FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 10/04/98
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)
Mississippi 72-1362492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 East Capitol Street
Jackson, Mississippi 39201
(Address of principal executive offices) (Zip code)
(601) 352-1107
(Registrant's telephone number including area code)
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 X No __
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding (as of October 4, 1998)
Common Stock, $.01 par value 24,532,519
<PAGE>
Friede Goldman International Inc.
Table of Contents
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
<S> <C>
Item 1. Financial Statements 1
Consolidated Balance Sheets as of December 31, 1997
and October 4, 1998 1
Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 1997 and October 4, 1998 2
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 1997 and October 4, 1998 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures
</TABLE>
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FRIEDE GOLDMAN INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, Oct. 4,
1997 1998
-------------- -------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 57,038,036 $ 28,021,396
Accounts receivable 20,568,194 69,983,930
Inventory and stockpiled materials 5,216,651 25,281,868
Costs and estimated earnings in excess of billings on
uncompleted contracts - 76,044
Restricted escrowed funds 14,383,929 -
Prepaid expenses and other 607,448 7,696,441
-------------- --------------
Total current assets 97,814,258 131,059,679
Property, plant and equipment, net of accumulated
depreciation 11,816,664 127,655,612
Restricted escrowed funds 10,433,071 163,099
Construction in progress 17,934,877 3,854,039
Investment in unconsolidated subsidiary 907,957 12,825,000
Intangibles and other assets 3,648,585 12,880,559
-------------- --------------
Total assets $ 142,555,412 $ 288,437,988
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS'EQUITY
-----------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt, including current portion of long-
term debt $ 493,829 $ 5,300,978
Accounts payable 11,507,108 43,893,067
Accrued expenses 3,803,587 15,486,416
Billing in excess of costs and estimated earnings on
uncompleted contracts 36,487,735 64,191,411
-------------- --------------
Total current liabilities 52,292,259 128,871,872
Deferred income tax liability 691,000 1,619,740
Short term obligation expected to be refinanced (Note 4) - 8,830,437
Long-term debt, less current maturities 25,766,929 30,669,967
-------------- --------------
Total liabilities 78,750,188 169,992,016
-------------- --------------
Deferred government subsidy, net of accumulated
amortization - 43,286,157
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 24,532,519 shares issued
and outstanding at December 31, 1997 and October 4, 1998 244,050 245,325
Additional paid-in capital 49,501,707 50,549,542
Retained earnings 14,059,467 37,421,589
Less: Treasury Stock at cost, 1,065,100 shares at
October 4, 1998 - (14,401,579)
Foreign currency translation adjustment - 1,344,938
-------------- --------------
Total stockholders' equity 63,805,224 75,159,815
-------------- --------------
Total liabilities and stockholders' equity $ 142,555,412 $ 288,437,988
============== ==============
</TABLE>
The accompanying notes are
an integral part of these financial statements.
1
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FRIEDE GOLDMAN INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- -----------------------------
Sep. 30, Oct. 4, Sep. 30, Oct. 4,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 34,628,577 $ 92,669,670 $ 80,151,773 $ 250,017,809
Cost of revenue 23,217,829 70,751,600 52,641,716 188,572,909
------------- ------------- ------------- ---------------
Gross profit 11,410,748 21,918,070 27,510,057 61,444,900
------------- ------------- ------------- ---------------
Selling, general and administrative
expenses 2,864,549 7,682,270 8,984,604 23,506,234
------------- ------------- ------------- ---------------
Operating income 8,546,199 14,235,800 18,525,453 37,938,666
------------- ------------- ------------- ---------------
Other income (expense):
Interest expense (125,648) (576,312) (495,782) (1,315,100)
Interest income 490,930 377,689 576,049 1,752,364
Gain on sale or distribution of assets - - 3,921,973 -
Litigation settlement - - 611,310 -
Other 33,847 30,860 86,135 (512,147)
------------- ------------- ------------- ---------------
Total other income(expense) 399,129 (167,763) 4,699,685 (74,883)
------------- ------------- ------------- ---------------
Income before tax 8,945,328 14,068,037 23,225,138 37,863,783
Income tax provision 3,470,061 5,090,825 4,720,061 14,501,661
------------- ------------- ------------- ---------------
Net income $ 5,475,267 $ 8,977,212 18,505,077 23,362,122
============= =============
Pro forma income tax provision 3,980,000 -
------------- ---------------
Pro forma net income $ 14,525,077 $ 23,362,122
============= ===============
Earnings per share:
Basic $ 0.23 $ 0.37 $ 0.92 $ 0.96
============= ============= ============= ===============
Diluted $ 0.23 $ 0.37 $ 0.92 $ 0.95
============= ============= ============= ===============
Pro forma earnings per share:
Basic $ 0.72
=============
Diluted $ 0.72
=============
Weighted average shares:
Basic 23,515,569 24,077,815 20,123,928 24,342,842
============= ============= ============= ===============
Diluted 23,589,682 24,394,596 20,148,904 24,719,383
============= ============= ============= ===============
</TABLE>
The accompanying notes are
an integral part of these financial statements.
