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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] 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 0-22303
GULF ISLAND FABRICATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
72-1147390
LOUISIANA (I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
70363
583 THOMPSON ROAD, HOUMA, LOUISIANA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(504) 872-2100
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 6, 1998 was approximately $165,816,200.
The number of shares of the Registrant's common stock, no par value per
share, outstanding at March 6, 1998 was 11,623,400.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement prepared for use in
connection with the registrant's 1998 Annual Meeting of Shareholders to be
held April 30, 1998 have been incorporated by reference into Part III of this
Form 10-K.
GULF ISLAND FABRICATION, INC.
ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE
----
PART I
Items 1 and 2. Business and Properties............................... 1
Item 3. Legal Proceedings..................................... 10
Item 4. Submission of Matters to a Vote of Security Holders... 11
Item 4A. Executive Officers of the Registrant.................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 12
Item 6. Selected Financial Data............................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 14
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk................................................. 18
Item 8. Financial Statements and Supplementary Data........... 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 19
PART III
Item 10. Directors and Executive Officers of the Registrant.... 19
Item 11. Executive Compensation................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 19
Item 13. Certain Relationships and Related Transactions........ 19
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K.......................................... 19
GLOSSARY OF CERTAIN TECHNICAL TERMS...................................... G1
FINANCIAL STATEMENTS..................................................... F1
SIGNATURES............................................................... S1
EXHIBIT INDEX............................................................ E1
i
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Certain technical terms are defined in the "Glossary of Certain Technical
Terms" appearing at the end of this Report.
GENERAL
Gulf Island Fabrication, Inc. (together with its subsidiaries, the
"Company") is a leading fabricator of offshore drilling and production
platforms and other specialized structures used in the development and
production of offshore oil and gas reserves. Structures and equipment
fabricated by the Company include jackets and deck sections of fixed
production platforms, hull and deck sections of floating production platforms
(such as tension leg platforms ("TLPs")), piles, wellhead protectors, subsea
templates and various production, compressor and utility modules. The Company
believes it is one of only three domestic companies capable of fabricating
fixed offshore production platforms, including jackets, for installation in
water depths greater than 300 feet. The Company's focus on controlling costs
and providing high quality, reliable products and services has enabled it to
be profitable for each year since 1988.
Demand for the Company's products and services is primarily a function of
the level of offshore oil and gas activity in the Gulf of Mexico and, to a
lesser extent, offshore areas in West Africa and Latin America. The Company
believes that the number of acreage blocks leased by oil and gas companies in
the Gulf of Mexico and the number of active drilling rigs in the Gulf of
Mexico are leading indicators of demand for the Company's products, with
fabricating activity trailing leasing and drilling activity by one to three
years. Over the past five years, improvements in seismic and drilling
technology, production techniques and oil and gas prices have resulted in an
increased number of acreage blocks leased, more intensive drilling activity in
shallow water areas, and increased exploration of deepwater areas of the Gulf
of Mexico. As a result, demand for the Company's products improved.
The Company was founded in 1985 by a group of investors, including Alden J.
"Doc" Laborde and Huey J. Wilson, and began operations at its fabrication yard
on the Houma Navigation Canal in Southern Louisiana, approximately 30 miles
from the Gulf of Mexico. On January 2, 1997, Gulf Island Fabrication, Inc.
acquired Dolphin Services, Inc. and two related companies (collectively,
"Dolphin Services"), which perform offshore and inshore fabrication and
construction services (the "Dolphin Acquisition"), and in April 1997,
completed the initial public offering (the "Initial Public Offering") of its
common stock, no par value per share (the "Common Stock"). The Company's
primary facilities are located on 597 acres, of which 250 are currently
developed for fabrication activities with 347 acres available for future
expansion. These facilities allow the Company to build jackets for
installation in water depth of up to 800 feet and deck sections for fixed or
floating production platforms for use in unlimited water depth. In addition,
the Company is able to build certain hull sections of tension leg platforms,
typically for use in water depth greater than 1,000 feet.
Effective January 1, 1998, the Company acquired all of the outstanding stock
of Southport, Inc. and its wholly owned subsidiary Southport International,
Inc. (collectively, "Southport"). Southport specializes in the fabrication of
living quarters for offshore platforms. The purchase price was $6.0 million
cash, plus contingent payments of up to an additional $5.0 million based on
Southport's net income over a four-year period ending December 31, 2001.
DESCRIPTION OF OPERATIONS
The Company's primary activity is the fabrication of offshore drilling and
production platforms, including jackets and deck sections of fixed production
platforms, hull and deck sections of floating production platforms (such as
TLPs), piles, wellhead protectors, subsea templates and various production,
compressor and utility modules. The Company also has the ability to produce
and repair pressure vessels used in the oil and gas
1
industry, refurbish existing platforms and fabricate various other types of
steel structures. With its acquisition of Southport, the Company has also
increased its presence in the market for the fabrication of living quarters
for installation on such platforms.
The Company uses the latest welding and fabrication technology available,
and all of the Company's products are manufactured in accordance with industry
standards and specifications, including those published by the American
Petroleum Institute, the American Welding Society and the American Society of
Mechanical Engineers. The Company has also been certified as an ISO 9002
fabricator for its quality assurance programs. See "-- Safety and Quality
Assurance."
Fabrication of Offshore Platforms. The Company fabricates structural
components of fixed platforms for use in the offshore development and
production of oil and gas. A fixed platform is the traditional type of
platform used for the offshore development and production of oil and gas,
although recently there has been an increase in the use of floating production
platforms and TLPs as a result of increased drilling and production activities
in deeper waters. Most fixed platforms built today can accommodate both
drilling and production operations. These combination platforms are large and
generally more costly than single-purpose structures. However, because
directional drilling techniques permit a number of wells to be drilled from a
single platform and because drilling and production can take place
simultaneously, combination platforms are often more cost effective.
The most common type of fixed platform consists of a jacket (a tubular
steel, braced structure extending from the mudline on the seabed to a point
above the water surface) which is supported on tubular pilings driven deep
into the seabed and supports the deck structure located above the level of
storm waves. The deck structure, extending above the surface of the water and
attached to the top end of the jacket, is designed to accommodate multiple
functions, including drilling, production, separating, gathering, piping,
compression, well support and crew quartering. Platforms can be joined by
bridges to form complexes of platforms for very large developments or to
improve safety by dividing functions among specialized platforms. Jacket-type
platforms are generally the most viable solution for water depths of 1,000
feet or less. Although there is no height limit to the size of the jackets
that can be fabricated at the Company's facilities, the dimensions of the
Houma Navigation Canal prevent the transportation to the Gulf of Mexico of
most jackets designed for water depths exceeding 800 feet. The Company can,
however, build decks, piping and equipment modules, living quarters, piles and
other components of platforms for installation in any water depth. Often,
customers split projects among fabricators, contracting with different
companies for the fabrication of the jacket, deck sections, living quarters
and piles for the same platform. Therefore, the Company is able, through the
construction of decks, living quarters and piles, to participate in the
construction of platforms requiring jackets that are larger than those the
Company can transport through the Houma Navigation Canal.
Most of the steel used in the Company's operations arrives at the Company's
fabrication yards as steel plate. The plate is cut and rolled into tubular
sections at rolling mills in the fabrication yards. The tubular sections
(which vary in diameter, up to 12 feet) are welded together in long straight
tubes to become legs or into shorter tubes to become part of the network of
bracing that supports the legs. Various cuts and welds in the fabrication
process are made by computer-controlled equipment that operates from data
developed during the design of the structure. The Company's ability to
fabricate and assemble the large tubular sections needed for jackets built for
use in water depths over 300 feet distinguish the Company from all but two of
its domestic competitors.
Jackets are built on skidways (which are long parallel rails along which the
jacket will slide when it is transferred to a barge for towing out to sea) and
are generally built in sections so that, to the extent possible, much of their
fabrication is done on the ground. As each section of legs and bracing is
complete, large crawler cranes pick up an entire side and "roll up" the
section, which is then joined to another uprighted section. When a jacket is
complete and ready for launch, it is pulled along the skidway onto a launch
barge, which is gradually deballasted to compensate for the weight of the
structure as more of it moves aboard the barge. Using ocean-going tugs, the
barge and jacket are transported to the offshore installation site.
2
Decks are built either as single structures or in sections and are installed
on location by marine construction contractors. The composition and quantity
of petroleum in the well stream generally determine the makeup of the
production deck on a processing platform. Typical deck equipment includes
crude oil pumps, gas and oil separators and gas compressors. Unlike large
jackets, which are transported in a horizontal position, decks are transported
upright and, as a result, are not subject to the width restrictions of the
Houma Navigation Canal. Therefore, the only limitation on the Company's
ability to fabricate decks is the weight capacity of the barges that transport
the decks from the Company's yard, to the installation site. Barges currently
exist that have the weight capacity and other characteristics required to
transport even the largest of the decks currently installed in the Gulf of
Mexico, and management believes that currently there are no decks installed in
the Gulf of Mexico that could not have been constructed at the Company's
facilities. While larger deck structures to be built in the future could
exceed the capacities of currently existing barges, management does not
believe that this will materially affect its share of the market for deck
construction.
The Company can also fabricate sections of, and structures used in
connection with, TLPs. TLPs consist of a deck that sits atop one or more
column-shaped hulls, which are positioned on site with vertical tendons
running from the hulls to the seabed. The tendons hold the hulls partially
submerged and are highly tensioned using the buoyancy of the hulls. This
system develops a restoring force against wave, wind and current actions in
proportion to the lateral displacement of the vessel. Wells for a TLP are
often pre-drilled through a subsea template. Long, flexible production risers,
which carry the petroleum to the deck of the TLP, are supported in tension by
mechanical tensioner machines on the platform's deck and are directly subject
to wave, wind and current forces. TLPs can be used in any water depth and are
generally better suited than fixed platforms for water depth greater than
1,000 feet.
The size of a TLP depends on a number of factors, including the intended
scope of production of the platform, the length of the production risers
connected to the platform, the size of the deck to be installed on the
platform and the water depth for which the platform is designed. The Company
can fabricate deck sections for use with TLPs of any size. The constraints of
the Houma Navigation Canal, however, limit the Company's ability to deliver
certain hulls for use with TLPs, depending on the size and weight of the hull
sections. For example, the hulls that are used to support the TLPs currently
operating in the Gulf of Mexico were too large to transport through the Houma
Navigation Canal. All of these hull sections were fabricated by overseas
shipbuilding companies. The Company, however, is currently constructing the
deck section and floating hull of a TLP designed for installation in 1,700-
1,800 feet of water. The Company has also entered into a letter of intent to
construct a similar hull to be installed in 3,200 feet of water. To the
Company's knowledge, these are the first two TLPs of this size to be
constructed entirely in the United States. The Company should be able to
compete for further TLP projects of this size, including the fabrication of
hull sections.
The Company has fabricated subsea templates for use in connection with TLPs,
which are structures that are installed on the seabed before development
drilling begins. As exploration and drilling move into the deep water of the
Gulf of Mexico, the Company believes that there will be increased
opportunities to fabricate subsea templates, as well as decks and other
structures, for use in connection with TLPs.
The Company also fabricates piles and other rolled goods, templates, bridges
for connecting offshore platforms, wellhead protectors, various production,
compressor and utility modules and other structures used in offshore oil and
gas production and development activities. All of the Company's products are
installed by marine construction contractors.
