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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 5, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-22595
FRIEDE GOLDMAN INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-1362492
(STATE OR OTHER JURISDICTION OF (I.R.S.EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.
525 E. CAPITOL STREET, SUITE 402
JACKSON, MISSISSIPPI 39201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(601) 352-1107
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the Registrant's common stock, par value $.01 per
share outstanding at May 13, 1998 was shares.
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FRIEDE GOLDMAN INTERNATIONAL INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGES
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<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 1
Consolidated Balance Sheets as of December 31, 1997 and April 5,
1998................................................................ 1
Consolidated Statements of Operations for the three months ended
March 31, 1997 and
April 5, 1998....................................................... 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and
April 5, 1998....................................................... 3
Notes to Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 8
Forward Looking Statements........................................... 13
PART II. OTHER INFORMATION............................................... 14
Item 5. Other Information.............................................. 14
Item 6. Exhibits and Reports on Form 8-K............................... 14
Signatures........................................................... 15
</TABLE>
i
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FRIEDE GOLDMAN INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 5,
1997 1998
------------ ------------
ASSETS
------ (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 57,038,036 $ 34,647,413
Accounts receivable............................... 20,568,194 61,692,569
Inventory and stockpiled materials................ 5,216,651 19,633,078
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... -- 548,000
Restricted escrowed funds......................... 14,383,929 11,903,922
Prepaid expenses and other........................ 607,448 3,312,309
------------ ------------
Total current assets............................ 97,814,258 131,737,291
Property, plant and equipment, net of accumulated
depreciation....................................... 11,816,664 88,653,553
Restricted escrowed funds........................... 10,433,071 --
Construction in Progress............................ 17,934,877 31,968,820
Intangibles and other assets........................ 4,556,542 5,926,707
------------ ------------
Total assets.................................... $142,555,412 $258,286,371
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt, including current portion of
long-term debt................................... $ 493,829 $ 7,760,276
Accounts payable, trade........................... 11,507,108 33,382,964
Accrued expenses.................................. 3,803,587 15,597,045
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 36,487,735 48,820,026
------------ ------------
Total current liabilities....................... 52,292,259 105,560,311
------------ ------------
Deferred income tax liability....................... 691,000 691,000
Long-term debt, less current maturities............. 25,766,929 32,844,200
------------ ------------
Total liabilities............................... 78,750,188 139,095,511
------------ ------------
Deferred government subsidy, net of accumulated
amortization....................................... -- 48,911,636
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding..... -- --
Common stock; par value $0.01; 125,000,000 shares
authorized; 24,405,042 and 24,492,793 shares
issued and outstanding at December 31, 1997 and
April 5, 1998.................................... 244,050 244,927
Additional paid-in capital........................ 49,501,707 50,093,271
Retained earnings................................. 14,059,467 20,797,482
Foreign currency translation adjustment........... -- (856,456)
------------ ------------
Total stockholders' equity...................... 63,805,224 70,279,224
------------ ------------
Total liabilities and stockholders' equity...... $142,555,412 $258,286,371
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, APRIL 5,
1997 1998
----------- -----------
<S> <C> <C>
Revenue............................................... $18,654,636 $68,751,285
Cost of revenue....................................... 12,799,897 50,128,962
----------- -----------
Gross profit........................................ 5,854,739 18,622,323
----------- -----------
Selling, general and administrative expenses.......... 2,622,481 7,618,434
----------- -----------
Operating income.................................... 3,232,258 11,003,889
----------- -----------
Other income (expense):
Interest expense.................................... (201,360) (166,795)
Interest income..................................... 81,527 517,805
Gain on sale or distribution of assets.............. 1,378,842 --
Other............................................... 66,249 (203,258)
----------- -----------
Total other income (expense)...................... 1,325,258 147,752
----------- -----------
Income before tax................................. 4,557,516 11,151,641
Income tax provision.............................. -- (4,413,626)
----------- -----------
Net income............................................ 4,557,516 $ 6,738,015
===========
Pro forma income tax provision........................ (1,685,000)
-----------
Pro forma net income.................................. $ 2,872,516
===========
Earnings per share
Basic............................................... $ 0.25 $ 0.28
=========== ===========
Diluted............................................. $ 0.25 $ 0.27
=========== ===========
Pro forma earnings per share
