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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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)
NOT APPLICABLE
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 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 number of shares of the registrant's Common Stock, $.05 par value,
outstanding as of May 3, 2005 was 21,546,612.
================================================================================
WILLBROS GROUP, INC
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2005
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets for March 31, 2005 (unaudited) and
December 31, 2004 3
Condensed Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 2005 and 2004 (Restated) 4
Condensed Consolidated Statement of Stockholders' Equity and Comprehensive
Income (Loss) (unaudited) for the three months ended March 31, 2005 5
Condensed Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 2005 and 2004 (Restated) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 28
Item 4 - Controls and Procedures 29
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 30
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3 - Defaults upon Senior Securities 30
Item 4 - Submission of Matters to a Vote of Security Holders 30
Item 5 - Other Information 30
Item 6 - Exhibits 30
SIGNATURE 32
EXHIBIT INDEX 33
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WILLBROS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2005 2004
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 67,901 $ 78,720
Accounts receivable, net................................................... 138,330 151,054
Contract cost and recognized income not yet billed......................... 33,589 21,251
Prepaid expenses........................................................... 17,682 15,662
Parts inventory, net....................................................... 5,512 5,623
-------- --------
Total current assets................................................. 263,014 272,310
Deferred tax assets.............................................................. 5,932 6,416
Property, plant and equipment, net............................................... 124,764 116,643
Investments in joint ventures.................................................... 3,476 3,441
Goodwill......................................................................... 6,498 6,535
Other assets..................................................................... 11,348 11,765
-------- --------
Total assets......................................................... $415,032 $417,110
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................... $ 817 $ 1,171
Accounts payable and accrued liabilities................................... 129,334 122,470
Contract billings in excess of cost and recognized income.................. 28,710 30,957
Accrued income taxes....................................................... 7,820 9,069
Capital lease payable...................................................... 5,775 -
-------- --------
Total current liabilities............................................ 172,456 163,667
2.75% Convertible senior notes................................................... 70,000 70,000
Long-term debt................................................................... 558 2,324
Other liabilities................................................................ 1,088 1,075
-------- --------
Total liabilities.................................................... 244,102 237,066
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; 21,635,725 shares issued at March 31, 2005
(21,425,980 at December 31, 2004)........................................ 1,082 1,071
Capital in excess of par value............................................. 160,690 156,175
Retained earnings.......................................................... 13,716 23,614
Treasury stock at cost, 89,113 shares (63,196 at December 31, 2004)........ (972) (555)
Deferred compensation...................................................... (4,957) (1,639)
Notes receivable for stock purchases....................................... (219) (216)
Accumulated other comprehensive income..................................... 1,590 1,594
-------- --------
Total stockholders' equity........................................... 170,930 180,044
-------- --------
Total liabilities and stockholders' equity........................... $415,032 $417,110
======== ========
See accompanying notes to condensed consolidated financial statements
3
WILLBROS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-----------------------------
2005 2004
----------- -----------
RESTATED
Contract revenue................................................................. $ 131,602 $ 101,647
Operating expenses:
Contract................................................................... 114,835 86,717
Depreciation and amortization.............................................. 5,307 3,713
General and administrative................................................. 17,068 10,402
Other operating costs...................................................... 1,084 786
----------- -----------
138,294 101,618
----------- -----------
Operating loss....................................................... (6,692) 29
Other income (expense):
Interest - net............................................................. (546) (310)
Other - net................................................................ 104 239
----------- -----------
(442) (71)
----------- ------------
Loss before income taxes............................................. (7,134) (42)
Provision for income taxes....................................................... 2,764 125
----------- -----------
Net loss............................................................. $ (9,898) $ (167)
=========== ===========
Loss per common share:
Basic .................................................................... $ (.47) $ (.01)
=========== ===========
Diluted.................................................................... $ (.47) $ (.01)
=========== ===========
Weighted average number of common shares outstanding:
Basic...................................................................... 21,250,257 20,741,302
=========== ===========
Diluted.................................................................... 21,250,257 20,741,302
=========== ===========
See accompanying notes to condensed consolidated financial statements
4
WILLBROS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
NOTES OTHER
CAPITAL RECEIVABLE COMPRE- TOTAL
COMMON STOCK IN EXCESS DEFERRED FOR HENSIVE STOCK-
--------------------- OF PAR RETAINED TREASURY COMPEN- STOCK INCOME HOLDERS'
SHARES PAR VALUE VALUE EARNINGS STOCK SATION PURCHASES (LOSS) EQUITY
