================================================================================
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, 2004
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 1-11953
WILLBROS GROUP, INC.
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 98-0160660
(Jurisdiction of incorporation) (I.R.S. Employer Identification Number)
PLAZA 2000 BUILDING
50TH STREET, 8TH FLOOR
P.O. BOX 0816-01098
PANAMA, REPUBLIC OF PANAMA
TELEPHONE NO.: + 50-7-213-0947
(Address, including zip code, and telephone number, including
area code, of principal executive offices of registrant)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $.05 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 No X
----- -----
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 the 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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
----- -----
Indicate by check mark whether the Registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes No X
----- -----
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of June 30, 2004, the last business day of
the Registrant's most recently completed second fiscal quarter, was
$318,254,484.
As of March 21, 2005, 21,634,840 shares of the Registrant's Common Stock
were outstanding.
Documents incorporated by reference: None
================================================================================
WILLBROS GROUP, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
Page
----
PART I
Items 1.
and 2. Business and Properties....................................... 5
Item 3. Legal Proceedings............................................. 36
Item 4. Submission of Matters to a Vote of Security Holders........... 37
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities............. 38
Item 6. Selected Financial Data....................................... 39
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 56
Item 8. Financial Statements and Supplementary Data................... 57
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 97
Item 9A. Controls and Procedures....................................... 97
Item 9B. Other Information............................................. 99
PART III
Item 10. Directors and Executive Officers of the Registrant............ 100
Item 11. Executive Compensation........................................ 104
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters......... 108
Item 13. Certain Relationships and Related Transactions................ 110
Item 14. Principal Accountant Fees and Services........................ 111
PART IV
Item 15. Exhibits and Financial Statement Schedules.................... 112
Signatures .............................................................. 115
2
FORWARD-LOOKING STATEMENTS
THIS FORM 10-K INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACTS, INCLUDED IN THIS FORM 10-K THAT ADDRESS
ACTIVITIES, EVENTS OR DEVELOPMENTS WHICH WE EXPECT OR ANTICIPATE WILL OR MAY
OCCUR IN THE FUTURE, INCLUDING SUCH THINGS AS FUTURE CAPITAL EXPENDITURES
(INCLUDING THE AMOUNT AND NATURE THEREOF), OIL, GAS, GAS LIQUIDS AND POWER
PRICES, DEMAND FOR OUR SERVICES, THE AMOUNT AND NATURE OF FUTURE INVESTMENTS BY
GOVERNMENTS, EXPANSION AND OTHER DEVELOPMENT TRENDS OF THE OIL, GAS AND POWER
INDUSTRIES, BUSINESS STRATEGY, EXPANSION AND GROWTH OF OUR BUSINESS AND
OPERATIONS, THE OUTCOME OF GOVERNMENT INVESTIGATIONS AND LEGAL PROCEEDINGS AND
OTHER SUCH MATTERS ARE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED ON CERTAIN ASSUMPTIONS AND ANALYSES WE MADE IN LIGHT OF OUR
EXPERIENCE AND OUR PERCEPTION OF HISTORICAL TRENDS, CURRENT CONDITIONS AND
EXPECTED FUTURE DEVELOPMENTS AS WELL AS OTHER FACTORS WE BELIEVE ARE APPROPRIATE
UNDER THE CIRCUMSTANCES. HOWEVER, WHETHER ACTUAL RESULTS AND DEVELOPMENTS WILL
CONFORM TO OUR EXPECTATIONS AND PREDICTIONS IS SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES. AS A RESULT, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM OUR
EXPECTATIONS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE
CONTEMPLATED BY OUR FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
THE FOLLOWING:
- THE RESULTS OF GOVERNMENT INVESTIGATIONS INTO THE ACTIONS OF THE
COMPANY AND OF CURRENT AND FORMER EMPLOYEES OF THE COMPANY, INCLUDING
J. KENNETH TILLERY, THE FORMER PRESIDENT OF WILLBROS INTERNATIONAL,
INC.;
- THE IMPOSITION OF FINES, PENALTIES OR OTHER SANCTIONS THAT MIGHT BE
IMPOSED AS A RESULT OF GOVERNMENT INVESTIGATIONS;
- DIFFICULTIES WE MAY ENCOUNTER IN OBTAINING NEW BUSINESS, RETAINING
EXISTING BUSINESS AND/OR COLLECTING RECEIVABLES IN NIGERIA AND
ELSEWHERE BECAUSE OF THE SEVERANCE OF LONG-TERM RELATIONSHIPS WITH
CONSULTANTS AND OTHER INDIVIDUALS;
- ADVERSE RESULTS THAT WE COULD SUFFER IN CIVIL LITIGATION INVOLVING OR
ARISING FROM THE ACTIONS OF CURRENT AND FORMER EMPLOYEES AND OFFICERS
OF THE COMPANY;
- THE ASSERTION BY PARTIES TO CONTRACTS WITH US THAT THE ACTIONS OF
CURRENT AND FORMER EMPLOYEES OF THE COMPANY WERE IMPROPER WHICH
CONSTITUTES A BREACH OF, OR OTHERWISE GIVE RISE TO CLAIMS UNDER,
CONTRACTS TO WHICH WE ARE A PARTY;
- DETERMINATION THAT THE ACTIONS OF CURRENT AND FORMER EMPLOYEES OF THE
COMPANY CAUSED US TO BREACH OUR CREDIT AGREEMENTS OR DEBT INSTRUMENTS,
WHICH COULD RESULT IN THE LACK OF ACCESS TO OUR CREDIT FACILITIES AND
THE REQUIREMENT TO CASH COLLATERALIZE OUR EXISTING LETTERS OF CREDIT;
- THE COMMENCEMENT BY FOREIGN GOVERNMENTAL AUTHORITIES OF INVESTIGATIONS
INTO THE ACTIONS OF CURRENT AND FORMER EMPLOYEES OF THE COMPANY, AND
THE DETERMINATION THAT SUCH ACTIONS CONSTITUTED VIOLATIONS OF FOREIGN
LAW;
- THE DISHONESTY OF EMPLOYEES AND/OR OTHER REPRESENTATIVES OR THEIR
REFUSAL TO ABIDE BY APPLICABLE LAWS AND THE COMPANY'S ESTABLISHED
POLICIES AND RULES;
- CURTAILMENT OF CAPITAL EXPENDITURES IN THE OIL, GAS, AND POWER
INDUSTRIES;
- POLITICAL OR SOCIAL CIRCUMSTANCES IMPEDING THE PROGRESS OF OUR WORK;
- FAILURE TO OBTAIN THE TIMELY AWARD OF ONE OR MORE PROJECTS;
- CANCELLATION OF PROJECTS;
- INCLEMENT WEATHER;
- PROJECT COST OVERRUNS, UNFORESEEN SCHEDULE DELAYS, AND THE APPLICATION
OF LIQUIDATED DAMAGES;
- FAILING TO REALIZE COST RECOVERIES FROM PROJECTS COMPLETED OR IN
PROGRESS WITHIN A REASONABLE PERIOD AFTER COMPLETION OF THE RELEVANT
PROJECT;
- INABILITY TO IDENTIFY AND ACQUIRE SUITABLE ACQUISITION TARGETS ON
REASONABLE TERMS;
- INABILITY TO OBTAIN ADEQUATE FINANCING;
- LOSS OF THE SERVICES OF KEY MANAGEMENT PERSONNEL;
- THE DEMAND FOR ENERGY MODERATING OR DIMINISHING;
- DOWNTURNS IN GENERAL ECONOMIC, MARKET OR BUSINESS CONDITIONS IN OUR
TARGET MARKETS;
- CHANGES IN THE EFFECTIVE TAX RATE IN COUNTRIES WHERE OUR WORK WILL BE
PERFORMED;
- CHANGES IN APPLICABLE LAWS OR REGULATIONS;
3
- CHANGES IN THE SCOPE OF OUR EXPECTED INSURANCE COVERAGE;
- INABILITY TO MANAGE INSURABLE RISK AT AN AFFORDABLE COST;
- THE OCCURRENCE OF THE RISK FACTORS LISTED ELSEWHERE IN THIS FORM 10-K
AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
FROM TIME TO TIME; AND
- OTHER FACTORS, MOST OF WHICH ARE BEYOND OUR CONTROL.
CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FORM 10-K
ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE THAT
THE ACTUAL RESULTS OR DEVELOPMENTS WE ANTICIPATE WILL BE REALIZED OR, EVEN IF
SUBSTANTIALLY REALIZED, THAT THEY WILL HAVE THE CONSEQUENCES FOR, OR EFFECTS ON,
OUR BUSINESS OR OPERATIONS THAT WE ANTICIPATE TODAY. WE ASSUME NO OBLIGATION TO
UPDATE PUBLICLY ANY SUCH FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE. FOR A MORE COMPLETE DESCRIPTION OF THE
CIRCUMSTANCES SURROUNDING THE ACTIONS OF THE CURRENT AND FORMER EMPLOYEES OF THE
COMPANY, SEE THE RISK FACTORS INCLUDED IN THIS FORM 10-K BEGINNING ON PAGE 27.
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS FORM 10-K TO
"WILLBROS", THE "COMPANY", "WE", "US" AND "OUR" REFER TO WILLBROS GROUP, INC.,
ITS CONSOLIDATED SUBSIDIARIES AND THEIR PREDECESSORS.
4
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
WEBSITE ACCESS TO REPORTS
Our public internet site is http://www.willbros.com/. We make available
free of charge through our internet site, via a link to Edgar Online, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
In addition, we currently make available on http://www.willbros.com/ our
annual reports to stockholders. You will need to have the Adobe Acrobat Reader
software on your computer to view these documents, which are in the .PDF format.
If you do not have Adobe Acrobat, a link to Adobe Systems Incorporated's
internet site, from which you can download the software, is provided.
RESTATEMENT
As a result of an internal investigation, which is more fully described in
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Overview - Restatement" of this Form 10-K, the Company's
financial results for the years ended December 31, 2000, 2001, 2002 and 2003,
and the first three quarters of 2004 have been restated. All financial results
presented in this report for these periods reflect the restatement.
GENERAL
We are an independent international contractor serving the oil, gas and
power industries and government entities worldwide. We currently operate our
business in two segments: the United States and Canada (which we refer to as
"United States & Canada") and all other countries outside of the United States &
Canada (which we refer to as "International"). We provide construction and
engineering services to industry and governmental entities worldwide,
specializing in pipelines and associated facilities for onshore, coastal and
offshore locations. We are also actively involved in asset development,
ownership and operations as an extension of our construction and engineering
services. We place particular emphasis on projects in countries where we believe
our experience gives us a competitive advantage, including several developing
countries.
Our construction and engineering services include the building or
fabrication and installation or replacement of:
- major pipelines;
- gathering systems;
- flow stations;
- pump stations;
- gas compressor stations;
- gas processing facilities;
- oil and gas production facilities;
- subsea facilities;
- offshore jackets and decks;
- modular processing facilities;
- piers;
- pressure vessels;
- dock facilities; and
- bridges.
Construction services are provided utilizing a large fleet of company-owned
and leased equipment that includes marine vessels, barges, dredges, pipelaying
equipment, heavy construction equipment, transportation equipment and camp
equipment. Our equipment fleet is supported by an extensive inventory of spare
parts and tools, which we strategically position and maintain throughout the
world to maximize availability and minimize cost. We also own and operate
fabrication facilities in Canada, Nigeria, the United States, and Venezuela.
Through our construction resources, we also provide specialty services,
including
5
asset development and operations. Our asset development and operations (also
referred to as "facility operations") include assets developed under "Build, Own
and Operate" contracts, such as the fueling facilities operated for the Defense
Energy Support Center, an agency of the U.S. government, a gas processing plant
owned by us in the Opal, Wyoming area, and a water injection facility in
Venezuela.
Our engineering services include:
- feasibility studies;
- conceptual and detailed engineering services;
- field services, material procurement; and
- overall project management.
We provide our engineering services through engineering resources located
in Salt Lake City (Murray), Utah, Tulsa, Oklahoma, and Houston, Texas.
We trace our roots to the construction business of Williams Brothers
Company, founded in 1908. Through successors to that business, we have completed
many landmark projects around the world, including the "Big Inch" and "Little
Big Inch" War Emergency Pipelines (1942-44), the Mid-America Pipeline (1960),
the TransNiger Pipeline (1962-64), the Trans-Ecuadorian Pipeline (1970-72), the
northernmost portion of the Trans-Alaska Pipeline System (1974-76), the
All-American Pipeline System (1984-86), Colombia's Alto Magdalena Pipeline
System (1989-90), a portion of the Pacific Gas Transmission System expansion
(1992-93), and through a joint venture led by a subsidiary of ours, the
Chad-Cameroon Pipeline (2000-2003).
Over the years, we have been employed by more than 400 clients to carry out
work in 55 countries. Within the past ten years, we have worked in Africa, Asia,
Australia, the Middle East, North America and South America. We have
historically had a steady base of operations in the United States, Canada,
Nigeria, Oman, and Venezuela, which has been enhanced by major projects in
Australia, Bolivia, Cameroon, Chad, Ecuador, Egypt, Gabon, Indonesia, Ivory
Coast, Kuwait, Mexico and Pakistan.
Private sector clients have historically accounted for the majority of our
revenue. Government entities and agencies have accounted for the remainder. Our
top ten clients were responsible for 64 percent of our total revenue in 2004 (75
percent in 2003 and 2002). In 2004, operating units of Royal Dutch/Shell Group
and Halliburton accounted for 21 percent and 11 percent of our total revenue,
respectively.
CORPORATE STRUCTURE
We are incorporated in the Republic of Panama and maintain our headquarters
at Plaza 2000 Building, 50th Street, 8th Floor, P.O. Box 0816-01098, Panama,
Republic of Panama; our telephone number is +50-7-213-0947. Panama's General
Corporation Law is substantially modeled on the New York and Delaware corporate
laws as they existed in 1932. Panama does not tax income derived from activities
conducted outside Panama. The principal subsidiaries of Willbros Group, Inc.
are:
- Willbros International, Inc.; and
- Willbros USA, Inc.
At the beginning of 2004, 100 percent ownership of the Willbros RPI, Inc.
and Willbros Mt. West, Inc. subsidiaries was transferred to Willbros USA, Inc.
Willbros USA, Inc. now owns all United States subsidiaries of the Company.
All significant International operations are carried out by material direct
or indirect subsidiaries of Willbros International, Inc., which is also a
Panamanian corporation. Such material subsidiaries include:
- Willbros Middle East, Inc.;
- Willbros West Africa, Inc.;
- Willbros (Nigeria) Limited;
- Willbros (Offshore) Nigeria Limited;
- Constructora CAMSA, C.A.;
- The Oman Construction Company LLC; and
- Willbros Transandina, S.A.
6
All significant operations in the United States & Canada are carried out by
material direct or indirect subsidiaries of Willbros Group, Inc. Such material
subsidiaries include:
- Willbros RPI, Inc.;
- Willbros MSI Canada Inc.;
- Willbros Mt. West, Inc.;
- Willbros Engineers, Inc.;
- Willbros Project Services, Inc.; and
- Willbros Operating Services, Inc.
The Willbros corporate structure is designed to comply with jurisdictional
and registration requirements associated with work bid and performed and to
reduce worldwide taxation of operating income. Additional subsidiaries may be
formed in specific work countries where necessary or useful for compliance with
local laws or tax objectives. Administrative services are provided by Willbros
USA, Inc., whose administrative headquarters are located at 4400 Post Oak
Parkway, Suite 1000, Houston, Texas 77027, telephone number (713) 403-8000.
CURRENT MARKET CONDITIONS
We believe the fundamentals supporting the demand for engineering and
construction services for the energy industry will continue to be strong for the
next two to five years. We expect demand in the International market, which has
led the improvement in backlog in 2004, to continue to be strong. We also expect
an improvement in our market position in the United States & Canada market to
increase our level of activity in that market in 2005 and 2006. The following
factors have caused the short-term outlook for our business to strengthen:
- Increased demand in North America for natural gas has resulted in the
citing, permitting and approval of at least three new liquefied
natural gas ("LNG") regasification terminals in addition to multiple
proposals for additional facilities, principally: regasification
terminals and connecting pipelines in North America.
- Increased demand for natural gas worldwide has also resulted in new
LNG liquefaction facilities and expansion of existing facilities to
meet the higher demand levels. These new facilities require additional
pipeline capacity to transport the feed gas for liquefaction.
- Improved global economic conditions have increased demand for oil,
gas, and power resulting in an increase in the expected number of oil,
gas and power projects.
- The increasing use of the engineering, procurement and construction
("EPC") contract model should allow us to improve our market share in
North America.
- In West Africa, we have major energy infrastructure projects under
contract and underway and believe there are opportunities for us to
perform multiple phases of follow-on work on these projects.
- New holders of North American pipeline assets acquired in the past two
years through merger or outright purchase are now implementing plans
to expand or upgrade those assets.
- Major customers are benefiting from high discretionary cash flow which
should enable them to implement expanded capital construction
programs.
As a result of these factors, we expect our revenue in 2005 to increase
substantially from the 2004 level.
In the mid to long-term, we believe several factors influencing the global
energy markets will result in increased activity across our primary lines of
business. The fundamental factors that we expect will lead to higher levels of
energy-related capital expenditures include:
- Efforts to establish new oil and gas production in more politically
secure regions of the world;
- Rising global energy demand resulting from economic growth in
developing countries;
- The need for larger oil and gas transportation infrastructures in a
number of developing countries;
- Some state-controlled oil and gas companies seeking foreign
investment;
- The increasing role of natural gas as a fuel for power generation and
other uses in producing countries;
- The international effort to stabilize Iraq and restore Iraqi oil
production;
7
- Decline in existing producing reservoirs which will require additional
investment to stabilize or reverse the decline in production;
- Initiatives to reduce natural gas flaring worldwide; and
- Aging of energy infrastructure.
A February 2004 industry survey of pipeline construction suggests that
planned worldwide pipeline construction will be higher in 2005 than in 2004.
This report indicates that approximately $27 billion is planned to be spent
worldwide in 2005 on pipeline construction and related infrastructure, compared
to approximately $19 billion planned to have been spent in 2004. The survey also
indicates that approximately 60,000 miles of pipeline construction are planned
for 2005 and beyond, up slightly over comparable figures (59,000 miles) for 2004
and beyond. We expect more than $7 billion of these projects to meet our bidding
criteria in 2005 and through mid-2006, and we expect to aggressively pursue
these opportunities.
Partially offsetting these positive factors is the potential for political
and social unrest in some countries in which we operate:
- Continuing unrest and security concerns in the Middle East have
created greater than normal uncertainty in the global oil markets.
This uncertainty continues to cause caution among oil and gas
producers with respect to their planned capital expenditure programs.
This caution is despite the high levels for oil and gas prices enjoyed
by producers over the past two years and may also stem from skepticism
as to the sustainability of current energy prices.
- Policies of populist governments in some South American countries have
caused foreign investment in certain sectors, including energy, to
decrease.
- The political situation in Venezuela remains uncertain and projects
continue to be delayed.
- The Government of Venezuela continues to pursue an agenda which
includes renegotiation of contracts with foreign investors.
BUSINESS STRATEGY
We seek to maximize stockholder value through our business strategy. The
core elements of this strategy are to:
- Concentrate on projects and prospects in areas where we can be most
competitive and obtain the highest profit margins consistent with the
appropriate level of contractual and geo-political risk;
- Pursue EPC contracts with vigor because they can often yield higher
profit margins on the engineering and construction components of the
contract than stand-alone contracts for similar services;
- Focus on performance and project execution in order to maximize the
profit potential on each contract awarded;
- Place an increased focus on our commitments to safety and quality
because these elements of performance measurement are increasingly
important as differentiators from our competitors;
- Develop alliances with other service providers who will enhance our
capabilities and competitiveness in markets throughout the world;
- Pursue growth through expansion and acquisitions in complementary
business lines;
- Pursue asset development and operation opportunities to leverage our
expertise in design and construction, and to provide a more
predictable stream of revenue and cash flow;
- Maintain a strong balance sheet, which balances business risk with
financial risk, and keep operating and overhead costs commensurate
with anticipated levels of revenue; and
- Pursue alliances and equity investment opportunities with clients to
secure long-term contracts which provide greater stability in our
future revenue and cash flow streams.
In pursuing this strategy, we rely on the competitive advantage gained from
our experience in completing logistically complex and technically difficult
projects in remote areas with difficult terrain and harsh climatic conditions,
our longstanding customer relationships, and our experienced multinational
employee base. Recognizing our employees as key to our competitive advantage, we
continue to invest in them to ensure that they have the training and tools
needed to be successful in today's challenging environment.
In carrying out the core elements of our long-term strategies, we build
from the following:
8
Geographic Focus. Our objective is to maintain and enhance our presence in
regions where we have developed a strong base of operations, such as Africa, the
Middle East, North America and South America, by capitalizing on our local
experience, established contacts with local customers and suppliers, and
familiarity with local working conditions. In pursuing this strategy, we seek to
identify a limited number of long-term niche markets in which we can outperform
the competition and establish an advantageous position. In 2001, to establish
our presence in Canada, we acquired Willbros MSI Canada Inc. (formerly MSI
Energy Services Inc.), a Canadian contractor active in the oil sands producing
area of northern Alberta. In 2002, we acquired the Mt. West Group to increase
and complement our engineering and construction, and EPC capabilities. The Mt.
West Group acquisition also enhanced our presence in the northwestern United
States. We also seek to establish or enhance our presence in other strategically
important areas.
EPC Contracts. We will continue to pursue EPC contracts because they can
often yield higher profit margins on the engineering and construction components
of the contract compared to stand-alone contracts for similar services. In
performing EPC contracts, we participate in numerous aspects of a project. We
are therefore able to determine the most efficient design, permitting,
procurement and construction sequence for a project in connection with making
engineering decisions. EPC contracts enable us to deploy our resources more
efficiently and capture those efficiencies in the form of improved margins on
the engineering and construction components of these projects. We intend to
capitalize on being one of the few pipeline construction companies worldwide
with the ability to provide the full range of EPC services in order to capture
more of this business.
Focus on Superior Project Execution. We will continue to focus on
performance and project execution in order to maximize customer satisfaction and
the profit potential on each contract awarded. Our work force benefits from and
integrates feedback from complementary activities conducted by our engineering
and construction organizations. Our global experience enables our engineering
teams to incorporate best practice for any geographic region, terrain or
climate. New technologies and designs introduced first in engineering studies
and project management tools are leveraged to increase productivity and maximize
asset utilization in capital intensive construction activities. By doing so, we
improve our competitive position and we also enhance our potential for repeat
business and/or add-on engineering or specialty services.
Safety and Quality Improvements. Our Health, Safety and Environmental
("HSE") program enhances our ability to meet the specific requirements of our
customers through continuous improvements to all our business processes. The HSE
program is a systems-based approach that follows the API 9100 guidelines. These
guidelines are based on regulatory laws and best practices that include general
standards, construction activities and maintenance operations in the oil
services industry, and focus on management leadership in the safety process. HSE
goals and objectives are an integral part of our business strategy, aimed to
promote continuous improvement in safety performance through management
commitment and visibility. Our HSE program includes specific training, audits,
recognition and accountability, action plans, and pre-planning as proactive
measures.
Strategic Alliances. We seek to establish strategic alliances with
companies, whose resources, skills and strategies are complementary to and are
likely to enhance our business opportunities, including the formation of joint
ventures and consortia to achieve a competitive advantage and share risks. We
currently have alliances to pursue or perform work in Abu Dhabi, Algeria,
Australia, Canada, China, Libya, Saudi Arabia, the United States, and Venezuela.
Acquisitions. We seek to identify, evaluate and acquire companies that
offer growth opportunities and that complement our resources and capabilities.
Consistent with this strategy, in October 2002, we acquired the Mt. West Group,
a group of four closely-held engineering and construction companies operating
principally in the western region of the United States.
Asset Development and Operations. We may decide to make an equity
investment in a project in order to enhance our competitive position and/or
maximize project returns. In 1998, this strategy led to our Venezuelan
subsidiary taking a 10 percent equity interest in a joint venture which was
awarded a 16-year contract to operate, maintain and refurbish water injection
facilities in Lake Maracaibo, Venezuela. Also, since 1998, we have owned and
operated fueling facilities for an agency of the U.S. Government. In 2003, we
entered into an agreement with a U.S. natural gas processor to design, construct
and own a gas processing plant near Opal, Wyoming to process gas production from
nearby fields for an annual processing fee plus a share of sales of natural gas
liquids extracted. The Opal Gas Plant was completed in early 2004 and is
currently in commercial operation.
9
Conservative Financial Management. We emphasize the maintenance of a strong
balance sheet in financing the development and growth of our business. We also
seek to obtain contracts that are likely to result in recurring revenue in order
to partially mitigate the cyclical nature of our construction and engineering
businesses. Additionally, whenever possible we act to minimize our exposure to
currency fluctuations through the use of U.S. dollar-denominated contracts and
by limiting payments in local currency to approximately the amount of local
currency expense. We may seek new financing, in the form of either debt or
equity, as market conditions allow and as business opportunities and capital
equipment requirements may dictate.
WILLBROS BACKGROUND
We are the successor to the pipeline construction business of Williams
Brothers Company, which was started in 1908 by Miller and David Williams. In
1949, the business was reconstituted and acquired by the next generation of the
Williams family. The resulting enterprise eventually became The Williams
Companies, Inc., a major U.S. energy and interstate natural gas and petroleum
products transportation company ("Williams").
In 1975, Williams elected to discontinue its pipeline construction
activities and, in December 1975, sold substantially all of the non-U.S. assets
and international entities comprising its pipeline construction division to a
newly formed Panama corporation (eventually renamed Willbros Group, Inc.) owned
by employees of the division. In 1979, Willbros Group, Inc. retired its debt
incurred in the acquisition by selling a 60 percent equity interest to Heerema
Holding Construction, Inc. ("Heerema"). In 1986, Heerema acquired the balance of
Willbros Group, Inc., which then operated as a wholly-owned subsidiary of
Heerema until April 1992.
In April 1992, Heerema sold Willbros Group, Inc. to a corporation formed on
December 31, 1991 in the Republic of Panama by members of the Company's
management at the time, certain other investors, and Heerema. Subsequently, the
original Willbros Group, Inc. was dissolved into the acquiring corporation which
was renamed "Willbros Group, Inc." In August 1996, we completed an initial
public offering of common stock in which Heerema sold all of its shares of
common stock; and in October 1997 we completed a secondary offering in which the
other investors sold substantially all of their shares of common stock. In May
2002, we completed a third public offering of common stock, which was used to
repay debt and to provide cash for general corporate purposes.
WILLBROS MILESTONES
The following are selected milestones which we have achieved:
1915 Began pipeline work in the United States.
1939 Began international pipeline work in Venezuela.
1942-44 Served as principal contractor on the "Big Inch" and "Little Big Inch"
War Emergency Pipelines in the United States which delivered Gulf Coast
crude oil to the Eastern Seaboard.
1947-48 Built the 370-mile (600-kilometer) Camiri to Sucre and Cochabamba crude
oil pipeline in Bolivia.
1951 Completed the 400-mile (645-kilometer) western segment of the
Trans-Arabian Pipeline System in Jordan, Syria and Lebanon.
1954-55 Built Alaska's first major pipeline system, consisting of 625 miles
(1,000 kilometers) of petroleum products pipeline, housing,
communications, two tank farms, five pump stations, and marine dock and
loading facilities.
1956-57 Led a joint venture which constructed the 335-mile (535-kilometer)
southern section of the Trans-Iranian Pipeline, a products pipeline
system extending from Abadan to Tehran.
1958 Constructed pipelines and related facilities for the world's largest
oil export terminal at Kharg Island, Iran.
10
1960 Built the first major liquefied petroleum gas pipeline system, the
2,175-mile (3,480-kilometer) Mid-America Pipeline in the United States,
including six delivery terminals, two operating terminals, 13 pump
stations, communications and cavern storage.
1962 Began operations in Nigeria with the commencement of construction of
the TransNiger Pipeline, a 170-mile (275-kilometer) crude oil pipeline.
1964-65 Built the 390-mile (625-kilometer) Santa Cruz to Sica Sica crude oil
pipeline in Bolivia. The highest altitude reached by this line is
14,760 feet (4,500 meters) above sea level, which management believes
is higher than the altitude of any other pipeline in the world.
1965 Began operations in Oman with the commencement of construction of the
175-mile (280-kilometer) Fahud to Muscat crude oil pipeline system.
1967-68 Built the 190-mile (310-kilometer) Orito to Tumaco crude oil pipeline
in Colombia, one of five Willbros crossings of the Andes Mountains, a
project notable for the use of helicopters in high-altitude
construction.
1969 Completed a gas gathering system and 105 miles (170 kilometers) of
42-inch trunkline for the Iranian Gas Trunkline Project (IGAT) in Iran
to supply gas to the USSR.
1970-72 Built the Trans-Ecuadorian Pipeline, crossing the Andes Mountains,
consisting of 315 miles (505 kilometers) of 20-inch and 26-inch
pipeline, seven pump stations, four pressure-reducing stations and six
storage tanks. Considered the most logistically difficult pipeline
project ever completed at the time.
1974-76 Led a joint venture which built the northernmost 225 miles (365
kilometers) of the Trans Alaska Pipeline System.
1974-76 Led a joint venture which constructed 290 miles (465 kilometers) of
pipeline and two pump stations in the difficult to access western
Amazon basin of Peru; another logistics challenge which required
lightering from shipping on the Amazon River.
1974-79 Designed and engineered the 500-mile (795-kilometer) Sarakhs-Neka gas
transmission line in northeastern Iran.
1982-83 Built the Cortez carbon dioxide pipeline system in the southwestern
United States, consisting of 505 miles (815 kilometers) of 30-inch
pipeline.
1984-86 Constructed, through a joint venture, the All-American Pipeline System,
a 1,240-mile (1,995-kilometer), 30-inch heated pipeline, including 23
pump stations, in the United States.
1984-95 Developed and furnished a rapid deployment fuel pipeline distribution
and storage system for the U.S. Army which was used extensively and
successfully in Saudi Arabia during Operation Desert Shield/Desert
Storm in 1990/1991, in Somalia during 1993 and in Iraq in 2003.
1985-86 Built a 185-mile (300-kilometer), 24-inch crude oil pipeline from
Ayacucho to Covenas in Colombia, another Andean challenge.
1987 Rebuilt 25 miles (40 kilometers) of the Trans-Ecuadorian crude oil
pipeline, mobilizing to Ecuador in two weeks and completing work within
six months after major portions were destroyed by an earthquake.
1988-92 Performed project management, engineering, procurement and field
support services to expand the Great Lakes Gas Transmission System in
the northern United States. The expansion involved modifications to 13
compressor stations and the addition of 660 miles (1,060 kilometers) of
36-inch pipeline in 50 separate loops.
1989-92 Provided pipeline engineering and field support services for the Kern
River Gas Transmission System, a 36-inch pipeline project extending
over 685 miles (1,100 kilometers) of desert and mountains from Wyoming
to California.
11
1992-93 Rebuilt oil field gathering systems in Kuwait as part of the post-war
reconstruction effort.
1996 Listed shares upon completion of an initial public offering of common
stock on the New York Stock Exchange under the symbol "WG."
1996-97 Achieved ISO Certification for seven operating companies.
1996-98 Performed an EPC contract with Asamera (Overseas) Limited to design and
construct pipelines, flowlines and related facilities for the Corridor
Block Gas Project located in southern Sumatra, Indonesia.
1997-98 Carried out a contract for the construction of 120 miles (200
kilometers) each of 36-inch and 20-inch pipelines in the Zuata Region
of the Orinoco Belt in Venezuela.
1997-98 Completed an EPC contract for El Paso Natural Gas Company and
Gasoductos de Chihuahua, a joint venture between El Paso and PEMEX, to
construct a 45-mile (75-kilometer) gas pipeline system in Texas and
Mexico.
1999-00 Carried out a contract through a joint venture to construct a 492-mile
(792-kilometer), 18-inch gas pipeline in Australia.
2000 Acquired Rogers & Phillips, Inc., a United States pipeline construction
company.
2000 Relocated the Willbros USA, Inc. administrative headquarters from
Tulsa, Oklahoma to Houston, Texas.
2001 Acquired MSI Energy Services Inc., an Alberta, Canada based contractor
working in the oil sands area, and established a presence in Canada.
2001 Ended year with record backlog of $407.6 million.
2002 Acquired the Mt. West Group to enhance presence in the western United
States and to improve our service capabilities worldwide.
2002 Completed engineering and project management of the Gulfstream project,
a $1.6 billion natural gas pipeline system from Mobile, Alabama
crossing the Gulf of Mexico and serving markets in central and southern
Florida.
2002 Elected Michael F. Curran CEO, succeeding Larry J. Bump, who retired
after 22 years as Willbros CEO.
2002 Completed the Centennial Pipeline Project: FERC application support,
engineering, procurement, construction and construction management of
new-build and conversion to refined products service of a natural gas
system from Gulf Coast to mid-western United States, 797 miles (1,275
kilometers) of 24-inch and 26-inch pipelines and facilities.
2003 Completed work on the Explorer Pipeline Mainline expansion project,
adding 12 new pump stations and additional storage to this products
pipeline from the Gulf Coast to central Illinois.
2003 Completed an EPC contract for the 665-mile (1,070-kilometer), 30-inch
crude oil Chad-Cameroon Pipeline Project, through a joint venture with
another international contractor.
2003 Completed construction of the GASYRG natural gas pipeline in Bolivia,
144 miles (230 kilometers) of 32-inch pipeline from the San Alberto gas
field to connect with export facilities to Brazil.
2004 Completed construction and began commercial operation of the Opal Gas
Plant with nominal capacity of 350 million standard cubic feet per day.
2004 Began work on the Eastern Gas Gathering System ("EGGS") project, an
83-kilometer 40-inch feed gas pipeline to the Bonny Island LNG
facilities in Nigeria.
12
2004 Awarded the contract for the onshore portions of the West Africa Gas
Pipeline project, to transport natural gas from Nigeria to end users in
Ghana, Togo and Benin.
2004 Began work on a field upgrade East Area Platforms Retrofit and Wellhead
Tie-ins Project ("EPC-IV"), offshore Nigeria, for a major exploration
and production company.
2004 Completed pipeline rehabilitation and replacement project in Iraq.
2004 Ended year with record backlog of $660.9 million.
BUSINESS SEGMENTS
Historically, the Company reported in one operating segment offering three
integrated services: engineering, construction, and specialty. In mid-2004, the
Company restructured its operating segments to include Engineering and
Construction and Facilities Development and Operations. Beginning in the fourth
quarter of 2004, the Company restructured its business into two operating
segments, International and United States & Canada. All periods presented
reflect this change in segments.
The Company's segments are strategic business units that are managed
separately as each segment has different operational requirements and marketing
strategies. Management believes, due to the composition of current work and
potential work opportunities, and the nuances of the geographic markets the
Company serves, that the organization should be viewed on a geographic basis.
Consequently, the businesses have been restructured and we are reporting on the
basis of two operating segments: International and United States & Canada. The
International segment consists of all construction, engineering and facilities
development operations in countries other than the United States and Canada.
Currently such operations are in Africa, the Middle East, and South America. The
United States & Canada segment consists of all construction, engineering and
facilities development operations in the United States and Canada. The Company's
corporate operations include the general and administrative and financing
functions of the organization. The costs of these functions are allocated
between the two operating segments. The Company's corporate operations also
include various other assets that are allocated between the two operating
segments. Inter-segment revenue and revenue between geographic areas are not
material.
The tables below reflect the Company's business segments as of and for the
years ended December 31, 2004, 2003, and 2002: (All table dollar amounts in
thousands)
Year Ended December 31, 2004
----------------------------------------
United States
Total International & Canada
-------- ------------- -------------
Revenue $483,318 $290,524 $192,794
Operating expense:
Contract costs 417,671 249,660 168,011
Depreciation and amortization 16,747 9,135 7,612
General and administrative 46,614 22,600 24,014
Other operating costs 3,571 3,571 --
-------- -------- --------
484,603 284,966 199,637
-------- -------- --------
Operating income (loss) $ (1,285) $ 5,558 $ (6,843)
======== ======== ========
13
Year Ended December 31, 2003 RESTATED
----------------------------------------
United States
Total International & Canada
-------- ------------- -------------
Revenue $416,573 $262,241 $154,332
Operating expense:
Contract costs 374,442 223,672 150,770
Depreciation and amortization 15,570 8,727 6,843
General and administrative 36,300 16,321 19,979
Other operating costs 2,314 2,314 --
-------- -------- --------
428,626 251,034 177,592
-------- -------- --------
Operating income (loss) $(12,053) $ 11,207 $(23,260)
======== ======== ========
Year Ended December 31, 2002 RESTATED
----------------------------------------
United States
Total International & Canada
-------- ------------- -------------
Revenue $582,829 $337,592 $245,237
Operating expense:
Contract costs 494,318 287,330 206,988
Depreciation and amortization 16,627 10,697 5,930
General and administrative 34,046 16,191 17,855
Other operating costs 3,076 3,076 --
-------- -------- --------
548,067 317,294 230,773
-------- -------- --------
Operating income $ 34,762 $ 20,298 $ 14,464
======== ======== ========
Total assets by segment are presented below:
December 31,
-------------------
2004 2003
-------- --------
RESTATED
International $225,262 $204,237
United States & Canada 191,848 100,457
-------- --------
Total Consolidated Assets $417,110 $304,694
======== ========
Due to a limited number of major projects and clients, the Company may at
any one time have a substantial part of its operations dedicated to one project,
client and country.
Customers representing more than 10 percent of total contract revenue are
as follows:
Year Ended December 31,
--------------------------
2004 2003 2002
---- -------- --------
RESTATED RESTATED
Customer A 21% 14% --%
Customer B 11 -- --
Customer C -- 16 29
Customer D -- -- 16
--- --- ---
32% 30% 45%
=== === ===
14
Information about the Company's operations in its significant work
countries is shown below:
Year Ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
RESTATED RESTATED
Contract revenue:
United States (1) $159,270 $130,155 $231,552
Nigeria 121,774 53,252 49,230
Iraq 54,029 10,057 --
Offshore West Africa 49,784 62,988 59,285
Oman 36,846 40,885 17,244
Canada 33,524 24,177 13,685
Venezuela 17,750 29,312 12,835
Bolivia 6,368 3,943 45,105
Ecuador 3,222 -- --
Cameroon 336 61,605 136,149
Australia 415 -- --
Dominican Republic -- 199 17,744
-------- -------- --------
$483,318 $416,573 $582,829
======== ======== ========
(1) Net of inter-country revenue of $11,845 in 2004, $9,009 in 2003, and
$25,849 in 2002.
December 31,
------------------------------
2004 2003 2002
-------- -------- --------
RESTATED RESTATED
Long-lived assets:
United States $ 49,521 $ 41,359 $24,298
Nigeria 31,824 20,129 17,562
Offshore West Africa 12,281 11,038 10,040
Canada 6,554 4,289 3,852
Oman 4,214 4,705 3,116
Venezuela 4,835 5,450 6,962
Bolivia 1,703 2,806 3,503
Cameroon -- 3,089 7,262
Other 5,711 2,035 199
-------- -------- -------
$116,643 $ 94,900 $76,794
======== ======== =======
SERVICES PROVIDED
The Company provides engineering, construction, specialty services and
development activities in each of the geographic segments described above. We
also have experience in the operation of the types of facilities we design and
build. We may make equity investments in some projects to enhance our
competitive position for the work assignments associated with the project. In
other instances, our experience enables us to understand and manage project
completion risk and in these cases we may elect to develop and own a complete
facility which will provide attractive internal rates of return over an extended
period of time.
ENGINEERING SERVICES
We provide project management, engineering, and material procurement
services to the oil, gas and power industries and government agencies. We
specialize in providing engineering services to assist clients in constructing
or expanding pipeline systems, compressor stations, pump stations, fuel storage
facilities, and field gathering and production facilities. Over the years, we
have developed expertise in addressing the unique engineering challenges
involved with pipeline systems and associated facilities to be installed where
climatic conditions are extreme, areas where environmental sensitivity must be
crossed, and fluids which present extreme health hazards or which present
technical challenges regarding the selection of materials for fluid/gas
conveyance.
15
To complement our engineering services, we also provide a full range of
field services, including:
- surveying;
- right-of-way acquisition;
- material receiving and control;
- construction inspection;
- facilities startup assistance; and
- facilities operations.
These services are furnished to a number of oil, gas, power and government
clients on a stand-alone basis and are also provided as part of EPC contracts
undertaken by us.
The buying process of our customers includes close scrutiny of our
experience and capabilities with respect to project requirements. Some of those
requirements involve:
Climatic Constraints. In the design of pipelines and associated facilities
to be installed in harsh environments, special provisions for metallurgy of
materials and foundation design must be addressed. We are experienced in
designing pipelines for arctic conditions (where permafrost and extremely low
temperatures are prevalent), desert conditions, mountainous terrain, swamps and
offshore.
Environmental Impact of River Crossings/Wetlands. We have considerable
capability in designing pipeline crossings of rivers, streams and wetlands in
such a way as to minimize environmental impact. We possess expertise to
determine the optimal crossing techniques, such as open cut,
directionally-drilled or overhead, and to develop site-specific construction
methods to minimize bank erosion, sedimentation and other environmental impacts.
Seismic Design and Stress Analysis. Our engineers are experienced in
seismic design of pipeline crossings of active faults and areas where
liquefaction or slope instability may occur due to seismic events. Our engineers
also carry out specialized stress analyses of piping systems that are subjected
to expansion and contraction due to temperature changes, as well as loads from
equipment and other sources.
Hazardous Materials. Special care must be taken in the design of pipeline
systems transporting sour gas. Sour gas not only presents challenges regarding
personnel safety since hydrogen sulfide leaks can be extremely hazardous, but
also requires that material be specified to withstand highly corrosive
conditions. Our engineers have extensive natural gas experience which includes
design of sour gas systems.
Hydraulics Analysis for Fluid Flow in Piping Systems. We employ engineers
with the specialized knowledge necessary to address properly the effects of both
steady state and transient flow conditions for a wide variety of fluids
transported by pipelines, including natural gas, crude oil, refined petroleum
products, natural gas liquids, carbon dioxide and water. This expertise is
important in optimizing the capital costs of pipeline projects where pipe
material costs typically represent a significant portion of total project
capital costs.
We have developed significant expertise with respect to each of the
following:
Natural Gas Transmission Systems. The expansion of the natural gas
transportation network in the United States in recent years has been a major
contributor to our engineering business. We believe we have established a strong
position as a leading supplier of project management and engineering services to
natural gas pipeline transmission companies in the United States. Since 1988, we
have provided engineering services for over 19 major natural gas pipeline
projects in the United States, totaling more than 7,000 miles (11,200
kilometers) of large diameter pipe for new systems and expansions of existing
systems. During this same period, we were also the engineering contractor for
over 80 compressor stations, including new stations and additions to existing
stations for 17 clients.
Liquids Pipelines and Storage Facility Design. We have engineered a number
of crude oil and refined petroleum products systems throughout the world, and
have become recognized for our expertise in the engineering of systems for the
storage and transportation of petroleum products and crude oil. In 2001, we
provided engineering and field services for conversion of a natural gas system
in the mid-western United States, involving over 794 miles (1,270 kilometers) of
24-inch to 26-inch diameter pipeline to serve the upper Midwest with refined
petroleum products. We recently completed EPC services for the expansion of
16
another petroleum products pipeline to the Midwest involving 12 new pump
stations, modifications to another 13 pump stations and additional storage.
U.S. Government Services. Since 1981, we have established our position with
U.S. government agencies as a leading engineering contractor for jet fuel
storage and aircraft fueling facilities, having performed the engineering for
major projects at seven U.S. military bases including three air bases outside
the U.S. The award of these projects was based largely on contractor experience
and personnel qualifications. In the past four years, we have won four of seven
so-called "Build, Own, and Operate", or "BOO" projects, to provide fueling
facilities at four military bases in the United States for the U.S. Defense
Energy Support Center.