2
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FRIEDE GOLDMAN INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
Sep. 30, Oct. 4,
1997 1998
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 18,505,077 $ 23,362,122
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 978,423 3,362,229
Compensation expense related to stock
issued to employees 594,104 283,347
(Gain) loss on sale of assets (3,921,973) 261,228
Deferred income tax provision 636,000 928,740
Net increase in billings related to
costs and estimated earnings on uncompleted
contracts 3,481,591 11,443,709
Net effect of changes in assets and liabilities:
Restricted certificates of deposit 4,651,964 -
Accounts receivable (12,699,539) (29,074,270)
Inventory and stockpiled materials (1,373,000) (4,680,584)
Prepaid expenses and other assets (2,076,147) (5,401,219)
Accounts payable and accrued expenses 13,190,741 18,538,648
-------------- --------------
Net cash provided by operating activities 21,967,241 19,023,950
-------------- --------------
Cash flows from investing activities:
Capital expenditures for plant and equipment (12,136,365) (55,464,039)
Acquisition of French subsidiary - (25,285,072)
Cash acquired upon acquisition of French subsidiary - 20,553,300
Proceeds from sale of property, plant and equipment 395,521 -
Investment in unconsolidated subsidiary - (11,917,043)
Payments received on sales-type lease 417,801 112,406
-------------- --------------
Net cash used in investing activities $(11,323,043) $ (72,000,448)
-------------- --------------
</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>
Nine Months Ended
-------------------------------
Sep. 30, Oct, 4
1997 1998
------------ -------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from stock offering $ 46,766,719 $ -
Proceeds from exercise of stock options - 761,387
Net borrowings under lines of credit (1,501,000) 1,063,904
Proceeds from borrowings under debt facilities 468,203 20,093,134
Release of restricted escrowed funds - 24,653,901
Purchase of Friede Goldman International
Treasury Stock - (14,401,579)
Repayments on borrowings under debt facilities (7,897,979) (9,555,827)
Distributions to stockholders (6,672,682) -
-------------- -------------
Net cash provided by financing activities 31,163,261 22,614,920
-------------- -------------
Effect of currency translation adjustments - 1,344,938
------------- -------------
Net increase (decrease) in cash and cash equivalents 41,807,459 (29,016,640)
Cash and cash equivalents at beginning of year 1,509,876 57,038,036
-------------- -------------
Cash and cash equivalents at end of period $ 43,317,335 $ 28,021,396
============== =============
Supplemental disclosure of cash flow information--
Cash paid during the period for interest $ 521,000 $ 776,202
============== =============
Issuance of common stock as compensation $ 594,000 $ 760,991
============== =============
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 $ -
============== =============
Distribution of marketable securities to
stockholders $ 6,391,000 $ -
============== =============
Assumption of margin account debt by stockholders $ 2,749,000 $ -
============== =============
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
<PAGE>
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 Inc.
("FGO"), Friede Goldman Newfoundland Limited ("FGN"), Friede Goldman France
S.A.S. ("FGF") and World Rig Leasing, Inc. ("WRL")(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
10, 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.
Effective October 6, 1998, the Company changed its state of incorporation from
Delaware to Mississippi. This change was accomplished through the merger of the
Company into a newly formed Mississippi Corporation, Friede Goldman Mississippi,
Inc. ("FGM"). The change has no impact on the Company for accounting and
financial reporting purposes.
