UNIFAB INTERNATIONAL INC - 10-Q Quarterly Report

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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended June 30, 2003

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From to
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Commission file number 0-29416
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UNIFAB International, Inc.
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(Exact name of registrant as specified in its charter)

Louisiana 72-1382998
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(State or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)

5007 Port Road
New Iberia, LA 70560
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(Address of principal executive offices) (Zip Code)

(337) 367-8291
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(Registrant's telephone number, including area code)

Not applicable
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(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934) Yes [ ] No [X]

Common Stock, $0.01 Par Value ---- 8,201,899 shares outstanding as of August 8,
2003.

UNIFAB INTERNATIONAL, INC.

INDEX

UNIFAB INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See accompanying notes.

1

UNIFAB INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes.

2

UNIFAB INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes.

3

UNIFAB INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

JUNE 30, 2003

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

UNIFAB International, Inc. (the Company) fabricates and assembles jackets,
decks, topside facilities, quarters buildings, drilling rigs and equipment for
installation and use offshore in the production, processing and storage of oil
and gas. Through a wholly-owned subsidiary, Allen Process Systems, LLC, the
Company designs and manufactures specialized process systems such as oil and gas
separation systems, gas dehydration and treatment systems, and oil dehydration
and desalting systems, and other production equipment related to the development
and production of oil and gas reserves. Compression Engineering Services, Inc.
(CESI), a division of Allen Process Systems, LLC, provides compressor project
engineering from inception through commissioning, including project studies and
performance evaluation of new and existing systems, on-site supervision of
package installation, and equipment sourcing and inspection. The Company's main
fabrication facilities are located at the Port of Iberia in New Iberia,
Louisiana. Through a newly-formed, wholly-owned subsidiary, Rig Port Services,
LLC, the Company provides repair, refurbishment and conversion services for oil
and gas drilling rigs at its deep-water facility in Lake Charles, Louisiana.

The operating cycle of the Company's contracts is typically less than one
year, although some large contracts may exceed one year's duration. Assets and
liabilities have been classified as current and noncurrent under the operating
cycle concept whereby all contract-related items are regarded as current
regardless of whether cash will be received within a 12-month period. At June
30, 2003, it was anticipated that substantially all contracts in progress, and
receivables associated therewith, would be completed and collected within a
12-month period.

The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly owned. Significant intercompany accounts and transactions have been
eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring adjustments
considered necessary for a fair presentation have been included. Operating
results for the three and six-month periods ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.

These financial statements should be read in conjunction with the financial
statements and footnotes thereto for the year ended December 31, 2002 included
in the Company's Annual Report on Form 10-K.

Certain amounts previously reported have been reclassified to conform with
the presentation at June 30, 2003.

2. MIDLAND RECAPITALIZATION AND INVESTMENT TRANSACTION

In April 2002, the Company entered into an agreement with Midland
Fabricators and Process Systems, LLC ("Midland") as a result of which, among
other things, Midland acquired the rights of the Company's lenders under the
Company's Senior Secured Credit Agreement. On August 13, 2002, pursuant to the
agreement with Midland, Midland exchanged $24.1 million outstanding under the
Company's Senior Secured Credit Agreement and $5.6 million in acquired claims of
unsecured creditors for 738 shares of our preferred stock, a secured
subordinated convertible debenture in the amount of $10.7 million and two
secured subordinated notes which total in the aggregate $6.8 million. The
debenture is convertible into the Company's common stock at a price of $3.50 per
share on a post reverse split basis. Midland's 738 shares of preferred stock
converted automatically into

4

a total of 73,800,000 shares of the Company's common stock on August 1, 2003,
the date the shareholders authorized additional shares of common stock. The
Company also recorded additional paid in capital on the transaction of $3.7
million resulting from the discount recorded on the secured subordinated
convertible debenture, and capital contributions of $680,000 resulting from
forgiveness by Midland of penalties accrued under the Senior Secured Credit
Agreement and $914,000 resulting from partial forgiveness of the unsecured
creditor claims acquired by Midland. Further, $675,000 of the amount the Company
owed Midland under the Company's Senior Secured Credit Agreement was cancelled
in exchange for the assignment to Midland of certain accounts.

Under an informal arrangement with the Company, Midland has agreed to
provide financial support and funding for working capital or other needs at
Midland's discretion, from time to time. However, if Midland does not provide
such additional funding, the Company could be unable to meet its obligations,
including obligations under the Credit Agreement, in the ordinary course of
business.

3. CONTRACTS IN PROGRESS

Information pertaining to contracts in progress at June 30, 2003 and
December 31, 2002 consisted of the following:

Accounts receivable includes retainages and unbilled receivables,
respectively, of $242,000 and $141,000 at June 30, 2003, and of $775,000 and
$36,000 at December 31, 2002. Unbilled receivables relate primarily to time and
material contracts.