Through Dolphin Services, the Company also provides interconnect piping
services on offshore platforms, inshore steel and wood structure construction,
and steel warehousing and sales. Interconnect piping services involve sending
employee crews to offshore platforms that have been installed in the Gulf of
Mexico in order to perform welding and other activities required to connect
production equipment, service modules and other equipment to a platform prior
to its becoming operational. Dolphin Services also contracts with oil and gas
companies that have platforms and other structures located in the inland lakes
and bays throughout the Southeast
3
for various on-site construction and maintenance activities. At its existing
facility, a quarter of a mile from the Company's main yard, Dolphin Services
can fabricate jackets up to 100 feet tall along with decks and other steel
structures. Dolphin Services has also been active in the refurbishment of
existing platforms. Platform operators occasionally remove platforms
previously installed in the Gulf of Mexico and return the platforms to a
fabricator for refurbishment, which usually consists of general repairs,
maintenance work and modification.
FACILITIES AND EQUIPMENT
Facilities. The Company's corporate headquarters and main fabrication yard
are located on the east bank of the Houma Navigation Canal at Houma,
Louisiana, approximately 30 miles from the Gulf of Mexico. That facility
includes approximately 140 acres with approximately 100 acres developed for
fabrication, one 13,200 square foot building that houses administrative staff,
approximately 180,000 square feet of covered fabrication area, and over 17,000
square feet of warehouse storage area and 8,000 square feet of training and
medical facilities. The main yard also has approximately 2,800 linear feet of
water frontage, of which 1,500 feet is steel bulkhead which permits outloading
of heavy structures.
The Company's west yard is located across the Houma Navigation Canal from
the main yard and includes 437 acres, with 130 acres developed for fabrication
and over 300 acres of unimproved land, which could be used for expansion. The
west yard, which has approximately 72,000 square feet of covered fabrication
area and 3,500 square feet of warehouse storage area, spans 6,750 linear feet
of the Houma Navigation Canal, of which 2,350 feet is steel bulkhead.
Dolphin Services operates from a 20-acre site located approximately a
quarter of a mile from the Company's main yard on a channel adjacent to the
Houma Navigation Canal. The facility includes a 7,000-square foot building
that houses administrative staff, approximately 14,000 square feet of covered
fabrication area, 1,500 square feet of warehouse storage area, a 10,000-square
foot blasting and coating facility and 600 linear feet of steel bulkhead.
Southport is located on a 13-acre site located in Harvey, Louisiana, a
suburb of New Orleans, on the Harvey Canal, which has access to the Gulf of
Mexico through the Intracoastal Canal. The facility includes 7,550 square feet
of administrative offices, 22,300 square feet of covered fabrication area and
1,450 linear feet of steel bulkhead.
The Company owns all of the foregoing properties except the property where
the Southport facility is located, which is held subject to a three-year
lease. The Company has an option to purchase this property that is exercisable
prior to May 14, 1999 at a purchase price of $1,150,000.
Equipment. The Company's main yard houses its Bertsch Model 34 and Model 20
plate bending rolls, a Frye Wheelabrator grit blast system, a hydraulic plate
shear, a hydraulic press brake and various other equipment needed to build
offshore structures and fabricate steel components. The Company's west yard
has a Bertsch Model 38 plate bending roll, a computerized Vernon brace coping
machine used for cutting steel in complex geometric sections and various other
equipment used in the Company's fabrication business. The Company also
currently uses 19 crawler cranes, which range in tonnage capacity from 150 to
300 tons and service both of the Company's yards. The Company owns nine of
these cranes and rents the remaining 10 cranes on a monthly basis. The Company
recently purchased and installed a plasma-arc cutting system that cuts steel
up to one inch thick at a rate of two hundred inches per minute. The Company
performs routine repairs and maintenance on all of its equipment.
The Company's plate bending rolls allow it to roll and weld into tubular
pipe sections approximately 50,000 tons of plate per year. By having such
capacity at its fabrication facility, the Company is able to coordinate all
aspects of platform construction, which can reduce the risk of cost overruns,
delays in project completion and labor costs. In addition, these facilities
often allow the Company to participate as subcontractors on projects awarded
to other contractors. The Company's grit blast system can blast steel at a
rate approximately ten times
4
faster than conventional sandblasting. This greatly reduces labor costs and
also decreases the Company's use of conventional sandblasting, which is
considered to be a more hazardous and slower method of preparing steel for
painting.
For use in connection with its inshore construction activities, Dolphin
Services owns two spud barges. Dolphin Services also leases five barges for
use with inshore construction activities. Each barge is equipped with a crane
with a lifting capacity of 60 to 100 tons. Dolphin Services also owns two
Manitowoc 4100 cranes with lifting capacities of 200 to 230 tons and five
smaller cranes ranging from 60 to 100 tons lifting capacity. Southport rents
two crawler cranes with lifting capacities of 100 and 150 tons, respectively.
MATERIALS AND SUPPLIES
The principal materials and supplies used by the Company in its fabrication
business, standard steel shapes, steel plate, welding gases, fuel oil,
gasoline and paint, are currently available in adequate supply from many
sources. The Company does not depend upon any single supplier or source.
SAFETY AND QUALITY ASSURANCE
Management is concerned with the safety and health of the Company's
employees and maintains a stringent safety assurance program to reduce the
possibility of costly accidents. The Company's safety department establishes
guidelines to ensure compliance with all applicable state and federal safety
regulations and provides training and safety education through orientations
for new employees and subcontractors, weekly crew safety meetings and first
aid and CPR training. The Company also employs two in-house medical personnel.
The Company has a comprehensive drug program and conducts periodic employee
health screenings. A safety committee, whose members consist of management
representatives and peer-elected field representatives, meet monthly to
discuss safety concerns and suggestions that could prevent accidents. Through
1997 the Company rewarded its supervisory employees with safety bonuses based
on the amount that the Company saves under its self-insured workers'
compensation program compared to the existing rates of the Louisiana Worker's
Compensation Corporation.
The Company fabricates to the standards of the American Petroleum Institute,
the American Welding Society, the American Society of Mechanical Engineers and
specific customer specifications. The Company uses welding and fabrication
procedures in accordance with the latest technology and industry requirements.
Training programs have been instituted to upgrade skilled personnel and
maintain high quality standards. In addition, the Company maintains on-site
facilities for the non-destructive testing of all welds, which process is
performed by an independent contractor.
The Company's main and west yards are certified as an ISO 9002 fabricator.
ISO 9002 is an internationally recognized verification system for quality
management overseen by the International Standard Organization based in
Geneva, Switzerland. The certification is based on a review of the Company's
programs and procedures designed to maintain and enhance quality production
and is subject to annual review and recertification. Dolphin Services is
currently applying for ISO 9002 certification.
CUSTOMERS AND CONTRACTING
The Company's customers are primarily major and independent oil and gas
companies. Over the past five years, sales of structures used in the Gulf of
Mexico by oil and gas companies accounted for approximately 77% of the
Company's revenue. The balance of its revenue was derived from the fabrication
of structures installed outside the Gulf of Mexico, including offshore West
Africa and Latin America.
A large portion of the Company's revenue has historically been generated by
a few customers, although not necessarily the same customers from year-to-
year. For example, the Company's largest customers (those which individually
accounted for more than 10% of revenue in a given year) collectively accounted
for 67% (Texaco, Inc., British Petroleum Company and Atlantia Corporation),
35% (Shell Offshore, Inc., Global Industries
5
Offshore, Inc., Coastal Corporation) and 40% (Texaco, Inc., British Gas Ltd.)
of revenue for fiscal 1997, 1996 and 1995, respectively. In addition, at
December 31, 1997, 54% of the Company's backlog was attributable to three
projects, two of which were for the same customer. Because the level of
fabrication that the Company may provide to any particular customer depends,
among other things, on the size of that customer's capital expenditure budget
devoted to platform construction plans in a particular year and the Company's
ability to meet the customer's delivery schedule, customers that account for a
significant portion of revenue in one fiscal year may represent an immaterial
portion of revenue in subsequent years.
Most of the Company's projects are awarded on a fixed-price or
alliance/partnering basis, and while customers may consider other factors,
including the availability, capability, reputation and safety record of a
contractor, price and the ability to meet a customer's delivery schedule are
the principal factors on which the Company is awarded contracts. The Company's
contracts generally vary in length from one month to eighteen months depending
on the size and complexity of the project. Generally, the Company's contracts
and projects are subject to termination at any time prior to completion at the
option of the customer. Upon termination, however, the customer is generally
required to pay the Company for work performed and materials purchased through
the date of termination and, in some instances, cancellation fees.
Under fixed price contracts, the Company receives the price fixed in the
contract, subject to adjustment only for change orders approved by the
customer. As a result, the Company retains all cost savings but is also
responsible for all cost overruns. Under typical alliance/partnering
arrangements, the Company and the customer agree in advance to a target price
that includes specified levels of labor and material costs and profit margins.
If the project is completed at less cost than those targeted in the contract,
the contract price is reduced by a portion of the savings. If the cost of
completion is greater than those targeted in the contract, the contract price
is increased, but generally to the target price plus the actual incremental
cost of materials and direct labor costs. Accordingly, under
alliance/partnering arrangements, the Company has some protection from cost
overruns but also shares a portion of any cost savings with the customer.
Under cost-plus arrangements, the Company receives a specified fee in excess
of its direct labor and material cost and so is protected against cost
overruns but does not benefit directly from cost savings. Because the Company
generally prices materials as pass-through items on its contracts, the cost
and productivity of the Company's labor force are the primary factors
affecting the Company's operating costs. Consequently, it is essential that
the Company control the cost and productivity of the direct labor hours worked
on the Company's projects. As an aid to achieving this control, the Company
places a single project manager in charge of the production operations related
to each project and gives significant discretion to the project manager, with
oversight by the Company's Vice President of Operations. As an incentive to
control man-hours through 1997 the Company paid production bonuses to its
supervisory and salary employees if the actual hours worked on a contract are
less than the estimated hours used to formulate a bid for the project.
SEASONALITY
Although high activity levels in the oil and gas industry and capacity
limitations have somewhat diminished the seasonality of the Company's
operations in recent years, the Company's operations have historically been
subject to seasonal variations in weather conditions and daylight hours. Since
most of the Company's construction activities take place outdoors, the number
of direct labor hours worked generally declines during the winter months due
to an increase in rainy and cold conditions and a decrease in daylight hours.
In addition, the Company's customers often schedule the completion of their
projects during the summer months in order to take advantage of the milder
weather during such months for the installation of their platforms. As a
result, a disproportionate portion of the Company's income has historically
been earned during the second and third quarters of the year, and the Company
has occasionally incurred losses during the first and fourth quarters of its
fiscal year. For example, the portion of net income earned during the second
and third quarters amounted to 57%, 61%, and 81% of the Company's total net
income for fiscal 1997, 1996 and 1995, respectively. Because of this
seasonality, full year results are not likely to be a direct multiple of any
particular quarter or combination of quarters.
6
COMPETITION
The offshore platform fabrication industry is highly competitive and
influenced by events largely outside of the control of offshore platform
fabrication companies. Platform fabrication companies compete intensely for
available projects, which are generally awarded on a competitive bid basis
with customers usually requesting bids on projects one to three months prior
to commencement. The Company's marketing staff contacts oil and gas companies
believed to have fabrication projects scheduled to allow the Company an
opportunity to bid for the projects. Although price and the contractor's
ability to meet a customer's delivery schedule are the principal factors in
determining which qualified fabricator is awarded a contract for a project,
customers also consider, among other things, the availability of technically
capable personnel and facility space, a fabricator's efficiency, condition of
equipment, reputation, safety record and customer relations.
The Company currently has two primary competitors, Aker Gulf Marine and J.
Ray McDermott, S.A., for the fabrication of platform jackets to be installed
in the Gulf of Mexico in water depths greater than 300 feet. In addition to
these two companies, the Company primarily competes with five other
fabricators for platform jackets for intermediate water depths from 150 feet
to 300 feet. A number of other companies compete for projects designed for
shallower waters as well as for the projects typically performed by Southport.
