Exhibit 99.2
REPORT OF INDEPENDENT AUDITORS
The Partners
Gulf Marine Fabricators
We have audited the accompanying balance sheets of Gulf Marine Fabricators (Partnership) as of December 31, 2005 and 2004, and the related statements of operations and changes in partners’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gulf Marine Fabricators at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New Orleans, Louisiana
April 14, 2006
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GULF MARINE FABRICATORS
BALANCE SHEETS
(in thousands)
| December 31, | ||||||
| 2005 | 2004 | |||||
| ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 665 | $ | 509 | ||
Contracts receivable | 3,414 | 8,900 | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 1,445 | 2,781 | ||||
Prepaid expenses and other | 1,123 | 1,197 | ||||
Receivable from affiliates | 11,374 | 11,092 | ||||
Inventory | 612 | 455 | ||||
Total current assets | 18,633 | 24,934 | ||||
Property, plant and equipment, net | 27,678 | 32,588 | ||||
Total assets | $ | 46,311 | $ | 57,522 | ||
| LIABILITIES AND PARTNERS’ EQUITY | ||||||
Current liabilities: | ||||||
Bank overdrafts | $ | 4,797 | $ | 2,022 | ||
Accounts payable | 664 | 669 | ||||
Accounts payable - affiliates | 1,941 | 2,993 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 1,042 | 2,701 | ||||
Accrued expenses | 2,269 | 3,585 | ||||
Other liabilities | 19,090 | 18,576 | ||||
Total current liabilities | 29,803 | 30,546 | ||||
Partners’ equity | 16,508 | 26,976 | ||||
Total liabilities and partners’ equity | $ | 46,311 | $ | 57,522 | ||
The accompanying notes are an integral part of these statements
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GULF MARINE FABRICATORS
STATEMENTS OF OPERATIONS AND CHANGES IN PARTNERS’ EQUITY
(in thousands)
| Years Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Revenue | $ | 41,558 | $ | 225,269 | $ | 264,461 | ||||||
Cost of revenue | 47,450 | 221,180 | 268,531 | |||||||||
Gross profit (loss) | (5,892 | ) | 4,089 | (4,070 | ) | |||||||
General and administrative expenses | 5,006 | 7,281 | 5,654 | |||||||||
Operating income (loss) | (10,898 | ) | (3,192 | ) | (9,724 | ) | ||||||
Other income (expense): | ||||||||||||
Interest expense | (415 | ) | (785 | ) | (699 | ) | ||||||
Interest income | 12 | 4 | — | |||||||||
Gain on disposition of equipment | 833 | 7,754 | — | |||||||||
| 430 | 6,973 | (699 | ) | |||||||||
Net income (loss) | $ | (10,468 | ) | $ | 3,781 | $ | (10,423 | ) | ||||
Partners’ equity at beginning of year | 26,976 | 23,195 | 33,618 | |||||||||
Partners’ equity at end of year | $ | 16,508 | $ | 26,976 | $ | 23,195 | ||||||
The accompanying notes are an integral part of these statements
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GULF MARINE FABRICATORS
STATEMENT OF CASH FLOWS
(in thousands)
| Years Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Operating activities: | ||||||||||||
Net income (loss) | $ | (10,468 | ) | $ | 3,781 | $ | (10,423 | ) | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 5,034 | 7,417 | 6,336 | |||||||||
Gain on sale of equipment | (833 | ) | (7,754 | ) | (37 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Contracts receivable, net | 4,454 | 12,333 | (13,884 | ) | ||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 1,336 | 8,584 | (535 | ) | ||||||||
Prepaid expenses, inventory and other assets | (83 | ) | 936 | 243 | ||||||||
Accounts payable | (1,057 | ) | (4,741 | ) | 3,362 | |||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | (1,659 | ) | (20,315 | ) | 13,993 | |||||||
Other liabilities | 514 | 15,936 | 2,640 | |||||||||
Accrued expenses | (1,316 | ) | (8,444 | ) | 6,309 | |||||||
Net cash provided by (used in) operating activities | (4,078 | ) | 7,733 | 8,004 | ||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | (130 | ) | (5,963 | ) | (2,594 | ) | ||||||
Proceeds from the disposition of equipment | 1,589 | 7,214 | 1,609 | |||||||||
Net cash provided by (used in) investing activities | 1,459 | 1,251 | (985 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Bank overdrafts | 2,775 | (9,056 | ) | (6,787 | ) | |||||||
Net cash provided by (used in) financing activities | 2,775 | (9,056 | ) | (6,787 | ) | |||||||
Net increase (decrease) in cash | 156 | (72 | ) | 232 | ||||||||
Cash and cash equivalents at beginning of period | 509 | 581 | 349 | |||||||||
Cash and cash equivalents at end of period | $ | 665 | $ | 509 | $ | 581 | ||||||
Supplemental cash flow information: | ||||||||||||
Interest paid | $ | 415 | $ | 785 | $ | 699 | ||||||
The accompanying notes are an integral part of these statements
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GULF MARINE FABRICATORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Gulf Marine Fabricators (“the Partnership”), is an indirect wholly-owned partnership of Technip Coflexip USA Holding Inc. and is engaged in the fabrication of offshore oil and gas production platforms for oil and gas industry companies. The Partnership’s principal markets are concentrated in the offshore regions and along the coast of the Gulf of Mexico.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Cash Equivalents
