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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
or
[_]Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 0-22303
GULF ISLAND FABRICATION, INC.
(Exact name of registrant as specified in its charter)
Louisiana 72-1147390
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
583 Thompson Road, Houma, Louisiana 70363
(Address of principal executive (zip code)
offices)
(504) 872-2100
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 5, 1999 was approximately $58,003,375.
The number of shares of the Registrant's common stock, no par value per
share, outstanding at March 5, 1999 was 11,638,400.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement prepared for use in
connection with the registrant's 1999 Annual Meeting of Shareholders to be
held April 29, 1999 have been incorporated by reference into Part III of this
Form 10-K.
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GULF ISLAND FABRICATION, INC.
ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I
Items 1 and 2. Business and Properties.............................. 1
Item 3. Legal Proceedings.................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.. 11
Item 4A. Executive Officers of the Registrant................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................. 12
Item 6. Selected Financial Data.............................. 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 14
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk................................................ 18
Item 8. Financial Statements and Supplementary Data.......... 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. 18
PART III
Item 10. Directors and Executive Officers of the Registrant... 19
Item 11. Executive Compensation............................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................... 21
Item 13. Certain Relationships and Related Transactions....... 21
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K......................................... 21
GLOSSARY OF CERTAIN TECHNICAL TERMS..................................... G1
FINANCIAL STATEMENTS.................................................... F1
SIGNATURES.............................................................. S1
EXHIBIT INDEX........................................................... E1
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PART I
Items 1 and 2. Business and Properties
Certain technical terms are defined in the "Glossary of Certain Technical
Terms" appearing at the end of this Report.
General
Gulf Island Fabrication, Inc. (together with its subsidiaries, the
"Company") is a leading fabricator of offshore drilling and production
platforms and other specialized structures used in the development and
production of offshore oil and gas reserves. Structures and equipment
fabricated by the Company include jackets and deck sections of fixed
production platforms; hull and deck sections of floating production platforms
(such as tension leg platforms ("TLPs")); piles, wellhead protectors, subsea
templates and various production, compressor and utility modules; offshore
interconnect pipe hook-up; inshore marine construction; manufacture and repair
of pressure vessels; steel warehousing and sales; and the fabrication of
offshore living quarters.
The Company was founded in 1985 by a group of investors, including Alden J.
"Doc" Laborde and Huey J. Wilson, and began operations at its fabrication yard
on the Houma Navigation Canal in Southern Louisiana, approximately 30 miles
from the Gulf of Mexico. The Company's primary facilities are located on 608
acres, of which 261 are currently developed for fabrication activities with
347 acres available for future expansion. These facilities allow the Company
to build jackets for installation in water depth of up to 800 feet and deck
sections for fixed or floating production platforms for use in unlimited water
depth. In addition, the Company is able to build certain hull sections of
floating production platforms, typically for use in water depth greater than
1,000 feet.
On January 2, 1997, Gulf Island Fabrication, Inc. acquired Dolphin Services,
Inc. and two related companies (collectively, "Dolphin Services"), which
perform offshore and inshore fabrication and construction services (the
"Dolphin Acquisition"), and in April 1997, completed the initial public
offering (the "Initial Public Offering") of its common stock, no par value per
share (the "Common Stock"). 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.
In April, 1998, the Company, together with three engineering companies,
formed a limited liability company called MinDOC, L.L.C., to patent, design
and market a deep-water floating drilling and production concept. The Company
initially owned a 40% interest in the LLC. Design and marketing of the project
was pursued during the remainder of 1998. In February, 1999, an additional
participant joined the group for a consideration, with the Company reducing
its ownership interest to 33 1/3% leaving the other original members as well
as the new entry with 16 2/3% each. Although there have been no sales to date,
the group anticipates that as the design progresses, the concept can be
successfully marketed to the oil industry for development of deepwater
offshore oil and gas fields.
Description of Operations
The Company's primary activity is the fabrication of offshore drilling and
production platforms, including jackets and deck sections of fixed production
platforms, hull and deck sections of floating production platforms (such as
TLPs), piles, wellhead protectors, subsea templates and various production,
compressor and utility modules. The Company also has the ability to produce
and repair pressure vessels used in the oil and gas industry, refurbish
existing platforms and fabricate various other types of steel structures. With
its acquisition of Southport, the Company has also increased its presence in
the market for the fabrication of living quarters for installation on such
platforms.
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The Company uses the latest welding and fabrication technology available,
and all of the Company's products are manufactured in accordance with industry
standards and specifications, including those published by the American
Petroleum Institute, the American Welding Society and the American Society of
Mechanical Engineers. Gulf Island Fabrication is certified as an ISO 9002
fabricator for its quality assurance programs. See "-- Safety and Quality
Assurance."
Fabrication of Offshore Platforms. The Company fabricates structural
components of fixed platforms for use in the offshore development and
production of oil and gas. A fixed platform is the traditional type of
platform used for the offshore development and production of oil and gas,
although recently there has been an increase in the use of floating production
platforms and TLPs as a result of increased drilling and production activities
in deeper waters. Most fixed platforms built today can accommodate both
drilling and production operations. These combination platforms are large and
generally more costly than single-purpose structures. However, because
directional drilling techniques permit a number of wells to be drilled from a
single platform and because drilling and production can take place
simultaneously, combination platforms are often more cost effective.
The most common type of fixed platform consists of a jacket (a tubular
steel, braced structure extending from the mudline on the seabed to a point
above the water surface) which is supported on tubular pilings driven deep
into the seabed and supports the deck structure located above the level of
storm waves. The deck structure, extending above the surface of the water and
attached to the top end of the jacket, is designed to accommodate multiple
functions, including drilling, production, separating, gathering, piping,
compression, well support and crew quartering. Platforms can be joined by
bridges to form complexes of platforms for very large developments or to
improve safety by dividing functions among specialized platforms. Jacket-type
platforms are generally the most viable solution for water depths of 1,000
feet or less. Although there is no height limit to the size of the jackets
that can be fabricated at the Company's facilities, the dimensions of the
Houma Navigation Canal prevent the transportation to the Gulf of Mexico of
most jackets designed for water depths exceeding 800 feet. The Company can,
however, build decks, piping and equipment modules, living quarters, piles and
other components of platforms for installation in any water depth. Often,
customers split projects among fabricators, contracting with different
companies for the fabrication of the jacket, deck sections, living quarters
and piles for the same platform. Therefore, the Company is able, through the
construction of decks, living quarters and piles, to participate in the
construction of platforms requiring jackets that are larger than those the
Company can transport through the Houma Navigation Canal.
Most of the steel used in the Company's operations arrives at the Company's
fabrication yards as steel plate. The plate is cut and rolled into tubular
sections at rolling mills in the fabrication yards. The tubular sections
(which vary in diameter, up to 12 feet) are welded together in long straight
tubes to become legs or into shorter tubes to become part of the network of
bracing that supports the legs. Various cuts and welds in the fabrication
process are made by computer-controlled equipment that operates from data
developed during the design of the structure. The Company's ability to
fabricate and assemble the large tubular sections needed for jackets built for
use in water depths over 300 feet distinguish the Company from all but two of
its domestic competitors.
Jackets are built on skidways (which are long parallel rails along which the
jacket will slide when it is transferred to a barge for towing out to sea) and
are generally built in sections so that, to the extent possible, much of their
fabrication is done on the ground. As each section of legs and bracing is
complete, large crawler cranes pick up an entire side and "roll up" the
section, which is then joined to another uprighted section. When a jacket is
complete and ready for launch, it is pulled along the skidway onto a launch
barge, which is gradually deballasted to compensate for the weight of the
structure as more of it moves aboard the barge. Using ocean-going tugs, the
barge and jacket are transported to the offshore installation site.
Decks are built either as single structures or in sections and are installed
on location by marine construction contractors. The composition and quantity
of petroleum in the well stream generally determine the makeup of the
production deck on a processing platform. Typical deck equipment includes
crude oil pumps, gas and oil separators and gas compressors. Unlike large
jackets, which are transported in a horizontal position, decks are transported
upright and, as a result, are not subject to the width restrictions of the
Houma Navigation Canal.
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Therefore, the only limitation on the Company's ability to fabricate decks is
the weight capacity of the barges that transport the decks from the Company's
yard, to the installation site. Barges currently exist that have the weight
capacity and other characteristics required to transport even the largest of
the decks currently installed in the Gulf of Mexico, and management believes
that currently there are no decks installed in the Gulf of Mexico that could
not have been constructed at the Company's facilities. While larger deck
structures to be built in the future could exceed the capacities of currently
existing barges, management does not believe that this will materially affect
its share of the market for deck construction.
The Company can also fabricate sections of, and structures used in
connection with, TLPs. TLPs consist of a deck that sits atop one or more
column-shaped hulls, which are positioned on site with vertical tendons
running from the hulls to the seabed. The tendons hold the hulls partially
submerged and are highly tensioned using the buoyancy of the hulls. This
system develops a restoring force against wave, wind and current actions in
proportion to the lateral displacement of the vessel. Wells for a TLP are
often pre-drilled through a subsea template. Long, flexible production risers,
which carry the petroleum to the deck of the TLP, are supported in tension by
mechanical tensioner machines on the platform's deck and are directly subject
to wave, wind and current forces. TLPs can be used in any water depth and are
generally better suited than fixed platforms for water depth greater than
1,000 feet.
The size of a TLP depends on a number of factors, including the intended
scope of production of the platform, the length of the production risers
connected to the platform, the size of the deck to be installed on the
platform and the water depth for which the platform is designed. The Company
can fabricate deck sections for use with TLPs of any size. The constraints of
the Houma Navigation Canal, however, limit the Company's ability to deliver
certain hulls for use with TLPs, depending on the size and weight of the hull
sections. In July 1998, the Company completed the fabrication of the deck
section and floating hull of a TLP designed for installation in 1,800 feet of
water. The Company is currently constructing a similar hull to be installed in
3,200 feet of water. To the Company's knowledge, these are the first two TLPs
of this size to be constructed entirely in the United States. With TLP's and
other floating concepts as the alternative of choice for deepwater drilling
and production platforms, and the Company's participation in this arena firmly
established, the Company will participate in the continued expansion into the
deepwater areas.
The Company has fabricated subsea templates for use in connection with TLPs,
which are structures that are installed on the seabed before development
drilling begins. As exploration and drilling move into the deep water of the
Gulf of Mexico, the Company believes that there will be increased
opportunities to fabricate subsea templates, as well as decks and other
structures, for use in connection with TLPs.
The Company also fabricates piles and other rolled goods, templates, bridges
for connecting offshore platforms, wellhead protectors, various production,
compressor and utility modules and other structures used in offshore oil and
gas production and development activities. All of the Company's products are
installed by marine construction contractors.
Through Dolphin Services, the Company also provides interconnect piping
services on offshore platforms, inshore steel and wood structure construction,
fabrication of pressure vessels and large and small packaged skid units, and
steel warehousing and sales. Interconnect piping services involve sending
employee crews to offshore platforms that have been installed in the Gulf of
Mexico in order to perform welding and other activities required to connect
production equipment, service modules and other equipment to a platform prior
to its becoming operational. Dolphin Services also contracts with oil and gas
companies that have platforms and other structures located in the inland lakes
and bays throughout the Southeast for various on-site construction and
maintenance activities. At its existing facility, a quarter of a mile from the
Company's main yard, Dolphin Services can fabricate jackets up to 100 feet
tall along with decks and other steel structures. Dolphin Services has also
been active in the refurbishment of existing platforms. Platform operators
occasionally remove platforms previously installed in the Gulf of Mexico and
return the platforms to a fabricator for refurbishment, which usually consists
of general repairs, maintenance work and modification.
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Through Southport, the Company fabricates living quarters, primarily for
offshore platforms, ranging in size from 4 to 250 beds.