---------- --------- --------- -------- -------- -------- ---------- ----------- --------
Balance,
January 1, 2005 21,425,980 $ 1,071 $ 156,175 $ 23,614 $ (555) $ (1,639) $ (216) $ 1,594 $180,044
Comprehensive
Loss:
Net loss - - - (9,898) - - - - (9,898)
Foreign currency
translation
adjustment - - - - - - - (4) (4)
--------
Total
comprehensive
loss (9,902)
Amortization of note
discount - - - - - - (3) - (3)
Restricted stock grants 175,000 9 3,822 - - (3,831) - - -
Deferred compensation,
net of forfeitures - - 333 - (186) 513 - - 660
Vesting of restricted
stock rights 10,875 1 (1) - - - - - -
Additions to treasury
stock - - - - (231) - - - (231)
Issuance of common
stock under employee
benefit plan 3,870 - 79 - - - - - 79
Exercise of stock
options 20,000 1 282 - - - - - 283
---------- --------- --------- -------- -------- -------- ------ ------- --------
Balance March 31, 2005 21,635,725 $ 1,082 $ 160,690 $ 13,716 $ (972) $ (4,957) $ (219) $ 1,590 $170,930
========== ========= ========= ======== ======== ======== ====== ======= ========
See accompanying notes to condensed consolidated financial statements
5
WILLBROS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------------
2005 2004
-------- --------
RESTATED
Cash flows from operating activities:
Net loss................................................................... $ (9,898) $ (167)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................................... 5,307 3,713
Amortization of debt issue costs....................................... 472 312
Amortization of deferred compensation.................................. 660 161
Amortization of discount on notes receivable for stock purchases....... (3) (15)
Loss on retirements of property, plant and equipment................... 79 11
Equity in joint ventures, net.......................................... (35) (226)
Deferred income tax benefit............................................ 477 48
Changes in operating assets and liabilities:
Accounts receivable................................................ 12,687 (6,354)
Contract cost and recognized income not yet billed................. (12,757) (5,953)
Prepaid expenses................................................... (2,051) (2,854)
Parts inventory, net............................................... 111 (588)
Other assets....................................................... (41) (243)
Accounts payable and accrued liabilities........................... 7,171 2,556
Accrued income taxes............................................... (1,240) -
Contract billings in excess of cost and recognized income.......... (2,404) 922
Other liabilities.................................................. 10 -
-------- --------
Cash provided by (used in) operating activities............... (1,455) (8,677)
Cash flows from investing activities:
Proceeds from sale of equipment............................................ 41 18
Purchase of property, plant and equipment.................................. (7,275) (9,858)
-------- ---------
Cash used in investing activities............................. (7,234) (9,840)
Cash flows from financing activities:
Proceeds from notes payable................................................ 787 535
Proceeds from issuance of common stock..................................... 362 999
Repayment of notes payable................................................. (2,909) (469)
Payments on capital lease.................................................. (408) -
Acquisition of treasury stock.............................................. (231) -
Costs of debt issues....................................................... (11) (4,851)
Proceeds from issuance of 2.75% convertible senior notes................... - 60,000
Collections of notes receivable for stock purchases........................ - 350
Repayments of long-term debt............................................... - (14,000)
-------- --------
Cash provided by (used in) financing activities............... (2,410) 42,564
Effect of exchange rate changes on cash and cash equivalents..................... 280 400
-------- --------
Cash provided by (used in) all activities........................................ (10,819) 24,447
Cash and cash equivalents, beginning of period................................... 78,720 20,969
-------- --------
Cash and cash equivalents, end of period......................................... $ 67,901 $ 45,416
======== ========
Cash payments made during the period:
Interest................................................................... $ 1,150 $ 353
Income taxes............................................................... $ 4,479 $ 540
Non-cash investing and financing transactions:
Property obtained by capital lease......................................... $ 5,775 $ -
See accompanying notes to condensed consolidated financial statements
6
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Willbros
Group, Inc. and its majority-owned subsidiaries (the "Company") reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary to present fairly the financial position as of
March 31, 2005 and the results of operations and cash flows of the Company for
all interim periods presented.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the Company's December 31, 2004
audited consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004. The
results of operations and cash flows for the three-month period ended March 31,
2005 are not necessarily indicative of the operating results to be achieved for
the full year.
The condensed 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 condensed consolidated financial statements. These estimates
and assumptions relate to the reported amounts of assets and liabilities at the
date of the condensed 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 spare parts; quantification of amounts recorded for
contingencies, tax accruals and certain other accrued liabilities; valuation
allowances for accounts receivables 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.
2. RESTATEMENT
In late December of 2004, the Company became aware of an approximate
$2,500 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.
7
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
2. RESTATEMENT (CONTINUED)
The Company's review of its historical accounting also identified other
accounting errors which were corrected in the Company's restated consolidated
financial statements. Financial statement adjustments resulting from misconduct
of certain members of the international subsidiaries' management had a negative
impact on the Company's consolidated loss of approximately $711 for the three
months ended March 31, 2004. The impact of the correction of other accounting
errors for the same period had a positive impact on the Company's consolidated
loss of $776.
