FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- -----
ACT OF 1934
For the quarterly period ended 3/31/99
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 issuer's classes of
common stock, as of the latest practicable date.
Title Outstanding (as of March 31, 1999)
Common Stock, $.01 par value 23,356,468
<PAGE>
Friede Goldman International Inc.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements 1
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 1
Consolidated Statements of Operations for the three-month
periods ended April 5, 1998 and March 31, 1999 2
Consolidated Statements of Cash Flows for the three-month
periods ended April 5, 1998 and March 31, 1999 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
Signatures
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
--------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,796,320 $ 24,159,627
Accounts receivable 52,956,309 58,801,162
Inventory and stockpiled materials 34,191,727 32,515,188
Costs and estimated earnings in excess of billings on
uncompleted contracts 14,397,714 28,080,893
Prepaid expenses and other 2,535,947 3,008,359
Current deferred tax asset 2,246,084 2,998,168
--------------- --------------
Total current assets 149,124,101 149,563,397
Investment in unconsolidated subsidiary 12,825,000 12,825,000
Property, plant and equipment, net of accumulated
depreciation 138,108,264 137,624,508
Construction in progress 969,978 2,863,062
Goodwill and other assets net of accumulated amortization 13,532,760 12,088,004
--------------- --------------
Total assets $ 314,560,103 $ 314,963,971
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Short-term debt, including current portion of
long-term debt $ 16,129,380 $ 19,973,386
Accounts payable 62,968,178 55,934,976
Accrued expenses 16,640,068 20,375,403
Billings in excess of costs and estimated earnings
on uncompleted contracts 47,527,884 39,417,094
--------------- --------------
Total current liabilities 143,265,510 135,700,859
Deferred income tax liabilities 6,794,177 7,449,721
Long-term debt, less current maturities 45,862,732 44,095,202
--------------- --------------
Total Liabilities 195,922,419 187,245,782
--------------- --------------
Deferred government subsidy, net of accumulated
amortization 33,347,604 33,300,458
Commitments and contingencies
Stockholders' Equity:
Common stock; par value $0.01; 125,000,000 shares
authorized; 24,535,168 and 23,356,468 shares
issued and outstanding at December 31, 1998, and
March 31, 1999, respectively 245,351 233,564
Additional paid-in capital 50,928,526 35,281,468
Retained earnings 49,345,947 59,353,273
Less: Treasury stock at cost, 1,188,900 shares at
December 31, 1998 (15,827,557) -
Accumulated other comprehensive income 597,813 (450,574)
--------------- --------------
Total stockholders' equity 85,290,080 94,417,731
--------------- --------------
Total liabilities and stockholders' equity $ 314,560,103 $ 314,963,971
=============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
1
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
April 5, March 31,
1998 1999
--------------- --------------
<S> <C> <C>
Revenue $ 68,751,285 $145,156,392
Cost of revenue 50,128,962 119,233,004
--------------- --------------
Gross profit 18,622,323 25,923,388
--------------- --------------
Selling, general, and administrative
expenses 7,618,434 9,914,823
--------------- --------------
Operating income 11,003,889 16,008,565
--------------- --------------
Other income/(expense)
Interest expense (166,795) (1,076,647)
Interest income 517,805 281,576
Gain on sale or distribution of
assets - 37,318
Other (203,258) (40,070)
--------------- --------------
Total other income/(expense) 147,752 (797,823)
--------------- --------------
Income before income taxes 11,151,641 15,210,742
Income tax provision (4,413,626) (5,203,416)
--------------- --------------
Net income $ 6,738,015 $ 10,007,326
=============== ==============
Earnings per share
Basic $ 0.28 $ 0.43
=============== ==============
Diluted $ 0.27 $ 0.43
=============== ==============
Weighted average shares
Basic 24,446,059 23,346,617
=============== ==============
Diluted 25,182,769 23,539,388
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
April 5, March 31,
1998 1999
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,738,015 $ 10,007,326
Adjustments to reconcile net income to net
cash used in operation activities:
Depreciation and amortization 601,259 1,608,654
Compensation expense related to stock
issued to employees 161,775 48,612
Gain on sale or distribution of assets - (37,318)
Deferred income tax provision - 167,779
Net decrease in billings in excess of cost
and estimated earnings on uncompleted
contracts (1,132,055) (7,332,337)
Net increase related to costs and estimated
earnings in excess of billings on
uncompleted contracts - (14,069,969)
Net effect of changes in assets and liabilities:
Accounts receivable (20,576,445) (6,269,718)
Inventory and stockpiled materials (106,803) 914,246
Prepaid expenses and other assets (2,502,020) 133,904
Accounts payable and accrued expenses 6,531,676 (1,645,978)
-------------- ---------------
Net cash used in operating activities (10,284,598) (16,474,799)
-------------- ---------------
Cash flows from investing activities:
Capital expenditures for plant and equipment (26,244,675) (3,660,841)
Acquisition of French subsidiary (25,065,000) -
Cash acquired upon acquisition of French
holding company 18,771,517 -
Payments received on sales-type lease 49,592 -
-------------- ---------------
Net cash used in investing activities $ (32,488,566) $ (3,660,841)