Facilities and Equipment
Facilities. The Company's corporate headquarters and main fabrication yard
are located on the east bank of the Houma Navigation Canal at Houma,
Louisiana, approximately 30 miles from the Gulf of Mexico. That facility
includes approximately 140 acres with approximately 100 acres developed for
fabrication, one 13,200 square foot building that houses administrative staff,
approximately 180,000 square feet of covered fabrication area, and over 17,000
square feet of warehouse storage area and 8,000 square feet of training and
medical facilities. The main yard also has approximately 2,800 linear feet of
water frontage, of which 1,500 feet is steel bulkhead which permits outloading
of heavy structures.
During 1998 the Company acquired an 11.3 acre facility located on the Houma
Navigation Canal across Thompson Road from the main fabrication yard. This
facility includes a two-story 5,000 square feet administration building with
an attached 5,300 square foot warehouse. Also located on the property in an
additional two-story 2,100 square foot administration building. The property
has approximately 570 linear feet of water frontage, of which 380 linear feet
is steel bulkhead which permits docking of large ocean going vessels and the
outloading of heavy loads.
The Company's west yard is located across the Houma Navigation Canal from
the main yard and includes 437 acres, with 130 acres developed for fabrication
and over 300 acres of unimproved land, which could be used for expansion. The
west yard, which has approximately 72,000 square feet of covered fabrication
area and 3,500 square feet of warehouse storage area, spans 6,750 linear feet
of the Houma Navigation Canal, of which 2,350 feet is steel bulkhead.
Dolphin Services operates from a 20-acre site located approximately a
quarter of a mile from the Company's main yard on a channel adjacent to the
Houma Navigation Canal. The facility includes a 7,000 square foot building
that houses administrative staff, approximately 14,000 square feet of covered
fabrication area, 1,500 square feet of warehouse storage area, a 10,000 square
foot blasting and coating facility and 600 linear feet of steel bulkhead.
Dolphin Services also operates a commercial steel sales division and a
pressure vessel shop.
Steel sales recently expanded to a new three acre facility located adjacent
to Gulf Island Fabrication's main facility. In addition to the standard
inventory items, it expanded to include A516-70 pressure vessel plate, ABS
plate and a wider selection of wide flange beams. It intends to further expand
the material sales by utilizing Gulf Island Fabrication's capability to
process the steel by cutting, shaping, forming and painting.
The vessel shop can manufacture pressure vessels up to eleven feet in
diameter and eight inches in thickness. The shop is equipped with a Cypress
Circle Cutter and auto core flux and submerged arc welding equipment. The
vessel shop can also accommodate the construction of a 50 ton skid unit inside
the facility.
Southport is located on a 13-acre site located in Harvey, Louisiana, a
suburb of New Orleans, on the Harvey Canal, which has access to the Gulf of
Mexico through the Intracoastal Canal. The facility includes 7,550 square feet
of administrative offices, 22,300 square feet of covered fabrication area and
1,450 linear feet of steel bulkhead.
The Company owns all of the foregoing properties.
Equipment. The Company's main yard houses its Bertsch Model 38, Model 34 and
Model 20 plate bending rolls, a Frye Wheelabrator grit blast system, a
hydraulic plate shear, a hydraulic press brake and various other equipment
needed to build offshore structures and fabricate steel components. The
Company's west yard has a Bertsch Model 38 plate bending roll, a computerized
Vernon brace coping machine used for cutting steel in complex geometric
sections and various other equipment used in the Company's fabrication
business. The
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Company also currently uses 14 crawler cranes, which range in tonnage capacity
from 150 to 300 tons and service both of the Company's yards. The Company owns
these cranes which can thus avoid having to rent cranes on a monthly basis
except in times of very high activity levels. The Company has a plasma-arc
cutting system that cuts steel up to one inch thick at a rate of two hundred
inches per minute. The Company performs routine repairs and maintenance on all
of its equipment.
The Company's plate bending rolls allow it to roll and weld into tubular
pipe sections approximately 50,000 tons of plate per year. By having such
capacity at its fabrication facility, the Company is able to coordinate all
aspects of platform construction, which can reduce the risk of; cost overruns;
delays in project completion; and labor costs. In addition, these facilities
often allow the Company to participate as subcontractors on projects awarded
to other contractors. The Company's grit blast system can blast steel at a
rate approximately ten times faster than conventional sandblasting. This
greatly reduces labor costs and also decreases the Company's use of
conventional sandblasting, which is considered to be a more hazardous and
slower method of preparing steel for painting.
For use in connection with its inshore construction activities, Dolphin
Services owns three spud barges. Dolphin Services also leases two barges for
use with inshore construction activities. Each barge is equipped with a crane
with a lifting capacity of 60 to 100 tons. Dolphin Services also owns two
Manitowoc 4100 cranes with lifting capacities of 200 to 230 tons and five
smaller crawler cranes ranging from 60 to 100 tons lifting capacity. Southport
rents two crawler cranes with lifting capacities of 100 and 150 tons,
respectively.
Materials and Supplies
The principal materials and supplies used by the Company in its fabrication
business, standard steel shapes, steel plate, welding gases, fuel oil,
gasoline and paint, are currently available in adequate supply from many
sources. The Company does not depend upon any single supplier or source.
Safety and Quality Assurance
Management is concerned with the safety and health of the Company's
employees and maintains a stringent safety assurance program to reduce the
possibility of costly accidents. The Company's safety department establishes
guidelines to ensure compliance with all applicable state and federal safety
regulations and provides training and safety education through orientations
for new employees and subcontractors, weekly crew safety meetings and first
aid and CPR training. The Company also employs two in-house medical personnel.
The Company has a comprehensive drug program and conducts periodic employee
health screenings. A safety committee, whose members consist of management
representatives and peer-elected field representatives, meet monthly to
discuss safety concerns and suggestions that could prevent accidents. The
Company also rewards its employees with safety awards every six months if the
actual workmen's compensation recordable case rate is less than a pre-
determined benchmark case rate for the six month period.
The Company fabricates to the standards of the American Petroleum Institute,
the American Welding Society, the American Society of Mechanical Engineers and
specific customer specifications. The Company uses welding and fabrication
procedures in accordance with the latest technology and industry requirements.
Training programs have been instituted to upgrade skilled personnel and
maintain high quality standards. In addition, the Company maintains on-site
facilities for the non-destructive testing of all welds, which process is
performed by an independent contractor.
Gulf Island Fabrication is certified as an ISO 9002 fabricator. ISO 9002 is
an internationally recognized verification system for quality management
overseen by the International Standard Organization based in Geneva,
Switzerland. The certification is based on a review of the Company's programs
and procedures designed to maintain and enhance quality production and is
subject to annual review and recertification. Dolphin Services and Southport
are evaluating procedures to begin the process of applying for ISO 9002
certification.
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Customers and Contracting
The Company's customers are primarily major and independent oil and gas
companies. Over the past five years, sales of structures used in the Gulf of
Mexico by oil and gas companies accounted for approximately 80% of the
Company's revenue. The balance of its revenue was derived from the fabrication
of structures installed outside the Gulf of Mexico, including offshore West
Africa and Latin America.
A large portion of the Company's revenue has historically been generated by
a few customers, although not necessarily the same customers from year-to-
year. For example, the Company's largest customers (those which individually
accounted for more than 10% of revenue in a given year) collectively accounted
for 38% (Texaco, Inc. and Atlantia Corporation), 58% (Texaco, Inc., Atlantia
Corporation and British Petroleum Company), and 35% (Shell Offshore, Global
Industries, Coastal Offshore) of revenue for fiscal 1998, 1997 and 1996,
respectively. In addition, at December 31, 1998, 41% of the Company's backlog
was attributable to one project. Because the level of fabrication that the
Company may provide to any particular customer depends, among other things, on
the size of that customer's capital expenditure budget devoted to platform
construction plans in a particular year and the Company's ability to meet the
customer's delivery schedule, customers that account for a significant portion
of revenue in one fiscal year may represent an immaterial portion of revenue
in subsequent years.
Most of the Company's projects are awarded on a fixed-price or
alliance/partnering basis, and while customers may consider other factors,
including the availability, capability, reputation and safety record of a
contractor, price and the ability to meet a customer's delivery schedule are
the principal factors on which the Company is awarded contracts. The Company's
contracts generally vary in length from one month to twenty-four months
depending on the size and complexity of the project. Generally, the Company's
contracts and projects are subject to termination at any time prior to
completion, at the option of the customer. Upon termination, however, the
customer is generally required to pay the Company for work performed and
materials purchased through the date of termination and, in some instances,
cancellation fees.
Under fixed price contracts, the Company receives the price fixed in the
contract, subject to adjustment only for change orders approved by the
customer. As a result, the Company retains all cost savings but is also
responsible for all cost overruns. Under typical alliance/partnering
arrangements, the Company and the customer agree in advance to a target price
that includes specified levels of labor and material costs and profit margins.
If the project is completed at less cost than those targeted in the contract,
the contract price is reduced by a portion of the savings. If the cost of
completion is greater than those targeted in the contract, the contract price
is increased, but generally to the target price plus the actual incremental
cost of materials and direct labor costs. Accordingly, under
alliance/partnering arrangements, the Company has some protection from cost
overruns but also shares a portion of any cost savings with the customer.
Under cost-plus arrangements, the Company receives a specified fee in excess
of its direct labor and material cost and so is protected against cost
overruns but does not benefit directly from cost savings. Because the Company
generally prices materials as pass-through items on its contracts, the cost
and productivity of the Company's labor force are the primary factors
affecting the Company's operating costs. Consequently, it is essential that
the Company control the cost and productivity of the direct labor hours worked
on the Company's projects. As an aid to achieving this control, the Company
places a single project manager in charge of the production operations related
to each project and gives significant discretion to the project manager, with
oversight by the Company's Vice President of Operations. As an incentive to
control man-hours, the Company gives bonuses to its employees based on 5% of
the Company's income before taxes.
Seasonality
Although in the recent past high activity levels in the oil and gas industry
and capacity limitations have somewhat diminished the seasonality of the
Company's operations, the Company's operations have historically been subject
to seasonal variations in weather conditions and daylight hours. Since most of
the Company's construction activities take place outdoors, the number of
direct labor hours worked generally declines during
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the winter months due to an increase in rainy and cold conditions and a
decrease in daylight hours. In addition, the Company's customers often
schedule the completion of their projects during the summer months in order to
take advantage of the milder weather during such months for the installation
of their platforms. As a result, a disproportionate portion of the Company's
income has historically been earned during the second and third quarters of
the year, and the Company has occasionally incurred losses during the first
and fourth quarters of its fiscal year.
The table below indicates for each quarter of the Company's last three
fiscal years the percentage of the annual revenue, gross profit and net
income, and the number of direct labor hours worked.
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1998 1997 1996
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1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
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Revenue................. 24% 26% 28% 22% 21% 26% 27% 26% 25% 27% 24% 24%
Gross profit............ 23% 27% 27% 23% 20% 26% 29% 25% 13% 26% 30% 31%
Net income.............. 22% 27% 29% 22% 19% 27% 30% 24% 11% 27% 34% 28%
Direct labor hours (in
000's)................. 642 697 670 606 497 542 588 523 249 304 264 256
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Because of this seasonality, full year results are not likely to be a direct
multiple of any particular quarter or combination of quarters. Recent
reductions in industry activity, levels may tend to increase the seasonality
of the Company's operations.
Competition
The offshore platform fabrication industry is highly competitive and
influenced by events largely outside of the control of offshore platform
fabrication companies. Platform fabrication companies compete intensely for
available projects, which are generally awarded on a competitive bid basis
with customers usually requesting bids on projects one to three months prior
to commencement. The Company's marketing staff contacts oil and gas companies
believed to have fabrication projects scheduled to allow the Company an
opportunity to bid for the projects. Although price and the contractor's
ability to meet a customer's delivery schedule are the principal factors in
determining which qualified fabricator is awarded a contract for a project,
customers also consider, among other things, the availability of technically
capable personnel and facility space, a fabricator's efficiency, condition of
equipment, reputation, safety record and customer relations.
The Company currently has two primary competitors, Aker Gulf Marine and J.