The Company had contract loss reserves of $893,000 and $1,148,000 at June 30,
2003 and December 31, 2002, respectively. Included in contract loss reserves at
June 30, 2003 is $10,000 related to three fixed price contracts for platform
fabrication. At December 31, 2002, contract loss reserves included $441,000
related to two fixed price contracts. In the March quarter the Company recorded
$79,000 in loss reserves on new contracts. In the June quarter, the Company
increased those contract loss reserves by$141,000. These adjustments reflect
increased cost of labor for overtime caused by schedule constraints due to poor
weather conditions experienced in the quarter. The remaining $883,000 contract
loss reserve at June 30, 2003 relates to contracts to provide process equipment.
Three of these contracts involved systems that are being fabricated overseas.
These contracts have encountered delays in completion of fabrication and
commissioning and have resulted in cost overruns to the Company. The Company
increased the loss reserves by $117,000 on these contracts in the March quarter.
There was no change to the reserves on these contracts in the June quarter. The
remaining loss reserves on contracts to provide process equipment were
established in the March 2003 quarter on new contracts. The reserves on these
contracts were increased $51,000 in the June quarter. The reserves on these
contracts reflect current competitive market conditions and increased estimated
shop overhead costs due to low utilization of the Company's process system
fabrication facilities. Through June 30, 2003, performance on two contracts
improved over expectations

5

and based on delivery and evaluation of the contracts the Company reduced the
related loss reserves $426,000.

4. CREDIT AGREEMENT

On November 18, 2002, the Company entered into a Commercial Business Loan
Agreement with Whitney National Bank (the "Credit Agreement"), which provides
for up to $8.0 million in borrowings for working capital purposes, including up
to $2.0 million in letters of credit under a revolving credit facility. The
Credit Agreement is guaranteed by Nassau Holding Company (an affiliate of
Midland), the subsidiaries of Unifab, and the principle members of Midland, and
is secured by the assets of Universal Fabricators, LLC and Allen Process
Systems, LLC, both wholly-owned subsidiaries of the Company. At June 30, 2003,
the Company had $5.9 million in borrowings and no letters of credit outstanding
under the Credit Agreement. Borrowings under the Credit Agreement bear interest
at Libor plus 1.75% or the Prime rate (3.1% at June 30, 2003), at the Company's
discretion. The Credit Agreement matures May 26, 2004. Annually, the Company
renews the terms of the Credit Agreement and extends the maturity date for one
year. The last such extension was made in May 2003 and extended the maturity to
May 26, 2004. The Company anticipates the next such renewal and extension will
take place in the first quarter of 2004. Management believes that its available
funds, cash generated by operating activities and funds available from Midland
and under the Credit Agreement will be sufficient to fund its working capital
needs and planned capital expenditures for the next 12 months.

5. INCOME TAXES

The Company provides for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. As of June 30, 2003, the Company recorded deferred tax assets
of $18.0 million, including $13.3 million related to net operating loss
carryforwards which, if not used, expire in years 2020 through 2023. The ability
of the Company to utilize net operating loss carryforwards is limited on an
annual basis because the Midland transaction resulted in a change in control
under the current tax regulations. The Company has recorded a valuation
allowance of $15.7 million to offset the deferred tax asset related to the net
operating loss carryforward and other deferred tax assets that exceed deferred
tax liabilities because the Company believes that it is more likely than not
that these deferred tax assets will not be utilized.

6. SHAREHOLDERS' EQUITY

EARNINGS PER SHARE

Under the terms of the Midland agreement, the Company issued 738 Series A
Preferred Shares and a $10,652,000 convertible debenture. Each share of series A
preferred stock was convertible into 100,000 shares of Unifab common stock, for
a total of 73,800,000 common shares on a pre-reverse split basis. Until
converted, each share of preferred stock enjoyed all the rights and privileges
of 100,000 shares of common stock on a pre-reverse split basis, including voting
rights. The conversion was mandatory when the appropriate number of shares of
common stock were available. At June 30, 2003, the total number of common shares
authorized was 20,000,000, which was an insufficient number of authorized common
shares to effect the conversion of the preferred shares. At the annual meeting
of the shareholders held on August 1, 2003, the proposition to increase the
number of shares of common stock to 150,000,000 shares was passed, providing a
sufficient number of shares of common stock to convert the 738 Series A
Preferred Shares into 73,800,000 shares of common stock. Accordingly, the
conversion occurred on August 1, 2003. The denominator in the table below
includes the common shares related to these Series A Preferred Shares as if they
had been converted into shares of common stock on August 13, 2002, the date of
the Midland Investment and Recapitalization Transaction. On August 1, 2003, the
Company's shareholders also approved a one-for-ten reverse stock split of the
outstanding shares of the Company's common stock, to be effective immediately
after the conversion of Midland's Series A preferred shares. All prior periods
weighted average share and option amounts have been restated for the effect of
the reverse stock split. Midland's $10,652,000 convertible debenture is
convertible into Unifab common stock at a conversion price of $0.35 per share,
for a total of 30,434,000 shares of common stock on a pre-reverse split basis.
Since the conversion price is "out-of-the-money," these shares are anti-dilutive
and are not included in the computation of diluted earnings per share during
periods when the Company incurs a loss.

6

The following table sets forth the computation of basic and diluted earnings
per share giving retroactive effect to the assumed conversion of Midland's 738
shares as of August 13, 2002 and giving effect to the one-for-ten reverse stock
split:

Options with an exercise price greater than the average market price of the
Company's common stock for the year and options outstanding during years where
the Company incurs a net loss are anti-dilutive and, therefore, not included in
the computation of diluted earnings per share. During the period ended June 30,
2003, 1,335,000 options and 60,000 warrants outstanding on a pre-reverse split
basis were anti-dilutive due to the net loss incurred by the Company. During the
period ended June 30, 2002, 835,000 options and 60,000 warrants outstanding on a
pre-reverse split basis were anti-dilutive due to the net loss incurred by the
Company.