Certain of the Company's competitors have greater financial and other
resources than the Company.
Management believes that, while new competitors can enter the market for
smaller structures relatively easily, it is more difficult for several reasons
to enter the market for jackets designed for use in water depths greater than
300 feet, including the substantial investment required to establish an
adequate facility, the difficulty of locating a facility adjacent to an
adequate waterway due to environmental and wetland regulations, and the
limited availability of experienced supervisory and management personnel.
Management believes that the Company's competitive pricing, expertise in
fabricating offshore structures and its certification as an ISO 9002
fabricator will enable it to continue to compete effectively for projects
destined for international waters. The Company recognizes, however, that
foreign governments often use subsidies and incentives to create jobs where
oil and gas production is being developed. In addition, the additional
transportation costs that are incurred when exporting structures from the U.S.
to foreign locations may hinder the Company's ability to successfully bid for
projects against foreign competitors. Because of subsidies, import duties and
fees, taxes on foreign operators and lower wage rates in foreign countries
along with fluctuations in the value of the U.S. dollar and other factors, the
Company may not be able to remain competitive with foreign contractors for
projects designed for use in international waters as well as those designed
for use in the Gulf of Mexico.
BACKLOG
As of December 31, 1997 the Company's backlog was $86.3 million, $79.7
million of which management expects to be performed during 1998. Of the $86.3
million backlog at December 31, 1997, approximately 54% was attributable to
three projects, two of which were for the same customer.
The Company's backlog is based on management's estimate of the direct labor
hours required to complete, and the remaining revenue to be recognized with
respect to, those projects as to which a customer has authorized the Company
to begin work or purchase materials pursuant to written contracts, letters of
intent or other forms of authorization. Often, however, management's estimates
are based on incomplete engineering and design specifications. As engineering
and design plans are finalized or changes to existing plans are made,
management's estimate of the direct labor hours required to complete and price
at completion for such projects is likely to change. In addition, all projects
currently included in the Company's backlog are subject to termination at the
option of the customer, although the customer in that case is generally
required to pay the Company for work performed and materials purchased through
the date of termination and, in some instances, pay the Company cancellation
fees.
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GOVERNMENT AND ENVIRONMENTAL REGULATION
Many aspects of the Company's operations and properties are materially
affected by federal, state and local regulation, as well as certain
international conventions and private industry organizations. The exploration
and development of oil and gas properties located on the outer continental
shelf of the United States is regulated primarily by the Minerals Management
Service (United States Department of the Interior) ("MMS"). The MMS has
promulgated federal regulations under the Outer Continental Shelf Lands Act
requiring the construction of offshore platforms located on the outer
continental shelf to meet stringent engineering and construction
specifications. Violations of these regulations and related laws can result in
substantial civil and criminal penalties as well as injunctions curtailing
operations. The Company believes that its operations are in compliance with
these and all other regulations affecting the fabrication of platforms for
delivery to the outer continental shelf of the United States. In addition, the
Company depends on the demand for its services from the oil and gas industry
and, therefore, can be affected by changes in taxes, price controls and other
laws and regulations relating to the oil and gas industry. Offshore
construction and drilling in certain areas has also been opposed by
environmental groups and, in certain areas, has been restricted. To the extent
laws are enacted or other governmental actions are taken that prohibit or
restrict offshore construction and drilling or impose environmental protection
requirements that result in increased costs to the oil and gas industry in
general and the offshore construction industry in particular, the business and
prospects of the Company could be adversely affected, although such
restrictions in the areas of the Gulf of Mexico where the Company's products
are used have not been substantial. The Company cannot determine to what
extent future operations and earnings of the Company may be affected by new
legislation, new regulations or changes in existing regulations.
The Houma Navigation Canal provides the only means of access for the
Company's products from the Company's facilities to open waters. The Houma
Navigation Canal is considered to be a navigable waterway of the United States
and, as such, is protected by federal law from unauthorized obstructions that
would hinder water-borne traffic. Federal law also authorizes federal
maintenance of the canal by the United States Corps of Engineers. The canal
requires annual dredging to maintain its water depth and, while federal
funding for this dredging has been provided for over 30 years, no assurance
that Congressional appropriations sufficient for adequate dredging and other
maintenance of the canal will be continued indefinitely. If sufficient funding
were not appropriated for that purpose, the Houma Navigation Canal could
become impassable by barges required to transport many of the Company's
products, with the result that the Company's operations and financial position
could be materially and adversely affected.
The Company's operations and properties are subject to a wide variety of
increasingly complex and stringent foreign, federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes,
the remediation of soil and groundwater contaminated by hazardous substances
and the health and safety of employees. These laws may provide for "strict
liability" for damages to natural resources and threats to public health and
safety, rendering a party liable for the environmental damage without regard
to negligence or fault on the part of such party. Sanctions for noncompliance
may include revocation of permits, corrective action orders, administrative or
civil penalties and criminal prosecution. Certain environmental laws provide
for strict, joint and several liability for remediation of spills and other
releases of hazardous substances, as well as damage to natural resources. In
addition, the Company may be subject to claims alleging personal injury or
property damage as a result of alleged exposure to hazardous substances. Such
laws and regulations may also expose the Company to liability for the conduct
of or conditions caused by others, or for acts of the Company that were in
compliance with all applicable laws at the time such acts were performed.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, and similar laws provide for responses to and liability for
releases of hazardous substances into the environment. Additionally, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Safe Drinking Water Act, the Emergency Planning and Community Right to Know
Act, each as amended, and similar foreign, state or local counterparts to
these federal laws, regulate air emissions, water discharges, hazardous
substances and wastes, and require public disclosure related to the use of
various hazardous substances.
8
Compliance with such environmental laws and regulations may require the
acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. The Company
believes that its facilities are in substantial compliance with current
regulatory standards.
The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, primarily the Occupational Safety and
Health Act and regulations promulgated thereunder. In addition, various other
governmental and quasi-governmental agencies require the Company to obtain
certain permits, licenses and certificates with respect to its operations. The
kind of permits, licenses and certificates required in the Company's
operations depend upon a number of factors. The Company believes that it has
all material permits, licenses and certificates necessary to the conduct of
its existing business.
The Company's compliance with these laws and regulations has entailed
certain additional expenses and changes in operating procedures, which
historically have resulted in approximately $100,000 in expenditures per year.
The Company believes that compliance with these laws and regulations will not
have a material adverse effect on the Company's business or financial
condition for the foreseeable future. However, future events, such as changes
in existing laws and regulations or their interpretation, more vigorous
enforcement policies of regulatory agencies, or stricter or different
interpretations of existing laws and regulations, may require additional
expenditures by the Company, which expenditures may be material.
Certain activities engaged in by employees of the Company, including
interconnect piping and other service activities conducted on offshore
platforms and activities performed on the spud barges owned by the Company,
are covered by the provisions of the Jones Act, the Death on the High Seas Act
and general maritime law, which laws operate to make the liability limits
established under state workers' compensation laws inapplicable to these
employees and, instead, permit them or their representatives to pursue actions
against the Company for damages or job related injuries, with generally no
limitations on the Company's potential liability. The Company's ownership and
operation of vessels can give rise to large and varied liability risks, such
as risks of collisions with other vessels or structures, sinkings, fires and
other marine casualties, which can result in significant claims for damages
against both the Company and third parties for, among other things, personal
injury, death, property damage, pollution and loss of business.
In addition to government regulation, various private industry
organizations, such as the American Petroleum Institute, the American Society
of Mechanical Engineers and the American Welding Society, promulgate technical
standards that must be adhered to in the fabrication process.
INSURANCE
The Company maintains insurance against property damage caused by fire,
flood, explosion and similar catastrophic events that may result in physical
damage or destruction to the Company's facilities. All policies are subject to
deductibles and other coverage limitations. The Company also maintains a
builder's risk policy for its construction projects and general liability
insurance. Gulf Island Fabrication, Inc. is self-insured for workers'
compensation liability except for losses in excess of $300,000 per occurrence
for Louisiana workers' compensation and for U.S. longshoreman and harbor
workers' coverage. Dolphin Services is conventionally insured for workers'
compensation liability with a $100,000 deductible. The Company also maintains
maritime employer's liability insurance. Although management believes that the
Company's insurance is adequate, there can be no assurance that the Company
will be able to maintain adequate insurance at rates which management
considers commercially reasonable, nor can there be any assurance that such
coverage will be adequate to cover all claims that may arise.
EMPLOYEES
The Company's workforce varies based on the level of ongoing fabrication
activity at any particular time. During 1997, the number of Company employees
ranged from approximately 525 to more than 1,000, approximately 335 of which
were added through the acquisition of Dolphin Services. As of March 1, 1998,
the
9
Company had approximately 1,250 employees, approximately 200 of which were
added through the acquisition of Southport. Although the seasonality of the
Company's operations may cause a decline in Company output during the winter
months, the Company generally does not lay off employees during those months
but reduces the number of hours worked per day by many employees to coincide
with the reduction in daylight hours during that period. None of the Company's
employees is employed pursuant to a collective bargaining agreement, and the
Company believes that its relationship with its employees is good.
The Company's ability to remain productive and profitable depends
substantially on its ability to attract and retain skilled construction
workers, primarily welders, fitters and equipment operators. In addition, the
Company's ability to expand its operations depends primarily on its ability to
increase its labor force. The demand for such workers is high and the supply
is extremely limited. While the Company believes its relationship with its
skilled labor force is good, a significant increase in the wages paid by
competing employers could result in a reduction in the Company's skilled labor
force, increases in the wage rates paid by the Company, or both. If either of
these occurred, in the near-term, the profits expected by the Company from
work in progress could be reduced or eliminated and, in the long-term, to the
extent such wage increases could not be passed on to the Company's customers,
the production capacity of the Company could be diminished and the growth
potential of the Company could be impaired.
As part of an effort to increase and improve its workforce, the Company
employs a full-time recruiter responsible for coordinating all aspects of the
Company's recruiting efforts, has instituted and enhanced several incentive
programs for its current employees and expanded its training facility. The
Company has facilities to train its employees on productivity and safety
matters. The Company is committed to training its employees and offers
advancement through in-house training programs.
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 "Business
and Properties," "Legal Proceedings," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The words
"expect," "believe," "anticipate," "project," "plan," "estimate," "predict"
and similar expressions often identify forward-looking statements. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is one of four defendants in a lawsuit (AGIP Petroleum Co. Inc.
v. Gulf Island Fabrication, Inc., McDermott Incorporated, Snamprogetti USA,
Inc. and Petro-Marine Engineering of Texas, Inc., Civil Action No. H-94-3382,
United States Federal District Court for the Southern District of Texas) in
which AGIP Petroleum Co. Inc. (the "Plaintiff") claims that the Company
improperly installed certain attachments to a jacket that it had fabricated
for the Plaintiff. The decision was made, without the Company's participation,
to remove the attachments prior to placing the jacket in its intended location
in the Gulf of Mexico and to modify the offshore installation plan. The
installation was unsuccessful and the jacket, after retrieval, required repair
and refurbishment. The Plaintiff, which has recovered most of its out-of-
pocket losses from its own insurer, seeks to recover the remainder of its
claimed out-of-pocket losses (approximately $1 million) and approximately $63
million for economic losses which it alleges resulted from the delay in oil
and gas production that was caused by these events and punitive damages. Co-
defendants with the Company include the installation contractor, the firm that
acted as the Plaintiff's agent in supervising the fabrication and installation
of the jacket and the design engineer that provided engineering services
related to the design and installation of the jacket. The Company has received
certain favorable rulings from the Court, particularly the Court's ruling that
the Company is not liable for economic losses with respect to certain of the
Plaintiff's principal causes of action; however, the Plaintiff could appeal
these rulings in the future. The Company believes that it has meritorious
defenses to the remaining
10
claims of the Plaintiff. In addition, the Company has asserted that it is
entitled to coverage as an additional named insured under the Plaintiff's
builders risk insurance policy relating to this project, although the insurer
is contesting coverage. The Company is vigorously contesting the Plaintiff's
claims. Based on the Company's analysis of the Plaintiff's claims, the
Company's defenses thereto and the Court's rulings received to date, the
Company believes that its liability for such claims, if any, will not be
material to its financial position. In view of the uncertainties inherent in
litigation, however, no assurance can be given as to the ultimate outcome of
such claims.