Ray McDermott, S.A., for the fabrication of platform jackets to be installed
in the Gulf of Mexico in water depths greater than 300 feet. In addition to
these two companies, the Company primarily competes with five other
fabricators for platform jackets for intermediate water depths from 150 feet
to 300 feet. A number of other companies compete for projects designed for
shallower waters as well as for the projects typically performed by Southport.
Certain of the Company's competitors have greater financial and other
resources than the Company.
Management believes that, while new competitors can enter the market for
smaller structures relatively easily, it is more difficult for several reasons
to enter the market for jackets designed for use in water depths greater than
300 feet, including the substantial investment required to establish an
adequate facility, the difficulty of locating a facility adjacent to an
adequate waterway due to environmental and wetland regulations, and the
limited availability of experienced supervisory and management personnel.
Management believes that the Company's competitive pricing, expertise in
fabricating offshore structures and its certification as an ISO 9002
fabricator will enable it to continue to compete effectively for projects
destined for international waters. The Company recognizes, however, that
foreign governments often use subsidies and incentives to create jobs where
oil and gas production is being developed. In addition, the additional
transportation costs that are incurred when exporting structures from the U.S.
to foreign locations may hinder the Company's ability to successfully bid for
projects against foreign competitors. Because of subsidies, import duties and
fees, taxes on foreign operators and lower wage rates in foreign countries
along with
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fluctuations in the value of the U.S. dollar and other factors, the Company
may not be able to remain competitive with foreign contractors for projects
designed for use in international waters as well as those designed for use in
the Gulf of Mexico.
Backlog
As of December 31, 1998 the Company's backlog was $67.3 million, $63.3
million of which management expects to be performed during 1999. Of the $67.3
million backlog at December 31, 1998, approximately 41% was attributable to
one project.
The Company's backlog is based on management's estimate of the direct labor
hours required to complete, and the remaining revenue to be recognized with
respect to, those projects as to which a customer has authorized the Company
to begin work or purchase materials pursuant to written contracts, letters of
intent or other forms of authorization received by our company. Often,
however, management's estimates are based on incomplete engineering and design
specifications. As engineering and design plans are finalized or changes to
existing plans are made, management's estimate of the direct labor hours
required to complete and price at completion for such projects is likely to
change. In addition, all projects currently included in the Company's backlog
are subject to termination at the option of the customer, although the
customer in that case is generally required to pay the Company for work
performed and materials purchased through the date of termination and, in some
instances, pay the Company cancellation fees.
Government and Environmental Regulation
Many aspects of the Company's operations and properties are materially
affected by federal, state and local regulation, as well as certain
international conventions and private industry organizations. The exploration
and development of oil and gas properties located on the outer continental
shelf of the United States is regulated primarily by the Minerals Management
Service (United States Department of the Interior) ("MMS"). The MMS has
promulgated federal regulations under the Outer Continental Shelf Lands Act
requiring the construction of offshore platforms located on the outer
continental shelf to meet stringent engineering and construction
specifications. Violations of these regulations and related laws can result in
substantial civil and criminal penalties as well as injunctions curtailing
operations. The Company believes that its operations are in compliance with
these and all other regulations affecting the fabrication of platforms for
delivery to the outer continental shelf of the United States. In addition, the
Company depends on the demand for its services from the oil and gas industry
and, therefore, can be affected by changes in taxes, price controls and other
laws and regulations relating to the oil and gas industry. Offshore
construction and drilling in certain areas has also been opposed by
environmental groups and, in certain areas, has been restricted. To the extent
laws are enacted or other governmental actions are taken that prohibit or
restrict offshore construction and drilling or impose environmental protection
requirements that result in increased costs to the oil and gas industry in
general and the offshore construction industry in particular, the business and
prospects of the Company could be adversely affected, although such
restrictions in the areas of the Gulf of Mexico where the Company's products
are used have not been substantial. The Company cannot determine to what
extent future operations and earnings of the Company may be affected by new
legislation, new regulations or changes in existing regulations.
The Houma Navigation Canal provides the only means of access for the
Company's products from the Company's facilities to open waters. The Houma
Navigation Canal is considered to be a navigable waterway of the United States
and, as such, is protected by federal law from unauthorized obstructions that
would hinder water-borne traffic. Federal law also authorizes federal
maintenance of the canal by the United States Corps of Engineers. The canal
requires annual dredging to maintain its water depth and, while federal
funding for this dredging has been provided for over 30 years, no assurance
that Congressional appropriations sufficient for adequate dredging and other
maintenance of the canal will be continued indefinitely. If sufficient funding
were not appropriated for that purpose, the Houma Navigation Canal could
become impassable by barges required to transport many of the Company's
products, with the result that the Company's operations and financial position
could be materially and adversely affected.
8
<PAGE>
The Company's operations and properties are subject to a wide variety of
increasingly complex and stringent foreign, federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes,
the remediation of soil and groundwater contaminated by hazardous substances
and the health and safety of employees. These laws may provide for "strict
liability" for damages to natural resources and threats to public health and
safety, rendering a party liable for the environmental damage without regard
to negligence or fault on the part of such party. Sanctions for noncompliance
may include revocation of permits, corrective action orders, administrative or
civil penalties and criminal prosecution. Certain environmental laws provide
for strict, joint and several liability for remediation of spills and other
releases of hazardous substances, as well as damage to natural resources. In
addition, the Company may be subject to claims alleging personal injury or
property damage as a result of alleged exposure to hazardous substances. Such
laws and regulations may also expose the Company to liability for the conduct
of or conditions caused by others, or for acts of the Company that were in
compliance with all applicable laws at the time such acts were performed.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, and similar laws provide for responses to and liability for
releases of hazardous substances into the environment. Additionally, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Safe Drinking Water Act, the Emergency Planning and Community Right to Know
Act, each as amended, and similar foreign, state or local counterparts to
these federal laws, regulate air emissions, water discharges, hazardous
substances and wastes, and require public disclosure related to the use of
various hazardous substances. Compliance with such environmental laws and
regulations may require the acquisition of permits or other authorizations for
certain activities and compliance with various standards or procedural
requirements. The Company believes that its facilities are in substantial
compliance with current regulatory standards.
The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, primarily the Occupational Safety and
Health Act and regulations promulgated thereunder. In addition, various other
governmental and quasi-governmental agencies require the Company to obtain
certain permits, licenses and certificates with respect to its operations. The
kind of permits, licenses and certificates required in the Company's
operations depend upon a number of factors. The Company believes that it has
all material permits, licenses and certificates necessary to the conduct of
its existing business.
The Company's compliance with these laws and regulations has entailed
certain additional expenses and changes in operating procedures, which
historically have resulted in approximately $150,000 in expenditures per year.
The Company believes that compliance with these laws and regulations will not
have a material adverse effect on the Company's business or financial
condition for the foreseeable future. However, future events, such as changes
in existing laws and regulations or their interpretation, more vigorous
enforcement policies of regulatory agencies, or stricter or different
interpretations of existing laws and regulations, may require additional
expenditures by the Company, which expenditures may be material.
Certain activities engaged in by employees of the Company, including
interconnect piping and other service activities conducted on offshore
platforms and activities performed on the spud barges owned by the Company,
are covered by the provisions of the Jones Act, the Death on the High Seas Act
and general maritime law, which laws operate to make the liability limits
established under state workers' compensation laws inapplicable to these
employees and, instead, permit them or their representatives to pursue actions
against the Company for damages or job related injuries, with generally no
limitations on the Company's potential liability. The Company's ownership and
operation of vessels can give rise to large and varied liability risks, such
as risks of collisions with other vessels or structures, sinkings, fires and
other marine casualties, which can result in significant claims for damages
against both the Company and third parties for, among other things, personal
injury, death, property damage, pollution and loss of business.
In addition to government regulation, various private industry
organizations, such as the American Petroleum Institute, the American Society
of Mechanical Engineers and the American Welding Society, promulgate technical
standards that must be adhered to in the fabrication process.
9
<PAGE>
Insurance
The Company maintains insurance against property damage caused by fire,
flood, explosion and similar catastrophic events that may result in physical
damage or destruction to the Company's facilities. All policies are subject to
deductibles and other coverage limitations. The Company also maintains a
builder's risk policy for its construction projects and general liability
insurance. Gulf Island Fabrication, Inc. is self-insured for workers'
compensation liability except for losses in excess of $300,000 per occurrence
for Louisiana workers' compensation and for U.S. longshoreman and harbor
workers' coverage. Dolphin Services and Southport are conventionally insured
for workers' compensation liability with deductibles of $100,000 and $25,000
respectively. The Company also maintains maritime employer's liability
insurance. Although management believes that the Company's insurance is
adequate, there can be no assurance that the Company will be able to maintain
adequate insurance at rates which management considers commercially
reasonable, nor can there be any assurance that such coverage will be adequate
to cover all claims that may arise.
Employees
The Company's workforce varies based on the level of ongoing fabrication
activity at any particular time. During 1998, the number of Company employees
ranged from approximately 1,100 to 1,275, approximately 200 of which were
added through the acquisition of Southport. As of March 1, 1999, the Company
had approximately 1,000 employees. Although the seasonality of the Company's
operations may cause a decline in Company output during the winter months, the
Company generally does not lay off employees during those months but reduces
the number of hours worked per day by many employees to coincide with the
reduction in daylight hours during that period. None of the Company's
employees is employed pursuant to a collective bargaining agreement, and the
Company believes that its relationship with its employees is good.
The Company's ability to remain productive and profitable depends
substantially on its ability to attract and retain skilled construction
workers, primarily welders, fitters and equipment operators. In addition, the
Company's ability to expand its operations depends not only upon customer
demand but also the Company's ability to increase its labor force. The demand
for such workers is high and the supply is extremely limited. While the
Company believes its relationship with its skilled labor force is good, a
significant increase in the wages paid by competing employers could result in
a reduction in the Company's skilled labor force, increases in the wage rates
paid by the Company, or both. If either of these occurred, in the near-term,
the profits expected by the Company from work in progress could be reduced or
eliminated and, in the long-term, to the extent such wage increases could not
be passed on to the Company's customers, the production capacity of the
Company could be diminished and the growth potential of the Company could be
impaired.
As part of an effort to maintain its workforce, the Company has instituted
and enhanced several incentive programs for its current employees and expanded
its training facility. The Company has facilities to train its employees on
productivity and safety matters. The Company is committed to training its
employees and offers advancement through in-house training programs.
Cautionary Statement Concerning Forward-Looking Information
Certain statements included in this report and in oral statements made from
time to time by management of the Company that are not statements of
historical fact are forward-looking statements. In this report, forward-
looking statements are included primarily in the sections entitled "Business
and Properties," "Legal Proceedings," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The words
"expect," "believe," "anticipate," "project," "plan," "estimate," "predict"
and similar expressions often identify forward-looking statements. All such
statements are subject to factors that could cause actual results and outcomes
to differ materially from the results and outcomes predicted in the statements
and investors are cautioned not to place undue reliance upon them.
10
<PAGE>
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. 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.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kerry J. Chauvin........... 51 President, Chief Executive Officer and Director
William A. Downey.......... 52 Vice President--Operations
Murphy A. Bourke........... 54 Vice President--Marketing
Joseph P. Gallagher, III... 48 Vice President--Finance, Chief Financial
Officer, Treasurer and Secretary
</TABLE>
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.
11
<PAGE>
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. 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).
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year 1998
First Quarter.................................................. $23.81 $15.50
Second Quarter................................................. 27.50 17.25
Third Quarter.................................................. 20.50 10.00
Fourth Quarter................................................. 18.00 7.19
Fiscal Year 1997
Second Quarter (commencing April 4, 1997)...................... $13.31 $ 7.88
Third Quarter.................................................. 25.50 12.50
Fourth Quarter................................................. 39.50 15.00
</TABLE>
The Company currently intends to retain earnings, if any, to meet its
working capital requirements and to finance the future operation and growth of
its business and, therefore, does not plan to pay cash dividends to holders of
its Common Stock in the foreseeable future. Prior to the Initial Public
Offering, the Company made cash distributions to its shareholders in order to
provide a cash return to them as well as to fund their federal and state
income tax liability that resulted from the Company's prior status as an S
Corporation. These distributions totaled $2.7 million in the year ended
December 31, 1996, and $16.6 million through the termination of the Company's
S Corporation Status on April 4, 1997.
