Item 3. Legal Proceedings
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 $65 million from the four defendants for economic losses which it alleges resulted from the delay in oil and gas production that was caused by these events. The trial court has issued rulings, the effect of which is to limit the damages recoverable from all four defendants to a maximum of $15 million. The trial court has issued this and other rulings that have been favorable to the defendants, all of which are subject to appeal by the plaintiff at the conclusion of the trial. 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 arising primarily in 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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4A. Executive Officers of the Registrant
Listed below are the names, ages and offices held by each of the executive officers of the Company as of March 1, 1999. All officers of the Company serve at the pleasure of the Company's Board of Directors.
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 a 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 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.
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 Stock Market under the symbol "GIFI." At March 12, 1999, the Company had approximately 5,200 holders of record of Common Stock.
The following table sets forth the high and low bid prices per share of the Common Stock, as reported by the Nasdaq Stock 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).
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.
Item 6.
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, 1998 are derived from the audited financial statements of the Company. The table also sets forth unaudited pro forma financial information as of and for the years ended December 31, 1998, 1997, and 1996 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.
- -------- (1) Includes results of operations of Southport, Inc. from January 1, 1998. (2) Includes results of operations of Dolphin Services from January 2, 1997. (3) 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. (4) 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 3 to the Company's financial statements included elsewhere in this Report. (5) Information for 1996, 1995 and 1994 includes $530,000, $434,000, and $477,000, respectively, of current maturities of debt. (6) Direct labor hours are hours worked by employees directly involved in the production of the Company's products. (7) 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, 1998 included approximately 32,000 direct labor hours and $4.0 million attributable to portions of orders expected to be completed after December 31, 1999.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction and Outlook
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, North Africa, West Africa, Latin America, and the Middle East; (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 first four of the past five years, generally favorable trends in these factors led to increased activity levels in the Gulf of Mexico; however, declining commodity prices in the past year have caused a corresponding reduction in 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. 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. Activity in water depths greater than 300 feet, where larger structures requiring more steel tonnage are needed, has helped maintain demand on the available capacity of the major platform fabricators serving the Gulf of Mexico, with a resulting stability in pricing levels for their services through the end of 1998.
Demand for the Company's products and services remained high the first four of the past five years. The resultant backlog of projects that were built up during 1997 resulted in a strong performance for 1998. Revenue in 1998 was $192.4 million, a 41.1% increase over 1997 revenue, and pro forma net income was $18.8 million, a 54.5% increase over 1997 pro forma net income. Declining oil and natural gas prices have caused a reduction in industry levels, however, and this is reflected in the Company's backlog at December 31, 1998 which was $67.3 million as compared to $86.3 million at the end of 1997.
Despite the Company's performance for the twelve months ended December 31, 1998, the Company expects that the downturn in the industry brought on by continued low oil prices and a downturn in natural gas prices will impact the Company's ability to maintain these high levels of performance beyond 1998. The dollar value of projects available in the market is significantly below last year's levels and the Company's backlog is being similarly eroded. Competition for available projects has become more intense and future margins will likely be diminished. Cost reduction measures will be undertaken as appropriate to meet these conditions. In the longer term, demand for the Company's services will continue to depend largely upon prices for oil and gas, which are difficult to predict. At some point however, it is expected that these prices should recover as supplies are reduced and the Company's customers are forced to replace them.
The Company has from time to time increased the average hourly wages of its employees, has subcontracted work to others on a fixed-price basis and, in some years, has found it necessary to engage contract labor. During 1998, the Company's work force ranged from approximately 1,100 to 1,275 employees, including approximately 200 employees added through the 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 and due to recent reduced demand for the Company's products and services, the Company does not anticipate the need to increase average hourly wages or engage a material amount of contract labor in the foreseeable future.
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.
Year 2000 Issues
The Problem. Year 2000 issues result from the past practice in the computer industry of using two digits rather than four when coding the year portion of a date. This practice can create breakdowns or erroneous results when computers and processors embedded in other equipment perform operations involving dates later than December 31, 1999.
The Company's State of Readiness. The Company has assessed the Year 2000 compliance of its information technology systems and has purchased software and hardware that it believes will be adequate to upgrade all of these systems to Year 2000 compliance. The Company has also surveyed its significant non- information technology equipment for Year 2000 issued. While the Company uses several such items of equipment that are significant to its operations (such as automated welding and cutting equipment) none of the automated functions of this equipment are date sensitive and the Company believes that none of the equipment will require replacement or modification for Year 2000 compliance.