Basic............................................... $ 0.16
===========
Diluted............................................. $ 0.16
===========
Weighted average shares:
Basic............................................... 18,400,000 24,446,059
Diluted............................................. 18,400,000 25,182,769
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FRIEDE GOLDMAN INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
MARCH 31, APRIL 5,
1997 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 4,557,516 $ 6,738,015
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 215,080 601,259
Compensation expense related to stock issued to
employees...................................... 475,000 161,775
Gain on sale of assets.......................... (1,430,969) --
Net increase (decrease) in billings related to
costs and estimated earnings on uncompleted
contracts...................................... 2,788,972 (3,132,055)
Net effect of changes in assets and liabilities:
Restricted certificates of deposit............ 3,544,934 --
Accounts receivable........................... (7,022,369) (20,576,445)
Inventory and stockpiled materials............ (175,277) (106,803)
Prepaid expenses and other assets............. (509,469) (2,502,020)
Accounts payable and accrued expenses......... 2,908,805 8,531,676
----------- ------------
Net cash provided by (used in) operating
activities................................. 5,352,223 (10,284,598)
Cash flows from investing activities:
Capital expenditures for plant and equipment...... (1,357,942) (26,244,675)
Acquisition of French holding company............. -- (25,065,000)
Cash acquired upon acquisition of French holding
company.......................................... -- 18,771,517
Proceeds from sale of property, plant and
equipment........................................ 395,521 --
Payments received on sales-type lease............. 185,189 49,592
----------- ------------
Net cash used in investing activities....... $ (777,232) $(32,488,566)
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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FRIEDE GOLDMAN INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, APRIL 5,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock................. $ -- $ 430,666
Net borrowings (repayments) under lines of credit.. (2,227,960) --
Proceeds from borrowings under debt facilities..... 290,212 20,808,331
Repayments on borrowings under debt facilities..... (1,664,962) --
Distributions to stockholders...................... (386,602) --
----------- -----------
Net cash provided by (used in) financing activities.. (3,989,312) 21,238,997
----------- -----------
Effect of exchange rate changes in cash.............. -- (856,456)
----------- -----------
Net increase in cash and cash equivalents............ 585,679 22,390,623
Cash and cash equivalents at beginning of year....... 1,509,876 57,038,036
----------- -----------
Cash and cash equivalents at end of period........... $ 2,095,555 $34,647,413
=========== ===========
Supplemental disclosure of cash flow information--
Cash paid during the period for interest........... $ 204,278 $ 138,326
=========== ===========
Issuance of common stock or options as
compensation...................................... $ 475,000 $ --
=========== ===========
Non-cash distributions of property to stockholders. $ 1,641,000 $ --
=========== ===========
Assumption of note payable by stockholder.......... $ 198,000 $ --
=========== ===========
Distribution of marketable securities to
stockholder to satisfy note payable............... $ 1,400,000 $ --
Estimated fair value of non-cash assets acquired in
acquisition of Canadian company................... $ -- $49,462,096
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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FRIEDE GOLDMAN INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, INITIAL PUBLIC OFFERING AND STOCK SPLIT
The consolidated financial statements include the accounts of Friede Goldman
International Inc. and its wholly-owned subsidiaries, HAM Marine, Inc.
("HAM"), Friede & Goldman, Ltd. ("Friede & Goldman"), Friede Goldman Offshore
("FGO"), Friede Goldman Newfoundland ("FGN"), and Friede Goldman France
("FGF") (collectively referred to as the "Company").
In July 1997, the Company completed an initial public offering (the
"Offering") of its common stock. In connection with the Offering, the Company
sold 3,002,521 (6,005,042 after the 2 for 1 stock split discussed below)
shares of its common stock for net proceeds of approximately $46.7 million.
In September 1997, the Company declared a 2 for 1 stock split, effective
October 16, 1997 for stockholders of record as of October 1, 1997. Unless
otherwise indicated, all share and per share data have been restated to
reflect the effects of the 2 for 1 split.
2. CHANGE IN INTERIM REPORTING PERIODS
Effective January 1, 1998, the Company adopted a 13-week quarterly reporting
period by which the fiscal year is divided into four 13-week periods ending on
the last Sunday in each period. The fiscal year-end will continue to be
December 31. Accordingly, for calendar year 1998, quarterly periods will end
on April 5, July 5, October 4 and December 31. This change in reporting
periods was made to allow the close of interim financial reporting periods to
coincide with the close of direct labor reporting periods. The change will
have no impact on annual results of operations and will have an immaterial
impact on interim results.
3. QUARTERLY FINANCIAL INFORMATION
The information presented as of April 5, 1998 and for the three-month
periods ended April 5, 1998 and March 31, 1997 is unaudited. In the opinion of
the Company's management, the accompanying unaudited financial statements
contain all adjustments (consisting of normal recurring adjustments) which the
Company considers necessary for the fair presentation of the Company's
financial position as of April 5, 1998 and the results of its operations and
its cash flows for the three-month periods ending April 5, 1998 and March 31,
1997.