The Company is a party to various other 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. While the outcome of these lawsuits, legal proceedings and claims
cannot be predicted with certainty, management believes that the outcome of
all such proceedings, even if determined adversely, would not have a material
adverse effect on the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is the name, age and offices held by each of the executive
officers of the Company as of March 1, 1998. All officers of the Company serve
at the pleasure of the Company's Board of Directors.
NAME AGE POSITION
---- --- --------
Kerry J. Chauvin................. 50 President, Chief Executive Officer and
Director
William A. Downey................ 51 Vice President--Operations
Murphy A. Bourke................. 53 Vice President--Marketing
Joseph P. Gallagher, III......... 47 Vice President--Finance, Chief
Financial Officer, Treasurer and
Secretary
Kerry J. Chauvin has served as the Company's President and as a director
since the Company's inception and has served as Chief Executive Officer since
January 1990. Mr. Chauvin also served as the Company's Chief Operating Officer
from January 1989 to January 1990. He has over 20 years of experience in the
fabrication industry including serving from 1979 to 1984 as President of Delta
Fabrication, the assets of which were purchased by the Company in 1985, and as
Executive Vice President, General Manager and Manager of Engineering with
Delta Fabrication from 1977 to 1979. From 1973 to 1977, he was employed by
Delta Shipyard as Manager of New Construction and as a Project Manager. Mr.
Chauvin holds both an M.B.A. degree and a B.S. degree in Mechanical
Engineering from Louisiana State University.
William A. Downey has been Vice President--Operations of the Company since
1985. From 1980 to 1984, Mr. Downey served as the Vice President of
Engineering of Delta Fabrication. With over 20 years of experience in the
fabrication industry, he has served in various capacities with Avondale
Industries, Inc., including Senior Project Manager and Senior Cost & Design
Analyst, and has also been employed by Sanderson Enterprises, Inc. and Mission
Drilling & Exploration Corp. Mr. Downey received his B.S. degree in Industrial
Technology from Southeastern Louisiana University in 1971.
Murphy A. Bourke has been Vice President--Marketing since the Company began
operations in 1985. Mr. Bourke also served as Vice President Marketing for
Delta Fabrication from 1979 to 1984 and as the General Sales Manager of
Louisiana State Liquor Distributors, Inc., a beverage distributor, from 1972
to 1979. He holds a B.A. degree in marketing from Southeastern Louisiana
University.
Joseph P. "Duke" Gallagher, III was elected Vice President--Finance and
Chief Financial Officer of the Company in January 1997 and in that capacity he
also serves as chief accounting officer of the Company. Mr. Gallagher served
as the Company's Controller from 1985 until 1997. He has been the Company's
Treasurer since
11
1986 and Secretary since January 1993. Mr. Gallagher also served as Secretary
from 1986 to 1990. From 1981 to 1985, he was employed as the Controller of TBW
Industries, Incorporated, a manufacturer of machinery and pressure vessels,
and from 1979 to 1981 as the Assistant Controller of Brock Exploration
Corporation, a publicly traded oil and gas exploration company. Mr. Gallagher,
a Certified Public Accountant, also worked as a Senior Auditor for the
accounting firm A.A. Harmon & Co., CPA's Inc. He received a B.S. degree in
Production Management in 1973 from the University of Southwestern Louisiana.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, no par value per share (the "Common Stock"), is
traded on the Nasdaq National Market under the symbol "GIFI." At March 13,
1998, the Company had approximately 5,200 holders of its Common Stock of
record and individual participants including securities position listings.
The following table sets forth the high and low bid prices per share of the
Common Stock, as reported by the Nasdaq National Market, for each fiscal
quarter since trading in the Common Stock began on April 4, 1997 (adjusted to
give retroactive effect for a two-for-one stock split of the Common Stock
effected in the form of a stock dividend paid on October 28, 1997).
HIGH LOW
------ -----
Fiscal Year 1997
Second Quarter (commencing April 4, 1997)....................... $13.31 $7.88
Third Quarter................................................... 25.50 12.50
Fourth Quarter.................................................. 39.50 15.00
The Company currently intends to retain earnings, if any, to meet its
working capital requirements and to finance the future operation and growth of
its business and, therefore, does not plan to pay cash dividends to holders of
its Common Stock in the foreseeable future. Prior to the Initial Public
Offering, the Company made cash distributions to its shareholders in order to
provide a cash return to them as well as to fund their federal and state
income tax liability that resulted from the Company's prior status as an S
Corporation. These distributions totaled $2.7 million in the year ended
December 31, 1996, and $16.6 million through the termination of the Company's
S Corporation Status on April 4, 1997.
12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data as of the
dates and for the periods indicated. The historical financial data for each
year in the five-year period ended December 31, 1997 are derived from the
audited financial statements of the Company. The table also sets forth pro
forma financial information as of and for the years ended December 31, 1997,
1996 and 1995 that gives effect to the termination of the Company's S
Corporation status, as further explained in the notes to the Company's audited
financial statements included elsewhere in this report. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto included elsewhere in this report.
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997(1) 1996 1995 1994 1993
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue........................ $ 136,355 $ 79,004 $ 63,779 $ 60,984 $ 65,435
Cost of revenue................ 112,033 68,673 60,034 57,519 60,599
--------- -------- -------- -------- --------
Gross profit................... 24,322 10,331 3,745 3,465 4,836
General and administrative
expenses...................... 4,670 2,161 1,730 1,567 1,585
Non-recurring compensation
charge(2)..................... -- 500 -- -- --
--------- -------- -------- -------- --------
Operating income............... 19,652 7,670 2,015 1,898 3,251
Net interest expense........... 109 384 430 328 70
--------- -------- -------- -------- --------
Income before income taxes..... 19,543 7,286 1,585 1,570 3,181
Income taxes................... 5,973 -- -- -- --
Cumulative deferred tax
provision..................... 1,144 -- -- -- --
--------- -------- -------- -------- --------
Net income..................... $ 12,426 $ 7,286 $ 1,585 $ 1,570 $ 3,181
========= ======== ======== ======== ========
PRO FORMA DATA:
Income before provision for
income taxes.................. $ 19,543 $ 7,286 $ 1,585
Provision for income taxes..... 5,973 -- --
Pro forma provision for income
taxes(3)...................... 1,379 2,934 602
--------- -------- --------
Pro forma net income........... $ 12,191 $ 4,352 $ 983
========= ======== ========
Pro forma basic earnings per
share......................... $ 1.15 $ 0.55 $ 0.13
========= ======== ========
Pro forma diluted earnings per
share......................... $ 1.14 $ 0.55 $ 0.13
========= ======== ========
Pro forma weighted-average
common shares................. 10,633 7,854 7,854
========= ======== ========
Pro forma adjusted weighted-
average common shares......... 10,700 7,854 7,854
========= ======== ========
AS OF DECEMBER 31,
---------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital...................... $17,555 $11,001 $10,048 $ 7,437 $ 8,217
Property, plant and equipment, net... 34,505 17,735 13,483 13,873 14,567
Total assets......................... 67,678 35,909 30,414 25,665 29,225
Debt, including current
maturities(4)....................... -- 6,187 5,545 4,477 2,424
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
OPERATING DATA:
Direct labor hours worked(5).......... 2,150 1,073 920 1,037 981
Backlog(6)
Direct labor hours.................. 1,341 1,038 427 400 404
Dollars............................. $86,312 $87,093 $22,003 $20,740 $20,832
13
- --------
(1) Includes results of operations of Dolphin Services from January 2, 1997.
(2) In December 1996, the Company's principal shareholders sold an aggregate
of 98,000 shares of Common Stock to the Company's executive officers at a
total purchase price of $350,000. As a result, the Company was required to
recognize a non-cash expense equal to the difference between the aggregate
purchase price for such shares (adjusted for certain distributions with
respect to such shares that were paid in 1997 before completion of the
Initial Public Offering) and the estimated value of such shares at the
time of the Initial Public Offering.
(3) Includes pro forma effect for the application of federal and state income
taxes to the Company as if it were a C Corporation for tax purposes. Prior
to the Initial Public Offering, the Company elected to terminate its S
Corporation status. As a result, the Company became subject to corporate
level income taxation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Tax Adjustments," and Notes
1 and 2 to the Company's financial statements included elsewhere in this
Report.
(4) Information for 1997, 1996, 1995, 1994 and 1993 includes $0, $530,000,
$434,000, $477,000 and $324,000, respectively, of current maturities of
debt.
(5) Direct labor hours are hours worked by employees directly involved in the
production of the Company's products.
(6) The Company's backlog is based on management's estimate of the number of
direct labor hours required to complete, and the remaining revenues to be
recognized with respect to, those projects on which a customer has
authorized the Company to begin work or purchase materials. Backlog at
December 31, 1997 included approximately 125,000 direct labor hours and
$6.6 million attributable to portions of orders expected to be completed
after December 31, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are affected primarily by (i) the level
of oil and gas exploration and development activity maintained by oil and gas
companies in the Gulf of Mexico, and to a lesser extent, West Africa and Latin
America; (ii) the Company's ability to win contracts through competitive
bidding or alliance/partnering arrangements and (iii) the Company's ability to
manage those contracts to successful completion. The level of exploration and
development activity is related to several factors, including trends of oil
and gas prices, exploration and production companies' expectations of future
oil and gas prices, and changes in technology which reduce costs and improve
expected returns on investment. Over the past five years, generally favorable
trends in these factors have led to increased activity levels in the Gulf of
Mexico.
Improvements in three-dimensional seismic, directional drilling, production
techniques, and other advances in technology have increased drilling success
rates and reduced costs. Drilling activity has increased in and around
existing fields in shallow water (less than 300 feet) where technology has
allowed for the identification of smaller, previously overlooked oil and gas
deposits. Technological improvements have also led to larger discoveries of
oil and gas in subsalt geological formations (which generally are located in
300 to 800 feet of water) and in deep water (800 to 6,000 feet) areas of the
Gulf of Mexico. Increased activity in water depths greater than 300 feet,
where larger structures requiring more steel tonnage are needed, has placed
increased demand on the available capacity of the major platform fabricators
serving the Gulf of Mexico with a resulting improvement in pricing levels for
their services. Although the physical limitations of the Houma Navigation
Canal prevent the transporting of jackets for use in water depths greater than
800 feet, the increased activity in the deepwater areas of the Gulf of Mexico
has also benefitted the Company's pricing levels as the Company is able to
fabricate deck sections for installation on platforms used in any water depths
and sections of floating platforms, which are generally better suited than
fixed platforms for deepwater projects. In addition, to the extent the
Company's competitors are involved in deepwater projects, these projects
occupy a portion of the resources that the Company's competitors could apply
to projects designed for shallower waters, resulting in less industry capacity
for such projects.