The Company does not have any significant suppliers or customers whose information technology systems directly interface with that of the Company. Nevertheless, as part of its assessment of its state of readiness, the Company has surveyed a representative number of its suppliers and customers for Year 2000 compliance. To date, the Company has received replies from approximately 73% of the suppliers that it has contacted, all of which (with insignificant exceptions) have indicated that they have taken appropriate steps to achieve Year 2000 compliance or have plans to do so. The Company has received replies from approximately 75% of its customers contacted all of which have indicated that they have taken appropriate steps to achieve Year 2000 compliance or have plans to do so.
Costs. Because the Company's information technology systems have been regularly upgraded and replaced as part of the Company's ongoing efforts to maintain high-grade technology and because the Company is not heavily dependent on non-information technology equipment that is date sensitive, the Company's Year 2000
compliance costs are expected to be relatively low. Recently the Company has incurred $77,000 to purchase software and hardware to upgrade its information technology systems and management does not believe that significant additional costs will be required for Year 2000 compliance. There can be no guarantee, however, that actual costs will not exceed that amount.
Risks. While the Company believes that it has taken reasonable steps to access its internal systems and prepare them for Year 2000 issues, if those steps prove inadequate the Company's ability to estimate and bid on new jobs and its financial and other daily business procedures could be interrupted or delayed, any of which could have a material adverse effect on the Company's operations. Because the Company's survey of its suppliers and customers is not complete, the Company is not in a position to evaluate the risk of their non- compliance. It is possible that the operations of the Company could be adversely affected to a material extent by the non-compliance of significant suppliers or customers.
Contingency Plan. While the Company intends to continue to monitor Year 2000 issues, it does not currently have a contingency plan for dealing with the possibility that its current systems may prove inadequate, nor does the Company currently intend to develop such a plan.
Results of Operations
Comparison of the Years Ended December 31, 1998 and 1997
The Company's revenue for the year ended December 31, 1998 was $192.4 million, an increase of 41.1%, compared to $136.4 million in revenue for the year ended December 31, 1997. Revenue increased as a result of the Southport acquisition, the on-going labor recruiting and retention efforts by the Company which generated an increase in the volume of direct labor hours applied to contracts and the implementation of productivity enhancing equipment for the year ended December 31, 1998 compared to the year ended December 31, 1997.
The increased employment levels and the utilization of labor saving equipment enabled the Company to increase volume and profit margins. The volume of direct labor hours applied to contracts increased to 2.6 million for the year ended December 31, 1998 compared to 2.2 million for 1997. Gross profit increased by 48.2% to $36.0 million (18.7% of revenue) for 1998 compared to $24.3 million (17.8% of revenue) of gross profit for the year ended December 31, 1997.
Cost of revenue was $156.3 million and $112.0 million for the years ended December 31, 1998 and 1997, respectively. Cost of revenue consists of cost associated with the fabrication process, including direct cost (such as direct labor hours, subcontractor cost and raw materials) allocated to specific jobs and indirect cost (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 81.3% for 1998 compared to 82.2% for 1997.
The Company's general and administrative expenses were $6.0 million for the year ended December 31, 1998 compared to $4.7 million for the year ended December 31, 1997. Although general and administrative expenses increased by $1.3 million, as a percentage of revenue, these expenses decreased to 3.1% from 3.4% of revenue for the years ended December 31, 1998 and 1997, respectively. This increase of $1.3 million for the year was caused by the additional general and administrative costs associated with Southport and the additional costs associated with increased production levels.
The Company had net interest income of $168,000 for the year ended December 31, 1998 compared to net interest expense of $109,000 for the year ended December 31, 1997. The Company completed its Initial Public Offering in April, 1997 and used the proceeds to eliminate all of its outstanding bank debt and provide working capital to the Company. Since that time, the Company's cash provided by operations has increased to a level that has allowed the Company to make capital expenditures and acquisitions with little or no debt.
The Company converted to C Corporation status on April 4, 1997. The 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 of 1997. Pro forma net income for 1997 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, 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 (2.2 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, 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.
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.
