiana, N.A., as
agent (the "Credit Agreement"). At March 31, 2002, the Company had $21.6 million
outstanding under the Credit Agreement, of which $1.0 million was for letters of
credit. During the three months ended March 31, 2002, the Company decreased the
outstanding balance under the Credit Agreement from $23.8 million to $21.6
million. The Credit Agreement is secured by substantially all of the assets of
the Company and provides borrowings subject to certain borrowing base
limitations based on 50% of the appraised value of fixed assets (approximately
$14.2 million at March 31, 2002) plus 80% of eligible accounts receivable
(approximately $4.3 million at March 31, 2002). At March 31, 2002, borrowings
under the Credit Agreement exceeded the borrowing base limit by $2.3 million.
The Credit Agreement requires the Company to make monthly interest payments,
currently approximately $140,000 per month, based on amounts outstanding under
the Credit Agreement which bear interest at the prime lending rate plus 3%
(7.75% at March 31, 2002). The variable fee range for issued letters of credit
is 1.25% to 2.75% per annum on the
5
principal amount of letters of credit issued for performance or payment, or 2%
to 4% per annum on the principal amount if the letter of credit is a financial
letter of credit. The unused commitment fee range is 1/4% to 1% per annum. The
letter of credit fees and unused commitment fees are variable based on the
funded indebtedness to EBITDA ratio as defined in the Credit Agreement.
The Company was not in compliance with the terms of the Credit Agreement
as of March 31, 2002, in the following particulars: tangible net worth was not
sufficient to meet the ratio to funded indebtedness; adjusted earnings before
taxes, depreciation and amortization for the three month period ended March 31,
2002 were not sufficient to meet the ratio to funded indebtedness; adjusted
earnings before taxes, depreciation and amortization for the three month period
ended March 31, 2002 were not sufficient to meet the ratio to fixed charges; the
current ratio was not sufficient to meet the minimum current ratio; and the
cumulative net loss before taxes for the three month period ended March 31, 2002
exceeded the maximum cumulative net loss before taxes allowed under the Credit
Agreement. The maturity date of the Credit Agreement is January 31, 2003. If the
Company has not replaced the Credit Agreement by January 31, 2003, or if the
maturity date is accelerated due to non performance under the terms of the
Amendment, the Company will be required to pay $450,000 to the secured creditor.
The Amendment requires the Company to make scheduled reductions totaling $8.0
million, $1.9 million of which was paid concurrent with the execution of the
Amendment on March 5, 2002, and the remaining $6.1 million is due on June 30,
2002. In the event the Company is unable to make the $6.1 million payment by
June 30, 2002, the Company will be required to pay up to $825,000 in accrued
penalties to the secured creditor. The Amendment allows the Company to exceed
the borrowing base limit up to $3.5 million until June 30, 2002, and limits the
Company to the borrowing base limit beginning June 30, 2002. The Amendment
requires the Company to diligently market for sale the Company's deep water
facility in Lake Charles, Louisiana. However, because the Amendment requires a
substantial repayment by June 30, 2002, and the Company currently does not have
the resources to make such a payment, there is a substantial risk that the
Company will be unable to maintain compliance with its obligations to its
secured creditor or meet its obligations in the ordinary course of business. The
Amendment provides for additional borrowings under certain conditions, mainly
through the sale of assets or subsidiaries.
Under the terms of the Midland Agreement, the Company consented to an
assignment of the Amended Credit Agreement from the Bank Group to Midland. As a
condition to the Company's consent, Midland entered into an agreement with the
Company in which Midland agreed to convert $10 million of the outstanding
principal amount under the Amended Credit Agreement into 90% of the Company's
common stock if certain conditions are met. The Company is working with Midland
to attempt to meet those conditions, but there can be no assurance that the
Company and Midland will be successful. If the Company and Midland are unable to
meet such conditions by August 31, 2002, then Midland has indicated that it will
force the Company to seek bankruptcy protection.
4. INCOME TAXES
The Company provides for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES. As of March 31, 2002, the Company has recorded deferred tax
assets of $14.3 million, including $11.1 million related to net operating loss
carryforwards that expire in years 2020 through 2022. The Company has recorded a
valuation allowance to offset the deferred tax asset related to the operating
loss carryforwards which exceeds net deferred tax liabilities. In accordance
with FAS 109, the Company considered that it had a cumulative pre-tax loss for
recent years the valuation allowance reflects the Company's judgment that it is
more likely than not that a portion of the deferred tax assets will not be
realized. The Company believes that the remaining deferred tax assets at March
31, 2002, amounting to $4.7 million, are realizable. Management will continue to
assess the adequacy of the valuation allowance on a quarterly basis.