-------------- ---------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
April 5, March 31,
1998 1999
------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock $ 430,666 $ -
Proceeds from exercise of stock options - 120,156
Net borrowings under lines of credit - 3,286,575
Proceeds from borrowing under debt facilities 20,808,331 1,931,007
Repayments on borrowing under debt facilities - (2,951,001)
------------- --------------
Net cash provided by financing activities 21,238,997 2,386,737
------------- --------------
Effect of currency translation adjustments (856,456) (887,790)
------------- --------------
Net decrease in cash and cash equivalents (22,390,623) (18,636,693)
Cash and cash equivalents at beginning of year 57,038,036 42,796,320
------------- --------------
Cash and cash equivalents at end of period $ 34,647,413 $ 24,159,627
============= ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 138,326 $ 1,301,693
============= ==============
Cash paid during the period for income taxes $ - $ 1,429,350
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Friede Goldman International Inc. and
subsidiaries (the "Company") should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
2. QUARTERLY FINANCIAL INFORMATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim reporting
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all disclosures required by generally accepted
accounting principles for complete financial statements. The consolidated
financial information has not been audited but, in the opinion of management,
includes all adjustments required (consisting of normal recurring adjustments)
for a fair presentation of the consolidated balance sheets, statements of
income, and statements of cash flows at the dates and for the periods indicated.
Results of operations for the interim periods are not necessarily indicative of
results of operations for the respective full years.
During the fourth quarter of 1998, the Company finalized the accounting for the
acquisition of FGN and completed the determination of the fair value of the
construction contracts that were in progress at the date of acquisition. The
determination resulted in the Company's recognizing revenue and net income and
basic income per share of approximately $0.7 million and $0.5 million and $0.02
per share, respectively, in the quarter ended December 31, 1998, that were more
properly attributable to the first quarter of 1998.
3. CHANGE IN INTERIM REPORTING PERIODS
Effective January 1, 1999, the Company adopted a policy whereby calendar
quarters (March 31, June 30, and September 30) will be used for interim
reporting purposes. This change was made to provide more direct comparability
with other publicly traded entities.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Earnings Per Share
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 periods
ending April 5, 1998 and March 31, 1999 were 736,710 and 192,771, respectively.
Options to purchase 50,168 and 352,152 shares of common stock were outstanding
as of April 5, 1998 and March 31, 1999, respectively, which were not included in
the computation of diluted EPS because the options are antidiluted.
5
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Foreign Currency Translation
The financial statements of subsidiaries outside the United States, (FGN and
FGF, 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 1998, the Company's Board of Directors authorized a stock repurchase
plan. Through January 31, 1999, 1,188,900 shares of the Company's Common Stock
had been repurchased for an aggregate consideration of $15.8 million. All shares
of treasury stock were retired during February 1999.
5. ACQUISITIONS
Acquisition of Friede Goldman Newfoundland
In January 1998, the Company purchased, through its wholly owned subsidiary,
Friede Goldman Newfoundland, Inc. ("FGN"), 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 C$1 (one dollar).
However, the Share Purchase Agreement also provides that, among other things,
the Company must (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. The Share Purchase Agreement
provides that the Company will pay to the Seller liquidated damages of C$10
million (approximately $7 million) in 1998 and C$5 million (approximately $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 requirement for
1998 was met. Pursuant to these provisions of the Share Purchase Agreement, the
Company has expended $5.5 million for capital improvements of the shipyard
facilities. The sellers' share of net income for the twelve months ended March
31, 1998, is immaterial. The net assets acquired have been recorded at their
fair market values and, at the acquisition date, included $47.7 million in fixed
assets, $1.8 million in net working capital, a deferred credit recorded to
reflect the fair value of the construction contracts that were in progress at
the date of the acquisition in the amount of $10.7 million, along with $1.6
million in deferred taxes related to each of these items at the acquisition
date. The difference between the fair value of the acquired net assets and the
C$1 consideration was recorded as a deferred government subsidy which is being
amortized over the lives of the assets acquired, which is approximately 17
years. Accumulated amortization of the deferred subsidy as of March 31, 1999,
was $2.9 million. Amortization of the subsidy is recorded in the statement of
operations as a reduction to cost of revenues and represents a reduction in
depreciation and amortization in the statement of cash flows for the three month
periods ended April 5, 1998 and March 31, 1999.