STOCK BASED COMPENSATION

The Company uses the intrinsic value method of accounting for employee-based
compensation prescribed by Accounting Principles Board ("APB") Opinion No. 25
and, accordingly, follows the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages the use of fair value based method of
accounting for compensation expense associated with stock option and similar
plans. However, SFAS No. 123 permits the continued use of the intrinsic value
based method prescribed by Opinion No. 25 but requires additional disclosures,
including pro forma calculations of net earnings and earnings per share as if
the fair value method of accounting prescribed by SFAS No. 123 had been applied.

7

Had compensation cost for the Company's stock plans been determined based on
the fair value at the grant dates consistent with the method of SFAS No. 123,
the Company's net income and net income per share amounts would have
approximated the following pro forma amounts giving effect to the one-for-ten
reverse stock split (in thousands, except per share data):

Black-Scholes option pricing model assumptions:

There were no option grants in the three-month periods ended June 30, 2003
and 2002.

7. COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

In addition to the matters described below, the Company is a party to
various routine legal proceedings primarily involving commercial claims,
workers' compensation claims and claims for personal injury under the General
Maritime Laws of the United States and the Jones Act. A number of the Company's
vendors have sued the Company to collect amounts of money allegedly due to them.
These vendors are, in each case, unsecured creditors of the Company. While the
outcome of these lawsuits, legal proceedings and claims cannot be predicted with
certainty, management believes that it is not reasonably possible that they will
have a material adverse effect on the Company's consolidated financial
statements.

In a lawsuit filed against the Company in the 14th Judicial Court in the
Parish of Calcasieu, State of Louisiana, Professional Industrial Maintenance,
L.L.C., Don E. Spano and Kimberly Spano allege multiple claims for breach of
contract, breach of specific performance, a request for injunction, request for
damages, and a request for treble damages and attorney fees for violations of
the Louisiana Unfair Trade Practices Act. Mr. Spano was the managing member of
Professional Industrial Maintenance, LLC, the company whose assets we acquired
in January 1998. The plaintiffs more specifically claim that 1) the accounts
receivable and cash in the

8

bank at the time of the asset acquisition were not conveyed as part of the
transaction, 2) certain accounting adjustments should have resulted in a credit
to Mr. Spano, 3) the Company failed to timely deliver shares of common stock to
Mr. Spano as required by the sale documents, 4) the Company failed to pay a
bonus of $1,000,000 to Mr. Spano, 5) the Company allowed the maintenance work in
the petrochemical plants to deteriorate under Mr. Spano's post transaction
management, 6) the Company defamed the Plaintiffs, 7) the Company wrongfully
commingled funds belonging to the Plaintiffs that resulted in seizure of taxes,
interest and penalties, and 8) the Company failed to pay certain debts on assets
included in the transaction. Total damages claimed by the Plaintiffs are
approximately $5,000,000. The Company intends to vigorously defend the lawsuit.
The Company has filed a counterclaim for recovery of approximately $2,775,000
paid on behalf of Professional Industrial Maintenance, LLC and Mr. Spano as a
result of the transaction. This matter is scheduled to go to trial during the
second half of 2003. While the outcome of this litigation cannot be predicted
with certainty, management believes that it is not reasonably possible that the
outcome of this proceeding will have a material adverse effect on the Company's
consolidated financial statements and the Company has recorded no reserve with
respect to this lawsuit.

On March 14, 2003, the Lake Charles Harbor and Terminal District (the
"Port") sent a letter to the Company alleging that the Company was not in
compliance with certain environmental and workforce provisions of the lease
agreement (the "Lease") by and between the Company and the Port for the Lake
Charles facility. The Company engaged a qualified environmental inspection
company to perform a phase one study of the premises, which was completed in the
first week of April 2003 and did not result in any material findings. The
Company met with Port officials in July 2003 and resolved the allegations of non
compliance without any further implications to the Company.

LETTERS OF CREDIT

In the normal course of its business activities, the Company is required to
provide letters of credit to secure performance. At June 30, 2003, cash deposits
totaling $115,000 secured outstanding letters of credit totaling $110,000.

EMPLOYMENT AGREEMENTS

The Company has an employment agreement with one of its officers. This
agreement terminates on August 18, 2006. The minimum annual compensation
commitment by the Company under this agreement is $60,000.

LEASES

The Company leases land, upon which portions of its structural fabrication
and process equipment fabrication facilities in New Iberia are located, under
noncancelable operating leases. The leases expire in 2003 for the structural
fabrication facility with two 10-year renewal options, and in 2009 for the
process equipment facilities with one 10-year renewal option. The Company also
leases its facility in Lake Charles under a noncancelable operating lease. The
lease expires in 2005 and has two five-year renewal options. At June 30, 2003,
the Company had approximately $10.0 million in aggregate lease commitments under
operating leases, of which $0.6 million is payable during the next twelve
months.

8. RELATED PARTY TRANSACTIONS

The Company provides health care benefits to its employees under a plan
that covers the employees of companies owned by Nassau Holding Company, an
affiliate of Midland ("Nassau"), including the employees of Nassau. This
insurance coverage began on November 1, 2002. In the three and six-month periods
ended June 30, 2003, the Company incurred costs of approximately $535,000 and
$980,000, respectively, for coverage under this plan.