6
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.
RESULTS OF OPERATIONS
Revenue for the three months ended March 31, 2002 decreased 55% to $9.9
million from $21.7 million for the three months ended March 31, 2001. This
decrease is primarily due to reduced revenue on barge repair and shipbuilding
activities resulting from the closure of the Company's OBI facilities at the
Port of Iberia, and revenue levels approximately half of those in the same
quarter last year for the Company's structural fabrication, process system
design and fabrication and international project management and design services.
These reduced levels were the result of lower activity in these markets in the
March 2002 quarter compared to the March 2001 quarter. Also, the Company
experienced reduced opportunities to bid on projects and was eliminated from
bidding on various projects as a result of the substantial deterioration of the
Company's financial condition and results of operations experienced during the
2001 fiscal year. Further, the Company was unable to post sufficient collateral
to secure performance bonds and as a result was unable to qualify to bid on
various contracts. At March 31, 2002, backlog was approximately $10.0 million,
which is less than one-third the backlog at March 31, 2001.
Total direct labor hours worked decreased 50% from the levels experienced
in the same period last year. Direct labor hours worked by the Company's
structural fabrication and process system design and fabrication facilities
decreased by nearly 50% from the same period last year. Direct labor hours at
the Company's drilling rig fabrication facilities were eliminated with the
closure of that facility.
Cost of revenue was $9.9 million for the three months ended March 31, 2002
compared to $21.6 million for the same period last year. Cost of revenue
consists of costs associated with the fabrication process, including direct
costs (such as direct labor costs and raw materials) and indirect costs that can
be specifically allocated to projects (such as supervisory labor, utilities,
welding supplies and equipment costs). These costs increased in the March
quarter as a percentage of revenue to 100.3% from 99.4% in 2001. This increase
in costs as a percentage of revenue reflects the severe decrease in revenue and
activity, which did not allow the Company to recover fixed costs related to
process system design and fabrication or the costs related to the deep water
fabrication facility in Lake Charles. The Company is actively seeking
alternative sources of capital to sustain the development and operations of the
facility in Lake Charles, including partnering with a financially viable entity,
obtaining separate capital financing for the facility and other capital raising
methods. In the event these methods are unsuccessful, the Company may sell the
facility. If the facility is sold, it is likely the Company would not fully
recover the cost of construction of the facility and would record a loss on the
sale that would be material to the operating results of the Company. Cost of
sales for the March 2001 quarter included a $1.1 million contract loss reserve
on the new build liftboat then under construction at the OBI yard and which was
delivered in January 2002.
Gross profit (loss) for the three months ended March 31, 2002 decreased to
a loss of $37,000 from a profit of $128,000 for the same period last year. The
decrease in gross profit is primarily due costs in excess of revenue for the
Company's process system design and fabrication services and at the Company's
deep water facility in Lake Charles, Louisiana which was offset in part by a
$1.1 million contract loss reserve recorded in the March quarter last year.
Additionally, decreased man hour levels in the March 2002 quarter compared to
the same quarter last year at the Company facilities caused hourly fixed
overhead rates to increase and resulted in increased costs relative to revenue.
The selling, general and administrative expense was $1.6 million in the
three months ended March 31, 2002 compared to $2.1 million in the corresponding
period in 2001. The Company's selling, general and administrative expense as a
percentage of revenue increased to 16% in the three months ended March 31, 2002
from 9.7% in the three months ended March 31, 2001 due mainly to significantly
lower revenue in the March 2002 quarter compared to the same quarter in 2001.
The Company reduced selling, general and administrative costs at its facilities
by closing its drilling rig repair facility in New Iberia and by reducing
7
activity and overhead at its facility in Lake Charles, Louisiana.
Funds drawn on the Company's credit facility and the interest rates
charged for those funds where approximately the same in the March 2002 quarter
as they were in the March 2001 quarter. As a result, interest expense for the
three months ended March 31, 2002 was approximately equal to interest expense in
the three months ended March 31, 2001.
No net income tax benefit was recognized in the three months ended March
31, 2002 compared to an income tax benefit of $948,000 in the three months ended
March 31, 2001 The Company has recorded a valuation allowance to offset the
deferred tax asset related to the operating loss generated in the quarter which
exceeds net deferred tax liabilities. In accordance with FAS 109, the Company
considered that it had a cumulative pre-tax loss for recent years and revised
its judgment about the realization of deferred tax assets. The valuation
allowance reflects the Company's judgment that it is more likely than not that a
portion of the deferred tax assets will not be realized. The Company believes
that the remaining deferred tax assets at March 31, 2002 are realizable.