6
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Acquisition of Friede Goldman France S.A.S.
Effective February 5, 1998, the Company, through its wholly-owned subsidiary,
Friede Goldman France, Inc. ("FGF"), a French entity, acquired all of the issued
and outstanding shares of a French holding company and its French subsidiaries,
for a cash payment of approximately $25.0 million. The purchase price has been
allocated to land, building and machinery in the amount of $11.8 million,
goodwill of $5.7 million (amortized over 25 years), and other assets net of
liabilities in the amount of $7.5 million.
The following summarized income statement data reflects the impact which the
acquisition of FGF would have had on the Company's results of operations had the
transactions taken place as of the beginning of the period ended April 5, 1998:
Pro Forma Results For
The Three Months Ended April 5, 1998
(In thousands, except per share amount)
---------------------------------------
Revenues $ 72,143
Operating income 11,791
Net income 6,778
Earning per common share - Basic $ 0.28
Earnings per common share - Diluted $ 0.27
6. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
At March 31, 1999, 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 a significant customer of the
Company)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 March 31, 1999. Equity in earnings of the
unconsolidated subsidiary was not significant during the period.
7. CONTINGENT LIABILITIES
On September 18, 1998, Liberty Mutual and Employers Insurance of Wausau (the
"Insurers") filed suit against a subsidiary of the Company, FGO (formerly HAM
Marine, Inc.), two contract labor providers, Petra Contractors, Inc., KT
Contractors, Inc., and 50 unnamed individuals in an action styled Liberty Mutual
Insurance Company and Employers Insurance of Wausau v. HAM Marine, Inc., et al.
7
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(in the United States District Court for the Southern District of Mississippi,
Jackson Division, Case No. 3:98cv6111LOS). Insurers allege that the contract
labor providers were alter egos of FGO established to obtain workers'
compensation insurance at lower rates than FGO could have obtained in its own
name. The Insurers seek actual damages of $2,269,836 and punitive damages of
$4,539,672. FGO believes that the original rates charged by the Insurers were
appropriate and is vigorously defending this action.
On January 11, 1999, FGO was served with a summons by Hyundai Heavy Industries
Co. Limited ("Hyundai") in an action styled Hyundai Heavy Industries Co. Limited
v. Ocean Rig ASA and HAM Marine, Inc. (in the High Court of Justice, Queen's
Bench Division, Commercial Court, 1009 Folio No. 67). Hyundai alleges that FGO
tortuously interfered with Hyundai's contract (the "Hyundai Contract") with
Ocean Rig ASA ("Ocean Rig") to complete one oil and gas drilling rig for
$149,913,000. The Hyundai contract was signed on October 22, 1997, but was
subject to approval by the Ocean Rig Board of Directors on December 18, 1997.
The contract contained a "no shop" clause prohibiting Ocean Rig from negotiating
with any other party for the work on this one vessel while the contract was in
effect. After the Hyundai Contract was signed, but before it was considered by
the Ocean Rig Board of Directors, FGO actively pursued a contract from Ocean Rig
for the completion of three other drilling vessels. Ultimately, the Ocean Rig
Board of Directors did not approve the Hyundai contract and, thereafter, FGO
received a contract to complete two drilling vessels for Ocean Rig and an option
to complete two more. Hyundai alleges that FGO tortuously interfered with the
Hyundai Contract in order to obtain a contract from Ocean Rig for the completion
of the first drilling vessel. FGO denies all of Ocean Rig's allegations and is
vigorously defending the action. The total potential exposure to FGO is
approximately $15 million or 10 percent of the Hyundai Contract.
The Company is a party to various other routine legal proceedings primarily
involving commercial claims and workers' compensation claims. While the outcome
of these claims and legal proceedings cannot be predicted with certainty,
management believes that the outcome of all such proceedings, even if determined
adversely, would not have a material adverse effect on the Company's business or
financial condition.