Design of Peripheral Systems. Our expertise extends to the engineering of a
wide range of project peripherals, including various types of support buildings
and utility systems, power generation and electrical transmission,
communications systems, fire protection, water and sewage treatment, water
transmission, roads and railroad sidings.
Material Procurement. Because material procurement plays such a critical
part in the success of any project, we maintain an experienced staff to carry
out material procurement activities. Material procurement services are provided
to clients as a complement to the engineering services performed for a project.
Material procurement is especially critical to the timely completion of
construction on the EPC contracts we undertake. We maintain a computer-based
material procurement, tracking and control system, which utilizes software
enhanced to meet our specific requirements.
CONSTRUCTION SERVICES
We are one of the most experienced contractors serving the oil, gas and
power industries. Our construction capabilities include the expertise to
construct and replace large-diameter cross-country and offshore pipelines; to
fabricate engineered structures and process modules and facilities; to construct
oil and gas production facilities, pump stations, flow stations, gas compressor
stations, gas processing facilities and other related facilities; and to
construct offshore platforms, subsea facilities, piers, docks and bridges.
Pipeline Construction. World demand for pipelines results from the need to
move millions of barrels of crude oil and petroleum products and billions of
cubic feet of natural gas to refiners, processors and consumers each day.
Pipeline construction is capital-intensive, and we own, lease, operate and
maintain a fleet of specialized equipment necessary for operations in the
pipeline construction business. We focus on pipeline construction activity in
remote areas and harsh climates where we believe our experience gives us a
competitive advantage. We believe that we have constructed more miles of
pipeline than any other private sector company.
The construction of a cross-country pipeline involves a number of
sequential operations along the designated pipeline right-of-way. These
operations are virtually the same for all overland pipelines, but personnel and
equipment may vary widely depending upon such factors as the time required for
completion, general climatic conditions, seasonal weather patterns, the number
of road crossings, the number and size of river crossings, terrain
considerations, extent of rock formations, density of heavy timber and amount of
swamp.
Onshore construction often involves separate crews to perform the following
different functions:
- clear the right-of-way;
- grade the right-of-way;
- excavate a trench in which to bury the pipe;
- haul pipe to intermediate stockpiles from which stringing trucks carry
pipe and place individual lengths (joints) of pipe alongside the
ditch;
- bend pipe joints to conform to changes of direction and elevation;
- clean pipe ends and line up the succeeding joint;
- perform various welding operations;
- inspect welds non-destructively;
- clean pipe and apply anti-corrosion coatings;
- lower pipe into the ditch;
- backfill the ditch;
17
- bore and install highway and railroad crossings;
- drill, excavate or dredge and install pipeline river crossings;
- tie in all crossings to the pipeline;
- install mainline valve stations;
- conduct pressure testing;
- install cathodic protection system; and
- perform final clean up.
Special equipment and techniques are required to construct pipelines across
wetlands and offshore. We use swamp pipelaying methods extensively in Nigeria,
where a significant portion of our construction operations are carried out in
the Niger River Delta. In addition to our primary offshore and swamp equipment
such as lay barges, dredges and swamp backhoes, we have a substantial investment
in support vessels, including tugboats, barges, supply boats and houseboats,
which are required in order to maintain and support our capabilities in offshore
and swamp pipeline construction.
Fabrication. Fabrication services can be a more efficient means of
delivering engineered, major process or production equipment with improved
schedule certainty and quality. We provide fabrication services in both the
International and United States & Canada segments and are capable of fabricating
such diverse deliverables as process modules, subsea templates, flare piles and
tips and offshore jackets and decks. The deepwater projects being developed
offshore West Africa offer significant opportunities for fabrication services
and we have completed initial projects in 2004 which establish Willbros as a
qualified provider of these services. We are one of the few qualified companies
able to offer local content and meet stringent quality requirements. Additional
emphasis by the host government on local content has the effect of making our
service capabilities more attractive to project developers. These developers are
required by the government to demonstrate that their projects meet certain
levels of local content. Also, Willbros MSI Canada Inc. ("Willbros MSI") made
the commitment in early 2005 to purchase an additional 90,000 square foot
fabrication facility in Edmonton, Alberta. This facility will expand Willbros
MSI fabrication capability to provide process modules to the burgeoning heavy
oil market in northern Alberta. Including the new facility in Edmonton, Willbros
MSI currently operates three fabrication facilities in Ft. McMurray and
Edmonton, Alberta, Canada.
Station Construction. Oil and gas companies require various facilities in
the course of producing, processing, storing and moving oil and gas. We are
experienced in and capable of constructing facilities such as pump stations,
flow stations, gas processing facilities, gas compressor stations and metering
stations. The acquisition of the Mt. West Group, which provides a full range of
services for the engineering, design, procurement and construction of
processing, pumping, compression, and metering facilities, has substantially
enhanced our expertise in this area. We are capable of building such facilities
onshore, offshore in shallow water or in swamp locations. The construction of
station facilities, while not nearly as capital-intensive as pipeline
construction, is generally characterized by complex logistics and scheduling,
particularly on projects in locations where seasonal weather patterns limit
construction options, and in countries where the importation process is
difficult. Our capabilities have been enhanced by our experience in dealing with
such challenges in numerous countries around the world.
Marine Construction. Our marine construction equipment, including
conventional combination derrick/pipelay barges, pile driving barges, tugs and
support vessels, service the Venezuelan Lake Maracaibo and near shore areas and
the offshore Nigeria area. In Lake Maracaibo and near shore locations, we
construct and install fixed drilling and production platforms, berthing docks,
jetties and mooring facilities. Offshore Nigeria, the primary construction
vessels we own and operate are the combination derrick/pipelay barge WB 318, the
hook up/support barge WB 82, and the multi-purpose motor vessel Eros III. We
also operate the shallow water pipelay barge LB 41. The WB 318 size of 300' x
90', lift capacity of 250 tons and center slot pipelay make the vessel ideal for
the Nigerian offshore projects involving platform installation, removal and
pipelay for up to 24-inch pipe in water depths up to 200 feet. The hook up barge
WB 82, measuring 256' x 69' with quarters for 150 persons and a 100 ton crane,
is well suited for the platform and facilities retrofit and maintenance projects
in the area. The 3,200 horsepower M/V Eros III, measuring 150' x 36', with
quarters for 42 and a four-point mooring system, is well suited for construction
support, platform survey, dive support and survey projects. The LB 41, a 180' x
54' shallow water pipelay vessel, is well suited for the shallow water pipelay
market for offshore Nigeria.
18
SPECIALTY SERVICES
We provide a wide range of support and ancillary services related to the
construction, operation, repair and rehabilitation of pipelines. Frequently,
such services require the utilization of specialized equipment, which is costly
and requires operating expertise. Due to the initial equipment cost and
operating expertise required, many client companies hire us to perform these
services. We own and operate a variety of specialized equipment that is used to
support construction projects and to provide a wide range of oilfield services.
We provide the following primary types of specialty services:
- Dredging;
- Pipe Coating;
- Concrete Weight Coating;
- Pipe Double-Jointing;
- Piling;
- Pressure Vessels;
- Marine Heavy Lift Services;
- Transport of Dry and Liquid Cargo;
- Rig Moves;
- Maintenance and Repair Services; and
- Facilities Development and Operations.
FACILITIES DEVELOPMENT AND OPERATIONS
Our workforce has significant experience in the operation of the types of
facilities we design and build. In some instances, we make equity investments in
projects to enhance our competitive position for the work assignments associated
with the project. In other instances, our experience enables us to understand
and manage project completion risk, and in these cases we may elect to develop
and own a complete facility which will provide attractive internal rates of
return over an extended period of time.
We currently have equity positions in and operate the following facilities
in our United States & Canada segment:
Opal Gas Plant. We designed, built and own a turbo-expander plant which
processes gas produced from the Pinedale anticline. Designated TXP4, the plant
is located near Opal, Wyoming in southwestern Wyoming and is designed to process
volumes in excess of 350 million standard cubic feet per day of natural gas,
producing 7,000 to 11,000 barrels per day of natural gas liquids at various
operating conditions. We receive an annual processing fee under a 10-year
contract and share in the proceeds from the sales of natural gas liquids
extracted. The Opal Gas Plant began commercial natural gas processing activity
in the first quarter of 2004.
U.S. Defense Energy Support Center. Since 1998, we have constructed five
fueling facilities for the U.S. Defense Energy Support Center. Currently, we own
and operate two fueling facilities at Ft. Bragg, North Carolina, which were
constructed by us in 1998 and a similar facility completed in 2000 at
Twenty-nine Palms Marine Corps Base in California. In 2001, we were awarded
contracts for similar facilities at Ft. Stewart, Georgia and Ft. Gordon,
Georgia; these facilities were completed and operational in 2002. In 2005, we
were awarded a contract for another such facility at Ft. Campbell, Kentucky.
In our International segment in 1998, through our Venezuelan subsidiary, we
took a 10 percent equity interest in a joint venture which was awarded a 16-year
contract to operate, maintain and refurbish water injection facilities on Lake
Maracaibo in Venezuela.
GEOGRAPHIC REGIONS
The Company operates, or has operated, worldwide, but has focused its
operations in recent years on certain markets in North America, South America,
West Africa and the Middle East. The resulting operating segments of
International and United States & Canada are shown in the following table, which
reports our contract revenue for 2004, 2003 and 2002.
19
Year Ended December 31,
------------------------------------------------------------
2004 2003 RESTATED 2002 RESTATED
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollar amounts in thousands)
CONTRACT REVENUE
International ........... $290,524 60.1% $262,241 63.0% $337,592 57.9%
United States & Canada .. 192,794 39.9 154,332 37.0 245,237 42.1
-------- ----- -------- ----- -------- -----
Total ................ $483,318 100.0% $416,573 100.0% $582,829 100.0%
======== ===== ======== ===== ======== =====
INTERNATIONAL
Africa
Africa has been an important strategic market for us. There are large,
potentially exploitable reserves of natural gas in West Africa, extending from
the Ivory Coast to Angola. Depending upon the world market for natural gas and
the availability of financing, the amount of potential new work could be
substantial. We intend to maintain our presence in Africa and seek to increase
our share of available work. Currently, we are monitoring or bidding on major
work prospects in Algeria, Angola, Egypt, Gabon, Libya and Nigeria.
Over the past 50 years, we have completed major projects in a number of
African countries including Algeria, Chad, Cameroon, Egypt, Gabon, Ivory Coast,
Libya, Morocco and Nigeria. We have management staff resident in Africa,
assisted by engineers, managers and craftsmen with extensive African experience,
who are capable of providing construction expertise, fabrication services,
repair and maintenance services, dredging operations, pipe coating and
engineering support. Strong local relationships have enabled us to satisfy the
varied needs of our clientele in this region.
We have maintained a continuous presence in Nigeria since 1962. Our
activities in Nigeria are directed from a fully staffed operational base near
Port Harcourt. This 150-acre site includes office and living facilities,
equipment and vehicle repair shops, a marine jetty, warehouses and fabrication
and lay-down areas for both the client's and our materials and spare parts. We
have diversified our range of services by adding additional pipe coating
expertise, drydock facilities, and, in 2004, fabrication services. The deepwater
projects being developed offshore West Africa offer significant opportunities
for fabrication services and we have completed initial projects in 2004 which
establish Willbros as a qualified provider of these services. We are one of the
few qualified companies able to offer local content and meet stringent quality
requirements. Additional emphasis by the host government on local content has
the effect of making our service capabilities more attractive to project
developers. These developers are required by the government to demonstrate that
their projects meet certain levels of local content. Having diverse yet
complementary capabilities has often given us a competitive advantage on
projects that contain several distinct work elements within a project's scope of
work. For example, we believe that we are currently among only a few contractors
operating in the Nigerian oil and gas sector capable, with our own resources, of
executing EPC projects for pipelines and related facilities for onshore, swamp,
and offshore locations.
Since our purchase of the WB 318 combination derrick/pipelay barge in 1998
and the WB 82 hook-up/support barge in 2001, we have successfully completed
several offshore projects, including repair and maintenance, installation of
decks and other production facilities on offshore platforms, multiple offshore
pipeline construction projects, the installation of a single-point mooring, and
various other services for our clients.
Middle East
Hostilities in the Middle East continued during 2004 and caused the
short-term outlook for projects to remain very limited. However, we continue to
believe that increased exploration and production activity in the Middle East
will be the primary factor influencing the construction of new energy
transportation systems in the region. The majority of future transportation
projects in the region are expected to be centered around natural gas due to
increased regional demand, governments' recognition of gas as an important asset
and
20
an underdeveloped gas transportation infrastructure throughout the region. In
April 2003, we were awarded an EPC contract for a natural gas pipeline system in
Oman and completed that project in 2004. In October 2003, we were awarded work
as a subcontractor to KBR, a subsidiary of Halliburton, to repair damaged
pipelines in northern Iraq. This work was completed in late 2004. Projects
delayed in the region by uncertainty associated with the hostilities in Iraq are
now being tendered and awarded. We believe the Middle East in general will
present opportunities to provide an increased level of services through 2005 and
into 2006. We continue to monitor project opportunities throughout the Middle
East and are currently investigating prospects in Abu Dhabi, Jordan, Kuwait,
Oman, Qatar, Saudi Arabia and Yemen.
Our operations in the Middle East date back to 1948. We have worked in most
of the countries in the region, with particularly heavy involvement in Iran,
Kuwait, Oman and Saudi Arabia. Currently, we have ongoing operations in Oman,
where we have been active continuously for more than 39 years. We maintain a
fully staffed facility in Oman with equipment repair facilities and spare parts
on site and offer construction expertise, repair and maintenance services,
engineering support, oil field transport services, materials procurement and a
variety of related services to our clients. In 2004, we were awarded a new
five-year contract by Oman LNG for general maintenance services. We believe our
presence in Oman and our experience there and in other Middle Eastern countries
will enable us to successfully win and perform projects in this region.
South America
We have been active in South America since 1939. The medium to long-term
market outlook has not changed, but in the short-term, the markets in Venezuela
and Bolivia have been disrupted by political instability. We expect gas
transportation projects in Bolivia, Brazil, Chile, Peru and Venezuela to
continue to evolve to meet increasing demand for gas for industrial and power
usage in the rapidly growing urban areas. In Venezuela and Ecuador, crude oil
transportation systems will likely need to be built and/or upgraded so that the
vast crude reserves in these countries can be efficiently exported to the world
market. We are selectively pursuing business opportunities throughout South
America.
We have performed numerous major projects in South America, where our
accomplishments include the construction of five major pipeline crossings of the
Andes Mountains and the world altitude record for constructing a pipeline. Most
recently, we completed, in an alliance with another international contractor, a
144-mile (230-kilometer) 32-inch natural gas pipeline in Bolivia for the
Transierra consortium. This project was completed in the first half of 2003, and
resolution and settlement of contract variations was finalized in 2004.
Venezuela is the largest oil producer in South America and conservative
estimates place proven reserves at more than 77 billion barrels of oil and 146
trillion cubic feet of natural gas. The government of Venezuela, under
Presidente Hugo Chavez, has separated the natural gas initiative from the oil
interests of Petroleos de Venezuela, S. A., or "PDVSA", the government owned oil
company, to place natural gas projects on an equal footing with oil projects.
This emphasis on natural gas projects should translate into more demand for
natural gas engineering and construction capabilities such as ours; however, at
present, the timing of such projects remains uncertain. The Chavez government
withstood a national recall referendum and is moving toward more state control
of energy projects. New hydrocarbon laws and the reopening and renegotiation of
production services contracts and royalty agreements have added perceived
political risk to investment decisions by international production companies.
This has resulted in more deliberate and slower project development. We believe
the large reserves and favorable location of Venezuela to the U.S. market will
continue to attract investment but expect the process to be slower and more
cautious.
In Venezuela, we maintain an operating facility including offices,
equipment, yard and dock facilities on a 15-acre waterfront site on Lake
Maracaibo. We provide services for both onshore and offshore projects. Services
include pipeline construction, repair and maintenance services, fabrication and
installation of concrete piles and platforms, marine-related services,
engineering support and other needed services. In 1998, a joint venture in which
we hold a 10 percent equity interest was awarded a 16-year contract valued at
$785 million to operate, maintain and refurbish the Lake Maracaibo water
injection program for PDVSA Gas. In 2002, in a joint contract with a Venezuelan
company, we were awarded a project for the engineering, procurement and
construction of a marine loading terminal for Petrolera Ameriven, a joint
venture of ConocoPhillips, ChevronTexaco and PDVSA. This project was completed
in 2004.
21
Mexico
We have operated in Mexico for many years, completing several projects,
including the Samalayuca Gas Pipeline project from Texas into Mexico in 1998. We
believe the government-owned oil company, Petroleos de Mexico ("PEMEX"), will
spend in excess of $10 billion in 2005 to expand and modify production
facilities both onshore and offshore Mexico. The Company intends to pursue
projects in Mexico.
Asia and Australia
Markets in Asia and Australia continue to be of interest due to the
relative abundance of undeveloped natural gas resources and the strong growth
rates in energy demand. That abundance, and environmental concerns, favor the
use of natural gas for power generation and industrial and residential usage in
Asia and Australia. We are currently conducting marketing and business
development activities in these markets.
United States & Canada
We have provided services to the U.S. oil and gas industry for more than 90
years. We believe that the United States will continue to be an important market
for our services. Market conditions for the short-term are expected to show more
improvement in 2005, as many of the energy transportation companies improve
their financial condition and focus on core businesses. To improve their
liquidity, some of our traditional clients have sold pipeline assets; in some
cases, to new industry participants. These new owners are beginning to develop
and implement their capital budgets for these newly acquired assets, as they
have completed their evaluation of the newly acquired assets and are finalizing
their strategies for maximizing the return on their investments in these assets.
Deregulation of the electric power and natural gas pipeline industries in the
United States has led to the consolidation and reconfiguration of existing
pipeline infrastructure and the establishment of new energy transport systems,
which we expect will result in continued demand for our services in the mid to
long-term. The demand for natural gas for industrial and power usage in the
United States should increase the demand for additional new natural gas
transportation infrastructure. We anticipate that additional supply to satisfy
such market demand for natural gas will come from existing and new production in
the North Slope of Alaska, the Mackenzie Delta in northern Canada, western
Canada, the Rocky Mountain region, the Gulf of Mexico, and newly proposed and
permitted liquefied natural gas ("LNG") regasification terminals along the Gulf
Coast. Environmental concerns will likely continue to require careful, thorough
and specialized professional engineering and planning for all new facilities
within the oil, gas and power sectors. Furthermore, the demand for replacement
and rehabilitation of pipelines is expected to increase as pipeline systems in
the United States approach the end of their design lives and population trends
influence overall energy needs.
Oil and gas prices at higher than historical averages have increased
industry interest, investment and development in the oil sands region of
northern Alberta, Canada, where industry estimates expect over CDN $20 billion
to be invested in the next 10 years. New process plant developments offer
prospective fabrication and installation work as well as maintenance
opportunities, and the anticipated increase in crude oil volumes to be shipped
to markets in the United States and Asia has resulted in proposals for several
major crude oil export pipelines from this region. The need for additional
process fuel for the oil sands also is driving the development of new pipeline
infrastructure from the Mackenzie Delta region. Willbros MSI made the commitment
in early 2005 to purchase a 90,000 square foot fabrication facility in the
Edmonton, Alberta area. This facility will expand Willbros MSI's fabrication
capability to provide process modules to the burgeoning heavy oil market in
northern Alberta.
We are recognized as an industry leader in the United States for providing
project management, engineering, procurement and construction services. We
maintain a staff of experienced management, construction, engineering and
support personnel in the United States. We provide these services through
engineering offices located in Tulsa, Oklahoma and Salt Lake City (Murray),
Utah. Construction operations based in Houston, Texas, (Willbros RPI); Fruita,
Colorado (Willbros Mt. West); and Ft. McMurray and Edmonton, Alberta (Willbros
MSI) provide the majority of construction services in North America.
We have also provided significant engineering services to U.S. government
agencies during the past 24 years, particularly in fuel storage and distribution
systems and aircraft fueling facilities.
22
BACKLOG
In our industry, backlog is considered an indicator of potential future
performance because it represents a portion of the future revenue stream. Our
strategy is not focused solely on backlog additions but, rather, on capturing
quality backlog with margins commensurate with the risks associated with a given
project.
Backlog consists of anticipated revenue from the uncompleted portions of
existing contracts and contracts whose award is reasonably assured. At December
31, 2004, backlog was $660.9 million, compared to $223.5 million at December 31,
2003. We believe the backlog figures are firm, subject only to the cancellation
and modification provisions contained in various contracts. We expect that
approximately $450 million, or about two-thirds, of our existing backlog at
December 31, 2004, will be recognized in revenue during 2005. Historically, a
substantial amount of our revenue in a given year has not been reflected in our
backlog at the beginning of that year. Additionally, due to the short duration
of many jobs, revenue associated with jobs performed within a reporting period
will not be reflected in backlog. We generate revenue from numerous sources,
including contracts of long and short duration entered into during a year as
well as from various contractual processes, including change orders, extra work,
variations in the scope of work and the effect of escalation or currency
fluctuation formulas. These revenue sources are not added to backlog until
realization is assured.
The following table shows our backlog by segment and geographic region as
of December 31, 2004 and 2003:
2004 2003 RESTATED
------------------ ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollar amounts in thousands)
BACKLOG
International
Africa ........................... $554,692 84% $ 49,018 22%
South America .................... 12,211 2 23,369 10
Middle East ...................... 2,500 <1 57,853 26
-------- --- -------- ---
Subtotal International ........... 569,403 86 130,240 58
United States & Canada
United States .................... 68,926 10 53,582 24
Canada ........................... 22,603 4 39,709 18
-------- --- -------- ---
Subtotal United States & Canada .. 91,529 14 93,291 42
-------- --- -------- ---
Total ............................ $660,932 100% $223,531 100%
======== === ======== ===
COMPETITION
We operate in a highly competitive environment. We compete against
government-owned or supported companies and other companies that have financial
and other resources substantially in excess of those available to us. In certain
markets, we compete against national and regional firms against which we may not
be price competitive.
Our primary competitors for International onshore construction projects in
developing countries include Technip (France), CCC (Lebanon), Saipem (Italy),
AMEC (UK), Spie-Capag (France), Techint (Argentina), Bechtel (U.S.),
Stroytransgaz (Russia), Tekfen (Turkey), and Nacap (Netherlands). We believe
that we are one of the few companies among our competitors possessing the
ability to carry out large projects in developing countries on a turnkey basis
(engineering, procurement and construction), without subcontracting major
elements of the work. As a result, we may be more cost effective than our
competitors in certain instances or offer a superior value proposition.
We have different competitors in different markets. In Nigeria, we compete
for pipe coating work with ShawCor Ltd. (Canada), while our dredging competitors
include Bos Kalis Westminster (Netherlands), Dredging International (Belgium),
Bilfinger + Berger (Germany), Nigerian Dredging & Marine (Netherlands) and Ham
Dredging (Netherlands). In offshore West Africa, we compete with SaiBos (Italy),
Stolt Offshore (United Kingdom), Global Industries, Ltd. (United States), and
Adamac Group (Nigeria). In Oman,
23
competitors in oil field transport services include Desert Line, Al Ahram,
Hamdam and TruckOman, all Omani companies; and in construction and the
installation of flowlines and mechanical services, we compete with Taylor
Woodrow Towell (UK), CCC (Lebanon), Dodsal (India), Saipem (Italy), Desert Line
(Oman) and Galfar (Oman). In Venezuela, competitors in marine support services
include Raymond de Venezuela, Petrolago, and Siemogas, all Venezuelan companies.
In the Southern Cone of South America, major competitors include Techint
(Argentina), Conduto (Brazil), Odebrecht (Brazil), and Contreras Hermanos
(Argentina).
In the United States, our primary construction competitors on a national
basis include Associated Pipeline Contractors, Gregory & Cook, H. C. Price,
Sheehan Pipeline Construction, U.S. Pipeline and Welded Construction. In
addition, there are a number of regional competitors, such as Sunland, Dyess,
Flint, and Jomax.
Primary competitors for engineering services include:
- Alliance Engineering;
- Bechtel;
- Colt Engineering;
- Fluor;
- Gulf Interstate;
- Jacobs Engineering;
- KBR;
- Mustang Engineering;
- Paragon Engineering;
- Snamprogetti;
- Technip;
- Trigon Sheehan; and
- Universal Ensco.
JOINT VENTURES
From time to time in the ordinary course of our business, we enter into
joint venture agreements with other contractors for the performance of specific
projects. Typically, we seek one or more joint venture partners when a project
requires local content, equipment, manpower or other resources beyond those we
have available to complete work in a timely and efficient manner or when we wish
to share risk on a particularly large project. Our joint venture agreements
identify the work to be performed by each party, the procedures for managing the
joint venture work, the manner in which profits and losses will be shared by the
parties, the equipment, personnel or other assets that each party will make
available to the joint venture and the means by which any disputes will be
resolved. We completed the construction of the onshore pipeline for the Chad
Development Project in Chad and Cameroon, in such a joint venture with
Spie-Capag (Jersey) Ltd. in 2003.
CONTRACT PROVISIONS AND SUBCONTRACTING
Most of our revenue is derived from engineering and construction contracts.
We enter into four basic types of construction and specialty service contracts:
- firm fixed-price or lump sum fixed-price contracts providing for a
single price for the total amount of work or for a number of fixed
lump sums for the various work elements comprising the total price;
- unit-price contracts which specify a price for each unit of work
performed;
- time and materials contracts under which personnel and equipment are
provided under an agreed schedule of daily rates with other direct
costs being reimbursable; and
- a combination of the above (such as lump sums for certain items and
unit rates for others).
We enter into three types of engineering contracts:
- firm fixed-price or lump sum fixed-price contracts;
24
- time and materials contracts pursuant to which engineering services
are provided under an agreed schedule of hourly rates for different
categories of personnel, and materials and other direct costs are
reimbursable; and
- cost-plus-fee contracts, common with U.S. government entities and
agencies under which income is earned solely from the fee received.
Cost-plus-fee contracts are often used for material procurement
services.
Changes in scope of work are defined by change orders agreed to by both
parties. These changes can affect our contract revenue either positively or
negatively.
We usually obtain contracts through competitive bidding or through
negotiations with long-standing clients. We are typically invited to bid on
projects undertaken by our clients who maintain approved bidder lists. Bidders
are pre-qualified by virtue of their prior performance for such clients, as well
as their experience, reputation for quality, safety record, financial strength
and bonding capacity.
In evaluating bid opportunities, we consider such factors as the client,
the geographic location, the difficulty of the work, our current and projected
workload, the likelihood of additional work, the project's cost and
profitability estimates, and our competitive advantage relative to other likely
bidders. We give careful thought and consideration to the political and
financial stability of the country or region where the work is to be performed.
The bid estimate forms the basis of a project budget against which performance
is tracked through a project control system, enabling management to monitor
projects effectively.
All U.S. government contracts and many of our other contracts provide for
termination of the contract for the convenience of the client. In addition, many
contracts are subject to certain completion schedule requirements that require
us to pay liquidated damages in the event schedules are not met as the result of
circumstances within our control.
We act as prime contractor on a majority of the construction projects we
undertake. In our capacity as prime contractor and when acting as a
subcontractor, we perform most of the work on our projects with our own
resources and typically subcontract only such specialized activities as
hazardous waste removal, non-destructive inspection, tank erection, catering and
security. In the construction industry, the prime contractor is normally
responsible for the performance of the entire contract, including subcontract
work. Thus, when acting as a prime contractor, we are subject to the risk
associated with the failure of one or more subcontractors to perform as
anticipated.
A substantial portion of our projects are currently performed on a
fixed-price basis. Under a fixed-price contract, we agree on the price that we
will receive for the entire project, based upon specific assumptions and project
criteria. If our estimates of our own costs to complete the project are below
the actual costs that we may incur, our margins will decrease, and we may incur
a loss. The revenue, cost and gross profit realized on a fixed-price contract
will often vary from the estimated amounts because of unforeseen conditions or
changes in job conditions and variations in labor and equipment productivity
over the term of the contract. If we are unsuccessful in mitigating these risks,
we may realize gross profits that are different from those originally estimated
and may incur losses on projects. Depending on the size of a project, these
variations from estimated contract performance could have a significant effect
on our operating results for any quarter or year. In some cases, we are able to
recover additional costs and profits from the client through the change order
process. In general, turnkey contracts to be performed on a fixed-price basis
involve an increased risk of significant variations. This is a result of the
long-term nature of these contracts and the inherent difficulties in estimating
costs and of the interrelationship of the integrated services to be provided
under these contracts whereby unanticipated costs or delays in performing part
of the contract can have compounding effects by increasing costs of performing
other parts of the contract. Our accounting policy related to contract
variations and claims requires recognition of all costs as incurred. Revenue
from change orders, extra work and variations in the scope of work is recognized
when an agreement is reached with the client as to the scope of work and when it
is probable that the cost of such work will be recovered in a change in contract
price. Profit on change orders, extra work and variations in the scope of work
is recognized when realization is assured beyond a reasonable doubt. Also
included in contract costs and recognized income not yet billed on uncompleted
contracts are amounts the Company seeks or will seek to collect from customers
or others for errors or changes in contract specifications or design, contract
change orders in dispute or unapproved as to both scope and price, or other
customer-related causes of unanticipated additional contract costs (unapproved
change orders). These amounts are recorded at their estimated net realizable
value when realization is probable and can be reasonably estimated. Unapproved
change orders and claims also involve the use of estimates, and it is reasonably
possible that revisions to
25
the estimated recoverable amounts of recorded unapproved change orders may be
made in the near-term. If the Company does not successfully resolve these
matters, a net expense (recorded as a reduction in revenues), may be required,
in addition to amounts that have been previously provided for.
EMPLOYEES
At December 31, 2004, we employed directly a multi-national work force of
approximately 3,800 persons, of which approximately 67 percent were citizens of
the respective countries in which they work. Although the level of activity
varies from year to year, we have maintained an average work force of
approximately 3,530 over the past five years. The minimum employment during that
period has been 2,194 and the maximum was 4,620. At December 31, 2004,
approximately 41 percent of our employees were covered by collective bargaining
agreements. We believe our relations with our employees are satisfactory.
The following table sets forth the location of employees by work countries
as of December 31, 2004:
NUMBER OF
EMPLOYEES PERCENT
--------- -------
Nigeria .................................................. 2,385 63%
Oman ..................................................... 566 15
U.S. Construction ........................................ 303 8
U.S. Engineering ......................................... 184 5
Canada ................................................... 159 4
U.S. Administration ...................................... 106 3
Other .................................................... 63 2
----- ---
Total .................................................... 3,766 100%
===== ===
EQUIPMENT
We own, lease, and maintain a fleet of generally standardized construction,
transportation and support equipment. In 2004 and 2003, expenditures for capital
equipment were $38.5 million and $34.0 million, respectively. At December 31,
2004, the net book value of our property, plant, equipment was $116.6 million.
Historically, we have elected to own rather than lease equipment to ensure
the required equipment is available as needed. We believe this has resulted in
lower equipment costs. We are constantly evaluating the availability of
equipment and may from time to time pursue the leasing of equipment to support
projects. In recent years, the leasing market for heavy construction equipment
in international locales has become much more competitive. As a result, we have
recently made more significant use of leasing to support our project equipment
requirements. We continue to evaluate expected equipment utilization, given
anticipated market conditions, and may dispose of underutilized equipment from
time to time. All equipment is subject to scheduled maintenance to maximize
fleet readiness. We have maintenance facilities at Azaiba, Oman; Channelview,
Texas; Fruita, Colorado; Ft. McMurray, Alberta, Canada; Houston, Texas;
Maracaibo, Venezuela; and Port Harcourt, Nigeria, as well as temporary site
facilities on major jobs to minimize downtime.
FACILITIES
In Channelview, Texas, near Houston, we own a 20-acre equipment and
maintenance facility, which includes an office and maintenance shop building. In
Houston, we own a 10-acre equipment yard and maintenance facility which includes
an 8,500 square foot maintenance/warehouse building and an office building
totaling approximately 8,200 square feet. Also, in Tulsa, Oklahoma we own a
100,000 square foot office building. In Canada, we own a 10,000 square foot
fabrication shop on three acres of land in Ft. McMurray, Alberta, and another
10,000 square foot facility in Edmonton, Alberta, Canada. In February, 2005, we
committed to purchase an additional 90,000 square foot fabrication facility in
the Edmonton area. In Venezuela, our offices and construction facilities are
located on 15 acres of land, which we own, on the shores of Lake Maracaibo. We
own an office/shop/warehouse facility in Gillette, Wyoming, which consists of a
50 foot by 150 foot building on a 4.5-acre site. We lease all other facilities
used in our operations, including corporate offices in Panama; administrative,
procurement and engineering offices in Houston,
26
Texas; Fruita, Colorado; Salt Lake City (Murray), Utah and various office
facilities, equipment sites and expatriate housing units in the United States,
Bolivia, Canada, Ecuador, England, Nigeria, Oman, and Venezuela. Rent expense
for these facilities was $1.8 million in 2004 and $2.1 million in 2003. We own a
14-acre equipment yard/maintenance facility that is under lease to a third party
in Broken Arrow, Oklahoma, a short distance from Tulsa, Oklahoma. This property
was sold in 2005.
INSURANCE AND BONDING
Operational risks are analyzed and categorized by our risk management
department and are insured through major international insurance brokers under a
comprehensive insurance program, which includes commercial insurance policies,
consisting of the types and amounts typically carried by companies engaged in
the worldwide engineering and construction industry. We maintain worldwide
master policies written mostly through highly-rated insurers. These policies
cover our land and marine property, plant, equipment and cargo against all
normally insurable risks, including war risk, political risk and terrorism, in
third-world countries. Other policies cover our workers and liabilities arising
out of our operations. Primary and excess liability insurance limits are
consistent with the level of our asset base. Risks of loss or damage to project
works and materials are often insured on our behalf by our clients. On other
projects, "builders all risk insurance" is purchased when deemed necessary.
Substantially all insurance is purchased and maintained at the corporate level,
other than certain basic insurance, which must be purchased in some countries in
order to comply with local insurance laws.
The insurance protection we maintain may not be sufficient or effective
under all circumstances or against all hazards to which we may be subject. An
enforceable claim for which we are not fully insured could have a material
adverse effect on our results of operations. In the future, our ability to
maintain insurance, which may not be available or at rates we consider
reasonable, may be affected by events over which we have no control, such as
those that occurred on September 11, 2001.
We often are required to provide surety bonds guaranteeing our performance
and/or financial obligations. The amount of bonding available to us depends upon
our experience and reputation in the industry, financial condition, backlog and
management expertise, among other factors. We maintain relationships with two
highly-rated surety companies to provide surety bonds. We also use letters of
credit issued under our credit facility in lieu of bonds to satisfy performance
and financial guarantees on some projects when required.
RISK FACTORS
The nature of our business and operations subjects us to a number of
uncertainties and risks.
GOVERNMENTAL INVESTIGATIONS INTO THE ACTIVITIES OF THE COMPANY, J. KENNETH
TILLERY, THE FORMER PRESIDENT OF OUR PRINCIPAL INTERNATIONAL SUBSIDIARY, AND
OTHER CURRENT AND FORMER EMPLOYEES OF THE COMPANY COULD ADVERSELY AFFECT US.
In late December 2004, we learned that tax authorities in Bolivia had
charged our Bolivian subsidiary with failure to pay taxes owed, filing improper
tax returns and the falsification of tax documents. As a result of the Company's
investigation, we determined that J. Kenneth Tillery, then President of Willbros
International, Inc. ("WII") and the individual principally responsible at that
time for the Company's international operations outside of the United States and
Canada, was aware of the circumstances that led to the Bolivian charges. Mr.
Tillery resigned from the Company on January 6, 2005. Based on our preliminary
investigation, we determined that our Bolivian subsidiary had also failed to
properly withhold taxes on payments made in Bolivia and had failed to file tax
returns related to those withholding taxes. We reported this information to the
Bolivian government. In March, 2005, we paid approximately $3.3 million to
resolve outstanding assessments with the Bolivian tax authorities.
On January 18, 2005, the Company's Audit Committee engaged independent
outside legal counsel for the purpose of commencing an investigation into the
circumstances surrounding the Bolivian tax assessment as well as other
activities which were previously under the control of Mr. Tillery. The
independent counsel retained forensic accountants to assist with the
investigation.
The investigations conducted by the Audit Committee and senior management
have revealed information indicating that Mr. Tillery, and others who directly
or indirectly reported to him, engaged in a
27
pattern of activity over a number of years that was and is specifically contrary
to established Company policies and possibly the laws of several countries,
including the United States. A summary description of the activities carried out
by Mr. Tillery and others that may have damaged the Company or that may cause
such damage in the future is provided in the risk factor below entitled "The
actions of Mr. Tillery and others have harmed the Company and may harm the
Company in the future." Our investigations determined the following:
- Under the direction of Mr. Tillery and others acting under his
direction, the Company's Bolivian subsidiary filed incorrect tax
returns, failed to file required tax returns and failed to pay taxes
owed.
- Mr. Tillery and other employees or consultants of WII or its
subsidiaries may have made or caused others to make payments directly
or indirectly to government officials in connection with the
submission of incorrect tax information.
- Mr. Tillery and other employees or consultants of WII or its
subsidiaries may have made or caused others to make payments directly
or indirectly to government officials and client representatives in
connection with the award and retention of business in Nigeria, the
reduction of Nigerian tax obligations, the facilitation of Nigerian
customs clearances and the disposition of Nigerian legal proceedings.
- Mr. Tillery and other employees or consultants of WII or its
subsidiaries have made or caused others to make payments directly or
indirectly to government officials in connection with attempts to
obtain and/or retain business in Ecuador.
- Mr. Tillery and other employees or consultants of WII or its
subsidiaries usurped corporate opportunities and owned undisclosed
interests in enterprises with which the Company had material
relationships.
- Mr. Tillery and other employees or consultants of WII or its
subsidiaries may have engaged in discussions or entered into
arrangements with competitors of the Company regarding bidding
strategies for projects outside the United States.
- Mr. Tillery may have acquiesced in or approved a prior commitment by
another to make an improper future payment in Mexico.
- Mr. Tillery and other employees of WII or its subsidiaries may have
received kickbacks, payments and/or other improper benefits from
Company consultants, suppliers and/or competitors or may otherwise
have benefited personally as a result of the activities described
above.
- Mr. Tillery and other employees or consultants of WII or its
subsidiaries may have intentionally mischaracterized Company
expenditures resulting in the Company's books not accurately
reflecting the true nature of such expenditures.
- Acts carried out by Mr. Tillery and others acting under his direction
with respect to a bid for work in Sudan may constitute facilitation
efforts prohibited by U.S. law, a violation of U.S. trade sanctions
and the unauthorized export of technical information.
- Some of the actions of Mr. Tillery and other employees or consultants
of WII or its subsidiaries may have caused the Company to violate U.S.
securities laws, including the Foreign Corrupt Practices Act ("FCPA"),
and/or other U.S. and foreign laws.
- Following Mr. Tillery's resignation, other employees of WII or its
subsidiaries may have continued to carry out improper activities
previously initiated by Mr. Tillery. Those employees may have made
payments directly to certain government officials or to third party
consultants with the understanding that such payments would be paid to
government officials.
We have voluntarily reported the results of our investigations to both the
United States Securities and Exchange Commission ("SEC") and the United States
Department of Justice ("DOJ"). We have also voluntarily reported the potentially
improper facilitation and export activities to the United States Department of
Treasury's Office of Foreign Assets Control ("OFAC"), and to the DOJ and to the
SEC. OFAC is
28
commencing an investigation of the reported facilitation and export activities.
The SEC and the DOJ are each conducting their own investigations of other
actions taken by the Company and its employees and representatives that may
constitute violations of U.S. law. We are cooperating fully with all such
investigations. If the Company or one of its subsidiaries is found to have
violated the U.S. securities laws (including the FCPA), that entity could be
subject to civil penalties of up to $650,000 per violation, and criminal
penalties of up to the greater of $2 million per violation or twice the gross
pecuniary gain resulting from the improper conduct and other sanctions. If the
Company or one of its subsidiaries is found to have violated U.S. trade
sanctions or U.S. export restrictions that entity could be subject to civil
penalties of up to $11,000 per violation and criminal penalties of up to
$250,000 per violation. In each case there could be multiple violations. The
Company and its subsidiaries could also be barred from participating in future
U.S. government contracts and from participating in certain U.S. export
transactions. There may be other penalties that could apply under other U.S.
laws or the laws of foreign jurisdictions. The Company cannot predict the
outcome of the investigations being conducted by the SEC, the DOJ and OFAC,
including the Company's exposure to civil or criminal fines or penalties, or
other regulatory action which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has terminated employment relationships and commercial and/or
consulting arrangements with multiple entities and individuals by whom, through
whom and to whom potentially improper payments may have been made in Bolivia,
Nigeria and Ecuador. In at least two instances, we have received claims that
such terminations are unjustified and may constitute a breach of contract. There
can be no assurance that the severance of long term relationships with
influential consultants and other individuals will not adversely impact the
Company's ability to retain business it currently has, its ability to collect
receivables currently outstanding or its ability to collect receivables from new
business, particularly in Nigeria.
Our investigations have also led us to believe that there are material
weaknesses in the Company's internal controls and procedures. As a result of the
alleged misconduct which those controls and procedures failed to detect, it has
become necessary for us to correct our financial statements for the periods 2000
through 2003 and the first three quarters of 2004. Although the Company is
in the process of implementing an enhanced system of internal controls and
procedures, there is no assurance that those enhanced controls and procedures
will completely eliminate future inaccuracies or violations of law. See Item 9A
"Controls and Procedures" of this Form 10-K for a discussion of our disclosure
controls and procedures and measures being taken by the Company to address the
material weaknesses and significant deficiencies in our internal controls.
THE ACTIONS OF MR. TILLERY AND OTHERS HAVE HARMED THE COMPANY AND MAY HARM THE
COMPANY IN THE FUTURE.
Mr. Tillery became the Managing Director of the Company's affiliate in
Nigeria in 1995. Evidence that arose from our investigations indicates that Mr.
Tillery thereafter acquired interests in, or began exercising some control over,
several entities that did business with the Company and did not disclose such
interests and relationships to the Company. Mr. Tillery authorized and directed
numerous transactions between Company subsidiaries and entities in which he
owned an interest or over which he exercised control. That practice continued
until his resignation from the Company. Mr. Tillery obtained significant
personal benefit from such dealings and such benefit should have been made
available to the Company. In some cases, the Company may still be acquiring
goods or services from entities in which Mr. Tillery has an interest because
suitable alternatives have not yet been found or legal constraints prevent the
immediate termination of those relationships. However, the Company has
discontinued all payments to all such entities that it believes might constitute
a violation of law. During the course of his employment with various
subsidiaries of the Company, Mr. Tillery submitted numerous certifications
disclaiming any related party interests or transactions with the Company or its
subsidiaries. His failure to disclose his interests was a violation of the
Company's written policies and may have caused the Company to violate rules or
laws related to the public disclosure of such information. See Note 18 of our
"Notes to Consolidated Financial Statements" included in Item 8 of this Form
10-K for additional information regarding related party transactions.
Although no Company official is authorized to do so, Mr. Tillery used the
apparent authority of his positions with Company subsidiaries and affiliates to
personally make or cause to be made numerous unauthorized payments from the
Company's bank accounts and cash reserves. Some such payments were significant
and were used, for among other purposes:
29
- to influence various officials and judicial authorities for the
purpose of reducing tax obligations;
- to dispose of lawsuits and/or influence a variety of legal matters;
and
- to facilitate actions by customs officials in connection with the
importation and exportation of materials and equipment.