12
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998(1) 1997(2) 1996 1995 1994
-------- -------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue........................... $192,372 $136,355 $79,004 $63,779 $60,984
Cost of revenue................... 156,326 112,033 68,673 60,034 57,519
-------- -------- ------- ------- -------
Gross profit...................... 36,046 24,322 10,331 3,745 3,465
General and administrative
expenses......................... 6,023 4,670 2,161 1,730 1,567
Non-recurring compensation
charge(3)........................ -- -- 500 -- --
-------- -------- ------- ------- -------
Operating income.................. 30,023 19,652 7,670 2,015 1,898
Net interest expense (income)..... (168) 109 384 430 328
-------- -------- ------- ------- -------
Income before income taxes........ 30,191 19,543 7,286 1,585 1,570
Income taxes...................... 11,359 5,973 -- -- --
Cumulative deferred tax
provision........................ -- 1,144 -- -- --
-------- -------- ------- ------- -------
Net income........................ $ 18,832 $ 12,426 $ 7,286 $ 1,585 $ 1,570
======== ======== ======= ======= =======
Pro Forma Data (unaudited):
Income before provision for income
taxes............................ $ 30,191 $ 19,543 $ 7,286
Provision for income taxes........ 11,359 5,973 --
Pro forma provision for income
taxes(4)......................... -- 1,379 2,934
-------- -------- -------
Pro forma net income.............. $ 18,832 $ 12,191 $ 4,352
======== ======== =======
Pro forma basic earnings per
share............................ $ 1.62 $ 1.15 $ 0.55
======== ======== =======
Pro forma diluted earnings per
share............................ $ 1.61 $ 1.14 $ 0.55
======== ======== =======
Pro forma weighted-average common
shares........................... 11,630 10,633 7,854
======== ======== =======
Pro forma adjusted weighted-
average common shares............ 11,703 10,700 7,854
======== ======== =======
<CAPTION>
As of December 31,
------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital, excluding current
maturities of long-term debt..... $ 25,239 $ 17,555 $11,001 $10,048 $ 7,437
Property, plant and equipment,
net.............................. 45,418 34,505 17,735 13,483 13,873
Total assets...................... 97,740 67,678 35,909 30,414 25,665
Debt, including current
maturities(5).................... 3,000 -- 6,187 5,545 4,477
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Direct labor hours worked(6)...... 2,615 2,150 1,073 920 1,037
Backlog(7)
Direct labor hours.............. 1,079 1,341 1,038 427 400
Dollars......................... $ 67,300 $ 86,300 $87,000 $22,000 $20,700
</TABLE>
13
<PAGE>
- --------
(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. 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.
14
<PAGE>
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
15
<PAGE>
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.
16
<PAGE>
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.
17
<PAGE>
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. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
In this report the consolidated financial statements and supplementary data
of the Company appear on pages F-1 through F-15 and are incorporated herein by
reference. See Index to Consolidated Financial Statements on Page 21.
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.
18
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning the Company's directors and officers called for by
this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 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.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Alden J. Laborde........... 83 Chairman of the Board of Directors
Kerry J. Chauvin........... 51 President, Chief Executive Officer and Director
William A. Downey.......... 52 Vice President--Operations
Murphy A. Bourke........... 54 Vice President--Marketing
Joseph P. Gallagher, III... 48 Vice President--Finance, Chief Financial
Officer, Treasurer and Secretary
Gregory J. Cotter.......... 50 Director
Thomas E. Fairley.......... 50 Director
Hugh J. Kelly.............. 73 Director
John P. "Jack" Laborde..... 49 Director
Huey J. Wilson............. 70 Director
</TABLE>
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.
19
<PAGE>
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.
20
<PAGE>
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. 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. 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. 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors..................................... F-1
Consolidated Balance Sheets at December 31, 1998 and at December
31, 1997.......................................................... F-2
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996............................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996...................... F-4
Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996........................................... F-5
Notes to Consolidated Financial Statements......................... F-6
</TABLE>
(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.
21
<PAGE>
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.
G-1
<PAGE>
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.
G-2
<PAGE>
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
F-1
<PAGE>
GULF ISLAND FABRICATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
ASSETS
------
Current assets:
Cash........................................................ $ 2,808 $ 6,879
Contracts receivable........................................ 34,682 21,204
Contract retainage.......................................... 5,837 1,556
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... 2,061 903
Prepaid expenses............................................ 878 914
Inventory................................................... 1,137 968
Recoverable income taxes.................................... 531 321
-------- -------
Total current assets...................................... 47,934 32,745
Property, plant and equipment, net............................ 45,418 34,505
Excess of cost over fair value of net assets acquired less
accumulated amortization of $278,825 at December 31, 1998.... 3,839 --
Other assets.................................................. 549 428
-------- -------
Total assets.............................................. $ 97,740 $67,678
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................................ $ 7,151 $ 3,368
Billings in excess of costs and estimated earnings on
uncompleted contracts...................................... 9,476 5,925
Accrued employee costs...................................... 4,085 3,068
Accrued expenses............................................ 1,983 2,829
-------- -------
Total current liabilities................................. 22,695 15,190
Deferred income taxes......................................... 2,315 1,878
Notes payable................................................. 3,000 --
-------- -------
Total liabilities......................................... 28,010 17,068
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding........................... -- --
Common stock, no par value, 20,000,000 shares authorized,
11,638,400 and 11,600,000 shares issued and outstanding at
December 31, 1998 and 1997, respectively................... 4,162 4,133
Additional paid-in capital.................................. 35,124 34,865
Retained earnings........................................... 30,444 11,612
-------- -------
Total shareholders' equity................................ 69,730 50,610
-------- -------
$ 97,740 $67,678
======== =======
</TABLE>
See accompanying notes.
F-2
<PAGE>
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenue........................................... $192,372 $136,355 $79,004
Cost of revenue................................... 156,326 112,033 68,673
-------- -------- -------
Gross profit...................................... 36,046 24,322 10,331
General and administrative expenses............... 6,023 4,670 2,661
-------- -------- -------
Operating income.................................. 30,023 19,652 7,670
Other expense (income):
Interest expense................................ 93 348 415
Interest income................................. (261) (239) (31)
-------- -------- -------
(168) 109 384
-------- -------- -------
Income before income taxes........................ 30,191 19,543 7,286
Income taxes...................................... 11,359 5,973 --
Cumulative deferred tax provision................. -- 1,144 --
-------- -------- -------
Net income........................................ $ 18,832 $ 12,426 $ 7,286
======== ======== =======
Pro forma data:
Income before income taxes...................... $ 30,191 $ 19,543 $ 7,286
Income taxes.................................... 11,359 5,973 --
Pro forma income taxes related to operations as
S Corporation.................................. -- 1,379 2,934
-------- -------- -------
Pro forma net income............................ $ 18,832 $ 12,191 $ 4,352
======== ======== =======
Pro forma per share data:
Pro forma basic earnings per share.............. $ 1.62 $ 1.15 $ 0.55
======== ======== =======
Pro forma diluted earnings per share............ $ 1.61 $ 1.14 $ 0.55
======== ======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Retained
Shares Amount Capital Earnings Total
---------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996.... 7,000,000 $1,000 $ 6,170 $11,232 $18,402
Dividends..................... -- -- -- (2,691) (2,691)
Nonrecurring compensation
charge....................... -- -- 500 -- 500
Net income.................... -- -- -- 7,286 7,286
---------- ------ ------- ------- -------
Balance at December 31, 1996.. 7,000,000 1,000 6,670 15,827 23,497
Issuance of common stock...... 4,600,000 3,133 28,195 -- 31,328
Dividends..................... -- -- -- (16,641) (16,641)
Net income.................... -- -- -- 12,426 12,426
---------- ------ ------- ------- -------
Balance at December 31, 1997.. 11,600,000 4,133 34,865 11,612 50,610
Issuance of common stock...... 38,400 29 259 -- 288
Net income.................... -- -- -- 18,832 18,832
---------- ------ ------- ------- -------
Balance at December 31, 1998.. 11,638,400 $4,162 $35,124 $30,444 $69,730
========== ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net income......................................... $18,832 $12,426 $ 7,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 3,893 2,932 1,586
Amortization...................................... 279 -- --
Nonrecurring noncash compensation charge.......... -- -- 500
Deferred income taxes............................. 437 1,878 --
Changes in operating assets and liabilities:
Contracts receivable............................. (5,604) (4,734) (796)
Contract retainage............................... (3,036) 443 258
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 2 458 (801)
Recoverable income taxes......................... (478) (774) --
Prepaid expenses and other assets................ 21 883 (630)
Accounts payable................................. (690) 832 (1,082)
Accrued employee costs........................... 655 1,550 636
Accrued expenses................................. (965) (804) 510
Billings in excess of costs and estimated
earnings on uncompleted contracts............... 1,106 3,233 (306)
------- ------- -------
Net cash provided by operating activities....... 14,452 18,323 7,161
Investing activities:
Capital expenditures, net.......................... (13,192) (15,179) (5,838)
Payment for purchase of businesses, net of cash
acquired.......................................... (5,915) (5,803) --
Other.............................................. (104) 253 --
------- ------- -------
Net cash used in investing activities........... (19,211) (20,729) (5,838)
Financing activities:
Proceeds from initial public offering.............. -- 31,328 --
Proceeds from issuance of notes payable............ 11,000 41,900 24,353
Principal payments on notes payable................ (10,600) (48,659) (23,712)
Proceeds from issuance of stock.................... 288 -- --
Dividends.......................................... -- (16,641) (2,691)
------- ------- -------
Net cash provided by (used in) financing
activities..................................... 688 7,928 (2,050)
------- ------- -------
Net increase (decrease) in cash..................... (4,071) 5,522 (727)
Cash at beginning of year........................... 6,879 1,357 2,084
------- ------- -------
Cash at end of year................................. $ 2,808 $ 6,879 $ 1,357
======= ======= =======
Supplemental cash flow information:
Interest paid...................................... $ 100 $ 408 $ 415
======= ======= =======
Income taxes paid.................................. $11,388 $ 5,861 $ --
======= ======= =======
Property, plant and equipment acquired through
accrued expenses.................................. $ -- $ 1,408 $ --
======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
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.
F-6
<PAGE>
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).
F-7
<PAGE>
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.
<TABLE>
<CAPTION>
Year ended
December 31, 1997
(in thousands,
except per share data)
----------------------
<S> <C>
Revenue............................................ $158,239
Pro forma net income............................... 13,218
Pro forma basic earnings per share................. 1.24
Pro forma diluted earnings per share............... 1.24
</TABLE>
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.
<TABLE>
<CAPTION>
Year ended
December 31, 1996
(in thousands,
except per share data)
----------------------
<S> <C>
Revenue........................................... $103,007
Pro forma net income.............................. 8,333
Pro forma basic and diluted earnings per share.... 1.19
</TABLE>
F-8
<PAGE>
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
F-9
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per
share............................................ $18,832 $12,191 $4,352
======= ======= ======
Denominator:
Denominator for basic earnings per share--
weighted-average shares........................ 11,630 10,633 7,854
Effect of dilutive securities:
Employee stock options.......................... 73 67 --
------- ------- ------
Dilutive potential common shares:
Denominator for diluted earnings per share--
adjusted weighted-average shares............. 11,703 10,700 7,854
======= ======= ======
Pro forma basic earnings per share................ $ 1.62 $ 1.15 $ 0.55
======= ======= ======
Pro forma diluted earnings per share.............. $ 1.61 $ 1.14 $ 0.55
======= ======= ======
</TABLE>
7. CONTRACTS RECEIVABLE
Amounts due on contracts as of December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Completed contracts..................................... $ 2,605 $ 725
Contracts in progress:
Current............................................... 32,155 20,549
Retainage due within one year......................... 5,837 1,556
Less allowance for doubtful accounts.................... 78 70
-------- -------
$ 40,519 $22,760
======== =======
</TABLE>
F-10
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts............... $177,698 $77,613
Estimated profit earned to date....................... 34,409 13,382
-------- -------
212,107 90,995
Less billings to date................................. 219,522 96,017
-------- -------
$ (7,415) $(5,022)
======== =======
</TABLE>
The above amounts are included in the accompanying consolidated balance
sheets under the following captions (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... $ 2,061 $ 903
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... (9,476) (5,925)
-------- -------
$ (7,415) $(5,022)
======== =======
</TABLE>
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Land.................................................... $ 4,369 $ 2,457
Buildings............................................... 9,764 8,723
Machinery and equipment................................. 34,491 25,765
Furniture and fixtures.................................. 1,136 673
Transportation equipment................................ 1,185 1,053
Improvements............................................ 15,209 11,450
Construction in progress................................ 697 1,594
-------- -------
66,851 51,715
Less accumulated depreciation........................... 21,433 17,210
-------- -------
$ 45,418 $34,505
======== =======
</TABLE>
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.