14
Demand for the Company's products and services is primarily a function of
the level of offshore oil and gas activity in the Gulf of Mexico and, to a
lesser extent, offshore areas in West Africa and Latin America. The Company
believes the number of blocks leased by oil and gas companies in the Gulf of
Mexico and the number of active drilling rigs in the Gulf of Mexico are
leading indicators of demand for the Company's products, with fabricating
activity trailing leasing and drilling activity by one to three years. Over
the past five years, improvements in seismic and drilling technology,
production techniques and oil and gas prices have resulted in an increased
number of acreage blocks leased, more intensive drilling activity in shallow
water areas, and increased exploration of deepwater areas of the Gulf of
Mexico. As a result, demand for the Company's products improved. Revenue in
1997 was $136.4 million, a 72.7% increase over 1996 revenue, and pro forma net
income was $12.2 million, a 180% increase over 1996 pro forma net income. The
Company's backlog at December 31, 1997 was $86.3 million as compared to $87.1
million at the end of 1996.
Most of the Company's contracts are awarded on a fixed-price or
alliance/partnering basis although some contracts are bid on a cost-plus
basis. Under fixed-price contracts, the Company receives the price fixed in
the contract, subject to adjustment only for change orders placed by the
customer. As a result, the Company retains all cost savings but is also
responsible for all cost over-runs. Under typical alliance/partnering
arrangements, the Company and the customer agree in advance to a target price
that includes specified levels of labor and materials costs and profit
margins. If the project is completed at a lower cost than that targeted in the
contract, the contract price is reduced by a portion of the savings. If the
cost to completion is greater than target costs, the contract price is
increased, but generally to the target price plus the actual cost of
incremental materials and direct labor. Accordingly, under alliance/partnering
arrangements, the Company has some protection from cost overruns but also must
share a portion of any cost savings with the customer. Under cost-plus
arrangements, the Company receives a specified fee in excess of its direct
labor and materials cost and so is protected against cost overruns but does
not benefit directly from cost savings. Because the Company generally prices
materials as pass-through items on its contracts, the cost and productivity of
the Company's labor force are key factors affecting the Company's operating
profits. Consequently, it is essential that the Company control the cost and
productivity of the direct labor hours worked on the Company's projects.
The ability of the Company to operate profitably and to expand its
operations depends substantially on its ability to attract skilled production
workers, primarily welders, fitters and equipment operators. As part of an
effort to increase and improve its workforce, the Company employs a full-time
recruiter responsible for coordinating all aspects of the Company's recruiting
efforts, has instituted and enhanced several recruitment incentive programs
for its current employees and expanded its training facility. While the supply
of production workers is limited, the demand for their services has increased
as oil and gas development and production activity has increased. As a result,
the Company has increased the average hourly wages of its employees and, in
some circumstances, has subcontracted work to others on a fixed-price basis
and, in 1994 and 1995, engaged contract labor. During 1997, the Company
increased its work force to approximately 1,000 employees, including
approximately 335 employees added through the acquisition of Dolphin Services.
The Company also added approximately 200 employees in January 1998 as a result
of its acquisition of Southport. Because the Company has succeeded in
increasing its production workforce through the acquisitions of Southport and
Dolphin Services and its own recruiting efforts, the Company does not
anticipate the need to engage a material amount of contract labor in the
foreseeable future.
Although recent high activity levels in the oil and gas industry and
capacity limitations have somewhat diminished the seasonality of the Company's
operations in recent years, the Company's operations have traditionally been
subject to seasonal variations in weather conditions and daylight hours.
Because most of the Company's construction activities take place outdoors, the
number of direct labor hours worked generally declines during the winter
months due to an increase in rainy and cold conditions and a decrease in
daylight hours. In addition, the Company's customers often schedule the
completion of their projects during the summer months in order to take
advantage of the milder weather during such months for the installation of
their platforms. As a result, a disproportionate amount of the Company's net
income and, to a lesser extent, revenue and gross profit, has historically
been earned during the second and third quarters of the year, and the Company
15
has occasionally incurred losses during the first and fourth quarters of its
fiscal year. Because of this seasonality, full year results are not likely to
be a direct multiple of any particular quarter or combination of quarters. The
table below indicates for each quarter of the Company's last three fiscal
years the percentage of the annual revenue, gross profit and net income, and
the number of direct labor hours worked.
1997 1996 1995
------------------- ------------------- --------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Revenue................. 21% 26% 27% 26% 25% 27% 24% 24% 22% 26% 30% 22%
Gross profit............ 20% 26% 29% 25% 13% 26% 30% 31% 7% 25% 40% 28%
Net income (loss)....... 19% 27% 30% 24% 11% 27% 34% 28% (12%) 26% 55% 31%
Direct labor hours (in
000's)................. 497 542 588 523 249 304 264 256 219 256 245 200
Most of the Company's revenue is recognized on a percentage-of-completion
basis based on the ratio of direct labor hours worked to the total estimated
direct labor hours required for completion. Accordingly, contract price and
cost estimates are reviewed monthly as the work progresses, and adjustments
proportionate to the percentage of completion are reflected in revenue for the
period when such estimates are revised. If these adjustments were to result in
a reduction of previously reported profits, the Company would have to
recognize a charge against current earnings, which may be significant
depending on the size of the project or the adjustment.
The Company has developed a plan to modify its information technology to
recognize the year 2000. The Company has committed to purchase software and
upgrade its hardware to address the year 2000. The project is to be
substantially complete and operational by mid to late 1998 and is expected to
cost approximately $77,000. Management does not expect this project to have a
significant effect on the Company's operations. The Company is currently
evaluating its position with significant suppliers and large customers to
ensure that those parties have appropriate plans to address year 2000 issues
where they may otherwise impact the operations of the Company. The Company
does not have any significant suppliers or large customers that directly
interface with the Company's information technology systems. There is no
guarantee that the systems of the Company's suppliers and customers will be
year 2000 compliant and that such non-compliance will not have an adverse
effect on the Company.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1997 and 1996
The Company's revenue for the year ended December 31, 1997 was $136.4
million, an increase of 72.7%, compared to $79.0 million in revenue for the
year ended December 31, 1996. Revenue increased as a result of the acquisition
of Dolphin Services and high activity levels in the oil and gas industry
during 1997 which created increased demand and, thus, upward pressure on the
pricing of the Company's goods and services. In addition, the on-going labor
recruiting and retention efforts at the Company generated an increase in the
volume of direct labor hours applied to contracts for the year ended December
31, 1997, compared to 1996 (2.1 million in 1997 versus 1.1 million in 1996).
The combination of increased volume and strong pricing enabled the Company to
increase gross profit by 135% to $24.3 million (17.8% of revenue) for the year
ended December 31, 1997, compared to the $10.3 million (13.1% of revenue) of
gross profit for the year ended December 31, 1996.
Cost of revenue was $112.0 million in 1997 compared to $68.7 million in
1996. Cost of revenue consists of costs associated with the fabrication
process, including direct costs (such as direct labor hours and raw materials)
allocated to specific projects and indirect costs (such as supervisory labor,
utilities, welding supplies and equipment costs) that are associated with
production but are not directly related to a specific project. As a percentage
of revenue, these costs decreased to 82.2% compared to 86.9% in 1996.
The Company's general and administrative expenses were $4.7 million for the
year ended December 31, 1997, compared to $2.7 million for the year ended
December 31, 1996. Although the absolute dollar cost of the Company's general
and administrative expenses increased by $2.0 million for 1997, as a
percentage of revenue,
16
it remained constant at 3.4%. The increase of $2.0 million for the year was
caused by (i) additional general and administrative costs associated with
Dolphin Services, (ii) greater accrual of performance-based employee
incentives which resulted from increased profits for the year ended December
31, 1997, and (iii) additional costs associated with increased production
levels and the reporting requirements of a public company for 1997.
The Company's net interest expense decreased to $100,000 for 1997 compared
to $400,000 for 1996. As a result of the use of the net proceeds from the
Company's Initial Public Offering to repay all of the Company's outstanding
debt and net cash provided by operations of $18.3 million in 1997, as compared
to $7.2 million in 1996, the weighted average borrowings for 1997 were lower
in comparison to 1996.
The Company converted to C Corporation status on April 4, 1997. Pro forma
provision for income taxes and pro forma net income give effect to federal and
state income taxes as if all entities presented had been taxed as C
Corporations during all the periods presented of both 1996 and 1997. Pro forma
net income excludes a non-recurring charge of $1.1 million to record the
cumulative deferred income tax provision upon the election on April 4, 1997 to
convert from S Corporation status to C Corporation status.
Comparison of the Years Ended December 31, 1996 and 1995
During the year ended December 31, 1996, the Company generated revenue of
$79.0 million, an increase of 23.8% compared to the $63.8 million generated in
1995. This increase was caused by a 16.6% increase in production volume (1.1
million direct labor hours worked in 1996 versus 0.9 million in 1995) and an
increase of 6.2% in the Company's average selling rate. The Company's average
selling rate is computed by dividing revenue for any period by the number of
direct labor hours worked in such period. As a result of stronger demand for
fabricated structures in the oil and gas industry, the Company was able to
increase the number of direct labor hours worked by hiring additional
employees and increase its average selling rate by raising the prices charged
to its customers. The 6.2% increase in average selling rate is not fully
indicative of the prices charged by the Company on all of its projects since
it includes work performed and projects completed in the early part of 1996
for contracts awarded during 1995 as well as work performed and projects
completed in late 1996 for projects awarded during the improving market
conditions of early 1996.
Cost of revenue was $68.7 million in 1996 compared to $60.0 million in 1995.
These costs decreased to 89.9% of revenue in 1996 from 94.1% of revenue in
1995, primarily as a result of the increase in pricing discussed above and a
decrease in the cost of revenue that resulted primarily from (i) productivity
increases caused by labor saving equipment and production incentives, (ii) a
reduction in equipment rental costs which was partially offset by increased
depreciation expense which resulted from equipment purchases and (iii) an
increase in the amount of scrap steel sold.
Excluding a $500,000 non-recurring compensation expense in 1996, general and
administrative expenses were $2.2 million in 1996 compared to $1.7 million in
1995, remaining a constant 2.7% of revenue for each period.
Interest expense decreased to $384,000 in 1996 from $430,000 in 1995 as the
weighted average of the Company's borrowings decreased during 1996.
PRO FORMA TAX ADJUSTMENTS
From April 1989 until April 4, 1997, the Company operated as an S
Corporation for federal and state income tax purposes. As a result, the
Company paid no federal or state income tax, and the entire earnings of the
Company were subject to tax directly at the shareholder level. Immediately
prior to the Initial Public Offering, the Company's shareholders elected to
terminate the Company's S Corporation status. As a result, the Company
recorded a one-time deferred tax liability in the amount of approximately $1.1
million in the second quarter of 1997. Pro forma income taxes related to
operations as an S Corporation for 1997 and 1996 would have been $1.4 million
and $2.9 million, respectively.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the Initial Public Offering on April 9, 1997 in which
it sold 4.6 million shares of Common Stock and received net proceeds of $31.3
million after underwriting discounts and other costs of $3.2 million. Of the
net proceeds, the Company used $31.1 million to repay all of the indebtedness
outstanding under the Company's Bank Credit Facility (as defined herein). The
balance of the proceeds was used by the Company as additional working capital.
Working capital increased 60% from the prior year end to $17.6 million at
December 31, 1997.
Historically the Company has funded its business activities through funds
generated from operations and borrowings under its Bank Credit Facility. Net
cash provided by operations increased by 156% to $18.3 million for the year
ended December 31, 1997, primarily attributable to cash received from
customers related to increased sales. Net cash used in investing activities
for the year ended December 31, 1997 was $20.7 million, related to the $5.8
million purchase of Dolphin Services, $15.2 million of capital expenditures
and $300,000 of other miscellaneous items. The Company's capital expenditures
were for improvements to its production facilities and for equipment designed
to increase the capacity of its facilities and the productivity of its labor
force. During 1997 the Company purchased five new Manitowoc cranes and a used
American Model 5300 crane, constructed a pressure vessel fabrication facility,
expanded its fabrication shop and pipe mill, installed construction skidways,
and acquired various other fabrication equipment and facilities.