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
Interim statements are subject to possible adjustments in connection with the
annual audit of the Company's accounts for the full year 1998. 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 October 4, 1998 and the results of its operations for the
three-month and nine-month periods ending October 4, 1998 and September 30, 1997
and its cash flows for the nine-month periods ending October 4, 1998 and
September 30, 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 and nine-month periods ended
October 4, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
5
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 for the nine months ended September 30, 1997,
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.
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. The
following table reflects the potentially dilutive common shares for the periods
presented, all of which are attributable to stock options.
Three months ended September 30, 1997 74,113
Nine months ended September 30, 1997 24,976
Three months ended October 4, 1998 316,781
Nine months ended October 4, 1998 376,541
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.
Treasury Stock
During the three months ended October 4, 1998, the Company's Board of Directors
authorized a stock repurchase plan. Through October 4, 1998, 1,065,100 shares of
the Company's Common Stock had been repurchased for an aggregate consideration
of $14,401,579. Funds used to accomplish the Common Stock repurchase were
provided from operating cash flow and borrowings under a $15.0 million
short-term credit facility provided by an investment banking firm. As of October
4, 1998, $8.8 million was outstanding under the short-term facility. Such
borrowings are due on November 30, 1998 and bear interest at 7.5%.
6
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FRIEDE GOLDMAN INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Short-term Obligations Expected To Be Refinanced
The Company is in the process of arranging for the private placement of
approximately $18 million in debt securities through the Mississippi Business
Finance Corporation and has received a commitment from a borrower for the
purchase of the securities. The purpose of the debt securities placement is to
reimburse the Company for amounts already expended for equipment to be utilized
at the Company's two Pascagoula, Mississippi shipyard facilities. The debt
securities will bear interest at 7.9% and will be repayable over 10 years. The
Company expects placement of the securities to be completed by the end of 1998.
Management of the Company intends to utilize a portion of the proceeds from the
Mississippi Business Finance Corporation Bonds to repay short-term obligations
of approximately $8.8 million. Accordingly such obligations have been considered
long-term in the accompanying balance sheet as of October 4, 1998.
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 was 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 minimum man-hour obligation for 1998 has been met as of October 4, 1998. 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 acquired. 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$1.8 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 includes mooring, anchoring and cargo handling equipment;
rack-and-pinion jacking systems used on offshore drilling platforms; trawl and
draw net winches for fishing vessels; and hydraulic power and rack-and-pinion
steering systems used in all types of vessels. The purchase price has been
7
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FRIEDE GOLDMAN INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
preliminarily allocated to net current assets of $8.8 million and land, building
and machinery in the amount of $6.6 million and goodwill of $9.6 million.
Goodwill is being amortized over 25 years.
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:
Pro Forma Results For
The Nine Months Ended
(In thousands, except per share amount)
---------------------------------------
Sep. 30 Oct. 4
1997 1998
------------ ------------
Revenues $ 144,979 $ 253,467
Operating income 19,651 38,156
Net income 19,687 23,447
Earning per common share - Basic 0.98 0.96
Earnings per common share - Diluted 0.98 0.95
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. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
At October 4, 1998, the Company had invested approximately $12.8 million in an
unconsolidated subsidiary ("Ilion LLC") in which the Company currently owns a
50% equity interest. The Company's ownership interest in Ilion LLC may be
reduced to 30% if the other member (who is also the Company's largest customer)
of the LLC exercises its option to convert a note receivable from Ilion LLC
into equity interest . Ilion LLC owns a hull for a semi-submersible drilling rig
that requires substantial completion and outfitting. The Company and the other
member of Ilion LLC are considering various options for formal arrangements
related to the hull, including financing of its completion, securing a contract
for utilization or sale of the rig, or other options. Other than the initial
purchase of the drilling rig hull, Ilion LLC has had no significant activity as
of October 4, 1998. The Company's investment in Ilion LLC is accounted for using
the equity method.
7. CONTINGENT LIABILITIES
In September 1998, two insurance companies ("the Insurers") filed suit against
HAM and two contract labor providers and unnamed individuals alleging that the
contract labor providers were alter egos of HAM established to obtain workers'
8
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
compensation insurance at lower rates than HAM could have otherwise obtained.