F-11
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Deferred tax liabilities:
Depreciation............................................. $3,464 $2,314
Deferred tax assets:
Employee benefits........................................ 827 419
Uncompleted contracts.................................... 306 --
Other benefits........................................... 16 17
------ ------
Total deferred assets.................................. 1,149 436
------ ------
Net deferred tax liabilities............................... $2,315 $1,878
====== ======
</TABLE>
Significant components of income taxes for the years ended December 31, 1998
and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Current:
Federal.................................................. $ 9,939 $4,451
State.................................................... 983 788
------- ------
Total current.......................................... 10,922 5,239
Deferred:
Federal.................................................. 398 1,731
State.................................................... 39 147
------- ------
Total deferred......................................... 437 1,878
------- ------
Income taxes............................................... $11,359 $7,117
======= ======
</TABLE>
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,
F-12
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net income:
Pro forma as reported.................................. $18,832 $12,191
Pro forma including the effect of options.............. $18,295 $11,927
Basic earnings per share:
Pro forma as reported.................................. $ 1.62 $ 1.15
Pro forma including the effect of options.............. $ 1.57 $ 1.12
Diluted earnings per share:
Pro forma as reported.................................. $ 1.61 $ 1.14
Pro forma including the effect of options.............. $ 1.56 $ 1.11
</TABLE>
F-13
<PAGE>
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):
<TABLE>
<CAPTION>
1997 1998
------------------------- -------------------------
Options Weighted Average Options Weighted Average
(000s) Exercise Price (000s) Exercise Price
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding--beginning
of year................ -- -- 393 $11.790
Granted................. 413 $12.040 105 18.263
Exercised............... -- -- (38) 7.500
Expired................. -- -- -- --
Forfeited............... (20) 16.875 (14) 16.875
------ -------
Outstanding--end of
year................... 393 $11.790 446 $13.529
====== ======= =======
Exercisable at end of
year................... -- $ -- 37 $15.822
====== ======= ======= =======
Weighted-average fair
value of options
granted during the
year................... $9.130 $13.083
====== =======
</TABLE>
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.
F-14
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Customer A......................................... $42,638 $44,467 $ --
Customer B......................................... 30,088 21,603 --
Customer C......................................... -- -- 8,196
Customer D......................................... -- 13,383 --
Customer E......................................... -- -- 9,379
Customer F......................................... -- -- 10,119
</TABLE>
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.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
(in millions)
<S> <C> <C> <C>
Location:
United States....................................... $160.6 $116.4 $66.1
International....................................... 31.8 20.0 12.9
------ ------ -----
Total............................................. $192.4 $136.4 $79.0
====== ====== =====
</TABLE>
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):
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue......................... $46,914 $50,641 $51,866 $42,951
Gross profit.................... 8,311 9,767 9,830 8,138
Pro forma net income............ 4,233 5,151 5,312 4,136
Pro forma basic earnings per
share.......................... 0.36 0.44 0.46 0.36
Pro forma diluted earnings per
share.......................... 0.36 0.44 0.45 0.35
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue......................... $30,224 $35,023 $36,311 $34,797
Gross profit.................... 4,865 6,424 6,986 6,047
Pro forma net income............ 2,248 3,265 3,698 2,980
Pro forma basic earnings per
share.......................... 0.29 0.28 0.32 0.26
Pro forma diluted earnings per
share.......................... 0.29 0.28 0.32 0.25
</TABLE>
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.
F-15
<PAGE>
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.
<TABLE>
<S> <C>
</TABLE>
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
<PAGE>
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C> <C>
2.1 Stock Purchase Agreement with respect to Dolphin Services, Inc. dated
November 27, 1996.*
2.2 Stock Purchase Agreement with respect to Dolphin Steel Sales, Inc. dated
as of November 27, 1996.*
2.3 Stock Purchase Agreement with respect to Dolphin Sales & Rentals, Inc.
dated as of November 27, 1996.*
2.4 Stock Purchase Agreement, dated as of November 12, 1997, between the
Company and the shareholders of Southport, Inc.**
3.1 Amended and Restated Articles of Incorporation of the Company.*
3.2 Bylaws of the Company. Restated and Amended through March 10, 1999.
4.1 Specimen Common Stock Certificate.*
10.1 Form of Indemnity Agreement by and between the Company and each of its
directors and executive officers.*
10.2 Registration Rights Agreement between the Company and Alden J. Laborde.*
10.3 Registration Rights Agreement between the Company and Huey J. Wilson.*
10.4 The Company's Long-Term Incentive Plan.*+
10.5 Form of Stock Option Agreement under the Company's Long-Term Incentive
Plan, as amended; incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.+
10.6 Form of Reimbursement Agreement.*+
10.7 Employment Agreement dated as of January 1, 1998 between Southport, Inc.
and Stephen G. Benton, Jr.**+
10.8 Seventh Amended and Restated Revolving Credit and Term Loan Agreement
among the Company and First National Bank of Commerce and Whitney
National Bank, dated as of August 21, 1998 (the "Bank Credit Facility"),
incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
16.1 Letter from Price Waterhouse LLP regarding change in certifying
accountant, incorporated by reference to the Company's Current Report on
Form 8-K dated
August 25, 1997.
21.1 Subsidiaries of the Company--The Company's significant subsidiaries,
Dolphin Services, Inc. and Southport, Inc., are wholly owned
subsidiaries and included in the Company's consolidated financial
statements.
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Report of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
99.1 Press release issued by the Company on February 4, 1999 announcing its
1998 fourth quarter and year earnings.
</TABLE>
- --------
+ 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.
E-1
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
GULF ISLAND FABRICATION, INC.
(AS AMENDED AND RESTATED THROUGH MARCH 10, 1999)
SECTION 1
OFFICES
1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be
located at 583 Thompson Road, Houma, Louisiana 70363.
1.2 ADDITIONAL OFFICES. The Corporation may have such offices at such
other places as the Board of Directors may from time to time determine or the
business of the Corporation may require.
SECTION 2
SHAREHOLDER MEETINGS
2.1 PLACE OF MEETINGS. Unless otherwise required by law or these By-laws,
all meetings of the shareholders shall be held at the principal office of the
Corporation or at such other place, within or without the State of Louisiana, as
may be designated by the board of Directors.
2.2 ANNUAL MEETINGS; NOTICE THEREOF. An annual meeting of the
shareholders shall be held each year on the date and at the time as the Board of
Directors shall designate, for the purpose of electing directors and of the
transaction of such other business as may be properly brought before the
meeting. If no annual shareholders' meeting is held for a period of eighteen
months, any shareholder may call such meeting to be held at the registered
office of the Corporation as shown on the records of the Secretary of State of
the State of Louisiana.
2.3 SPECIAL MEETINGS. Special meetings of the shareholders, for any
purpose or purposes, may be called by or at the direction of the Board of
Directors. Shareholders may call a special meeting of shareholders in
accordance with the applicable provisions of the Articles of Incorporation.
2.4 NOTICE OF MEETINGS. Except as otherwise provided by law or the
Articles of Incorporation, the authorized person or persons calling a
shareholders' meeting shall cause written notice of the time, place and purpose
of the meeting to be given to all shareholders entitled to vote at such meeting,
at least 10 days and not more than 75 days prior to the day fixed for the
meeting. Notice of the annual meeting need not state the purpose or purposes
thereof, unless action is to be
<PAGE>
taken at the meeting as to which notice is required by law or the By-laws.
Notice of a special meeting shall state the purpose or purposes thereof, and the
business conducted at any special meeting shall be limited to the purpose or
purposes stated in the notice.
2.5 LIST OF SHAREHOLDERS. At every meeting of shareholders, a list of
shareholders entitled to vote, arranged alphabetically and certified by the
Secretary or by the agent of the Corporation having charge of transfers of
shares, showing the number and class of shares held by each such shareholder on
the record date for the meeting and confirming the number of votes per share as
to which each such shareholder is entitled, shall be produced on the request of
any shareholder.
2.6 QUORUM. At all meetings of shareholders, the holders of a majority of
the total voting power shall constitute a quorum; provided, however, that this
subsection shall not have the effect of reducing the vote required to approve
any matter that may be established by law, the Articles of Incorporation or
these By-laws.
2.7 VOTING. When a quorum is present at any shareholders' meeting, the
vote of the holders of a majority of the votes actually cast shall decide each
question brought before such meeting, unless the resolution of the question
requires, by express provision of law, the Articles of Incorporation or these
By-laws, a different vote or one or more separate votes by the holders of a
class or series of capital stock, in which case such express provision shall
apply and control the decision of such question. Directors shall be elected by
plurality vote.
2.8 PROXIES. At any meeting of the shareholders, every shareholder having
the right to vote shall be entitled to vote in person or by proxy appointed by
an instrument in writing executed by such shareholder and bearing a date not
more than eleven months prior to the meeting, unless the instrument provides for
a longer period, but in no case will an outstanding proxy be valid for longer
than three years from the date of its execution. The person appointed as proxy
need not be a shareholder of the Corporation.
2.9 ADJOURNMENTS. Adjournments of any annual or special meeting of
shareholders may be taken without new notice being given unless a new record
date is fixed for the adjourned meeting, but any meeting at which directors are
to be elected shall be adjourned only from day to day until such directors shall
have been elected.
2.10 WITHDRAWAL. If a quorum is present or represented at a duly
organized shareholders' meeting, such meeting may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum as fixed in Section 2.6 of these By-laws, or the refusal of any
shareholders to vote.
2.11 LACK OF QUORUM. If a meeting cannot be organized because a quorum
has not attended, those present may adjourn the meeting to such time and place
as they may determine, subject, however, to the provisions of Section 2.9
hereof. In the case of any meeting called for the
2
<PAGE>
election of directors, those who attend the second of such adjourned meetings,
although less than a quorum as fixed in Section 2.6 hereof, shall nevertheless
be deemed to constitute a quorum for the purpose of electing directors.
2.12 PRESIDING OFFICER. The Chairman of the Board or a person designated
by the Chairman of the Board, or in their absence a person designated by the
Board of Directors, shall preside at all shareholders' meetings.
2.13 DEFINITION OF SHAREHOLDER. As used in these By-laws, and unless the
context otherwise requires, the term shareholder shall mean a person who is (i)
the record holder of shares of the Corporation's common stock or any other
capital stock of the Corporation granted voting rights, or (ii) a registered
holder of any bonds, debentures or similar obligations granted voting rights by
the Corporation pursuant to La.R.S. 12:75H.
SECTION 3
DIRECTORS
3.1 NUMBER. All of the corporate powers shall be vested in, and the
business and affairs of the Corporation shall be managed by, a Board of
Directors. Except as otherwise fixed by or pursuant to Article III(B) of the
Articles of Incorporation (as it may be duly amended from time to time) relating
to the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect additional
directors by class vote, the Board of Directors shall consist of seven natural
persons; provided that, if after the last action of the Board of Directors with
respect to nomination of directors prior to the mailing to shareholder of proxy
materials for any meeting of shareholders at which directors are to be elected,
any person or persons named therein to be nominated at the direction of the
Board of Directors becomes unable or unwilling to serve, the foregoing number of
authorized directors shall be automatically reduced by a number equal to the
number of such persons unless the Board of Directors selects a replacement
nominee or nominees. No director need be a shareholder. The Secretary shall
have the power to certify at any time as to the number of directors authorized
and as to the class to which each director has been elected or assigned.