The impact on the Company's consolidated cumulative earnings (loss) as a
result of all financial statement adjustments through March 31, 2004 was
approximately ($13,247), with $65 in such adjustments occurring in the
three months ended March 31, 2004. See Note 2 of the "Notes to Consolidated
Financial Statements" included in Item 8 of the Company's Annual Report on Form
10-K for information about the various adjustments recorded for fiscal
periods prior to 2004, which resulted in consolidated cumulative earnings (loss)
through December 31, 2003 of approximately ($13,312).
The impact on the restated three-month period ended March 31, 2004, is
presented below.
Three Months Ended March 31, 2004
----------------------------------------------
As Reported Adjustments Restated
------------ ------------ ------------
Contract revenue $ 102,338 $ (691) $ 101,647
Operating expenses 102,421 (803) 101,618
------------ ------------ ------------
Operating income (loss) (83) 112 29
Other income (expense) (24) (47) (71)
------------ ------------ ------------
Income (loss) before income taxes (107) 65 (42)
Provision for income taxes 125 - 125
------------ ------------ ------------
Net income (loss) $ (232) $ 65 $ (167)
============ ============ ============
Income (loss) per common share:
Basic $ (.01) $ (.00) $ (.01)
Diluted $ (.01) $ (.00) $ (.01)
Weighted average number of common shares
outstanding:
Basic 20,741,302 20,741,302 20,741,302
Diluted 20,741,302 20,741,302 20,741,302
The financial effects caused by the restatement are as follows:
INCREASE/(DECREASE) IN CONTRACT REVENUE ATTRIBUTABLE TO:
- The recalculation of revenue on the Bolivia Transierra Project as a result of the timing of
percentage of completion revenue $ 213
- The reclassification of contract revenue and contract costs associated with an error in the
recording of provisions for loss contracts (935)
- The recalculation of percentage-of-completion revenue for the removal of fraudulent charges
incorrectly recorded to individual projects 16
- Correction of percentage completion revenue recognition to reflect the reclassification of 15
fraudulent consulting fees and other operating costs
--------
TOTAL INCREASE/(DECREASE) IN CONTRACT REVENUE $ (691)
========
(INCREASE)/DECREASE IN OPERATING EXPENSES ATTRIBUTABLE TO:
- Accrual of unreported and unpaid value added taxes and payroll taxes related to certain
international subsidiaries $ (366)
- The reclassification of contract revenue and contract costs associated with an error in the
recording of the provisions for loss contracts 935
- Increase in contract cost for an error in accounting for prepaid barge costs (401)
- Increase due to fraudulent invoices inappropriately capitalized (65)
- Decrease due to error in accounting for parts inventory 700
--------
TOTAL (INCREASE)/DECREASE IN OPERATING EXPENSES $ 803
========
(INCREASE)/DECREASE IN OTHER INCOME (EXPENSE) ATTRIBUTABLE TO:
- Provision for penalties and interest associated with the underpayment of various taxes in our
international subsidiaries $ (123)
- Decrease due to error in the amortization period used to amortize debt issuance costs 61
- Other miscellaneous corrections 15
--------
TOTAL (INCREASE)/DECREASE IN OTHER INCOME (EXPENSE) $ (47)
========
TOTAL (INCREASE)/DECREASE IN NET LOSS $ 65
========
8
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
3. STOCK-BASED COMPENSATION
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 Statement of Financial Accounting Standards (SFAS) Statement
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of SFAS 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 if the
fair-value-based method had been applied to all outstanding and unvested awards
in each period:
2005 2004
-------- --------
RESTATED
Net loss as reported $ (9,898) $ (167)
Add stock-based employee compensation
included in net income 660 161
Less stock-based employee compensation
determined under fair value method (752) (203)
-------- --------
Pro forma net loss $ (9,990) $ (209)
======== ========
Income (loss) per common share:
Basic, as reported $ (.47) $ (.01)
======== ========
Basic, pro forma $ (.47) $ (.01)
======== ========
Diluted, as reported $ (.47) $ (.01)
======== ========
Diluted, pro forma $ (.47) $ (.01)
======== ========
4. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (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 the standard will not have a material impact on its financial
statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
This standard requires expensing of stock options and other share-based payments
and supersedes SFAS No. 123, which had allowed companies to choose between
expensing stock options or showing pro forma disclosure only. This standard
9
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
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. The Company will adopt the standard as
of January 1, 2006. The Company is currently evaluating the 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 (ARB) 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 the Company incurs after January 1, 2006. The Company is
currently evaluating the impact, if any, of this standard on its consolidated
financial statements.
In October 2004, the FASB ratified the consensus reached by the Emerging
Issues Task Force (EITF) 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. The Company adopted EITF 04-8 as of December 31, 2004. See Note 14 of the
"Notes to Consolidated Financial Statements" included in Item 8 of the Company's
Annual Report on Form 10-K for additional information about the Company's
earnings (loss) per share calculation.