Management will continue to assess the adequacy of the valuation allowance on a
quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its business activities through funds
generated from operations, short-term borrowings on its revolving credit
facilities for working capital needs and individual financing arrangements for
equipment, facilities improvements, insurance premiums, and long-term needs.
During the three months ended March 31, 2002, the Company's available funds and
cash generated from operating activities together funded cash used in financing
and in investing activities of $2.1 million.
On March 5, 2002, the Company entered into a Waiver and Second Amendment
to Amended and Restated Credit Agreement (the "Amendment"). The Senior Secured
Credit Agreement was originally entered into on November 30, 1999, and was
amended and restated October 19, 2000 with the same syndicate of commercial
banks led by Bank One, Louisiana, N.A., as agent (the "Credit Agreement"). At
March 31, 2002, the Company had $21.6 million outstanding under the Credit
Agreement, of which $1.0 million was for letters of credit. During the three
months ended March 31, 2002, the Company decreased the outstanding balance under
the Credit Agreement from $23.8 million to $21.6 million. The Credit Agreement
is secured by substantially all of the assets of the Company and provides
borrowings subject to certain borrowing base limitations based on 50% of the
appraised value of fixed assets (approximately $14.2 million at March 31, 2002)
plus 80% of eligible accounts receivable (approximately $4.3 million at March
31, 2002). At March 31, 2002, borrowings under the Credit Agreement exceeded the
borrowing base limit by $2.3 million. The Credit Agreement requires the Company
to make monthly interest payments, currently approximately $140,000 per month,
based on amounts outstanding under the Credit Agreement which bear interest at
the prime lending rate plus 3% (7.75% at March 31, 2002). The variable fee range
for issued letters of credit is 1.25% to 2.75% per annum on the principal amount
of letters of credit issued for performance or payment, or 2% to 4% per annum on
the principal amount if the letter of credit is a financial letter of credit.
The unused commitment fee range is 1/4% to 1% per annum. The letter of credit
fees and unused commitment fees are variable based on the funded indebtedness to
EBITDA ratio as defined in the Credit Agreement.
The Company was not in compliance with the terms of the Credit Agreement
as of March 31, 2002, in the following particulars: tangible net worth was not
sufficient to meet the ratio to funded indebtedness; adjusted earnings before
taxes, depreciation and amortization for the three month period ended March 31,
2002 were not sufficient to meet the ratio to funded indebtedness; adjusted
earnings before taxes, depreciation and amortization for the three month period
ended March 31, 2002 were not sufficient to meet the ratio to fixed charges; the
current ratio was not sufficient to meet the minimum current ratio; and the
cumulative net loss before taxes for the three month period ended March 31, 2002
exceeded the maximum cumulative net loss before taxes allowed under the Credit
Agreement. The maturity date of the Credit Agreement is January 31,
8
2003. If the Company has not replaced the Credit Agreement by January 31, 2003,
or if the maturity date is accelerated due to non performance under the terms of
the Amendment, the Company will be required to pay $450,000 to the secured
creditor. The Amendment requires the Company to make scheduled reductions
totaling $8.0 million, $1.9 million of which was paid concurrent with the
execution of the Amendment on March 5, 2002, and the remaining $6.1 million is
due on June 30, 2002. In the event the Company is unable to make the $6.1
million payment by June 30, 2002, the Company will be required to pay up to
$825,000 in accrued penalties to the secured creditor. The Amendment allows the
Company to exceed the borrowing base limit up to $3.5 million until June 30,
2002, and limits the Company to the borrowing base limit beginning June 30,
2002. The Amendment requires the Company to diligently market for sale the
Company's deep water facility in Lake Charles, Louisiana. However, because the
Amendment requires a substantial repayment by June 30, 2002, and the Company
currently does not have the resources to make such a payment, there is a
substantial risk that the Company will be unable to maintain compliance with its
obligations to its secured creditor or meet its obligations in the ordinary
course of business. The Amendment provides for additional borrowings under
certain conditions, mainly through the sale of assets or subsidiaries.