In the opinion of management, the financial statements included herein have
been prepared in accordance with generally accepted accounting principles and
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
certain information and disclosures normally included in financial statements
have been condensed or omitted.
The results of operations for the three-month period ended April 5, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
4. SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
Prior to June 15, 1997, the Company was an S Corporation for Federal and
state income tax purposes, and as a result, was not subject to income taxes.
On June 15, 1997, such S Corporation status was terminated. The pro forma
income tax provision is the result of the application of a combined Federal
and state rate (37%) to income before income taxes for periods prior to
termination of S Corporation status.
5
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FRIEDE GOLDMAN INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share," which simplifies the computation of
earnings per share ("EPS"). SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, and requires restatement of
all prior period EPS data presented. Under SFAS No. 128, the Company computes
two earnings per share amounts--basic EPS and diluted EPS. Basic EPS is
calculated based on the weighted average number of shares of common stock
outstanding for the periods presented. Diluted EPS is based on the weighted
average number of shares of common stock outstanding for the periods,
including dilutive potential common shares which reflect the dilutive effect
of the Company's stock options. Dilutive common equivalent shares for the
three months ended April 5, 1998 were 736,710, all attributable to stock
options. There were no common equivalent shares outstanding during the three
months ended March 31, 1997.
Foreign Currency Translation
The financial statements of subsidiaries outside the United States, (Canada
and France, see Note 5), are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date. The resultant
translation adjustments are included as a separate component of stockholders'
equity. Income and expense items are translated at average monthly rates of
exchange during the period.
5. ACQUISITIONS
In January 1998, the Company purchased the assets of Newfoundland Ocean
Enterprises Ltd. of Marystown Newfoundland ("Marystown"), a steel fabrication
and marine construction concern with operations similar to those of the
Company. The acquisition was effected pursuant to a Share Purchase Agreement,
dated January 1, 1998 (the "Share Purchase Agreement"). Under the terms of the
Share Purchase Agreement, the Company paid a purchase price of US $1 (one
dollar). However, the Share Purchase Agreement also provides that, among other
things, the Company (i) maintain a minimum of 1.2 million man-hours
(management, labor, salaried and hourly) for each of the 1998, 1999 and 2000
calendar years, (ii) undertake certain capital improvements at the acquired
shipyards and (iii) pay to the sellers fifty percent (50%) of net after tax
profit of Marystown for the twelve-month period ending March 31, 1998 (which
amount is not material). The Company has also indicated its intent to invest
C$5 million to C$15 million (approximately US $3 million to US $10 million) to
maintain and expand the business. The Share Purchase Agreement provides that
the Company will pay to the Seller liquidated damages of C$10 million
(approximately US$7 million) in 1998 and C$5 million (approximately US$3
million) in 1999 and 2000 in any of such years in which the minimum number of
man-hours described above is not attained. The assets acquired have been
recorded at their estimated fair values of approximately US $49.5 million. The
difference between the fair value of the acquired assets and the $1
consideration was recorded as a deferred government subsidy which is being
amortized over the lives of the assets. In addition the sellers guaranteed
that at the time of acquisition working capital of Marystown would be at least
C$2.5 million (approximately US$1.7 million). At the purchase date the Company
recorded an additional deferred subsidy of US$1.8 million for the contribution
by Marystown to bring working capital to its contractually required amount.
Effective February 5, 1998, the Company, through its wholly-owned
subsidiary, Friede Goldman France, S.A.S., ("FGF') a French par actions
simplifee, acquired all of the issued and outstanding shares of a French
holding company and its French subsidiaries, for a cash payment of
approximately $25 million. The operating subsidiaries of the holding company
operate facilities in Carquefou and Lanveoc, France. The subsidiaries
primarily design and manufacture deck machinery that include mooring,
anchoring and cargo handling equipment; rack-and-pinion jacking systems used
on offshore drilling platforms; trawl and draw net winches for
6
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FRIEDE GOLDMAN INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
fishing vessels; and hydraulic power and rack-and-pinion steering systems used
in all types of vessels. The purchase price has been preliminarily allocated
to net current assets of $7.7 million and land, building and machinery in the
amount of $17.3 million.
The following summarized income statement data reflects the impact which the
acquisitions would have had on the company's results of operations had the
transactions taken place as of the beginning of the periods presented:
<TABLE>
<CAPTION>
PRO FORMA RESULTS
FOR THE THREE
MONTHS ENDED
-----------------
MARCH 31, APRIL
1997 5, 1998
--------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
<S> <C> <C>
Revenues............................................... $38,092 $72,143
Operating income....................................... 4,605 11,791
Net income............................................. 4,396 6,778
Earning per common share--Basic........................ 0.24 0.28
Earnings per common share--Diluted..................... 0.24 0.27
</TABLE>
The initial purchase allocations for both of the acquisitions were based on
preliminary appraisals of the fair values of assets and liabilities acquired
pending development of more detailed appraisals and assessments by management.