In connection with the construction of the FGO East Facility, the County of
Jackson, Mississippi, agreed to dredge the ship channel and build roads and
other infrastructure under an economic incentive program. The terms of the
economic incentive program require that the Company maintains a minimum
employment level of 400 jobs through the FGO East Facility during the primary
term of the FGO East Facility's 20-year lease. If the Company fails to maintain
the minimum employment level, the Company could be required to pay the remaining
balance of the $6 million loan incurred by the county to finance such
improvements.
8
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
8. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," as of January 1, 1998. Other comprehensive
income includes foreign currency translation adjustments. Total comprehensive
income was as follows:
April 5, March 31,
1998 1999
------------ ------------
Net income $ 6,738,015 $10,007,326
Other comprehensive income
Foreign currency translation (856,456) (450,574)
------------ ------------
Comprehensive income $ 5,881,559 $ 9,556,752
============ ============
9. NEW ACCOUNTING PRONOUNCEMENTS
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 SFAS No. 133.
10. BUSINESS SEGMENTS
The Company adopted Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
with the year end of 1998. The Company operates two business segments, "offshore
drilling rig construction" and "equipment manufacturing." The offshore drilling
rig construction segment includes the Gulf Coast construction yards of FGO and
the Canadian yard of FGN. The equipment manufacturing segment represents the
Company's French operations, FGF. The segment data presented for the quarters
ending April 5, 1998 and March 31, 1999, below were prepared on the same basis
as the Company's consolidated financial statements.
9
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
(In thousands of dollars)
Offshore
Drilling Rigs Equipment Intersegment
Construction Manufacturing Other Eliminations Total
------------- ------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED
APRIL 5, 1998
Revenues $ 59,268 $ 9,215 $ 784 $ (516) $ 68,751
Operating income 13,079 561 (2,636) - 11,004
Total assets 178,634 59,811 72,760 (52,919) 258,286
QUARTER ENDED
MARCH 31, 1999
Revenues $130,394 $ 14,004 $ 1,519 $ (761) $145,156
Operating Income 18,948 1,200 (4,067) (72) 16,009
Total assets 249,244 57,977 70,206 (62,463) 314,964
</TABLE>
10
<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 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.
During 1997 and early 1998, relatively high and stable oil and gas prices, among
other things, resulted in a significant increase in offshore drilling activity.
In addition to relatively high prices, this level of drilling activity is
generally attributed to a number of 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 resulted in increased demand for newly
constructed semisubmersible drilling rigs and for retrofitting offshore drilling
rigs. During this period of high activity, the Company added several major
projects to its backlog. Those projects have generated significant revenues for
the Company through March 31, 1999, and many of such projects remain in the
Company's backlog as of March 31, 1999.
During the second half of 1998, oil and gas prices declined rapidly, and the
utilization rates for mobile offshore drilling units declined also. According to
Offshore Data Services, Inc., as of April 30, 1999, the worldwide utilization
rate for mobile offshore drilling units was 74.1% compared to 95.4% a year
earlier. Despite this overall decline in utilization rates and, the resulting
decline in orders for new offshore drilling rigs and retrofit or conversions of
existing offshore drilling rigs, the Company has maintained its backlog at
approximately $407 million as of March 31, 1999. Substantially all of this
backlog consists of projects related 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.
The backlog amount includes a $143.2 million contract for the new construction
of a Friede & Goldman, Ltd. designed Millennium S.A. semisubmersible offshore
drilling rig that is subject to the owner's securing rig financing. Such
financing is expected to be secured in the second quarter of 1999.
To accommodate the increased demand which occurred during 1997 and 1998, the
Company leased additional acreage adjacent to its existing shipyard in
Pascagoula, Mississippi, that provides it with additional dock space and covered
fabrication capacity. In addition, the Company has 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
11
<PAGE>
production units. The new 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 1,500 employees
at April 5, 1998, to approximately 4,450 employees at March 31, 1999.
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 has helped the Company meet the increase in demand by providing
equipment and components for new and modified offshore drilling rigs.
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.
Accordingly, revenues may decline in the remaining quarters of 1999 depending on
the Company's ability to replace completed 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
12
<PAGE>
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.
Results of Operations
Comparison of the Three Month Periods Ended March 31, 1999 and April 5, 1998
During the three months ended March 31,1999, the Company generated revenue of
$145.2 million, an increase of 111.1%, compared to the $68.8 million generated
for three months ended April, 5, 1998. The following table sets forth revenues
attributable to new rig construction, conversion/retrofit of rigs, shipbuilding
and ship and rig repair, equipment manufacturing and other activities for the
quarters ended March 31, 1999 and April 5, 1998.