Midland provides accounting information system and reporting services to
the Company, including maintaining computer hardware and software to process
financial information and produce management reports, processing data associated
with those reports, assisting in report design and preparation, processing
operating and payroll checks, consulting assistance with the design and
implementation of financial reporting systems, and other related services.
Included in general and administrative expenses for the three and six-month
periods ended June

9

30, 2003 is $45,000 and $90,000, respectively, related to these services. At
June 30, 2003, $45,000 had not been paid.

At June 30, 2003, accrued and unpaid interest owed to Midland related to
the secured, subordinated notes payable and convertible debenture was $303,000.
At December 31, 2002, there was no accrued and unpaid interest owed to Midland.

Under an informal arrangement with the Company, Midland has agreed to
provide financial support and funding for working capital or other needs at
Midland's discretion, from time to time. At December 31, 2002, Midland provided
a standby letter of credit to a customer of the Company in support of a contract
included in the Company's backlog at June 30, 2003. The letter of credit is in
the amount of $3.1 million and expires on March 31, 2004. The Company reimbursed
$12,600 to Midland for the cost of the letter of credit.

In the six-month period ended June 30, 2003, the Company executed several
contracts with Ridgelake Energy, Inc. to fabricate a platform and design and
manufacture process equipment. The total value of these contracts is $6.7
million ($1.6 million value in backlog at June 30, 2003). In the three and
six-month periods ended June 30, 2003, $3,206,000 and $5,156,000, respectively,
in revenue, and $340,000 and $641,000, respectively, in gross profit was
recognized related to these contracts. At June 30, 2003, the Company had
$362,000 receivable from Ridgelake Energy, Inc. related to these contracts.
Ridgelake Energy, Inc. is owned and controlled by Mr. William A. Hines, Chairman
of our Board of Directors, and his family. Two of the contracts were completed
in May 2003. The remaining three contracts are expected to be completed in the
September quarter of 2003.

9. INDUSTRY SEGMENT INFORMATION

Effective January 1, 2003, as a result of the Midland Recapitalization and
Investment transaction, management has evaluated the changed organizational and
reporting structure and has concluded that the Company operates three reportable
segments: the platform fabrication segment, the process systems segment and the
drilling rig fabrication segment. The platform fabrication segment fabricates
and assembles platforms and platform components for installation and use
offshore in the production, processing and storage of oil and gas. The process
systems segment designs and manufactures specialized process systems and
equipment related to the development and production of oil and gas reserves. The
drilling rig fabrication segment provides fabrication services for new
construction and repair of drilling rigs. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies, except that income taxes are accounted for on a
consolidated basis and deferred tax assets are managed as corporate assets and
are not recorded in the operating segments. The Company evaluates performance
based on segment income, which is defined as revenue less cost of revenue and
selling, general and administrative expense allocated to the operating segment.
The Company does not allocate interest expense to the operating segments.
Unallocated overhead consists primarily of corporate general and administrative
costs that the Company does not allocate to the operating segments. The Company
accounts for intersegment sales at fixed labor rates and at cost for materials
and other costs. Intersegment sales are not intended to represent current market
prices for the services provided.

10

The following tables show information about the revenue, profit or loss and
segment assets of each of the Company's reportable segments for the three and
six-month periods ending June 30, 2003 and 2002. Segment assets do not include
intersegment receivable balances, as the Company believes inclusion of such
assets would not be meaningful. Segment assets are determined by their location
at period end. Some assets that pertain to the segment operations are recorded
on corporate books, such as prepaid insurance. These assets have been allocated
to the segment in a manner that is consistent with the methodology used in
recording the segment's expense.

(a) Revenue and segment loss from operations related to derrick fabrication and
plant maintenance are included in Other. There are no operations related to
these products in 2003.

Total assets of the Company by segment is as follows as of June 30, 2003 and
December 31, 2002:

11

10. COMPREHENSIVE INCOME

The following is a summary of the Company's comprehensive income (loss) for
the three and six months ended June 30, 2003 and 2002.

11. SHUT DOWN OF ALLEN PROCESS SYSTEMS LIMITED

On June 12, 2003, at a meeting of the creditors of Allen Process Systems
Limited, Mr. Tony Freeman of Tony Freeman & Company, New Maxdov House,
Manchester, England was appointed as Liquidator of Allen Process Systems Limited
("APS Limited"), located in London, England, for the purposes of ceasing and
voluntarily winding up operations of that company. The Company, as the sole
shareholder of APS Limited, ratified Mr. Freeman's appointment. APS Limited was
acquired by the Company in June 1998 and has provided engineering and project
management services for process systems mainly to Europe and the Middle East.
Allen Process Systems, LLC, a wholly owned subsidiary of the Company will
provide these services in the future. The Company does not expect that ceasing
and winding up operations of APS Limited will have a material impact on the
consolidated financial statements of the Company.

12. NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations", requires the recording of liabilities for all
legal obligations associated with the retirement of long-lived assets that
result from the normal operation of those assets. These liabilities are required
to be recorded at their fair values (which are likely to be the present values
of the estimated future cash flows) in the period in which they are incurred.
SFAS No. 143 requires the associated asset retirement costs to be capitalized as
part of the carrying amount of the long-lived asset. The asset retirement
obligation will be accreted each year through a charge to expense. The amounts
added to the carrying amounts of the assets will be depreciated over the useful
lives of the assets. The Company implemented SFAS No. 143 on January 1, 2003, as
required, and it did not have a material effect on our consolidated financial
position or results of operations.