As a result, final purchase price allocations may differ from current
allocations.
6. NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement is effective for fiscal years beginning after December 15,
1997. Reconciliation of net income to comprehensive income for the three
months ended April 5, 1998 is as follows:
<TABLE>
<S> <C>
Net Income.................................................... $6,738,015
Other comprehensive income, net of tax
Foreign currency translation................................ (856,456)
----------
Comprehensive Income.......................................... $5,881,559
==========
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company's results of operations are affected primarily by conditions
affecting offshore drilling contractors, including the level of offshore
drilling activity by oil and gas companies. The level of offshore drilling
activity is affected by a number of factors, including prevailing and expected
oil and natural gas prices, the cost of exploring for, producing and
delivering oil and gas, the sale and expiration dates of offshore leases in
the United States and overseas, the discovery rate of new oil and gas reserves
in offshore areas, local and international political and economic conditions
and the ability of oil and gas companies to access or generate capital
sufficient to fund capital expenditures for offshore, exploration, development
and production activities. Despite recent declines in oil prices, oil and gas
price levels have generally improved over the past five years resulting in
increased drilling activity in the Gulf of Mexico. This increase in drilling
activity is also attributable to a number of recent industry trends, including
three-dimensional seismic mapping, directional drilling and other advances in
technology that have increased drilling success rates and efficiency and have
led to the discoveries of oil and gas in subsalt geological formations (which
generally are located in depths of 300 to 800 feet of water) and deepwater
areas of the Gulf of Mexico. In the deepwater areas where larger and more
technically advanced drilling rigs are needed, increased drilling activity has
increased demand for retrofitting offshore drilling rigs and improved pricing
levels for such services. In addition, increased drilling activity in and
around more mature fields in shallower waters has contributed to the increase
in demand for conversion, retrofit and repair services for jackups and other
offshore drilling rigs.
Due to increased demand for its services, the Company's backlog has
increased from $66.9 million at March 31, 1997 to $407.0 million at April 5,
1998. To accommodate this increased demand, the Company has leased additional
acreage adjacent to HAM's existing shipyard in Pascagoula, Mississippi that
provides it with additional dock space and covered fabrication capacity and
has increased HAM's workforce from approximately 300 employees at December 1,
1996 to approximately 1,500 employees at April 5, 1998. In addition, the
Company has commenced construction of a state-of-the-art shipyard that will be
capable of constructing new offshore drilling rigs and production units as
well as converting retrofitting and repairing existing offshore drilling rigs
and production units. The new facility (the "Greenwood Island Facility") is
expected to be completed in the second half of 1998.
Further, in January 1998 the Company acquired substantially all of the
operating assets of a shipyard and fabrication facility in Marystown,
Newfoundland (the "Marystown Facility"). The Marystown Facility is expected to
be used to expand the Company's capacity for new construction as well as
retrofit and repair of offshore drilling rigs and production units. Also, in
February 1998, the Company acquired a company located near Nantes, France,
that designs and manufactures mooring, anchoring, rack-and-pinion jacking
systems and cargo handling equipment. This additional capacity is expected to
help the Company in meeting the anticipated increase in demand for such
equipment as components of new and modified offshore drilling rigs.
The addition of such facilities and capacity and the related increase in
workforce will cause a significant increase in the Company's costs due to
increased labor, lease rental and depreciation and amortization expenses.
Selling, general and administrative expense and interest expense are also
expected to increase as a result of these business growth activities.
Management expects that the increase in such costs will directly correlate to
anticipated increases in revenue from increased construction, conversion,
retrofit and repair activity. If such activity does not increase to the extent
management anticipates, the Company's gross profit, operating income and net
income could be adversely impacted by such increased costs.
At April 5, 1998, the Company had paid approximately $2.6 million,
consisting primarily of a deposit for the manufacture of certain jackup rig
components in anticipation of being awarded a contract to build one or more
new jackup rigs. The Company has plans to build such components with a total
estimated cost of approximately $12 million. As of April 5, 1998, the Company
had not been awarded any contracts for
8
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construction of new jackup rigs; however, management of the Company believes
that contracts will be secured that will utilize these components.
For the last several years, substantially all of the Company's Pascagoula,
MS work force was leased to the Company by employee leasing companies serving
the Company exclusively. All employee leasing arrangements were terminated as
of May 18, 1997, and the Company now directly employs its employees at levels
of wages and benefits substantially equivalent to those formerly provided by
the employee leasing companies. Management of the Company believes that the
costs of directly employing its laborers will be essentially the same as the
historic cost of the employee leasing arrangement most recently terminated. In
connection with the termination of employee leasing arrangements, the Company
restructured its workmen's compensation insurance arrangements and utilizes a
different carrier from that used by the employee leasing companies. Management
of the Company believes that the change in workmen's compensation insurance
arrangements and carriers will not result in costs which are significantly
different than those which would have been incurred under the previous
arrangements.