Under the terms of the Midland Agreement, the Company consented to an
assignment of the Amended Credit Agreement from the Bank Group to Midland. As a
condition to the Company's consent, Midland entered into an agreement with the
Company in which Midland agreed to convert $10 million of the outstanding
principal amount under the Credit Agreement into 90% of the Company's common
stock if certain conditions are met. The Company is working with Midland to
attempt to meet those conditions, but there can be no assurance that the Company
and Midland will be successful. If the Company and Midland are unable to meet
such conditions by August 31, 2002, then Midland has indicated that it will
force the Company to seek bankruptcy protection.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to revenue recognition
and long-lived assets. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its consolidated financial statements.
Revenue from construction contracts, which are typically of short
duration, are recognized on the percentage-of-completion method, measured by
relating actual labor cost, labor and subcontract cost, or total estimated
contract costs for work performed to date to the estimated total labor cost,
total labor and subcontract cost or total contract cost of the respective
contract. Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, and repairs. Provisions for estimated losses, if any, on uncompleted
contracts are made in the period in which such losses are determined.
Significant changes in cost estimates due to adverse market conditions or poor
contract performance could affect estimated gross profit, possibly resulting in
a contract loss.
The Company's customers are principally major and large independent oil
and gas companies and drilling companies. This concentration of customers may
impact our overall exposure to credit risk, either positively or negatively, in
that our customers may be similarly affected by changes in economic or other
conditions. Reserves for uncollectible accounts receivable are evaluated
periodically against specific accounts that are known to be uncollectible.
Increases in the reserves for uncollectible accounts are charged to operating
results in the period they are identified. Receivables are generally not
collateralized. Significant adverse changes in the economic environment of the
oil and gas industry could result in materially lower
9
collectibility of recorded receivables and could require a charge for
uncollectible accounts in the future.
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company assesses the recoverability of
long- lived assets by determining whether the carrying values can be recovered
through projected net cash flows undiscounted and without interest charges,
based on expected operating results over their remaining lives. Future adverse
market conditions or poor operating results could result in the inability to
recover the current carrying value of the long-lived asset, thereby possibly
requiring an impairment charge in the future.
Income taxes have been provided using the liability method. Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The amount of future income tax assets
recognized is limited to the amount of benefit that is more likely than not to
be realized. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or the entire
deferred tax asset will not be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversals of deferred tax liabilities, the
likelihood of future taxable income and tax planning strategies when making this
assessment. Based on this assessment, the Company records a valuation allowance
against deferred tax assets that are more likely than not unrealizable. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the future if taxable income is not available to allow for the
deduction of the deferred tax assets.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Certain statements included in this report and in oral statements made
from time to time by management of the Company that are not statements of
historical fact are forward-looking statements. In this report, forward-looking
statements are included primarily in the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
words "expect," "believe," "anticipate," "project," "plan," "estimate,"
"predict," and similar expressions often identify forward-looking statements.
Such statements may involve risks and uncertainties and include, among other
things, information as to possible future increases in oil and gas prices and
drilling activity and the effect of current and future levels of prices and
drilling activity on demand for products and services of the Company, on the
prices the Company can obtain for its products and services and on the
profitability of the Company. All such statements are subject to factors that
could cause actual results and outcomes to differ materially from the results
and outcomes predicted in the statements, and investors are cautioned not to
place undue reliance upon them. Those factors include the risks described
immediately below and elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are in Item 7A
of the Company's Form 10-K for the period ended December 31, 2001. Refer to Note
4 to the Condensed Consolidated Financial Statements for a discussion of the
Credit Agreement. No other material changes have occurred since December 31,
2001.
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PART II
ITEM 5. OTHER INFORMATION
On April 26, 2002 the Company announced the execution of an agreement with
Midland Fabricators and Process Systems, L.L.C. The press release making this
announcement is attached hereto as Exhibit 99.1.
On May 20, 2002 the Company announced operating results and related
matters for the first quarter ending March 31, 2002. The press release making
this announcement is attached hereto as Exhibit 99.2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
99.1 Press release issued by the Company on April
26, 2002 announcing the execution of an
agreement with Midland Fabricators and Process
Systems, L.L.C.
99.2 Press release issued by the Company on May 20,
2002 announcing its operating results and
related matters for the first quarter ending
March 31, 2002.
On March 12, 2002 we filed a Current Report on Form 8-K dated March 5,
2002. The report included Item 5 and an exhibit and was filed to announce the
signing of the Waiver and Second Amendment to Amended and Restated Credit
Agreement dated as of March 5, 2002, among the Company, Bank One, N.A.,
IberiaBank, Regions Bank and Whitney National Bank.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIFAB International, Inc.
-------------------------------------------
Date May 20, 2001 /s/ Peter J. Roman
-------------------- --------------------------------------------
Peter J. Roman
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
11