5. FOREIGN EXCHANGE RISK
The Company attempts to negotiate contracts which provide for payment in
U.S. dollars, but it 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, the
Company seeks to match anticipated non-U.S. currency revenue with expenses in
the same currency whenever possible. To the extent it is unable to match
non-U.S. currency revenue with expenses in the same currency, the Company may
use forward contracts, options or other common hedging techniques in the same
non-U.S. currencies. The Company had no derivative financial instruments to
hedge currency risk at March 31, 2005 or March 31, 2004, or during the
three-month periods then ended.
6. INCOME TAXES
During the quarter ended March 31, 2005, the Company recorded income taxes
of $2,764 on a loss before income taxes of $7,134, resulting in an effective
income tax rate in excess of 100% for the period. During the restated quarter
ended March 31, 2004, the Company recorded a provision for income taxes of $125
on a loss before income taxes of $42. The circumstances that gave rise to the
Company recording provisions for income taxes when the Company had losses before
income taxes for the quarters ended March 31, 2005 and 2004 were primarily the
result of income taxes in certain countries being based on a deemed income
rather than on taxable income and the fact that losses in one country are not
able to be used to offset taxable income in another country.
7. 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.
10
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
7. CONVERTIBLE NOTES (CONTINUED)
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 March 31, 2005). 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 $2,790 associated with
the Convertible Notes are included in other assets at March 31, 2005 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 in Note 8
below 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 United States Securities and Exchange Commission (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.
11
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
8. 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
$2,589 associated with the 2004 Credit Facility are included in other assets at
March 31, 2005 and are amortized over the term of the 2004 Credit Facility
ending March 2007.
As of March 31, 2005, there were no borrowings under the 2004 Credit
Facility and there were $56,122 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 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 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,
12
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
8. 2004 CREDIT FACILITY (CONTINUED)
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.
9. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per common share for the three months
ended March 31, 2005 and 2004 are computed as follows:
2005 2004
------------- ------------
RESTATED
Net loss applicable to common shares................................... $ (9,898) $ (167)
============= ============
Weighted average number of common shares outstanding for basic earnings
per share............................................................ 21,250,257 20,741,302
Effect of dilutive potential common shares from
stock options........................................................ - -
------------- ------------
Weighted average number of common shares outstanding for diluted
earnings per share................................................... 21,250,257 20,741,302
============= ============
Loss per common share:
Basic............................................................. $ (.47) $ (.01)
============= ============
Diluted........................................................... $ (.47) $ (.01)
============= ============
The Company incurred net losses for the three months ended March 31, 2005
and 2004 and has therefore excluded securities from the computation of diluted
earnings per share as the effect would be anti-dilutive.
The weighted average number of potential common shares excluded from the
computation of diluted earnings (loss) per share because of their anti-dilutive
effect was 3,595,277 shares issuable upon conversion of the Convertible Notes,
953,770 shares from options, and 292,875 restricted shares of common stock at
March 31, 2005; 3,595,277 shares issuable upon conversion of the Convertible
Notes, 1,340,478 shares from options and 164,500 restricted shares of common
stock at March 31, 2004.
13
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
10. 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.
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, 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. Intersegment revenue and revenue between geographic areas are not
material.
The tables below reflect the Company's operating segments as of and for
the three months ended March 31, 2005 and 2004:
Three Months Ended March 31, 2005
------------------------------------------
United States
Total International & Canada
--------- ------------- -------------
Revenue $ 131,602 $ 87,034 $ 44,568
Operating expense:
Contract costs 114,835 73,580 41,255
Depreciation and amortization 5,307 3,016 2,291
General and administrative 17,068 12,519 4,549
Other operating costs 1,084 1,084 -
--------- -------- --------
138,294 90,199 48,095
--------- -------- --------
Operating income (loss) $ (6,692) $ (3,165) $ (3,527)
========= ======== ========
Three Months Ended March 31, 2004
------------------------------------------
RESTATED
United States
Total International & Canada
--------- ------------- -------------
Revenue $ 101,647 $ 63,486 $ 38,161
Operating expense:
Contract costs 86,717 52,985 33,732
Depreciation and amortization 3,713 2,178 1,535
General and administrative 10,402 5,655 4,747
Other operating costs 786 786 -
--------- ----------- --------
101,618 61,604 40,014
--------- ----------- --------
Operating income (loss) $ 29 $ 1,882 $ (1,853)
========= =========== ========
14
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
10. SEGMENT INFORMATION (CONTINUED)
Total assets by segment are presented below:
March 31, December 31,
2005 2004
--------- ------------
International $ 234,550 $225,262
United States & Canada 180,482 191,848
--------- --------
Total Consolidated Assets $ 415,032 $417,110
========= ========
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.
11. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES
On January 6, 2005, J. Kenneth Tillery, President of 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 their 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 12 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.
15
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
11. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES (CONTINUED)
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.