The Partnership considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The principal customers of the Partnership are the major and large independent oil and gas companies. This concentration of customers may impact the Partnership’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 Partnership’s management believes that the portfolio of receivables is diversified and that such diversification minimizes any potential credit risk. Receivables are generally not collateralized. In the normal course of business, the Partnership extends credit to its customers on a short-term basis. Because the Partnership’s principal customers are major oil and natural gas exploration, development and production companies, credit risks associated with its customers are considered minimal. However, the Partnership routinely reviews its accounts receivable balances and makes adequate provisions for probable doubtful accounts.
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 are 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 20 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.
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GULF MARINE FABRICATORS
NOTES TO FINANCIAL STATEMENTS – (Continued)
Long-Lived Assets
The Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. The impairment loss is determined by comparing the fair value of the assets to their carrying amounts and recording the excess of the carrying amounts of the assets over their fair value. Fair value is determined based on discounted cash flows or appraised values, as appropriate.
Revenue Recognition
Revenue from fixed-price 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. 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 the amount can be reliably estimated and collection is probable. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Income Taxes
Because the entity is a partnership, federal income taxes are the responsibility of the partnership’s partners. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements.
Related Party Transactions
The Partnership is owned by Technip Coflexip Holdings USA, and has several related party transactions between it and its parent during the year. The parent provides various services to the Partnership during the year such as financing, insurance benefits, marketing, project management accounting and executive management services and thus the Partnership reimburses the parent for its share of cost related to those services. The Partnership pays management fees to the ultimate French parent based on 1.2% of the external sales of the Partnership.
2. CONTRACTS RECEIVABLE
Amounts due on contracts as of December 31 were as follows (in thousands):
| 2005 | 2004 | |||||
Completed contracts | $ | 1,185 | $ | 1,357 | ||
Contracts in progress: | ||||||
Current | 2,229 | 7,543 | ||||
Retainage due within one year | — | — | ||||
| 3,414 | 8,900 | |||||
Less allowance for doubtful accounts | — | — | ||||
| $ | 3,414 | $ | 8,900 | |||
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GULF MARINE FABRICATORS
NOTES TO FINANCIAL STATEMENTS – (Continued)
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts as of December 31 consisted of the following (in thousands):
| 2005 | 2004 | |||||||
Costs incurred on uncompleted contracts | $ | 22,892 | $ | 201,778 | ||||
Estimated profit earned to date | 1,551 | 19,983 | ||||||
Revenue recognized | 24,443 | 221,761 | ||||||
Less billings to date | (24,040 | ) | (221,681 | ) | ||||
| $ | 403 | $ | 80 | |||||
The above amounts are included in the accompanying balance sheets at December 31, under the following captions (in thousands):
| 2005 | 2004 | |||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 1,445 | $ | 2,781 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | (1,042 | ) | (2,701 | ) | ||||
| $ | 403 | $ | 80 | |||||
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Useful Life | 2005 | 2004 | |||||||
Land | — | $ | 5,851 | $ | 5,851 | ||||
Buildings | 7-20 years | 29,061 | 29,061 | ||||||
Machinery and equipment | 3-8 years | 33,905 | 36,413 | ||||||
Office equipment | 5 years | 544 | 544 | ||||||
IT equipment | 3 years | 2,319 | 2,319 | ||||||
| 71,680 | 74,188 | ||||||||
Less accumulated depreciation | (44,002) | (41,600 | ) | ||||||
| $ | 27,678 | $ | 32,588 | ||||||
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GULF MARINE FABRICATORS
NOTES TO FINANCIAL STATEMENTS – (Continued)
5. OTHER LIABILITIES
In October 2004, the Partnership completed certain fabrication work as a subcontractor for Technip Offshore, Inc., its’ parent company. The Partnership and its parent are involved in certain disputes with the customer related to this project. The Partnership believes the customer is responsible for certain additional costs related to the project, while the customer disputes certain billings and has asserted claims for liquidated damages. At December 31, 2005 and 2004, receivables from affiliates included approximately $10.5 million of claims receivable related to this dispute and other liabilities included approximately $17.9 million for the customer’s assessment of liquidated damages and disputed receivables.