Mr. Tillery and other employees of WII or its subsidiaries also caused
substantial payments to be made from Company funds for the nominal purpose of
obtaining consulting or advisory services when the actual purpose of at least a
portion of the amounts paid was to fund payments to government or client
officials for the purpose of obtaining or retaining Company business. Some of
these payments appear to have benefited Mr. Tillery's own personal interests as
well as those of others who cooperated with him. There is a significant
probability that such activities constituted violations of U.S. and other laws.
See the risk factor above entitled "Governmental investigations into the
activities of the Company, J. Kenneth Tillery, the former President of our
principal international subsidiary, and other current and former employees of
the Company could adversely affect us".
OUR REPUTATION AND OUR ABILITY TO DO BUSINESS MAY BE IMPAIRED BY THE CORRUPT
BEHAVIOR OF MR. TILLERY AND OTHER EMPLOYEES OF WII OR ITS SUBSIDIARIES.
We are committed to conducting business worldwide in a legal and ethical
manner. Many of our clients make compliance with applicable laws and ethical
conduct a condition to their business relationships. The actions of Mr. Tillery
and other employees of WII or its subsidiaries may cause us to be disqualified
from some business opportunities with clients and others who require their
business partners to maintain high ethical standards. In addition, certain of
the actions already taken by Mr. Tillery and others may continue to impose
serious obstacles to implementation of the enhanced compliance controls
procedures we are now striving to implement, particularly in Nigeria. Some
individuals who received the improper payments may threaten the personal safety
of our employees and may seek to bar us from continuing to win or carry out
business with entities that are subject to their influence. In addition, those
individuals may seek to cause such entities to stop or delay payments that are
due us.
SPECIAL RISKS ASSOCIATED WITH DOING BUSINESS IN HIGHLY CORRUPT ENVIRONMENTS MAY
ADVERSELY AFFECT OUR BUSINESS.
Our international business operations include projects in countries where
corruption is prevalent. Since the anti-bribery restrictions of the FCPA make it
illegal for us to give anything of value to foreign officials in order to obtain
or retain any business or other advantage, we may be subject to competitive
disadvantages to the extent that our competitors are able to secure business,
licenses or other preferential treatment by making payments to government
officials and others in positions of influence.
INVESTORS ARE SEEKING TO RECOVER DAMAGES FROM US BECAUSE OF THE ACTIONS OF MR.
TILLERY AND OTHERS.
Several lawsuits have been brought against the Company and certain of our
current and former officers and directors, asserting violations of federal
securities laws. We cannot predict the outcome of these lawsuits. While the
Company maintains insurance that may cover the defense of those lawsuits and
damages or other monetary remedies assessed against us or our current and former
officers and directors, such insurance may not cover all claims or may not be
adequate to cover all costs, damages and assessments. Substantial, uninsured
damages or other monetary remedies assessed against us could have a material
adverse effect on our business, results of operations, financial condition and
cash flows. See Item 3 "Legal Proceedings" of this Form 10-K for a discussion of
the various lawsuits.
OUR BUSINESS IS HIGHLY DEPENDENT UPON THE LEVEL OF CAPITAL EXPENDITURES BY OIL,
GAS AND POWER COMPANIES ON INFRASTRUCTURE.
Our revenue and cash flow are primarily dependent upon major engineering
and construction projects. The availability of these types of projects is
dependent upon the condition of the oil, gas and power industries, and,
specifically, the level of capital expenditures of oil, gas and power companies
on infrastructure. Our failure to obtain major projects, the delay in awards of
major projects, the cancellation of major projects or delays in completion of
contracts are factors that could result in the under-utilization of our
resources, which would have an adverse impact on our revenue and cash flow.
There are numerous factors beyond our control that influence the level of
capital expenditures of oil, gas and power companies, including:
30
- current and projected oil, gas and power prices;
- the demand for electricity;
- the abilities of oil, gas and power companies to generate, access and
deploy capital;
- exploration, production and transportation costs;
- the discovery rate of new oil and gas reserves;
- the sale and expiration dates of oil and gas leases and concessions;
- regulatory restraints on the rates that power companies may charge
their customers;
- local and international political and economic conditions;
- the ability or willingness of host country government entities to fund
their budgetary commitments; and
- technological advances.
OUR SIGNIFICANT INTERNATIONAL OPERATIONS ARE SUBJECT TO POLITICAL AND ECONOMIC
RISKS OF DEVELOPING COUNTRIES.
We have substantial operations and/or assets in Africa (Nigeria and
Offshore West Africa), the Middle East (Oman) and South America (Venezuela).
Approximately 60 percent of our contract revenue for 2004 was derived from
activities outside of North America, and approximately 54 percent of our
long-lived assets as of December 31, 2004 were located outside of North America.
For a list of revenue and assets by country, see Note 15 of our "Notes to
Consolidated Financial Statements" included in Item 8 of this Form 10-K.
Each of these locations is presently a unique commercial and political
environment for our business. A disruption of activities, or loss of use of the
equipment or installations, at any of these locations could have a material
adverse effect on our financial condition and results of operations. In
particular, Nigeria and West Africa have represented and are expected to
continue to represent a significant percentage of our assets, backlog and
revenue. These areas have experienced periods of extreme political instability
in recent years. Accordingly, we are subject to risks which ordinarily would not
be expected to exist to the same extent in the United States, Canada, Japan or
Western Europe. Some of these risks include:
- repatriating foreign currency received in excess of local currency
requirements and converting it into dollars or other fungible
currency;
- exchange rate fluctuations, which can reduce the purchasing power of
local currencies and cause our costs to exceed our budget, reducing
our operating margin in the affected country;
- expropriation of assets, by either a recognized or unrecognized
foreign government, which can disrupt our business activities and
create delays and corresponding losses;
- civil uprisings, riots and war, which can make it impractical to
continue operations, adversely affect both budgets and schedules and
expose us to losses;
- availability of suitable personnel and equipment, which can be
affected by government policy, or changes in policy, which limit the
importation of skilled craftsmen or specialized equipment in areas
where local resources are insufficient;
- government instability, which can cause investment in capital projects
by our potential customers to be withdrawn or delayed, reducing or
eliminating the viability of some markets for our services;
- decrees, laws, regulations, interpretations and court decisions under
legal systems, which are not always fully developed and which may be
retroactively applied and cause us to incur unanticipated and/or
unrecoverable costs as well as delays which may result in real or
opportunity costs; and
- terrorist attacks such as those which occurred on September 11, 2001
in the United States, which could impact insurance rates, insurance
coverages and the level of economic activity, and produce instability,
in financial markets.
Our operations in developing countries may be adversely affected in the
event any governmental agencies in these countries interpret laws, regulations
or court decisions in a manner which might be considered inconsistent or
inequitable in the United States, Canada, Japan or Western Europe. We may be
subject to unanticipated taxes, including income taxes, excise duties, import
taxes, export taxes, sales taxes or other governmental assessments which could
have a material adverse effect on our results of operations for any quarter or
year.
These risks may result in a loss of business which could have a material
adverse effect on our results of operations.
31
WE MAY BE ADVERSELY AFFECTED BY A CONCENTRATION OF BUSINESS IN A PARTICULAR
COUNTRY.
Due to a limited number of major projects worldwide, we currently have, and
expect that we will continue to have, a substantial portion of our resources
dedicated to projects located in a few countries. Therefore, our results of
operations are susceptible to adverse events beyond our control that may occur
in a particular country in which our business may be concentrated at that time.
Economic downturns in such countries could also have an adverse impact our
operations. At December 31, 2004, our property, plant, equipment and spare parts
were located in Nigeria, the United States, Canada, Offshore West Africa, South
America and the Middle East and 84 percent of our backlog was located in Nigeria
and Offshore West Africa. Our operations and assets are subject to various risks
inherent in conducting business in these countries and regions.
OUR BUSINESS IS DEPENDENT ON A LIMITED NUMBER OF KEY CLIENTS.
We operate primarily in the oil, gas and power industries, providing
construction, engineering and facilities development and operations services to
a limited number of clients. Much of our success depends on developing and
maintaining relationships with our major clients and obtaining a share of
contracts from these clients. The loss of any of our major clients could have a
material adverse effect on our operations. Our 10 largest clients were
responsible for 64 percent of our revenue in 2004 and 75 percent of our revenue
in 2003 and in 2002. Operating units of Royal Dutch Shell Group and Halliburton
accounted for 21 percent and 11 percent, respectively, of our total revenue in
2004.
OUR DEPENDENCE UPON FIXED-PRICE CONTRACTS COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
A substantial portion of our projects are currently performed on a
fixed-price basis. Under a fixed-price contract, we agree on the price that we
will receive for the entire project, based upon a defined scope, which includes
specific assumptions and project criteria. If our estimates of our own costs to
complete the project are below the actual costs that we may incur, our margins
will decrease, and we may incur a loss. The revenue, cost and gross profit
realized on a fixed-price contract will often vary from the estimated amounts
because of unforeseen conditions or changes in job conditions and variations in
labor and equipment productivity over the term of the contract. If we are
unsuccessful in mitigating these risks, we may realize gross profits that are
different from those originally estimated and incur reduced profitability or
losses on projects. Depending on the size of a project, these variations from
estimated contract performance could have a significant effect on our operating
results for any quarter or year. In general, turnkey contracts to be performed
on a fixed-price basis involve an increased risk of significant variations. This
is a result of the long-term nature of these contracts and the inherent
difficulties in estimating costs and of the interrelationship of the integrated
services to be provided under these contracts whereby unanticipated costs or
delays in performing part of the contract can have compounding effects by
increasing costs of performing other parts of the contract.
PERCENTAGE-OF-COMPLETION METHOD OF ACCOUNTING FOR CONTRACT REVENUE MAY RESULT IN
MATERIAL ADJUSTMENTS THAT WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We recognize contract revenue using the percentage-of-completion method on
long-term fixed price contracts. Under this method, estimated contract revenue
is accrued based generally on the percentage that costs to date bear to total
estimated costs, taking into consideration physical completion. Estimated
contract losses are recognized in full when determined. Accordingly, contract
revenue and total cost estimates are reviewed and revised periodically as the
work progresses and as change orders are approved, and adjustments based upon
the percentage-of-completion are reflected in contract revenue in the period
when these estimates are revised. These estimates are based on management's
reasonable assumptions and our historical experience, and are only estimates.
Variation of actual results from these assumptions or our historical experience
could be material. To the extent that these adjustments result in an increase, a
reduction or an elimination of previously reported contract revenue, we would
recognize a credit or a charge against current earnings, which could be
material.
TERRORIST ATTACKS AND WAR OR RISK OF WAR MAY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS, OUR ABILITY TO RAISE CAPITAL OR SECURE INSURANCE OR OUR FUTURE
GROWTH.
The continued threat of terrorism and the impact of military and other
action, including U.S. military operations in Iraq, will likely lead to
continued volatility in prices for crude oil and natural gas and could affect
32
the markets for our operations. In addition, future acts of terrorism could be
directed against companies operating both outside and inside the United States.
Further, the U.S. government has issued public warnings that indicate that
pipelines and other energy assets might be specific targets of terrorist
organizations. These developments have subjected our operations to increased
risks and, depending on their ultimate magnitude, could have a material adverse
effect on our business.
OUR OPERATIONS ARE SUBJECT TO A NUMBER OF OPERATIONAL RISKS.
Our business operations include pipeline construction, dredging,
fabrication pipeline rehabilitation services, marine support services and the
operation of vessels and heavy equipment. These operations involve a high degree
of operational risk. Natural disasters, adverse weather conditions, collisions
and operator or navigational error could cause personal injury or loss of life,
severe damage to and destruction of property, equipment and the environment and
suspension of operations. In locations where we perform work with equipment that
is owned by others, our continued use of the equipment can be subject to
unexpected or arbitrary interruption or termination. The occurrence of any of
these events could result in work stoppage, loss of revenue, casualty loss,
increased costs and significant liability to third-parties.
The insurance protection we maintain may not be sufficient or effective
under all circumstances or against all hazards to which we may be subject. An
enforceable claim for which we are not fully insured could have a material
adverse effect on our financial condition and results of operations. Moreover,
we may not be able to maintain adequate insurance in the future at rates that we
consider reasonable.
WE MAY BECOME LIABLE FOR THE OBLIGATIONS OF OUR JOINT VENTURES AND OUR
SUBCONTRACTORS.
Some of our projects are performed through joint ventures with other
parties. In addition to the usual liability of contractors for the completion of
contracts and the warranty of our work, where work is performed through a joint
venture, we also have potential liability for the work performed by our joint
ventures. In these projects, even if we satisfactorily complete our project
responsibilities within budget, we may incur additional unforeseen costs due to
the failure of our joint ventures to perform or complete work in accordance with
contract specifications.
We act as prime contractor on a majority of the construction projects we
undertake. In our capacity as prime contractor and when acting as a
subcontractor, we perform most of the work on our projects with our own
resources and typically subcontract only such specialized activities as
hazardous waste removal, nondestructive inspection, tank erection, catering and
security. In the construction industry, the prime contractor is normally
responsible for the performance of the entire contract, including subcontract
work. Thus, when acting as a prime contractor, we are subject to the risk
associated with the failure of one or more subcontractors to perform as
anticipated.
GOVERNMENTAL REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Many aspects of our operations are subject to governmental regulations in
the countries in which we operate, including those relating to currency
conversion and repatriation, taxation of our earnings and earnings of our
personnel, and our use of local employees and suppliers. In addition, we depend
on the demand for our services from the oil, gas and power industries, and,
therefore, our business is affected by changing taxes, price controls and laws
and regulations relating to the oil, gas and power industries generally. The
adoption of laws and regulations by the countries or the states in which we
operate that are intended to curtail exploration and development drilling for
oil and gas or the development of power generation facilities for economic and
other policy reasons, could adversely affect our operations by limiting demand
for our services.
Our operations are also subject to the risk of changes in laws and policies
which may impose restrictions on our business, including trade restrictions,
which could have a material adverse effect on our operations. Other types of
governmental regulation which could, if enacted or implemented, adversely affect
our operations include:
- expropriation or nationalization decrees;
- confiscatory tax systems;
- primary or secondary boycotts directed at specific countries or
companies;
- embargoes;
33
- extensive import restrictions or other trade barriers;
- mandatory sourcing rules;
- oil, gas or power price regulation; and
- unrealistically high labor rate and fuel price regulation.
Our future operations and earnings may be adversely affected by new
legislation, new regulations or changes in, or new interpretations of, existing
regulations, and the impact of these changes could be material.
OUR OPERATIONS EXPOSE US TO POTENTIAL ENVIRONMENTAL LIABILITIES.
Our United States operations are subject to numerous environmental
protection laws and regulations which are complex and stringent. We regularly
perform work in and around sensitive environmental areas such as rivers, lakes
and wetlands. Significant fines and penalties may be imposed for non-compliance
with environmental laws and regulations, and some environmental laws provide for
joint and several strict liability for remediation of releases of hazardous
substances, rendering a person liable for environmental damage, without regard
to negligence or fault on the part of such person. In addition to potential
liabilities that may be incurred in satisfying these requirements, we may be
subject to claims alleging personal injury or property damage as a result of
alleged exposure to hazardous substances. These laws and regulations may expose
us to liability arising out of the conduct of operations or conditions caused by
others, or for our acts which were in compliance with all applicable laws at the
time these acts were performed.
We own and operate several properties in the United States that have been
used for a number of years for the storage and maintenance of equipment and upon
which hydrocarbons or other wastes may have been disposed or released. Any
release of substances by us or by third-parties who previously operated on these
properties may be subject to the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA"), the Resource Compensation and
Recovery Act ("RCRA"), and analogous state laws. CERCLA imposes joint and
several liability, without regard to fault or the legality of the original
conduct, on certain classes of persons who are considered to be responsible for
the release of hazardous substances into the environment, while RCRA governs the
generation, storage, transfer, and disposal of hazardous wastes. Under such
laws, we could be required to remove or remediate previously disposed wastes and
clean up contaminated property. This could have a significant impact on our
future results.
Our operations outside of the United States are potentially subject to
similar governmental controls and restrictions relating to the environment.
OUR INDUSTRY IS HIGHLY COMPETITIVE, WHICH COULD IMPEDE OUR GROWTH.
We operate in a highly competitive environment. A substantial number of the
major projects that we pursue are awarded based on bid proposals. We compete for
these projects against government-owned or supported companies and other
companies that have substantially greater financial and other resources than we
do. In some markets, there is competition from national and regional firms
against which we may not be able to compete on price. Our growth may be impacted
to the extent that we are unable to successfully bid against these companies.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF OUR NON-U.S. OPERATIONS
BECAME TAXABLE IN THE UNITED STATES.
If any income earned, currently or historically, by Willbros Group, Inc. or
its non-U.S. subsidiaries from operations outside the United States constituted
income effectively connected to a United States trade or business, and as a
result became taxable in the United States, our consolidated operating results
could be materially and adversely affected.
WE ARE DEPENDENT UPON THE SERVICES OF OUR EXECUTIVE MANAGEMENT.
Our success depends heavily on the continued services of our executive
management. Our management team is the nexus of our operational experience and
customer relationships. Our ability to manage business risk and satisfy the
expectations of our clients, stockholders and other stakeholders is dependent
upon the collective experience and relationships of our management team. In
34
addition, we do not maintain key man life insurance for these individuals. The
loss or interruption of services provided by one or more of our senior officers
could adversely affect our results of operations.
WE ARE SUBJECT TO A NEW ACCOUNTING RULE THAT MAY RESULT IN LOWER EARNINGS PER
SHARE, ON A DILUTED BASIS.
In September 2004, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on EITF Issue No. 04-8, "The Effect of Contingently
Convertible Debt on Convertible Diluted Earnings Per Share," that requires the
shares of common stock issuable upon conversion of our 2.75% convertible senior
notes to be included in the Company's diluted earnings per share calculation (if
dilutive), retroactive to the date of issuance by applying the "if converted"
method under SFAS 128, "Earnings Per Share". In October 2004, FASB ratified the
EITF's consensus. Since we reported a net loss for the four quarters and the
year ended December 31, 2004, application of the "if converted" method under
SFAS 128 would have been anti-dilutive and would not have required us to include
the approximately 3.6 million shares of our common stock issuable as of December
31, 2004, upon conversion as additional shares in our diluted earnings per share
computation. See Note 9 of our "Notes to Consolidated Financial Statements"
included in Item 8 of this Form 10-K for additional information on the
convertible notes. In the future, our diluted earnings per share will be reduced
in any period in which conversion of the convertible notes would not be
anti-dilutive, regardless of whether the thresholds allowing conversion have
been met.
OUR STOCKHOLDER RIGHTS PLAN, ARTICLES OF INCORPORATION AND BY-LAWS MAY INHIBIT A
TAKEOVER, WHICH MAY ADVERSELY AFFECT THE PERFORMANCE OF OUR STOCK.
Our Stockholder Rights Plan and provisions of our Articles of Incorporation
and By-Laws may discourage unsolicited takeover proposals or make it more
difficult for a third-party to acquire us, which may adversely affect the price
that investors might be willing to pay for our common stock. For example, our
Articles of Incorporation and By-Laws:
- provide for restrictions on the transfer of any shares of common stock
to prevent us from becoming a "controlled foreign corporation" under
United States tax law;
- provide for a classified board of directors, which allows only
one-third of our directors to be elected each year;
- restrict the ability of stockholders to take action by written
consent;
- establish advance notice requirements for nominations for election to
our board of directors; and
- authorize our board of directors to designate the terms of and issue
new series of preferred stock.
The Stockholder Rights Plan gives holders of our common stock the right to
purchase additional shares of our capital stock if a potential acquirer
purchases or announces a tender or exchange offer to purchase 15 percent or more
of our outstanding common stock. The rights issued under the Stockholder Rights
Plan would cause substantial dilution to a person or group that attempts to
acquire us on terms not approved in advance by our board of directors.
IT MAY BE DIFFICULT TO ENFORCE JUDGMENTS WHICH ARE PREDICATED ON THE FEDERAL
SECURITIES LAWS OF THE UNITED STATES AGAINST US.
We are a corporation organized under the laws of the Republic of Panama.
Accordingly:
- because a substantial amount of our assets are located outside the
United States, any judgment obtained against us in the United States
may not be fully collectible in the United States; and
- we have been advised that courts in the Republic of Panama will not
enforce liabilities in original actions predicated solely on the
United States federal securities laws.
These factors mean that it may be more costly and difficult for you to
recover fully any alleged damages that you may claim to have suffered due to
alleged violations of federal securities laws by us or our management than it
would otherwise be in the case of a United States corporation.
IF WE ARE NOT ABLE TO NEGOTIATE WAIVERS OF THE DEFAULTS UNDER THE 2004 CREDIT
FACILITY OUR ABILITY TO OPERATE WOULD BE SIGNIFICANTLY RESTRICTED
The Company was not in compliance with certain of the financial covenants
under the 2004 Credit Facility at September 30, 2005 and the Company has not
obtained a waiver. The Company also believes it will not be in compliance with
certain of the financial covenants under the 2004 Credit Facility at December
31, 2005. As a result of the covenant violations and the failure to provide
certain financial statements by September 30, 2005, the bank syndicate has the
right to discontinue advances under the facility as well as the issuance of new
letters of credit. The inability of the Company to access new letters of credit
could negatively impact the Company's ability to take on new work or bid
additional work where letters of credit are required in order to bid on a
project. Additionally, the bank syndicate could request that the Company provide
cash collateral for outstanding letters of credit. The Company has begun
discussions with the bank syndicate regarding obtaining a waiver of the
necessary covenants. However, we cannot assure you that we will be successful in
negotiating additional waivers or amendments or that the lenders would not
require us to collateralize our existing letters of credit. Should the Company
fail to obtain the necessary waiver or amendment; our operations will be
adversely impacted.
35
ITEM 3. LEGAL PROCEEDINGS
We have voluntarily reported the results of our investigations into certain
activities of J. Kenneth Tillery, the former President of WII, and other
employees of WII or its subsidiaries to the United States Department of Justice
("DOJ") and to the United States Securities and Exchange Commission ("SEC").
The DOJ is conducting an investigation concerning possible violations of
the United States Foreign Corrupt Practices Act ("FCPA") and other applicable
U.S. laws.
The SEC is conducting a formal non-public investigation into whether the
Company and others may have violated various provisions of the Securities Act of
1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the
"Exchange Act").
We have also voluntarily reported to the United States Department of
Treasury's Office of Foreign Assets Control ("OFAC") the substance of certain
activities conducted by certain employees that may constitute a violation of
U.S. trade sanctions administered and enforced by the Department of Treasury and
U.S. export restrictions administered by the Department of Commerce. OFAC is
currently investigating the information we have provided and could conclude that
we have violated the Sudanese Sanctions Regulations.
The Company is cooperating fully with all of these investigations. Any
violations could result in civil or criminal charges, penalties or other actions
that may adversely impact our ability to continue or undertake operations in
some countries. The Company cannot predict the outcome of the investigations
being conducted by the SEC, the DOJ and OFAC, including the Company's exposure
to civil or criminal fines or penalties, or other regulatory action which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
For a further discussion of the potential adverse impact on our business,
financial condition and results of operations related to these investigations,
see the risk factor contained in Items 1 and 2 of this Form 10-K entitled
"Governmental investigations into the activities of the Company, J. Kenneth
Tillery, the former President of our principal international subsidiary, and
other current and former employees of the Company could adversely affect us."
We have received letters from two Nigerian law firms alleging that we have
not complied with our obligations under certain consulting contracts with their
clients. The Company has not recognized contract costs or accrued any liability
for the $3,845 related to these asserted obligations. We believe that compliance
with those contracts may constitute a violation of the United States Foreign
Corrupt Practices Act and accordingly, we will not comply. While there can be no
assurance that a court or arbitration panel considering those contracts would
not award damages to the consulting firms who are parties to such contracts; the
Company believes the likelihood of a material adverse effect on our financial
position or results of operations from a resolution of this matter is remote.
On May 18, 2005 a putative securities class-action, captioned Legion
Partners, LLP v. Willbros Group, Inc. et al., was filed in the United States
District Court for the Southern District of Texas against the Company and
certain of its present and former officers and directors. Thereafter, three
nearly identical lawsuits were filed. Plaintiffs purport to represent a class
composed of all persons who purchased or otherwise acquired Willbros Group, Inc.
common stock and/or other securities between May 6, 2002 and May 16, 2005,
inclusive. These complaints generally allege violations by the defendants of
Section 10(b) of the Exchange Act, Rule 10b-5 under the Exchange Act and Section
20(a) of the Exchange Act and allege, among other things, that defendants made
false or misleading statements of material fact about the Company's financial
statements. The plaintiffs seek unspecified monetary damages and other relief.
Motions for Consolidation and for Appointment of Lead Plaintiff and Lead
Plaintiff's Counsel are currently pending before the Court. While the outcome of
such lawsuits cannot be predicted with certainty, the Company believes that it
has meritorious defenses and intends to defend itself vigorously.
In addition to the matters discussed above, we are a party to a number of
other legal proceedings. We believe that the nature and number of these
proceedings are typical for a company of our size engaged in our type of
business and that none of these proceedings will result in a material adverse
effect on our business, results of operations or financial condition.
36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 2004 through the solicitation of proxies or otherwise.
37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASER OF EQUITY SECURITIES
Our common stock commenced trading on the New York Stock Exchange on August
15, 1996, under the symbol "WG." The following table sets forth the high and low
sale prices per share of our common stock, as reported in the New York Stock
Exchange composite transactions, for the periods indicated:
High Low
------ ------
2003:
First Quarter.............................................. $ 8.89 $ 7.02
Second Quarter............................................. 10.72 6.95
Third Quarter.............................................. 10.85 8.86
Fourth Quarter............................................. 13.99 10.20
2004:
First Quarter.............................................. 16.08 11.80
Second Quarter............................................. 15.70 13.05
Third Quarter.............................................. 15.38 12.72
Fourth Quarter............................................. 23.60 13.87
Substantially all of our stockholders maintain their shares in "street
name" accounts and are not, individually, stockholders of record. As of March 7,
2005, our common stock was held by 103 holders of record and an estimated 3,032
beneficial owners.
In order to fund the development and growth of our business, we intend to
retain our earnings rather than pay dividends in the foreseeable future. Since
1991, we have not paid any dividends, except dividends in 1996 on our
outstanding shares of preferred stock, which were converted into shares of
common stock on July 15, 1996. Subject to restrictions under credit
arrangements, the payment of any future dividends will be at the discretion of
our Board of Directors and will depend upon, among other things, our financial
condition, cash flow from operations, the level of our capital expenditures and
our future business prospects. Our present credit agreement prohibits us from
paying cash dividends on our common stock.
38
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollar amounts in thousands, except per share data)
RESTATEMENT
As a result of an internal investigation, which is more fully described in Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview - Restatement" of this Form 10-K, the Company's financial
results for the years ended December 31, 2000, 2001, 2002, and 2003, and the
first three quarters of 2004 have been restated. All financial results presented
in the Selected Consolidated Financial and Other Data below reflect the
restatement. Certain reclassifications have been made to conform to current year
presentation. See Note 2 to the Consolidated Financial Statements in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K for more detail
restatement information for the fiscal years 2003 and 2002.
Year Ended December 31,
-------------------------------------------------------------
2004 2003 2002(1) 2001(2,7) 2000(3,7)
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA: RESTATED RESTATED RESTATED RESTATED
Contract revenue $ 483,318 $ 416,573 $ 582,829 $ 389,761 $ 314,533
Operating expense (income):
Contract cost 417,671 374,442 494,318 325,265 275,459
Termination of benefit plans -- -- -- (9,204) --
Depreciation and amortization 16,747 15,570 16,627 13,389 14,762
General and administrative 46,614 36,300 34,046 29,975 30,218
Other operating costs 3,571 2,314 3,076 1,510 1,303
--------- --------- --------- --------- ---------
Operating income (loss) (1,285) (12,053) 34,762 28,826 (7,209)
Net interest income (expense) (2,534) (721) (1,185) (2,588) (1,865)
Other income (expense) (6,932) (1,444) (1,786) (711) (804)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (10,751) (14,218) 31,791 25,527 (9,878)
Provision (benefit) for income taxes 10,064 (3,301) 6,885 10,362 5,257
--------- --------- --------- --------- ---------
Net income (loss) $ (20,815) $ (10,917) $ 24,906 $ 15,165 $ (15,135)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.99) $ (.53) $ 1.36 $ 1.05 $ 1.08
Diluted (0.99) (.53) 1.33 1.01 1.08
CASH FLOW DATA:
Cash provided by (used in):
Operating activities $ 40,969 $ (14,324) $ 21,014 $ 17,867 $ (3,586)
Investing activities (36,751) (32,589) (23,998) (29,251) (3,476)
Financing activities 54,362 17,794 33,100 18,373 10,442
Effect of exchange rate changes (829) 631 52 362 752
OTHER DATA:
EBITDA (4) $ 8,530 $ 2,073 $ 49,603 $ 41,504 $ 6,749
Capital expenditures, excluding acquisitions $ 38,479 $ 33,984 $ 22,601 $ 22,003 $ 8,792
Backlog (at period end) (5) $ 660,932 $ 223,531 $ 216,988 $ 407,683 $ 373,704
Number of employees (at period end) (6) 3,766 3,282 4,620 3,790 2,194
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $ 78,720 $ 20,969 $ 49,457 $ 19,289 $ 11,939
Working capital 108,643 83,728 92,640 51,830 34,742
Total assets (8) 417,110 304,694 295,035 224,905 180,224
Total liabilities (9) 237,066 110,167 92,418 128,678 104,966
Total debt 73,495 18,322 1,171 39,284 26,298
Stockholders' equity (10) 180,044 194,527 202,617 96,227 75,258
(1) We acquired Mt. West Group, comprised of four companies providing
design-build services to the western U.S. energy industry, on October 23,
2002. Accordingly, its results of operations since that date are
consolidated with our results of operations. See Note 4 of the "Notes to
Consolidated Financial Statements" included in Item 8 of this Form 10-K.
(2) We acquired MSI Energy Services Inc., a general contractor in Alberta,
Canada, on October 12, 2001. Accordingly, its results of operations since
that date are consolidated with our results of operations.
(3) We acquired Rogers & Phillips, Inc., a U.S. pipeline construction company,
on January 24, 2000. Accordingly, its results of operations since that date
are consolidated with our results of operations.
(4) EBITDA represents earnings before net interest, income taxes, depreciation
and amortization. EBITDA is not intended to represent cash flows for the
respective period, nor has it been presented as an alternative to operating
income as an indicator of operating performance. It should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with accounting principles generally accepted in the
United States. See our Consolidated Statements of Cash Flows in our
Consolidated Financial Statements included elsewhere in this Form 10-K.
EBITDA is included in this Form 10-K because it is one of the measures
through
which we assess our financial performance. EBITDA as presented may not be
comparable to other similarly titled measures used by other companies. A
reconciliation of EBITDA to GAAP financial information is provided in the
table below.
Year Ended December 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
RECONCILIATION OF NON-GAAP RESTATED RESTATED RESTATED RESTATED
FINANCIAL MEASURE:
Net income (loss)....................... $(20,815) $(10,917) $ 24,906 $ 15,165 $(15,135)
Interest, net.......................... 2,534 721 1,185 2,588 1,865
Provision (benefit) for income taxes... 10,064 (3,301) 6,885 10,362 5,257
Depreciation and amortization.......... 16,747 15,570 16,627 13,389 14,762
-------- -------- -------- -------- --------
EBITDA ................................. $ 8,530 $ 2,073 $ 49,603 $ 41,504 $ 6,749
======== ======== ======== ======== ========
(5) Backlog is anticipated contract revenue from uncompleted portions of
existing contracts and contracts whose award is reasonably assured.
(6) Includes joint ventures in 2002 and 2001.
(7) The effects of the restatement on net income for the years ended December
31, 2001 and 2000 are as follows:
Year Ended December 31, 2001
-------------------------------------------------------------
As Reported Adjustments Restated
------------ ----------- -------------
Contract revenue $ 390,134 $ (373) A $ 389,761
Operating expenses (income):
Contract 317,186 8,079 B 325,265
Termination of benefit plans (9,204) (9,204)
Depreciation and amortization 19,522 (6,133) C 13,389
General and administrative 29,975 -- 29,975
Other operating costs -- 1,510 D 1,510
------------ ----------- -------------
357,479 3,456 360,935
------------ ----------- -------------
Operating income (loss) 32,655 (3,829) 28,826
Other income (expense):
Interest income 377 -- 377
Interest expense (2,965) -- (2,965)
Foreign exchange loss (117) -- (117)
Other - net (486) (108) E (594)
------------- ----------- -------------
(3,191) (108) (3,299)
------------- ----------- -------------
Income (loss) before income taxes 29,464 (3,937) 25,527
Provision (benefit) for income taxes 10,384 (22) F 10,362
------------ ----------- -------------
Net income (loss) $ 19,080 $ (3,915) $ 15,165
============ =========== =============
Income (loss) per common share:
Basic $ 1.32 $ (0.27) $ 1.05
============ =========== ============
Diluted $ 1.27 $ (0.26) $ 1.01
============ =========== ============
Weighted average number of common shares outstanding:
Basic 14,442,035 14,442,035 14,442,035
============ =========== ============
Diluted 15,074,166 15,074,166 15,074,166
============ =========== ============
Year Ended December 31, 2000
-------------------------------------------------------------
As Reported Adjustments Restated
------------ ----------- -------------
Contract revenue $ 314,290 $ 243 A $ 314,533
Operating expenses (income):
Contract 269,418 6,041 B 275,459
Termination of benefit plans -- -- --
Depreciation and amortization 22,408 (7,646) C 14,762
General and administrative 30,218 -- 30,218
Other operating costs -- 1,303 D 1,303
------------ ----------- -------------
322,044 (302) 321,742
------------ ----------- -------------
Operating income (loss) (7,754) 545 (7,209)
Other income (expense):
Interest income -- -- --
Interest expense (1,865) -- (1,865)
Foreign exchange loss -- -- --
Other - net (716) (88) E (804)
------------ ----------- -------------
(2,581) (88) (2,669)
------------ ----------- -------------
Income (loss) before income taxes (10,335) 457 (9,878)
Provision (benefit) for income taxes 5,257 -- F 5,257
------------ ----------- -------------
Net income (loss) $ (15,592) $ 457 $ (15,135)
============ =========== =============
Income (loss) per common share:
Basic $ (1.11) $ 0.03 $ (1.08)
============ =========== ============
Diluted $ (1.11) $ 0.03 $ (1.08)
============ =========== ============
Weighted average number of common shares outstanding:
Basic 14,017,857 14,017,857 14,017,857
============ =========== ============
Diluted 14,017,857 14,017,857 14,017,857
============ =========== ============
NOTES TO STATEMENTS OF OPERATIONS RESTATEMENT ADJUSTMENTS:
2001 2000
--------- ---------
A. INCREASE (DECREASE) IN CONTRACT REVENUE
o Increase (decrease) attributable to recalculation of contract revenue
as a result of the fraudulent invoices impacting the timing of revenue
recognition $ 17 $ (147)
o Increase (decrease) due to reclassification of contract revenue and
contract costs associated with an error in the manner used to record
the provision for loss contracts (390) 390
--------- ---------
$ (373) $ 243
========= =========
B. INCREASE IN CONTRACT COSTS
o Increase due to the accrual of unreported and unpaid
value added taxes and payroll related taxes of certain
international subsidiaries $ 835 $ 708
o Decrease related to correction of minority interest accrual -- (1,200)
o Decrease due to fraudulent invoices inappropriately charged to
contract cost (1,290) (1,303)
o Increase due to reclassification of parts inventory
expense from amortization 6,124 7,646
o Increase (decrease) due to reclassification of contract revenue and
contract costs associated with an error in the manner
used to record the provision for loss contracts (390) 390
o Increase (decrease) due to an error in accounting for parts inventory 2,800 (200)
--------- ---------
$ 8,079 $ 6,041
========= =========
C. DECREASE IN DEPRECIATION AND AMORTIZATION
o Decrease due to reclassification of parts inventory
expense to contract costs $ (6,124) $ (7,646)
o Decrease due to the elimination of depreciation expense on the
improper capitalization of fraudulent charges (9) --
--------- ---------
$ (6,133) $ (7,646)
========= =========
D. INCREASE IN OTHER OPERATING COSTS
o Increase is the result of reclassification of fraudulent invoices from
contract costs $ 1,510 $ 1,303
========= =========
E. INCREASE IN OTHER - NET
o Increase is the result of provision for penalties and interest
associated with the underpayment of various taxes in certain
international subsidiaries $ (108) $ (88)
========= =========
F. INCREASE IN PROVISION (BENEFIT) FOR INCOME TAXES
o Decrease due to the tax effect of the restatement adjustments $ (22) $ --
========= =========
(8) The effects of the restatement on total assets as of December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
--------- -------- ---------
Increase due to loss contracts inappropriately capitalized $ 1,320 -- 336
Decrease due to reclassification of fraudulent consulting fees from
contract costs to other operating costs resulting in timing differences
in the recognition of contract revenue on fixed price contracts (101) (130) (147)
Decrease in property plant and equipment for fraudulent invoices
inappropriately capitalized (210) --
Recognition of allowance for obsolescence of parts inventory
for pre-2000 periods (1,290) (1,290) (1,290)
Decrease in PP&E due to fraudulent invoice relating asset purchases (467) -- --
Decrease due to reclassification of certain international taxes
charged to projects (2,278) -- --
Increase due to erroneous expensing of prepaid charter costs 1,500 -- --
Net increase due to error in deferral and amortization of debt
issuance costs 293 -- --
Decrease due to adjustment of goodwill due to incorrect valuation
of stock consideration (3,135) -- --
Increase due to recognition of state deferred tax assets 300 -- --
Increase due to an error in accounting for parts inventory 700 2,400 5,200
--------- -------- ---------
(DECREASE) INCREASE IN TOTAL ASSETS $ (3,158) $ 770 $ 4,099
========= ======== =========
(9) The effects of the restatement on total liabilities as of December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
--------- -------- ---------
Increase due to the accrual of unreported and unpaid related taxes
of certain international subsidiaries $ 3,321 $ 2,004 $ 1,200
Increase due to foreign exchange effect of adjustments 102 318 251
Increase (decrease) due to tax effect adjustments 62 (22) --
Increase due to accrual for loss contracts 1,320 -- 336
Decrease due to adjustment for minority interests -- (1,200) (1,200)
Increase due to accrual of earn-out compensation in connection
with an acquisition 200 -- --
--------- -------- ---------
INCREASE (DECREASE) IN TOTAL LIABILITIES $ 5,005 $ 1,100 $ 587
========= ======== =========
(10) The effects of the restatement on stockholders' equity as of December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
--------- -------- ---------
Decrease due to the accrual of unreported and unpaid related taxes
of certain international subsidiaries $ (6,056) $ (2,460) $ (1,517)
Decrease due to fraudulent invoices inappropriately capitalized (569) (340) (147)
Increase (decrease) due to tax effect adjustments (62) 21 -
Increase due to foreign exchange effect of adjustments 356 139 66
Increase due to minority interest adjustment -- 1,200 1,200
Decrease due to recognition of obsolescence of parts inventory
for pre-2000 periods (1,290) (1,290) (1,290)
Increase due to deferral of prepaid charter cost erroneously expensed 1,500 -- --
Increase due to error in deferral and amortization of debt issuance costs 293 -- --
Decrease due to accrual of earn-out compensation in connection with an
acquisition (200) -- --
Increase due to recognition of deferred state tax assets 300 -- --
Decrease due to adjustment of goodwill due to incorrect valuation of stock
consideration (3,135) -- --
Increase due to an error in accounting for parts inventory 700 2,400 5,200
--------- -------- ---------
INCREASE (DECREASE) IN TOTAL STOCKHOLDERS' EQUITY $ (8,163) $ (330) $ 3,512
========= ======== =========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS OR UNLESS NOTED OTHERWISE)
The following discussion should be read in conjunction with the
consolidated financial statements for the years ended December 31, 2004, 2003
and 2002, included in Item 8 of this Form 10-K.
OVERVIEW
RESTATEMENT
In late December of 2004, the Company became aware of an approximate $2.5
million tax assessment against the Company's Bolivian subsidiary which alleged
that the subsidiary had filed improper tax returns. The assessment also imposed
penalties and interest related to the tax assessment. Prior to late December
2004, the executive management of the Company was unaware of the tax assessment,
with the exception of J. Kenneth Tillery, the then President of Willbros
International, Inc. ("WII"), the primary international subsidiary of the
Company. Mr. Tillery resigned from the Company on January 6, 2005.
Upon learning of the tax assessment, the Company immediately commenced an
initial investigation into the matter and notified the Audit Committee of the
Board of Directors. The Audit Committee retained independent counsel, who in
turn retained forensic accountants, and began an independent investigation.
Concurrent with the Audit Committee's investigation, the Company initiated
its own review of the Company's accounting. This review focused primarily on the
Company's international activities supervised by the former President of WII,
but also included other areas of the Company's accounting activities.
As a result of the investigation by the Audit Committee and the Company's
accounting review, the Company determined that several members of the senior
management of WII and its subsidiaries collaborated to misappropriate assets
from the Company and cover up such activity. It was determined that the Bolivian
subsidiary had in fact filed improper tax returns, or failed to file returns, at
the direction of Mr. Tillery, the former President of WII. The investigation
also determined that Mr. Tillery, in collusion with several members of the
management of the international subsidiaries, was involved in other improper
activities, primarily in the Company's Nigerian subsidiaries. The improper
activities which significantly impacted the Company's consolidated financial
statements, include:
- Understatement and underpayment of value added taxes (VAT) and payroll
related taxes with resultant penalties and interest at certain
international subsidiaries of $8,714 for the period from 1999 through
December 2003 ($2,658 in 2003, $3,596 in 2002 and $2,460 in prior
periods;
- The existence of previously undisclosed and unknown multiple related
party affiliations and transactions with entities in which the former
President of WII and other members of management of the international
subsidiaries operating in Nigeria had an ownership interest or exerted
significant influence. As disclosed in Note 18 to the Consolidated
Financial Statements included in Item 8 of this Form 10-K, previously
undisclosed related party transactions totaled $24,077 for the two
year period ended 2003, which transactions and services may not have
been based on market terms or rates and/or the Company may not have
received appropriate benefit from such arrangements;
- Misappropriation of $5,847 in cash funds for the period from 1999
through December 2003 ($1,500 in 2003, $1,534 in 2002 and $2,813 in
prior periods), through the use of fraudulent vendor invoices in
Nigeria which resulted in an overstatement of fixed assets, and timing
differences in the recognition of contract revenue on fixed price
contracts;
- Misappropriation of $2,356 in cash funds for the period 2002 through
2003 ($814 in 2003 and $1,542 in 2002) through the use of fraudulent
consulting agreements in Nigeria, which resulted in an overstatement
of contract costs (subsequently reclassified as other operating costs)
and timing differences in the recognition of contract revenue on fixed
priced contracts.
- Overstatement of estimated contract margins for several significant
Nigeria contracts resulting in an overstatement of contract margins
and in timing differences in the recognition of contract revenue on
fixed price contracts;
- Overstatement of costs incurred and anticipated recovery of a
significant contract change order resulting in an overstatement of
contract revenue and margin of $3,664;
- Overstatement of net accounts receivable, as a result of inaccurate
information provided by several members of management of international
subsidiaries resulting in an understatement of bad debt expense of
approximately $6,737; and
- Misappropriation of funds to refurbish equipment not owned by the
Company charged to contract costs in the amount of approximately
$2,182.
The Company's review of its historical accounting also identified
accounting errors which are corrected in the Company's restated consolidated
financial statements and include:
41
- An error in determining the price used for the Company's common stock
issued as partial consideration in connection with an acquisition in
2002;
- An error in the treatment of an earn-out payment in connection with a
2002 acquisition classified as a purchase price adjustment instead of
compensation expense;
- An error in the computation of the accretion of interest on discount
on notes receivable for stock purchases;
- An error in the amortization period used to amortize debt issuance
costs;
- An error in the accounting period used to reverse an excess accrual of
minority interest;
- An error in revenue resulting from the recording of duplicate
invoices;
- An error in the tax rate used to recognize deferred tax assets;
- An error in the recognition of withholding tax expense;
- An error in the application of accounting for loss contracts corrected
by a reclassification of contract revenue and contract costs;
- An error in the carrying value and classification of parts
inventories; and
- Corrections with respect to the income tax consequences on the matters
identified and corrected as a result of the investigation and the
accounting review.