The Company generally performs conversion, retrofit and repair services
pursuant to contracts that provide for a portion of the work to be performed
on a fixed-price basis and a portion of the work to be performed on a cost-
plus basis. In addition, the scope of the services to be performed with
respect to a particular drilling rig often increases as the project progresses
due to additional retrofits or modifications requested by the customer or
additional repair work necessary to meet the safety or environmental standards
established by the Coast Guard or other regulatory authorities. With respect
to the fixed-price portions of a project, the Company receives the negotiated
contract price, subject to adjustment only for change orders placed by the
customer. As a result, under fixed price arrangements, the Company retains all
cost savings but is also responsible for all cost over-runs. Under cost-plus
arrangements, the Company receives specified amounts in excess of its direct
labor and materials cost so that it is protected against cost overruns but
does not benefit from cost savings. The cost and productivity of the Company's
labor force are primary factors affecting the Company's operating profits.
Accordingly, control by the Company of the cost and productivity of direct
labor hours worked on its projects is essential. The Company believes that the
access to information provided by its project management system allows it to
effectively manage its current projects as well as to negotiate contracts on
new projects on a profitable basis.
The Company's operations are subject to variations from quarter to quarter
and year to year resulting from fluctuations in demand for the Company's
services and, due to the large amounts of revenue that are typically derived
from a small quantity of projects, the timing of the receipt of awards for new
projects. In addition, the Company schedules projects based on the timing of
available capacity to perform the services requested and, to the extent that
there are delays in the arrival of a drilling rig or production unit into the
shipyard, the Company generally is not able to utilize the excess capacity
created by such delays. Although the Company may be able to offset the effect
of such delays through adjustments to the size of its skilled labor force on a
temporary basis, such delays may adversely affect the Company's results of
operations in any period in which such delays occur.
The Company's revenue on contracts is earned on the percentage-of-completion
method which is based upon the percentage that incurred costs to date,
excluding the costs of any purchased but uninstalled materials, bear to total
estimated costs. Accordingly, contract price and costs estimates are reviewed
periodically as the work progresses, and adjustments proportionate to the
percentage of completion are reflected in the accounting period in which the
facts that require such adjustments become known. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are identified. Other changes, including those arising from contract penalty
provisions and final contract settlements, are recognized in the period in
which the revisions are determined. To the extent that these adjustments
result in a reduction or elimination of previously reported profits, the
Company would report such a change by recognizing a charge against current
earnings, which might be significant depending on the size of the project or
the adjustment. Cost of revenue includes costs associated with the fabrication
process and can be further broken down between direct costs (such as direct
labor hours and raw materials) allocated to specific projects and indirect
costs (such as supervisory labor, utilities, welding supplies and equipment
costs) that are associated with production but are not directly related to a
specific project.
9
<PAGE>
Prior to June 15, 1997, HAM and Friede & Goldman (collectively referred to
as the "Predecessors" of the Company) had operated as S Corporations for
federal and state income tax purposes. As a result, the Predecessors paid no
federal or state income tax, and their earnings were subject to tax directly
at the stockholder level. On June 15, 1997, the stockholders of the Company
and the Predecessors terminated the S Corporation status of such entities. As
a result, the Company and each of the Predecessors became subject to corporate
level income taxation following such termination, and the Company recorded a
net deferred income tax liability through a charge to earnings of
approximately $0.8 million in the second quarter of 1997 attributable
primarily to the difference in financial reporting and tax reporting methods
of accounting for depreciation and sales-type leases.
In the past, the Predecessors made distributions to their stockholders in
order to provide a cash return to them and to fund their federal and state
income tax liability that resulted from the S Corporation status of the
Predecessors. In accordance with this practice, one of the Predecessors made
distributions prior to the completion of the Company's initial public
offering. Such amount was based on the estimated federal and state income
taxes payable by the stockholders of the Predecessors on the aggregate
undistributed earnings of the Predecessors through the date of their election
to terminate the S Corporation status of the Predecessors. In addition, in
March 1997, one of the predecessors made a distribution to its stockholders of
certain nonoperating assets that had a fair market value of approximately $1.6
million in the aggregate. One of the Predecessors also distributed to its
stockholders (i) cash of approximately $0.7 million received by such
Predecessor in June 1997 in settlement of claims for unpaid amounts related to
a project completed prior to 1997 and (ii) marketable securities having a fair
value of approximately $6.4 million. In connection with the distribution of
marketable securities, such stockholders assumed the related margin account
indebtedness of approximately $2.7 million.