Liquidity and Capital Resources
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 decreased by 25% to $14.5 million for the year ended December 31, 1998, primarily attributable to the increased balances of accounts receivable and retainage related to increased sales. Net cash used in investing activities for the year ended December 31, 1998 was $19.2 million, related to the $5.9 million purchase of Southport, $13.2 million of capital expenditures and $100,000 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 1998 the Company purchased four new Manitowoc crawler cranes and a used American crawler crane, upgraded the shot blast facility, constructed a pressure vessel shop, installed construction skidways, and acquired various other fabrication equipment and facilities.
Net cash provided by financing activities of $688,000 during 1998 represented the net proceeds of $288,000 from the issuance of stock related to option exercises and $400,000 net borrowings under the revolving line of credit (the "Revolver").
The Company's bank credit facility provides for a 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% (7.75% at December 31, 1998). The Revolver matures December 31, 2000 and is secured by a mortgage on the Company's real estate, equipment and fixtures. The Company pays a fee quarterly of three-eighths of one percent per annum on the average unused portion of the line of credit. The Company is required to maintain certain covenants, including balance sheet and cash flow ratios. At December 31, 1998, the Company was in compliance with these covenants. At December 31, 1998, the Company had $3.0 million borrowed under the Revolver.
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. No contingent payments were payable for 1998.
The Company's Board of Directors has approved a capital budget of $4.4 million for 1999, including additional bulkheading, skidway systems, and automated painting, welding and steel cutting systems. 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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
In this report the consolidated financial statements and supplementary data of the Company appear on pages through and are incorporated herein by reference. See Index to Consolidated Financial Statements on Page 21.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
A change in the Company's independent accountants during 1997 and the information required by this item have been previously reported by the Company in a Current Report on Form 8-K dated August 25, 1997 and such information is incorporated herein by reference.
PART III
Item 10.
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 1999 Annual Meeting of Shareholders and is incorporated herein by reference.
The following table sets forth, as of March 1, 1999, certain information with respect to the Company's directors and executive officers.
Alden J. "Doc" Laborde has served as Chairman of the Board of the Company since 1986 and as a director since 1985. He also served as the Company's Chief Executive Officer from 1986 to January 1990. Mr. Laborde founded ODECO, Inc., an offshore drilling contractor ("ODECO"), and served as its Chairman of the Board and Chief Executive Officer from 1953 to 1977. In 1954, Mr. Laborde founded Tidewater, Inc. ("Tidewater"), a supplier of offshore marine transportation and other services, and served as a director of Tidewater from 1978 to 1986 and as director emeritus from 1986 to September 1993. Mr. Laborde graduated from the United States Naval Academy with a degree in engineering and served in World War II as a combat officer. Mr. Laborde is the father of John P. "Jack" Laborde.
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 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 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 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.
Gregory J. Cotter has been a director of the Company since 1985 and has served as a non-compensated financial advisor to the Company since its formation. Mr. Cotter has also been President, Chief Operating and Financial Officer and a director of Huey Wilson Interests, Inc. since January 1989. Mr. Cotter also served in that capacity from 1985 through 1986. During 1987 and 1988, Mr. Cotter was President, Chief Operating Officer and a director of Great American Corporation, then a publicly traded multibank holding company. Since October 1989, Mr. Cotter has served as President, Chief Financial Officer and a director of Wilson Jewelers, Inc. From 1977 to 1985, Mr. Cotter was Senior Vice President and Chief Financial Officer of H.J. Wilson, Co., Inc., then a publicly traded jewelry and retail merchandising chain. Mr. Cotter received his B.S. degree in Chemical Engineering in 1970 and his M.B.A. in 1972, both from Tulane University.
Thomas E. Fairley has served as a director of the Company since January 1997 and is the Chief Executive Officer and President of Trico Marine Services, Inc. ("Trico"), a publicly traded marine vessel operator. He has served in that capacity since October 1993 and as President of Trico Marine Operators, the predecessor of Trico, since 1980. From 1978 to 1980, Mr. Fairly served as Vice President of Trans Marine International, an offshore marine service company and a wholly owned subsidiary of GATX Leasing Corporation. From 1975 to 1978, Mr. Fairley served as Genera Manager of International Logistics, Inc., a company engaged in the offshore marine industry. Prior to 1975, Mr. Fairley held various positions with Petrol Marine Company, an offshore marine service company.