Financial statement adjustments resulting from the misconduct of certain
members of the international subsidiaries management had a negative impact on
the Company's consolidated cumulative earnings (loss) through December 31, 2003
of approximately ($13,307). The impact on the Company's consolidated cumulative
earnings (loss) through December 31, 2003 for other accounting errors noted
above decreased earnings by approximately ($5). The total impact on the
Company's consolidated cumulative earnings (loss) of all financial statement
adjustments through December 31, 2003 was approximately ($13,312). The impact of
these items on the Company's balance sheet as of December 31, 2003 and its
statements of operations for the fiscal years ended December 31, 2003 and 2002
are presented below. The impact on the 2004 and 2003 interim periods are
included in Note 17 to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
The significant items having financial statement impact as of December 31,
2003 and all restated annual periods prior to 2004 are as follows:
- Decrease in contract revenue of $3,038 for the 2002 and 2003 restated
periods;
- Decrease in operating income for the 2002 and 2003 restated annual
periods of $10,355;
- Increase in other income (expense) net of ($643) for the 2002 and 2003
restated annual periods;
- Increase in income taxes of $1,549 for the 2002 and 2003 restated
annual periods;
- Reduction in stockholders' equity of $15,754, of which $13,312
represented a deduction in retained earnings;
- Reduction in goodwill, with corresponding reduction in
capital-in-excess of par of $2,841 and a reduction in retained
earnings of $294, relating to an error in the price used for Company
common stock issued as partial consideration in connection with an
acquisition in 2002; and
- Increase of $7,179 in accounts payable and accrued liabilities and an
increase of $1,827 in accrued income taxes.
Additional information regarding these accounting corrections is provided
in Note 2 to the Consolidated Financial Statements included in Item 8 of this
Form 10-K.
2004 GENERAL
We derive our revenue from providing engineering, construction, specialty
services and development activities to the oil, gas and power industries and
government entities worldwide. In 2004, our revenue was primarily generated from
operations in Canada, Iraq, Nigeria, Oman, and the United States. We obtain
contracts for our work primarily by competitive bidding or through negotiations
with long-standing or prospective clients. Our contracts have durations from a
few weeks to several months or in some cases more than a year.
We believe the fundamentals supporting the demand for engineering and
construction services for the oil, gas and power industries indicate the market
for our services will be strong for the next two to five years. We expect the
international demand for our services to continue to be strong. We expect the
demand for our services in the United States and Canada to improve into 2006. An
industry survey appears to substantiate our outlook as they are suggesting that
planned worldwide pipeline construction will be slightly higher in 2005 than in
2004. Overall the survey indicates an increase of 1,000 miles of planned miles
of pipeline construction from approximately 59,000 miles in 2004 and beyond to
approximately 60,000 miles in 2005 and beyond. More significant is the increase
in planned expenditures identified by the survey. Respondents plan to build more
than 51,000 miles of pipeline at a cost of more than $27.5 billion in 2005. This
compares to more than 13,000 miles planned in 2004 at a cost of more than $19.0
billion. Our bidding
42
activity also substantiates our outlook for the near-term as we continue to see
an increase in prospects that we believe fit with our capabilities and
qualifications from approximately $5 billion at the end of 2003 to approximately
$7 billion at the end of 2004.
FINANCIAL SUMMARY
For the year ended December 31, 2004, we had a net loss of ($20,815) or
$(0.99) per share on revenue of $483,318. This compares to revenue of $416,573
in 2003 with net loss of ($10,917) or $(0.53) per share.
Our 2004 revenue was up 16.0 percent from 2003, primarily driven by
improving market conditions in both International and United States & Canada
business segments. See Note 15 of the "Notes to Consolidated Financial
Statements" included in Item 8 of this Form 10-K for additional information
regarding segment reporting. The increase in revenue is attributable to the
following:
- A new maintenance contract in the Canadian oil sands;
- The commencement of operation in the first quarter of 2004 of the Opal
Gas Plant in Wyoming;
- The commencement of work on the Eastern Gas Gathering System ("EGGS")
project in Nigeria; and
- The continuation of our work related to rebuilding pipeline
infrastructure in Iraq.
Contract margin for the year increased to 13.6 percent of revenue from 10.1
percent in 2003. This improvement in contract margin is the result of the
following:
- The Opal Gas Plant commencing operations in the first quarter of 2004;
- Improved contract margins realized on work performed in the Middle
East; and
- Settlement of contract claims on projects in Bolivia and Venezuela
which were substantially completed in 2003.
In addition to the positive factors impacting our contract margin in 2004
listed above, we did not encounter the heavy rain and inclement weather on our
projects in the United States in 2004 that we did in 2003 which negatively
impacted our contract margin in 2003.
Offsetting these factors, we increased our allowance for doubtful accounts
by $6,737 due to delays in collection of our accounts receivable, primarily in
West Africa, and the anticipated discounted sale of an aged receivable.
General and Administrative ("G&A") expense increased $10,314 in 2004 from
2003 due primarily to more resources dedicated to bidding, estimating,
supporting existing projects, and regulatory compliance. G&A expense was also
higher as we supported the implementation of a new management information system
in the United States and Canada. We expect to complete the implementation of the
new management information system in the remaining business units in early 2006.
The provision for income taxes for 2004 of $10,064 was primarily the result
of:
- Income tax expense on foreign earnings of $3,641;
- Income tax expense on foreign deemed income of $8,483; and
- Income tax benefit on operating losses in the United States of
($2,060).
In 2004, our cash and cash equivalents increased from $20,969 to $78,720
and our long-term debt increased from $18,322 to $73,495. These changes were
primarily due to the following:
- Proceeds from the issuance of the $70,000, 2.75 percent Convertible
Senior Notes due 2024;
- $40,969 provided by operating activities primarily attributable to
improved working capital management; and
- Investment of $38,479 in capital assets associated with the expansion
of our fabrication facilities in Nigeria and Canada, expansion of our
housing and office facilities in Nigeria, the implementation of a new
information technology system in the United States and Canada, and the
normal replacement of our equipment.
In the first quarter of 2004, we completed two financing transactions which
we believe will improve our liquidity and, combined with cash flows from
operations, will be sufficient to finance our working capital and
43
capital expenditure requirements for our current operations. In March and April,
2004, we issued $70,000 of 2.75 percent Convertible Senior Notes (the
"Convertible Notes") due 2024. Also, on March 12, 2004, we amended and restated
our senior secured credit facility. The three-year amended and restated credit
facility (the "2004 Credit Facility") initially provided for $150,000 of
available credit capacity to be used for letters of credit and cash borrowing.
On July 19, 2005, the Company entered into a Second Amendment and Waiver
Agreement ("Waiver Amendment") of the 2004 Credit Facility with the syndicated
bank group to obtain continuing waivers regarding its non-compliance with
certain financial and non-financial covenants in the 2004 Credit Facility. Under
the terms of the Waiver Amendment, the total credit availability under the 2004
Credit Facility is reduced to $100,000 as of the effective date of the Waiver
Amendment. (See the related discussion in this Item 7 under "Liquidity and
Capital Resources").
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
REVENUE RECOGNITION; PERCENTAGE-OF-COMPLETION METHOD
A number of factors relating to our business affect the recognition of
contract revenue. Revenue from fixed-price construction and engineering
contracts is recognized on the percentage-of-completion method. Under this
method, estimated contract income and resulting revenue is generally accrued
based on costs incurred to date as a percentage of total estimated costs, taking
into consideration physical completion. Total estimated costs, and thus contract
income, are impacted by changes in productivity, scheduling, and the unit cost
of labor, subcontracts, materials and equipment. Additionally, external factors
such as weather, client needs, client delays in providing permits and approvals,
labor availability, governmental regulation and politics, may affect the
progress of a project's completion and thus the timing of revenue recognition.
We do not recognize income on a fixed-price contract until the contract is
approximately 5 percent to 10 percent complete, depending upon the nature of the
contract. If a current estimate of total contract cost indicates a loss on a
contract, the projected loss is recognized in full when determined. Also
included in contract costs and recognized income not yet billed on uncompleted
contracts are amounts the Company seeks or will seek to collect from customers
or others for errors or changes in contract specifications or design, contract
change orders in dispute or unapproved as to both scope and price, or other
customer-related causes of unanticipated additional contract costs (unapproved
change orders). These amounts are recorded at their estimated net realizable
value when realization is probable and can be reasonably estimated. Unapproved
change orders and claims also involve the use of estimates, and it is reasonably
possible that revisions to the estimated recoverable amounts of recorded
unapproved change orders may be made in the near-term. If the Company does not
successfully resolve these matters, a net expense (recorded as a reduction in
revenues), may be required, in addition to amounts that have been previously
provided for. Revenue from unit-price and time and material contracts is
recognized as earned. Revenue from operations of the Opal Gas Plant is
recognized upon delivery of product to the customer. We believe that our
operating results should be evaluated over a time horizon during which major
contracts in progress are completed and change orders, extra work, variations in
the scope of work and cost recoveries and other claims are negotiated and
realized.
All U.S. government contracts and many of our other contracts provide for
termination of the contract for the convenience of the client. In the event a
contract would be terminated at the convenience of the client prior to
completion, we will typically be compensated for progress up to the time of
termination and any termination costs. Many contracts are subject to certain
completion schedule requirements which require us to pay liquidated damages in
the event schedules are not met as the result of circumstances that are within
our control. In addition, some contracts provide for bonus payments to us for
early completion of the project and/or attainment of specified safety goals.
INCOME TAXES
The determination of our tax provision is complex due to our operations in
several tax jurisdictions outside the United States which may be subject to
certain risks which ordinarily would not be expected in the United States. Tax
regimes in certain jurisdictions are subject to significant changes which may be
applied on a retroactive basis. If this were to occur, our tax expense could be
materially different than the amounts reported. Furthermore, in determining the
valuation allowance related to deferred tax assets, we estimate taxable income
into the future and determine the magnitude of deferred tax assets which are
more likely than not to be realized. Future taxable income could be materially
different than amounts estimated, in which case the valuation allowance would
need to be adjusted.
44
JOINT VENTURE ACCOUNTING
From time to time, we seek one or more joint venture partners when a
project requires local content, equipment, manpower or other resources beyond
those we have available to complete work in a timely and efficient manner or
when we wish to share risk on a particularly large project. We have investments,
ranging from 10 percent to 50 percent, in joint ventures that operate in similar
lines of business as ours. Investments consist of a 10 percent interest in a
consortium for work in Venezuela, and a 50 percent interest in a joint venture
for work in Africa in 2002 and 2003. Interests in these unconsolidated ventures
are accounted for under the equity method in the consolidated balance sheets and
on a proportionate consolidation basis in the consolidated statements of
operations. This presentation is consistent with construction industry practice.
Alternatively, if we were to account for these interests using the equity method
in the consolidated statement of operations, revenue and contract cost would be
materially lower; however, net income would not change.
SIGNIFICANT BUSINESS DEVELOPMENTS
In late March 2004, we commenced commercial production from our newly
constructed Opal Gas Plant, located near Opal, Wyoming. This gas plant adds a
new source of long-term revenue to complement our revenue stream from our
project work. In 2003, we completed agreements with Williams Gas Processing
Company ("Williams") that allowed us to design and construct our Opal Gas Plant.
The plant is designed to process approximately 350,000 MCF per day of natural
gas, producing 294,000 to 462,000 gallons per day of natural gas liquids at
various operating conditions. We receive a $0.0175 per MCF processing fee under
a 10-year contract through March 2014, and net approximately 38.8% of the
liquids sales after payment to Williams for the contracted operations of the
Opal Gas Plant.
In July 2004, Willbros Nigeria Ltd., with operations based in Port
Harcourt, Nigeria, was awarded an Engineering, Procurement, and Construction
("EPC") contract to design and build a new gas transmission pipeline for Shell
Petroleum Development Company. The 40-inch diameter, high pressure natural gas
pipeline will be routed between the Soku gas plant and the Nigeria Liquefied
Natural Gas ("NLNG") terminal on Bonny Island in Nigeria, a distance of
approximately 83 kilometers. The pipeline is part of the EGGS project, and the
contract is valued at approximately $246,000. Completion is scheduled for the
fourth quarter of 2005.
In mid-August 2004, Willbros (Offshore) Nigeria Limited ("WONL") and
Willbros West Africa, Inc. ("WWAI") received a letter of intent ("LOI") from
Mobil Producing Nigeria Unlimited ("MPNU") to commence preliminary engineering
and design work for the EPC-IV project located offshore West Africa. The EPC-IV
contract, encompassing both fixed sum and time and material work is projected to
have a value of approximately $200,000. MPNU has entered into separate contracts
for work inside Nigeria with WONL and work outside of Nigeria with WWAI. The
project covers the retrofitting and revamping of facilities on existing offshore
platforms. Engineering and procurement activities began in 2004. Field work is
expected to commence in the third quarter of 2005 and continue through 2006.
In December 2004, WWAI was awarded an EPC contract for the onshore pipeline
and facilities of the 693-kilometer West African Gas Pipeline Project by the
West African Pipeline Company Limited, comprised of Chevron, Nigerian National
Petroleum Corporation, Shell, and the Takoradi Power Company Ltd. of Ghana. The
project includes the installation of custody transfer metering in Nigeria and a
30-inch natural gas pipeline from the existing Escravos Lagos gas pipeline
system, near Itoki, Nigeria, to the initial compressor station at Lagos Beach,
and the point of departure for the offshore section. Additional pipelines and
regulating and metering facilities for the onshore portions of the project in
Benin, Togo, and Ghana are included in the project scope, as well as the
engineering, procurement, construction and tie-in of the initial compressor
station and land pipeline section. Groundbreaking ceremonies for the project
were held at Takoradi, Ghana, on December 3, 2004. Engineering and procurement
activities for the onshore portions commenced in January 2005, with field
activities scheduled to begin in the fourth quarter of 2005, and project
completion scheduled for fourth quarter of 2006.
In January 2005, J. Kenneth Tillery, President of Willbros International,
Inc., resigned from the Company after management learned that the tax
authorities in Bolivia assessed its local subsidiary approximately $2,500 on a
completed project. (See the first risk factor under "Risk Factors" in Items 1
and 2 of this Form 10-K.) Subsequent to Mr. Tillery's resignation, R. Clay
Etheridge was named President of Willbros International, Inc.
45
OTHER FINANCIAL MEASURES
EBITDA
We use EBITDA (earnings before net interest, income taxes, depreciation and
amortization) as part of our overall assessment of financial performance by
comparing EBITDA between accounting periods. We believe that EBITDA is used by
the financial community as a method of measuring our performance and of
evaluating the market value of companies considered to be in businesses similar
to ours. EBITDA for 2004 was $8,530 as compared to $2,073 in 2003. The $6,457
increase in EBITDA is primarily the result of:
- Increased contract income of approximately $14.5 million due to
improved contract margins in 2004 over 2003 of 3.5 percentage points,
and
- Increased contract income in 2004 over 2003 of approximately $9.1
million due to a $66.7 million increase in 2004 over 2003 revenue,
offset by
- Increased G&A expense of $10.3 million in 2004 over 2003, and
- Increased other expense of $6.5 million in 2004 over 2003.
A reconciliation of EBITDA to GAAP financial information can be found in
Item 6 "Selected Financial Data" of this Form 10-K.
BACKLOG
In our industry, backlog is considered an indicator of potential future
performance because it represents a portion of the future revenue stream. Our
strategy is not focused solely on backlog additions but, rather, on capturing
quality backlog with margins commensurate with the risks associated with a given
project.
Backlog consists of anticipated revenue from the uncompleted portions
of existing contracts and contracts whose award is reasonably assured. At
December 31, 2004, backlog was $660,932 with an estimated embedded margin of
21.6%, compared to $223,531 with an estimated embedded margin of 29.6% at
December 31, 2003. We believe the backlog figures are firm, subject only to the
cancellation and modification provisions contained in various contracts. We
expect that approximately $450,000, or about two-thirds, of our existing backlog
at December 31, 2004, will be recognized in revenue during 2005. Historically, a
substantial amount of our revenue in a given year has not been in our backlog at
the beginning of that year. Additionally, due to the short duration of many
jobs, revenue associated with jobs performed within a reporting period will not
be reflected in backlog. We generate revenue from numerous sources, including
contracts of long or short duration entered into during a year as well as from
various contractual processes, including change orders, extra work, variations
in the scope of work and the effect of escalation or currency fluctuation
formulas. These revenue sources are not added to backlog until realization is
assured.
46
The following table shows our backlog by segment and geographic region as
of December 31, 2004 and 2003:
2004 2003 RESTATED
------------------ ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollar amounts in thousands)
BACKLOG
International
Africa ........................... $554,692 84% $ 49,018 22%
South America .................... 12,211 2 23,369 10
Middle East ...................... 2,500 <1 57,853 26
-------- --- -------- ---
Subtotal International ........... 569,403 86 130,240 58
United States & Canada
United States .................... 68,926 10 53,582 24
Canada ........................... 22,603 4 39,709 18
-------- --- -------- ---
Subtotal United States & Canada .. 91,529 14 93,291 42
-------- --- -------- ---
Total ............................ $660,932 100% $223,531 100%
======== === ======== ===
RESULTS OF OPERATIONS
Beginning in the fourth quarter of 2004, we restructured our business into
two operating segments, International and United States & Canada.
Our contract revenue and contract costs are significantly impacted by the
capital budgets of our clients and the timing and location of development
projects in the oil, gas and power industries worldwide. Contract revenue and
cost variations by country from year-to-year are the result of entering and
exiting work countries; the execution of new contract awards; the completion of
contracts; and the overall level of activity related to our services.
FISCAL YEAR ENDED DECEMBER 31, 2004,
COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2003
CONTRACT REVENUE
Contract revenue increased $66,745 (16.0%) to $483,318 in 2004 from
$416,573 in 2003.
Contract Revenue - Year Ended December 31,
------------------------------------------
Percent
2004 2003 Increase Change
-------- -------- -------- -------
RESTATED
International ........... $290,524 $262,241 $28,283 10.8%
United States & Canada .. 192,794 154,332 38,462 24.9%
-------- -------- -------
Total Contract Revenue .. $483,318 $416,573 $66,745 16.0%
======== ======== =======
International revenue increased by $28,283 or 10.8 percent. Increased
revenue in 2004 resulted from the start of the EGGS project in Nigeria ($62,313)
and continued work related to rebuilding Iraq ($43,972) that was completed in
2004. These increases were offset by the 2003 completion of the Chad-Cameroon
Pipeline project which resulted in a year-to-year construction revenue decline
of $61,269. The completion of several Nigerian projects also contributed to
revenue reductions from 2003. Venezuela and Oman revenue also decreased from
2003.
United States & Canada revenue increased $38,462 or 24.9 percent in 2004 to
$192,794, from $154,332 in 2003. The primary reasons for the increase in 2004
were the start-up of operations of the new Opal Gas Plant in Wyoming
(approximately $21,216) and the expanded Albian Sands maintenance contract in
Canada (approximately $8,766).
47
CONTRACT INCOME
Contract income increased $23,516 or 55.8 percent to $65,647 in 2004 from
$42,131 in 2003. Variations in contract costs by country were closely related to
the variations in contract revenue.
Contract Income - Year Ended December 31,
-------------------------------------------------------------
% of % of Increase Percent
2004 Revenue 2003 Revenue (Decrease) Change
-------- ------- -------- ------- ---------- -------
RESTATED
International ........... $40,864 14.1% $38,569 14.7% $ 2,295 6.0%
United States & Canada .. 24,783 12.9% 3,562 2.3% 21,221 595.8%
------- ------- -------
Total Contract Income ... $65,647 13.6% $42,131 10.1% $23,516 55.8%
======= ======= =======
International contract income increased $2,295 primarily as a result of
increased revenue as the segment's contract margin dropped 0.6% from 14.7% in
2003 to 14.1%. This decrease in contract margin is despite the settlement of the
claim on the Transierra Project in Bolivia that positively impacted contract
income in 2004 by $6,308. Based on the findings related to the investigation
into the Company's former President of WII's activities contract income in 2004
and 2003 was negatively impacted by approximately $4,265 and $360 respectively.
Margins for 2004 and 2003 were reduced by approximately 1.5% and 0.1%,
respectively.
United States & Canada contract income increased $21,221 as margins greatly
improved from last year on engineering and construction activity. Three factors
resulted in this improvement in the margins. First, our construction projects in
the United States were not as negatively impacted by weather in 2004 as they had
been in 2003. Second, our revenue was up over 2003, which resulted in increased
contract income. And, finally, our new Opal Gas Plant commenced operations in
the first quarter of 2004 and contributed $5,464 of contract income.
OTHER OPERATING EXPENSE
Depreciation and amortization increased $1,177 (7.6 percent) in 2004 due to
the acquisition of $38,479 in assets in 2004 and a change in the mix of assets
and depreciable lines of our property, plant and equipment. International
depreciation increased from $8,727 to $9,135 or 4.7 percent. United States &
Canada depreciation and amortization increased from $6,843 to $7,612 or 11.2
percent.
G&A expense increased $10,314 or 28.4 percent to $46,614 in 2004 compared
to $36,300 in 2003. The increase is a result of more resources dedicated to
bidding, estimating, and supporting existing projects, regulatory compliance,
litigation costs, and the implementation of a new accounting system.
International G&A increased from $16,321 to $22,600. United States & Canada G&A
increased from $19,979 to $24,014.
Other operating costs, representing fraudulent expenses identified in our
investigation, as described in Note 2 to the Consolidated Financial Statements
in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K,
increased from $2,314 to $3,571 in 2004.
NET INTEREST INCOME (EXPENSE)
Net interest expense, including amortization of debt issue cost, increased
$1,813 to $2,534 in 2004 from $721 in 2003. This increase is a direct result of
interest on the $70,000 of Convertible Notes issued in the first quarter of
2004. Interest income increased $270 in 2004 as compared to 2003 as a result of
an overall increase in invested funds in 2004 as compared to 2003.
OTHER INCOME (EXPENSE)
Other expense increased $5,488 to $6,932 in 2004 from $1,444 in 2003,
primarily as a result of the $6,737 increase in bad debt expense and partially
offset by foreign currency gain of $1,037.
PROVISION FOR INCOME TAXES
The provision for income taxes in 2004 increased $13,365 as compared to
2003. This increase in the provision for income taxes is due to improved
operating results in countries where income taxes are calculated on actual
pre-tax earnings, increase in revenue in Nigeria where taxes are based upon
deemed income, and an increase in the allowance against deferred tax assets in
Bolivia.
48
FISCAL YEAR ENDED DECEMBER 31, 2003,
COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2002
CONTRACT REVENUE
Contract revenue decreased $166,256 (28.5 percent) to $416,573 in 2003 from
$582,829 in 2002.
Contract Revenue - Year Ended December 31,
------------------------------------------
Percent
2003 2002 (Decrease) Change
-------- -------- ---------- -------
RESTATED RESTATED
International ..................... $262,241 $337,592 $ (75,351) (22.3%)
United States & Canada ............ 154,332 245,237 (90,905) (37.1%)
-------- -------- ---------
Total Contract Revenue ............ $416,573 $582,829 $(166,256) (28.5%)
======== ======== =========
International revenue decreased $75,351 or 22.3 percent. International
revenue in 2003 was $262,241 versus $337,592 in 2002. The decline in
International revenue is attributable to the completion of the Chad-Cameroon
Pipeline in the first half of the year as well as the completion of the Bolivia
Transierra Pipeline. The completion of these two projects resulted in a combined
decrease in International revenue of $118,929 in 2003 from 2002. This decrease
was partially offset by increased revenue related to the Venezuelan Ameriven
project ($22,101) and increased activity in Oman ($23,641).
United States & Canada revenue decreased $90,905 or 37.1 percent in 2003 to
$154,332 from $245,237 in 2002. Contributing to the decrease in 2003 was the
significant decline in engineering services. Engineering revenue decreased
approximately $140,000 in 2003 as compared to 2002. This decrease was partially
offset by additional construction revenue in the U.S. and Canada, primarily as a
result of including the Mt. West Group's revenue for a full year in 2003.
CONTRACT INCOME
Contract income decreased $46,380 or 52.4 percent to $42,131 in 2003 from
$88,511 in 2002.
Contract Income - Year Ended December 31,
--------------------------------------------------------------
% of % of Percent
2003 Revenue 2002 Revenue (Decrease) Change
-------- ------- -------- ------- ---------- -------
RESTATED RESTATED
International ................ $38,569 14.7% $50,262 14.9% $(11,693) (23.3%)
United States & Canada ....... 3,562 2.3% 38,249 15.6% (34,687) (90.7%)
------- ------- --------
Total Contract Income ........ $42,131 10.1% $88,511 15.2% $(46,380) (52.4%)
======= ======= ========
International contract income decreased $11,693 from 2002 as a result of
the $75,351 decrease in revenue for the segment. Contract income in 2003 and
2002 was negatively impacted by approximately $360 and $228, respectively,
based on findings related to the investigation into the Company's former
President of WII's activities. Contract margins for 2003 and 2002 were reduced
by approximately 0.1% and 0.1% respectively.
United States & Canada contract income decreased $34,687 as a result of the
large decline in revenue for the segment and a significant decrease in contract
margins for the segment. Margins were negatively impacted by the depressed
market conditions in the United States as well as poor weather on construction
projects in the southern United States.
OTHER OPERATING EXPENSE
Depreciation and amortization decreased $1,057 (6.4%) primarily due
to a change in the mix of assets and depreciable lines of our property, plant,
and equipment. International depreciation and amortization decreased $1,970
(18.4%) from $10,697 to $8,727. United States & Canada depreciation and
amortization increased $913 (15.4%) from $5,930 to $6,843.
49
G&A expense increased $2,254 (6.6%) to $36,300. International G&A
expense increased $130 (0.8%) from $16,191 to $16,321 and is partially offset by
reductions in Venezuela. United States & Canada G&A expense increased $2,124
(11.9%) from $17,855 to $19,979. This increase resulted from a full year of G&A
expense for the Mt. West Group acquired on October 23, 2002 and is partially
offset by U.S. engineering G&A expense. We did incur higher G&A expense in 2003
over 2002 in the following areas: bidding and estimating; insurance; legal; and
consulting.
Other operating costs, representing fraudulent expenses identified in
our investigation, as described in Note 2 to the Consolidated Financial
Statements in Item 8 "Financial Statements and Supplementary Data" of this Form
10-K, decreased from $3,076 in 2002 to $2,314 in 2003.
NET INTEREST INCOME (EXPENSE)
Net interest expense decreased $464 to $721 in 2003 from $1,185 in 2002.
Interest expense was $327 less than 2002 because of reduced debt and capitalized
interest related to the construction of our Opal Gas Plant. Interest income
increased $137 in 2003 as compared to 2002.
OTHER INCOME (EXPENSE)
Other expense decreased $342 to $1,444 in 2003 from $1,786 in 2002. The
$342 decrease is the result of a $343 gain on the disposal of equipment in 2003
following a $281 loss in 2002, a $236 reduction in foreign currency translation
losses in 2003 versus 2002, and the occurrence in 2003 of $518 of miscellaneous
expense which were not incurred in 2002.
PROVISION FOR INCOME TAXES
The provision for income taxes in 2003 decreased $10,186 as compared to
2002 mainly as a result of a $37,688 decrease in pre-tax income in the United
States. The decrease in pre-tax income in the United States resulted in a
$10,116 decrease in income tax expense in 2003 from 2002. The income tax expense
on foreign earnings for 2003 also decreased by $70 when compared to 2002.
These decreases in income tax expense were partially offset by a $4,946 increase
in income tax expense associated with the change in the deferred tax valuation
allowance between the two years.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL REQUIREMENTS
Our primary requirements for capital are to acquire, upgrade and maintain
equipment, provide working capital for current projects, finance the
mobilization of employees and equipment to new projects, establish a presence in
countries where we perceive growth opportunities and finance the possible
acquisition of new businesses and equity investments. Historically, we have met
these capital requirements primarily from operating cash flows, borrowings under
our credit facility, and debt and equity financings.
WORKING CAPITAL
Cash and cash equivalents increased $57,751 (275.4%) to $78,720 at
December 31, 2004, from $20,969 at December 31, 2003. The increase is primarily
the result of the issuance of $70,000 of the Convertible Notes less the $14,000
repayment of the outstanding balance on the June 2002 credit agreement and the
payment of $6,176 of debt issuance costs related to the Convertible Notes and
the 2004 Credit Facility. Additionally, $40,969 of cash was provided by
operating activities. This increase was partially offset by an investment of
$38,479 in capital assets associated with the expansion of our fabrication
facilities in Nigeria and Canada, expansion of our housing and office facilities
in Nigeria, the implementation of a new information technology system in the
United States and Canada, and the normal replacement of our equipment.
Working capital increased $24,915 (29.8%) to $108,643 at December
31, 2004 from $83,728 at December 31, 2003. The increase was primarily
attributable to an increase in cash of $57,751.
We believe the anticipated increase in revenue, a focus on reducing working
capital requirements, and more stringent criteria in our analysis in the area of
capital asset addition will improve cash flow from operations in 2005.
50
2004 CREDIT FACILITY
On March 12, 2004, the existing $125,000 June 2002 credit agreement was
amended, restated and increased to $150,000 (the "2004 Credit Facility"). The
2004 Credit Facility matures on March 12, 2007. The 2004 Credit Facility may be
used for standby and commercial letters of credit, borrowings or a combination
thereof. Borrowings are limited to the lesser of 40 percent of the borrowing
base or $30,000 and are payable at termination on March 12, 2007. Interest is
payable quarterly at a base rate plus a margin ranging from 0.75 percent to 2.00
percent or a Eurodollar rate plus a margin ranging from 1.75 percent to 3.00
percent. A commitment fee on the unused portion of the 2004 Credit Facility is
payable quarterly, ranging from 0.375 percent to 0.625 percent. The 2004 Credit
Facility is collateralized by substantially all of the Company's assets,
including stock of the principal subsidiaries, prohibits the payment of cash
dividends and requires the Company to maintain certain financial ratios. The
borrowing base is calculated using varying percentages of cash, accounts
receivable, accrued revenue, contract cost and recognized income not yet billed,
property, plant and equipment, and spare parts. Unamortized debt issue costs of
$2,933 and $1,512 associated with the 2004 Credit Facility are included in other
assets at December 31, 2004 and 2003, respectively. Debt issue costs are
amortized over the term of the 2004 Credit Facility ending March 2007.
As of December 31, 2004, there were no borrowings under the 2004 Credit
Facility and there were $60,163 in outstanding letters of credit. Letters of
credit reduce the availability on the facility by 75 percent of their amount
outstanding; however, the total value of letters of credit outstanding may not
exceed $150,000 (see "Waiver Amendment" below).
2004 Credit Facility Waivers
For the quarter ended June 30, 2004, due to the Company's operating results
and EBITDA (earnings before net interest, income taxes, depreciation and
amortization) levels, an Amendment and Waiver Agreement (the "Waiver Agreement")
was obtained from the syndicated bank group to waive non-compliance with a
financial covenant to the credit agreement at June 30, 2004 and to amend certain
financial covenants. The Waiver Agreement provides for an amendment of certain
quarterly financial covenants and the multiple of EBITDA calculation with
respect to the borrowing base determination through September 30, 2005.
In January 2005, the Company obtained a Consent and Waiver from its
syndicated bank group, covering a period through June 29, 2005, waiving certain
defaults and covenants which related to the filing of tax returns, the payment
of taxes when due, tax liens and legal proceedings against the Company related
to a tax assessment in Bolivia. (See Note 2 to the Consolidated Financial
Statements included in Item 8 of this Form 10-K). Additional Consent and Waivers
were obtained from the syndicated bank group as of April 8, 2005 and June 13,
2005 with respect to these defaults and non-compliance with certain financial
covenants as of June 13, 2005.
2004 Credit Facility Amendment
On July 19, 2005, the Company entered into a Second Amendment and Waiver
Agreement ("Waiver Amendment") of the 2004 Credit Facility with the syndicated
bank group to obtain continuing waivers regarding its non-compliance with
certain financial and non-financial covenants in the 2004 Credit Facility. Under
the terms of the Waiver Amendment, the total credit availability under the
2004 Credit Facility is reduced to $100,000 as of the effective date of
the Waiver Amendment. Subject to certain conditions, the bank group agreed to
permanently waive all existing and probable technical defaults under the 2004
Credit Facility as long as the Company submits its year-end 2004 financial
statements and interim financial statements for the quarters ended March 31 and
June 30, 2005 by September 30, 2005. These conditions relate primarily to
submissions of various financial statements and other financial and borrowing
base related information.
The Waiver Amendment also modified certain of the ongoing financial
covenants under the 2004 Credit Facility and established a requirement that the
Company maintain a minimum cash balance of $15,000. Until such time as the
waiver becomes permanent, the Company has certain additional reporting
requirements, including periodic cash balance reporting. In addition, the Waiver
Amendment prohibits the Company from borrowing cash under the 2004 Credit
Facility until the waiver becomes permanent. Since the Company was not able to
submit the referenced statements by September 30, 2005, the waiver did not
become permanent.
Additionally, the Company was not in compliance with certain of the
financial covenants under the 2004 Credit Facility at September 30, 2005 and the
Company has not obtained a waiver. The Company also believes it will not be in
compliance with certain of the financial covenants under the 2004 Credit
Facility at December 31, 2005. As a result of the covenant violations and the
failure to provide certain financial statements by September 30, 2005, the bank
syndicate has the right to discontinue advances under the facility as well as
the issuance of new letters of credit. The inability of the Company to access
new letters of credit could negatively impact the Company's ability to take on
new work or bid additional work where letters of credit are required in order to
bid on a project. Additionally, the bank syndicate could request that the
Company provide cash collateral for outstanding letters of credit.
As the Company has done in the past, management believes that it will be
able to negotiate a waiver with the syndicated bank group with respect to these
violations. In the event the waivers are not obtained, the Company would expect
to arrange for alternative financing which could include the following
components, individually or in combination: (1) establishing a credit facility
with a new bank group, (2) raising equity capital, (3) selling certain assets or
(4) issuing debt in either a public or private transaction.
51
CONVERTIBLE NOTES
On March 12, 2004, the Company completed a primary offering of $60,000 of
2.75 percent Convertible Senior Notes (the "Convertible Notes"). On April 13,
2004, the initial purchasers of the Convertible Notes exercised their option to
purchase an additional $10,000 aggregate principal amount of the notes.
Collectively, the primary offering and purchase option of the Convertible Notes
total $70,000. The Convertible Notes are general senior unsecured obligations.
Interest is paid semi-annually on March 15 and September 15, and payments began
on September 15, 2004. The Convertible Notes mature on March 15, 2024 unless the
notes are repurchased, redeemed or converted earlier. The Company may redeem the
Convertible Notes for cash on or after March 15, 2011, at 100 percent of the
principal amount of the notes plus accrued interest. The holders of the
Convertible Notes have the right to require the Company to purchase the
Convertible Notes, including unpaid interest, on March 15, 2011, 2014, and 2019
or upon a change of control related event. On March 15, 2011, or upon a change
in control event, the Company must pay the purchase price in cash. On March 15,
2014 and 2019, the Company has the option of providing its common stock in lieu
of cash or a combination of common stock and cash to fund purchases. The holders
of the Convertible Notes may under certain circumstances, convert the notes into
shares of the Company's common stock at an initial conversion ratio of 51.3611
shares of common stock per $1,000.00 principal amount of notes (representing a
conversion price of approximately $19.47 per share resulting in 3,595,277 shares
at December 31, 2004). The notes will be convertible only upon the occurrence of
certain specified events including, but not limited to, if, at certain times,
the closing sale price of the Company's common stock exceeds 120 percent of the
then current conversion price, or $23.36 per share based on the initial
conversion price. Unamortized debt issue costs of $2,908, associated with the
Convertible Notes are included in other assets at December 31, 2004 and are
being amortized over the seven-year period ending March 2011. In the event of a
default under any Company credit agreement other than the indenture covering the
Convertible Notes, (1) in which the Company fails to pay principal or interest
on indebtedness with an aggregate principal balance of $10,000 or more; or (2)
in which indebtedness with a principal balance of $10,000 or more is
accelerated, an event of default would result under the Convertible Notes. Since
the non-compliance issues under the 2004 Credit Facility discussed above did not
involve payment defaults and did not result in the acceleration of any
indebtedness of the Company, these defaults did not create an event of default
under the Convertible Notes.
On June 10, 2005, the Company received a letter from a law firm
representing an investor claiming to be the owner of in excess of 25% of the
Convertible Notes asserting that, as a result of the Company's failure to timely
file with the SEC its 2004 Form 10-K and its Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005, it was placing the Company on notice of an
event of default under the indenture dated as of March 12, 2004 between the
Company as issuer, and JPMorgan Chase Bank N.A., as trustee (the "Indenture"),
which governs the Convertible Notes. The Company indicated that it does not
believe that it has failed to perform its obligations under the relevant
provisions of the Indenture referenced in the letter. On August 19, 2005, the
Company entered into a settlement agreement with the beneficial owner of the
Convertible Notes on behalf of whom the notice of default was sent, pursuant to
which the Company agreed to use commercially reasonable efforts to solicit the
requisite vote to approve an amendment to the Indenture (the "Indenture
Amendment"). The Company has obtained the requisite vote and on September 22,
2005, the Indenture Amendment became effective.
The Indenture Amendment extends the initial date on or after which the
Convertible Notes may be redeemed by the Company to March 15, 2013 from March
15, 2011. In addition, a new provision was added to the Indenture which requires
the Company, in the event of a "fundamental change" which is a change of
52
control event, in which 10% or more of the consideration in the transaction
consists of "cash", to make a "coupon make-whole payment" equal to the present
value (discounted at the U.S. treasury rate) of the lesser of (a) two years of
scheduled payments of interest on the Convertible Notes or (b) all scheduled
interest on the Convertible Notes from the date of the transaction through March
15, 2013.
LIQUIDITY
We believe that cash flows from operations, future borrowing capacity under
the 2004 Credit Facility and the net proceeds from the Convertible Notes
offering will be sufficient to finance working capital and capital expenditures
for ongoing operations at our present level of activity. Capital expenditures
for equipment in 2005 are estimated at $42,400. We believe that while there are
numerous factors that could and will have an impact on our cash flow, both
positively and negatively, the vast majority of which, should they occur, could
be funded from our operations, existing cash balances, or future borrowing
capacity. However, should the DOJ, SEC, or OFAC, as a result of their
investigations, levy material civil and/or criminal fines or penalties against
the Company, these fines could have a material adverse effect on the Company's
liquidity and operations. For a list of events which could cause actual results
to differ from our expectations and a discussion of risk factors that could
impact cash flow, please refer to the section entitled "Risk Factors" contained
in Items 1 and 2 in this Form 10-K.
CONTRACTUAL OBLIGATIONS
Payments Due By Period
-------------------------------------------------------
Less than More than
Total 1 year 1-3 years 4-5 years 5 years
------- --------- --------- --------- ---------
(Dollar amounts in thousands)
Convertible Notes...................... $70,000 $ -- $ -- $ -- $70,000
Capital Lease Obligations ............. 3,695 1,258 2,400 37 --
Operating Lease Obligations ........... 9,645 2,864 3,962 1,693 1,126
Other Long-term Liabilities ........... 55 41 14 -- --
------- ------ ------ ------ -------
Total.................................. $83,395 $4,163 $6,376 $1,730 $71,126
======= ====== ====== ====== =======
As of December 31, 2004, there were no borrowings under the 2004 Credit
Facility and there were $60,163 in outstanding letters of credit. Letters of
credit reduce availability on the facility by 75 percent of their amount
outstanding; however, the total value of letters of credit outstanding may not
exceed $150,000.
On July 19, 2005, the Company entered into a Second Amendment and Waiver
Agreement ("Waiver Amendment") of the 2004 Credit Facility with the syndicated
bank group to obtain continuing waivers regarding its non-compliance with
certain financial and non-financial covenants in the 2004 Credit Facility. Under
the terms of the Waiver Amendment, the total credit availability under the
$150,000 2004 Credit Facility is reduced to $100,000 as of the effective date of
the Waiver Amendment. If we used all remaining availability to issue letters of
credit, we had an additional $83,869 available for issuance of letters of credit
at December 31, 2004. Cash borrowings under the line are limited to the lesser
of 40 percent of the borrowing base or $30,000.
The Company was not in compliance with certain of the financial covenants
under the 2004 Credit Facility at September 30, 2005 and the Company has not
obtained a waiver. The Company also believes it will not be in compliance with
certain of the financial covenants under the 2004 Credit Facility at December
31, 2005. As a result of the covenant violations and the failure to provide
certain financial statements by September 30, 2005, the bank syndicate has the
right to discontinue advances under the facility as well as the issuance of new
letters of credit. The inability of the Company to access new letters of credit
could negatively impact the Company's ability to take on new work or bid
additional work where letters of credit are required in order to bid on a
project. Additionally, the bank syndicate could request that the Company provide
cash collateral for outstanding letters of credit.
Capital lease obligations include approximately $3,259 to a leasing company
under a four-year capital lease in connection with the ongoing acquisition and
installation of new corporate information systems and infrastructure.
We have certain operating leases for equipment, office and camp facilities.
Minimum lease commitments under operating leases as of December 31, 2004,
totaled $9,645 and are payable as follows: 2005, $2,864; 2006, $2,357; 2007,
$1,605; 2008, $1,481; 2009, $212 and later years, $1,126.
Additionally, we have various notes and leases payable, generally related
to equipment financing and local revolving credit facilities. All notes and
leases are at market interest rates, and are collateralized by certain vehicles,
equipment and/or real estate.
We have unsecured credit facilities with banks in certain countries outside
the United States. Borrowings under these lines, in the form of short-term notes
and overdrafts, are made at competitive local interest rates. Generally, each
line is available only for borrowings related to operations in a specific
country. Credit available under these facilities is approximately $4,240 at
December 31, 2004. There were no outstanding borrowings at December 31, 2004 or
2003.
53
During 2004 we have increased our allowance for doubtful accounts from $917
to $7,598. This increase in the allowance is reflective of the $33,881 increase
in accounts receivable and contract costs and recognized income not yet billed
primarily in developing countries. However, we do not anticipate any significant
collection problems with our customers beyond what has been already recognized
in our allowance, including those in countries that may be experiencing economic
and/or currency difficulties. Since our customers generally are major oil
companies and government entities, and the terms for billing and collecting for
work performed are generally established by contracts, we historically have had
a very low incidence of collectability problems.
OFF-BALANCE SHEET ARRANGEMENTS AND COMMERCIAL COMMITMENTS
From time to time we enter into commercial commitments, usually in the form
of commercial and standby letters of credit, insurance bonds and financial
guarantees. Contracts with our customers may require us to provide letters of
credit or insurance bonds with regard to our performance of contracted services.
In such cases, the commitments can be called upon in the event of our failure to
perform contracted services. Likewise, contracts may allow us to issue letters
of credit or insurance bonds in lieu of contract retention provisions, in which
the client withholds a percentage of the contract value until project completion
or expiration of a warranty period.
In connection with our 10 percent interest in a joint venture in Venezuela,
we issued a corporate guarantee equal to 10 percent of the joint venture's
outstanding borrowings with two banks. The guarantee reduces as borrowings are
repaid. The commitment as of December 31, 2004 totals $3,453, the maximum amount
of future payments we could be required to make.