RESULTS OF OPERATIONS
Comparison of the Three Month Periods Ended April 5, 1998 and March 31, 1997
During the three months ended April 5, 1998, the Company generated revenue
of $68.8 million, an increase of 267%, compared to the $18.7 million generated
for three months ended March 31, 1997. This increase was caused primarily by
an increase in demand for conversion and retrofit services and a general
increase in the size of the conversion and modification projects in 1998 as
compared to 1997.
Cost of revenue was $50.1 million for the three months ended April 5, 1998
compared to $12.8 million for the three months ended March 31, 1997, resulting
in an increase in gross profit from $5.9 million for the three months ended
March 31, 1997 to $18.6 million in the three months ended April 5, 1998. The
decrease in gross profit as a percentage of revenues can be attributed
primarily to smaller margin percentages earned by the Company on contracts
assumed upon the acquisition of the Marystown Facility. Commitments under such
contracts are expected to be completed prior to the end of 1998. In addition,
management anticipates that gross margins, as a percentage of revenues, may be
lower on significantly larger projects such as the completion or new
construction of jack up and semisubmersible drilling rigs than margins
currently being achieved on the major retrofit and conversion projects. Such
lower gross margin percentages result from a higher dollar volume of lower
margin material and subcontract costs included in contract costs, and from a
greater portion of the total project being performed on a fixed price basis.
Gross margins on repair and retrofit projects also vary based on, among other
things, the size of the project undertaken. Of the Company's $407 million
backlog at April 5, 1998, $137 million is attributable to fixed price
contracts for completion or construction of new rigs.
Selling, general and administrative expenses (SG&A expenses) were $7.6
million in the three months ended April 5, 1998 compared to $2.6 million for
the three months ended March 31, 1997. The increase in SG&A expenses reflects
an increase in sales and administrative workforce and facilities due to
overall growth of the Company's business and costs associated with acquisition
activity and being a publicly held corporation.
Operating income increased by $7.8 million from the three months ended March
31, 1997 to $11.0 million for the three months ended April 5, 1998 primarily
as a result of increased revenue and gross profit discussed in the preceding
paragraphs.
10
<PAGE>
During the three months ended March 31, 1997, the Company realized gains of
approximately $1.4 million as a result of the distribution of certain
appreciated assets not used in the business to the stockholder of one of the
Predecessors.
The provision for income taxes for the three months ended April 5, 1998
reflects a combined Federal and State income tax rate of approximately 39.6%.
Foreign taxes for the period are not material. The pro forma provision for
income taxes for the three months ended March 31, 1997 is the result of the
application of a combined federal and state tax rate of 37% to estimated
taxable income for the period prior to termination of S Corporation status
during which the Company was not subject to Federal Income Tax.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its business activities through funds
generated from operations, a credit facility secured by accounts receivable,
and long-term borrowings secured by assets purchased with proceeds from such
borrowings. Net cash provided by operations was $5.4 for the three months
ended March 31, 1997 while cash flow used in operations was $10.3 million for
the three months ended April 5, 1998. In December 1997, the Company received
cash deposits of $27.4 million related to two significant rig contracts.
During the three months ended April 5, 1998, this cash was utilized in
connection with contract activity. Also, accounts receivable and inventory
related to contracts as of April 5, 1998 have increased significantly over
amounts outstanding at December 31, 1997 due to several large projects being
in progress. As a result, cash flows provided by operations was negative for
the three months ended April 5, 1998. Net borrowings (repayments) from all
credit arrangements, excluding the MARAD arrangement discussed below, were
($3.6) million for the three months ended April 5, 1998. The Company retired
substantially all of its then outstanding debt subsequent to receipt of the
proceeds of its initial public offering.
During the three months ended April 5, 1998, the Company incurred
approximately $26.2 million in capital expenditures primarily related to the
overall expansion of the Company's business activities. Approximately $14.0
million was expended for facilities and related equipment for the new
Greenwood Island Facility and $12.2 million related to additional equipment.
In addition, approximately $25 million was expended for the acquisition of the
Company's French subsidiary. These capital expenditures were funded from 1997
operating cash flow, proceeds from the initial public offering, the MARAD
arrangement and an additional $8 million debt facility discussed below.