3.2 POWERS. The Board may exercise all such powers of the Corporation and
do all such lawful acts and things which are not by law, the Articles of
Incorporation or these By-laws directed or required to be done by the
shareholders.
3.3 CLASSES. The Board of Directors, other than those directors who may
be elected by the holders of any class or series of stock having preference over
the Common Stock as to dividends or upon liquidation (whose term of office may
be determined by the Board of Directors pursuant to Section 3.3), shall be
divided, with respect to the time during which they shall hold office, into
three classes as nearly equal in number as possible, with the initial term of
office of Class I directors expiring at the annual meeting of shareholders to be
held in 1998, of Class II Directors expiring at
3
<PAGE>
the next succeeding annual meeting of shareholders and of Class III directors
expiring at the second succeeding annual meeting of shareholders, with all such
directors to hold office until their successors are elected and qualified. At
each annual meeting of shareholders, directors chosen to succeed those whose
terms then expire shall be elected to hold office for a term expiring at the
annual meeting of shareholder held in the third year following the year of their
election and until their successors are duly elected and qualified. If the Board
of Directors shall appoint any director to fill a vacancy on the Board, whether
resulting from an increase in the number of directors or otherwise, such
Director shall be assigned to a class by the Board of Directors so that all
classes of directors shall be as nearly equal in number as possible. In the
event of a decrease in the number of directors, the Board of Directors may
reassign the remaining directors to classes so that all classes of directors
shall be as nearly equal in number as possible.
3.4 GENERAL ELECTION. At each annual meeting of shareholders, directors
shall be elected to succeed those directors whose terms then expire. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
3.5 VACANCIES. Except as otherwise provided in the Articles of
Incorporation or these By-laws, the office of a director shall become vacant if
he dies, resigns or is duly removed from office.
3.6 FILLING VACANCIES. Except as otherwise provided in the Articles of
Incorporation or Section 3.8 of these By-laws, any vacancy on the board
(including any vacancy resulting from an increase in the authorized number of
directors or from failure of the shareholders to elect the full number of
authorized directors) may, notwithstanding any resulting absence of a quorum of
directors, be filled by a majority vote of the Board of Directors remaining in
office, provided that the shareholder shall have the right, at any special
meeting called for such purpose prior to such action by the Board, to fill the
vacancy. A director elected pursuant to this section shall serve until the next
shareholders' meeting held for the election of directors of the class to which
he shall have been appointed and until his successor is elected and qualified.
3.7 NOTICE OF SHAREHOLDER NOMINEES. Except as otherwise provided in
Section 3.8 of these By-laws, only persons who are nominated in accordance with
the procedures set forth in Article IV(E) of the Articles of Incorporation shall
be eligible for election as directors.
3.8 DIRECTORS ELECTED BY PREFERRED SHAREHOLDERS. Notwithstanding anything
in these By-laws to the contrary, whenever the holders of any one or more
classes or series of stock having a preference over the Common Stock as to
dividends or upon liquidation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the provisions of the
Articles of Incorporation (as they may be duly amended from time to time) fixing
the rights and preferences of such preferred stock shall govern with respect to
the nomination, election, term, removal, vacancies or other related matters with
respect to such directors.
4
<PAGE>
3.9 COMPENSATION OF DIRECTORS. Directors shall receive such compensation
for their services, in their capacity as directors, as may be fixed by
resolution of the Board of Directors; provided, however, that nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
SECTION 4
MEETINGS OF THE BOARD
4.1 PLACE OF MEETINGS. The meetings of the Board of Directors may be held
at such place within or without the State of Louisiana as a majority of the
directors may from time to time appoint.
4.2 INITIAL MEETINGS. Except as otherwise determined by the Board of
Directors, the first meeting of each newly-elected Board shall be held
immediately following the shareholders' meeting at which the Board, or any class
thereof, is elected and at the same place as such meeting, and no notice of such
first meeting shall be necessary for the newly-elected directors in order
legally to constitute the meeting.
4.3 REGULAR MEETINGS; NOTICE. Regular meetings of the Board may be held
at such times as the Board may form time to time determine. Notice of regular
meetings of the Board of Directors shall be given, but no special form of notice
or time of notice shall be necessary.
4.4 SPECIAL MEETINGS; NOTICE. Special meetings of the Board may be called
by or at the direction of the Chairman of the Board or the President on
reasonable notice given to each director, either personally or by telephone,
mail, telex, telecopy or any other comparable form of facsimile communication.
Special meetings shall be called by the Secretary in like manner and on like
notice on the written request of a majority of the directors and if such officer
fails or refuses, or is unable within 24 hours to call a meeting when requested,
then the directors making the request may call the meeting on two days' written
notice given to each director. The notice of a special meeting of directors
need not state it purpose or purposes, but if the notice states a purpose or
purposes and does not state a further purpose to consider such other business as
may properly come before the meeting, the business to be conducted at the
special meeting shall be limited to the purpose or purposes stated in the
notice.
4.5 WAIVER OF NOTICE. Directors present at any regular or special meeting
shall be deemed to have received, or to have waived, due notice thereof,
provided that a director who participates in a meeting by telephone (as
permitted by Section 4.9 hereof) shall not be deemed to have received or waived
due notice if, at the beginning of the meeting, he objects to the transaction of
any business because the meeting is not lawfully called.
4.6 QUORUM. A majority of the Board shall be necessary to constitute a
quorum for the transaction of business, and except as otherwise provided by law,
the Articles of Incorporation or these By-laws, the acts of a majority of the
directors present at a duly-called meeting at which a
5
<PAGE>
quorum is present shall be the acts of the board. If a quorum is not present at
any meeting of the Board of Directors, the directors present may adjourn the
meeting from time to time without notice other than announcement at the meeting,
until a quorum is present.
4.7 WITHDRAWAL. If a quorum was present when the meeting convened, the
directors present may continue to do business, taking action by vote of a
majority of a quorum as fixed in Section 4.6 hereof, until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum
as fixed in Section 4.6 hereof or the refusal of any director present to vote.
4.8 ACTION BY CONSENT. Any action that may be taken at a meeting of the
Board, or any committee thereof, may be taken by a consent in writing signed by
all of the directors or by all members of the committee, as the case may be, and
filed with the records of proceedings of the Board or committee.
4.9 MEETINGS BY TELEPHONE OR SIMILAR COMMUNICATION. Members of the Board
may participate at and be present at any meeting of the Board or any committee
thereof by means of conference telephone or similar communications equipment if
all persons participating in such meeting can hear and communicate with each
other.
SECTION 5
COMMITTEES OF THE BOARD
5.1 GENERAL. The Board may designate one or more committees, each
committee to consist of two or more of the directors of the Corporation (and one
or more directors may be named as alternate members to replace any absent or
disqualified regular members), which, to the extent provided by resolution of
the Board or these By-laws, shall have and may exercise the powers of the Board
in the management of the business and affairs of the Corporation, and may have
power to authorize the seal of the Corporation to be affixed to documents, but
no such committee shall have power or authority to amend the Articles of
Incorporation, adopt an agreement of merger, consolidation or share exchange,
adopt or recommend to the shareholders the sale, lease or exchange of all or
substantially all of the Corporation's assets, recommend to the shareholders a
dissolution of the Corporation or a revocation of dissolution, remove directors,
or amend these By-laws; and unless the resolution expressly so provides, no such
committee shall have the power or authority to declare a dividend or authorize
the issuance of stock. Such committee or committees shall have such name or
names as may be stated in these By-laws, or as may be determined, from time to
time, by the Board. Any vacancy occurring in any such committee shall be filled
by the Board, but the President may designate another director to serve on the
committee pending action by the Board. Each such member of a committee shall
hold office during the term designated by the Board.
5.2 COMPENSATION COMMITTEE. The Board shall establish and maintain a
Compensation Committee consisting of two or more directors, each of whom (i)
shall be qualified to the extent appropriate as a "non-employee director" under
Rule 16b-3 of the Securities Exchange Commission
6
<PAGE>
and as an "outside director" under Section 162(m) of the Internal Revenue Code
and (ii) shall meet any further qualifications designated by the Board. The
Compensation Committee shall review and analyze the compensation of the
Corporation's executive officers; review and provide general guidance as to
compensation of the Corporation's other managers; evaluate the performance of
the Corporation's executive officers; administer the Corporation's Long-Term
Incentive Compensation Plan, including grants thereunder; and perform such other
services as may be designated by the Board.
5.3 AUDIT COMMITTEE. The Board shall establish an Audit Committee
consisting of at least two directors, a majority of whom are not officers or
employees of the Corporation or any of its affiliates. The Audit Committee
shall (i) facilitate communication among the Corporation's directors,
management, independent accountants and internal auditing personnel regarding
matters relating to financial accounting, reporting and controls, (ii) assist
the Board of Directors in fulfilling its fiduciary responsibilities as to
accounting policies and reporting practices of the Corporation and all
subsidiaries and the sufficiency of auditing practices with respect thereto by,
among other things, reviewing the scope of audit coverage, including
consideration of the Corporation's accounting practices and procedures and
system of internal accounting controls and reporting to the Board with respect
thereto, (iii) operate as the Board's principal agent in ensuring the
independence of the Corporation's independent accountants, the integrity of
management and the adequacy of disclosure to shareholders, and (iv) perform such
other services as may be designated by the Board.
SECTION 6
REMOVAL OF BOARD MEMBERS
Directors may be removed in accordance with the applicable provisions of
the Articles of Incorporation.
SECTION 7
NOTICES
7.1 FORM OF DELIVERY. Whenever under the provisions of law, the Articles
of Incorporation or these By-laws notice is required to be given to any
shareholder or director, it shall not be construed to mean personal notice
unless otherwise specifically provided in the Articles of Incorporation or these
By-laws, but such notice may be given by mail, addressed to such shareholder or
director at his address as it appears on the records of the Corporation, with
postage thereon prepaid, or in such other manner as may be specified in these
By-laws. Notices given by mail shall be deemed to have been given at the time
they are deposited in the United States mail, and all other notices shall be
deemed to have been give upon receipt.
7
<PAGE>
7.2 WAIVER. Whenever any notice is required to be given by law, the
Articles of Incorporation or these By-laws, a waiver thereof in writing signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent thereto. In addition, notice
shall be deemed to have been given to, or waived by, any shareholder or director
who attends a meeting of shareholders or directors in person, or is represented
at such meeting by proxy, without protesting at the commencement of the meeting
the transaction of any business because the meeting is not lawfully called or
convened.
SECTION 8
OFFICERS
8.1 DESIGNATIONS. The officers of the Corporation shall be elected by the
directors and shall be the President, Secretary and Treasurer. The Board of
Directors may appoint a Chief Executive Officer, a Chief Operating Officer, a
Chief Accounting Officer, one or more Vice Presidents and such other officers as
it shall deem necessary. Officers shall hold their offices for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board. To the extent permitted by law, more than one office
may be held by a single person.
8.2 TERM OF OFFICE. The officers of the Corporation shall hold office at
the pleasure of the Board of Directors. Except as otherwise provided in the
resolution of the Board of Directors electing any officer, each officer shall
hold office until the first meeting of the Board of Directors after the annual
meeting of shareholders next succeeding his or her election, and until his or
her successor is elected and qualified or until his or her earlier resignation
or removal. Any officer may resign at any time upon written notice to the
Board, Chairman of the Board, President or Secretary of the Corporation. Such
resignation shall take effect at the time specified therein and acceptance of
such resignation shall not be necessary to make it effective. The Board may
remove any officer with or without cause at any time. Any such removal shall be
without prejudice to the contractual rights of such officers, if any, with the
Corporation, but the election of an officer shall not in and of itself create
contractual rights. Any vacancy occurring in any office of the Corporation by
death, resignation, removal or otherwise may be filled for the unexpired
position of the term by the Board at any regular or special meeting.