A summary of our off-balance sheet commercial commitments as of December
31, 2004 is as follows:
Amount of Commitment
Expiration Per Period
----------------------------------
Total Less Than More Than
Commitment 2 Years 2 Years
---------- --------- ---------
(Dollar amounts in thousands)
Letters of Credit:
Chad-Cameroon Pipeline Project - performance ... $ 6,410 $ 6,410 $ --
Nigeria Projects - performance ................. 36,941 17,182 19,759
Other - performance and retention .............. 16,812 16,812 --
-------- ------- -------
Total Letters of Credit ........................ 60,163 40,404 19,759
Expiring Insurance Bonds - primarily performance .. 47,310 47,310 --
Corporate Guarantee ............................... 3,453 3,453 --
-------- ------- -------
Total Commercial Commitments ...................... $110,926 $91,167 $19,759
======== ======= =======
These commercial commitments totaling $110,926 represent the maximum amount
of future payments we could be required to make. We had no liability recorded as
of December 31, 2004, related to these commitments.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 153, "Exchanges of Non-monetary
Assets," which amends APB Opinion No. 29. The guidance in APB 29, Accounting for
Non-monetary Transactions, is based on the principle that exchanges of
non-monetary assets should be measured based on the fair value of the assets
exchanged. The amendment made by SFAS 153 eliminates the exception for exchanges
of similar productive assets and replaces it with a broader exception for
exchanges of non-monetary assets that do not have commercial substance. The
provisions of the statement are effective for exchanges taking place in fiscal
periods beginning after June 15, 2005. We will adopt the standard as of the
effective date and we believe it will not have a material impact on our
consolidated financial statements.
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment." This
standard requires expensing of stock options and other share-based payments and
supersedes SFAS 123, which had allowed companies to choose between expensing
stock options or showing pro forma disclosure only. This standard is effective
for reporting periods beginning January 1, 2006 and will apply to all awards
granted, modified,
54
cancelled or repurchased after that date as well as the unvested portion of
prior awards. We will adopt the standard as of January 1, 2006. We are currently
evaluating the total effect on the consolidated financial statements and the
method to use when valuing stock options.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," an
amendment of Accounting Research Bulletin No. 43, Chapter 4. This statement
clarifies the types of costs that should be expensed rather than capitalized as
inventory. This statement also clarifies the circumstances under which fixed
overhead costs associated with operating facilities involved in inventory
processing should be capitalized. The provisions of SFAS No. 151 are effective
for fiscal years beginning after June 15, 2005, and may impact certain inventory
costs we incur after January 1, 2006. We are currently evaluating the impact, if
any, of this standard on our consolidated financial statements.
In October 2004, the FASB ratified the consensus reached by the "Emerging
Issues Task Force in EITF Issue No. 04-8 ("EITF 04-8") "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share," which changes the
treatment of contingently convertible debt instruments in the calculation of
diluted earnings per share. EITF 04-8 provides that shares issuable upon
conversion of these debt instruments be included in the earnings per share
computation, if dilutive, regardless of whether any contingent conditions, in
such instruments have been met. EITF 04-8 is for reporting periods ending after
December 15, 2004, and requires restatement of previously reported earnings per
share. We adopted EITF 04-8 as of December 31, 2004. See Note 14 of the "Notes
to Consolidated Financial Statements" included in Item 8 of this Form 10-K for
additional information about our income (loss) per share calculation.
In December 2003, the FASB reissued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," an Interpretation of Accounting
Research Bulletin No. 51 ("FIN 46") and its amendment entitled FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities ("FIN 46R") which were first issued by the FASB in January
2003. FIN 46R requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if (a) the equity investors in the entity
do not have the characteristics of a controlling financial interest or (b) do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
adoption of FIN 46R did not have a material impact on our financial position or
results of operations.
EFFECTS OF INFLATION AND CHANGING PRICES
Our operations are affected by increases in prices, whether caused by
inflation, government mandates or other economic factors, in the countries in
which we operate. We attempt to recover anticipated increases in the cost of
labor, fuel and materials through price escalation provisions in certain of our
major contracts or by considering the estimated effect of such increases when
bidding or pricing new work.
55
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk is our exposure to changes in non-U.S. currency
exchange rates. We attempt to negotiate contracts which provide for payment in
U.S. dollars, but we may be required to take all or a portion of payment under a
contract in another currency. To mitigate non-U.S. currency exchange risk, we
seek to match anticipated non-U.S. currency revenue with expense in the same
currency whenever possible. To the extent we are unable to match non-U.S.
currency revenue with expense in the same currency, we may use forward
contracts, options or other common hedging techniques in the same non-U.S.
currencies. We had no forward contracts or options at December 31, 2004 and
2003.
The carrying amounts for cash and cash equivalents, accounts receivable,
notes payable and accounts payable and accrued liabilities shown in the
consolidated balance sheets approximate fair value at December 31, 2004 due to
the generally short maturities of these items. At December 31, 2004, we invested
primarily in short-term dollar denominated bank deposits. We have the ability
and expect to hold our investments to maturity.
Our exposure to market risk for changes in interest rates relates primarily
to our borrowings under the 2004 Credit Facility. At December 31, 2004, there
were no borrowings subject to variable interest rates. At December 31, 2004, our
fixed rate debt approximated fair value based upon discounted future cash flows
using current market rates.
56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of Willbros Group, Inc. and
Subsidiaries
Reports of Independent Registered Public Accounting Firm.............. 58
Consolidated Balance Sheets as of December 31, 2004 and 2003
(Restated)......................................................... 61
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 (Restated) and 2002 (Restated)............. 62
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the years ended December 31, 2004, 2003
(Restated) and 2002 (Restated)..................................... 63
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 (Restated) and 2002 (Restated)............. 64
Notes to Consolidated Financial Statements for the years ended
December 31, 2004, 2003 and 2002................................... 65
57
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Willbros Group, Inc.:
We have audited the accompanying consolidated balance sheets of Willbros Group,
Inc. as of December 31, 2004 and 2003, and the related consolidated statements
of operations, stockholders' equity and comprehensive income (loss), and cash
flows for each of the years in the three-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Willbros Group, Inc.
as of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company has
restated its consolidated balance sheet as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for the years ended December 31, 2003 and 2002.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Willbros Group,
Inc.'s internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated November 21, 2005 expressed an unqualified opinion on management's
assessment of, and an adverse opinion on the effective operation of, internal
control over financial reporting.
KPMG LLP
Houston, Texas
November 21, 2005
58
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Willbros Group, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting (Item 9A(b)),
that Willbros Group, Inc. ("the Company") did not maintain effective internal
control over financial reporting as of December 31, 2004, because of the effect
of material weaknesses identified in management's assessment, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that: (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment as of December 31, 2004:
1. Company-Level Controls - The Company did not maintain effective
company-level controls in the control environment, risk assessment, and
monitoring components as defined by COSO, including related antifraud
controls. Specifically, the following deficiencies were identified:
- The Company's control environment did not sufficiently promote
effective internal control over financial reporting throughout
the Company's management structure, and this material weakness
was a contributing factor in the development of other material
weaknesses described below.
- The Company did not provide sufficient training for personnel
engaged in key elements of the financial reporting process,
including training on relevant regulations such as the Foreign
Corrupt Practices Act.
- The Company's policies and procedures did not effectively ensure
that: (1) personnel, including internal audit, have the
appropriate skills and experience commensurate with their job
responsibilities; (2) the reporting structure of the
organization was appropriate; and (3) key personnel in certain
international subsidiaries adhere to a periodic rotation policy.
- The Company failed to educate and train employees in
identifying, monitoring, or reporting and responding to,
incidents of alleged misconduct or unethical behavior, including
the Company's whistleblower policy and the Company's code of
conduct policies.
These deficiencies in the Company's internal control over financial
reporting resulted in material misstatements to various amounts in
previously-issued annual and interim financial statements. Accordingly,
the Company has restated its consolidated financial statements as of and
for the years ended December 31, 2002 and 2003 and the first three
quarters of 2004.
2. Construction Contract Management - The Company's operating subsidiaries
in Nigeria did not maintain effective policies and procedures regarding
review and approval processes relating to: (i) original and revised
project cost estimates; (ii) original contract pricing; (iii)
establishment and management of contract contingencies; and (iv) change
order management. These deficiencies in the Company's internal control
over financial reporting resulted in material overstatement of contract
revenue and understatement of contract costs, in previously-issued
annual and interim financial statements. Accordingly, the Company has
restated its consolidated financial statements as of and for the years
ended December 31, 2002 and 2003, and the first three quarters of 2004.
3. International Taxes - The Company's policies and procedures did not
provide for effective supervisory review of the Company's accounting for
international taxes, value added taxes, and payroll taxes and the
related recordkeeping activities. These deficiencies in the Company's
internal control over financial reporting resulted in material
understatement of contract cost and income tax expense in
previously-issued annual and interim financial statements. Accordingly,
the Company has restated its consolidated financial statements as of and
for the years ended December 31, 2002 and 2003, and the first three
quarters of 2004.
4. Disbursements Process - The Company did not maintain effective policies
and procedures regarding its disbursements process. Specifically,
deficiencies in policies and procedures were noted in the following
areas: (i) petty cash disbursements at the Company's Nigerian
subsidiaries; (ii) the Company's vendor approval process and maintenance
of an approved vendor listing; and (iii) disbursement approval levels
for individuals, subsidiaries, and senior management. These deficiencies
resulted in material undisclosed related party transactions and payment
of fraudulent vendor invoices resulting in material overstatement of
contract revenue and overstatement of contract cost in previously-issued
annual and interim financial statements. Accordingly, the Company has
restated its consolidated financial statements as of and for the years
ended December 31, 2002 and 2003, and the first three quarters of 2004.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Willbros Group, Inc. and subsidiaries as of December 31, 2004 and 2003
(restated), and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for the years ended December 31,
2004, 2003 (restated), and 2002 (restated). The above material weaknesses were
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the 2004 consolidated financial statements, and this report does
not affect our report dated November 21, 2005, which expressed an unqualified
opinion on those consolidated financial statements.
In our opinion, management's assessment that the Company did not maintain
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, because
of the effect of the material weaknesses described above on the achievement of
the objectives of the control criteria, the Company has not maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
KPMG LLP
November 21, 2005
WILLBROS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
-------------------
2004 2003
-------- --------
RESTATED
ASSETS
Current assets:
Cash and cash equivalents $ 78,720 $ 20,969
Accounts receivable, net 151,054 101,654
Contract cost and recognized income not yet billed 21,251 36,724
Prepaid expenses 15,662 11,531
Parts inventory, net 5,623 5,773
-------- --------
Total current assets 272,310 176,651
Deferred tax assets 6,416 8,347
Property, plant and equipment, net 116,643 94,900
Investment in joint ventures 3,441 14,086
Goodwill 6,535 6,225
Other assets 11,765 4,485
-------- --------
Total assets $417,110 $304,694
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,171 $ 1,315
Accounts payable and accrued liabilities 122,470 82,793
Contract billings in excess of cost and recognized
income 30,957 6,988
Accrued income taxes 9,069 1,827
-------- --------
Total current liabilities 163,667 92,923
2.75% convertible senior notes 70,000 --
Long-term debt 2,324 17,007
Other liabilities 1,075 237
-------- --------
Total liabilities 237,066 110,167
Stockholders' equity:
Class A preferred stock, par value $.01 per share,
1,000,000 shares authorized, none issued -- --
Common stock, par value $.05 per share, 35,000,000
shares authorized and 21,425,980 shares issued
at December 31, 2004 (20,748,498 at
December 31, 2003) 1,071 1,037
Capital in excess of par value 156,175 149,373
Retained earnings 23,614 44,429
Treasury stock at cost, 63,196 shares at
December 31, 2004 (46,196 at December 31, 2003) (555) (345)
Deferred compensation (1,639) --
Notes receivable for stock purchases (216) (982)
Accumulated other comprehensive income 1,594 1,015
-------- --------
Total stockholders' equity 180,044 194,527
-------- --------
Total liabilities and stockholders' equity $417,110 $304,694
======== ========
See accompanying notes to consolidated financial statements.
61
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Year Ended December 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
RESTATED RESTATED
Contract revenue $ 483,318 $ 416,573 $ 582,829
Operating expense:
Contract (including related
party costs of $7,694 in
2004, $7,144 in 2003 and
$14,577 in 2002) 417,671 374,442 494,318
Depreciation and amortization 16,747 15,570 16,627
General and administrative 46,614 36,300 34,046
Other operating costs
(including related party
costs of $1,722 in 2004,$814
in 2003 and $1,542 in 2002) 3,571 2,314 3,076
----------- ----------- -----------
484,603 428,626 548,067
----------- ----------- -----------
Operating income (loss) (1,285) (12,053) 34,762
Other income (expense):
Interest income 879 609 472
Interest expense (3,413) (1,330) (1,657)
Foreign exchange gain (loss) 248 (789) (1,025)
Other - net (7,180) (655) (761)
----------- ----------- -----------
(9,466) (2,165) (2,971)
----------- ----------- -----------
Income (loss) before income taxes (10,751) (14,218) 31,791
Provision (benefit) for income taxes 10,064 (3,301) 6,885
----------- ----------- -----------
Net income (loss) $ (20,815) $ (10,917) $ 24,906
=========== =========== ===========
Income (loss) per common share:
Basic $ (.99) $ (.53) $ 1.36
=========== =========== ===========
Diluted $ (.99) $ (.53) $ 1.33
=========== =========== ===========
Weighted average number of common shares
outstanding:
Basic 20,922,002 20,662,305 18,271,492
=========== =========== ===========
Diluted 20,922,002 20,662,305 18,721,759
=========== =========== ===========
See accompanying notes to consolidated financial statements.
62
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share amounts)
Accumulated
Capital Notes Other
Common Stock in Receivable Compre- Total
------------------ Excess Deferred For hensive Stock-
Par of Par Retained Treasury Compen- Stock Income holders'
Shares Value Value Earnings Stock sation Purchases (Loss) Equity
---------- ------ -------- -------- -------- -------- ---------- ----------- --------
RESTATED RESTATED RESTATED RESTATED RESTATED
Balance, December 31, 2001 15,728,191 $ 786 $ 72,915 $ 31,205 $(7,403) $ -- $ (8) $ (938) $ 96,557
Cumulative effect for correction
of errors in prior periods -- -- -- (471) -- -- -- 141 (330)
---------- ------ -------- -------- ------- ------- ----- ------ --------
Restated balance, Dec. 31, 2001 15,728,191 786 72,915 30,734 (7,403) -- (8) (797) 96,227
Comprehensive income (loss):
Net income -- -- -- 24,906 -- -- -- -- 24,906
Foreign currency translation
adjustments -- -- -- -- -- -- -- (176) (176)
--------
Total comprehensive income 24,730
Issuance of notes receivable
for stock purchase -- -- -- -- -- -- (873) -- (873)
Amortization of note discount -- -- -- -- -- -- (72) -- (72)
Issuance of treasury stock for
acquisition of Mt. West Group -- -- (779) (294) 7,058 -- -- -- 5,985
Issuance of common stock
under employee benefit plan 33,121 1 421 -- -- -- -- -- 422
Sale of common stock, net
of offering cost 4,356,750 218 71,684 -- -- -- -- -- 71,902
Exercise of stock options 497,813 26 4,268 -- -- -- -- -- 4,294
---------- ------ -------- -------- ------- ------- ----- ------ --------
Balance, December 31, 2002 20,615,875 1,031 148,509 55,346 (345) -- (953) (973) 202,615
Comprehensive income (loss):
Net loss -- -- -- (10,917) -- -- -- -- (10,917)
Foreign currency translation
adjustments -- -- -- -- -- -- -- 1,988 1,988
--------
Total comprehensive loss (8,929)
Payment of notes receivable -- -- -- -- -- -- 75 -- 75
Amortization of note discount -- -- -- -- -- -- (104) -- (104)
Issuance of common stock
under employee benefit plan 27,623 1 244 -- -- -- -- -- 245
Exercise of stock options 105,000 5 620 -- -- -- -- -- 625
---------- ------ -------- -------- ------- ------- ----- ------ --------
Balance, December 31, 2003 20,748,498 1,037 149,373 44,429 (345) -- (982) 1,015 194,527
Comprehensive income (loss):
Net loss -- -- -- (20,815) -- -- -- -- (20,815)
Foreign currency translation
adjustments -- -- -- -- -- -- -- 579 579
--------
Total comprehensive loss (20,236)
Payment of notes receivable -- -- -- -- -- -- 990 -- 990
Amortization of note discount -- -- -- -- -- -- (224) -- (224)
Restricted stock grants 183,000 9 2,312 -- -- (2,321) -- -- --
Forfeitures of restricted
stock grants -- -- -- -- (210) 210 -- -- --
Deferred compensation -- -- 134 -- -- 472 -- -- 606
Issuance of common stock
under employee benefit plan 15,603 1 220 -- -- -- -- -- 221
Exercise of stock options 478,879 24 4,136 -- -- -- -- -- 4,160
---------- ------ -------- -------- ------- ------- ----- ------ --------
Balance, December 31, 2004 21,425,980 $1,071 $156,175 $ 23,614 $ (555) $(1,639) $(216) $1,594 $180,044
========== ====== ======== ======== ======= ======= ===== ====== ========
See accompanying notes to consolidated financial statements
63
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
RESTATED RESTATED
Cash flows from operating activities:
Net income (loss) $(20,815) $(10,917) $ 24,906
Reconciliation of net income (loss) to cash provided by
(used in) operating activities:
Equity in joint ventures 9,908 2,659 (9,059)
Depreciation and amortization 16,747 15,570 16,627
Amortization of debt issue costs 1,846 1,157 587
Amortization of notes receivable discount (224) (85) (72)
Provision (credit) for bad debts 6,737 199 (58)
Provisions for inventory obsolescence 1,400 600 700
Loss (gain) on sales and retirements of property,
plant and equipment 368 (343) 281
Non-cash compensation expense 606 -- 553
Deferred income tax expense (benefit) 1,773 (2,169) (4,203)
Changes in operating assets and liabilities:
Accounts receivable (55,231) (7,340) 11,093
Contract cost and recognized income not yet billed 15,788 (9,904) (8,163)
Prepaid expenses (4,016) (923) (6,292)
Parts inventory, net (1,250) (306) 308
Other assets (2,946) (1,929) 563
Accounts payable and accrued liabilities 38,928 13,238 3,547
Accrued income taxes 7,383 (9,782) (120)
Contract billings in excess of cost
and recognized income 23,967 (4,049) (10,184)
-------- -------- --------
Cash provided by (used in) operating activities 40,969 (14,324) 21,014
Cash flows from investing activities:
Acquisitions, net of cash acquired -- -- (2,001)
Proceeds from sales of property, plant and equipment 1,728 1,395 604
Purchases of property, plant and equipment (38,479) (33,984) (22,601)
-------- -------- --------
Cash used in investing activities (36,751) (32,589) (23,998)
Cash flows from financing activities:
Proceeds from issuance of 2.75% convertible senior notes 70,000 -- --
Proceeds from issuance of common stock 4,381 852 75,192
Proceeds from notes payable to banks 2,490 8,162 8,323
Collection of notes receivable for stock purchases 990 75 --
Proceeds from long-term debt -- 14,000 38,000
Repayment of long-term debt (14,000) -- (77,000)
Costs of debt issuance (6,176) (236) (3,019)
Repayment of notes payable to banks (3,323) (5,059) (8,396)
-------- -------- --------
Cash provided by financing activities 54,362 17,794 33,100
Effect of exchange rate changes on cash and cash
equivalents (829) 631 52
-------- -------- --------
Increase (decrease) in cash and cash equivalents 57,751 (28,488) 30,168
Cash and cash equivalents, beginning of year 20,969 49,457 19,289
-------- -------- --------
Cash and cash equivalents, end of year $ 78,720 $ 20,969 $ 49,457
======== ======== ========
See accompanying notes to consolidated financial statements.
64
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company - Willbros Group, Inc. ("WGI"), a Republic of Panama corporation,
and all of its majority-owned subsidiaries (the "Company") provide construction,
engineering, specialty services and development activities to the oil, gas and
power industries and government entities. The Company's principal markets are
Africa, the Middle East, South America, Canada and the United States.
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of WGI and all of its majority-owned subsidiaries.
Inter-company accounts and transactions are eliminated in consolidation. The
ownership interest of minority participants in subsidiaries that are not wholly
owned (principally in Nigeria and Oman) is included in accounts payable and
accrued liabilities and is not material. The minority participants' share of the
net income of those subsidiaries is included in contract costs. Interest in the
Company's unconsolidated joint ventures is accounted for using the equity method
in the consolidated balance sheet. The Company's equity in earnings in a 10%
joint venture is recognized as contract revenue and its share of operations for
a 50% joint venture is reflected in the statements of operations based on
proportionate consolidation.
Reclassification - Certain reclassifications have been made to conform to
current year presentations.
Use of Estimates - The consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States
and include certain estimates and assumptions by management of the Company in
the preparation of the consolidated financial statements. These estimates and
assumptions relate to the reported amounts of assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expense during the period. Significant items subject to such estimates and
assumptions include the carrying amount of property, plant and equipment,
goodwill and parts inventory; quantification of amounts recorded for
contingencies, tax accruals and certain other accrued liabilities; valuation
allowances for accounts receivable and deferred income tax assets; and revenue
recognition under the percentage-of-completion method of accounting, including
estimates of progress toward completion and estimates of gross profit or loss
accrual on contracts in progress. The Company bases its estimates on historical
experience and other assumptions that it believes relevant under the
circumstances. Actual results could differ from those estimates.
Commitments and Contingencies - Liabilities for loss contingencies arising
from claims, assessments, litigation, fines, and penalties and other sources are
recorded when management assesses that it is probable that a liability has been
incurred and the amount can be reasonably estimated. Recoveries of costs from
third parties, which management assesses are probable of realization, are
separately recorded as assets in other assets.
Accounts Receivable - Trade accounts receivable are recorded at the
invoiced amount and do not bear interest. The allowance for doubtful accounts is
the Company's best estimate of the amount of probable credit losses in the
Company's existing accounts receivable. A considerable amount of judgment is
required in assessing the realization of receivables. Relevant assessment
factors include the creditworthiness of the customers, prior collection history
with the customer and related aging of past due balances. Past due balances over
90 days and over a specified amount are reviewed individually for
collectability. Account balances are charged off against the allowance after all
means of collection have exhausted and the potential for recovery is considered
remote. The allowance requirements are based on the most current facts available
and are re-evaluated and adjusted on a regular basis and as additional
information is received. The Company does not have any off-balance-sheet credit
exposure related to its customers.
Inventories - Inventories, consisting generally of supplies and materials
in transit to construction sites in Nigeria, are stated at the lower of cost or
market. Cost is determined using the first-in, first-out ("FIFO") method.
Inventories of $4,882 at December 31, 2004 ($636 at December 31, 2003) are
included in prepaid expenses. Parts inventories are stated at the lower of
average cost or market. Parts inventories are evaluated at least annually and
adjusted for excess and obsolescence.
Other Operating Costs - Other operating costs consist of the expenses
incurred by the Company associated with fraudulent invoices for ficticious
supplies or services.
Property, Plant and Equipment - Depreciation is provided on the
straight-line method using estimated lives as follows:
65
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Construction equipment 4-6 years
Marine equipment 10 years
Transportation equipment 3-4 years
Buildings 20 years
Furniture and equipment 3-10 years
Production facilities 10-25 years
Assets held under capital leases and leasehold improvements are amortized
on a straight line basis over the shorter of the lease term or estimated useful
life of the asset. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in income for the period. Normal repair and
maintenance costs are charged to expense as incurred. Major overhaul costs are
accrued in advance of actual overhaul activities and are allocated to contracts
based on estimates of equipment condition. Significant renewals and betterments
are capitalized. Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Goodwill - Goodwill represents the excess of purchase price over fair value
of net assets acquired. Goodwill is not amortized but instead tested for
impairment at least annually, in accordance with provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", during the fourth quarter of its fiscal year and more frequently if an
event or circumstance indicates that an impairment has occurred. The impairment
test involves determining the fair market value of each of the reporting units
with which the goodwill is associated and comparing the estimated fair market
value of each of the reporting units with its carrying amount. The Company
completed its annual evaluation for impairment of goodwill as of December 31,
2004, and determined that no impairment of goodwill existed as of that date.
Revenue - A number of factors relating to the Company's business affect the
recognition of contract revenue. Revenue from fixed-price construction and
engineering contracts is recognized on the percentage-of-completion method.
Under this method, estimated contract income and resulting revenue is generally
accrued based on costs incurred to date as a percentage of total estimated
costs, taking into consideration physical completion. Total estimated costs, and
thus contract income, are impacted by changes in productivity, scheduling, and
the unit cost of labor, subcontracts, materials and equipment. Additionally,
external factors such as weather, client needs, client delays in providing
permits and approvals, labor availability, governmental regulation and politics,
may affect the progress of a project's completion and thus the timing of revenue
recognition. The Company does not recognize income on a fixed-price contract
until the contract is approximately 5 percent to 10 percent complete, depending
upon the nature of the contract. If a current estimate of total contract cost
indicates a loss on a contract, the projected loss is recognized in full when
determined. Also included in contract costs and recognized income not yet billed
on uncompleted contracts are amounts the Company seeks or will seek to collect
from customers or others for errors or changes in contract specifications or
design, contract change orders in dispute or unapproved as to both scope and
price, or other customer-related causes of unanticipated additional contract
costs (unapproved change orders). These amounts are recorded at their estimated
net realizable value when realization is probable and can be reasonably
estimated. Unapproved change orders and claims also involve the use of
estimates, and it is reasonably possible that revisions to the estimated
recoverable amounts of recorded unapproved change orders may be made in the
near-term. If the Company does not successfully resolve these matters, a net
expense (recorded as a reduction in revenues), may be required, in addition to
amounts that have been previously provided for. However, costs associated with
revenue from claims are expensed when incurred. Revenue from unit-price and time
and material contracts is recognized as earned. Revenue from operations of the
Opal Gas Plant is recognized upon delivery of product to the customer. The
66
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Company believes that its operating results should be evaluated over a time
horizon during which major contracts in progress are completed and change
orders, extra work, variations in the scope of work and cost recoveries and
other claims are negotiated and realized.
Income Taxes - The Company accounts for income taxes by the asset and
liability method under which deferred tax assets and liabilities are recognized
for the future tax consequences of operating loss and tax credit carry forwards
and temporary differences between the financial statement carrying values of
assets and liabilities and their respective tax bases. The provision for income
taxes and the annual effective tax rate are impacted by income taxes in certain
countries, primarily Nigeria, being computed based on a deemed income rather
than on taxable income and tax holidays on certain international projects.
Retirement Plans and Benefits - The Company has a voluntary defined
contribution retirement plan for U.S. based employees that is qualified, and is
contributory on the part of the employees, and a voluntary savings plan for
certain international employees that is non-qualified, and is contributory on
the part of the employees.
Common Stock Options - The Company applies the intrinsic-value-based method
of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations,
including FASB Interpretation No. 44, "Accounting for Certain Transactions
involving Stock Compensation and interpretation of APB Opinion No. 25," to
account for its fixed-plan stock options. Under this method, compensation cost
is recorded on the date of grant only if the current market price of the
underlying common stock exceeded the exercise price. SFAS No. 123, "Accounting
for Stock-Based Compensation" and SFAS Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
Statement No. 123", established accounting and disclosure requirements using
fair-value-based method of accounting for stock-based employee compensation
plans. As permitted by existing standards, the Company has elected to continue
to apply the intrinsic-value-based method of accounting described above, and has
adopted only the disclosure requirements of Statement 123, as amended.
Compensation cost related to restricted stock awards and restricted stock rights
awards is measured as the market price of the Company's common stock at the date
of the award, and compensation cost is recognized over the vesting period,
typically four years.
The following table illustrates the effect on net income (loss) if the
fair-value-based method had been applied to all outstanding and unvested awards
in each period:
Year Ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
RESTATED RESTATED
Net income (loss) as reported $(20,815) $(10,917) $24,906
Add stock-based employee compensation
included in net income 606 -- 553
Less stock-based employee compensation
determined under fair value method (1,431) (1,786) (2,397)
-------- -------- -------
Pro forma net income (loss) $(21,640) $(12,703) $23,062
======== ======== =======
Income (loss) per share:
Basic, as reported $ (.99) $ (.53) $ 1.36
======== ======== =======
Basic, pro forma $ (1.03) $ (.61) $ 1.26
======== ======== =======
Diluted, as reported $ (.99) $ (.53) $ 1.33
======== ======== =======
Diluted, pro forma $ (1.03) $ (.61) $ 1.23
======== ======== =======
67
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
The fair value of granted options was estimated on the date of grant using
the Black-Sholes option pricing model with the following weighted-average
assumptions:
Year Ended December 31,
-----------------------
2004 2003 2002
----- ----- -----
Expected option life in years 3 1-3 4
Risk-free interest rate .97% 1.13% 1.81%
Dividend yield -- -- --
Volatility 45.41% 52.99% 57.04%
The Company will adopt the provisions of SFAS Statement No. 123R,
"Share-Based Payment", in 2006 regarding stock compensation as discussed below.
Foreign Currency Translation - All significant monetary asset and liability
accounts denominated in currencies other than United States dollars are
translated into United States dollars at current exchange rates for countries in
which the local currency is the functional currency. Translation adjustments are
accumulated in other comprehensive income (loss). Non-monetary assets and
liabilities in highly inflationary economies are translated into United States
dollars at historical exchange rates. Revenue and expense accounts are converted
at prevailing rates throughout the year. Foreign currency transaction
adjustments and translation adjustments in highly inflationary economies are
recorded in income.
Concentration of Credit Risk - The Company has a concentration of customers
in the oil, gas and power industries which exposes the Company to a
concentration of credit risks within an industry. The Company seeks to obtain
advance and progress payments for contract work performed on major contracts.
Receivables are generally not collateralized. The allowance for doubtful
accounts has increased in 2004 to $7,598 from $917 in 2003. The Company believes
the allowance for doubtful accounts is adequate.
Fair Value of Financial Instruments - The carrying value of financial
instruments does not materially differ from fair value.
Cash Flows - In the determination of cash flows, all highly liquid
investments with maturities of less than three months are considered to be cash
equivalents. Cash equivalents were $63,756 and $4,911 at December 31, 2004 and
2003, respectively. The Company paid interest of $1,514 in 2004, $300 in 2003,
and $1,132 in 2002 and income taxes of $2,393 in 2004, $11,265 in 2003, and
$11,315 in 2002. In 2004, the Company's property, plant and equipment increased
$737 from non-cash transactions as a result of distributions of property from a
joint venture. Non-cash financing activities in 2004 include the addition of
17,000 shares to treasury stock resulting from forfeitures of restricted stock
grants, valued at the market price of the Company's common stock at the date of
grant of $210.
Capitalized Interest - The Company capitalizes interest as part of the cost
of significant assets constructed or developed for the Company's own use.
Capitalized interest was $349 and $386 in 2004 and 2003, respectively.
Income (Loss) per Common Share - Basic income (loss) per share is
calculated by dividing net income (loss), less any preferred dividend
requirements, by the weighted-average number of common shares outstanding during
the year. Diluted income (loss) per share is calculated by including the
weighted-average number of all potentially dilutive common shares with the
weighted-average number of common shares outstanding.
Derivative Financial Instruments - The Company may use derivative financial
instruments such as forward contracts, options or other financial instruments as
hedges to mitigate non-U.S. currency exchange risk when the Company is unable to
match non-U.S. currency revenue with expense in the same currency. The Company
had no derivative financial instruments as of December 31, 2004.
68
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Recently Issued Accounting Standards - In December 2004, the FASB issued
SFAS 153, "Exchanges of Non-monetary Assets," which amends APB Opinion No. 29.
The guidance in APB 29, "Accounting for Non-monetary Transactions," is based on
the principle that exchanges of non-monetary assets should be measured based on
the fair value of the assets exchanged. The amendment made by SFAS 153
eliminates the exception for exchanges of similar productive assets and replaces
it with a broader exception for exchanges of non-monetary assets that do not
have commercial substance. The provisions of the statement are effective for
exchanges taking place in fiscal periods beginning after June 15, 2005. The
Company will adopt the standard as of the effective date and the Company
believes it will not have a material impact on its consolidated financial
statements.
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment." This
standard requires expensing of stock options and other share-based payments and
supersedes SFAS 123, which had allowed companies to choose between expensing
stock options or showing pro forma disclosure only. This standard is effective
for reporting periods beginning January 1, 2006 and will apply to all awards
granted, modified, cancelled or repurchased after that date as well as the
unvested portion of prior awards. We will adopt the standard as of January 1,
2006. We are currently evaluating the total effect on the consolidated financial
statements and the method to use when valuing stock options.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," an
amendment of Accounting Research Bulletin No. 43, Chapter 4. This statement
clarifies the types of costs that should be expensed rather than capitalized as
inventory. This statement also clarifies the circumstances under which fixed
overhead costs associated with operating facilities involved in inventory
processing should be capitalized. The provisions of SFAS No. 151 are effective
for fiscal years beginning after June 15, 2005, and may impact certain inventory
costs we incur after January 1, 2006. We are currently evaluating the impact, if
any, of this standard on our consolidated financial statements.
In October 2004, the FASB ratified the consensus reached by the Emerging
Issues Task Force in EITF Issue No. 04-8 ("EITF 04-8") "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share," which changes the
treatment of contingently convertible debt instruments in the calculation of
diluted earnings per share. EITF 04-8 provides that shares issuable upon
conversion of these debt instruments be included in the earnings per share
computation, if dilutive, regardless of whether any contingent conditions, in
such instruments have been met. EITF 04-8 is for reporting periods ending after
December 15, 2004, and requires restatement of previously reported earnings per
share. We adopted EITF 04-8 as of December 31, 2004. See Note 14 below for
additional information about our income (loss) per share calculation.
In December 2003, the FASB reissued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," an Interpretation of Accounting
Research Bulletin No. 51 ("FIN 46") and its amendment entitled FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities ("FIN 46R") which were first issued by the FASB in January
2003. FIN 46R requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if (a) the equity investors in the entity
do not have the characteristics of a controlling financial interest or (b) do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
adoption of FIN 46R did not have a material impact on our financial position or
results of operations.
69
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. RESTATEMENT
In late December of 2004, the Company became aware of an approximate $2.5
million tax assessment against the Company's Bolivian subsidiary which alleged
that the subsidiary had filed improper tax returns. The assessment also imposed
penalties and interest related to the tax assessment. Prior to late December
2004, the executive management of the Company was unaware of the tax assessment,
with the exception of J. Kenneth Tillery, the then President of Willbros
International, Inc. ("WII"), the primary international subsidiary of the
Company. Mr. Tillery resigned from the Company on January 6, 2005.
Upon learning of the tax assessment, the Company immediately commenced an
initial investigation into the matter and notified the Audit Committee of the
Board of Directors. The Audit Committee retained independent counsel, who in
turn retained forensic accountants, and began an independent investigation.
Concurrent with the Audit Committee's investigation, the Company initiated
its own review of the Company's accounting. This review focused primarily on the
Company's international activities supervised by the former President of WII,
but also included other areas of the Company's accounting activities.
As a result of the investigation by the Audit Committee and the Company's
accounting review, the Company determined that several members of the senior
management of WII and its subsidiaries collaborated to misappropriate assets
from the Company and cover up such activity. It was determined that the Bolivian
subsidiary had in fact filed improper tax returns, or failed to file returns, at
the direction of Mr. Tillery, the former President of WII. The investigation
also determined that Mr. Tillery, in collusion with several members of the
management of the international subsidiaries, was involved in other improper
activities, primarily in the Company's Nigerian subsidiaries. The improper
activities which significantly impacted the Company's previously issued
consolidated financial statements, include:
- Understatement and underpayment of value added taxes (VAT) and payroll
related taxes with resultant penalties and interest at certain
international subsidiaries of $8,714 for the period from 1999 through
December 2003 ($2,658 in 2003, $3,596 in 2002 and $2,460 in prior
periods;
- The existence of previously undisclosed and unknown multiple related
party affiliations and transactions with entities in which the former
President of WII and other members of management of the international
subsidiaries operating in Nigeria, had an ownership interest or
exerted significant influence. As disclosed in Note 18, previously
undisclosed related party transactions totaled $24,077 for the two
year period ended 2003, which transactions and services may not have
been based on market terms or rates and/or the Company may not have
received appropriate benefit from such arrangements;
- Misappropriation of $5,847 in cash funds for the period from 1999
through December 2003 ($1,500 in 2003, $1,534 in 2002 and $2,813 in
prior periods), through the use of fraudulent vendor invoices in
Nigeria which resulted in an overstatement of fixed assets,
overstatement of contract costs (subsequently reclassified as Other
Operating Costs) and timing differences in the recognition of contract
revenue on fixed price contracts;
- Misappropriation of $2,356 in cash funds for the period 2002 through
2003 ($814 in 2003 and $1,542 in 2002) through the use of fraudulent
consulting agreements in Nigeria, which resulted in an overstatement
of contract costs (subsequently reclassified as Other Operating Costs)
and timing differences in the recognition of contract revenue on fixed
priced contracts;
- Overstatement of estimated contract margins for several significant
Nigeria contracts resulting in an overstatement of contract margins
and in timing differences in the recognition of contract revenue on
fixed price contracts;
- Overstatement of costs incurred and anticipated recovery of a
significant contract change order resulting in an overstatement of
contract revenue and margin of $3,664;
- Overstatement of net accounts receivable, as a result of inaccurate
information provided by several members of management of international
subsidiaries resulting in an understatement of bad debt expense of
approximately $6,737; and
- Misappropriation of funds to refurbish equipment not owned by the
Company charged to contract costs in the amount of approximately
$2,182.
The Company's review of its historical accounting also identified
accounting errors which are corrected in the Company's restated consolidated
financial statements and include:
- An error in determining the price used for the Company's common stock
issued as partial consideration in connection with an acquisition in
2002;
70
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. RESTATEMENT (CONT'D)
- An error in the treatment of an earn-out payment in connection with a
2002 acquisition classified as a purchase price adjustment instead of
compensation expense;
- An error in the computation of the accretion of interest on discount
on notes receivable for stock purchases;
- An error in the amortization period used to amortize debt issuance
costs;
- An error in the accounting period used to reverse an excess accrual of
minority interest;
- An error in revenue resulting from the recording of duplicate
invoices;
- An error in the tax rate used to recognize deferred tax assets;
- An error in the recognition of withholding tax expense;
- An error in the application of accounting for loss contracts corrected
by a reclassification of contract revenue and contract costs;
- An error in the carrying value and classification of parts
inventories; and
- Corrections with respect to the income tax consequences on the matters
identified and corrected as a result of the investigation and the
accounting review.
Financial statement adjustments resulting from the misconduct of certain
members of the international subsidiaries management had a negative impact on
the Company's consolidated cumulative earnings (loss) through December 31, 2003
of approximately ($13,307). The impact on the Company's consolidated cumulative
earnings (loss) through December 31, 2003 for other accounting errors noted
above decreased earnings by approximately ($5). The total impact on the
Company's consolidated cumulative earnings (loss) of all financial statement
adjustments through December 31, 2003 was approximately ($13,312). The impact of
these items on the Company's balance sheet as of December 31, 2003 and its
statements of operations for the fiscal years ended December 31, 2003 and 2002
are presented below. The impact on the 2004 and 2003 interim periods are
included in Note 17. Adjustments affecting fiscal periods prior to January 1,
2003 are shown below in the adjustments column for the 2003 balance sheet.
The significant items having financial statement impact as of December 31,
2003 and all restated annual periods prior to 2004 are as follows:
- Decrease in contract revenue of $3,038 for the 2002 and 2003 restated
periods;
- Decrease in operating income for the 2002 and 2003 restated annual
periods of 10,355;
- Increase in other income (expense) net of ($643) for the 2002 and 2003
restated annual periods;
- Increase in income taxes of $1,549 for the 2002 and 2003 restated
annual periods;
- Reduction in stockholders' equity of $15,754, of which $13,312
represented a deduction in retained earnings;
- Reduction in goodwill of $3,135, with corresponding reduction in
capital-in-excess of par of $2,841 and a reduction in retained
earnings of $294, relating to an error in the price used for Company
common stock issued as partial consideration in connection with an
acquisition in 2002; and
- Increase of $7,179 in accounts payable and accrued liabilities and an
increase of $1,827 in accrued income taxes.