We have received a demand from a party in Nigeria requesting repayment of
an alleged $500 note payable. However, credible evidence of the transaction has
not been furnished and the Company has not found any record that any funds were
received from the party. Additionally, we have received another claim from a
second party in Nigeria for the repayment of a separate alleged $1,000 note
payable. Based on our investigation of the events surrounding these purported
February 2005 transactions, we believe there is no lawful basis for the claims.
Furthermore, independent of whether the claims are credible, we believe that
recognizing these alleged liabilities could constitute a violation of the
United States Foreign Corrupt Practices Act. Accordingly, the Company has not
recorded any liability or expenses for the $1,500 in claims.
The Company provides engineering and construction services to the oil, gas
and power industries and government entities. The Company also 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
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 March 31, 2005, the maximum amount of future
payments the Company could be required to make under this guarantee is
approximately $3,096.
16
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
11. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES (CONTINUED)
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 March
31, 2005, the Company had approximately $94,658 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 March 31, 2005 related to these commitments.
During the first quarter of 2005, the Company entered into a capital lease
agreement for a 90,000 square foot building on 10 acres of land in Edmonton,
Alberta, with an option to purchase the building for a total of $6,612 (Canadian
$8,000). Under the terms of the agreement, the Company made payments of
approximately $620 (Canadian $750) through March 31, 2005, and will purchase the
building in December 2005 for a lump sum payment of approximately $5,992
(Canadian $7,250). At March 31, 2005, approximately $27 (Canadian $33) of costs
have been incurred for equipping and preparing the building for use. The Company
will begin depreciating the building and other components of the facility when
operations commence in the second half of 2005.
At March 31, 2005 and December 31, 2004, other assets include anticipated
recoveries from insurance or third parties of $4,445 related to repairs of
pipelines under two construction projects. The Company believes the recovery of
these costs from insurance or other parties is probable. Actual recoveries may
vary from these estimates.
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.
12. 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 WII, Mr. J. Kenneth Tillery, apparently had an ownership interest or exerted
significant influence. These related parties had not been previously disclosed
to the Company. Those companies included Windfall Energy Services, Oco
Industrial Services, Ltd., Hydrodive Nigeria, Ltd., and Hydrodive International,
Ltd. All are companies that chartered or sold marine vessels to the Company's
subsidiaries. Hydrodive International, Ltd. has 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 during the three-month
periods ended March 31, 2005 and March 31, 2004 were recorded as contract cost
on Nigerian and Bolivian projects and are detailed below.
17
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
March 31,
--------------------------
2005 2004
---------- ---------
Hydrodive International, Ltd. $ 1,243 $ 1,290
Hydrodive Nigeria Ltd. - 45
Kaplan and Associates - 106
Oco Industrial Services Ltd. 3 23
Windfall Energy Services 300 150
---------- ---------
Total $ 1,546 $ 1,614
========== =========
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:
March 31, December 31,
2005 2004
---------- ----------
Hydrodive International, Ltd. $ 920 $ 1,846
Windfall Energy Services 917 300
Hydrodive Nigeria, Ltd. 13 5
---------- ----------
Total $ 1,850 $ 2,151
========== ==========
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. 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 three months ended March 31, 2004, the Company recorded
revenue of $8,124 for services provided to New Addax. The Addax and New Addax
revenue accounted for eight percent of the Company's consolidated revenue during
the three months ended March 31, 2004. The Company did not have revenue
attributable to New Addax in the first quarter of 2005. The Company had
outstanding accounts receivable from New Addax and contract cost and recognized
income not yet billed to New Addax of $9,325 at March 31, 2005 and 2004. 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.
18
ITEM 2. 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 unaudited
condensed consolidated financial statements for the three-month interim periods
ended March 31, 2005 and 2004, included in Item 1 of this report, and the
consolidated financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations, including Critical Accounting
Policies, included in our Annual Report on Form 10-K for the year ended December
31, 2004.
OVERVIEW
We derive our revenue from providing construction, engineering and
facilities development operations to the oil, gas and power industries and
government entities worldwide. In 2005, our revenue was primarily generated from
operations in Canada, Nigeria, Oman, and the United States. We obtain contracts
for our work mainly by competitive bidding or through negotiations with
long-standing or prospective clients. 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 in the mid to long-term. We are encouraged by
many positive developments in the markets that we serve. In addition to
increased bid activity in several of our markets, we are optimistic about new
oil and gas production developments in both Canada and Mexico, both of which are
attractive markets for our engineering and construction services. The move
towards LNG is also expected to bring more opportunities to Willbros, both in
North America and in the producing/exporting countries.
The engineering market in North America is becoming more active and we are
encouraged that we have received multiple awards in recent weeks. Additionally,
we are involved in numerous discussions and contract negotiations regarding
pipeline and station construction projects in North America. The nature of these
recent discussions and the increase in engineering assignments continues to
support our belief that we may see an increase in activity in North America
during the second half of 2005.