In March 1997, HAM entered into a new credit facility (the "Credit
Facility") which provided for borrowings of up to $10.0 million, subject to a
borrowing base limitation equal to 80% of eligible receivables. The Credit
Facility is secured by contract-related receivables. In connection with
obtaining the Credit Facility, HAM Marine repaid all outstanding indebtedness
under the provisions of the existing credit facility and such facility was
terminated. In November 1997, the borrowing capacity under the Credit Facility
was increased to $20.0 million. At April 5, 1998, there was no outstanding
balance under the Credit Facility and the borrowing base amount was $20.0
million. Borrowings under the Credit Facility bear interest equal to the
lender's prime lending rate plus 1/2% per annum. At April 5, 1998, the
interest rate under the Credit Facility was 8.1875% per annum. The Credit
Facility contains a number of restrictions, including a provision which would
prohibit the payment of dividends by HAM to the Company in the event that HAM
defaults under the terms of the facility. In addition, the Company must
maintain certain minimum net worth and working capital levels and ratios and
debt to equity ratios. The Company was not in compliance with one of the
working capital ratio provisions of the Credit Facility debt agreement;
however, the Bank waived the compliance requirement for this working capital
ratio.
As an additional source of borrowing capacity, the United States Maritine
Administration ("MARAD") has provided its guarantee for $24.8 million of bonds
issued by the Company. The proceeds from the sale of MARAD guaranteed bonds
must be used only for capital expenditures relating to the costs of
constructing and equipping the Company's new Greenwood Island Facility. In
November 1997, $24.8 million of proceeds from the MARAD arrangement were
placed in escrow for use by the Company upon completion of documentation
11
<PAGE>
that qualifying expenditures had been made. As of April 5, 1998, the Company
had received reimbursement from the escrow in the amount of $14.4 million and
had incurred costs sufficient to obtain reimbursements for the remaining $11.9
million in escrow.
During the three months ended April 5, 1998, the Company entered into an $8
million equipment financing arrangement for the purchase of a floating dry
dock. Amounts borrowed bear interest at 7.05% and are to be repaid in
quarterly installments of $500,000 plus interest through March 2002.
The Company is also in the process of arranging for the private placement of
approximately $17 million in debt securities through the Mississippi Business
Finance Corporation. The proceeds will be used to reimburse the Company for
amounts expended for equipment to be utilized at the Company's two Pascagoula,
Mississippi shipyard facilities. The Company expects placement of the
securities to be completed by the end of the second quarter of 1998.
In July 1997, the Company completed an initial public offering (the
"Offering") of 6,005,042 shares of its common stock for net proceeds of
approximately $46.7 million. Proceeds from the Offering have been used to
finance a portion of the Company's expansion of its Pascagoula shipyard, the
new Greenwood Island facility, the acquisition of the French operations and
for working capital.
Management believes that the net proceeds from the Offering, cash generated
by operating activities, and funds available under its various credit
facilities will be sufficient to fund the construction of the new shipyard,
its other capital expenditure requirements, and its working capital needs at
current levels of activity. While management of the Company has historically
been able to manage cash flow from construction contracts in such a manner as
to minimize the need for short-term contract related borrowings, additional
debt financing or equity financing may be required in the future if the
Company significantly increases its conversion, retrofit and repair business
or obtains orders to construct new drilling rigs or production units. Although
the Company believes that, under such circumstances, it would be able to
obtain additional financing, there can be no assurance that any additional
debt or equity financing will be available to the Company for these purposes
or, if available, will be available on terms satisfactory to the Company.
At April 5, 1998, the Company had incurred costs of approximately $1.3
million related to a hull for a semisubmersible drilling rig that is owned by
a third party. Such costs were incurred in anticipation of a formal
arrangement for completion of the rig. The Company is considering various
options for formal arrangements related to the hull, including completing the
rig in exchange for an equity interest in the rig, securing a contract for
completion and sale of the rig, or other options.
As noted above, the Company has experienced rapid growth during the past
year. Contract revenues increased from $18.7 million for the three months
ended March 31, 1997 to $68.8 million for the three months ended April 5,
1998. During 1997 construction was begun on the Greenwood Island Facility; the
MARAD financing arrangement was consummated; an initial public offering of
common stock was completed and the Company's backlog increased significantly.
Also, unlike prior operations, the Company has incurred costs related to
construction or fabrication of rig components for which no specific customer
has committed. In addition, in early 1998, the Company completed the
acquisition of foreign entities in Canada and France. These changes in and
significant expansion of the Company's operation, expose the Company to
additional business and operating risks and uncertainties.
YEAR 2000 COMPLIANCE
In connection with the rapid expansion of the Company's business activities,
the Company is reassessing the computer and information system needs of the
overall organization. Along with this reassessment, the Company is also
reviewing its computer-based systems and applications to ensure that its
computer and information systems will function properly at Year 2000. At this
time, management of the Company believes that the specific costs of achieving
Year 2000 compliance for its current systems will not have a material effect
on the Company's consolidated financial statements.