Year Ended December 31, 2003
------------------------------------------
AS REPORTED Adjustments RESTATED
----------- ----------- -----------
Contract revenue $ 418,737 $ (2,164) A $ 416,573
Operating expenses:
Contract 365,625 8,817 B 374,442
Depreciation and amortization 22,285 (6,715) C 15,570
General and administrative 36,060 240 D 36,300
Other operating costs -- 2,314 E 2,314
----------- ----------- -----------
423,970 4,656 428,626
----------- ----------- -----------
Operating income (loss) (5,233) (6,820) (12,053)
Other income (expense):
Interest income 524 85 F 609
Interest expense (1,746) 416 G (1,330)
Foreign exchange loss (677) (112) H (789)
Other - net 506 (1,161) I (655)
----------- ----------- -----------
(1,393) (772) (2,165)
----------- ----------- -----------
Income (loss) before income taxes (6,626) (7,592) (14,218)
Provision (benefit) for income taxes (3,413) 112 J (3,301)
----------- ----------- -----------
Net income (loss) $ (3,213) $ (7,704) $ (10,917)
=========== =========== ===========
Income (loss) per common share:
Basic $ (0.16) $ (0.37) $ (0.53)
=========== =========== ===========
Diluted $ (0.16) $ (0.37) $ (0.53)
=========== =========== ===========
Weighted average number of common:
Basic 20,662,305 20,662,305 20,662,305
=========== =========== ===========
Diluted 20,662,305 20,662,305 20,662,305
=========== =========== ===========
71
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. RESTATEMENT (CONT'D)
Year Ended December 31, 2002
------------------------------------------
AS REPORTED Adjustments RESTATED
----------- ----------- -----------
Contract revenue $ 583,703 $ (874) A $ 582,829
Operating expenses:
Contract 488,256 6,062 B 494,318
Depreciation and amortization 23,304 (6,677) C 16,627
General and administrative 33,846 200 D 34,046
Other operating costs -- 3,076 E 3,076
----------- ----------- -----------
545,406 2,661 548,067
----------- ----------- -----------
Operating income (loss) 38,297 (3,535) 34,762
Other income (expense):
Interest income 400 72 F 472
Interest expense (1,951) 294 G (1,657)
Foreign exchange loss (1,025) -- H (1,025)
Other - net (524) (237) I (761)
----------- ----------- -----------
(3,100) 129 (2,971)
----------- ----------- -----------
Income (loss) before income taxes 35,197 (3,406) 31,791
Provision (benefit) for income taxes 5,448 1,437 J 6,885
----------- ----------- -----------
Net income (loss) $ 29,749 $ (4,843) $ 24,906
=========== =========== ===========
Income (loss) per common share:
Basic $ 1.63 $ (.27) $ 1.36
=========== =========== ===========
Diluted $ 1.59 $ (.26) $ 1.33
=========== =========== ===========
Weighted average number of common:
Basic 18,271,492 18,271,492 18,271,492
=========== =========== ===========
Diluted 18,721,759 18,721,759 18,721,759
=========== =========== ===========
NOTES TO STATEMENTS OF OPERATIONS RESTATEMENT ADJUSTMENTS:
2003 2002
------- -------
A. DECREASE IN CONTRACT REVENUE
- Increase (decrease) attributable to recalculation
of contract revenue on the Bolivia Transierra
Project as a result of the Bolivia tax assessment
impacting the timing of revenue recognition $ 2,139 $(2,278)
- Decrease in contract revenue attributable to an
error in the recognition of change order revenue
on a Nigerian contract (3,664) --
- Increase (decrease) due to reclassification of
contract revenue and contract costs associated
with an error in the manner used to record the
provision for loss contracts (440) 1,376
- Increase for other miscellaneous corrections 67 28
- Decrease due to reclassification of fraudulent
consulting fees from contract cost to other
operating costs resulting in timing differences
in the recognition of contract revenue on fixed
price contracts (266) --
------- -------
$(2,164) $ (874)
======= =======
B. INCREASE (DECREASE) IN CONTRACT COSTS
- Increase due to the accrual of unreported and
unpaid value added taxes and payroll related taxes
of certain international subsidiaries $ 3,195 $ 353
- Increase (decrease) in contract costs for an error
in accounting for prepaid barge costs 1,500 (1,500)
- Increase related to correction of minority
interest accrual -- 1,200
- Increase due to fraudulent invoices
inappropriately capitalized 228 296
- Decrease due to reclassification of foreign
withholding taxes to income tax expense -- (924)
- Increase (decrease) due to reclassification of
contract revenue and contract costs associated
with an error in the manner used to record the
provision for loss contracts (440) 1,376
- Decrease related to the reclassification of fraud
related costs from contract costs to other
operating costs (2,314) (3,076)
- Increase due to reclassification of parts
inventory expense from depreciation and
amortization 6,648 6,637
- Increase due to an error in accounting for
parts inventory -- 1,700
------- -------
$ 8,817 $ 6,062
======= =======
C. DECREASE IN DEPRECIATION AND AMORTIZATION
- Decrease due to reclassification of parts
inventory expense to contract costs (6,648) (6,637)
- Decrease due to the elimination of depreciation
expense on the improper capitalization of
fraudulent charges (67) (40)
------- -------
$(6,715) $(6,677)
======= =======
D. INCREASE IN GENERAL AND ADMINISTRATIVE EXPENSES:
- Increase due to an error in accounting for
compensation in connection with an earn-out
payment previously accounted for as a purchase
price adjustment charged to goodwill $ 240 $ 200
======= =======
E. INCREASE IN OTHER OPERATING COSTS:
- Increase related to the reclassification of
fraud related costs from contract costs to other
operating costs $ 2,314 $ 3,076
======= =======
72
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. RESTATEMENT (CONT'D)
2003 2002
------- ------
F. INCREASE IN INTEREST INCOME
- Increase is the result of accretion of interest on notes receivable
from stock purchase $ 85 $ 72
-====== ======
G. DECREASE IN INTEREST EXPENSE
- Decrease due to error in the amortization period used to amortize
debt issuances costs $ 416 $ 294
======= ======
H. INCREASE IN FOREIGN EXCHANGE LOSS
- Increase is related to revaluation of tax liability $ (112) $ --
======= ======
I. INCREASE IN OTHER - NET
- Increase is the result of provision for penalties and interest
associated with the underpayment of various taxes in certain
international subsidiaries $(1,161) $ (237)
======= ======
J. INCREASE IN PROVISION (BENEFIT) FOR INCOME TAXES
- Increase due to reclassification of foreign withholding taxes to
income tax expense $ 329 $ 924
- Increase due to the tax effect of the restatement adjustments (217) 813
- Decrease due to an error in the tax rate used to recognize
deferred state income taxes -- (300)
------- ------
$ 112 $1,437
======= ======
DECEMBER 31, 2003
-------------------------------------------
AS REPORTED ADJUSTMENTS RESTATED
----------- ----------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 20,969 $ -- $ 20,969
Accounts receivable, net 101,654 -- 101,654
Contract cost and recognized income not yet billed 40,109 (3,385) (1) 36,724
Prepaid expenses 11,531 -- 11,531
Parts inventory, net -- 5,773 (3) 5,773
-------- -------- --------
Total current assets 174,263 2,388 176,651
Deferred tax assets 6,948 1,399 (2) 8,347
Parts inventory, net 6,363 (6,363) (3) --
Property, plant and equipment, net 95,528 (628) (4) 94,900
Investment in joint ventures 14,086 -- 14,086
Goodwill 9,360 (3,135) (5) 6,225
Other assets 4,874 (389) (6) 4,485
-------- -------- --------
Total assets $311,422 $ (6,728) $304,694
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,315 $ -- $ 1,315
Accounts payable and accrued liabilities 75,614 7,179 (7) 82,793
Contract billings in excess of cost and recognized income 7,205 (217) (8) 6,988
Accrued income taxes -- 1,827 (9) 1,827
-------- -------- --------
Total current liabilities 84,134 8,789 92,923
-------- -------- --------
Long-term debt 17,007 -- 17,007
Other liabilities -- 237 (10) 237
-------- -------- --------
Total liabilities 101,141 9,026 110,167
-------- -------- --------
Stockholders' equity:
Common stock 1,037 -- 1,037
Capital in excess of par value 152,630 (3,257) (11) 149,373
Retained earnings 57,741 (13,312) (12) 44,429
Treasury stock (345) -- (345)
Notes receivable for stock purchases (1,240) 258 (13) (982)
Accumulated other comprehensive income 458 557 (14) 1,015
-------- -------- --------
Total stockholders' equity 210,281 (15,754) 194,527
-------- -------- --------
Total liabilities and stockholders' equity $311,422 $ (6,728) $304,694
======== ======== ========
73
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. RESTATEMENT (CONT'D)
Notes To Balance Sheet Restatement Adjustments:
(1) Net decrease of ($3,385) results from the decrease in contract revenue
attributable to an error in the recognition of change order revenue on a
Nigerian contract of $3,664, adjustments on certain loss contracts
(increase of $672) and other miscellaneous decrease adjustments of $393.
(2) Increase in deferred tax assets due to a reclassification of Venezuela tax
credits of $1,099 which were classified in other assets in error, and
due to error in the tax rate used to calculate deferred taxes of $300.
(3) Decrease in inventories of ($590) due to an error in accounting for parts
inventory and reclassification to current assets.
(4) Decrease in property, plant and equipment net results from reversal of
$628 of fraudulent invoices inappropriately capitalized and depreciated.
(5) Decrease in goodwill of $3,135 relating an error in the price used for
Company common stock issued as partial consideration in connection with an
acquisition in 2002.
(6) Other assets net decrease adjustments of $389 are comprised of (a)
reclassification of $1,099 of Venezuelan tax credits to deferred tax assets
(see 2 above) and (b) increase of $710 of debt issuance costs due to error
in the amortization period used to amortize debt issuance costs.
(7) Increase in accounts payable and accrued liabilities results from
corrections as follows:
- Nigerian payroll taxes and Bolivian VAT taxes including penalties and
interest, totaling approximately $6,136.
- Increase due to accrual for loss contracts in accrued liabilities of
$935.
- Decrease due to reclassification of minority interest to other
liabilities of $237.
- Increase due to recognition of accrual for earn-out not previously
accrued of $440.
- Decrease due to foreign exchange effect of international tax liability
adjustment of $95.
(8) Decrease is due to adjustments on certain loss contracts.
(9) Increase in accrued income taxes of $1,827 results from reclassification of
foreign withholding taxes and the tax effects of other adjustments.
(10) Increase is related to a change in the presentation of other liabilities
previously included in accounts payable and accrued liabilities.
(11) Decrease in capital in excess of par of $3,257 is the result of $2,841
relating to an error in the price used in valuing Company common stock
issued as partial consideration for an acquisition in 2002 (see 4 above)
and $416 relating to amortization of discounts on notes from officers for
purchase of Company common stock.
(12) Retained earnings decrease of $13,312 reflects the additional losses as a
result of the restatements, consisting of additional losses in 2003 of
($7,704), additional losses in 2002 of ($4,843) and a decrease in retained
earnings of ($294) relative to an error in the price used for Company
Common stock issued as partial consideration in connection with an
acquisition in 2002, and additional losses for all periods prior to 2002 of
($471).
(13) Increase is due to an error in the computation of the accretion of interest
or discounts on notes receivable for stock purchase.
(14) Increase is related to a foreign currency translation adjustment related to
tax liabilities at certain international subsidiaries.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net as of December 31, 2004 and 2003 is comprised of
the following:
2004 2003
-------- --------
RESTATED
Trade $125,875 $ 68,759
Contract retention 5,176 5,054
Unbilled revenue 20,616 24,263
Other receivables 4,985 4,495
Advances to joint ventures 2,000 --
-------- --------
Total accounts receivable 158,652 102,571
Less - Allowance for doubtful accounts (7,598) (917)
-------- --------
Total accounts receivable, net $151,054 $101,654
======== ========
The provision (credit) for bad debts included in Other-net was $6,737, $199
and ($58) for the years ended December 31, 2004, 2003 and 2002, respectively.
The allowance for bad debts increased significantly in 2004 as a result of
improprieties of management at certain of the Company's international
subsidiaries (See Note 2) which resulted in accounts receivable delinquencies
and decreased probability of ultimate collection. The $2,000 advances to joint
ventures at December 31, 2004 was made in the connection with the startup of a
Mexican joint venture in December 2004. The joint venture was terminated on May
27, 2005 and the $2,000 advance and subsequent advances made in 2005 were
remitted to the Company in May 2005.
4. ACQUISITIONS
On October 23, 2002, the Company acquired all outstanding shares of Mt.
West Fabrication Plants and Stations, Inc., Process Electric and Control, Inc.,
Process Engineering Design, Inc. and Pacific Industrial Electric, Inc.
(collectively, "Mt. West Group"). Mt. West Group provides design-build services,
including engineering, procurement and construction services to the energy
industry, primarily in the western United States, thereby expanding the
Company's services in the United States. The purchase price of $10,576
74
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
4. ACQUISITIONS (CONT'D)
was based on a multiple of cash flow and consisted of $4,591 cash and
acquisition costs and 950,000 shares of common stock valued at $5,985 (based on
the market price of the Company's common stock on the date the acquisition was
consummated). The transaction was accounted for using the purchase method of
accounting and, accordingly, the accompanying consolidated financial statements
include the financial position and results of operations from the date of the
acquisition. In addition, the acquisition included a potential earn-out amount
equal to 25 percent of the combined adjusted net income, as defined in the
definitive purchase agreement, of Mt. West Group for the 24-month period
following the date of acquisition. During the third quarter of 2004, the
earn-out was settled for $670 of which $240 and $200 were charged to expense in
2003 and 2002, respectively. This amount was paid to the former shareholders of
Mt. West Group, and accounted for as compensation expense.
None of the goodwill created as a result of this acquisition is expected to be
deductible for tax purposes.
The fair value of the net assets acquired from the acquisition was as
follows:
RESTATED
--------
Current assets $15,799
Property, plant and equipment 3,544
Current liabilities (9,173)
Deferred income taxes (808)
--------
Fair value of net assets acquired 9,362
Goodwill 1,214
--------
Total acquisition cost $10,576
========
The unaudited pro forma results of operations for the year ended December
31, 2002 including Mt. West Group as if the acquisition occurred January 1, 2002
would have been:
RESTATED
--------
Revenue $664,323
Net income 27,059
Income per common share:
Basic $ 1.48
========
Diluted $ 1.45
========
5. CONTRACTS IN PROGRESS
Contract costs and recognized income not yet billed on uncompleted
contracts arise when revenues have been recorded but the amounts cannot be
billed under the terms of the contracts. Such amounts are recoverable from
customers upon various measures of performance, including achievement of certain
milestones, completion of specified units or completion of the contract. Also
included in contract costs and recognized income not yet billed on uncompleted
contracts are amounts the Company seeks or will seek to collect from customers
or others for errors or changes in contract specifications or design, contract
change orders in dispute or unapproved as to both scope and price, or other
customer-related causes of unanticipated additional contract costs (unapproved
change orders). These amounts are recorded at their estimated net realizable
value when realization is probable and can be reasonably estimated. Unapproved
change orders and claims also involve the use of estimates, and it is reasonably
possible that revisions to the estimated recoverable amounts of recorded
unapproved change orders may be made in the near-term. If the Company does not
successfully resolve these matters, a net expense (recorded as a reduction in
revenues), may be required, in addition to amounts that have been previously
provided for.
75
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
5. CONTRACTS IN PROGRESS (CONT'D)
Contract cost and recognized income not yet billed and related amounts
billed as of December 31, 2004 and 2003 were as follows:
December 31,
---------------------
2004 2003
--------- ---------
RESTATED
Costs incurred on contracts in progress $ 294,977 $ 333,219
Recognized income 29,006 33,423
--------- ---------
323,983 366,642
Progress billings and advance payments (333,689) (336,906)
--------- ---------
$ (9,706) $ 29,736
========= =========
Contract cost and recognized income not yet billed $ 21,251 $ 36,724
Contract billings in excess of cost and
recognized income (30,957) (6,988)
--------- ---------
$ (9,706) $ 29,736
========= =========
Contract cost and recognized income not yet billed includes $7,836 and
$24,084 at December 31, 2004 and 2003, respectively, on completed contracts. In
May 2005, the Company billed and received $6,281 of the December 31, 2004
balance as part of the Addax Settlement as described in Note 18. As of December
31, 2004 and 2003, contract costs and recognized income not yet billed included
unbilled revenues for unapproved change orders of approximately $6,520 and
$12,561, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which are used to secure debt or are subject
to lien, at cost, consist of:
December 31,
---------------------
2004 2003
--------- ---------
RESTATED
Construction equipment $ 61,822 $ 57,916
Marine equipment 63,874 57,603
Transportation equipment 25,066 23,912
Land and buildings 17,003 11,556
Leasehold improvements 9,724 9,628
Production facilities 22,098 --
Furniture and equipment 29,511 38,071
--------- ---------
229,098 198,686
Less accumulated depreciation and amortization (112,455) (103,786)
--------- ---------
$ 116,643 $ 94,900
========= =========
Included in furniture and equipment is $4,217 and $3,871 at December 31,
2004 and 2003, respectively, for the cost of a new information system which has
been capitalized under capital leases.
76
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
7. JOINT VENTURES
Investment in joint ventures at December 31, 2004 and 2003 consist of a 10%
interest in a consortium for build, own and operate water injection facilities
in Venezuela and a 50% interest in a pipeline construction joint venture in
Africa. Interest in the unconsolidated joint ventures is accounted for using the
equity method in the consolidated balance sheet. The Company's equity in
earnings in the 10% joint venture is recognized as contract revenue and its
share of operations for the 50% joint venture is reflected in the statements of
operations based on proportionate consolidation.
The Company's share of revenue and contract cost included in the
consolidated statements of operations from these ventures consists of:
Year Ended December 31,
---------------------------
2004 2003 2002
------ ------- --------
Contract revenue $2,071 $60,344 $127,643
Contract cost -- 43,417 105,527
The 2004 activity for the 50 percent owned joint venture for the
Chad-Cameroon Pipeline project in Africa was limited to warranty work and the
final settlement among the parties. The summarized balance sheet information at
December 31, 2004 and 2003 reflects this decreased level of activity.
December 31,
--------------
2004 2003
------- -------
Current assets $ 645 $21,122
Non-current assets -- 1,055
------- -------
Total $ 645 $22,177
======= =======
Current liabilities $ 645 $ 64
Equity -- 22,113
------- -------
Total $ 645 $22,177
======= =======
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
December 31,
-------------------
2004 2003
-------- --------
RESTATED
Trade accounts payable $ 90,906 $60,705
Payrolls and payroll liabilities 19,263 15,226
Provision for loss contracts costs 4,263 935
Minority interest 2,798 2,353
Other accrued liabilities 2,130 1,375
Related parties 2,151 774
Equipment reconditioning and overhaul reserves 959 1,425
-------- -------
Total $122,470 $82,793
======== =======
77
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
9. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
------------------
2004 2003
------- --------
RESTATED
2.75% convertible senior notes $70,000 $ --
Revolving credit agreement with a syndicated bank group -- 14,000
Other obligations 3,495 4,322
------- -------
Total long-term debt 73,495 18,322
Less current portion 1,171 1,315
------- -------
Long-term debt, less current portion $72,324 $17,007
======= =======
2004 Credit Facility
On March 12, 2004, the existing $125,000 June 2002 credit agreement was
amended, restated and increased to $150,000 (the "2004 Credit Facility"). The
2004 Credit Facility matures on March 12, 2007. The 2004 Credit Facility may be
used for standby and commercial letters of credit, borrowings or a combination
thereof. Borrowings are limited to the lesser of 40 percent of the borrowing
base or $30,000 and are payable at termination on March 12, 2007. Interest is
payable quarterly at a base rate plus a margin ranging from 0.75 percent to 2.00
percent or on a Eurodollar rate plus a margin ranging from 1.75 percent to 3.00
percent. A commitment fee on the unused portion of the 2004 Credit Facility is
payable quarterly, ranging from 0.375 percent to 0.625 percent. The 2004 Credit
Facility is collateralized by substantially all of the Company's assets,
including stock of the principal subsidiaries, prohibits the payment of cash
dividends and requires the Company to maintain certain financial ratios. The
borrowing base is calculated using varying percentages of cash, accounts
receivable, accrued revenue, contract cost and recognized income not yet billed,
property, plant and equipment, and spare parts. Unamortized debt issue costs of
$2,933 and $1,512 associated with the 2004 Credit Facility are included in other
assets at December 31, 2004 and 2003, respectively. Debt issue costs are
amortized over the term of the 2004 Credit Facility ending March 2007.
As of December 31, 2004, there were no borrowings under the 2004 Credit
Facility and there were $60,163 in outstanding letters of credit. Letters of
credit reduce the availability on the facility by 75 percent of their amount
outstanding; however, the total value of letters of credit outstanding may not
exceed $150,000 (see "Waiver Amendment" below).
2004 Credit Facility Waivers
For the quarter ended June 30, 2004, due to the Company's operating results
and EBITDA (earnings before net interest, income taxes, depreciation and
amortization) levels, an Amendment and Waiver Agreement (the "Waiver Agreement")
was obtained from the syndicated bank group to waive non-compliance with a
financial covenant to the credit agreement at June 30, 2004 and to amend certain
financial covenants. The Waiver Agreement provides for an amendment of certain
quarterly financial covenants and the multiple of EBITDA calculation with
respect to the borrowing base determination through September 30, 2005.
In January 2005, the Company obtained a Consent and Waiver from its
syndicated bank group, covering a period through June 29, 2005, waiving certain
defaults and covenants which related to the filing of tax returns, the payment
of taxes when due, tax liens and legal proceedings against the Company related
to a tax assessment in Bolivia (see Note 2 above). Additional Consent and
Waivers were obtained from the syndicated bank group as of April 8, 2005 and
June 13, 2005 with respect to these defaults and non-compliance with certain
financial covenants as of June 13, 2005.
78
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
9. LONG-TERM DEBT (CONT'D)
2004 Credit Facility Amendment
On July 19, 2005, the Company entered into a Second Amendment and Waiver
Agreement ("Waiver Amendment") of the 2004 Credit Facility with the syndicated
bank group to obtain continuing waivers regarding its non-compliance with
certain financial and non-financial covenants in the 2004 Credit Facility. Under
the terms of the Waiver Amendment, the total credit availability under the 2004
Credit Facility is reduced to $100,000 as of the effective date of the Waiver
Amendment. Subject to certain conditions, the bank group agreed to permanently
waive all existing and probable technical defaults under the 2004 Credit
Facility as long as the Company submitted its year-end 2004 financial statements
and interim financial statements for the quarters ended March 31 and June 30,
2005 by September 30, 2005. These conditions relate primarily to submissions of
various financial statements and other financial and borrowing base related
information.
The Waiver Amendment also modified certain of the ongoing financial
covenants under the 2004 Credit Facility and established a requirement that the
Company maintain a minimum cash balance of $15,000. Until such time as the
waiver becomes permanent, the Company has certain additional reporting
requirements, including periodic cash balance reporting. In addition, the Waiver
Amendment prohibits the Company from borrowing cash under the 2004 Credit
Facility until the waiver becomes permanent. The Company was not able to submit
the referenced statements by September 30, 2005, therefore the waiver did not
become permanent.
Additionally, the Company was not in compliance with certain of the
financial covenants under the 2004 Credit Facility at September 30, 2005 and the
Company has not obtained a waiver. The Company also believes it will not be in
compliance with certain of the financial covenants under the 2004 Credit
Facility at December 31, 2005. As a result of the covenant violations and the
failure to provide certain financial statements by September 30, 2005, the bank
syndicate has the right to discontinue advances under the facility as well as
the issuance of new letters of credit. The inability of the Company to access
new letters of credit could negatively impact the Company's ability to take on
new work or bid additional work where letters of credit are required in order to
bid on a project. Additionally, the bank syndicate could request that the
Company provide cash collateral for outstanding letters of credit.
As the Company has done in the past, management believes that it will be
able to negotiate a waiver with the syndicated bank group with respect to these
violations. In the event the waivers are not obtained, the Company would expect
to arrange for alternative financing which could include the following
components, individually or in combination: (1) establishing a credit facility
with a new bank group, (2) raising equity capital, (3) selling certain assets or
(4) issuing debt in either a public or private transaction.
Convertible Notes
On March 12, 2004, the Company completed a primary offering of $60,000 of
2.75 percent Convertible Senior Notes (the "Convertible Notes"). On April 13,
2004, the initial purchasers of the Convertible Notes exercised their option to
purchase an additional $10,000 aggregate principal amount of the notes.
Collectively, the primary offering and purchase option of the Convertible Notes
total $70,000. The Convertible Notes are general senior unsecured obligations.
Interest is paid semi-annually on March 15 and September 15, and payments began
on September 15, 2004. The Convertible Notes mature on March 15, 2024 unless the
notes are repurchased, redeemed or converted earlier. The Company may redeem the
Convertible Notes for cash on or after March 15, 2011, at 100 percent of the
principal amount of the notes plus accrued interest. The holders of the
Convertible Notes have the right to require the Company to purchase the
Convertible Notes, including unpaid interest, on March 15, 2011, 2014, and 2019
or upon a change of control related event. On March 15, 2011, or upon a change
in control event, the Company must pay the purchase price in cash. On March 15,
2014 and 2019, the Company has the option of providing its common stock in lieu
of cash or a combination of common stock and cash to fund purchases. The holders
of the Convertible Notes may under certain circumstances, convert the notes into
shares of the Company's common stock at an initial conversion ratio of 51.3611
shares of common stock per $1,000.00 principal amount of notes (representing a
conversion price of approximately $19.47 per share resulting in 3,595,277 shares
at December 31, 2004). The notes will be convertible only upon the occurrence of
certain specified events including, but not limited to, if, at certain times,
the closing sale price of the Company's common stock exceeds 120 percent of the
then current conversion price, or $23.36 per share based on the initial
conversion price. Unamortized debt issue costs of $2,908 associated with the
Convertible Notes are
79
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
9. LONG-TERM DEBT (CONT'D)
included in other assets at December 31, 2004 and are being amortized over the
seven-year period ending March 2011. In the event of a default under any Company
credit agreement other than the indenture covering the Convertible Notes, (1) in
which the Company fails to pay principal or interest on indebtedness with an
aggregate principal balance of $10,000 or more; or (2) in which indebtedness
with a principal balance of $10,000 or more is accelerated, an event of default
would result under the Company's Convertible Notes. Since the non-compliance
issues under the 2004 Credit Facility discussed above did not involve payment
defaults and did not result in the acceleration of any indebtedness of the
Company, these defaults did not create an event of default under the Convertible
Notes.
On June 10, 2005, the Company received a letter from a law firm
representing an investor claiming to be the owner of in excess of 25% of the
Convertible Notes asserting that, as a result of the Company's failure to timely
file with the SEC its 2004 Form 10-K and its Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005, it was placing the Company on notice of an
event of default under the indenture dated as of March 12, 2004 between the
Company as issuer, and JPMorgan Chase Bank N.A., as trustee (the "Indenture"),
which governs the Convertible Notes. The Company indicated that it does not
believe that it has failed to perform its obligations under the relevant
provisions of the Indenture referenced in the letter. On August 19, 2005, the
Company entered into a settlement agreement with the beneficial owner of the
Convertible Notes on behalf of whom the notice of default was sent, pursuant to
which the Company agreed to use commercially reasonable efforts to solicit the
requisite vote to approve an amendment to the Indenture (the "Indenture
Amendment"). The Company has obtained the requisite vote and on September 22,
2005, the Indenture Amendment became effective.
The Indenture Amendment extends the initial date on or after which the
Convertible Notes may be redeemed by the Company to March 15, 2013 from March
15, 2011. In addition, a new provision was added to the Indenture which requires
the Company, in the event of a "fundamental change" which is a change of control
event in which 10% or more of the consideration in the transaction consists of
"cash", to make a "coupon make-whole payment" equal to the present value
(discounted at the U.S. treasury rate) of the lesser of (a) two years of
scheduled payments of interest on the Convertible Notes or (b) all scheduled
interest on the Convertible Notes from the date of the transaction through March
15, 2013.
Other Obligations
Other obligations include approximately $3,259 and $3,871 at December 31,
2004 and 2003, respectively, to a leasing company under a four-year capital
lease in connection with the ongoing acquisition and installation of new
corporate information systems and infrastructure. Additionally, the Company has
various notes payable, generally related to equipment financing, and local
revolving credit facilities. All are at market interest rates, and are
collateralized by certain vehicles, equipment and/or real estate.
The Company has unsecured credit facilities with banks in certain countries
outside the United States. Borrowings in the form of short-term notes and
overdrafts are made at competitive local interest rates. Generally, each line is
available only for borrowings related to operations in a specific country.
Credit available under these facilities is approximately $4,240 at December 31,
2004. There were no outstanding borrowings made under these facilities at
December 31, 2004 or 2003.
10. RETIREMENT BENEFITS
The Company has a defined contribution plan that is funded by participating
employee contributions and the Company. The Company matches employee
contributions, up to a maximum of four percent of salary in the form of cash or
WGI common stock, as elected by the employee. Company contributions for this
plan were $1,423 (including $221 of WGI common stock) in 2004, $1,094 (including
$245 of WGI common stock) in 2003 and $1,038 (including $422 of WGI common
stock) in 2002.
80
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. INCOME TAXES
The relationship between income (loss) before income taxes and the
provision for income taxes is affected by the method of determining income taxes
in the countries in which the Company operates. The effective consolidated tax
rate differs from the United States (U.S.) federal statutory tax rate as taxable
income and operating losses from different countries cannot be offset and tax
rates and methods of determining taxes payable are different in each country.
Income (loss) before income taxes and the provision (benefit) for income
taxes in the consolidated statements of operations consist of:
Year Ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
RESTATED RESTATED
Income (loss) before income taxes:
Other countries $ (4,726) $ 9,211 $17,532
United States (6,025) (23,429) 14,259
-------- -------- -------
$(10,751) $(14,218) $31,791
======== ======== =======
Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted and income is earned. The Company is
a Panamanian company and Panama does not impose corporate income taxes on income
earned outside of Panama. All income has been earned outside of Panama. The U.S.
subsidiaries are subject to tax at a U.S. tax rate of 34%. The Company also has
foreign earnings which are non-taxable due to tax exemptions or tax holidays in
certain foreign countries of $5,066 in 2004, $10,862 in 2003, and $21,058 in
2002.
Year Ended December 31,
-----------------------------
2004 2003 2002
------- -------- --------
RESTATED RESTATED
Provision (benefit) for income taxes:
Current provision (benefit):
Other countries $ 9,719 $ 6,353 $ 6,183
United States:
Federal (1,750) (6,427) 3,551
State 322 (1,058) 1,354
------- -------- -------
8,291 (1,132) 11,088
------- -------- -------
Deferred tax expense (benefit):
Other countries 2,405 (1,490) (1,250)
United States (632) (679) (2,953)
------- ------- -------
1,773 (2,169) (4,203)
------- ------- -------
Total provision (benefit) for income taxes $10,064 $(3,301) $ 6,885
======= ======= =======
81
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
11. INCOME TAXES (CONT'D)
A reconciliation of the differences between our income tax provision
computed at the appropriate statutory rates and our reported provision for
income taxes follows:
Year Ended December 31,
-----------------------------
2004 2003 2002
------- -------- --------
RESTATED RESTATED
Income tax provision at statutory rate (Panama) $ -- $ -- $ --
Taxes on U.S. earnings at greater than Panama rate (1,918) (7,106) 898
Taxes on foreign earnings at greater than Panama rate 3,103 (2,406) 4,022
Taxes on foreign deemed profits 8,483 5,632 4,220
U.S. state taxes (142) (1,058) 1,054
Change in valuation allowance 538 1,637 (3,309)
------- ------- -------
$10,064 $(3,301) $ 6,885
======= ======= =======
Included in prepaid expenses are income tax receivables of $5,209 and
$3,901 for 2004 and 2003 respectively. The principal components of the Company's
net deferred tax assets are:
December 31,
-------------------
2004 2003
-------- --------
RESTATED
Deferred tax assets:
Self insured medical accrual $ 196 $ 196
Accrued vacation 291 291
Non-U.S. tax net operating loss carry forwards 13,163 18,056
U.S. tax net operating loss carry forwards 10,246 4,859
Non-U.S. tax credits 3,639 1,099
Other 616 588
-------- --------
Gross deferred tax assets 28,151 25,089
Valuation allowance (16,194) (15,656)
-------- --------
Deferred tax assets, net of valuation allowance 11,957 9,433
Deferred tax liabilities:
Property, plant and equipment (5,541) (1,086)
-------- --------
Net deferred tax assets $ 6,416 $ 8,347
======== ========
The net deferred tax assets are as follows:
December 31,
-----------------
2004 2003
------ --------
RESTATED
United States $5,631 $4,998
Other countries 785 3,349
------ ------
Net deferred tax assets $6,416 $8,347
====== ======
The U.S. federal income tax benefit recognized in 2004 is a result of the
Company's ability to carry a significant portion of the 2004 U.S. loss back to
the year 2002 to offset the United States income of certain subsidiaries in that
year.
82
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
11. INCOME TAXES (CONT'D)
The ultimate realization of deferred tax assets related to the U.S. net
operating loss carry forwards is dependent upon the generation of future taxable
income in the U.S. during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. The Company has $30,062 in U.S. net operating loss carry
forwards at December 31, 2004 a portion of which are limited on an annual basis.
In order to fully realize the U.S. deferred tax assets, the Company will need to
generate future taxable income in the U.S. of approximately $8,190 prior to the
expiration of the net operating loss carry forwards of $391 in 2005, $2,617 in
2007, $345 in 2008, and $4,837 in 2009. Additional net operating loss carry
forwards of $21,872 expire in subsequent years through December 31, 2024. U.S.
taxable income (loss) for the years ended December 31, 2003, 2002, and 2001 was
($20,222), $14,964, and $10,751, respectively, and estimated taxable loss in
2004 is $20,243. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes that it is more likely than not that
the Company will realize the tax benefits of $10,246 of these deductible
differences. The amount of the deferred assets considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carry forward period are reduced.
The Company has $924 of Venezuelan tax credits, including $639 which are
non-expiring and can be used to offset the Company's Venezuelan taxable income
in future years or can be sold at approximately 95% of their value. The
remaining $285 in Venezuelan tax credits will expire if not utilized as follows:
$41 in 2004, $112 in 2005, and $132 in 2006. The Company has evaluated its
ability to utilize these credits and has recorded a valuation allowance of $317
against the credits, including 5% of the non-expiring credits.
At December 31, 2004, the Company has non-expiring operating loss carry
forwards in the United Kingdom of $35,956 ((pound)18,727), with a full valuation
allowance of $10,787. In 2004, the Company utilized $4,665 (Bolivianos 38,346)
of the Bolivian net operating loss carry forward from the prior years and
increased the valuation allowance to $2,375 on the remaining $9,500 (Bolivianos
78,088) net operating loss carry forward. In 2004, the Company reversed the full
valuation allowance on the Venezuelan deferred tax asset and utilized the net
operating loss carry forwards of $1,427 (Bolivars 2,736,436). In Nigeria, the
Company has tax credits of $2,715 (Naira 361,095), which have been fully
reserved. The total valuation allowance at December 31, 2004 is $16,194, an
overall increase of $538.
12. STOCKHOLDER RIGHTS PLAN
On April 1, 1999, the Company adopted a Stockholder Rights Plan and
declared a distribution of one Preferred Share Purchase Right ("Right") on each
outstanding share of the Company's common stock. The distribution was made on
April 15, 1999 to stockholders of record on that date. The Rights expire on
April 14, 2009.
The Rights are exercisable only if a person or group acquires 15 percent or
more of the Company's common stock or announces a tender offer the consummation
of which would result in ownership by a person or group of 15 percent or more of
the common stock. Each Right entitles stockholders to buy one one-thousandth of
a share of a series of junior participating preferred stock at an exercise price
of $30.00 per share.
If the Company is acquired in a merger or other business combination
transaction after a person or group has acquired 15 percent or more of the
Company's outstanding common stock, each Right entitles its holder to purchase,
at the Right's then-current exercise price, a number of acquiring company's
common shares having a market value of twice such price. In addition, if a
person or group acquires 15 percent or more of the Company's outstanding common
stock, each Right entitles its holder (other than such person or members of such
group) to purchase, at the Right's then-current exercise price, a number of the
Company's common shares having a market value of twice such price.
83
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
12. STOCKHOLDER RIGHTS PLAN (CONT'D)
Prior to the acquisition by a person or group of beneficial ownership of 15
percent or more of the Company's common stock, the Rights are redeemable for
one-half cent per Right at the option of the Company's Board of Directors.
13. STOCK OWNERSHIP PLANS
During May 1996, the Company established the Willbros Group, Inc. 1996
Stock Plan (the "1996 Plan") with 1,125,000 shares of common stock authorized
for issuance to provide for awards to key employees of the Company, and the
Willbros Group, Inc. Director Stock Plan (the "Director Plan") with 125,000
shares of common stock authorized for issuance to provide for the grant of stock
options to non-employee directors. The number of shares authorized for issuance
under the 1996 Plan, and the Director Plan, was increased to 4,075,000 and
225,000, respectively, by shareholder approval.
Options granted under the 1996 Plan vest over a three to four year period.
Options granted under the Director Plan vest six months after the date of grant.
At December 31, 2004, the 1996 Plan had 1,404,588 shares and the Director Plan
had 65,000 shares available for grant. Certain provisions allow for accelerated
vesting based on increases of share prices.
The Company's stock option activity and related information consist of:
Year Ended December 31,
------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding, beginning
of year 1,447,399 $10.68 1,560,899 $10.48 1,851,800 $ 9.64
Granted 45,000 12.73 45,000 10.22 218,912 12.56
Exercised 478,879 8.69 105,000 5.79 497,813 8.38
Forfeited 59,500 13.67 53,500 14.07 12,000 6.24
--------- ------ --------- ------ --------- ------
Outstanding, end of year 954,020 $11.57 1,447,399 $10.68 1,560,899 $10.48
========= ====== ========= ====== ========= ======
Exercisable at end of year 926,520 $11.59 1,096,774 $10.91 875,399 $ 9.94
========= ====== ========= ====== ========= ======
The weighted-average fair value of options granted during the year was
$4.02 in 2004 ($2.52 in 2003 and $4.05 in 2002). Exercise prices for options
outstanding, weighted-average remaining life and weighted-average exercise price
by ranges of exercise prices at December 31, 2004 are:
Weighted Weighted
Range of Options Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
--------------- ----------- -------------- --------------
$ 5.06 - $ 6.94 248,770 4.9 Years $ 6.07
7.26 - 11.75 157,000 5.7 Years 8.81
12.70 - 19.44 548,250 6.3 Years 14.88
-------
$ 5.06 - $19.44 954,020 5.9 Years $11.57
=======
84
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
13. STOCK OWNERSHIP PLANS (CONT'D)
The number of vested options and weighted-average exercise price by ranges
of exercise prices at December 31, 2004 are:
Weighted
Range of Average
Exercise Prices Vested Options Exercise Price
--------------- -------------- --------------
$ 5.06 - $ 6.94 248,770 $ 6.07
7.26 - 11.75 137,000 8.86
12.70 - 19.44 540,750 14.83
-------
$ 5.06 - $19.44 926,520 $11.59
=======
In March 2002, certain officers of the Company borrowed a total of $1,307
under the Employee Stock Purchase Program, which permitted selected executives
and officers (exclusive of the Chief Executive Officer) to borrow from the
Company up to 100 percent of the funds required to exercise vested stock
options. The loans are full recourse, non-interest bearing for a period of up to
five years and are collateralized by the related stock. The difference of $434
between the discounted value of the loans and the fair market value of the stock
on the date of exercise, and $119 representing the difference between the
exercise price of certain options and the fair market value of the stock was
recorded as compensation expense at the date of exercise. The notes were
recorded at the discounted value, and the discount is amortized as interest
income over the periods the notes are outstanding. The net loans receivable are
presented as a reduction of stockholders' equity. The maximum loan amount any
one officer may have outstanding under the Employee Stock Purchase Program is
$250. In accordance with The Sarbanes-Oxley Act of 2002, the Company in the
future will no longer make loans to executive officers of the Company.
During 2004, the Company granted 183,000 shares of restricted stock, and
restricted stock rights for 43,500 shares, to certain employees. Deferred
compensation of $2,321 was recorded for the restricted stock and is amortized
over the four year vesting period. Compensation expense of $606 was recognized
in 2004 for amortization of the deferred compensation and accrual of
compensation related to the restricted stock rights. At December 31, 2004, there
were 166,000 shares of restricted stock and 43,500 of restricted stock rights
outstanding, none of which were vested.
14. INCOME (LOSS) PER SHARE
Basic and diluted income (loss) per share are computed as follows:
Year Ended December 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
RESTATED RESTATED
Net income (loss) applicable to common shares $ (20,815) $ (10,917) $ 24,906
=========== =========== ===========
Weighted average number of common shares
outstanding for basic income per share 20,922,002 20,662,305 18,271,492
Weighted average number of dilutive potential
common shares outstanding -- -- 450,267
----------- ----------- -----------
Weighted average number of common shares
outstanding for diluted income per share 20,922,002 20,662,305 18,721,759
=========== =========== ===========
Income (loss) per common share:
Basic $ (.99) $ (.53) $ 1.36
=========== =========== ===========
Diluted $ (.99) $ (.53) $ 1.33
=========== =========== ===========
85
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
14. INCOME (LOSS) PER SHARE (CONT'D)
The Company incurred net losses for the years ended December 31, 2004 and
2003 and has therefore excluded securities from the computation of diluted
income (loss) per share as the effect would be anti-dilutive.
The weighted average number of potential common shares excluded from the
computation of diluted income (loss) per share because of their anti-dilutive
effect was 3,595,277 shares issuable upon conversion of the Convertible Notes,
954,020 options, and 166,000 restricted shares of common stock at December 31,
2004 (1,444,066 options at December 31, 2003 and 405,092 options at December 31,
2002).
In accordance with Emerging Issues Task Force ("EITF") Issue 04-8, "The
Effect of Contingently Convertible Instruments on Diluted Earnings per Share,"
the 3,595,277 shares issuable upon conversion of the Convertible Notes will be
included in diluted income (loss) per share if those securities are dilutive,
regardless of whether the market trigger price of $23.36 has been met.
15. SEGMENT INFORMATION
Historically, the Company reported in one operating segment offering three
integrated services: engineering, construction, and specialty. In mid-2004, the
Company restructured its operating segments to include Engineering and
Construction and Facilities Development and Operations. Beginning in the fourth
quarter of 2004, the Company restructured its business into two operating
segments, International and United States & Canada. All periods presented
reflect this change in segments.
The Company's segments are strategic business units that are managed
separately as each segment has different operational requirements and marketing
strategies. Management believes, due to the composition of current work and
potential work opportunities, and the nuances of the geographic markets the
Company serves, that the organization should be viewed on a geographic basis.
Consequently, the businesses have been restructured and we are reporting on the
basis of two operating segments: International and United States & Canada. The
International segment consists of all construction, engineering and facilities
development operations in countries other than the United States and Canada.
Currently such operations are in Africa, the Middle East, and South America. The
United States & Canada segment consists of all construction, engineering and
facilities development operations in the United States and Canada. The Company's
corporate operations include the general and administrative and financing
functions of the organization. The costs of these functions are allocated
between the two operating segments. The Company's corporate operations also
include various other assets that are allocated between the two operating
segments. Inter-segment revenue and revenue between geographic areas are not
material.
The tables below reflect the Company's business segments as of and for the
years ended December 31, 2004, 2003, and 2002:
Year Ended December 31, 2004
----------------------------------------
United States
Total International & Canada
-------- ------------- -------------
Revenue $483,318 $290,524 $192,794
Operating expense:
Contract costs 417,671 249,660 168,011
Depreciation and amortization 16,747 9,135 7,612
General and administrative 46,614 22,600 24,014
Other operating costs 3,571 3,571 --
-------- -------- --------
484,603 284,966 199,637
-------- -------- --------
Operating income (loss) $ (1,285) $ 5,558 $ (6,843)
======== ======== ========
86
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
15. SEGMENT INFORMATION (CONT'D)
Year Ended December 31, 2003 RESTATED
----------------------------------------
United States
Total International & Canada
-------- ------------- -------------
Revenue $416,573 $262,241 $154,332
Operating expense:
Contract costs 374,442 223,672 150,770
Depreciation and amortization 15,570 8,727 6,843
General and administrative 36,300 16,321 19,979
Other operating costs 2,314 2,314 --
-------- -------- --------
428,626 251,034 177,592
-------- -------- --------
Operating income (loss) $(12,053) $ 11,207 $(23,260)
======== ======== ========
Year Ended December 31, 2002 RESTATED
----------------------------------------
United States
Total International & Canada
-------- ------------- -------------
Revenue $582,829 $337,592 $245,237
Operating expense:
Contract costs 494,318 287,330 206,988
Depreciation and amortization 16,627 10,697 5,930
General and administrative 34,046 16,191 17,855
Other operating costs 3,076 3,076 --
-------- -------- --------
548,067 317,294 230,773
-------- -------- --------
Operating income $ 34,762 $ 20,298 $ 14,464
======== ======== ========
Total assets by segment are presented below:
December 31,
-------------------
2004 2003
-------- --------
RESTATED
International $225,262 $204,237
United States & Canada 191,848 100,457
-------- --------
Total consolidated assets $417,110 $304,694
======== ========
Due to a limited number of major projects and clients, the Company may at
any one time have a substantial part of its operations dedicated to one project,
client and country.
Customers representing more than 10 percent of total contract revenue are
as follows:
Year Ended December 31,
--------------------------
2004 2003 2002
---- -------- --------
RESTATED RESTATED
Customer A 21% 14% --%
Customer B 11 -- --
Customer C -- 16 29
Customer D -- -- 16
--- --- ---
32% 30% 45%
=== === ===
87
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
15. SEGMENT INFORMATION (CONT'D)
Information about the Company's operations in its significant work
countries is shown below:
Year Ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
RESTATED RESTATED
Contract revenue:
United States (1) $159,270 $130,155 $231,552
Nigeria 121,774 53,252 49,230
Iraq 54,029 10,057 --
Offshore West Africa 49,784 62,988 59,285
Oman 36,846 40,885 17,244
Canada 33,524 24,177 13,685
Venezuela 17,750 29,312 12,835
Bolivia 6,368 3,943 45,105
Ecuador 3,222 -- --
Cameroon 336 61,605 136,149
Australia 415 -- --
Dominican Republic -- 199 17,744
-------- -------- --------
$483,318 $416,573 $582,829
======== ======== ========
(1) Net of inter-country revenue of $11,845 in 2004, $9,009 in 2003, and
$25,849 in 2002.
December 31,
------------------------------
2004 2003 2002
-------- -------- --------
RESTATED RESTATED
Long-lived assets:
United States $ 49,521 $ 41,359 $24,298
Nigeria 31,824 20,129 17,562
Offshore West Africa 12,281 11,038 10,040
Canada 6,554 4,289 3,852
Oman 4,214 4,705 3,116
Venezuela 4,835 5,450 6,962
Bolivia 1,703 2,806 3,503
Cameroon -- 3,089 7,262
Other 5,711 2,035 199
-------- -------- -------
$116,643 $ 94,900 $76,794
======== ======== =======
88
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES
On January 6, 2005, J. Kenneth Tillery, then President of Willbros
International, Inc. ("WII"), who was principally responsible for international
operations, including Bolivian operations, resigned from the Company as
discussed in Note 2 above.