8.3 THE CHAIRMAN OF THE BOARD. The Board may appoint a Chairman of the
Board who shall preside at meetings of the Board of Directors and the
shareholders and perform such other duties as may be designated by the Board of
Directors or these By-laws. The Chairman of the Board shall not, solely by
virtue of such position, be an officer of the Corporation but may be designated
an officer by the Board of Directors.
8.4 THE PRESIDENT. The President shall, unless otherwise provided by the
Board, have general and active responsibility for the management of the business
of the Corporation, shall be the chief executive and chief operating officer of
the Corporation, shall supervise the daily operations
8
<PAGE>
of the business of the Corporation and shall ensure that all orders, policies
and resolutions of the Board are carried out.
8.5 THE VICE PRESIDENTS. The Vice Presidents (if any) shall have such
designations and perform such duties as the President or the Board of Directors
shall prescribe.
8.6 THE SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and all meetings of the shareholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose. He shall
give, or cause to be given, notice of all meetings of the shareholders and
regular and special meetings of the Board, and shall perform such other duties
as may be prescribed by the Board or President. He shall keep in safe custody
the seal of the Corporation, if any, and affix such seal to any instrument
requiring it.
8.7 THE ASSISTANT SECRETARY. The Assistant Secretary shall have the same
powers and duties as the Secretary and shall perform such other duties as may be
prescribed by the Board or President.
8.8 THE TREASURER. The Treasurer shall have the custody of the corporate
funds and shall keep or cause to be kept full and accurate accounts of receipts
and disbursements in books belonging to the Corporation and shall deposit all
monies and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
He shall keep a proper accounting of all receipts and disbursements and shall
disburse the funds of the Corporation only for proper corporate purposes or as
may be ordered by the Board and shall render to the President and the Board at
the regular meetings of the Board, or whenever they may require it, an account
of all his transactions as Treasurer and of the financial condition and results
of operations of the Corporation.
SECTION 9
STOCK
9.1 CERTIFICATES. Every holder of stock in the Corporation shall be
entitled to have a certificate signed by the President or a Vice President and
the Secretary or an Assistant Secretary evidencing the number and class (and
series, if any) of shares owned by him, containing such information as required
by law and bearing the seal of the Corporation. As provided in the Articles of
Incorporation, the Board of Directors may approve the use of dual forms of stock
certificates, one for issuance to U.S. citizen stockholders, and one for
issuance to non-U.S. citizen stockholders. If any stock certificate is manually
signed by a transfer agent or registrar other than the Corporation itself or an
employee of the Corporation, the signature of any such officer may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be an officer, transfer agent or registrar of the Corporation before such
certificate is issued, it may be issued by the Corporation with the same
9
<PAGE>
effect as if such person or entity were an officer, transfer agent or registrar
of the Corporation on the date of issue.
9.2 MISSING CERTIFICATES. The President or any Vice President may direct
a new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the Corporation's receipt of an affidavit of that fact
from the person claiming the certificate of stock to be lost, stolen or
destroyed. As a condition precedent to the issuance of a new certificate or
certificates, the officers of the Corporation shall, unless dispensed with by
the President, require the owner of such lost, stolen or destroyed certificate
or certificates, or his legal representative, to (i) give the Corporation a bond
or (ii) enter into a written indemnity agreement, in each case in an amount
appropriate to indemnify the Corporation against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
9.3 TRANSFERS. The shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives upon
surrender and cancellation of certificates for a like number of shares. Upon
surrender to the Corporation or the transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books, provided that as
a condition precedent to the transfer of shares on the records of the
Corporation, the Corporation may require representations or other proof of the
identity and citizenship of any prospective stockholder and may restrict
transfers to non-U.S. citizens as provided in the Articles of Incorporation.
SECTION 10
DETERMINATION OF SHAREHOLDERS
For the purpose of determining shareholders entitled to notice of and to
vote at a meeting, or to receive a dividend, or to receive or exercise
subscription or other rights, or to participate in a reclassification of stock,
or in order to make a determination of shareholders for any other proper
purpose, the Board of Directors may fix in advance a record date for
determination of shareholders for such purpose, such date to be not more than 60
days and, if fixed for the purpose of determining shareholders entitled to
notice of and to vote at a meeting, not less than 10 days, prior to the date on
which the action requiring the determination of shareholders is to be taken.
SECTION 11
INDEMNIFICATION
11.1 DEFINITIONS. As used in this section the following terms shall have
the meanings set forth below:
10
<PAGE>
(a) "Board" - the Board of Directors of the Corporation.
(b) "Claim" - any threatened, pending or completed claim, action,
suit, or proceeding, whether civil, criminal, administrative or investigative
and whether made judicially or extra-judicially, or any separate issue or matter
therein, as the context requires.
(c) "Determining Body" - (i) those members of the Board who are not
named as parties to the Claim for which indemnification is being sought
("Impartial Directors"), if there are at least three Impartial Directors, (ii) a
committee of at least three Impartial Directors appointed by the Board
(regardless whether the members of the Board of Directors voting on such
appointment are Impartial Directors) or (iii) if there are fewer than three
Impartial Directors or if the Board of Directors or the committee appointed
pursuant to clause (ii) of this paragraph so directs (regardless whether the
members thereof are Impartial Directors), independent legal counsel, which may
be the regular outside counsel of the Corporation.
(4) "Disbursing Officer" - the President of the Corporation or, if the
President is a party to the Claim for which indemnification is being sought, any
officer not a party to such Claim who is designated by the President to be the
Disbursing Officer with respect to indemnification requests related to the
Claim, which designation shall be made promptly after receipt of the initial
request for indemnification with respect to such Claim.
(5) "Expenses" - any expenses or costs, including, without limitation,
attorney's fees, judgments, punitive or exemplary damages, fines and amounts
paid in settlement.
(6) "Indemnitee" - each person who is or was a director or officer of
the Corporation.
11.2 INDEMNITY.
(1) To the extent such Expenses exceed the amounts reimbursed or paid
pursuant to policies of liability insurance maintained by the Corporation, the
Corporation shall indemnify each Indemnitee against any Expenses actually and
reasonably incurred by him (as they are incurred) in connection with any Claim
either against him or as to which he is involved solely as a witness or person
required to give evidence, by reason of his position (i) as a director or
officer of the Corporation, (ii) as a director or officer of any subsidiary of
the Corporation, (iii) as a fiduciary with respect to any employee benefit plan
of the Corporation, or (iv) as a director, officer, partner, employee or agent
of another corporation, partnership, joint venture, trust or other for-profit or
not-for-profit entity or enterprise, if such position is or was held at the
request of the Corporation, whether relating to service in such position before
or after the effective date of this Section, if he (i) is successful in his
defense of the claim on the merits or otherwise or (ii) has been found by the
Determining Body (acting in good faith) to have met the Standard of Conduct
(defined below); provided that (A) the amount otherwise payable by the
Corporation may be reduced by the Determining Body to such amount as it deems
proper if it determines that the Claim involved the
11
<PAGE>
receipt of a personal benefit by Indemnitee, and (B) no indemnification shall be
made in respect of any Claim as to which Indemnitee shall have been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable for willful or intentional misconduct in the performance of his duty
to the Corporation or to have obtained an improper personal benefit, unless, and
only to the extent that, a court shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as
the court deems proper.
(b) For purposes of this Section 11, the Standard of Conduct is met
when the con uct by an Indemnitee with respect to which a Claim is asserted was
conduct that was in good faith and that he reasonably believed to be in, or not
opposed to, the best interest of the Corporation, and, in the case of a criminal
action or proceeding, that he had no reasonable cause to believe was unlawful.
The termination of any Claim by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that Indemnitee did not meet the Standard of Conduct.
(c) Promptly upon becoming aware of the existence of any Claim as to
which he may be indemnified hereunder, Indemnitee shall notify the President of
the Corporation of the Claim and whether he intends to seek indemnification
hereunder. If such notice indicates that Indemnitee does so intend, the
President shall promptly advise the Board thereof and notify the Board that the
establishment of the Determining Body with respect to the Claim will be a matter
presented at the next regularly scheduled meeting of the Board. Such a meeting
is to be held within 90 calendar days of the date of Indemnitee's request. If a
meeting of the Board of Directors is not regularly scheduled within 120 calendar
days of such request, the President shall cause a special meeting of the Board
of Directors to be called within such period in accordance with these By-laws.
After the Determining Body has been established the President shall inform the
Indemnitee thereof and Indemnitee shall immediately provide the Determining Body
with all facts relevant to the Claim known to him. No later than the 45th day
(the "Determination Date") after its receipt of such information, together with
such additional information as the Determining Body may request of Indemnitee,
the Determining Body shall determine, and shall advise Indemnitee of its
determination, whether Indemnitee has met the Standard of Conduct.
(d) During such 45-day period, Indemnitee shall promptly inform the
Determining Body upon his becoming aware of any relevant facts not theretofore
provided by him to the Determining Body, unless the Determining Body has
obtained such facts by other means. The providing of such facts to the
Determining Body shall not begin a new 45-day period.
(e) The Determining Body shall have no authority to revoke a
determination that Indemnitee met the Standard of Conduct unless Indemnitee (i)
submits fraudulent information to the Determining Body at any time during the 45
days prior to the Determination Date or (ii) fails to comply with the provisions
of subsections (c) or (d) hereof, including without limitation Indemnitee's
obligation to submit information or documents relevant to the Claim reasonably
requested by the Determining Body prior to the Determination Date.
12
<PAGE>
(f) In the case of any Claim not involving a proposed, threatened or
pending criminal proceeding,
(i) if Indemnitee has, in the good faith judgment of the Determining
Body, met the Standard of Conduct, the Corporation may, in its sole discretion
after notice to Indemnitee, assume all responsibility for the defense of the
Claim, and, in any event, the Corporation and the Indemnitee each shall keep the
other informed as to the progress of the defense, including prompt disclosure of
any proposals for settlement; provided that if the Corporation is a party to the
Claim and Indemnitee reasonably determines that there is a conflict between the
positions of the Corporation and Indemnitee with respect to the Claim, then
Indemnitee shall be entitled to conduct his defense, with counsel of his choice;
and provided further that Indemnitee shall in any event be entitled at his
expense to employ counsel chosen by him to participate in the defense of the
Claim; and
(ii) the Corporation shall fairly consider any proposals by Indemnitee
for settlement of the Claim. If the Corporation (A) proposes a settlement
acceptable to the person asserting the Claim, or (B) believes a settlement
proposed by the person asserting the Claim should be accepted, it shall inform
Indemnitee of the terms thereof and shall fix a reasonable date by which
Indemnitee shall respond. If Indemnitee agrees to such terms, he shall execute
such documents as shall be necessary to effect the settlement. If he does not
agree he may proceed with the defense of the Claim in any manner he chooses, but
if he is not successful on the merits or otherwise, the Corporation's obligation
to indemnify him for any Expenses incurred following his disagreement shall be
limited to the lesser of (A) the total Expenses incurred by him following his
decision not to agree to such proposed settlement or (B) the amount the
Corporation would have paid pursuant to the terms of the proposed settlement.
If, however, the proposed settlement would impose upon Indemnitee any
requirement to act or refrain from acting that would materially interfere with
the conduct of his affairs, Indemnitee may refuse such settlement and proceed
with the defense of the Claim, if he so desires, at the Corporation's expense
without regard to the limitations imposed by the preceding sentence. In no
event, however, shall the Corporation be obligated to indemnify Indemnitee for
any amount paid in a settlement that the Corporation has not approved.
(g) In the case of a Claim involving a proposed, threatened or pending
criminal proceeding, Indemnitee shall be entitled to conduct the defense of the
claim, and to make all decisions with respect thereto, with counsel of his
choice; provided, however, that the Corporation shall not be obligated to
indemnify Indemnitee for an amount paid in settlement that the Corporation has
not approved.