(In thousands of dollars)
Three Months Ended
March 31, April 5,
1999 1998
------------ ------------
New rig construction $ 87,725 $ 4,424
Conversion/retrofit of rigs 37,287 44,481
Shipbuilding and ship and rig repair 5,382 10,363
Equipment manufacturing 14,004 9,215
Other 1,519 784
Intersegment eliminations (761) (516)
------------ -----------
Total revenues $ 145,156 $68,751
============ ===========
Revenues from new rig construction for the three months ended March 31, 1999,
relate to contracts for completion and outfitting of three new semisubmersible
drillings rigs. During the three months ended April 5, 1998, work had just
commenced on two contracts for outfitting new semisubmersibles. Revenues from
conversion/retrofit of rigs declined in the first quarter of 1999 compared to
1998 primarily as the result of some of the projects nearing completion. As of
March 31, 1999, the Company had conversion/retrofit projects in progress on four
rigs. Two of the rigs are expected to be delivered in the second quarter of
1999. As of April 5, 1998, five such projects were in progress. Shipbuilding and
ship and rig repair revenue relates primarily to shipbuilding and repair
projects in the Company's Marystown Facility and miscellaneous rig repair work
in Pascagoula. When the Company acquired the Marystown Facility three
shipbuilding projects were in progress. Two of the ships were completed and
delivered in 1998; the final ship is expected to be completed and delivered in
the second quarter of 1999. Equipment manufacturing revenues increased because
the three months ended March 31, 1999 include a full three months activity. The
French equipment company was acquired on February 5, 1998 and accordingly, the
three months ended April 5, 1998, include only two months activity.
13
<PAGE>
Cost of revenue was $119.2 million for the three months ended March 31,
1999, compared to $50.1 million for the three months ended April 5,1998,
resulting in an increase in gross profit from $18.6 million for the three months
ended April 5, 1998, to $25.9 million in the three months ended March 31, 1999.
The gross margin percentage earned by the Company for the quarter ended March
31, 1999, was approximately 18% compared to 27% for the same period of 1998.
This decline is primarily the result of the significantly higher portion of the
Company's revenues for the quarter ended March 31, 1999, attributable to the new
construction of offshore drilling rigs compared to the quarter ended April 5,
1998. Gross margins on the new construction of offshore drilling rigs are
typically lower than margins earned on retrofit/conversion projects. 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 were also impacted to a lesser degree by the Company's need to use more
costly subcontract workers rather than its own employees for certain projects in
order to meet contract delivery requirements. During the quarter ended April 5,
1998, approximately 80% of the Company's revenues were attributable to retrofit
and conversion of existing offshore drilling rigs. Gross margins on retrofit and
conversion projects typically are higher than margins earned on new build
projects because a higher percentage of the costs incurred is labor related and
a smaller percentage of the total project is 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. Management expected that gross
margins, as a percentage of revenues, would trend slightly lower as a more
significant portion of the Company's total revenues is derived from the new
construction of offshore drilling rigs. Of the Company's $407 million backlog at
March 31, 1999, approximately $303 million is attributable to fixed price
contracts for completion or construction of new rigs.
Selling, general and administrative expenses (SG&A expenses) were $9.9 million
in the three months ended March 31, 1999, compared to $7.6 million for the three
months ended April 5, 1998. 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 the additional administrative costs associated with
international activities. As a percentage of revenues, SG&A expenses declined to
6.8% for the three months ended March 31, 1999, compared to 11.1% for the three
months ended April 5, 1998.
Operating income increased by $5.0 million from the three months ended April 5,
1998, to $16.0 million for the three months ended March 31, 1999, primarily as a
result of increased revenue and gross profit discussed in the preceding
paragraphs.
Interest expense for the three months ended March 31, 1999, increased to $1.1
million from $0.2 million for the three months ended April 5, 1998, as a result
of increased borrowings attributable primarily to the construction costs and
related equipment for the new shipyard in Pascagoula, Mississippi. Interest
income declined due to lower excess cash balances.
The provision for income taxes for the three months ended March 31, 1999,
reflects a combined Federal and State income tax rate of approximately 34.2%.