Net cash provided by financing activities of $7.9 million during 1997
represented the net proceeds of $31.3 million from the Initial Public Offering
offset by $16.6 million of dividends paid to shareholders in connection with
the termination of the Company's S Corporation status prior to the Initial
Public Offering and $6.8 million net payments of notes payable under the Bank
Credit Facility.
The Company's bank credit facility (the "Bank Credit Facility") currently
provides for a revolving line of credit of up to $20.0 million which bears
interest equal to, at the Company's option, the prime lending rate established
by Citibank, N.A. or LIBOR plus 1 1/2%. The Bank Credit Facility matures
December 31, 1999 and is secured by a mortgage on the Company's real estate,
equipment and fixtures, and by the stock of Dolphin Services. As additional
security, the Company has caused Dolphin Services to guarantee the Company's
obligations under the Bank Credit Facility. At December 31, 1997, there were
no borrowings outstanding under the Bank Credit Facility.
Effective January 1, 1998, the Company acquired all the outstanding stock of
Southport. The purchase price was $6.0 million in cash, plus contingent
payments of up to $5.0 million based on Southport's net income over a four
year period ending December 31, 2001. The initial payment of $6.0 million was
funded through working capital generated from operations.
The Company's Board of Directors has approved a capital budget of $14.6
million for 1998, including the purchase of five Manitowoc 888 crawler cranes,
an additional skidway system for large jackets, automated painting, welding
and steel cutting systems and another barge, equipped with an 80-ton crane,
for use in inland construction operations. Management believes that its
available funds, cash generated by operating activities and funds available
under the Bank Credit Facility will be sufficient to fund these capital
expenditures and its working capital needs. However, the Company may expand
its operations through acquisitions in the future, which may require
additional equity or debt financing.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In this report the consolidated financial statements and supplementary data
of the Company appear on pages F-1 through F-14 and are incorporated herein by
reference. See Index to Consolidated Financial Statements on page 19.
18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A change in the Company's independent accountants and the information
required by this item has been previously reported by the Company in a Current
Report on Form 8-K dated August 25, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors and officers called for by
this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning the compensation of the Company's executives called
for by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management called for by this item will be included in the Company's
definitive Proxy Statement prepared in connection with the 1998 Annual Meeting
of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions called
for by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements schedules and exhibits are filed as
part of this Report:
(i) Financial Statements Page
PAGE
----
Report of Independent Auditors...................................... F-1
Consolidated Balance Sheets at December 31, 1997 and December 31,
1996............................................................... F-2
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995................................................ F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995....................... F-4
Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995............................................ F-5
Notes to Consolidated Financial Statements.......................... F-6
(ii) Schedules
Other schedules have not been included because they are not required, not
applicable, immaterial or the information required has been included
elsewhere herein.
(iii) Exhibits
See Exhibit Index on page E-1. The Company will furnish to any eligible
stockholder, upon written request, a copy of any exhibit listed upon
payment of a reasonable fee equal to the Company's expenses in furnishing
such exhibit. Such requests should be addressed to Ms. Valarae Bates,
Investor Relations, Gulf Island Fabrication, Inc., P.O. Box 310, Houma, LA
70361-0310.
19
GLOSSARY OF CERTAIN TECHNICAL TERMS
blasting and coating Building and equipment used to clean steel
facility: products and prepare them for coating with
marine paints and other coatings.
coping machine: A computerized machine that cuts ends of
tubular pipe sections to allow for changes in
weld bevel angles and fits onto other tubular
pipe sections.
deck: The component of a platform on which
development drilling, production, separating,
gathering, piping, compression, well support,
crew quartering and other functions related to
offshore oil and gas development are conducted.
direct labor hours: Direct labor hours are hours worked by
employees directly involved in the production
of the Company's products. These hours do not
include contractor labor hours and support
personnel hours such as maintenance,
warehousing and drafting.
fixed platform: A platform consisting of a rigid jacket which
rests on tubular steel pilings driven into the
seabed and which supports a deck structure
above water surface.
floating production Floating structure that supports offshore oil
platform: and gas production equipment (TLP, semi-
submersible, SPAR).
grit blast system: System of preparing steel for coating by using
steel grit rather than sand as a blasting
medium.
hydraulic plate shear: Machine that cuts steel by a mechanical system
similar to scissors.
inshore: Inside coastlines, typically in bays, lakes and
marshy areas.
ISO 9002: International Standards of Operations 9002--
Defines quality management system of procedures
and goals for certified companies.
jacket: A component of a fixed platform consisting of a
tubular steel, braced structure extending from
the mudline of the seabed to a point above the
water surface. The jacket is supported on
tubular steel pilings driven into the seabed
and supports the deck structure located above
the level of storm waves.
modules: Packaged equipment usually consisting of major
production, utility or compression equipment
with associated piping and control system.
offshore: In unprotected waters outside coastlines.
piles: Rigid tubular pipes that are driven into the
seabed to support platforms.
plasma-arc cutting system: Steel cutting system that uses a ionized gas
cutting rather than oxy-fuel system.
platform:
A structure from which offshore oil and gas
development drilling and production are
conducted.
G-1
pressure vessel: A metal container generally cylindrical or
spheroid, capable of withstanding various
internal pressure loadings.
spud barge: Construction barge rigged with vertical tubular
or square lengths of steel pipes that are
lowered to anchor the vessel.
subsea templates: Tubular frames which are placed on the seabed
and anchored with piles. Usually a series of
oil and gas wells are drilled through these
underwater structures.
tension leg platform (TLP): A platform consisting of a floating hull and
deck anchored by vertical tensioned cables or
pipes connected to pilings dreiven into the
seabed. A tension leg platform is typically
used in water depths exceeding 1,000 feet.
G-2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gulf Island Fabrication, Inc.
We have audited the accompanying consolidated balance sheet of Gulf Island
Fabrication, Inc. as of December 31, 1997 and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of Gulf
Island Fabrication, Inc. as of December 31, 1996, and for each of the two
years in the period ended December 31, 1996, were audited by other auditors
whose report dated January 23, 1997, except for the third paragraph of Note 1
which is as of February 13, 1997, the second paragraph of Note 4 which is as
of February 14, 1997, and the third paragraph of Note 4 which is as of October
28, 1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gulf
Island Fabrication, Inc. at December 31, 1997, and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------------
Ernst & Young LLP
New Orleans, Louisiana
January 26, 1998
F-1
GULF ISLAND FABRICATION, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
---------------
ASSETS 1997 1996
------ ------- -------
Current assets:
Cash......................................................... $ 6,879 $ 1,357
Contracts receivable, net.................................... 22,760 13,480
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... 903 1,306
Prepaid expenses............................................. 914 500
Inventory.................................................... 968 1,113
Recoverable income taxes..................................... 321 --
------- -------
Total current assets....................................... 32,745 17,756
Property, plant and equipment, net............................. 34,505 17,735
Other assets................................................... 428 418
------- -------
Total assets............................................... $67,678 $35,909
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................................. $ 3,368 $ 1,081
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... 5,925 2,205
Accrued employee costs....................................... 3,068 1,903
Accrued expenses............................................. 2,829 1,036
Current portion of notes payable............................. -- 530
------- -------
Total current liabilities.................................. 15,190 6,755
Deferred income taxes.......................................... 1,878 --
Notes payable, less current portion............................ -- 5,657
------- -------
Total liabilities.......................................... 17,068 12,412
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding............................ -- --
Common stock, no par value, 20,000,000 shares authorized,
11,600,000 and 7,000,000 shares issued and outstanding at
December 31, 1997 and 1996, respectively.................... 4,133 1,000
Additional paid-in capital................................... 34,865 6,670
Retained earnings............................................ 11,612 15,827
------- -------
Total shareholders' equity................................. 50,610 23,497
------- -------
$67,678 $35,909
======= =======
The accompanying notes are an integral part of these statements.
F-2
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
Revenue............................................ $136,355 $79,004 $63,779
Cost of revenue.................................... 112,033 68,673 60,034
-------- ------- -------
Gross profit....................................... 24,322 10,331 3,745
General and administrative expenses................ 4,670 2,661 1,730
-------- ------- -------
Operating income................................... 19,652 7,670 2,015
Other expense (income):
Interest expense................................. 348 415 447
Interest income.................................. (230) (31) (17)
Other--net....................................... (9) -- --
-------- ------- -------
109 384 430
-------- ------- -------
Income before income taxes......................... 19,543 7,286 1,585
Income taxes....................................... 5,973 -- --
Cumulative deferred tax provision.................. 1,144 -- --
-------- ------- -------
Net income......................................... $ 12,426 $ 7,286 $ 1,585
======== ======= =======
Pro forma data:
Income before income taxes....................... $ 19,543 $ 7,286 $ 1,585
Income taxes..................................... 5,973 -- --
Pro forma income taxes related to operations as S
Corporation..................................... 1,379 2,934 602
-------- ------- -------
Pro forma net income............................. $ 12,191 $ 4,352 $ 983
======== ======= =======
Pro forma per share data:
Pro forma basic earnings per share............... $ 1.15 $ 0.55 $ 0.13
======== ======= =======
Pro forma diluted earnings per share............. $ 1.14 $ 0.55 $ 0.13
======== ======= =======
The accompanying notes are an integral part of these statements.
F-3
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
Balance at January 1,1995...... 7,000 $1,000 $ 6,170 $10,081 $17,251
Dividends...................... -- -- -- (434) (434)
Net income..................... -- -- -- 1,585 1,585
------ ------ ------- ------- -------
Balance at December 31, 1995... 7,000 1,000 6,170 11,232 18,402
Dividends...................... -- -- -- (2,691) (2,691)
Non-recurring compensation
charge........................ -- -- 500 -- 500
Net income..................... -- -- -- 7,286 7,286
------ ------ ------- ------- -------
Balance at December 31, 1996... 7,000 1,000 6,670 15,827 23,497
Issuance of common stock....... 4,600 3,133 28,195 -- 31,328
Dividends...................... -- -- -- (16,641) (16,641)
Net income..................... -- -- -- 12,426 12,426
------ ------ ------- ------- -------
Balance at December 31, 1997... 11,600 $4,133 $34,865 $11,612 $50,610
====== ====== ======= ======= =======
The accompanying notes are an integral part of these statements.
F-4
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income...................................... $ 12,426 $ 7,286 $ 1,585
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 2,932 1,586 1,382
Non-recurring non-cash compensation charge..... -- 500 --
Deferred income taxes.......................... 1,878 -- --
Changes in operating assets and liabilities:
Contracts receivable.......................... (4,291) (538) (4,818)
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 458 (801) 1,573
Other assets.................................. 109 (630) 74
Accounts payable and accrued expenses......... 1,578 64 1,356
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 3,233 (306) 1,172
-------- -------- --------
Net cash provided by operating activities.... 18,323 7,161 2,324
Cash flows from investing activities:
Capital expenditures, net....................... (15,179) (5,838) (992)
Payment for purchase of Dolphin Services, net of
cash acquired.................................. (5,803) -- --
Other........................................... 253 -- --
-------- -------- --------
Net cash used in investing activities........ (20,729) (5,838) (992)
Cash flows from financing activities:
Proceeds from initial public offering........... 31,328 -- --
Proceeds from issuance of notes payable......... 41,900 24,353 21,595
Principal payments on notes payable............. (48,659) (23,712) (20,526)
Dividends....................................... (16,641) (2,691) (434)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 7,928 (2,050) 635
-------- -------- --------
Net increase (decrease) in cash.................. 5,522 (727) 1,967
Cash at beginning of period...................... 1,357 2,084 117
-------- -------- --------
Cash at end of period............................ $ 6,879 $ 1,357 $ 2,084
======== ======== ========
Supplemental cash flow information:
Interest paid................................... $ 408 $ 415 $ 447
======== ======== ========
Income taxes paid............................... $ 5,861 $ -- $ --
======== ======== ========
Property, plant and equipment acquired through
accrued expenses............................... $ 1,408 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these statements.