The Insurers claim actual damages of approximately $2.3 million and seek
punitive damages of $4.5 million. The Company and HAM believe that the original
rates charged by the Insurers were appropriate and are vigorously defending this
action. While the ultimate outcome of this matter is uncertain, management of
the Company believes that this matter will not have a material effect on the
Company's financial position or results of operations.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
8. 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 nine-month period
ended October 4, 1998 is as follows:
Net income $23,362,122
Other comprehensive income, net of tax
Foreign currency translation 1,344,938
-----------
Comprehensive income $24,707,060
===========
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. Given the Company's historically minimal use of
these types of instruments, the Company does not expect a material impact on its
statements from adoption of SFAF No. 133.
9
<PAGE>
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 and natural gas prices, drilling
activity in the Gulf of Mexico has generally increased over the past few years.
This increase in drilling activity is generally 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 newly constructed semi-submersible
drilling rigs and for retrofitting offshore drilling rigs.
Due to increased demand for its services, the Company's backlog has increased
from $132 million at September 30, 1997 to $456 million at October 4, 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. In addition, the
Company has substantially completed construction of a state-of-the-art shipyard,
also in Pascagoula, Mississippi, that is 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") began generating revenue in the first quarter
of 1998 and became fully operational in the third quarter. Further, the Company
has increased its Pascagoula based workforce from approximately 300 employees at
December 1, 1996 to approximately 3000 thousand employees at October 4, 1998.
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 expanded 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.
Due to general declines in oil and gas prices during the first nine months of
1998, demand for shallow water offshore drilling rigs has declined and, as a
result, dayrates earned by drilling contractors have also declined. Demand for
deep water drilling rigs remains strong; however, it is possible that continued
low oil and gas prices could result in a decline in demand for such rigs and, as
a result, dayrates for deepwater rigs could also decline. Substantially all of
the contracts included in the Company's backlog at October 4, 1998 relate to
deep water drilling rigs. Some of these contracts are subject to cancellation by
the customers; however, the Company has had no indication that any of its
contracts might be cancelled.
10
<PAGE>
At October 4, 1998, the Company had paid approximately $4.3 million for the
manufacture of certain jackup rig components. Total commitments related to rig
components, including the $4.3 million already expended, are approximately $11.0
million. Management of the Company believes that contracts for new construction,
modification or repairs will be secured that will utilize these components.
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.
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
11
<PAGE>
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.
Results of Operations
Comparison of the Three Month Periods Ended October 4, 1998 and
September 30, 1997
During the three months ended October 4, 1998, the Company generated revenue of
$92.7 million, an increase of 167%, compared to the $34.6 million generated for
three months ended September 30, 1997. This increase was caused by (1) an
increase in demand for conversion and retrofit services related to deep water
offshore drilling rigs, (2) revenues of approximately $20.8 million attributable
to the completion and outfitting of an existing semi-submersible drilling rig
hull, (3) approximately $18.8 million of revenues generated by the Greenwood
Island Facility attributable to the new construction of semi-submersible
drilling rigs, and (4) revenues of approximately $26.9 million generated by the
Company's Marystown Facility and French operations.
Cost of revenue was $70.8 million for the three months ended October 4, 1998
compared to $23.2 million for the three months ended September 30, 1997,
resulting in an increase in gross profit from $11.4 million for the three months
ended September 30, 1997 to $21.9 million in the three months ended October 4,
1998. The decrease in gross profit as a percentage of revenues can be explained
as follows: (1) the new build construction of semi-submersible offshore drilling
rigs generally results in lower gross margin percentages than those generated
from repair and retrofit work, (2) the Company earned smaller margin percentages
on contracts assumed upon the acquisition of the Marystown Facility, and (3)
margin percentages earned on equipment sales from the Company's French
operations generally are less than those earned from repair and retrofit work.
Commitments under the assumed Canadian contracts are expected to be
substantially complete by the end of 1998. Management expects that gross
margins, as a percentage of revenues, may trend slightly lower as a more
significant portion of the company's total revenues is derived from the new
construction of offshore drilling rigs and from sales of equipment. Such lower
gross margin percentages result from a higher dollar volume of lower margin
material and subcontract costs included in costs of revenues, 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 $456 million backlog at
October 4, 1998, approximately $293 million is attributable to fixed price
contracts for completion or construction of new rigs.
Selling, general and administrative expenses (SG&A expenses) were $7.7 million
in the three months ended October 4, 1998 compared to $2.9 million for the three
months ended September 30, 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, the additional administrative costs associated
with international activities and costs associated with being a publicly held
corporation.