RESTATEMENT
In late December of 2004, the Company became aware of an approximate
$2,500 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.
FINANCIAL SUMMARY
For the quarter ended March 31, 2005, we had a loss of ($0.47) per share
on revenue of $131,602. This compares to revenue of $101,647 in the same
restated quarter in 2004, when we reported a loss of ($0.01) per share.
19
Revenue of $131,602 for the first quarter of 2005 represents a 29%
increase over the revenue for the same restated period in 2004. In the first
quarter of this year, International revenue increased $23,548 primarily because
of a $51,808 million increase from new work in Nigeria, partially offset by a
$31,456 decrease in revenue from completed 2004 projects in Iraq ($15,969),
Venezuela ($8,929) and Oman ($6,558). United States and Canada revenue increased
$6,407 primarily as a result of $4,454 of increased activity in Canada.
Contract costs increased $28,118 (32%) to $114,835 due to the activity
increases in both operating segments. Overall, contract margin decreased by
approximately two percentage points in the first quarter of 2005 as compared
to the same restated quarter in 2004.
G&A expense increased $6,666 (64%) to $17,068 in the first quarter of 2005
from $10,402 in the restated first quarter of last year. The increase in G&A
expense includes $3,657 related to the Audit Committee's internal investigation,
$3,039 increase in information technology support costs, additional Houston
office labor costs to support the effort of Audit Committee's independent
investigation, and increased operating activity.
We recognized $2,764 of tax expense on a $7,134 pre-tax loss in the first
quarter of 2005. The $2,639 tax expense increase in the first quarter of 2005
resulted from $51,808 of increased revenue in Nigeria as compared to the same
restated quarter in 2004. This increase was partially offset by $3,948 of
pre-tax income in 2004 that was earned under a foreign contract which provided
tax concessions that eliminated the payment of taxes. Tax expense results from
pre-tax losses primarily from accruing income taxes in countries where taxes are
calculated and based on a deemed income (percentage of revenue) instead of
actual pre-tax income.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In our report on Form 10-K for the year ended December 31, 2004, we
identified and disclosed three critical accounting policies: (a) Revenue
Recognition: Percentage-of-Completion Method; (b) Income Taxes; and (c) Joint
Venture Accounting. There have been no changes to our critical accounting
policies during the three-month period ended March 31, 2005.
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 the three months ended March 31, 2005 was $(1,281) as
compared to $3,981 for the same restated period in 2004, a $5,262 (132%)
decrease.
A reconciliation of EBITDA to GAAP financial information follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
--------- ---------
RESTATED
Net loss $ (9,898) $ (167)
Interest, net 546 310
Provision for income taxes 2,764 125
Depreciation and amortization 5,307 3,713
--------- ---------
EBITDA $ (1,281) $ 3,981
========= =========
20
BACKLOG
We define anticipated contract revenue as backlog when the award of a
contract is reasonably assured, generally upon the execution of a definitive
agreement or contract. Anticipated revenue from post-contract award processes,
including change orders, extra work, variations in the scope of work and the
effect of escalation or currency fluctuation formulas, is not added to backlog
until realization is reasonably assured. Backlog as of March 31, 2005 was
$754,837 with an estimated embedded margin of 19.6% compared to $660,932 at
December 31, 2004 with an estimated embedded margin of 21.6%. Included in the
backlog at March 31, 2005 is $20,164 of gas processing revenue with an estimated
embedded margin of 100%. The gas processing revenue is associated with the
10-year gas processing contract for our Opal Gas Plant. If backlog amounts were
reduced by eliminating the effects of the Opal gas processing contract, the
adjusted estimated embedded margin would be 17.4% as of March 31, 2005. An
estimated $401,354 (53.2%) of the current backlog is scheduled to be worked off
during the remainder of 2005.
RESULTS OF OPERATIONS
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 (a) entering and
exiting work countries; (b) the execution of new contract awards; (c) the
completion of contracts; and (d) the overall level of activity in our services.
Our ability to be successful in obtaining and executing contracts can be
affected by the relative strength or weakness of the U.S. dollar compared to the
currencies of our competitors, our clients and our work locations. During the
three-month period ended March 31, 2004, the Venezuelan Bolivar experienced
significant devaluation relative to the U.S. dollar and the restated first
quarter of 2004 included a foreign exchange gain of $331 resulting from the
translation of our Bolivar denominated monetary assets and liabilities into U.S.
dollars. In the first quarter of 2005 we had a foreign exchange gain of $54 on
the Bolivar.