The provision for income taxes for the three months ended April 5, 1998 reflects
a combined Federal and State tax rate of 39.6%. Foreign taxes included in the
provision for income taxes for the three months ended March 31, 1999, were
approximately $0.8 million. Foreign taxes for the three months ended April 5,
1998, were not material. The reduction in the effective income tax rate is
attributable to state income tax credits related to increased employment levels
and equipment financing and U.S. rate reductions related to revenues generated
by the Company's foreign sales corporation subsidiary.
14
<PAGE>
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 used in operations was $10.3 and $16.5 million for the
three months ended April 5, 1998, and March 31,1999, respectively. The timing of
cash payments on contracts was the primary contributor to the decline in the
cash balance for the three months ended March 31, 1999. A significant progress
payment on one of the Company's new rig construction contracts was received
during the second week of April, 1999. As a result, costs in excess of billings
on uncompleted contracts as of March 31, 1999, increased $14.1 million. While
cash balances declined, working capital increased approximately $8.0 million
during the quarter ended March 31, 1999. This increase is the result of earnings
during the quarter and the relatively low level of capital expenditures for the
quarter compared to calendar year 1998.
During the three months ended March 31, 1999, the Company incurred approximately
$3.7 million in capital expenditures primarily related to shipyard equipment and
computer needs related to continued growth of the Company's business.
FGO has a credit facility (the "Credit Facility") with a bank that provides for
accounts receivable and contract related inventory based borrowings of up to $25
million at prime plus 1/2% (7.44% at March 31, 1999). These borrowings are
secured by accounts receivable and inventory. A balance of $12.6 million was
outstanding at March 31, 1999, and an additional $12.4 million was available.
The Credit Facility expired on May 3, 1999, however, the bank has agreed to
extend the Credit Facility until August, 1999. The Credit Facility contains a
number of restrictions, including a provision that would prohibit the payment of
dividends by FGO to the Company in the event that FGO defaults under the terms
of the facility. The Credit Facility requires that the Company maintain certain
minimum net worth and working capital levels and ratios and debt to equity
ratios. At March 31, 1999, the bank waived certain of the working capital ratio
covenants.
In December 1997, the Company issued bonds under Title XI that are guaranteed by
the MARAD to partially finance construction of the Company's FGO East Facility.
The bonds bear interest at a rate of 6.35% and are payable over 15 years in
semi-annual installments. The financing agreement includes several restrictive
financial and non-financial covenants, the violation of which would carry
monetary penalties.
In 1998, the Company borrowed $8.0 million from GE Capital Corporation for the
financing of the purchase of certain equipment used in the Company's Pascagoula,
Mississippi facilities. The loan, which is secured by the purchased equipment,
bears interest at 7.05% and is repayable in quarterly installments of $500,000,
plus interest through 2002.
In December 1998, the Company issued $18 million of 7.99% taxable revenue bonds
through the Mississippi Business Finance Corporation to finance the purchase of
equipment used primarily at the FGO East Facility. The Bonds are repayable in
monthly installments of approximately $219,000, including interest for 10 years.
The Bonds are secured by the purchased equipment. The Company received certain
state sales, use and income tax incentives related to the bonds.
15
<PAGE>
During 1998, the Company's Board of Directors authorized a stock repurchase
plan. Through December 31, 1998, 1,188,900 shares of the Company's Common Stock
had been repurchased for an aggregate consideration of $15.8 million. No
repurchases have been made during 1999, and all shares of treasury stock were
retired during February 1999.
Management believes that the cash generated by operating activities, and funds
available under its credit facilities will be sufficient to fund its 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 March 31, 1999, the Company had paid approximately $7.6 million for the
manufacture of certain jackup rig components. Total commitments related to rig
components, including the $7.6 million already expended, are approximately $11.3
million. Management of the Company believes that contracts for new construction,
modification or repairs will be secured that will utilize these components.
At March 31, 1999, 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 a significant customer of the Company) 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 March 31,
1998. The Company's investment in Ilion LLC is accounted for using the equity
method.
As noted above, the Company has experienced rapid growth during the past two
years. During this period, construction was begun and substantially completed on
a new shipyard; 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
Many software applications, hardware and equipment and embedded chip systems
identify dates using only the last two digits of the year. These products may be
unable to distinguish between dates in the Year 2000 and dates in the year 1900.
That inability, if not addressed, could cause applications, equipment or systems
16
<PAGE>
to fail or provide incorrect information after December 31, 1999, or when using
dates after December 31, 1999. This in turn could have an adverse effect on the
Company, due to the Company's direct dependence on its own applications,
equipment and systems and indirect dependence on those of other entities with
which the Company must interact.