F-5
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Gulf Island Fabrication, Inc. ("Gulf Island"), located in Houma, Louisiana,
is engaged in the fabrication and refurbishment of offshore oil and gas
platforms for oil and gas industry companies. Gulf Islands principal markets
are concentrated in the offshore regions of the coast of the Gulf of Mexico.
The consolidated financial statements include the accounts of Gulf Island and
its wholly owned subsidiary (collectively "the Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
On January 2, 1997, Gulf Island acquired all outstanding shares of Dolphin
Services, Inc., Dolphin Steel Sales, Inc. and Dolphin Sales and Rentals Inc.
for $5.9 million (the "Dolphin Acquisition"). The acquired corporations
perform fabrication, sandblasting, painting and construction services for
offshore oil and gas platforms in inland and offshore regions of the coast of
the Gulf of Mexico. On April 30, 1997, Dolphin Steel Sales, Inc. and Dolphin
Sales and Rentals, Inc. merged into Dolphin Services, Inc. The three
corporations are referred to hereinafter collectively as "Dolphin Services."
The Dolphin Acquisition was financed by borrowings under Gulf Island's line of
credit. Gulf Island acquired assets with a fair value of $9.7 million and
assumed liabilities of $3.8 million. The acquisition was accounted for under
the purchase method of accounting. Accordingly, the operations of Dolphin
Services are included in the Company's operations from January 2, 1997.
On February 13, 1997, the Board of Directors approved the filing of an
initial registration statement on Form S-1 with the Securities and Exchange
Commission to register and sell 4.6 million shares of common stock. Shortly
before closing of the offering on April 9, 1997, the Company's current
shareholders elected to terminate its status as an S Corporation, and the
Company became subject to federal and state income taxes. (See Note 2.)
On April 3, 1997, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (Registration No. 333-21863)
effective. On April 9, 1997, the Company sold 4.6 million common shares
pursuant to the registration statement, increasing the total shares
outstanding to 11.6 million (the "Initial Public Offering"). The Company
received $34.5 million from the sale of the shares and paid $3.2 million for
underwriting and other fees related to the Initial Public Offering resulting
in net proceeds from the sale of $31.3 million.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenue and expense during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
The principal customers of the Company are the major and large independent
oil and gas companies. These concentrations of customers may impact the
Company's overall exposure to credit risk, either positively or negatively, in
that customers may be similarly affected by changes in economic or other
conditions. However, the Company's management believes that the portfolio of
receivables is diversified and that such diversification minimizes any
potential credit risk. Receivables are generally not collateralized.
The Company believes that its provision for possible losses on uncollectible
accounts receivable is adequate for its credit loss exposure.
F-6
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventory
Inventory consists of materials and production supplies and is stated at the
lower of cost or market determined on the first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line basis over the
estimated useful lives of the assets, which range from 3 to 25 years. Ordinary
maintenance and repairs, which do not extend the physical or economic lives of
the plant or equipment, are charged to expense as incurred.
Revenue Recognition
Revenue from fixed-price and cost-plus construction contracts is recognized
on the percentage-of-completion method, computed by the efforts-expended
method which measures the percentage of labor hours incurred to date as
compared to estimated total labor hours for each contract.
Contract costs include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as indirect labor,
supplies and tools. Also included in contract costs are a portion of those
indirect contract costs related to plant capacity, such as depreciation,
insurance and repairs and maintenance. These indirect costs are allocated to
jobs based on actual direct labor hours incurred. Profit incentives are
included in revenue when their realization is reasonably assured. Claims for
extra work or changes in scope of work are included in revenue when collection
is probable. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined
The asset caption entitled "costs and estimated earnings in excess of
billings on uncompleted contracts," represents revenue recognized in excess of
the amounts billed. The liability caption entitled "billings in excess of
costs and estimated earnings on uncompleted contracts" represents billings in
excess of revenue recognized.
Income Taxes
Income taxes have been provided using the liability method in accordance
with the Financial Accounting Standards Board's Statement No. 109, "Accounting
for Income Taxes." Prior to April 4, 1997, the Company's shareholders had
elected to have the Company taxed as an S Corporation for federal and state
income tax purposes whereby shareholders were liable for individual federal
and state income taxes on their allocated portions of the Company's taxable
income. Accordingly, the historical financial statements do not include any
provision for income taxes during the period the Company was an S Corporation
(see Note 2).
Reclassifications
Certain items included in the financial statements for the years ended
December 31, 1996 and 1995 have been reclassified to conform to the December
31, 1997 financial statement presentation.
NOTE 2--TERMINATION OF S CORPORATION STATUS
On April 4, 1997, the Company's shareholders elected to terminate the
Company's status as an S Corporation, and the Company became subject to
federal and state income taxes. In conjunction with the termination of S
Corporation status, the Company paid a distribution of $14 million to its
current shareholders representing substantially all of the Company's remaining
undistributed S Corporation earnings through April 4, 1997. The S Corporation
earnings for the period April 1, 1997 to April 4, 1997 were an immaterial part
of the
F-7
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
total distribution. The balance sheet of the Company as of December 31, 1997
reflects a deferred income tax liability of $1.9 million, which includes $1.1
million of deferred income tax liability resulting from the termination of the
S Corporation status. The amount of the Company's retained earnings represents
primarily the C Corporation earnings prior to the Company's election of S
Corporation status in 1989 and earnings after April 4, 1997.
The pro forma income statement presentation reflects an additional provision
for income taxes as if the Company had been subject to federal and state
income taxes since January 1, 1995 using an assumed effective tax rate of
approximately 38%.
NOTE 3--ACQUISITION OF DOLPHIN SERVICES
The following unaudited pro forma information presents a summary of
consolidated results of operations of Gulf Island and Dolphin Services as if
the acquisition had occurred on January 1, 1996. Pro forma adjustments include
(1) elimination of intercompany sales between Gulf Island and Dolphin
Services, (2) adjustments for the increase in interest expense on acquisition
debt, (3) additional depreciation on property, plant and equipment, and (4)
related tax effects. The effects of termination of the S corporation status
(Note 2) are excluded.
YEAR ENDED DECEMBER
31, 1996 (IN
THOUSANDS,
EXCEPT PER SHARE DATA)
----------------------
Revenue............................................ $103,007
Pro forma net income............................... 8,333
Pro forma basic and diluted net income per share... 1.19
NOTE 4--SHAREHOLDERS' EQUITY
On December 1, 1996, Gulf Island's principal shareholders sold 98,000 (1.4%)
of their existing shares to officers and management employees at $3.57 per
share (number of shares and per share prices adjusted for effect of stock
splits described in following paragraphs). The per share price on that date
was based on an independent appraisal that valued Gulf Island as a privately
held business. As a result of the Initial Public Offering, the Company
determined that it should record a non-recurring, non-cash compensation charge
of $500,000 for the year ended December 31, 1996 related to the 98,000 shares.
This charge was based on the difference between the net offering price the
Company expected to receive in the public offering and the net cash price
recipients of the 98,000 shares expected to pay. The net cash price to
recipients of $1.78 per share represented the $3.57 per share price charged by
the shareholders, less $1.88 per share of tax-free dividends that the
recipients expected to receive as a result of the shareholder distributions
described in Note 2, increased by the recipient's share of taxable income for
the year of $.09 per share (in each case adjusted for the effect of the stock
splits described in the following paragraphs). The compensation charge
resulted in a corresponding increase to additional paid-in capital.
On February 14, 1997, the shareholders enacted the following:
(a) Authorized the issuance of 2.5 shares of no par value common stock
for each of the then outstanding 2,000,000 shares, which resulted in
7,000,000 total outstanding shares. This recapitalization is reflected
retroactively in the accompanying financial statements and per share
calculations.
(b) Authorized 5,000,000 shares of no par value preferred stock. There
are no preferred shares issued or outstanding.
(c) Increased the authorized common shares from 10,000,000 shares to
20,000,000 shares.
F-8
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 6, 1997, the Company's Board of Directors authorized a two-for-
one stock split effected in the form of a stock dividend that became effective
on October 28, 1997 to shareholders of record on October 21, 1997. All share
and per share data included in the financial statements have been restated to
reflect the stock split.
NOTE 5-- PRO FORMA PER SHARE DATA
Pro forma per share data as shown in the statement of income consists of the
Company's historical income, adjusted to reflect income taxes as if the
Company had operated as a C Corporation during all periods presented. This
calculation for the year ended December 31, 1997 excludes the charge of $1.1
million related to cumulative deferred income taxes resulting from conversion
to a C Corporation on April 4, 1997. Further, the weighted average share
calculations for 1997 include the assumed issuance of additional shares
sufficient to pay the distributions made to shareholders in connection with
the Company's Initial Public Offering, to the extent such distributions
exceeded net income for the year ended December 31, 1996.
NOTE 6--NEW ACCOUNTING STANDARD
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement No. 128 replaced APB Opinion No. 15 for the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
1997 1996 1995
------- ------ ------
Numerator for basic and diluted earnings per share.. $12,191 $4,352 $ 983
======= ====== ======
Denominator:
Denominator for basic earnings per share--
weighted-average shares.......................... 10,633 7,854 7,854
Effect of dilutive securities:
Employee stock options............................ 67 -- --
Dilutive potential common shares:
Denominator for diluted earnings per share--
adjusted weighted-average shares............... 10,700 7,854 7,854
======= ====== ======
Pro forma basic earnings per share.................. $ 1.15 $ 0.55 $ 0.13
======= ====== ======
Pro forma diluted earnings per share................ $ 1.14 $ 0.55 $ 0.13
======= ====== ======
NOTE 7--ACQUISITION OF SOUTHPORT, INC.
Effective January 1, 1998, the Company acquired all of the outstanding
shares of Southport, Inc. and its wholly owned subsidiary Southport
International, Inc. (collectively "Southport"). Southport specializes in the
fabrication of living quarters for offshore platforms. The purchase price was
$6.0 million cash, plus contingent payments of up to an additional $5.0
million based on Southport's net income over a four-year period ending
December 31, 2001. The purchase price plus $101,000 of direct expenses
exceeded the fair value of assets acquired and liabilities assumed by $4.4
million.
F-9
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--CONTRACTS RECEIVABLE
Amounts due on contracts as of December 31 were as follows (in thousands):
1997 1996
------- -------
Completed contracts...................................... $ 725 $ 2,993
Contracts in progress:
Current................................................ 20,549 8,685
Retainage due within one year.......................... 1,556 1,806
Less: Allowance for doubtful accounts.................... 70 4
------- -------
$22,760 $13,480
======= =======
NOTE 9--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of December 31 is as
follows (in thousands):
1997 1996
------- -------
Costs incurred on uncompleted contracts...................... $77,613 $23,419
Estimated profit earned to date.............................. 13,382 2,296
------- -------
90,995 25,715
Less: Billings to date....................................... 96,017 26,614
------- -------
$(5,022) $ (899)
======= =======
The above amounts are included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... $ 903 $1,306
Billings in excess of costs and estimated earnings on
uncompleted contracts...................................... (5,925) (2,205)
------- ------
$(5,022) $ (899)
======= ======
NOTE 10--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31(in
thousands):
1997 1996
------- -------
Land..................................................... $ 2,457 $ 2,123
Buildings................................................ 8,723 5,160
Machinery and equipment.................................. 25,765 10,814
Furniture and fixtures................................... 673 426
Transportation equipment................................. 1,053 404
Improvements............................................. 11,450 9,385
Construction in progress................................. 1,594 128
------- -------
51,715 28,440
Less: Accumulated depreciation........................... 17,210 10,705
------- -------
$34,505 $17,735
======= =======
F-10
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company leases certain equipment used in the normal course of its
operations under month-to-month lease agreements cancelable only by the
Company. During 1997, 1996, and 1995, the Company expensed $3,203,000,
$2,801,000, and $3,000,000, respectively, related to these leases.