Hugh J. Kelly has served as a director of the Company since January 1997, and has been an oil and gas consultant since 1989. From 1977 to 1989, Mr. Kelly served as the Chief Executive Officer of ODECO. Mr. Kelly is a director of Tidewater and Chieftain International, Inc. (oil and gas exploration and development concern). Mr. Kelly previously held positions as director of Central Louisiana Electric Co. (electric utility company), and Hibernia Corporation (regional bank holding company), with terms that expired in 1998 and 1997, respectively.
John P. "Jack" Laborde has served as a director of the Company since January 1997. Mr. Laborde is the Chief Executive Officer of All Aboard Development Corporation, an independent oil and gas exploration and production company since 1996, Vice President of All Aboard from November 1993 to March 1996, and President of All Aboard since 1998, Mr. Laborde served as a consultant to the Company from April 1996 to December 1996. From April 1992 to March 1996, Mr. Laborde served as the International Marketing Manager of the Company. From 1978 to 1992, Mr. Laborde served in various capacities, including Vice President--International Operations and Marketing Manager, for ODECO. Mr. Laborde received his B.S. in Civil Engineering in 1971 and his M.B.A. in 1973, both from Tulane University. Jack is the son of Alden J. Laborde.
Huey J. Wilson, one of the Company's founding shareholders, was elected director in January 1997. Mr. Wilson founded H.J. Wilson Co., Inc. ("Wilson's"); a jewelry and retail merchandising chain that grew to become the largest publicly traded company headquartered in Baton Rouge, Louisiana. He was Chairman of the Board and Chief Executive Officer of Wilson's from 1957 to 1985, when it was sold to Service Merchandise Company. Until June 1993, Mr. Wilson served as Chairman of the Board since 1982, Chief Executive Officer since 1983, and a director since 1973 of Great American Corporation; a then publicly traded multibank holding company. Currently, Mr. Wilson is Chairman of the Board and Chief Executive Officer of Huey Wilson Interests, Inc., a financial and business management company he founded in 1985, and Chairman of the Board and Chief Executive Officer of Wilson Jewelers, Inc., a jewelry store chain he established in 1989.
Item 11.
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 1999 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 12.
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 1999 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 13.
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 1999 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
Item 14.
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
(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.
GLOSSARY OF CERTAIN TECHNICAL TERMS
blasting and coating Building and equipment used to clean steel products facility: 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 and gas platform: 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 Machine that cuts steel by a mechanical system shear: 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 Steel cutting system that uses an ionized gas cutting system: rather than oxy-fuel system.
platform: A structure from which offshore oil and gas development drilling and production are conducted.
pressure vessel: A metal container generally cylindrical or spheroid, capable of withstanding various internal pressure loadings.
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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 A platform consisting of a floating hull and deck (TLP): anchored by vertical tensioned cables or pipes connected to pilings driven into the seabed. A tension leg platform is typically used in water depths exceeding 1,000 feet.
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders Gulf Island Fabrication, Inc.
We have audited the accompanying consolidated balance sheets of Gulf Island Fabrication, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for the years 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 audits. The consolidated statements of income, shareholders' equity and cash flows of Gulf Island Fabrication, Inc. for the year 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 audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gulf Island Fabrication, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Ernst & Young LLP New Orleans, Louisiana January 26, 1999
GULF ISLAND FABRICATION, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
See accompanying notes.
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share data)
See accompanying notes.
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 Island's 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 subsidiaries (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 consolidated financial statements 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 shareholders elected to terminate its status as an S Corporation, and the Company became subject to federal and state income taxes. (See Note 3.)
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.
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 $130,000 of direct expenses exceeded the fair value of the assets acquired of $12.3 million and liabilities assumed of $10.3 million by $4.1 million. The acquisition was accounted for under the purchase method of accounting. Accordingly, the operations of Southport are included in the Company's consolidated financial statements from January 1, 1998.
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.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 allowance for doubtful accounts is adequate for its credit loss exposure.
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 3).
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Excess of Cost Over Fair Value of Net Assets Acquired
Excess of cost over the fair value of the net assets acquired ("goodwill") is being amortized on the straight-line method over 15 years.
Reclassifications
Certain items included in the consolidated financial statements for the years ended December 31, 1997 and 1996 have been reclassified to conform to the December 31, 1998 consolidated financial statement presentation.