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO RESTATED THREE MONTHS ENDED
MARCH 31, 2004
CONTRACT REVENUE
Contract revenue increased $29,955 (29%) to $131,602 due to increases in
both International and United States and Canada segments. A quarter-to-quarter
comparison of revenue is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
INCREASE PERCENT
2005 2004 (DECREASE) CHANGE
----------- ------------ ------------ --------
RESTATED
International $ 87,034 $ 63,486 $ 23,548 37%
United States & Canada 44,568 38,161 6,407 17%
----------- ------------ ------------
$ 131,602 $ 101,647 $ 29,955 29%
=========== ============ ============
International revenue increased $23,548 primarily because of a $51,808
increase from new work in Nigeria, partially and offset by a $31,456 decrease in
revenue from completed 2004 projects in Iraq ($15,969), Venezuela ($8,929) and
Oman ($6,558). United States and Canada revenue increased $6,407 primarily as a
result of $4,454 of increased activity in Canada.
21
CONTRACT INCOME
Contract income increased $1,837 (12.3%) to $16,767 in the first three
months of 2005 as compared to the same restated period in 2004.
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
% OF % OF INCREASE PERCENT
2005 REVENUE 2004 REVENUE (DECREASE) CHANGE
----------- ------- ------------ ------- ------------ -------
RESTATED
International $ 13,454 15.5% $ 10,501 16.5% $ 2,953 28.1%
United States & Canada 3,313 7.4% 4,429 11.6% (1,116) (25.2)%
----------- ----------- ------------
$ 16,767 12.7% $ 14,930 14.7% $ 1,837 12.3%
=========== =========== ============
The United States and Canada contract income and margin decreases of $1,116 and
4.2%, respectively, is mainly due to reduced construction activity at our North
America RPI division along with slightly lower engineering margins.
International contract income increased $2,953 in the first quarter of 2005
versus the same restated period of 2004. The increase is mainly due to the Shell
Eastern Gas Gathering Project and Shell Offshore Gas Gathering Project in
Nigeria having significantly higher activity in the first quarter of 2005 versus
the same restated period of 2004. International contract margin was flat during
this period compared with the same restated period of 2004.
OTHER OPERATING EXPENSES
Depreciation and amortization increased $1,594 (43%) in the first quarter
of 2005 as compared to the same restated period of 2004 due to additions to
equipment in Nigeria and the implementation of a new information system in the
United States and Canada.
G&A expense increased $6,666 (64%) to $17,068 in the first quarter of 2005
from $10,402 in the restated first quarter of last year. The increase in G&A
expense includes $3,657 related to the Audit Committee's internal investigation,
$3,039 increase in information technology support costs, additional Houston
office labor costs to support the effort of Audit Committee's independent
investigation, and increased operating activity.
NON-OPERATING ITEMS
Other income/(expense) increased from $71 of expense in the restated first
quarter of 2004 to $442 of expense in the same quarter of 2005. The $371
quarter-to-quarter unfavorable variance is attributable to Venezuela Bolivar
currency devaluation gains in 2004 that did not occur in 2005, and a $236
increase in net interest expense in 2005.
We recognized $2,764 of tax expense on a $7,134 pre-tax loss in the first
quarter of 2005. The $2,639 tax expense increase in the first quarter of 2005
resulted from $51,808 of increased revenue in Nigeria as compared to the same
restated quarter in 2004. This increase was partially offset by $3,948 of
pre-tax income in 2004 that was earned under a foreign contract which provided
tax concessions that eliminated the payment of taxes. Tax expense results from
pre-tax losses primarily from accruing income taxes in countries where taxes are
calculated and based on a deemed income (percentage of revenue) instead of
actual pre-tax income.
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.
22
WORKING CAPITAL
Cash and cash equivalents decreased $10,819 (14%) to $67,901 at March 31,
2005 from $78,720 at December 31, 2004. This decrease was primarily due to
$7,275 of capital expenditures for the acquisition of equipment, a $2,122
net reduction of notes payable and $1,455 in cash used in operating activities.
Working capital decreased $18,085 (17%) due to increases in accounts
payable and accrued liabilities ($6,864) and capital lease payable ($5,775),
decreases in cash and accounts receivable of $10,819 and $12,724, respectively,
partially offset by increases in contract cost and recognized income not yet
billed of $12,338 and prepaid expenses of $2,020.
Cash flows from operations improved by $7,222 compared to the same
restated period in 2004, from a negative cash flow of $8,677 to a negative cash
flow of $1,455.
We believe the anticipated increase in revenue, a focus on reducing
working capital requirements internationally, and increased analysis in the area
of capital asset additions will improve cash flow from operations in 2005.
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 March 31, 2005). 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 $2,790 associated with
the Convertible Notes are included in other assets at March 31, 2005 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 below 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.
23
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.
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
$2,589 associated with the 2004 Credit Facility are included in other assets at
March 31, 2005 and are amortized over the term of the 2004 Credit Facility
ending March 2007.
As of March 31, 2005, there were no borrowings under the 2004 Credit
Facility and there were $56,122 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 of the Notes to the Condensed
Consolidated Financial Statements included in this report) Additional Consent
and Waivers were obtained from the syndicated bank group as of April 8 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 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.