Operating income increased by $5.7 million from the three months ended September
30, 1997 to $14.2 million for the three months ended October 4, 1998 primarily
as a result of increased revenue and gross profit discussed in the preceding
paragraphs.
Interest expense for the three months ended October 4, 1998 increased to $0.6
million from $0.1 million for the three months ended September 30, 1997, as a
result of increased borrowings attributable primarily to the construction costs
of the Greenwood Island Facility and other capital expenditures. Interest income
declined slightly due to lower excess cash balances caused by capital
expenditures and the French acquisition.
12
<PAGE>
The provision for income taxes for the three months ended October 4, 1998
reflects a combined Federal and State income tax rate of approximately 36.2%.
Foreign taxes for the period are not material. The provision for income taxes
for the three months ended September 30, 1997, reflects a combined Federal and
State tax rate of 38.8%. The decline in the overall rate for the three months
ended October 4, 1998 is the result of available state income tax credits
related to increased employment levels at the Company's Pascagoula, Mississippi
locations.
Comparison of the Nine Month Periods Ended October 4, 1998 and
September 30, 1997
During the nine months ended October 4, 1998, the Company generated revenue of
$250.0 million, an increase of 212%, compared to the $80.2 million generated for
nine months ended September 30, 1997. This increase was caused by (1) an
increase in demand for conversion and retrofit services related to deep water
offshore drilling rigs, (2) revenues of approximately $51.0 million attributable
to the completion and outfitting of an existing semi-submersible drilling rig
hull, (3) approximately $28.7 million of revenues generated by the Greenwood
Island facility attributable to the new construction of semi-submersible
drilling rigs, and (4) revenues of approximately $63.4 million generated by the
Company's Marystown Facility and French operations.
Cost of revenue was $188.6 million for the nine months ended October 4, 1998
compared to $52.6 million for the nine months ended September 30, 1997,
resulting in an increase in gross profit from $27.5 million for the nine months
ended September 30, 1997 to $61.4 million in the nine months ended October 4,
1998. The decrease in gross profit as a percentage of revenues can be explained
as follows: (1) the new build construction of semi-submersible offshore drilling
rigs generally results in lower gross margin percentages than those generated
from repair and retrofit work, (2) the Company earned smaller margin percentages
on contracts assumed upon the acquisition of the Marystown Facility, and (3)
margin percentages earned on equipment sales from the Company's French
operations generally are less than those earned from repair and retrofit work.
Commitments under the assumed Canadian contracts are expected to be
substantially complete by the end of 1998. Management expects that gross
margins, as a percentage of revenues, may trend slightly lower as a more
significant portion of the Company's total revenues is derived from the new
construction of offshore drilling rigs and from sales of equipment. Such lower
gross margin percentages result from a higher dollar volume of lower margin
material and subcontract costs included in costs of revenues, 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 $456 million backlog at
October 4, 1998, approximately $293 million is attributable to fixed price
contracts for completion or construction of new rigs.
SG&A expenses were $23.5 million in the nine months ended October 4, 1998
compared to $9.0 million for the nine months ended September 30, 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, the
additional administrative costs associated with international activities and
costs associated with being a publicly held corporation.
Operating income increased by $19.4 million from the nine months ended September
30, 1997 to $37.9 million for the nine months ended October 4, 1998 primarily as
a result of increased revenue and gross profit discussed in the preceding
paragraphs.
Interest expense for the nine months ended October 4, 1998 increased to $1.3
million from $0.5 million for the nine months ended September 30, 1997, as a
result of increased borrowing attributable primarily to the construction costs
of the Greenwood Island Facility and other capital expenditures. Interest income
increased to $1.8 million for the nine months ended October 4, 1998 from $0.6
million for the nine months ended September 30, 1997 as a result of generally
high amounts of cash available for short term investment.
13
<PAGE>
During the nine months ended September 30, 1997, the Company realized gains of
approximately $3.9 million as a result of the distribution of certain
appreciated assets not used in the business to the stockholder of one of the
Predecessors. In addition, the settlement of litigation resulted in other income
of $0.6 million in the nine months ended September 30, 1997. There were no
similar items of other income in the nine months ended October 4, 1998.
The provision for income taxes for the nine months ended October 4, 1998
reflects a combined Federal and State income tax rate of approximately 38.3%.