In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS no. 145 eliminates SFAS No. 4
and as a result, gains and losses from extinguishments of debt should be
classified as extraordinary items only if they meet the criteria of APB Opinion
No. 30. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases" to eliminate an
inconsistency between the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 also updates and amends existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The Company implemented SFAS No. 145 on January 1,
2003, as required, and it did not have a material impact on our consolidated
financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred rather than at the date a plan is
committed to. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company will
implement the provisions of this statement on a prospective basis.

12

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. As required, the Company adopted the
disclosure requirements of FIN 45 as of December 31, 2002. The Company adopted
the initial recognition and measurement provisions on a prospective basis for
guarantees issued or modified after December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN46"). FIN 46 requires that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. FIN 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. The Company implemented FIN 46
and it did not have a material impact on its consolidated financial position or
results of operations.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of financial condition and results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the related disclosures included elsewhere
herein and Management's Discussion and Analysis of Financial Condition and
Results of Operations included as part of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002.

THE MIDLAND TRANSACTION

On August 13, 2002, the Company and Midland Fabricators and Process
Systems, LLC closed a transaction under which Midland exchanged $24.1 million
outstanding under the Company's Senior Secured Credit Agreement and $5.6 million
in claims of unsecured creditors for 738 shares of preferred stock, a secured
subordinated debenture and two secured subordinated notes in the aggregate
amount of $17.5 million. The debenture, valued at $10.7 million, is convertible
into the Company's common stock at a price of $3.50 per share on a post reverse
split basis. Midland's preferred stock was converted into a total of 73,800,000
shares of the Company's common stock on August 1, 2003. The Company also
recorded additional capital contributions on the transaction of $3.7 million
resulting from the discount recorded on the convertible debenture, $680,000
resulting from forgiveness by Midland of penalties accrued under the Senior
Secured Credit Agreement, and $914,000 resulting from partial forgiveness of
unsecured creditor claims acquired by Midland. On November 18, 2002, the Company
entered into a Senior Secured Credit Agreement with the Whitney National Bank,
which is guaranteed by Nassau Holding Company (an affiliate of Midland), the
subsidiaries of Unifab, and the principle members of Midland, in accordance with
the terms of the Midland transaction.

RESULTS OF OPERATIONS

Revenue for the three months ended June 30, 2003 increased 73% to $14.5
million from $8.4 million for the three months ended June 30, 2002. For the six
months ended June 30, 2003, revenue increased 32% to $24.0 million from $18.2
million for the six months ended June 30, 2002. Revenue increased for the
Company's platform fabrication segment in both the three and six-month periods
ended June 30, 2003 compared to the same periods last year. Decreased revenues
from plant maintenance and derrick fabrication services in the current year
partially offset this increase; the Company no longer provides these services.
Revenue for the Company's process systems segment was approximately the same in
both the three and six-month periods ended June 2003 and 2002. Backlog was
approximately $16.1 million and $22.5 million at June 30, 2003 and December 31,
2002, respectively. At the present time, the level of bidding activity is
approximately 60% of the level experienced at the end of 2002. This lower level
of bidding activity increases competition for the projects being bid, which
results in lower profit expectations for those projects when they are awarded.
The Company does not expect bidding activity to increase before the last quarter
of 2003, at the earliest.

Total direct labor hours worked through June 30, 2003 increased 15% overall
from the levels experienced in the same period last year. Direct labor hours
worked at the Company's platform fabrication and process system facilities
increased by nearly 64% from the same period last year. This increase was offset
by a reduction of

13

approximately 84,000 direct labor hours incurred in the six-month period ended
June 30, 2002 on plant maintenance, derrick fabrication and drilling rig repair.
There were no labor hours incurred associated with these types of projects in
the six-month period ended June 30, 2003.

Cost of revenue was 96% of revenue, or $14.0 million for the three months
ended June 30, 2003, compared to 112% of revenue, or $9.4 million for the same
period last year. For the six-month period ended June 30, 2003, cost of revenue
was $23.3 million (97% of revenue), compared to $19.3 million (106% of revenue)
for the six-month period ended June 30, 2002. Cost of revenue consists of costs
associated with the fabrication process, including direct costs (such as direct
labor costs and raw materials) and indirect costs that can be specifically
allocated to projects (such as supervisory labor, utilities, welding supplies
and equipment costs). The decrease in costs as a percentage of revenue in the
three and six-month periods ended June 30, 2003 compared to the same periods
last year is mainly due to increased utilization at the Company's main operating
facilities, and reduced costs due to the suspension of operations at the
Company's Lake Charles facility in 2002 and elimination of unprofitable
operations. The decrease in costs was offset in part by increased repair expense
related to repairs to the roof of the Company's main fabrication building.

Gross profit (loss) for the three months ended June 30, 2003 increased to a
profit of $519,000 from a loss of $1.0 million for the same period last year.
For the six months ended June 30, 2003, gross profit was $703,000, compared to a
loss of $1.1 million in the same period last year. Increased man hour levels in
the three and six-month periods ended June 30, 2003 compared to the same periods
last year at the Company's main fabrication facilities caused hourly fixed
overhead rates to decrease and resulted in increased gross profit relative to
revenue.