COMPLIANCE PROGRAM. In order to address the Y2K issue, the Company has
implemented a Y2K compliance plan to coordinate the five phases of Y2K
remediation. Those phases include:(1) awareness,(2) assessment,(3) remediation,
(4) testing and (5) implementation of necessary modifications. The Company has
made all applicable levels of its organization aware of the Y2K issue and of the
Company's plans to assure Y2K compliance.
In connection with the rapid expansion of the Company's business activities, the
Company, with the assistance of third-party consultants, has conducted an
overall assessment of its computer and information systems needs. As a result of
such assessment, the Company has begun implementation of an expanded and
upgraded information system. The new system, which will be Y2K compliant,
includes upgraded software and hardware and will involve the outsourcing of
certain data processing functions. Implementation of the new system is scheduled
to be substantially complete for the Company's domestic operations during the
third quarter of 1999. As part of the implementation process, the new system
will be tested for Y2K compliance. Implementation of the system's applications
at the Company's international locations will follow the domestic
implementation, but will not be complete prior to the year 2000.
With respect to the Company's domestic non-financial systems applications, and
its international financial and non-financial systems, the Company has initiated
a review and testing program to assess the Y2K compliance of the systems
currently in place. Such review will determine the nature and impact of the year
2000 issue for hardware and equipment, embedded chip systems, and third-party
developed software. The review involves, among other things, obtaining
representations and assurances from third parties, including third party
vendors, that their hardware and equipment, embedded chip systems, and software
being used by or impacting the Company are or will be modified to be Y2K
compliant.
The Company's Non-IT Systems primarily consist of equipment 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.
COMPANY'S STATE OF READINESS. As noted above, the Company expects that
implementation of its new information systems at its domestic locations will be
complete before the end of the third quarter of 1999. Nevertheless, the Company
is currently testing its existing domestic information systems for Y2K
compliance and expects to have such testing completed by the end of the second
quarter of 1999. The review of Y2K compliance at international locations and for
domestic non-financial applications is underway. As previously noted, the review
involves soliciting responses from third parties concerning Y2K compliance of
the products. To date, the responses from such third parties are inconclusive.
As a result, management cannot predict the potential consequences if these or
other third parties are not Y2K compliant. Management expects that the review,
testing, and any required remediation will be completed by the end of the third
quarter of 1999.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE ISSUES. The costs of acquiring and
implementing the Company's expanded and upgraded information system are not
directly attributable to achieving Y2K Compliance, rather, such costs are a
direct result of the Company's growth. While these costs are expected to be
17
<PAGE>
significant in the aggregate, the most significant portion is being financed
through a five-year operating lease. Annual lease payments are expected to total
approximately $1.4 million. Costs incurred to date and expected to be incurred
with respect to review, testing and remediation of international financial and
non-financial systems and domestics non-financial systems are not anticipated to
be significant.
RISKS OF NON-COMPLIANCE AND CONTINGENCY PLANS. The major applications that pose
the greatest threat to the Company if the Y2K compliance program is not
successful are the Company's financial systems, including project management
systems and payroll. A failure of such systems could result in an inability to
determine the status of construction projects or to disburse payroll to the
Company's workforce on a timely basis or to perform its other financial and
accounting functions. Failure of embedded technology could result in the
temporary unavailability of equipment and disruption of construction projects.
The primary potential Y2K risk attributable to third parties would be from a
temporary disruption in certain materials and services provided by such third
parties.
The goal of the Y2K project is to ensure that all of the Company's critical
systems and processes remain functional. However, because certain systems and
processes may be interrelated with systems outside of the control of the
Company, there can be no assurance that all implementations will be successful.
Accordingly, as part of the Y2K project, contingency and business plans are
being developed to respond to any failures as they may occur. Such contingency
and business plans are scheduled to be completed by mid-year 1999. Management
does not expect the costs to the Company of the Y2K project to have a material
adverse effect on the Company's financial position, results of operations or
cash flows. Based on information available at this time, however, the Company
cannot conclude that any failure of the Company or third-parties to achieve Y2K
compliance will not adversely affect the Company.
Recently Issued Accounting Pronouncements
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
18
<PAGE>
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.
The Company's market risk disclosures set forth in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 have not changed
significantly through the period ended March 31, 1999.