Following Mr. Tillery's resignation, the Audit Committee, working with
independent outside legal counsel and forensic accountants retained by such
legal counsel, commenced an independent investigation into the circumstances
surrounding the Bolivian tax assessment and the actions of Mr. Tillery in other
international locations. The Audit Committee's investigation identified payments
that were made by or at the direction of Mr. Tillery in Bolivia, Nigeria and
Ecuador which may have been violations of the United States Foreign Corrupt
Practices Act ("FCPA") and other United States laws. The investigation also
revealed that Mr. Tillery authorized numerous transactions between Company
subsidiaries and entities in which he apparently held an ownership interest or
exercised significant control. See Note 18 below. In addition, the Company has
learned that certain acts carried out by Mr. Tillery and others acting under his
direction with respect to a bid for work in Sudan may constitute facilitation
efforts prohibited by U.S. law, a violation of U.S. trade sanctions and the
unauthorized export of technical information.
The United States Securities and Exchange Commission ("SEC") is conducting
an investigation into whether the Company and others may have violated various
provisions of the Securities Act of 1933 (the "Securities Act") and the
Securities Exchange Act of 1934 (the "Exchange Act") The United States
Department of Justice ("DOJ") is conducting an investigation concerning possible
violations of the FCPA and other applicable laws. In addition, the United States
Department of Treasury's Office of Foreign Assets Control ("OFAC") is commencing
an investigation of the potentially improper facilitation and export activities.
The Company is cooperating fully with all of these investigations If the Company
or one of its subsidiaries is found to have violated the FCPA, that entity could
be subject to civil penalties of up to $650 per violation and criminal penalties
of up to the greater of $2,000 per violation or twice the gross pecuniary gain
resulting from the improper conduct. If the Company or one of its subsidiaries
is found to have violated trade sanctions or U.S. export restrictions, that
entity could be subject to civil penalties of up to $11 per violation and
criminal penalties of up to $250 per violation. The Company and its subsidiaries
could also be barred from participating in future U.S. government contracts and
from participating in certain U.S. export transactions. There may be other
penalties that could apply under other U.S. laws or the laws of foreign
jurisdictions. The Company cannot predict the outcome of the investigations
being conducted by the SEC, the DOJ and OFAC, including the Company's exposure
to civil or criminal fines or penalties, or other regulatory action which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company's ability to obtain and
retain business and to collect outstanding receivables in current or future
operating locations, including Nigeria, could be negatively affected.
In May 2005, a securities class-action lawsuit was filed against the
Company and certain of its present and former officers and directors in U.S.
District Court for the Southern District of Texas. Three additional
substantially identical lawsuits were filed shortly thereafter. Plaintiffs in
these lawsuits purport to represent a class of persons who purchased or
otherwise acquired Willbros Group, Inc. common stock and/or other securities
between May 6, 2002 and May 16, 2005, inclusive, and allege various violations
by the defendants of Sections 10(b), 10b-5 and 20a of the Exchange Act and
allege, among other things, that the defendants made false or misleading
statements of material fact about the Company's financial statements. The
plaintiffs seek unspecified monetary damages and other relief. While the outcome
of such lawsuits cannot be predicted with certainty, the Company believes that
it has meritorious defenses and intends to defend itself vigorously.
We have received letters from two Nigerian law firms alleging that we have
not complied with our obligations under certain consulting contracts with their
clients. The Company has not recognized contract costs or accrued any liability
for the $3,845 related to these asserted obligations. We believe that compliance
with those contracts may constitute a violation of the United States Foreign
Corrupt Practices Act and accordingly, we will not comply. While there can be no
assurance that a court or arbitration panel considering those contracts would
not award damages to the consulting firms who are parties to such contracts; the
Company believes the likelihood of a material adverse effect on the Company's
financial position or results of operations from a resolution of this matter is
remote.
The Company provides engineering and construction services to the oil, gas
and power industries and government entities, and develops, owns and operates
assets developed under "Build, Own and Operate" contracts. The Company's
principal markets are currently Africa, the Middle East, South America and North
America. Operations outside the United States may be subject to certain risks
which ordinarily would not be expected to exist in the United States, including
foreign currency restrictions, extreme exchange rate
89
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES (CONT'D)
fluctuations, expropriation of assets, civil uprisings and riots, war,
unanticipated taxes including income taxes, excise duties, import taxes, export
taxes, sales taxes or other governmental assessments, availability of suitable
personnel and equipment, termination of existing contracts and leases,
government instability and legal systems of decrees, laws, regulations,
interpretations and court decisions which are not always fully developed and
which may be retroactively applied. Management is not presently aware of any
events of the type described in the countries in which it operates that have not
been provided for in the accompanying consolidated financial statements.
Based upon the advice of local advisors in the various work countries
concerning the interpretation of the laws, practices and customs of the
countries in which it operates, management believes the Company follows the
current practices in those countries; however, because of the nature of these
potential risks, there can be no assurance that the Company may not be adversely
affected by them in the future. The Company insures substantially all of its
equipment in countries outside the United States against certain political risks
and terrorism through political risk insurance coverage that contains a 20
percent co-insurance provision.
The Company has the usual liability of contractors for the completion of
contracts and the warranty of its work. Where work is performed through a joint
venture, the Company also has possible liability for the contract completion and
warranty responsibilities of its joint venture partners. In addition, the
Company acts as prime contractor on a majority of the projects it undertakes and
is normally responsible for the performance of the entire project, including
subcontract work. Management is not aware of any material exposure related
thereto which has not been provided for in the accompanying consolidated
financial statements.
Certain post-contract completion audits and reviews are periodically
conducted by clients and/or government entities. While there can be no assurance
that claims will not be received as a result of such audits and reviews,
management does not believe a legitimate basis for any material claims exists.
At the present time it is not possible for management to estimate the likelihood
of such claims being asserted or, if asserted, the amount or nature thereof.
In connection with the Company's 10 percent interest in a joint venture in
Venezuela, the Company issued a corporate guarantee equal to 10 percent of the
joint venture's outstanding borrowings with two banks. The guarantee reduces as
borrowings are repaid. As of December 31, 2004, the maximum amount of future
payments the Company could be required to make under this guarantee is
approximately $3,453.
From time to time the Company enters into commercial commitments, usually
in the form of commercial and standby letters of credit, insurance bonds and
financial guarantees. Contracts with the Company's customers may require the
Company to provide letters of credit or insurance bonds with regard to the
Company's performance of contracted services. In such cases, the commitments can
be called upon in the event of failure to perform contracted services. Likewise,
contracts may allow the Company to issue letters of credit or insurance bonds in
lieu of contract retention provisions, in which the client withholds a
percentage of the contract value until project completion or expiration of a
warranty period. Retention commitments can be called upon in the event of
warranty or project completion issues, as prescribed in the contracts. At
December 31, 2004, the Company had approximately $107,473 of letters of credit
and insurance bonds outstanding, representing the maximum amount of future
payments the Company could be required to make. The Company had no liability
recorded as of December 31, 2004, related to these commitments.
In 2004 and 2003, the Company incurred contract costs of $4,948 and $3,312,
respectively, related to repairs of pipelines under two construction projects.
The Company believes the recovery of certain of these costs from insurance or
other parties is probable. At December 31, 2004 and 2003, other assets include
anticipated recoveries from insurance or third parties of $4,445 and $2,500,
respectively. Actual recoveries may vary from these estimates.
90
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES (CONT'D)
In addition to the matters discussed above, the Company is a party to a
number of other legal proceedings. Management believes that the nature and
number of these proceedings are typical for a firm of similar size engaged in a
similar type of business and that none of these proceedings is material to the
Company's financial position.
The Company entered into a lease with an agreement to purchase a 90,000
square foot fabrication facility on 10 acres of land in Edmonton, Alberta,
$7,750 (CAD) which would convert to $6,458 (USD) as of December 31, 2004. The
Company began operating the facility in the second half of 2005; the purchase
transaction is expected to be completed December 15, 2005.
The Company has certain operating leases for office and camp facilities.
Rental expense, excluding daily rentals and reimbursable rentals under cost plus
contracts, was $3,181 in 2004, $2,127 in 2003, and $1,782 in 2002. Minimum lease
commitments under operating leases as of December 31, 2004, totaled $9,645 and
are payable as follows: 2005, $2,864; 2006, $2,357; 2007, $1,605; 2008, $1,481;
2009, $212 and later years, $1,126.
91
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the years ended December 31,
2004 and 2003 presented below has been restated from amounts previously reported
to reflect the error matters and corrections described above in Note 2,
"Restatement," and as set forth in the notes to the tables below. The total of
the quarterly income (loss) per share amounts may not equal the per share
amounts for the full year due to the manner in which earnings (loss) per share
is calculated.
YEAR 2004 QUARTER ENDED MARCH 31, 2004 JUNE 30, 2004 SEPTEMBER 30, 2004 DEC. 31, TOTAL
------------------------- ------------------------- ------------------------- -------- ---------
AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED 2004 2004
----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Contract revenue $ 102,338 $ 101,647 $ 116,003 $ 116,204 $ 118,459 $ 117,933 $ 147,534 $ 483,318
Operating expenses 102,421 101,618 112,903 114,167 119,356 123,971 144,847 484,603
----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Operating income (loss) (83) 29 3,100 2,037 (897) (6,038) 2,687 (1,285)
Other income (expense): (24) (71) (682) (728) (1,144) (1,181) (7,486) (9,466)
----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Income (loss) before
income taxes (107) (42) 2,418 1,309 (2,041) (7,219) (4,799) (10,751)
Provision (benefit)
for income taxes 125 125 2,911 2,911 2,930 2,785 4,243 10,064
----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Net income (loss) $ (232) $ (167) $ (493) $ (1,602) $ (4,971) $ (10,004) $ (9,042) $ (20,815)
=========== =========== =========== =========== =========== =========== ========= =========
Income (loss) per
common share:
Basic $ (.01) $ (.01) $ (.02) $ (.08) $ (.24) $ (.48) $ (.43) $ (.99)
=========== =========== =========== =========== =========== =========== ========= =========
Diluted $ (.01) $ (.01) $ (.02) $ (.08) $ (.24) $ (.48) $ (.43) $ (.99)
=========== =========== =========== =========== =========== =========== ========= =========
TOTAL
YEAR 2003 MARCH 31, 2003 JUNE 30, 2003 SEPTEMBER 30, 2003 DECEMBER 31, 2003 2003
QUARTER ENDED ----------------------- ----------------------- ----------------------- ----------- --------- ---------
AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED RESTATED
----------- --------- ----------- --------- ----------- --------- ----------- --------- ---------
Contract revenue $ 98,936 $ 100,742 $ 122,864 $ 122,834 $ 91,498 $ 88,923 $ 105,439 $ 104,074 $ 416,573
Operating expenses 103,787 105,329 120,354 120,909 101,039 102,116 98,790 100,272 428,626
----------- --------- ----------- --------- ----------- --------- ----------- --------- ---------
Operating income
(loss) (4,851) (4,587) 2,510 1,925 (9,541) (13,193) 6,649 3,802 (12,053)
Other income
(expense): (753) (938) (321) (500) (191) (526) (128) (201) (2,165)
----------- --------- ----------- --------- ----------- --------- ----------- --------- ---------
Income (loss)
before
income taxes (5,604) (5,525) 2,189 1,425 (9,732) (13,719) 6,521 3,601 (14,218)
Provision
(benefit)
for income taxes (1,031) (821) (1,936) (1,839) (986) (976) 540 335 (3,301)
----------- --------- ----------- --------- ----------- --------- ----------- --------- ---------
Net income
(loss) $ (4,573) $ (4,704) $ 4,125 $ 3,264 $ (8,746) $ (12,743) $ 5,981 $ 3,266 $ (10,917)
=========== ========= =========== ========= =========== ========= =========== ========= =========
Income (loss)
per common
share:
Basic $ (.22) $ (.23) $ .20 $ .16 $ (.42) $ (.62) $ .29 $ .16 $ (.53)
=========== ========= =========== ========= =========== ========= =========== ========= =========
Diluted $ (.22) $ (.23) $ .20 $ .16 $ (.42) $ (.62) $ .29 $ .16 $ (.53)
=========== ========= =========== ========= =========== ========= =========== ========= =========
The quarterly financial effects caused by the restatement are as follows:
2004 QUARTER ENDED
-------------------------------------
March 31 June 30 Sept. 30
---------- ---------- --------
INCREASE/(DECREASE) IN CONTRACT REVENUE ATTRIBUTABLE TO:
o An error in the recognition of change order revenue on a Nigerian contract $ - $ 250 $ -
o The recalculation of revenue on the Bolivia Transierra Project as a result of the timing of
percentage of completion revenue. 213 (74) -
o The reclassification of contract revenue and contract costs associated with an error in the
recording of provisions for loss contracts (935) 30 2
o The recalculation of percentage of completion revenue for the removal of fraudulent charges
incorrectly recorded to individual projects 16 (28) 287
o Correction of percentage completion revenue recognition to reflect the reclassification of
fraudulent consulting fees as other operating costs 15 23 (595)
o Reversal of duplicate recording of revenue -- -- (220)
---------- ---------- --------
$ (691) $ 201 $ (526)
========== ========== ========
(INCREASE)/DECREASE IN OPERATING EXPENSE ATTRIBUTABLE TO:
o Accrual of unreported and unpaid value added taxes and payroll taxes related to certain
international subsidiaries $ (366) $ (376) $ (354)
o The reclassification of contract revenue and contract costs associated with an error in the
recording of the provisions for loss contracts 935 (30) (2)
o Increase in contract cost for an error in accounting for prepaid barge costs (401) - (154)
o The recalculation of contract cost on the Bolivia Transierra Project as a result
of the Bolivia tax assessments - (1,043) (145)
o Increase due to recognition of acquisition earn-out payment as compensation expense - - (230)
o Increase due to fraudulent invoices inappropriately capitalized (65) (15) (37)
o Provision for a Nigeria fixed price project in an overall loss position - - (3,693)
o Decrease due to an error in accounting for parts inventory 700 200 -
---------- ---------- --------
TOTAL (INCREASE)/DECREASE IN OPERATING EXPENSES $ 803 $ (1,264) $ (4,615)
========== ========== ========
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
17. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONT'D)
2004 QUARTER ENDED
------------------------------
March 31 June 30 Sept. 30
-------- ------- --------
(INCREASE)/DECREASE IN OTHER INCOME (EXPENSE) ATTRIBUTABLE TO:
o Provision for penalties and interest associated with the underpayment of various
taxes in our international subsidiaries $ (123) $ (111) $ (143)
o Decrease due to error in the amortization period used to amortize debt issuance costs 61 50 91
o Other miscellaneous corrections 15 15 15
-------- -------- --------
TOTAL (INCREASE)/DECREASE IN OTHER INCOME (EXPENSE) $ (47) $ (46) $ (37)
======== ======== ========
DECREASE IN THE PROVISION FOR INCOME TAX:
o Increase due to reclassification of foreign withholding taxes to income tax expense $ -- $ -- $ 145
o Net tax effect of the restatement adjustments -- -- --
-------- -------- --------
TOTAL DECREASE IN PROVISION FOR INCOME TAX $ -- $ -- $ 145
======== ======== ========
TOTAL DECREASE (INCREASE) IN THE NET LOSS $ 65 $ (1,109) $ (5,033)
======== ======== ========
2003 QUARTER ENDED
-------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- ------ -------- -------
INCREASE/(DECREASE) IN CONTRACT REVENUE ATTRIBUTABLE TO:
o An error in the recognition of change order revenue on a Nigerian contract $ -- $ -- $ (3,664) $ --
o The recalculation of revenue on the Bolivia Transierra Project as a result of the
timing of percentage of completion revenue 192 113 (112) 1,946
o The reclassification of contract revenue and contract costs associated with an error
in the recording
of provisions for loss contracts 1,813 (523) 1,190 (2,921)
o The recalculation of percentage of completion revenue for the removal of fraudulent
charges incorrectly recorded to individual projects (199) 380 11 (124)
o Correction of percentage completion revenue recognition to reflect the
reclassification of fraudulent consulting fees as other operating costs -- -- -- (266)
-------- ------ -------- -------
o TOTAL INCREASE/(DECREASE) IN CONTRACT REVENUE $ 1,806 $ (30) $ (2,575) $(1,365)
======== ====== ======== =======
(INCREASE)/DECREASE IN OPERATING EXPENSES ATTRIBUTABLE TO:
o Accrual of unreported and unpaid value added taxes and payroll taxes related to certain
international
subsidiaries $ (280) $ (365) $ (374) $ (334)
o The reclassification of contract revenue and contract costs associated with an error
in the recording
of the provisions for loss contracts (1,814) 523 (1,190) 2,921
o Increase in contract cost for an error in accounting for prepaid barge costs 323 (826) 19 (1,016)
o The recalculation of contract cost on the Bolivia Transierra Project as a result of
the Bolivia tax
assessments 105 (113) 109 (1,943)
o Increase due to fraudulent invoices inappropriately capitalized (36) (74) (41) (10)
o Increase due to recognition of acquisition earn-out payment as compensation expense (240) -- -- --
o Increase due to an error in accounting for parts inventory 400 300 400 (1,100)
-------- ------ -------- -------
TOTAL (INCREASE)/DECREASE IN OPERATING EXPENSES $ (1,542) $ (555) $ (1,077) $(1,482)
======== ====== ======== =======
(INCREASE)/DECREASE IN OTHER EXPENSE ATTRIBUTABLE TO:
o Provision for penalties and interest associated with the underpayment of various
taxes in our international subsidiaries $ (336) $ (328) $ (293) $ (188)
o Decrease due to error in the amortization period used to amortize debt issuance costs 129 128 (63) 222
o Other miscellaneous corrections 22 21 21 (107)
-------- ------ -------- -------
TOTAL (INCREASE)/DECREASE IN OTHER EXPENSES $ (185) $ (179) $ (335) $ (73)
======== ====== ======== =======
(INCREASE)/DECREASE IN THE PROVISION FOR INCOME TAX
o Increase due to reclassification of foreign withholding taxes to income tax expense $ (210) $ (97) $ (10) $ (12)
o Net tax effect of the restatement - - - 217
-------- ------ -------- -------
TOTAL (INCREASE) DECREASE IN THE PROVISION FOR INCOME TAX $ (210) $ (97) $ (10) $ 205
======== ====== ======== =======
TOTAL (INCREASE) IN THE NET LOSS $ (131) $ (861) $(3,997) $(2,715)
======== ====== ======== =======
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
17. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONT'D)
Additional Notes:
(a) Financial statement adjustments resulting from the misconduct of certain
members of the international subsidiaries management had a negative
impact on the Company's consolidated cumulative earnings (loss) through
September 30, 2004 of approximately ($20,226). The impact on the
Company's consolidated cumulative earnings (loss) through September 30,
2004 for other accounting errors increased earnings by approximately
$978. The total impact on the Company's consolidated cumulative
earnings (loss) of all financial statement adjustments through
September 30, 2004 was approximately ($19,248).
(b) Included in contract revenue, operating income and net income in the
fourth quarter of 2003 is $6,892 for settlement of a contract variation.
The settlement added $.33 to earnings per share.
(c) Included in the fourth quarter of 2004 are the following adjustments
related to the restatement corrections.
o Write-down of accrued liabilities and trade payables totaling
approximately $3,845 associated with invalid related party
"consulting" agreements, primarily in Nigeria. The majority of these
liabilities were related to fourth quarter of 2004 activity;
however, $2,122 of the accrued liabilities were originated in prior
periods. Offsetting reductions were made to contract costs. The
former President of WII entered into or arranged for subordinates to
enter into these "consulting" agreements with companies in which the
former President of WII had an economic interest or exerted
significant influence.
o Recognition of $6,662 of bad debt expense related to the
collectability of receivables on several Nigeria projects previously
managed by the former President of WII and other subordinates who
are no longer with the Company. The new International management
completed their assessment of the collectability of these
receivables, including direct communications with clients on these
matters, and concluded that contrary to the information provided by
the previous WII management team, an increase to the allowance for
doubtful accounts was appropriate.
o Reduced contract revenue of $3,847 resulting from a downward
adjustment to previously overstated contract margin estimates on
several significant Nigeria contracts.
o Reserve of $1,400 for inventory obsolescence on parts inventory in
Nigeria.
The Company derives its revenue from contracts with durations from a few
weeks to several months or in some cases, more than a year. Unit-price contracts
provide relatively even quarterly results. However, major projects are usually
fixed-price contracts that may result in uneven quarterly financial results due
to the method by which revenue is recognized.
Selected unaudited consolidated balance sheet data as of the end of the
first three fiscal quarters for 2004 is presented below and have been restated
from amounts previously reported to reflect the error corrections and other
matters described above in Note 2. "Restatement" and as set forth in the notes
to the table below.
March 31, 2004 June 30, 2004 September 30, 2004
--------------------- ---------------------- ---------------------
As Reported RESTATED As Reported RESTATED As Reported RESTATED
------------------------------------------------------------------------
Total current assets (A) $ 214,547 $ 217,048 $ 227,124 $ 229,442 $ 279,796 $ 282,755
Total assets (B) 362,526 356,020 366,527 360,597 428,285 421,328
Total current liabilities (C) 87,483 96,677 80,433 91,186 146,317 161,089
Total liabilities 151,025 160,219 154,167 165,060 219,766 234,680
Stockholders' equity (D) 211,501 195,801 212,360 195,537 208,519 186,648
Total liabilities and stockholders'
equity 362,526 356,020 366,527 360,597 428,285 421,328
The following notes A - D pertain to the cumulative effects on the
captioned balance sheets items resulting from the restatement adjustments.
(A) Current assets at the end of each 2004 quarter reflect adjustments
primarily related to reduced contract costs and income not yet billed
relating to reduced contract revenue from pre-2004 periods from Nigerian
contracts, an increase in parts inventory balance due to a
reclassification of spare parts inventory from non-current to current
and due to an error in accounting for parts inventory, and a $220
reduction in accounts receivable from a duplicate invoice.
(B) Decrease in all other assets for each of the 2004 quarters reflects
reduction in goodwill of $3,135 resulting from correction of valuation
of Company stock issued as partial consideration in connection with an
acquisition in 2002, decreases in property, plant and equipment
resulting from erroneous capitalization of approximately $600, offset by
an increase of approximately $900 in deferred debt issuance cost, and a
$300 increase in deferred tax assets related to the correction in the
tax rate used to determine deferred taxes.
(C) Increase in current liabilities from previously reported amounts for
certain taxes for international subsidiaries.
(D) Decrease in stockholders' equity of $15,700 at March 31, 2004 reflects
the offset to the goodwill correction discussed in note (B) above
($2,841) and pre-2004 decrease adjustments in accumulated comprehensive
income for all quarters. The balance of the stockholders' equity
decreases are to retained earnings. Retained earnings decrease
adjustments at March 31, 2004 of $13,247 result from pre-2004
corrections totaling $13,312 (see Note 2 above) and corrections recorded
in the first fiscal quarter totaling approximately $(65). The
incremental changes in retained earnings as of June and September 2004
from previously reported amounts reflect adjustments for additional
costs of $1,109 and $5,033, respectively, as set forth in the notes
above to the statements of operations for the quarters ended June 30,
2004 and September 30, 2004.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
18. RELATED PARTY TRANSACTIONS
During the past several years, certain of the Company's subsidiaries have
entered into commercial agreements with companies in which the former President
of Willbros International, Inc., J. Kenneth Tillery, apparently had an ownership
interest. These ownership interests had not been previously disclosed to the
Company. Those companies included Arbastro Trading Ltd., Windfall Energy
Services, Oco Industrial Services, Ltd., Hydrodive Offshore Services
International, Inc., Hydrodive Nigeria, Ltd., and Hydrodive International, Ltd.
All are companies that chartered or sold marine vessels to the Company's
subsidiaries. Hydrodive Offshore Services International, Inc. and Hydrodive
International, Ltd. have also provided diving services to the Company's
subsidiaries. Payment terms for these vendors range from due on receipt to net
30 days. The settlement method is cash.
Mr. Tillery also appears to have exercised significant influence over the
activities of Symoil Petroleum Ltd and Fusion Petroleum Services Ltd., which
provided consulting services for projects in Nigeria, and Kaplan and Associates,
which provided consulting services for projects in Bolivia and certain other
foreign locations.
Payments made to companies where Mr. Tillery appears to have an undisclosed
ownership interest, varying from 13 percent to 40 percent, or over which he
appears to have exercised significant influence in the three year period ended
December 31, 2004 totaling $33,493 were recorded as contract cost on Nigerian
and Bolivian projects or as Other Operating Costs in the consolidated financial
statements and are detailed below.
Year Ended December 31,
-----------------------------------
2004 2003 2002 Total
------ ------ ------- -------
Arbastro Trading Ltd $ -- $ -- $ 2,047 $ 2,047
Fusion Petroleum Services Ltd. 871 -- -- 871
Hydrodive Offshore Services
International, Inc. -- 2,682 10,483 13,165
Hydrodive International, Ltd. 5,705 3,431 -- 9,136
Hydrodive Nigeria Ltd. 210 112 881 1,203
Kaplan and Associates 524 617 840 1,981
Oco Industrial Services Ltd. 63 287 236 586
Windfall Energy Services Ltd. 922 285 -- 1,207
Symoil Petroleum Ltd. 1,121 544 1,632 3,297
------ ------ ------- -------
Total $9,416 $7,958 $16,119 $33,493
====== ====== ======= =======
Outstanding amounts owed to related parties in which Mr. Tillery appears to
have had an undisclosed ownership interest or over which he appears to have
exercised significant influence and which are included in accounts payable and
accrued liabilities are as follows:
December 31,
---------------
2004 2003
------ ------
Hydrodive International, Ltd. $1,846 $ --
Windfall Energy Services Ltd. 300 233
Symoil Petroleum Ltd. -- 437
Kaplan and Associates -- 41
Oco Industrial Services Ltd. -- 55
Hydrodive Nigeria, Ltd. 5 8
------ ----
Total $2,151 $774
====== ====
95
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
18. RELATED PARTY TRANSACTIONS (CONT'D)
In addition, it appears that Mr. Tillery had an equity interest in Addax
Petroleum of Nigeria ("Addax") during an unknown period prior to April of 2003.
During this period subsidiaries of the Company were paid for various services
which they performed for Addax. During the first three months of 2003 and all of
2002, the Company recognized revenue from Addax of $311 and $10,469,
respectively. Subsequent to March 2003, Mr. Tillery purportedly sold his equity
interest in Addax. The subsidiaries of the Company continued to perform services
for Addax and/or its successor company ("New Addax"). During the last nine
months of 2003 and the full year of 2004, the Company recorded revenue of $5,465
and $21,404, respectively, for services provided to New Addax. The Addax and New
Addax revenue accounted for less than five percent of the Company's consolidated
revenue in 2004, 2003 and 2002. The Company had outstanding accounts receivable
from New Addax and contract cost and recognized income not yet billed to New
Addax of $9,845 and $5,401 at December 31, 2004 and 2003, respectively. In 2005,
the Company entered into a global settlement with New Addax for outstanding
receivables, change orders, and claims for $10,000, the settlement was recovered
in full in May 2005.
96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
As discussed in Note 2 to our consolidated financial statements and Item 7
of this Form 10-K, investigations conducted by the Audit Committee and senior
management regarding the actions of J. Kenneth Tillery, President of Willbros
International, Inc., have revealed information indicating that Mr. Tillery, in
collusion with others who directly or indirectly reported to him, engaged in a
pattern of activity that was specifically contrary to established Company
policies, internal controls, and possibly the laws of several countries,
including the United States (see "Risk Factors" included in Item 1 and 2 of this
Form 10-K). We have restated our consolidated financial statements for the years
ended December 31, 2002 and 2003 and the first three quarters of 2004 to correct
errors in our previously-issued financial statements, primarily caused by this
pattern of activity. We have also identified material weaknesses in our internal
control over financial reporting, which are discussed in (b) below.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and the
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this report.
Based on this evaluation, and due to the material weaknesses in internal
control over financial reporting described in (b) below, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) were not effective to ensure the information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
properly recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934), which is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion and/or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. Also, projections of any evaluation of control effectiveness to
future periods are subject to the risk that the controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
Management of the Company made an assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004. In
making this assessment, management used the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
97
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management has concluded the Company had the following material
weaknesses in its internal control over financial reporting as of December 31,
2004:
1. Company-Level Controls - The Company did not maintain effective
company-level controls in the control environment, risk assessment, and
monitoring components as defined by COSO, including related antifraud
controls. Specifically, the following deficiencies were identified:
- The Company's control environment did not sufficiently promote
effective internal control over financial reporting throughout our
management structure, and this material weakness was a contributing
factor in the development of other material weaknesses described
below.
- The Company did not provide sufficient training for personnel engaged
in key elements of the financial reporting process, including training
on relevant regulations such as the Foreign Corrupt Practices Act.
- The Company's policies and procedures did not effectively ensure that:
(1) personnel, including internal audit, have the appropriate skills
and experience commensurate with their job responsibilities; (2) the
reporting structure of the organization was appropriate; and (3) key
personnel in certain international subsidiaries adhere to a periodic
rotation policy.
- The Company failed to educate and train employees in identifying,
monitoring, or reporting and responding to, incidents of alleged
misconduct or unethical behavior, including the Company's
whistleblower policy and the Company's code of conduct policies.
These deficiencies in the Company's internal control over financial
reporting resulted in material misstatements to various amounts in
previously-issued annual and interim financial statements. Accordingly, the
Company has restated its consolidated financial statements as of and for
the years ended December 31, 2002 and 2003 and the first three quarters of
2004.
2. Construction Contract Management - The Company's operating subsidiaries in
Nigeria did not maintain effective policies and procedures regarding review
and approval processes relating to: (i) original and revised project cost
estimates; (ii) original contract pricing; (iii) establishment and
management of contract contingencies; and (iv) change order management.
These deficiencies in the Company's internal control over financial
reporting resulted in material overstatement of contract revenue and
understatement of contract costs in previously-issued annual and interim
financial statements. Accordingly, the Company has restated its
consolidated financial statements as of and for the years ended December
31, 2002 and 2003 and the first three quarters of 2004.
3. International Taxes - The Company's policies and procedures did not provide
for effective supervisory review of the Company's accounting for
international income taxes, value added taxes, and payroll taxes and the
related recordkeeping activities. These deficiencies in the Company's
internal control over financial reporting resulted in material
understatement of contract cost and income tax expense in previously-issued
annual and interim financial statements. Accordingly, the Company has
restated its consolidated financial statements as of and for the years
ended December 31, 2002 and 2003, and the first three quarters of 2004.
4. Disbursements Process - The Company did not maintain effective policies and
procedures regarding its disbursement process. Specifically, deficiencies
in policies and procedures were identified in the following areas: (i)
petty cash disbursements at the Company's Nigerian subsidiaries; (ii) the
Company's vendor approval process and maintenance of an approved vendor
listing; and (iii) disbursement approval levels for individuals,
subsidiaries, and senior management. These deficiencies resulted in
material undisclosed related party transactions and payment of fraudulent
vendor invoices resulting in material overstatement of contract revenue and
overstatement of contract cost in previously-issued annual and interim
financial statements. Accordingly, the Company has restated its
consolidated financial statements as of and for the years ended December
31, 2003 and 2002, and the first three quarters of 2004.
Because of the material weaknesses described above, management concluded
that as of December 31, 2004, the Company did not maintain effective internal
control over financial reporting based upon the criteria described above.
KPMG LLP, an independent registered accounting firm, audited management's
assessment of the effectiveness of the Company's internal control over financial
reporting. KPMG LLP issued an audit report thereon, which is included in this
Annual Report on Form 10-K.
98
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fourth quarter of 2004, there were no changes in the Company's
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting,
except as described immediately below:
- Increased staffing and training of the finance and accounting
personnel at the business unit level.
- Adoption of a more frequent rotation policy for the financial staff at
our business units.
(d) REMEDIATION ACTIVITIES
Company management with oversight from the Audit Committee has devoted
substantial effort to the remediation of its material weaknesses described in
(b) above, and to the improvement of the Company's internal control over
financial reporting. Specifically, subsequent to December 31, 2004, we have
undertaken the following actions to remediate these material weaknesses, and to
improve the Company's internal control over financial reporting:
Actions subsequent to December 31, 2004:
- Initiation of an enhanced worldwide awareness program to educate
employees with respect to the content of our whistleblower policy to
better achieve reporting of any suspected problems.
- Realignment of the reporting of all business units' financial staff
directly to the Corporate Controller's Office.
- Adoption of a more frequent rotation policy for the operations staff
at our business units.
- Adoption of a policy requiring approval of the General Counsel or the
Chief Financial Officer for the engagement of legal, accounting and
tax advisors.
- Implementation of an "enhanced and stand-alone" FCPA Compliance
Program (separate from that incorporated previously into our Code of
Business Conduct and Ethics), inclusive of a "Definitive FCPA Policy
Statement" from the Board of Directors and an FCPA Compliance
Procedure providing for, among other measures, routine training
company-wide, starting in Nigeria, Latin America and Oman.
- Requirement that employees in positions of authority, as well as
professional consultants, identify any direct or indirect ownership
interest in entities doing business with the Company. Included in this
disclosure will be any entities owned or controlled in whole or in
part by immediate family members such as spouses.
- Improvements to strengthen existing internal controls relating
specifically to Nigerian cash disbursements, approved vendor lists and
approval levels for individuals, subsidiaries and senior management.
- Expansion and formalization of the review process by corporate tax
personnel of all international tax returns on at least a quarterly
basis. Book and tax liability accounts will be reconciled and compared
with tax returns as filed. This process was already in place for the
North American subsidiaries.
Company management with oversight from the Audit Committee is implementing
other improvements as described below:
- Appointment of a senior-level Company employee with primary
responsibility for implementation, oversight and enforcement of the
(i) Definitive FCPA Policy Statement; (ii) the Code of Business
Conduct and Ethics; and (iii) the Whistleblower Policy, and publish
that appointment throughout the Company. The appointee will have a
direct communication line to the Audit Committee.
- Movement of the internal audit function from an outsourced function
with an independent accounting firm to an in-house department to
facilitate more frequent and more in-depth examination of controls
throughout the Company.
The above changes are all part of our overall plan that is intended to
remediate the material weaknesses described in (b) above by December 31, 2005.
ITEM 9B. OTHER INFORMATION
None.
99
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The following table sets forth information regarding our directors and
executive officers. Officers are elected annually by, and serve at the
discretion of, our Board of Directors.
Name Age Position(s)
---- --- -----------
Michael F. Curran...... 64 Director, Chairman of the Board of Directors, Chief
Executive Officer, President and Chief Operating
Officer
John K. Allcorn........ 43 Executive Vice President
R. Clay Etheridge...... 50 President of Willbros International, Inc.
John "Jay" T. Dalton... 54 Senior Vice President and General Counsel
Warren L. Williams..... 49 Senior Vice President, Chief Financial Officer and
Treasurer
Larry J. Bump.......... 65 Director
S. Fred Isaacs......... 68 Director
Peter A. Leidel........ 49 Director
Rodney B. Mitchell..... 69 Director
James B. Taylor, Jr.... 67 Director
S. Miller Williams..... 54 Director
Michael F. Curran joined Willbros in March 2000 as a Director, Vice
Chairman of the Board of Directors, President and Chief Operating Officer. Mr.
Curran was named Chief Executive Officer in May 2002 and was elected Chairman of
the Board of Directors in March 2004. He served from 1972 to March 2000 as
Chairman and CEO of Michael Curran & Associates, a mainline pipeline constructor
in North America and West Africa, prior to joining Willbros. Mr. Curran has over
43 years of diversified experience in pipeline construction around the world,
including 34 years as President and Chief Executive Officer of various domestic
and international pipeline construction firms. Mr. Curran also served as
President of the Pipe Line Contractors Association.
John K. Allcorn joined Willbros in May 2000 as Senior Vice President of
Willbros International, Inc. and was elected Executive Vice President of
Willbros Group, Inc. in 2001. Mr. Allcorn was employed at U.S. Pipeline, Inc., a
North American pipeline construction company, as Senior Vice President, from
July 1997 until joining Willbros in May 2000. He served from 1985 to 1997 at
Gregory & Cook, Inc., an international pipeline construction company, in various
management capacities including Vice President from June 1996 to July 1997. Mr.
Allcorn has over 19 years of pipeline industry experience including an
established record in operations management, finance, and business development.
R. Clay Etheridge joined Willbros in December 2003 as an industry
consultant and was named Senior Vice President of Willbros International, Inc.
in September 2004. Mr. Etheridge was promoted to President of Willbros
International Inc. in January 2005. He was employed at Horizon Offshore
Contractors, Inc., a marine construction services firm, from 1999 to 2003 as
Executive Vice President and Chief Operating Officer. Mr. Etheridge served as
Vice President International at Global Industries, Ltd., an offshore
construction services company, from 1997 to 1999. Mr. Etheridge has over 25
years of experience in domestic and international construction.
100
John "Jay" T. Dalton joined Willbros in November 2002 and was elected
Senior Vice President and General Counsel of Willbros Group, Inc. From 1993 to
November 2002, Mr. Dalton served as outside counsel to the Company advising on
contracts. Between 1980 and 1993, Mr. Dalton was employed by Occidental
Petroleum Corporation ("Occidental") where he served as an officer and chief
legal counsel to various business units in Occidental's oil and gas division,
both domestically and in Colombia, Pakistan and the United Kingdom. Before
entering private practice in 1993, Mr. Dalton's last position with Occidental
was Vice President and General Counsel of Island Creek Corporation in Lexington,
Kentucky.
Warren L. Williams joined Willbros in July 2000 as Vice President, Finance
and Accounting, for Willbros USA, Inc. In 2001, he was elected Vice President,
Chief Financial Officer and Treasurer of Willbros, and in 2002, he was elected
Senior Vice President of Willbros. Prior to joining Willbros, Mr. Williams was
employed at TransCoastal Marine Services, Inc. ("Transcoastal"), a marine
construction company, from April 1998 to July 2000. Mr. Williams served as Vice
President during the entire period of his employment at TransCoastal and was
named Chief Financial Officer in early 2000. Mr. Williams worked as an
independent financial consultant from 1994 to April 1998. Prior to 1994, Mr.
Williams worked at the public accounting firm of Ernst & Young, the last four
years as a partner.
Larry J. Bump joined Willbros in 1977 as President and Chief Operating
Officer and was elected to the Board of Directors. Mr. Bump served as Chief
Executive Officer from 1980 until his retirement from Willbros in May 2002. He
was elected Chairman of the Board of Directors in 1981 and served in that
capacity until May 2004. His 44-year career includes significant U.S. and
international pipeline construction management experience. Prior to joining
Willbros, he managed major international projects in North Africa and the Middle
East, and was Chief Executive Officer of a major international pipeline
construction company. Mr. Bump served two terms as President of the
International Pipeline & Offshore Contractors Association. He also serves as a
Director of EMCOR Group, Inc.
S. Fred Isaacs was elected to the Board of Directors in March 2004. Mr.
Isaacs has been President of A1 Services, Inc. (formerly SFI Consulting, Inc.),
an electrical engineering services company, since March 1997. He was President
of Computer Video Training, Inc., a consulting company, from August 1995 to
March 1997. From September 1992 to August 1995, he served as President of SFI
Consulting, Inc. and Chairman of the Board of Directors of TranAm Systems
International, Inc., a gas compression equipment company. Prior to that time, he
served in senior engineering and executive positions in the pipeline industry
for over 35 years, most recently as Senior Vice President of Transportation of
MAPCO, Inc. and President of Mid-America Pipeline Company and Seminole Pipeline
Company from January 1983 until his retirement from MAPCO, Inc. in September
1992.
Peter A. Leidel was elected to the Board of Directors in 1992. Since
September 1997, Mr. Leidel has been a founder and partner in Yorktown Partners,
L.L.C., an investment management company. From 1983 to September 1997, he was
employed by Dillon, Read & Co., Inc., an investment banking firm, serving most
recently as a Senior Vice President.
James B. Taylor, Jr. was elected to the Board of Directors in February
1999. Mr. Taylor co-founded Solana Petroleum Corp., a Canadian-based public oil
and gas exploration and production company, in 1997 and served as Chairman of
its Board of Directors until December 2000. From 1996 to 1998, he was a Director
and consultant for Arakis Energy, a Canadian public company with operations in
North America and the Middle East. Prior to that time, he served for 28 years
for Occidental Petroleum Corporation in various worldwide exploration and
operations management positions before retiring in 1996 as Executive Vice
President.
Rodney B. Mitchell was elected to the Board of Directors in July 2001. Mr.
Mitchell has over 31 years of experience in the investment management business.
He is President and Chief Executive Officer of The Mitchell Group, Inc., an
investment advisory firm he founded in 1989. Previously, Mr. Mitchell was
President and Chief Executive Officer of Talassi Management Company, another
investment advisory organization he formed in 1970.
S. Miller Williams was elected to the Board of Directors in May 2004. He
was Executive Vice President of Strategic Development of Vartec Telecom, Inc.,
an international consumer telecommunications services company, from August 2002
until May 2004, and was appointed interim Chief Financial Officer of Vartec in
November 2003. From 2000 to August 2003, Mr. Williams served as Executive
Chairman of the Board of PowerTel, Inc., a public company which provided
telecommunications services in Australia. From 1991 to 2002, he served in
various executive positions with Williams Communications Group, a subsidiary of
The
101
Williams Companies that provided global network and broadband media services,
most recently as Senior Vice President Corporate Development and General Manager
International. He was President and owner of MediaTech, Incorporated, a
manufacturer and dealer of computer tape and supplies, from 1987 until the
company was sold in 1992.
The Board of Directors is divided into three approximately equal classes.
The terms of such classes are staggered so that only one class is elected at the
annual meeting of stockholders each year for a three-year term. The term of the
current Class III directors (Messrs. Bump, Curran and Isaacs) will expire at the
2005 Annual Meeting of Stockholders. The terms of the current Class I directors
(Messrs. Leidel and Taylor) and the current Class II directors (Messrs. Mitchell
and Williams) will expire at the annual meetings of stockholders to be held in
2006 and 2007, respectively. Mr. Bump will retire from the Board of Directors at
the 2005 Annual Meeting of Stockholders.
AUDIT COMMITTEE
The Board of Directors has an Audit Committee. The Audit Committee was
composed of Messrs. Leidel (Chairman), Mitchell, Taylor, and Guy E. Waldvogel
until March 10, 2004. From March 10, 2004 until May 20, 2004, the Audit
Committee was composed of Messrs. Leidel (Chairman), Mitchell, and Taylor. Since
then, the Audit Committee has been composed of Messrs. Leidel (Chairman),
Mitchell, Taylor, and Williams. In January 2005, Mr. M. Williams was appointed
as Co-Chairman on a temporary basis. Each of the current members of the Audit
Committee qualifies as an "independent" director under the current listing
standards of the New York Stock Exchange. The Board of Directors has determined
that it has two audit committee financial experts serving on the Audit Committee
and these persons are Messrs. Leidel and Williams. The Audit Committee has a
written charter, which is available on the Company's website at
http://www.willbros.com. The Company has in place and circulated a
"whistleblower policy" entitled Procedure of the Audit Committee on Reporting
and Investigating Complaints with Regard to Possible Accounting Irregularities.
The Audit Committee appoints the independent registered public accounting firm
who will serve each year as independent auditors of the Company's financial
statements and perform services related to the completion of such audit. The
Audit Committee also has the responsibility to (a) review the scope and results
of the audit with the independent auditors, (b) review with management and the
independent auditors the Company's interim and year-end financial condition and
results of operations, (c) consider the adequacy of the internal accounting,
bookkeeping, and other control procedures of the Company, and (d) review and
pre-approve any non-audit services and special engagements to be performed by
the independent auditors and consider the effect of such performance on the
auditors' independence. The Audit Committee also generally reviews the terms of
material transactions and arrangements, if any, between the Company and its
directors, officers and affiliates.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than 10
percent of the Company's Common Stock, to report their initial ownership of the
Common Stock and any subsequent changes in that ownership to the Securities and
Exchange Commission and the New York Stock Exchange, and to furnish the Company
with a copy of each such report. The Securities and Exchange Commission
regulations impose specific due dates for such reports, and the Company is
required to disclose in this Form 10-K any failure to file by these dates during
and with respect to fiscal 2004.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during and with respect to fiscal 2004, all Section 16(a)
filing requirements applicable to its officers, directors and more than 10
percent stockholders were complied with, except that Mr. Allcorn inadvertently
omitted from one of his reports three transactions relating to exercises of
employee stock options.