Selling, general and administrative expense decreased to $1.2 million in
the three months ended June 30, 2003, compared to $1.7 million in the three
months ended June 30, 2002. In the six months ended June 30, 2003, selling,
general and administrative expense decreased to $2.4 million from $3.2 million
in the same period last year. This decrease is mainly due to reduced general and
administrative expenses associated with closing underutilized facilities and
overall reductions in administrative overhead and employees. The Company's
selling, general and administrative expense as a percentage of revenue decreased
to 8% in the three months ended June 30, 2003 from 20% in the same period last
year, and to 10% for the six month period ended June 30, 2003 from 18% in the
same period last year.

Interest expense for the three months ended June 30, 2003 was higher than
the same period in 2002 due to amortization of the discount on the secured,
subordinated debenture issued to Midland, which is being recorded as interest
expense. This increase was partially offset by lower effective interest rates on
the amounts outstanding under the Company's revolving credit facility over the
three months ended June 30, 2003. These borrowings were necessary to fund
working capital. For the six-month period ended June 30, 2003, interest expense
was higher than in the same period in 2002 due to amortization of the discount
described above. This increase was offset by lower overall debt and effective
interest rates in the six-month period ended June 30, 2003 compared to the same
period in 2002. In the three and six months ended June 30, 2003, the Company
recorded $130,000 and $260,000 interest expense, respectively, related to
amortization of the discount on the secured subordinated debenture.

No net income tax benefit was recognized on the net loss recorded in the
three and six month periods ended June 30, 2003 and 2002. In accordance with FAS
109, the Company considered that it had a cumulative pre-tax loss for recent
years, which must be carried forward and used to offset future taxable income.
The ability of the Company to utilize net operating loss carryforwards is also
limited on an annual basis because the transaction with Midland resulted in a
change in control under tax regulations. At June 30, 2003, the Company has
deferred tax assets of $18.0 million, including $13.3 million related to net
operating loss carryforwards, which, if not used expire in years 2020 through
2023. The Company has recorded a valuation allowance of $15.7 million to offset
the deferred tax asset related to the net operating loss carryforward and other
deferred tax assets that exceed net deferred tax liabilities of the Company at
June 30, 2003. The valuation allowance reflects the Company's judgment that it
is more likely than not that these deferred tax assets will not be realized.
Management will continue to assess the adequacy of the valuation allowance on a
quarterly basis.

SEGMENT INFORMATION

The Company has identified three reportable segments as required by SFAS
No. 131. The following discusses the results of operations for each of those
reportable segments during the three and six-month periods ended June 30, 2003
and 2002.

14

PLATFORM FABRICATION SEGMENT

Revenue for the platform fabrication segment increased $7.6 million to
$11.1 million in the quarter ended June 30, 2003 from $3.5 million in the same
quarter in 2002. In the six-month period ended June 30, 2003, revenue for the
platform fabrication segment was $16.8 million, an increase of $9.1 million over
the same period in 2002. Direct manhours in the three and six-month periods
ended June 2003 increased 172% and 81%, respectively, over the same periods last
year. Segment income increased to $379,000 in the three-month period ended June
30, 2003 from a loss of $245,000 in the June quarter last year. In the six-month
period ended June 30, 2003, segment income increased to $387,000 from a loss of
$84,000 over the same period last year. Fabrication activity has increased over
last year, although bidding for projects in this segment has remained
competitive, causing lower profit margins. The increase in direct manhours has
reduced the cost per manhour on platform fabrication contracts and improved
overall segment operating income. Contracts to fabricate two similar platforms
were performed back to back, and the Company gained efficiencies in
construction. These efficiencies resulted in the Company revising estimated loss
reserves on the contracts and a net increase in segment income in the six-month
period ended June 30, 2003 of $0.1 million. In the six month period ended June
30, 2003, segment income was reduced by a $489,000 repair expense related to the
repair of the roof on the Company's main fabrication building. Savings from the
reduction of administrative staff and the consolidation of general and
administrative functions increased segment income in the three and six-month
periods ended June 30, 2003 over the same periods in 2002.

PROCESS SYSTEMS SEGMENT

Revenue for the process systems segment in the three and six-month periods
ended June 30, 2003 and 2002 was approximately the same when comparing year to
year. In the quarter ended June 30, 2003, direct manhours increased 20% over the
June 2002 quarter. Segment loss decreased in the June 30, 2003 quarter to $0.2
million from $0.3 million in the same quarter in 2002 and to $0.4 million in the
six-month period ended June 30, 2003 from $0.7 million in the same period in
2002. The Company has encountered delays in completion of fabrication and
commissioning of contracts to provide process equipment that are being
manufactured overseas, which have resulted in cost overruns. Included in segment
loss for the six-month period ended June 30, 2003, are contract loss reserves of
$220,000, including $117,000 recorded on these contracts. Savings from the
reduction of administrative staff and the consolidation of general and
administrative functions increased segment income in the three and six-month
periods ended June 30, 2003 over the same periods in 2002.

DRILLING RIG FABRICATION SEGMENT

The Company suspended operations in this segment prior to the Midland
investment and recapitalization transaction, and is currently reentering this
market. Revenue for the drilling rig fabrication segment was $164,000 in the
quarter ended June 30, 2003 and was $83,000 in the same quarter last year. In
the six-month period ended June 30, 2003, revenue for the drilling rig segment
was $268,000 and was $335,000 in the same period in 2002. Segment loss was
$253,000 for the quarter ended June 30, 2003 and was $434,000 in the same
quarter last year. In the six-month period ended June 30, 2003, segment loss was
$321,000 and was $782,000 in the same period last year.