12
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share," which adopts a revised methodology for computing
earnings per share for publicly owned companies. The Company adopted the new
methodology in the fourth quarter of 1997. The adoption of SFAS No. 128 did
not change the Company's previously reported historical earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," which is effective
for fiscal years beginning after December 15, 1997. SFAS No. 130 will require
the company to (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital. SFAS No. 130 was adopted in the quarter ended April 5, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise and
Related Information," which is effective for periods beginning after December
15, 1997. SFAS No. 131 will require the Company to report financial and
descriptive information about its operating segments.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains "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, are forward-
looking statements. Such forward-looking statements are subject to certain
risks, uncertainties and assumptions, including (i) risks of reduced levels of
demand for the Company's products and services resulting from reduced levels
of capital expenditures of oil and gas companies relating to offshore drilling
and exploration activity and reduced levels of capital expenditures of
offshore drilling contractors, which levels of capital expenditures may be
affected by prevailing oil and natural gas prices, expectations about future
oil and natural gas prices, the cost of exploring for, producing and
delivering oil and gas, the sale and expiration dates of offshore leases in
the United States and overseas, the discovery rate of new oil and gas reserves
in offshore areas, local and international political and economic conditions,
the ability of oil and gas companies to access or generate capital sufficient
to fund capital expenditures for offshore exploration, development and
production activities, and other factors, (ii) risks related to expansion of
operations, either at its shipyards or one or more other locations, (iii)
operating risks relating to conversion, retrofit and repair of drilling rigs,
new construction of drilling rigs and production units and the design of new
drilling rigs, (iv) contract bidding risks, (v) risks related to dependence on
significant customers, (vi) risk related to the failure to realize the level
of backlog estimated by the Company due to determinations by one or more
customers to change or terminate all or portions of projects included in such
estimation of backlog and (vii) risks related to regulatory and environmental
matters. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations
will prove to have been correct.
13
<PAGE>
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Change in Interim Reporting Periods
Effective January 1, 1998, the Company adopted a 13-week quarterly reporting
period by which the fiscal year is divided into four 13-week periods ending at
the last Sunday in each period. See Note 2 to Consolidated Financial
Statements.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
11.1 Computation of Earnings per Share
27 Financial Data Schedule
</TABLE>
(b) Reports of Form 8-K
--Current Report on Form 8-K, dated as of January 16, 1998, as amended
on Form 8-K/A, dated as of March 17, 1998.
--Current Report on Form 8-K, dated as of February 18, 1998, as amended
on Form 8-K/A, dated as of April 21, 1998.
14
<PAGE>
SIGNATURES
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, in the City of Pascagoula, State of
Mississippi, on the 14th day of May, 1998.
FRIEDE GOLDMAN INTERNATIONAL INC.
/s/ Marshall Lynch
By:__________________________________
Marshall Lynch
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Exhibit 11.1
Exhibit 27
</TABLE>
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, APRIL 5,
1997 1998
---------- ----------
<S> <C> <C>
Net Income............................................... $4,557,516 $6,738,015
Basic:
Weighted average number of shares outstanding.......... 18,400,000 24,446,059
---------- ----------
Basic earnings per share............................... $ 0.25 $ 0.28
========== ==========
Diluted:
Weighted average number of shares outstanding.......... 18,400,000 25,446,059
Dilutive effects of stock options using the treasury
stock method.......................................... -- 736,710
---------- ----------
18,400,000 25,182,769
---------- ----------
Diluted earnings per share............................... $ 0.25 $ 0.27
========== ==========
Proforma net income...................................... $2,872,516
Weighted average number of shares outstanding............ 18,400,000
----------
Basic and diluted earnings per share..................... $ 0.16
==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-05-1998
<CASH> 36,647,413
<SECURITIES> 0
<RECEIVABLES> 61,692,569
<ALLOWANCES> 0
<INVENTORY> 19,633,078
<CURRENT-ASSETS> 131,737,291
<PP&E> 88,653,553
<DEPRECIATION> 0
<TOTAL-ASSETS> 258,286,371
<CURRENT-LIABILITIES> 105,560,311
<BONDS> 0
0
0
<COMMON> 244,927
<OTHER-SE> 70,034,297
<TOTAL-LIABILITY-AND-EQUITY> 258,286,371
<SALES> 68,751,285
<TOTAL-REVENUES> 68,751,285
<CGS> 50,128,962
<TOTAL-COSTS> 57,747,396
<OTHER-EXPENSES> 203,258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166,795
<INCOME-PRETAX> 11,515,641
<INCOME-TAX> 4,413,626
<INCOME-CONTINUING> 6,738,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,738,015
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.27
</TABLE>