24
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 respect to these anticipated violations with the
syndicated bank group. 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.
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 the remainder of 2005 are estimated at $27,200 for equipment. 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 investigation, 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 the Company's Annual Report on Form 10-K for the
year ended December 31, 2004.
CONTRACTUAL OBLIGATIONS
As of March 31, 2005, we had $70,000 of outstanding debt related to the
Convertible Notes.
During the first quarter of 2005, the Company entered into a capital lease
agreement for a 90,000 square foot building on 10 acres of land in Edmonton,
Alberta, with an option to purchase the building for a total of $6,612 (Canadian
$8,000). Under the terms of the agreement, the Company made payments of
approximately $620 (Canadian $750) through March 31, 2005, and will purchase the
building in December 2005 for a lump sum payment of approximately $5,992
(Canadian $7,250).
Other contractual obligations and commercial commitments, as detailed in
the Company's annual report on Form 10-K for the year ended December 31, 2004,
did not materially change outside of payments made in the normal course of
business, except that a $2,600 capital lease with a remaining life of three
years related to a new information system was paid off in March 2005.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 4 of the Notes to the Condensed Consolidated Financial Statements
included in this report for a summary of recently issued accounting standards.
FORWARD-LOOKING STATEMENTS
This Form 10-Q 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-Q 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
25
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;
- 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-Q
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
26
of the current and former employees of the Company, see the Risk Factors
included in the Company's 2004 Annual Report on Form 10-K beginning on page 27.
27
ITEM 3. 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 expenses in the same
currency whenever possible. To the extent we are unable to match non-U.S.
currency revenue with expenses 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 March 31, 2005 and 2004 or
during the three-month periods then ended.
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 March 31, 2005 due to the
generally short maturities of these items. At March 31, 2005, our investments
were primarily in short-term dollar denominated bank deposits with maturities of
a few days, or in longer term deposits where funds can be withdrawn on demand
without penalty. 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 long-term debt. At March 31, 2005, none of our indebtedness was
subject to variable interest rates.
28
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934) as of March 31, 2005. Based on this evaluation, our management,
including our Chief Executive Officer and Chief Financial Officer, concluded
that, as of March 31, 2005, the disclosure controls and procedures are not
effective in alerting them on a timely basis to material information required to
be included in our periodic filings with the Securities and Exchange Commission.
Company management with oversight from the Audit Committee has devoted
substantial effort to the remediation of its material weaknesses described in
Item 9A "Controls and Procedures" in the Company's 2004 Annual Report on Form
10-K. Specifically, we have undertaken the following actions to remediate these
material weaknesses:
Remediation steps taken in the fourth quarter of 2004:
- 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.
Actions taken in 2005:
- Initiation of an enhanced worldwide awareness program to educate
employees with respect to the content of our Whistle Blower 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 a position 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.
- 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.
Company management with oversight from the Audit Committee is implementing
numerous 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 through the Company. The appointee will have a
direct communication line to the Audit Committee.
The above changes are all part of our overall plan that is intended to
remediate the material weaknesses described in Item 9A "Controls and Procedures"
in the Company's 2004 Annual Report on Form 10-K.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding legal proceedings, see Item 3. Legal Proceedings
of our Annual Report on Form 10-K for the year ended December 31, 2004, and Note
11 of our "Notes to Condensed Consolidated Financial Statements" in Item 1 of
Part I of this Form 10-Q, which information from Note 11 as to legal proceedings
is incorporated by reference into this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases of our common
stock by us during the quarter ended March 31, 2005:
(d)
Maximum
(c) Number (or
Total Approximate
Number Dollar Value)
Of Shares Of Shares
Purchased That May
(a) (b) As Part of Yet Be
Total Average Publicly Purchased
Number Price Announced Under the
Of Shares Paid per Plans or Plans or
Purchased (1) Share (2) Programs Programs
------------------------------------ ------------ --------- ---------- ------------
January 1, 2005 - January 31, 2005 10,917 $ 21.21 - -
February 1, 2005 - February 28, 2005 - - - -
March 1, 2005 - March 31, 2005 - - - -
(1) Shares of common stock acquired from certain of our officers and key
employees under the share withholding provisions of our 1996 Stock Plan
for the payment of taxes associated with the vesting of shares of
restricted stock granted under such plan.
(2) The price paid per common share represents the closing sales price of a
share of our common stock, as reported in the New York Stock Exchange
composite transactions, on the day that the stock was acquired by us.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
30
The following documents are included as exhibits to this Form 10-Q. 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.
4. 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).
10. 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).
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.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLBROS GROUP, INC.
Date: November 21, 2005 By: /s/ Warren L. Williams
-------------------------------
Warren L. Williams
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
32
EXHIBIT INDEX
The following documents are included as exhibits to this Form 10-Q. 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
------ -----------
4. 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).
10. 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).
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.
33