LIQUIDITY AND CAPITAL RESOURCES

Historically the Company has funded its business activities through funds
generated from operations, short-term borrowings on its revolving credit
facilities for working capital needs and individual financing arrangements for
equipment, facilities, insurance premiums and long-term needs. During the six
months ended June 30, 2003, the Company's available funds and $3.0 million
generated from financing activities together funded cash used in operations and
investing activities of $2.8 million. Investing activities consisted mainly of
capital expenditures of $719,000.

Capital expenditures for the six-month period ended June 30, 2003 included
$ 371,000 related to compressors being fabricated by the Company, which will be
leased upon completion. The remaining capital expenditures related to
facilities, yard equipment and computer software and equipment.

15

On November 18, 2002, the Company entered into a Commercial Business Loan
Agreement with Whitney National Bank (the "Credit Agreement"), which provides
for up to $8.0 million in borrowings for working capital purposes, including up
to $2.0 million in letters of credit under a revolving credit facility. The
Credit Agreement is guaranteed by Nassau Holding Company (an affiliate of
Midland), the subsidiaries of Unifab, and the principle members of Midland and
is secured by the assets of the Universal Fabricators, LLC and Allen Process
Systems, LLC, both wholly-owned subsidiaries of the Company. At June 30, 2003,
the Company had $5.9 million in borrowings and no letters of credit outstanding
under the Credit Agreement. Borrowings under the Credit Agreement bear interest
at Libor plus 1.75% or the Prime rate (3.1% at June 30, 2003), at the Company's
discretion. The Credit Agreement matures May 26, 2004. Annually, the Company
renews the terms of the Credit Agreement and extends the maturity date for one
year. The last such extension was made in May 2003 and extended the maturity to
May 26, 2004. The Company anticipates the next such renewal and extension will
take place in the first quarter of 2004.

Management believes that its available funds, cash generated by operating
activities and funds available from Midland and under the Credit Agreement will
be sufficient to fund its working capital needs and planned capital expenditures
for the next 12 months. Under an informal arrangement with the Company, Midland
has agreed to provide financial support and funding for working capital or other
needs at Midland's discretion, from time to time. However, if Midland does not
provide such additional funding, the Company could be unable to meet its
obligations, including obligations under the Credit Agreement, in the ordinary
course of business.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

Certain statements included in this report and in oral statements made from time
to time by management of the Company that are not statements of historical fact
are forward-looking statements. In this report, forward-looking statements are
included primarily in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The words "expect,"
"believe," "anticipate," "project," "plan," "estimate," "predict," and similar
expressions often identify forward-looking statements. Such statements may
involve risks and uncertainties and include, among other things, information as
to possible future increases in oil and gas prices and drilling activity and the
effect of current and future levels of prices and drilling activity on demand
for products and services of the Company, on the prices the Company can obtain
for its products and services and on the profitability of the Company. All such
statements are subject to factors that could cause actual results and outcomes
to differ materially from the results and outcomes predicted in the statements,
and investors are cautioned not to place undue reliance upon them. Those factors
include, but are not limited to, the risks, contingencies and uncertainties
described immediately below:

o general economic and business conditions and industry trends;

o the economic strength of our customers and potential customers;

o decisions about offshore developments to be made by oil and gas
companies;

o the highly competitive nature of our businesses;

o our future financial performance, including availability, terms and
deployment of capital;

o the continued availability of qualified personnel;

o changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory proceedings;

o changes in existing environmental regulatory matters;

o rapid technological changes;

o realization of deferred tax assets;

o consequences of significant changes in interest rates and currency
exchange rates;

o difficulties we may encounter in obtaining regulatory or other necessary
approvals of any strategic transactions;

o social, political and economic situations in foreign countries where we
do business, including among others, countries in the Middle East;

o effects of asserted and unasserted claims;

o our ability to obtain surety bonds and letters of credit; and

16

o our ability to maintain builder's risk, liability and property insurance
in amounts we consider adequate at rates that we consider economical,
particularly after the impact on the insurance industry of the September
11, 2001 terrorist attacks.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to the risk of changing interest rates and
foreign currency exchange rate risks. The Company does not use derivative
financial instruments to hedge the interest or currency risks. Interest on
approximately $23.4 million, including substantially all of the Company's debt,
was variable, based on short-term interest rates. A general increase of 1.0%
short-term market interest rates would result in additional interest cost of
$234,000 per year if the Company were to maintain the same debt level and
structure.

The Company has a subsidiary located in the United Kingdom for which
the functional currency is the British Pound. The Company currently does not
hedge its foreign currency exposure. However, the Company may use derivative
financial instruments in the future, if deemed appropriate to hedge such risk
exposure. Historically, fluctuations in British Pound/US Dollar exchange rates
have not had a material effect on the Company. Future changes in the exchange
rate of the US Dollar to the British Pound may positively or negatively impact
earnings; however, due to the size of its operations in the United Kingdom, the
Company does not anticipate its exposure to foreign currency rate fluctuations
to be material for the remainder of 2003.