Part II. Other Information
Item 1. Legal Proceedings
On September 18, 1998, Liberty Mutual and Employers Insurance of Wausau (the
"Insurers") filed suit against a subsidiary of the Company, FGO (formerly HAM
Marine, Inc.), two contract labor providers, Petra Contractors, Inc., KT
Contractors, Inc., and 50 unnamed individuals in an action styled 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). Insurers allege that the contract
labor providers were alter egos of FGO established to obtain workers'
compensation insurance at lower rates than FGO could have obtained in its own
name. The Insurers seek actual damages of $2,269,836 and punitive damages of
$4,539,672. FGO believes that the original rates charged by the Insurers were
appropriate and is vigorously defending this action.
On January 11, 1999, FGO was served with a summons by Hyundai Heavy Industries
Co. Limited ("Hyundai") in an action styled Hyundai Heavy Industries Co. Limited
v. Ocean Rig ASA and HAM Marine, Inc. (in the High Court of Justice, Queen's
Bench Division, Commercial Court, 1009 Folio No. 67). Hyundai alleges that FGO
tortuously interfered with Hyundai's contract (the "Hyundai Contract") with
Ocean Rig ASA ("Ocean Rig") to complete one oil and gas drilling rig for
$149,913,000. The Hyundai contract was signed on October 22, 1997, but was
subject to approval by the Ocean Rig Board of Directors on December 18, 1997.
The contract contained a "no shop" clause prohibiting Ocean Rig from negotiating
with any other party for the work on this one vessel while the contract was in
effect. After the Hyundai Contract was signed, but before it was considered by
the Ocean Rig Board of Directors, FGO actively pursued a contract from Ocean Rig
for the completion of three other drilling vessels. Ultimately, the Ocean Rig
Board of Directors did not approve the Hyundai contract and, thereafter, FGO
received a contract to complete two drilling vessels for Ocean Rig and an option
to complete two more. Hyundai alleges that FGO tortuously interfered with the
Hyundai Contract in order to obtain a contract from Ocean Rig for the completion
of the first drilling vessel. FGO denies all of Ocean Rig's allegations and is
vigorously defending the action. The total potential exposure to FGO is
approximately $15 million or 10 percent of the Hyundai Contract.
19
<PAGE>
The Company is a party to various other routine legal proceedings primarily
involving commercial claims and workers' compensation claims. While the outcome
of these claims and legal proceedings cannot be predicted with certainty,
management believes that the outcome of all such proceedings, even if determined
adversely, would not have a material adverse effect on the Company's business or
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Change in Interim Reporting Periods
Effective January 1, 1999, the Company adopted a policy whereby calendar
quarters (March 31, June 30, and September 30) will be used for interim
reporting purposes. This change was made to provide more direct comparability
with other publicly traded entities. See Note 2 to Consolidated Financial
Statements.
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
20
<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 14th day of May, 1999.
FRIEDE GOLDMAN INTERNATIONAL INC.
By: /s/ JOBIE T. MELTON, JR.
---------------------------------------------
Jobie T. Melton, Jr., Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit 11.1
Exhibit 27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Exhibit 11.1
Exhibit 27
</TABLE>
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED
-----------------------------------
April 5, March 31,
1998 1999
--------------- ---------------
Net Income $ 6,738,015 $ 10,007,326
Basic:
Weighted average number of shares
outstanding 24,446,059 23,346,617
--------------- ---------------
Basic earnings per share $ 0.28 $ 0.43
=============== ===============
Diluted:
Weighted average number of shares
outstanding 24,446,059 23,346,617
Dilutive effects of stock options using
the Treasury stock method 736,710 192,771
--------------- ---------------
25,182,769 23,539,388
--------------- ---------------
Diluted earnings per share $ 0.27 $ 0.43
=============== ===============
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 24,159,627
<SECURITIES> 0
<RECEIVABLES> 58,801,162
<ALLOWANCES> 0
<INVENTORY> 32,515,188
<CURRENT-ASSETS> 149,563,397
<PP&E> 137,624,508
<DEPRECIATION> 14,138,560
<TOTAL-ASSETS> 314,963,971
<CURRENT-LIABILITIES> 135,700,859
<BONDS> 64,068,588
0
0
<COMMON> 233,564
<OTHER-SE> 94,184,167
<TOTAL-LIABILITY-AND-EQUITY> 314,963,971
<SALES> 145,156,392
<TOTAL-REVENUES> 145,156,392
<CGS> 119,233,004
<TOTAL-COSTS> 129,147,827
<OTHER-EXPENSES> 40,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,076,647
<INCOME-PRETAX> 15,210,742
<INCOME-TAX> 5,203,416
<INCOME-CONTINUING> 10,007,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,007,326
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