NOTE 11--INCOME TAXES
On April 4, 1997, the Company's shareholders elected to terminate the
Company's status as an S Corporation, and the Company became subject to
federal and state income taxes (see Note 2). In conjunction with the Company's
change in tax status, the Company recorded a $1.1 million deferred tax
liability.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1997
are as follows (in thousands):
Deferred tax liabilities:
Depreciation.................................................... $2,314
Deferred tax assets:
Employee benefits............................................... 419
Other benefits.................................................. 17
------
Total deferred assets......................................... $ 436
------
Net deferred tax liabilities...................................... $1,878
======
Significant components of income taxes for the year ended December 31, 1997
were as follows:
Current:
Federal.......................................................... $4,451
State............................................................ 788
------
Total current.................................................. 5,239
Deferred:
Federal.......................................................... 1,731
State............................................................ 147
------
Total deferred................................................. 1,878
------
Income taxes....................................................... $7,117
======
The primary difference between income taxes computed at the U.S. federal
statutory rate of 34% and the Company's effective pro forma tax rate of 38% is
state income taxes.
NOTE 12--LINE OF CREDIT AND NOTES PAYABLE
The Company's bank credit facility provides for a revolving line of credit
(the "Revolver") of up to $20.0 million which bears interest equal to, at the
Company's option, the prime lending rate established by Citibank, N.A. or
LIBOR plus 1.5%. The Revolver matures December 31, 1999 and is secured by a
mortgage on the Company's real estate, equipment and fixtures, and the stock
of Dolphin Services. At December 31, 1997, there were no borrowings
outstanding under the credit facility. The Company is required to maintain
certain balance sheet and cash flow ratios. The Company pays a fee quarterly
of three-eighths of one percent per annum on the average unused portion of the
line of credit.
F-11
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997, the Company used a portion of the net proceeds received from
the Initial Public Offering (see Note 1) to repay all of its indebtedness.
NOTE 13--LONG-TERM INCENTIVE PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting For Stock-Based Compensation" (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equal the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
On February 13, 1997, the Board of Directors adopted the Long-Term Incentive
Plan (the "Plan"). The Plan has authorized the grant of options to purchase an
aggregate of 1,000,000 shares of the Company's common stock to certain
officers and key employees of the Company chosen by a committee appointed by
the Board of Directors (the "Compensation Committee") to administer such plan.
Under the Plan, all options granted have 10-year terms, and conditions
relating to the vesting and exercise of options are determined by the
Compensation Committee for each option. Options granted under the Plan are
"non-statutory options" (options which do not afford income tax benefits to
recipients, but the exercise of which may provide tax deductions for the
Company). Each option will have an exercise price per share not less than the
fair market value of a share of common stock on the date of grant and no
individual employee may be granted options to purchase more than an aggregate
of 400,000 shares of common stock. These options vest over a five-year period.
Pro forma information regarding net income and earnings per share is
required by Statement 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using the Black-Sholes option pricing model with the following weighted
average assumptions for 1997: a risk-free interest rate of 6.36%; dividend
yield of zero; volatility factor of the expected market price of the Company's
common stock of .745; and a weighted average expected life of the options of
eight years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of trade options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimated, in management's option, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-12
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options (net of expected tax benefits) is amortized to expense over the
options' vested period. Since the Company's options generally vest over a
five- year period, the pro forma disclosures are not indicative of future
amounts until Statement 123 is applied to all outstanding non-vested options.
The Company's pro forma information for 1997 is as follows (in thousands,
except for per share data):
Net income:
Pro forma as reported.......................................... $12,191
Pro forma including the effect of options...................... $11,927
Basic earnings per share:
Pro forma as reported.......................................... $ 1.15
Pro forma including the effect of options...................... $ 1.12
Diluted earnings per share:
Pro forma as reported.......................................... $ 1.14
Pro forma including the effect of options...................... $ 1.11
A summary of the Company's stock options activity and related information
for the year ended December 31, 1997 is as follows (in thousands, except for
per share data):
OPTIONS WEIGHTED AVERAGE
(000) EXERCISE PRICE
------- ----------------
Outstanding--beginning of year.................. -- --
Granted......................................... 413 $12.040
Exercised....................................... -- --
Expired......................................... -- --
Forfeited....................................... (20) 16.875
-----
Options outstanding at the end of the year...... 393 11.790
=====
Options exercisable at the end of the year...... -- --
===== =======
Weighted-average fair value of options granted
during the year................................ $9.13
=====
Exercise prices for options outstanding as of December 31, 1997 ranged from
$7.50 to $16.875. The weighted average remaining contractual life of those
options is nine years.
NOTE 14--RETIREMENT PLAN
The Company has a defined contribution plan (the Plan) for all employees
that are qualified under Section 401(k) of the Internal Revenue Code.
Contributions to the Plan by the Company are based on the participants'
contributions, with an additional year-end discretionary contribution
determined by the Board of Directors. For the years ended December 31, 1997,
1996, and 1995, the Company contributed $723,000, $542,000, and $239,200,
respectively.
NOTE 15--CONTINGENT LIABILITIES
The Company is one of four defendants in a lawsuit in which the plaintiff
claims that the Company improperly installed certain attachments to a jacket
that it had fabricated for the plaintiff. The plaintiff, which has recovered
most of its out-of-pocket losses from its own insurer, seeks to recover the
remainder of its claimed out-of-pocket losses (approximately $1 million) and
approximately $63 million for punitive damages and for economic losses which
it alleges resulted from the delay in oil and gas production that was caused
by these
F-13
GULF ISLAND FABRICATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
events. Management is vigorously defending this case and, after consultation
with legal counsel, does not expect that the ultimate resolution of this
matter will have a material adverse effect on the financial position or
results of operations of the Company.
The Company is subject to other claims through the normal conduct of its
business. While the outcome of such claims cannot be determined, management
does not expect that resolution of these matters will have a material adverse
effect on the financial position or results of operations of the Company.
NOTE 16--SALES TO MAJOR CUSTOMERS
The Company's customer base is primarily concentrated in the oil and gas
industry. The Company is not dependent on any one customer, and the revenue
earned from each customer varies from year to year based on the contracts
awarded. Sales to customers comprising 10% or more of the Company's total
revenue are summarized as follows (in thousands):
1997 1996 1995
------- ------- -------
Customer A........................................ $13,383 $ -- $ --
Customer B........................................ 21,603 -- --
Customer C........................................ 40,491 -- 12,036
Customer D........................................ -- -- 13,230
Customer E........................................ -- 8,196 --
Customer F........................................ -- 9,379 --
Customer G........................................ -- 10,119 --
Contracts receivable from customers A, B, and C totaled $10.0 million as of
December 31, 1997.
NOTE 17--QUARTERLY OPERATING RESULTS (UNAUDITED)
A summary of quarterly results of operations for the years ended December
31, 1997 and 1996 were as follows (in thousands, except per share data):
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
Revenue.......................... $30,224 $35,023 $36,311 $34,797
Gross profit..................... 4,865 6,424 6,986 6,047
Pro forma net income............. 2,248 3,265 3,698 2,980
Pro forma basic earnings per
share........................... 0.29 0.28 0.32 0.26
Pro forma diluted earnings per
share........................... 0.29 0.28 0.32 0.25
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
Revenue.......................... $19,504 $21,704 $19,168 $18,628
Gross profit..................... 1,346 2,626 3,129 3,230
Pro forma net income............. 485 1,238 1,524 1,105
Pro forma basic earnings per
share........................... 0.06 0.16 0.19 0.14
Pro forma diluted earnings per
share........................... 0.06 0.16 0.19 0.14
The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with Statement No.128.
F-14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on
March 23, 1998.
Gulf Island Fabrication, Inc.
(Registrant)
By: /s/ Kerry J. Chauvin
----------------------------------
KERRY J. CHAUVIN
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE
/s/ Alden J. Laborde Chairman of the Board
- -----------------------------------
ALDEN J. LABORDE
/s/ Kerry J. Chauvin President, Chief Executive Officer and
- ----------------------------------- Director (Principal Executive Officer)
KERRY J. CHAUVIN
/s/ Joseph P. Gallagher, III Vice President--Finance, Chief Financial
- ----------------------------------- Officer, Secretary and Treasurer
JOSEPH P. GALLLAGHER, III (Principal Financial and Accounting
Officer)
/s/ Gregory J. Cotter Director
- -----------------------------------
GREGORY J. COTTER
/s/ Thomas E. Fairley Director
- -----------------------------------
THOMAS E. FAIRLEY
/s/ Hugh J. Kelly Director
- -----------------------------------
HUGH J. KELLY
/s/ John P. Laborde Director
- -----------------------------------
JOHN P. LABORDE
/s/ Huey J. Wilson Director
- -----------------------------------
HUEY J. WILSON
/s/ Stephen G. Benton, Jr. Director
- -----------------------------------
STEPHEN G. BENTON, JR.
S-1
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
-------
2.1 Stock Purchase Agreement with respect to Dolphin Services, Inc.
dated November 27, 1996.*
2.2 Stock Purchase Agreement with respect to Dolphin Steel Sales,
Inc. dated as of November 7, 1996.*
2.3 Stock Purchase Agreement with respect to Dolphin Sales &
Rentals, Inc. dated as of November 27, 1996.*
2.4 Stock Purchase Agreement, dated as of November 12, 1997, between
the Company and the shareholders of Southport, Inc. **
3.1 Amended and Restated Articles of Incorporation of the Company.*
3.2 Bylaws of the Company.
4.1 Specimen Common Stock Certificate.*
10.1 Form of Indemnity Agreement by and between the Company and each
of its directors and executive officers.*
10.2 Registration Rights Agreement between the Company and Alden J.
Laborde.*
10.3 Registration Rights Agreement between the Company and Huey J.
Wilson.*
10.4 Sixth Amended and Restated Revolving Credit and Term Loan
Agreement among the Company and First National Bank of Commerce
and Whitney National Bank, dated as of May 1, 1997 (the "Bank
Credit Facility").
10.5 The Company's Long-Term Incentive Plan.*+
10.6 Form of Stock Option Agreement under the Company's Long-Term
Incentive Plan, as amended.+
10.7 Form of Reimbursement Agreement.*+
10.8 Employment Agreement dated as of January 1, 1998 between
Southport, Inc. and Stephen G. Benton, Jr. **+
16.1 Letter from Price Waterhouse LLP regarding change in independent
accountants.***
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Report of Price Waterhouse LLP.
27.1 Financial Data Schedule.
- --------
+ Management Contract or Compensatory Plan.
* Incorporated by reference to the Company's Registration Statement on Form
S-1 filed with the Commission on February 14, 1997 (Registration Number
333-21863).
** Incorporated by reference to the Company's Current Report on Form 8-K dated
January 1, 1998.
*** Incorporated by reference to the Company's Current Report on Form 8-K dated
August 25, 1997.
E-1