2. ACQUISITIONS
The Company completed the following business combinations during fiscal years 1998 and 1997:
Acquisition of Southport, Inc. in 1998
The following unaudited pro forma information presents a summary of consolidated results of operations of Gulf Island and Southport as if the acquisition had occurred on January 1, 1997. Pro forma adjustments include (1) adjustments for the increase in interest expense as a result of the acquisition, (2) additional depreciation on property, plant and equipment, (3) adjustments to record the amortization of cost in excess of fair value of net assets acquired, (4) the elimination of certain general and administrative expenses, and (5) the related tax effects. The pro forma income tax presentation (Note 3) is included.
Acquisition of Dolphin Services in 1997
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 3) are excluded.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. 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 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 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 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, 1996 using an assumed effective tax rate of approximately 38%.
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 nonrecurring, noncash 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 3, 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.
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.
5. PRO FORMA PER SHARE DATA
Pro forma per share data as shown in the statements of income consist 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
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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.
6. EARNINGS PER SHARE
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):
7. CONTRACTS RECEIVABLE
Amounts due on contracts as of December 31 were as follows (in thousands):
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of December 31 is as follows (in thousands):
The above amounts are included in the accompanying consolidated balance sheets under the following captions (in thousands):
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31 (in thousands):
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 1998, 1997, and 1996, the Company expensed $3,084,000, $3,203,000, and $2,801,000, respectively, related to these leases.
10. 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 3). In conjunction with the Company's change in tax status, the Company recorded a $1.1 million deferred tax liability.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 and 1997 are as follows (in thousands):
Significant components of income taxes for the years ended December 31, 1998 and 1997 were as follows (in thousands):
In 1998, the primary difference between income taxes computed at the U.S. federal statutory rate of 35% and the Company's effective tax rate of 37.6% is state income taxes. In 1997, the primary difference between income taxes computed at the U.S. federal statutory rate of 35% and the Company's effective pro forma tax rate of 37.6% is state income taxes.
11. 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% (7.75% at December 31, 1998). The Revolver matures December 31, 2000 and is secured by a mortgage on the Company's real estate, equipment and fixtures. The Company pays a fee quarterly of three-eighths of one percent per annum on the average unused portion of the line of credit. The Company is required to maintain certain covenants, including balance sheet and cash flow ratios. At December 31, 1998, the Company was in compliance with these convenants.
12. 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,
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 equals 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 "nonstatutory 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.
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-Scholes option pricing model with the following weighted- average assumptions. For 1998, a risk-free interest rate of 5.50% on the January options and a risk-free interest rate of 5.63% on the July options; dividend yield of zero; volatility factor of the expected market price of the Company's common stock of .652; and a weighted-average expected life of the options of eight years. 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.
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 1998 and 1997 is as follows (in thousands, except per share data):
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's stock options activity and related information for the years ended December 31, 1997 and 1998 is as follows (in thousands, except per share data):
Exercise prices for options outstanding as of December 31, 1998 ranged from $7.50 to $19.625. The weighted-average remaining contractual life of those options is nine years.
13. 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, 1998, 1997, and 1996, the Company contributed $1,428,000, $844,000, and $542,000, respectively.
14. 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 $65 million from the four defendants for economic losses which it alleges resulted from the delay in oil and gas production that was caused by these events. The trial court has issued rulings, the effect of which is to limit the damages recoverable from all four defendants to a maximum of $15 million. The trial court has issued this and other rulings that have been favorable to the defendants, all of which are subject to appeal by the plaintiff at the conclusion of the trial. 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 arising primarily in 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.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. 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):
16. INTERNATIONAL SALES
The Company's structures are used worldwide by U. S. customers operating abroad and by foreign customers. Sales outside the United States accounted for 17%, 15%, and 16% of the Company's revenues during 1998, 1997, and 1996, respectively.
17. QUARTERLY OPERATING RESULTS (UNAUDITED)
A summary of quarterly results of operations for the years ended December 31, 1998 and 1997 were as follows (in thousands, except per share data):
Quarterly data may not sum to the full year data reported in the Company's consolidated financial statements due to rounding. The first three quarters of 1997 earnings per share amounts have been restated to comply with Statement No. 128.
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 onMarch 23, 1999.
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. Gallagher, 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-1
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
- -------- + 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.
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