Foreign taxes for the period are not material. The pro forma provision for
income taxes for the nine months ended September 30, 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 $22.0 and $19.0 million for the
nine months ended September 30, 1997 and October 4, 1998, respectively. Accounts
receivable and inventory related to contracts as of October 4, 1998 have
increased significantly over amounts outstanding at December 31, 1997 due to
several large projects being in progress causing the slight decline in operating
cash flow.
During the three months and nine months ended October 4, 1998, the Company
incurred approximately $10.1 million and $55.5 million, respectively, in capital
expenditures primarily related to the overall expansion of the Company's
business activities. Of the $55.5 million total for the nine months ended July
5, 1998, approximately $35.4 million was expended for facilities and related
equipment for the new Greenwood Island and $18.6 million was related to
additional equipment. $1.0 million was also expended for furniture and fixtures
and $0.5 million was related to building improvements. In addition, in February
1998, approximately $25.0 million was expended for the acquisition of the
Company's French subsidiary. These capital expenditures were funded from
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 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 November 1997, the borrowing capacity under
the Credit Facility was increased to $20.0 million. The Credit Facility expired
on June 30, 1998 however, it was extended until October 31, 1998 and the maximum
amount of potential borrowings was increased to $25 million. In October 1998,
the facility was extended until December 31, 1998. At October 4, 1998, $1.1
million was the outstanding balance under the Credit Facility and $23.9 million
was available. Borrowings under the Credit Facility bear interest equal to the
lender's prime lending rate plus 1/2% per annum. At October 4, 1998, the
interest rate under the Credit Facility was 8.14% per annum. The Credit Facility
contains a number of restrictions, including a provision that 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.
As an additional source of borrowing for expansion, the United States Maritime
Administration ("MARAD") provided its guarantee for $24.8 million of bonds
issued by the Company. The proceeds from the sale of MARAD guaranteed bonds were
used for capital expenditures relating to 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 that qualifying expenditures had been made. As
of October 4, 1998, the Company had received substantially all of the $24.8
million from escrow.
14
<PAGE>
During the nine months ended October 4, 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 being repaid in quarterly
installments of $500,000 plus interest through March 2002.
During the nine months ended October 4, 1998, the Company adopted a stock
repurchase plan under which the Company, as of October 4, 1998, has repurchased
1,065,100 shares of its Common Stock for an aggregate of approximately $14.4
million. The Company utilized a $15.0 million short-term credit facility
provided by an investment banking firm to finance a portion of the purchases. As
of October 4, 1998, approximately $8.8 million has been borrowed under the
short-term facility. Borrowings under the facility are due on November 30, 1998,
and bear interest at 7.5%. Remaining amounts used to repurchase shares of the
Company's Common Stock were provided from working capital. In addition, the
Company has entered into credit arrangement with another investment banking firm
through which borrowings of up to $5.0 million are available to repurchase
shares of the Company's Common Stock. No amounts were outstanding under that
arrangement as of October 4, 1998.
The Company is also in the process of arranging for the private placement of
approximately $18 million in debt securities through the Mississippi Business
Finance Corporation and has received a commitment from a borrower for the
purchase of the securities to reimburse the Company for amounts already expended
for equipment utilized at the Company's two Pascagoula, Mississippi shipyard
facilities. The Company expects placement of the securities to be completed by
the end of 1998. The debt securities will bear interest at 7.9% and will be
repayable over 10 years.
Management of the Company intends to utilize a portion of the proceeds from the
Mississippi Business Finance Corporation Bonds to repay short-term obligations
of approximately $8.8 million. Accordingly, such obligations have been
considered long-term in the accompanying balance sheet as of October 4, 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, and 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 Greenwood Island Facility,
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
significant additional 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 October 4, 1998, the Company had invested approximately $12.8 million in an
unconsolidated subsidiary ("Ilion LLC") in which the Company currently owns a
50% equity interest. The Company's ownership interest in Ilion LLC is expected
to be reduced to 30%. Ilion LLC owns a hull for a semi-submersible drilling rig
that requires substantial completion and outfitting. The Company and the other
member of Ilion LLC (who is also the Company's largest customer) are considering
various options for formal arrangements related to the hull, including financing
of the completion, securing a contract for utilization or sale of the rig, or
other options. The Company's investment in Ilion LLC was financed through cash
flow from operations. Other than the initial purchase of the drilling rig hull,
Ilion LLC has had no significant activity as of October 4, 1998. The Company's
investment in Ilion LLC is accounted for using the equity method.