CODE OF CONDUCT
We have adopted both a code of business conduct and ethics for directors,
officers and employees and an additional separate code of ethics for the Chief
Executive Officer and senior financial officers. This information is available
on our website at http://www.willbros.com under the "Governance" caption on the
"Investors" page. We intend to satisfy the disclosure requirements, including
those of Item 406 of Regulation S-K, regarding certain amendments to, or waivers
from, provisions of our code of business conduct and ethics and code of ethics
for the Chief Executive Officer and senior financial officers by posting
102
such information on our website. Additionally, our corporate governance
guidelines and the charters of the Audit Committee, the Compensation Committee
and the Nominating/Corporate Governance Committee of the Board of Directors are
also available on our website. A copy of the codes, governance guidelines and
charters will be provided to any of our stockholders upon request to: Secretary,
Willbros Group, Inc., c/o Willbros USA, Inc., 4400 Post Oak Parkway, Suite 1000,
Houston, Texas 77027.
103
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation of the Company's Chief Executive Officer and each of the Company's
four most highly compensated executive officers other than the Chief Executive
Officer, based on salary and bonus earned during fiscal 2004, for services in
all capacities to the Company and its subsidiaries during each of the Company's
last three fiscal years.
LONG-TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
----------------------- ---------
ANNUAL COMPENSATION SECURITIES
----------------------------------------- RESTRICTED UNDERLYING LONG-TERM
OTHER ANNUAL STOCK OPTIONS/ INCENTIVE ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) (#)(4) ($) ($)
------------------ ---- ------- ------- ------------ ---------- ---------- --------- ------------
Michael F. Curran ................ 2004 425,000 150,000 -0- 309,500 -0- -0- 15,000(5)
President and 2003 425,000 -0- -0- -0- -0- -0- 15,000
Chief Executive Officer 2002 408,333 860,000 -0- -0- -0- -0- 8,992
John K. Allcorn .................. 2004 275,000 62,500 -0- 185,700 -0- -0- 10,070(5)
Executive Vice President 2003 275,000 -0- -0- -0- -0- -0- 10,070
2002 275,000 315,000 -0- -0- 15,625 -0- 12,955
James K. Tillery (6) ............. 2004 285,000 -0- -0- 185,700 -0- -0- 8,372(5)
Former President of 2003 258,710 -0- -0- -0- -0- -0- 8,772
Willbros International, Inc. 2002 250,008 240,000 -0- -0- 15,625 -0- 68,928
Warren L. Williams ............... 2004 250,000 100,000 -0- 185,700 -0- -0- 11,500(5)
Senior Vice President 2003 225,000 -0- -0- -0- -0- -0- 11,500
and Chief Financial Officer 2002 213,542 270,000 -0- -0- 15,625 -0- 12,687
John T. Dalton ................... 2004 330,000 100,000 -0- 185,700 -0- -0- 8,000(5)
Senior Vice President and 2003 330,000 -0- -0- -0- -0- -0- 8,000
General Counsel 2002(7) 82,500 200,000 -0- -0- -0- -0- -0-
----------
(1) Consists of compensation paid as discretionary bonuses.
(2) Does not include the value of perquisites and other personal benefits
because the aggregate amount of such compensation, if any, does not exceed
the lesser of $50,000 or 10 percent of the total amount of annual salary
and bonus for any named individual.
(3) Represents the dollar value of the restricted stock award based on the
number of shares granted and the market value of the Company's Common Stock
on the grant date. All grants of restricted stock are made under the
Company's 1996 Stock Plan. During the restricted period, dividends, if any,
are paid on all restricted shares at the same rate as dividends, if any,
paid to stockholders.
During 2004, Mr. Curran received a grant of restricted stock for 25,000
shares and Messrs. Allcorn, Dalton, Tillery and Williams each received a
grant of restricted stock for 15,000 shares. Each of these grants vests in
four equal annual installments, commencing January 12, 2005. The 15,000
shares of restricted stock granted to Mr. Tillery were forfeited to the
Company on January 6, 2005.
As of December 31, 2004, the aggregate number of shares of unvested
restricted stock held by the officers shown in the table and the dollar
value of such shares was: Mr. Curran, 25,000 shares ($576,250); Mr.
Allcorn, 15,000 shares ($345,750); Mr. Tillery, 15,000 shares ($345,750);
Mr. Williams, 15,000 shares ($345,750); and Mr. Dalton, 15,000 shares
($345,750). The dollar values are based on the closing price of the
Company's Common Stock on December 31, 2004, of $23.05 per share.
(4) Consists solely of options to acquire shares of Common Stock.
104
(5) Consists of Company contributions to the Company's (a) 401(k) Plan in the
amount of $8,000 for each of Messrs. Curran, Allcorn, Tillery, Williams,
and Dalton, and (b) Executive Life Plan in the amount of $7,000 for Mr.
Curran, $2,070 for Mr. Allcorn, $372 for Mr. Tillery, and $3,500 for Mr.
Williams.
(6) Mr. Tillery resigned as an executive officer of the Company on January 6,
2005.
(7) Mr. Dalton joined the Company in November 2002 as Senior Vice President and
General Counsel.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no options granted to the named executive officers of the
Company during fiscal 2004. The Company has never granted any stock appreciation
rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth certain information with respect to options
exercised by the named executive officers of the Company during fiscal 2004, and
the number and value of unexercised options held by such executive officers at
the end of the fiscal year. The Company has never granted any stock appreciation
rights.
VALUE OF UNEXERCISED
SHARES NUMBER OF SECURITIES IN-THE-MONEY
ACQUIRED UNDERLYING UNEXERCISED OPTIONS/SARS AT FY-END
ON VALUE OPTIONS/SARS AT FY-END(#) ($)(1)(2)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- --------- ----------- ------------- ----------- -------------
Michael F. Curran ... -0- -0- 200,000 -0- 2,497,500 -0-
John K. Allcorn ..... 100,000 1,578,430 50,000 -0- 402,500 -0-
James K. Tillery .... 10,808 119,091 28,500 -0- 229,425 -0-
Warren L. Williams .. 15,000 113,595 82,150 -0- 812,120 -0-
John T. Dalton ...... -0- -0- 27,000 25,000 410,970 394,750
(1) Market value of the underlying securities at exercise date or fiscal
year-end, as the case may be, minus the option exercise price.
(2) The closing price for the Company's Common Stock on the New York Stock
Exchange on December 31, 2004, the last trading day of the fiscal year, was
$23.05.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
None of the named executive officers of the Company have an employment
agreement, other than Mr. Curran. On December 31, 2004, Willbros USA, Inc.
("WUSA"), an indirect wholly owned subsidiary of the Company, entered into an
employment agreement (the "Agreement") with Mr. Curran.
The term of the Agreement is three years, commencing on January 1, 2005,
and ending on December 31, 2007 (the "Employment Period"). During the Employment
Period, Mr. Curran will earn a base salary of $700,000 per year (the "Base
Salary").
Additionally, Mr. Curran may earn a cash bonus of up to 150 percent of his
Base Salary (or $1,050,000) (the "Maximum Cash Bonus") for each year during the
Employment Period if certain transition performance goals and/or net income
target performance goals approved by the Board of Directors of the Company are
achieved. The transition performance goals specifically relate to Mr. Curran's
responsibilities during the Employment Period to facilitate the transition of
his title and responsibilities as the Chief Executive Officer of the Company to
another individual approved by the Board of Directors. During 2005, 2006, and
2007, 25 percent, 50 percent and 50 percent, respectively, of the Maximum Cash
Bonus may be earned if the transition performance goals for the relevant year
are achieved. The net income target performance goal is generally defined as the
line item designated as such in the Company's annual budget for the year 2005,
2006, and 2007, respectively, as approved by the Board of Directors for the
relevant year, before deducting any net income performance bonuses payable to
Mr. Curran and/or otherwise to employees. During 2005,
105
2006, and 2007, up to 75 percent, 50 percent and 50 percent, respectively, of
the Maximum Cash Bonus may be earned if the net income target performance goals
for the relevant year are achieved.
If the total remuneration payable to Mr. Curran, including Base Salary,
bonus and any other remuneration includable for purposes of Section 162(m) of
the Internal Revenue Code of 1986, as amended, for any year during the
Employment Period exceeds $1,000,000, then a part of the earned bonus will not
be paid until July 1, 2008. The part of the bonus earned that will be deferred
will be the amount which, when subtracted from the total remuneration payable to
Mr. Curran for such year, results in the total remuneration paid to Mr. Curran
for such year equaling $1,000,000. Any deferred amount will earn interest as
specified in the Agreement.
Under the terms of the Agreement, Mr. Curran has been and in the future
will be granted rights to receive Common Stock of the Company ("Restricted Stock
Rights") under the Company's 1996 Stock Plan, as amended, as follows:
1. On January 1, 2005, Restricted Stock Rights for 125,000 shares, with
vesting to occur in three equal annual installments on December 31 of
2005, 2006 and 2007;
2. On January 1, 2006, Restricted Stock Rights for 50,000 shares, with
vesting to occur in two equal annual installments on December 31 of
2006 and 2007; and
3. On January 1, 2007, Restricted Stock Rights for 50,000 shares, with
vesting to occur in two equal installments on June 30, 2007, and
December 31, 2007.
All shares of the Company's Common Stock deliverable to Mr. Curran by
reason of vesting of the Restricted Stock Rights will be delivered on July 1,
2008.
Pursuant to the Agreement, in the event Mr. Curran's employment is
terminated by WUSA without cause, or due to a constructive discharge, or due to
a Change in Control (as defined in the Willbros Group, Inc. Severance Plan as
amended and restated effective September 25, 2003), he will be entitled, among
other things: (i) to continue receiving his Base Salary during the remainder of
the Employment Period and (ii) to the maximum available amount for unearned
bonuses as if he had satisfied the performance goals for each of the uncompleted
years remaining in the Employment Period at the time of termination. If Mr.
Curran voluntarily resigns or is terminated by WUSA for cause, he will receive
his Base Salary through the date of termination and no cash bonuses for any
years remaining in the Employment Period which have not yet ended as of the date
of termination. If termination occurs by reason of Mr. Curran's death or
disability, he will receive his Base Salary through the date of death or
termination and the maximum amount available for a cash bonus in the year of his
death or termination by reason of disability as if he had satisfied the
performance goals for such year (but not for later years during the Employment
Period). In such cases, Mr. Curran is entitled to such benefits as are provided
under such Severance Plan, if any; provided, however, that the value of any
compensation and/or benefits payable under such Severance Plan shall not be
duplicative of any amounts paid under the Agreement, and such amounts payable
under such Severance Plan shall be offset against the value of any compensation
or benefits payable to him under the Agreement, and vice versa.
Pursuant to the Agreement, during the Employment Period and for a period of
one year thereafter, Mr. Curran will not compete with the businesses of the
Company and its affiliates.
In October 1998, the Compensation Committee approved and recommended, and
the Board of Directors adopted, the Willbros Group, Inc. Severance Plan (the
"Severance Plan"), effective January 1, 1999. The Board of Directors adopted the
Severance Plan in lieu of entering into new employment agreements with the
executive officers at that time. Since the Severance Plan was scheduled to
expire on December 31, 2003, the Compensation Committee approved and
recommended, and the Board of Directors adopted a restated and amended Severance
Plan (the "Restated Severance Plan"), effective September 25, 2003. Each of the
named executive officers of the Company is a participant in the Restated
Severance Plan. The Restated Severance Plan, which will remain in effect until
December 31, 2006, provides that a participant whose employment is terminated
other than for cause or who resigns due to (a) reduction of compensation or
other benefits, including incentive plans, (b) reduction in scope of
participant's authorities, duties, or title, or (c) material change in the
location of a participant's principal place of employment by the Company, when a
change in control of the Company is imminent or within three years after a
change in control of the Company has occurred, shall be entitled to severance
compensation (a)
106
equal to 300 percent of the participant's annual base compensation, (b) equal to
300 percent of the participant's greatest annual cash bonus received during the
36-month period ending on the date of the change in control, (c) equal to the
aggregate annual incentive plan target opportunity that could have been earned
in the year termination of employment occurs, (d) that provides full vesting of
all of the participant's outstanding stock options, restricted stock awards and
other equity-based awards, and (e) that extends the participant's and his
dependents' coverage under the benefit plans for 24 months. The Restated
Severance Plan also provides that a participant who voluntarily terminates his
employment for reasons similar to termination of employment by the Company
within 18 months after a change in control of the Company has occurred shall be
entitled to a severance payment equal to the same severance compensation
applicable to the entitlement provided by termination of employment by the
Company. Finally, the Restated Severance Plan provides that a participant whose
employment is terminated other than for cause prior to a change in control of
the Company shall be entitled to a severance payment equal to 100 percent of his
base salary then in effect. A participant who receives a severance payment under
the Restated Severance Plan will be subject to either a one year or two year
competition restriction depending on the basis for the termination. All taxes on
severance payments made under the Restated Severance Plan are the participant's
responsibility. Mr. Tillery did not receive any severance payments under the
Restated Severance Plan in connection with his resignation as an executive
officer of the Company on January 6, 2005.
All outstanding awards under the Company's 1996 Stock Plan, regardless of
any limitations or restrictions, become fully exercisable and free of all
restrictions, in the event of a change in control of the Company, as defined in
such Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2004, the Compensation Committee was composed of James B. Taylor,
Jr., Rodney B. Mitchell, Michael J. Pink (until May 20, 2004), and S. Fred
Isaacs (since May 20, 2004), all of whom are independent directors of the
Company. During 2004, none of the Company's executive officers served on the
board of directors or on the compensation committee of any other entity who had
an executive officer that served either on the Company's Board of Directors or
on its Compensation Committee.
COMPENSATION OF DIRECTORS
Employee directors receive no additional compensation for service on the
Board of Directors or any committee thereof. Non-employee directors currently
receive an annual retainer of $30,000 plus a fee of $1,500 per meeting for
attending meetings of the Board of Directors. Non-employee directors also
receive fees for attending meetings of committees of the Board of Directors as
follows: chairman and any co-chairman of the committee receive $2,500 per
meeting and the other members of the committee receive $1,500 per meeting.
Non-employee directors automatically receive non-qualified stock options
under the Willbros Group, Inc. Director Stock Plan, as amended (the "Director
Stock Plan"). Under the Director Stock Plan, an initial option to purchase 5,000
shares of Common Stock of the Company is granted to each new non-employee
director on the date such director is elected or appointed to the Board of
Directors. Each non-employee director also receives annually an option to
purchase 5,000 shares of Common Stock of the Company on the second Monday in
January of each year during the period of such director's incumbency. The option
exercise price of each option granted under the Director Stock Plan is equal to
the fair market value of the Common Stock on the date of grant. A total of
225,000 shares of Common Stock is available for issuance under the Director
Stock Plan. During fiscal 2004, Messrs. Bump, Leidel, Mitchell, and Taylor were
granted an option to purchase 5,000 shares of Common Stock at an exercise price
of $12.38 per share, Mr. Isaacs was granted an option to purchase 5,000 shares
of Common Stock at an exercise price of $14.26 per share, and Mr. M. Williams
was granted an option to purchase 5,000 shares of Common Stock at an exercise
price of $13.66 per share.
All directors are reimbursed by the Company for out-of-pocket expenses
incurred by them in connection with their service on the Board of Directors and
any committee thereof.
The Company paid Mr. Bump $120,000 during 2004 for consulting services
consisting of advice and assistance rendered in connection with its business
activities. The Consulting Services Agreement between the Company and Mr. Bump
terminated on December 31, 2004. Mr. Bump will retire from the Board of
Directors at the 2005 Annual Meeting of Stockholders.
107
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 1, 2005 by (a) each
person who is known by the Company to own beneficially more than five percent of
the outstanding shares of Common Stock, (b) each director and nominee for
director of the Company, (c) each of the executive officers of the Company named
in the Summary Compensation Table below, and (d) all executive officers and
directors of the Company as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed in the table,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares.
SHARES
BENEFICIALLY PERCENTAGE
NAME OF OWNER OR IDENTITY OF GROUP OWNED (1) OF CLASS (1)
---------------------------------- -------------- ------------
Wells Fargo & Company/Wells Capital Management ............... 2,401,722 (2) 11.1
Third Avenue Management LLC .................................. 1,652,875 (3) 7.6
Imperium Capital Management, LLC ............................. 1,164,100 (4) 5.4
Michael F. Curran ............................................ 657,900 (5) 3.0
Larry J. Bump ................................................ 271,590 (6) 1.2
John K. Allcorn .............................................. 144,730 (7) *
Warren L. Williams ........................................... 141,712 (8) *
John T. Dalton ............................................... 70,285 (9) *
James K. Tillery ............................................. 40,000 (10) *
Peter A. Leidel .............................................. 66,172 (11) *
Rodney B. Mitchell ........................................... 25,000 (12) *
James B. Taylor, Jr .......................................... 24,000 (13) *
S. Fred Isaacs ............................................... 10,000 (14) *
S. Miller Williams ........................................... 10,000 (15) *
All executive officers and directors as a group (11 people) .. 1,461,548 (16) 6.6
----------
* Less than 1%
(1) Shares beneficially owned include restricted stock held by the executive
officers of the Company over which they have voting power but not
investment power. Shares of Common Stock which were not outstanding but
which could be acquired by a person upon exercise of an option within 60
days of September 1, 2005, are deemed outstanding for the purpose of
computing the percentage of outstanding shares beneficially owned by such
person. Such shares, however, are not deemed to be outstanding for the
purpose of computing the percentage of outstanding shares beneficially
owned by any other person.
(2) Information is as of February 28, 2005, and is based on the Schedule 13G/A
dated March 24, 2005, which was filed by Wells Fargo & Company ("Wells
Fargo") and Wells Capital Management Incorporated ("Wells Capital"). Wells
Fargo's address is 420 Montgomery Street, San Francisco, California 94104,
and Wells Capital's address is 525 Market Street, 10th Floor, San
Francisco, California 94105. Wells Fargo is a parent holding company, and
Wells Capital is a registered investment advisor. Of the shares shown,
Wells Fargo has sole voting power over 2,354,457 shares, sole dispositive
power over 2,131,236 shares, and shared dispositive power over 700 shares.
Of the shares shown, Wells Capital has sole voting power over 1,309,601
shares and sole dispositive power over 2,131,106 shares.
108
(3) Information is as of December 31, 2004, and is based on the Schedule 13G/A
dated February 15, 2005, which was filed by Third Avenue Management LLC
("TAM"). TAM's address is 622 Third Avenue, 32nd Floor, New York, New York
10017-2023. TAM is a registered investment advisor.
(4) Information is as of December 31, 2004, and is based on the Schedule 13G
dated February 11, 2005, which was filed by Imperium Capital Management,
LLC, Imperium Capital Advisors, LLC, and Stephen R. Goldfield. The address
for all three filers is One Tampa City Center, Suite 2505, Tampa, Florida
33602. The three filers may be deemed the beneficial owners of the shares
shown, having sole voting power and sole dispositive power over the shares.
(5) Includes (a) 428,155 shares held in a corporation controlled by Mr. Curran,
(b) 200,000 shares subject to stock options which are currently exercisable
at an average exercise price of $10.56 per share, and (c) 6,575 shares held
in the Willbros Employees' 401(k) Investment Plan (the "401(k) Plan") for
the account of Mr. Curran.
(6) Includes 160,000 shares subject to stock options which are currently
exercisable at an average exercise price of $10.40 per share.
(7) Includes (a) 50,000 shares subject to stock options which are currently
exercisable at an average exercise price of $15.00 per share, and (b) 5,954
shares held in the 401(k) Plan for the account of Mr. Allcorn.
(8) Includes (a) 82,150 shares subject to stock options which are currently
exercisable at an average exercise price of $13.16 per share, and (b) 2,311
shares held in the 401(k) Plan for the account of Mr. Williams.
(9) Includes (a) 27,000 shares subject to stock options which are currently
exercisable at an average exercise price of $7.83 per share, and (b) 4,509
shares held in the 401(k) Plan for the account of Mr. Dalton.
(10) Information is as of January 6, 2005. Does not include stock options that
were forfeited on April 6, 2005.
(11) Includes 34,000 shares subject to stock options which are currently
exercisable at an average exercise price of $12.59 per share.
(12) Represents 25,000 shares subject to stock options which are currently
exercisable at an average exercise price of $14.32 per share. Does not
include 1,057,653 shares held as of September 1, 2005, by The Mitchell
Group, Inc., a registered investment advisor who holds these shares in
investment advisory accounts managed by it for numerous clients. The
Mitchell Group has full investment discretion with respect to such
accounts. Mr. Mitchell is a director and executive officer of The Mitchell
Group. Mr. Mitchell disclaims beneficial ownership of these shares.
(13) Represents (a) 1,000 shares held by the James and Sarah Taylor Trust, and
(b) 23,000 shares subject to stock options which are currently exercisable
at an average exercise price of $11.50 per share.
(14) Represents 10,000 shares subject to stock options which are currently
exercisable at an average exercise price of $17.73 per share.
(15) Represents 10,000 shares subject to stock options which are currently
exercisable at an average exercise price of $17.43 per share.
(16) For specific information regarding each of the listed individuals, see
footnotes (5) through (15) above.
109
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2004,
concerning shares of the Company's Common Stock authorized for issuance under
the Company's existing equity compensation plans.
NUMBER OF
SECURITIES
REMAINING
NUMBER OF AVAILABLE FOR
SECURITIES TO WEIGHTED FUTURE ISSUANCE
BE AVERAGE UNDER EQUITY
ISSUED UPON EXERCISE PRICE COMPENSATION
EXERCISE OF OF PLANS
OUTSTANDING OUTSTANDING (EXCLUDING
OPTIONS, OPTIONS, SECURITIES
WARRANTS WARRANTS REFLECTED IN
PLAN CATEGORY AND RIGHTS AND RIGHTS COLUMN (A))
------------- ------------- -------------- ---------------
EQUITY COMPENSATION PLANS (A)
APPROVED BY SECURITY HOLDERS 997,520(1) $11.57(1) 1,469,588
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY
HOLDERS -- -- --
------- ------ ---------
TOTAL 997,520 $11.57 1,469,588(2)
(1) Includes 43,500 shares subject to restricted stock rights. The weighted
average exercise price does not take these rights into account.
(2) Represents the total number of shares available for issuance under (a) our
1996 Stock Plan pursuant to stock options, stock appreciation rights or
restricted stock or restricted stock rights, and (b) our Director Stock
Plan pursuant to stock options. Of the 1,404,588 shares available for
issuance under our 1996 Stock Plan, 792,250 shares may be awarded as
restricted stock or restricted stock rights.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Board of Directors previously approved an Employee Stock Purchase
Program (the "Program"). Under the Program, selected executives and officers of
the Company were given the opportunity to borrow funds on an interest free basis
for the purpose of exercising vested stock options granted to the executives
under the Company's 1996 Stock Plan. All such loans are full recourse and
therefore secured by Company stock. The maximum amount that could be loaned to
individual executives under the Program is $250,000. Each loan has a maximum
term of five years and does not bear interest unless not repaid on the due date.
The loan will become due 90 days after termination of employment or on the
normal due date of the loan, whichever is first. Pursuant to the Program, in
March 2002, certain executive officers of the Company became indebted to the
Company in amounts in excess of $60,000 under various notes. In 2004, Messrs.
John K. Allcorn and J. Kenneth Tillery paid off all of their indebtedness,
$232,188 and $249,995, respectively, under the Program and have no outstanding
balance as of December 31, 2004. The following table sets forth, as to the
person shown, the largest amount of his indebtedness outstanding, the interest
rate, the final maturity date and the outstanding balance of such indebtedness
as of September 1, 2005:
LARGEST FINAL OUTSTANDING
AMOUNT OF INTEREST MATURITY BALANCE AT
NAME INDEBTEDNESS RATE DATE SEPT. 1, 2005
---- ------------ -------- ---------- -------------
Warren L. Williams $250,000 0% March 2007 $250,000
In accordance with the Sarbanes-Oxley Act of 2002, the Company in the
future will no longer make loans to executive officers of the Company.
For additional disclosures with respect to transactions with related
parties, see Note 18 (Related Party Transactions) in the Notes to Consolidated
Financial Statements in Part II, Item 8 of this Form 10-K, which information is
incorporated by reference into this Item 13.
110
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT AND OTHER FEES PAID TO INDEPENDENT AUDITORS
Audit Fees. The aggregate fees billed for the years ended December 31, 2004
and 2003, by KPMG LLP, the Company's independent auditors, for professional
services rendered for the audit of the Company's annual financial statements,
and for the reviews of the financial statements included in the Company's
Quarterly Reports on Form 10-Q or services that are normally provided by the
accountants in connection with statutory and regulatory filings or engagements
for those years were $763,500 and $433,000, respectively.
Audit-Related Fees. The aggregate fees billed for the years ended December
31, 2004 and 2003, for assurance and related services by KPMG that are
reasonably related to the performance of the audit or review of the Company's
financial statements and are not reported above under "Audit Fees" were $0 and
$23,000, respectively. These services consisted principally of audits of
financial statements of certain employee benefit plans, review of registration
statements, issuance of consents, and acquisition advisory services.
Tax Fees. The aggregate fees billed for the years ended December 31, 2004
and 2003, for professional services by KPMG for tax compliance, tax advice, and
tax planning were $0 and $0, respectively.
All Other Fees. The aggregate fees billed for the years ended December 31,
2004 and 2003, by KPMG for products and services rendered to the Company, other
than the services described above, were $69,000 and $0, respectively. These fees
were related to work associated with Sarbanes-Oxley requirements, unpriced
change orders, and the Company's Opal Gas Plant.
AUDIT COMMITTEE PRE-APPROVAL POLICY
It is the policy of the Audit Committee to pre-approve audit,
audit-related, tax and all other services specifically described by the Audit
Committee on a periodic basis up to a specified dollar amount. All other
permitted services, as well as proposed services exceeding such specified dollar
amount, are separately pre-approved by the Audit Committee.
111
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements:
Our financial statements and those of our subsidiaries and independent
registered public accounting firm's reports are listed in Item 8 of this Form
10-K.
2004
Form 10-K
Page(s)
---------
(2) Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm........ 116
Schedule II - Consolidated Valuation and Qualifying Accounts... 117
All other schedules are omitted as inapplicable or because the required
information is contained in the financial statements or included in the
footnotes thereto.
(3) Exhibits:
The following documents are included as exhibits to this Form 10-K. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
3.1 Amended and Restated Articles of Incorporation of Willbros Group, Inc.
(Filed as Exhibit 3.1 to our report on Form 10-Q for the quarter ended
September 30, 2002, filed November 14, 2002).
3.2 Restated By-Laws of Willbros Group, Inc. (Filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-5413 (the "S-1
Registration Statement")).
4.1 Form of stock certificate for our Common Stock, par value $.05 per
share (Filed as Exhibit 4 to the S-1 Registration Statement).
4.2 Rights Agreement, dated April 1, 1999, between us and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (Filed as an Exhibit to
our Registration Statement on Form 8-A, dated April 9, 1999).
4.3 Certificate of Designation of Series A Junior Participating Preferred
Stock (Filed as Exhibit 3 to our report on Form 10-Q for the quarter
ended March 31, 1999, filed May 17, 1999).
4.4 Indenture, dated March 12, 2004, between us and JPMorganChase Bank, as
trustee (Filed as Exhibit 10.2 to our report on Form 10-Q for the
quarter ended March 31, 2004, filed May 7, 2004).
4.5 First Supplemental Indenture, dated September 22, 2005, between us and
JPMorgan Chase Bank, N.A., successor to JPMorgan Chase Bank, as
trustee, to the Indenture, dated March 12, 2004, between us and
JPMorgan Chase Bank, as trustee (Filed as Exhibit 4.1 to our current
report on Form 8-K dated September 22, 2005, filed September 28, 2005).
4.6 Registration Rights Agreement, dated March 12, 2004, among Bear Stearns
& Co., Inc., CIBC World Markets Corp., Credit Lyonnais Securities (USA)
Inc. and us (Filed as Exhibit 10.3 to our report on Form 10-Q for the
quarter ended March 31, 2004, filed May 7, 2004).
10.1 Amended and Restated Credit Agreement dated March 12, 2004, by and
among us, certain designated subsidiaries, certain financial
institutions, Credit Lyonnais New York Branch, as administrative agent,
and CIBC, Inc., as syndication agent (Filed as Exhibit 10.1 to our
report on Form 10-Q for the quarter ended March 31, 2004, filed on May
7, 2004).
10.2 First Amendment and Waiver dated August 6, 2004, to the Amended and
Restated Credit Agreement dated March 12, 2004, among us, certain
designated subsidiaries, certain financial institutions, Calyon New
York Branch, as administrative agent, and CIBC Inc., as syndication
agent (Filed as Exhibit 10.1 to our report on Form 10-Q for the quarter
ended June 30, 2004, filed on August 9, 2004).
112
10.3 Second Amendment and Waiver dated July 19, 2005, to the Amended and
Restated Credit Agreement dated March 12, 2004, among us, certain
designated subsidiaries, certain financial institutions, Calyon New
York Branch, as administrative agent, and CIBC Inc., as syndication
agent (Filed as Exhibit 10 to our current report on Form 8-K dated July
19, 2005, filed July 25, 2005).
10.4* Form of Indemnification Agreement between our officers and us (Filed as
Exhibit 10.7 to the S-1 Registration Statement).
10.5* Form of Indemnification Agreement between our directors and us (Filed
as Exhibit 10.16 to the S-1 Registration Statement).
10.6* Willbros Group, Inc. 1996 Stock Plan (Filed as Exhibit 10.8 to the S-1
Registration Statement).
10.7* Amendment Number 1 to Willbros Group, Inc. 1996 Stock Plan dated
February 24, 1999 (Filed as Exhibit A to the Company's Proxy Statement
for Annual Meeting of Stockholders dated March 31, 1999).
10.8* Amendment Number 2 to Willbros Group, Inc. 1996 Stock Plan dated March
7, 2001, (Filed as Exhibit B to our Proxy Statement for Annual Meeting
of Stockholders dated April 2, 2001).
10.9* Amendment Number 3 to Willbros Group, Inc. 1996 Stock Plan dated
January 1, 2004 (Filed as Exhibit 10.4 to our report on Form 10-Q for
the quarter ended March 31, 2004, filed May 7, 2004).
10.10* Amendment Number 4 to Willbros Group, Inc. 1996 Stock Plan dated March
10, 2004 (Filed as Exhibit B to our Proxy Statement for Annual Meeting
of Stockholders dated April 23, 2004).
10.11* Form of Incentive Stock Option Agreement under the Willbros Group, Inc.
1996 Stock Plan (Filed as Exhibit 10.13 to our report on Form 10-K for
the year ended December 31, 1996, filed March 31, 1997 (the "1996 Form
10-K")).
10.12* Form of Non-Qualified Stock Option Agreement under the Willbros Group,
Inc. 1996 Stock Plan (Filed as Exhibit 10.14 to the 1996 Form 10-K).
10.13* Form of Restricted Stock Award Agreement under the Willbros Group, Inc.
1996 Stock Plan (Filed as Exhibit 10.6 to our report on Form 10-Q for
the quarter ended March 31, 2004, filed May 7, 2004).
10.14* Form of Restricted Stock Award Agreement under the Willbros Group, Inc.
1996 Stock Plan.
10.15* Form of Restricted Stock Rights Award Agreement under the Willbros
Group, Inc. 1996 Stock Plan.
10.16* Willbros Group, Inc. Director Stock Plan (Filed as Exhibit 10.9 to the
S-1 Registration Statement).
10.17* Amendment Number 1 to Willbros Group, Inc. Director Stock Plan dated
January 1, 2002 (Filed as Exhibit 10.13 to our report on Form 10-K for
the year ended December 31, 2001, filed February 20, 2002).
10.18* Amendment Number 2 to the Willbros Group, Inc. Director Stock Plan
dated February 18, 2002 (Filed as Exhibit 10.2 to our report on Form
10-Q for the quarter ended June 30, 2002, filed August 14, 2002).
10.19* Amendment Number 3 to the Willbros Group, Inc. Director Stock Plan
dated January 1, 2004 (Filed as Exhibit 10.5 to our report on Form 10-Q
for the quarter ended March 31, 2004, filed May 7, 2004).
10.20* Form of Secured Promissory Note under the Willbros Group, Inc. Employee
Stock Purchase Program (Filed as Exhibit 10.5 to our report on Form
10-Q for the quarter ended June 30, 2002, filed August 14, 2002).
10.21* Willbros Group, Inc. Severance Plan (as amended and restated effective
September 25, 2003) (Filed as Exhibit 10.1 to our report on Form 10-Q
for the quarter ended September 30, 2003, filed November 13, 2003).
113
10.22* Employment Agreement, dated December 31, 2004, between Willbros USA,
Inc. and Michael F. Curran, including the form of Restricted Stock
Rights Award Agreement attached as an Exhibit thereto (Filed as Exhibit
10 to our current report on Form 8-K dated December 31, 2004, filed
January 6, 2005).
10.23 Registration Rights Agreement dated April 9, 1992, between us and
Heerema Holding Construction, Inc., Yorktown Energy Partners, L.P.,
Concord Partners II, L.P., Concord Partners Japan Limited and certain
other stockholders of the Company (Filed as Exhibit 10.13 to the S-1
Registration Statement).
10.24* Consulting Services Agreement dated June 1, 2002, between Willbros USA,
Inc., and Larry J. Bump (Filed as Exhibit 10.4 to our report on Form
10-Q for the quarter ended June 30, 2002, filed August 14, 2002).
21. Subsidiaries.
23. Consent of KPMG LLP.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Management contract or compensatory plan or arrangement.
114
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.
WILLBROS GROUP, INC.
Date: November 21, 2005 By: /s/ Michael F. Curran
-----------------------------------
Michael F. Curran
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael F. Curran Director, Chairman of the Board, November 21, 2005
------------------------------------- President and Chief Executive Officer
Michael F. Curran (Principal Executive Officer)
/s/ Warren L. Williams Senior Vice President,
------------------------------------- Chief Financial Officer and Treasurer
Warren L. Williams (Principal Financial Officer and Principal November 21, 2005
Accounting Officer)
/s/ Peter A. Leidel Director November 21, 2005
-------------------------------------
Peter A. Leidel
/s/ S. Miller Williams Director November 21, 2005
-------------------------------------
S. Miller Williams
/s/ Larry J. Bump Director November 21, 2005
-------------------------------------
Larry J. Bump
/s/ James B. Taylor, Jr. Director November 21, 2005
-------------------------------------
James B. Taylor, Jr.
/s/ Rodney B. Mitchell Director November 21, 2005
-------------------------------------
Rodney B. Mitchell
/s/ S. Fred Isaacs Director November 21, 2005
-------------------------------------
S. Fred Isaacs
115
Report and Consent of Independent Registered Public Accounting Firm
The Board of Directors
Willbros Group Inc.:
The audits referred to in our report dated November 21, 2005, included the
related consolidated financial statement schedule as of December 31, 2004, and
for each of the years in the three-year period ended December 31, 2004. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statement schedule based on our audits. In our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Our report dated November 21, 2005, with respect to the consolidated balance
sheets of Willbros Group, Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2004, contains a separate paragraph that states that as
discussed in Note 2 to the consolidated financial statements, the Company has
restated its consolidated balance sheet as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for the years ended December 31, 2003 and 2002.
/s/ KPMG LLP
Houston, Texas
November 21, 2005
116
WILLBROS GROUP, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Charged
(Credited)
Balance at to Costs Charge Balance
Beginning and Offs and at End
Year Ended Description of Year Expense Other of Year
---------- ----------------------- ---------- ---------- -------- -------
December 31, 2002 Allowance for Bad Debts $ 734 $ (58) $ 49 $ 725
December 31, 2003 Allowance for Bad Debts $ 725 $ 199 $ (7) $ 917
December 31, 2004 Allowance for Bad Debts $ 917 $6,737 $ (56) $7,598
December 31, 2002 Overhaul Accrual $2,136 $ -- $ 141 $2,277
December 31, 2003 Overhaul Accrual $2,277 $ -- $(852) $1,425
December 31, 2004 Overhaul Accrual $1,425 $ 508 $(974) $ 959
December 31, 2002 Obsolescence Reserve $5,200 $ 700 $ -- $5,900
December 31, 2003 Obsolescence Reserve $5,900 $ 600 $ -- $6,500
December 31, 2004 Obsolescence Reserve $6,500 $1,400 $ -- $7,900
117
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-K. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Articles of Incorporation of Willbros Group, Inc.
(Filed as Exhibit 3.1 to our report on Form 10-Q for the quarter ended
September 30, 2002, filed November 14, 2002).
3.2 Restated By-Laws of Willbros Group, Inc. (Filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-5413 (the
"S-1 Registration Statement")).
4.1 Form of stock certificate for our Common Stock, par value $.05 per
share (Filed as Exhibit 4 to the S-1 Registration Statement).
4.2 Rights Agreement, dated April 1, 1999, between us and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (Filed as an Exhibit to
our Registration Statement on Form 8-A, dated April 9, 1999).
4.3 Certificate of Designation of Series A Junior Participating Preferred
Stock (Filed as Exhibit 3 to our report on Form 10-Q for the quarter
ended March 31, 1999, filed May 17, 1999).
4.4 Indenture, dated March 12, 2004, between us and JPMorganChase Bank, as
trustee (Filed as Exhibit 10.2 to our report on Form 10-Q for the
quarter ended March 31, 2004, filed May 7, 2004).
4.5 First Supplemental Indenture, dated September 22, 2005, between us and
JPMorgan Chase Bank, N.A., successor to JPMorgan Chase Bank, as
trustee, to the Indenture, dated March 12, 2004, between us and
JPMorgan Chase Bank, as trustee (Filed as Exhibit 4.1 to our current
report on Form 8-K dated September 22, 2005, filed September 28,
2005).
4.6 Registration Rights Agreement, dated March 12, 2004, among Bear
Stearns & Co., Inc., CIBC World Markets Corp., Credit Lyonnais
Securities (USA) Inc. and us (Filed as Exhibit 10.3 to our report on
Form 10-Q for the quarter ended March 31, 2004, filed May 7, 2004).
10.1 Amended and Restated Credit Agreement dated March 12, 2004, by and
among us, certain designated subsidiaries, certain financial
institutions, Credit Lyonnais New York Branch, as administrative
agent, and CIBC, Inc., as syndication agent (Filed as Exhibit 10.1 to
our report on Form 10-Q for the quarter ended March 31, 2004, filed on
May 7, 2004).
10.2 First Amendment and Waiver dated August 6, 2004, to the Amended and
Restated Credit Agreement dated March 12, 2004, among us, certain
designated subsidiaries, certain financial institutions, Calyon New
York Branch, as administrative agent, and CIBC Inc., as syndication
agent (Filed as Exhibit 10.1 to our report on Form 10-Q for the
quarter ended June 30, 2004, filed on August 9, 2004).
10.3 Second Amendment and Waiver dated July 19, 2005, to the Amended and
Restated Credit Agreement dated March 12, 2004, among us, certain
designated subsidiaries, certain financial institutions, Calyon New
York Branch, as administrative agent, and CIBC Inc., as syndication
agent (Filed as Exhibit 10 to our current report on Form 8-K dated
July 19, 2005, filed July 25, 2005).
10.4* Form of Indemnification Agreement between our officers and us (Filed
as Exhibit 10.7 to the S-1 Registration Statement).
10.5* Form of Indemnification Agreement between our directors and us (Filed
as Exhibit 10.16 to the S-1 Registration Statement).
10.6* Willbros Group, Inc. 1996 Stock Plan (Filed as Exhibit 10.8 to the S-1
Registration Statement).
10.7* Amendment Number 1 to Willbros Group, Inc. 1996 Stock Plan dated
February 24, 1999 (Filed as Exhibit A to the Company's Proxy Statement
for Annual Meeting of Stockholders dated March 31, 1999).
10.8* Amendment Number 2 to Willbros Group, Inc. 1996 Stock Plan dated March
7, 2001, (Filed as Exhibit B to our Proxy Statement for Annual Meeting
of Stockholders dated April 2, 2001).
118
10.9* Amendment Number 3 to Willbros Group, Inc. 1996 Stock Plan dated
January 1, 2004 (Filed as Exhibit 10.4 to our report on Form 10-Q for
the quarter ended March 31, 2004, filed May 7, 2004).
10.10* Amendment Number 4 to Willbros Group, Inc. 1996 Stock Plan dated March
10, 2004 (Filed as Exhibit B to our Proxy Statement for Annual Meeting
of Stockholders dated April 23, 2004).
10.11* Form of Incentive Stock Option Agreement under the Willbros Group,
Inc. 1996 Stock Plan (Filed as Exhibit 10.13 to our report on Form
10-K for the year ended December 31, 1996, filed March 31, 1997 (the
"1996 Form 10-K")).
10.12* Form of Non-Qualified Stock Option Agreement under the Willbros Group,
inc. 1996 Stock Plan (Filed as Exhibit 10.14 to the 1996 Form 10-K).
10.13* Form of Restricted Stock Award Agreement under the Willbros Group,
Inc. 1996 Stock Plan (Filed as Exhibit 10.6 to our report on Form 10-Q
for the quarter ended March 31, 2004, filed May 7, 2004).
10.14* Form of Restricted Stock Award Agreement under the Willbros Group,
Inc. 1996 Stock Plan.
10.15* Form of Restricted Stock Rights Award Agreement under the Willbros
Group, Inc. 1996 Stock Plan.
10.16* Willbros Group, Inc. Director Stock Plan (Filed as Exhibit 10.9 to the
S-1 Registration Statement).
10.17* Amendment Number 1 to Willbros Group, Inc. Director Stock Plan dated
January 1, 2002 (Filed as Exhibit 10.13 to our report on Form 10-K for
the year ended December 31, 2001, filed February 20, 2002).
10.18* Amendment Number 2 to the Willbros Group, Inc. Director Stock Plan
dated February 18, 2002 (Filed as Exhibit 10.2 to our report on Form
10-Q for the quarter ended June 30, 2002, filed August 14, 2002).
10.19* Amendment Number 3 to the Willbros Group, Inc. Director Stock Plan
dated January 1, 2004 (Filed as Exhibit 10.5 to our report on Form
10-Q for the quarter ended March 31, 2004, filed May 7, 2004).
10.20* Form of Secured Promissory Note under the Willbros Group, Inc.
Employee Stock Purchase Program (Filed as Exhibit 10.5 to our report
on Form 10-Q for the quarter ended June 30, 2002, filed August 14,
2002).
10.21* Willbros Group, Inc. Severance Plan (as amended and restated effective
September 25, 2003) (Filed as Exhibit 10.1 to our report on Form 10-Q
for the quarter ended September 30, 2003, filed November 13, 2003).
10.22* Employment Agreement, dated December 31, 2004, between Willbros USA,
Inc. and Michael F. Curran, including the form of Restricted Stock
Rights Award Agreement attached as an Exhibit thereto (Filed as
Exhibit 10 to our current report on Form 8-K dated December 31, 2004,
filed January 6, 2005).
10.23 Registration Rights Agreement dated April 9, 1992, between us and
Heerema Holding Construction, Inc., Yorktown Energy Partners, L.P.,
Concord Partners II, L.P., Concord Partners Japan Limited and certain
other stockholders of the Company (Filed as Exhibit 10.13 to the S-1
Registration Statement).
10.24* Consulting Services Agreement dated June 1, 2002, between Willbros
USA, Inc., and Larry J. Bump (Filed as Exhibit 10.4 to our report on
Form 10-Q for the quarter ended June 30, 2002, filed August 14, 2002).
21. Subsidiaries.
23. Consent of KPMG LLP.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
119
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Management contract or compensatory plan or arrangement.
120