(h) After notifying the Corporation of the existence of a Claim,
Indemnitee may from time to time request the Corporation to pay the Expenses
(other than judgments, fines, penalties or amounts paid in settlement) that he
incurs in pursuing a defense of the Claim prior to the time that the Determining
Body determines whether the Standard of Conduct has been met. If the Disbursing
Officer believes the amount requested to be reasonable, he shall pay to
Indemnitee the amount requested (regardless of Indemnitee's apparent ability to
repay such amount) upon receipt of an
13
<PAGE>
undertaking by or on behalf of Indemnitee to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Corporation under the circumstances. If the disbursing Officer does not believe
such amount to be reasonable, the Corporation shall pay the amount deemed by him
to be reasonable and Indemnitee may apply directly to the Determining Body for
the remainder of the amount requested.
(i) After the Determining Body has determined that the Standard of
Conduct was met, for so long as and to the extent that the Corporation is
required to indemnify Indemnitee under this Agreement, the provisions of
paragraph (h) shall continue to apply with respect to Expenses incurred after
such time except that (i) no undertaking shall be required of Indemnitee and
(ii) the Disbursing Officer shall pay to Indemnitee such amount of any fines,
penalties or judgments against him which have become final as the Corporation is
obligated to indemnify him.
(j) Any determination by the Corporation with respect to settlements
of a Claim shall be made by the Determining Body.
(k) The Corporation and Indemnitee shall keep confidential, to the
extent permitted by law and their fiduciary obligations, all facts and
determinations provided or made pursuant to or arising out of the operation of
this Section, and the Corporation and Indemnitee shall instruct its or his
agents and employees to do likewise.
11.3 ENFORCEMENT.
(a) The rights provided by this Section shall be enforceable by
Indemnitee in any court of competent jurisdiction.
(b) If Indemnitee seeks a judicial adjudication of his rights under
this Section, Indemnitee shall be entitled to recover from the Corporation, and
shall be indemnified by the Corporation against, any and all Expenses actually
and reasonably incurred by him in connection with such proceeding but only if he
prevails therein. If it shall be determined that Indemnitee is entitled to
receive part but not all of the relief sought, then the Indemnitee shall be
entitled to be reimbursed for all Expenses incurred by him in connection with
such judicial adjudication if the amount to which he is determined to be
entitled exceeds 50% of the amount of his claim. Otherwise, the Expenses
incurred by Indemnitee in connection with such judicial adjudication shall be
appropriately prorated.
(c) In any judicial proceeding described in this subsection, the
Corporation shall bear the burden of proving that Indemnitee is not entitled to
any Expenses sought with respect to any Claim.
11.4 SAVING CLAUSE. If any provision of this Section is determined by a
court having jurisdiction over the matter to require the Corporation to do or
refrain from doing any act that is in violation of applicable law, the court
shall be empowered to modify or reform such provision so that,
14
<PAGE>
as modified or reformed, such provision provides the maximum indemnification
permitted by law, and such provision, as so modified or reformed, and the
balance of this Section, shall be applied in accordance with their terms.
Without limiting the generality of the foregoing, if any portion of this Section
shall be invalidated on any ground, the Corporation shall nevertheless indemnify
an Indemnitee to the full extent permitted by any applicable portion of this
Section that shall not have been invalidated and to the full extent permitted by
law with respect to that portion that has been invalidated.
11.5 NON-EXCLUSIVITY.
(a) The indemnification and advancement of Expenses provided by or
granted pursuant to this Section shall not be deemed exclusive of any other
rights to which Indemnitee is or may become entitled under any statute, article
of incorporation, by-law, authorization of shareholders or directors, agreement,
or otherwise.
(b) It is the intent of the Corporation by this Section to indemnify
and hold harmless Indemnitee to the fullest extent permitted by law, so that if
applicable law would permit the Corporation to provide broader indemnification
rights than are currently permitted, the Corporation shall indemnify and hold
harmless Indemnitee to the fullest extent permitted by applicable law
notwithstanding that the other terms of this Section would provide for lesser
indemnification.
11.6 SUCCESSORS AND ASSIGNS. This Section shall be binding upon the
Corporation, its successors and assigns, and shall inure to the benefit of the
Indemnitee's heirs, personal representatives, and assigns and to the benefit of
the Corporation, its successors and assigns.
11.7 INDEMNIFICATION OF OTHER PERSONS. The Corporation may indemnify any
person not covered by Sections 11.1 through 11.6 to the extent provided in a
resolution of the Board or a separate section of these By-laws.
SECTION 12
ADOPTION AND AMENDMENT OF BY-LAWS
By-laws of the Corporation may be adopted and amended as provided in the
Articles of Incorporation.
15
<PAGE>
SECTION 13
MISCELLANEOUS
13.1 DIVIDENDS. Except as otherwise provided by law, the Articles of
Incorporation or these By-laws, dividends upon the stock of the Corporation may
be declared by the Board of Directors at any regular or special meeting.
Dividends may be paid in cash, property, or shares of stock, subject to the
limitations specified in the Articles of Incorporation.
13.2 VOTING OF SHARES OWNED BY CORPORATION. Unless otherwise directed by
the Board, any shares of capital stock issued by a wholly-owned subsidiary of
the Corporation may be voted by the President of the Corporation, or by any
person authorized to do so by the President, at any shareholders' meeting of the
subsidiary (or in connection with any written consent in lieu thereof).
13.3 FISCAL YEAR. The Board of Directors may adopt for and on behalf of
the Corporation a fiscal or a calendar year.
13.4 SEAL. The Board of Directors may adopt a corporate seal, which shall
have inscribed thereon the name of the Corporation. The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise. Failure to affix the seal shall not, however, affect the validity of
any instrument.
13.5 GENDER. All pronouns and variations thereof used in these By-laws
shall be deemed to refer to the masculine, feminine or neuter gender, singular
or plural, as the identity of the person, persons, entity or entities referred
to may require.
13.6 CONTROL SHARE ACQUISITIONS. The provisions of Sections 135 through
140.2 of the Louisiana Business Corporation Law (La.R.S. 12:135 through 140.2)
do not apply to control share acquisitions of shares of the Corporation.
16
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by the Registration Statement (Form S-8 No.
33-46155) pertaining to the Long-Term Incentive Plan of our report dated January
26, 1999, with respect to the consolidated financial statements of Gulf Island
Fabrication, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
ERNST & YOUNG LLP
New Orleans, Louisiana
March 19, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-46155) of Gulf Island Fabrication, Inc. of our
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,
appearing in Exhibit 23.3 in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
March 22, 1999
<PAGE>
Exhibit 23.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Gulf Island Fabrication, Inc.
In our opinion, the accompanying statements of income, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the results of operations and cash flows of Gulf Island Fabrication, Inc. (the
"Company") for the year ended December 31, 1996, in conformity with generally
accepted accounting principles. 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. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Gulf Island Fabrication, Inc. and its
subsidiaries for any period subsequent to December 31, 1996.
PRICE WATERHOUSE LLP
New Orleans, Louisiana
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,808
<SECURITIES> 0
<RECEIVABLES> 34,682
<ALLOWANCES> 0
<INVENTORY> 1,137
<CURRENT-ASSETS> 47,934
<PP&E> 66,851
<DEPRECIATION> 21,433
<TOTAL-ASSETS> 97,740
<CURRENT-LIABILITIES> 22,695
<BONDS> 3,000
0
0
<COMMON> 4,162
<OTHER-SE> 65,568
<TOTAL-LIABILITY-AND-EQUITY> 97,740
<SALES> 192,372
<TOTAL-REVENUES> 192,372
<CGS> 156,326
<TOTAL-COSTS> 162,349
<OTHER-EXPENSES> (261)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 30,191
<INCOME-TAX> 11,359
<INCOME-CONTINUING> 18,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,832
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.61
</TABLE>
<PAGE>
Exhibit 99.1
NEWS RELEASE
For further information contact:
Kerry J. Chauvin Joseph "Duke" Gallagher
Chief Executive Officer Chief Financial Officer
(504) 872-2100 (504) 872-2100
- --------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE
THURSDAY, FEBRUARY 4, 1999
GULF ISLAND FABRICATION, INC.
REPORTS FOURTH QUARTER EARNINGS
Houma, LA - Gulf Island Fabrication, Inc. (NASDAQ: GIFI) today reported
pro forma net income of $4.1 million ($.35 diluted EPS) on revenue of $43.0
million for its fourth quarter ended December 31, 1998, compared to pro forma
net income of $3.0 million ($.25 diluted EPS) on revenue of $34.8 million for
the fourth quarter ended December 31, 1997. Pro forma net income for the twelve
months ended December 31, 1998 was $18.8 million ($1.61 diluted EPS) on revenue
of $192.4 million, compared to pro forma net income of $12.2 million ($1.14
diluted EPS) on revenue of $136.4 million for the twelve months ended December
31, 1997.
Pro forma net income gives effect to federal and state income taxes as if
the company had been a C Corporation for tax purposes during all the periods
presented. Pro forma net income excludes the 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.
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 was distributed on
October 28, 1997 to shareholders of record on October 21, 1997. All share and
per share data presented reflects the stock split. At December 31, 1998, the
company had a revenue backlog of $67.3 million and a labor backlog of
approximately 1.1 million man-hours remaining to work.
Gulf Island Fabrication, Inc., based in Houma, Louisiana, is a leading
fabricator of offshore drilling and production platforms and other specialized
structures used in the development and production of offshore oil and gas
reserves. The Company also offers offshore interconnect pipe hook-up, inshore
marine construction, and steel warehousing and sales. With the acquisition of
Southport, Inc., effective January 1, 1998, the Company also provides the
fabrication of living quarters for offshore platforms for the oil and gas
industry.
<PAGE>
Exhibit 99.1.a
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
-------------------- ---------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue $42,951 $34,799 $192,372 $136,355
Cost of revenue 34,813 28,751 156,326 112,033
------- ------- -------- --------
Gross profit 8,138 6,048 36,046 24,322
General and administrative expenses 1,491 1,408 6,023 4,670
------- ------- -------- --------
Operating income 6,647 4,640 30,023 19,652
Other expense (income):
Interest expense 21 24 93 348
Interest income (82) (127) (261) (239)
------- ------- -------- --------
(61) (103) (168) 109
------- ------- -------- --------
Income before income taxes 6,708 4,743 30,191 19,543
Income taxes 2,572 1,763 11,359 5,973
Cumulative deferred tax provision(1) - - - 1,144
------- ------- -------- --------
Net income $ 4,136 $ 2,980 $ 18,832 $ 12,426
======= ======= ======== ========
Pro forma data: (2)
Income before income taxes $ 6,708 $ 4,743 $ 30,191 $ 19,543
Income taxes 2,572 1,763 11,359 5,973
Pro forma income taxes
related to operations as S Corporation - - - 1,379
------- ------- -------- --------
Pro forma net income $ 4,136 $ 2,980 $ 18,832 $ 12,191
======= ======= ======== ========
Pro forma per share data:
Pro forma basic earnings per share (3) $0.36 $0.26 $1.62 $1.15
======= ======= ======== ========
Pro forma diluted earnings per share (3) (4) $0.35 $0.25 $1.61 $1.14
======= ======= ======== ========
Weighted-average shares (3) 11,638 11,600 11,630 10,633
======= ======= ======== ========
Adjusted weighted-average shares (3) (4) 11,677 11,739 11,703 10,700
======= ======= ======== ========
Depreciation and amortization
included in expense above $ 1,082 $ 828 $ 4,172 $ 2,932
======= ======= ======== ========
</TABLE>
(1) Cumulative deferred tax provision charged upon election on April 4, 1997 to
convert from an S Corporation status to a C Corporation Status.
(2) Pro forma information gives effect to federal and state income taxes as if
the Company had been a C Corporation for tax purposes during all periods
presented.
(3) Includes the initial public offering completed on April 9, 1997 and
retroactively restates the two-for-one stock split effective October 28,
1997.
(4) The calculation of diluted earnings per share assumes that all stock
options are exercised and that the assumed proceeds are used to purchase
shares at the average market price for the period.