15
<PAGE>
As noted above, the Company has experienced rapid growth during the past 18
months. During this period, construction was begun and substantially completed
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. The Company has also invested in an
equity ownership in an unconsolidated subsidiary that owns a semi-submersible
drilling rig, and, 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
The Company's management has implemented a program to identify, evaluate and
address the Company's Y2K risks to ensure that all its IT Systems and Non-IT
Systems will be able to process dates from and after January 1, 2000 without
critical systems failure. In addition to evaluating its own systems, the Company
will also assess the Y2K risks associated with its significant customers and
suppliers.
In connection with the rapid expansion of the Company's business activities, the
Company, with the assistance of third-party consultants, is reassessing the
computer and information system needs of the overall organization and
anticipates that an overall expansion and upgrade of such system will be
indicated. It is estimated that implementation of new system upgrades and
expansion will substantially occur during 1999 and 2000. Along with this
reassessment, the Company, with the assistance of third-party consultants, is
also reviewing its current computer-based systems and applications to ensure
that its computer and information systems will function properly at Year 2000.
This reassessment should be completed during the first half of 1999.
Regarding the Company's Non-IT Systems, which primarily consist of systems with
embedded technology and computer assisted design software, the Company is in the
process of completing its preliminary assessment of all date-sensitive
components. Upon completion of its assessment, the Company will replace or
modify any non-compliant Non-IT Systems as necessary.
The primary potential Y2K risk attributable to third-parties would be from a
temporary disruption in certain materials and services provided by
third-parties. As part of its assessment of the Y2K risk associated with
third-parties systems, the Company is in the process of contacting its material
suppliers and customers to determine their level of Y2K compliance. The Company
has scheduled to complete its assessment during the first half of 1999.
At this time, management of the Company believes that, while the overall costs
of its information systems expansion and upgrade may be significant, the cost to
modify or replace its existing non-compliant IT and Non-IT Systems will not be
material to its financial condition or results of operations. The costs of these
projects and the dates on which the Company plans to complete modifications and
replacements are based on managements' best estimates, the modification plans of
third-parties and other factors. There can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Based on preliminary risk assessments, the Company believes the most likely Y2K
related failure would be a temporary disruption in certain materials and
services provided by third-parties, which would not be expected to have a
material adverse effect on the Company's financial condition or results of
operations. While the Company believes the likelihood of the above occurring to
be low, the Company will develop specific contingency plans to address certain
risk areas, as needed, beginning in the first quarter of 1999. There can be no
assurance that the Company will not be materially adversely affected by Y2K
problems.
16
<PAGE>
Recently Issued Accounting Pronouncements
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 in its annual financial statements for
the year ending December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. Given the Company's historically minimal use of
these types of instruments, the Company does not expect a material impact on its
statements from adoption of SFAF No. 133.
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.
17
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Liberty Mutual Insurance Company and Employers Insurance of Wausau v. HAM
Marine, Inc., et al. (In the United States District Court for the Southern
District of Mississippi, Jackson Division, Case No. 3:98CV6111LOS). On September
18, 1998, Liberty Mutual and Employers Insurance (the "Insurers") filed suit
against HAM Marine, two contract labor providers, Petra Contractors, Inc., KT
Contractors, Inc., and fifty unnamed individuals alleging that the contract
labor providers were alter egos of HAM Marine established to obtain workers'
compensation insurance at lower rates than HAM Marine could have obtained in its
own name. The Insurers seek actual damages of $2,269,836 and punitive damages of
$4,539,672. HAM Marine has not yet filed an answer to the original complaint but
believes that the original rates charged by the Insurers were appropriate and
shall vigorously defend this action.
The Company believes that in the event the foregoing case is decided against it,
the amount of damages will not have a material adverse effect on the Company's
financial results. However, it is impossible to accurately predict the outcome
of legal proceedings, and the Company can give no assurances that the ultimate
outcome of the litigation will not have a material adverse effect on its
financial performance.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of the Stockholders of Friede Goldman International Inc. was
held on September 25, 1998. The only matter submitted for vote at the meeting
was the adoption, approval and ratification of the Agreement and Plan of Merger
between the Company and Friede Goldman Mississippi, Inc., a Mississippi
Corporation and a wholly-owned subsidiary of the Company, the purpose of which
was to change the Company's state of incorporation from Delaware to Mississippi.