The parties are currently negotiating settlement of this matter. The Partnership does not believe that ultimate resolution of disputed items will have a material adverse impact on its financial position or operating results.
| December 31, | ||||||
| 2005 | 2004 | |||||
Contingency accruals on completed contracts | $ | 11,912 | $ | 12,051 | ||
Reserve for contract disputes | 6,525 | 6,525 | ||||
Accruals for operational expenses | 653 | — | ||||
| $ | 19,090 | $ | 18,576 | |||
6. SALES TO MAJOR CUSTOMERS
The Partnership’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 for the years ended December 31 are summarized as follows (in thousands):
| 2005 | 2004 | 2003 | |||||||
Chevron | $ | 11,593 | $ | — | $ | — | |||
Daewoo | 4,288 | 43,868 | — | ||||||
British Petroleum | — | 54,782 | 106,742 | ||||||
National Oilwell | 6,416 | — | — | ||||||
Modec | 5,009 | — | — | ||||||
Conoco | — | 55,723 | 38,005 | ||||||
BHP | — | 32,143 | — | ||||||
Kerr McGee | — | 25,250 | 46,539 | ||||||
7. RELATED PARTY TRANSACTIONS
Amounts included in the consolidated statements of operations with respect to transactions with affiliates are set forth below (in thousands):
| 2005 | 2004 | 2003 | |||||||
Sales | $ | 8,644 | $ | 83,143 | $ | 71,506 | |||
Insurance allocated from parent | 1,603 | 1,901 | 2,860 | ||||||
Purchases, salaries, and services | 3,004 | 4,461 | 3,447 | ||||||
Gain on the sale of equipment | 750 | — | — | ||||||
Interest expense | — | 4 | — | ||||||
Guaranty fees paid | 225 | 303 | 397 | ||||||
Management fees | 308 | 1,706 | 1,135 | ||||||
Accounts payable and accounts receivable from affiliates outstanding at December 31, 2005 and 2004 represent transactions in the normal course of business.
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GULF MARINE FABRICATORS
NOTES TO FINANCIAL STATEMENTS – (Continued)
8. COMMITMENTS AND CONTINGENCIES
The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
At December 31, 2005, the Company had noncancellable operating lease commitments for tug and barge services. Lease expense for the years ended December 31, 2005, 2004 and 2003 was $836,000, $836,000 and $540,000, respectively. Future minimum lease payments under this lease are as follows (in thousands):
Year ending December 31 | Minimum Lease Payments | ||
2006 | $ | 836 | |
2007 | 836 | ||
2008 | 836 | ||
2009 | 836 | ||
2010 | 836 | ||
| $4,180 | |||
9. RETIREMENT PLAN
The Partnership has a defined contribution retirement plan for all employees that are qualified under Section 401(k) of the Internal Revenue Service Code. Contributions to the Retirement Plan by the Partnership are based on participants’ contributions with additional year-end contributions by the Parent based on profits of the Partnership. For the years ended December 31, 2003, 2004 and 2005, the parent did not make any contributions to the Plan.
10. SUBSEQUENT EVENTS
Effective February 1, 2006, the Company’s facilities, machinery and equipment were acquired by a wholly-owned subsidiary of Gulf Island Fabrication, Inc. (“GIFI”). The aggregate consideration for the acquisition paid at the closing consisted of (i) $40 million in cash (subject to certain purchase price adjustments), (ii) 1,589,067 shares of GIF’s common stock, and (iii) assumption of certain liabilities. GIFI assumed all of the Company’s uncompleted fabrication contracts, as of the date of the closing.
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