While the Company does not currently use derivative financial instruments,
it may use them in the future if deemed appropriate.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90-day period immediately preceding the filing of this report,
an evaluation was carried out under the supervision and with the participation
of our management, including our Principal Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act). Based upon that evaluation, the Principal Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures were sufficient to ensure that material information relating to
the Company and its consolidated subsidiaries was made known to management,
including the Principal Executive Officer and Chief Financial Officer, during
the period in which this quarterly report was being prepared, in a timely manner
that allowed these officers to make appropriate decisions regarding required
disclosure in this Quarterly Report. Based upon this evaluation, the Company has
adopted a formal disclosure control policy. The new policy incorporates the
Company's previous informal policies, but with the significant change that a
formal Disclosure Committee has been formed to begin operations as of the second
fiscal quarter of 2003, and each person responsible for one of the operating
subsidiaries of the Company will participate as an active member of the
Disclosure Committee. The Committee is charged with determining when events,
developments or other facts involving the Company are material in nature and
require disclosure to the public. Beginning in the second fiscal quarter of
2003, each member of the Committee will also review all of the Company's public
filings to determine whether events or facts related to his or her area of
operations should be disclosed.

PART II

ITEM 1. LEGAL PROCEEDINGS.

In addition to the matters described below, the Company is a party to
various routine legal proceedings primarily involving commercial claims,
workers' compensation claims and claims for personal injury under the General
Maritime Laws of the United States and the Jones Act. A number of the Company's
vendors have sued the Company to collect amounts of money allegedly due to them.
These vendors are, in each case, unsecured creditors of the Company. While the
outcome of these lawsuits, legal proceedings and claims cannot be predicted with
certainty, management believes that it is not reasonably possible that they will
result in a material adverse effect on the Company's consolidated financial
statements.

In a lawsuit filed against the Company in the 14th Judicial Court in the
Parish of Calcasieu, State of Louisiana, Professional Industrial Maintenance,
L.L.C., Don E. Spano and Kimberly Spano allege multiple

17

claims for breach of contract, breach of specific performance, a request for
injunction, request for damages, and a request for treble damages and attorney
fees for violations of the Louisiana Unfair Trade Practices Act. Mr. Spano was
the managing member of Professional Industrial Maintenance, LLC, the company
whose assets we acquired in January 1998. The plaintiffs more specifically claim
that 1) the accounts receivable and cash in the bank at the time of the asset
acquisition were not conveyed as part of the transaction, 2) certain accounting
adjustments should have resulted in a credit to Mr. Spano, 3) the Company failed
to timely deliver shares of common stock to Mr. Spano as required by the sale
documents, 4) the Company failed to pay a bonus of $1,000,000 to Mr. Spano, 5)
the Company allowed the maintenance work in the petrochemical plants to
deteriorate under Mr. Spano's post transaction management, 6) the Company
defamed the plaintiffs, 7) the Company wrongfully commingled funds belonging to
the plaintiffs that resulted in seizure of taxes, interest and penalties, and 7)
the Company failed to pay certain debts on assets included in the transaction.
Total damages claimed by the plaintiffs are approximately $5,000,000. The
Company intends to vigorously defend the lawsuit. The Company has filed a
counterclaim for recovery of approximately $2,775,000 paid on behalf of
Professional Industrial Maintenance, LLC and Mr. Spano as a result of the
transaction. This matter is scheduled to go to trial during the second half of
2003. While the outcome of this litigation cannot be predicted with certainty,
management believes that it is not reasonably possible that the outcome of this
proceeding will have a material adverse effect on the Company's consolidated
financial statements and the Company has recorded no reserve with respect to
this lawsuit.

On March 14, 2003, the Lake Charles Harbor and Terminal District (the
"Port") sent a letter to the Company alleging that the Company was not in
compliance with certain environmental and workforce provisions of the lease
agreement (the "Lease") by and between the Company and the Port for the Lake
Charles facility. The Company engaged a qualified environmental inspection
company to perform a phase one study of the premises, which was completed in the
first week of April 2003 and did not result in any material findings. The
Company met with Port officials in July 2003 and resolved the allegations of non
compliance without any further implications to the Company.

18

ITEM 5. OTHER INFORMATION

This report on Form 10-Q is accompanied by a statement of the Principal
Executive Officer and the Chief Financial Officer of the registrant making
certain certifications as to the contents hereof, as required by Section 906 of
the Sarbanes-Oxley Act of 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit
Number Description

31.1 Certificate pursuant to Rule 13a-14(a) or 15d-14(a)
of the Securities Exchange Act of 1934, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of
2002-Principle Executive Officer

31.2 Certificate pursuant to Rule 13a-14(a) or 15d-14(a)
of the Securities Exchange Act of 1934, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of
2002-Chief Financial Officer

32.1 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley Act
of 2002-Principle Executive Officer

32.2 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley Act
of 2002-Chief Financial Officer

(b) Reports on Form 8-K

On July 18, 2003, the Company filed a current report on Form 8-K
dated July 17, 2003. The report included Items 5 and 7 and
amended the financial statements of the Company as filed in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 to include segment disclosure in Note 16.
Industry Segments, and amended Management's Discussion and
Analysis for the related segment disclosure. The report also
announced the appointment of a liquidator of Allen Process
Systems Limited, located in London, England, for the purposes of
ceasing and voluntarily winding up operations of that company.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

UNIFAB International, Inc.
--------------------------------------------

Date August 13, 2003 /s/ Peter J. Roman
--------------------------------------------
Peter J. Roman
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

19

INDEX TO EXHIBITS