The results of the voting are as follows:
For 18,741,647
Against 301,256
Abstain 18,738
Not Voted 5,431,156
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.
Proposals of Stockholders
Pursuant to the Company's Bylaws, proposals of stockholders submitted for
consideration at the Company's 1999 Annual Meeting of Stockholders (the "1999
Annual Meeting") must be delivered to the Secretary of the Company no later than
January 15, 1999 but no earlier than December 16, 1998, unless the date of the
1999 Annual Meeting has changed by more than 30 days from May 15, 1999 (the
anniversary of the date of the 1998 Annual Meeting of Stockholders (the "1998
Annual Meeting")), in which case the notice must be received at least 60 days
prior to the distribution by the Company of proxies relating to the 1999 Annual
Meeting of Stockholders. If such timely notice of a stockholder proposal is not
18
<PAGE>
given, the proposal may not be brought before the 1999 Annual Meeting. If timely
notice is given but is not accompanied by a written statement to the extent
required by applicable securities laws, the Company may exercise discretionary
voting authority over proxies with respect to such proposal if presented at the
1999 Annual Meeting.
The above deadlines do not apply to stockholder proposals to be included in the
proxy statement relating to the 1999 Annual Meeting pursuant to Rule 14a-8 of
the Securities Act of 1934, as amended ("Rule 14a-8"). As set forth in the proxy
materials relating to the 1998 Annual Meeting, such proposals must be received
by the Secretary of the Company no later than December 16, 1998 and must
otherwise comply with the requirements of Rule 14a-8.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of Earnings per Share
27 Financial Data Schedule
(b) Report of Form 8-K.
None
19
<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 Jackson, State of
Mississippi, on the 12th day of November, 1998.
FRIEDE GOLDMAN INTERNATIONAL INC.
By: /s/ JOBIE T. MELTON, JR.
---------------------------------------------
Jobie T. Melton, Jr., Chief Financial Officer
<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>
NINE MONTHS ENDED
-----------------------------------
Sep. 30, Oct.4,
1997 1998
---------------- --------------
<S> <C> <C>
Net Income $ 18,505,077 $ 23,362,122
Basic:
Weighted average number of shares outstanding 20,123,928 24,342,842
---------------- --------------
Basic earnings per share $ 0.92 $ 0.96
================ ==============
Diluted:
Weighted average number of shares outstanding 20,123,928 24,342,842
Dilutive effects of stock options using the
Treasury stock method 24,976 376,541
---------------- ---------------
20,148,904 24,719,383
---------------- ---------------
Diluted earnings per share $ 0.92 $ 0.95
================ ===============
Proforma net income $ 14,525,077
Basic:
Weighted average number of shares outstanding 20,123,928
----------------
Basic earnings per share $ 0.72
================
Diluted:
Weighted average number of shares outstanding 20,123,928
Dilutive effects of stock options using the
Treasury stock method 24,976
---------------
20,148,904
---------------
Diluted earnings per share $ 0.72
===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Oct-04-1998
<EXCHANGE-RATE> 1.000
<CASH> 28,021,396
<SECURITIES> 0
<RECEIVABLES> 69,983,930
<ALLOWANCES> 0
<INVENTORY> 25,281,868
<CURRENT-ASSETS> 131,059,679
<PP&E> 127,655,612
<DEPRECIATION> 4,672,776
<TOTAL-ASSETS> 288,437,988
<CURRENT-LIABILITIES> 128,871,872
<BONDS> 39,500,404
0
0
<COMMON> 245,325
<OTHER-SE> 74,914,490
<TOTAL-LIABILITY-AND-EQUITY> 288,437,988
<SALES> 250,017,809
<TOTAL-REVENUES> 250,017,809
<CGS> 188,572,909
<TOTAL-COSTS> 212,079,143
<OTHER-EXPENSES> 512,147
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,315,100
<INCOME-PRETAX> 37,863,783
<INCOME-TAX> 14,501,661
<INCOME-CONTINUING> 23,362,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,362,122
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.95
</TABLE>
