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 6/30/99
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 June 30, 1999)
Common Stock, $.01 par value 23,423,352
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC.
Table of Contents
Page No.
Part I. Financial Information
Item 1. Financial Statements 1
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 1
Consolidated Statements of Operations for the three
month and six-month periods ended July 5, 1998 and
June 30, 1999 2
Consolidated Statements of Cash Flows for the six-
month periods ended July 5,1998 and June 30, 1999 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
Signatures 25
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,796,320 $ 8,127,643
Accounts receivable 52,956,309 62,219,349
Inventory and stockpiled materials 34,191,727 32,682,241
Costs and estimated earnings in excess of billings
on uncompleted contracts 14,397,714 30,051,363
Prepaid expenses and other 2,535,947 5,559,023
Current deferred tax asset 2,246,084 3,109,430
--------------- ---------------
Total current assets 149,124,101 141,749,049
Investment in unconsolidated subsidiary 12,825,000 12,825,000
Property, plant and equipment, net of accumulated
depreciation 138,108,264 136,861,367
Construction in progress 969,978 3,601,826
Goodwill and other assets net of accumulated
amortization 13,532,760 11,902,480
--------------- ---------------
Total assets $ 314,560,103 $ 306,939,722
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Short-term debt, including current portion of
long-term debt $ 16,129,380 $ 25,947,691
Accounts payable 62,968,178 51,333,849
Accrued expenses 16,640,068 17,564,235
Billings in excess of costs and estimated
earnings on uncompleted contracts 47,527,884 25,673,368
--------------- ---------------
Total current liabilities 143,265,510 120,519,143
Deferred income tax liabilities 6,794,177 7,386,582
Long-term debt, less current maturities 45,862,732 42,587,667
--------------- ---------------
Total liabilities 195,922,419 170,493,392
--------------- ---------------
Deferred government subsidy, net of accumulated
amortization 33,347,604 33,597,604
Commitments and contingencies
Stockholders' equity:
Common stock; par value $0.01; 125,000,000
shares authorized; 24,535,168 and 23,423,352
shares issued and outstanding at December 31,
1998, and June 30, 1999, respectively 245,351 234,234
Additional paid-in capital 50,928,526 36,034,201
Retained earnings 49,345,947 67,381,410
Less: Treasury stock at cost, 1,188,900 shares
at December 31, 1998 (15,827,557) -
Accumulated other comprehensive income 597,813 (801,119)
--------------- ---------------
Total stockholders' equity $ 85,290,080 $ 102,848,726
--------------- ---------------
Total liabilities and stockholders' equity $ 314,560,103 $ 306,939,722
=============== ===============
The accompanying notes are an
integral part of these financial statements.
1
</TABLE>
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
----------------------------- -----------------------------
July 5, June 30, July 5, June 30,
1998 1999 1998 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 88,596,854 $ 133,488,978 $ 157,348,139 $ 278,645,370
Cost of revenue 67,692,347 113,396,543 117,821,309 232,629,547
-------------- -------------- -------------- --------------
Gross profit 20,904,507 20,092,435 39,526,830 46,015,823
-------------- -------------- -------------- --------------
Selling, general, and administrative
expenses 8,205,530 7,839,105 15,823,964 17,753,928
-------------- -------------- -------------- --------------
Operating income 12,698,977 12,253,330 23,702,866 28,261,895
-------------- -------------- -------------- --------------
Other income/(expense):
Interest expense (571,993) (1,069,858) (738,788) (2,146,505)
Interest income 856,870 159,562 1,374,675 441,139
Gain/(loss) on sale or distribution
of assets - 2,667 (310,687) 6,950
Other (339,749) (45,566) (232,320) (52,602)
-------------- -------------- -------------- --------------
Total other income/(expense) (54,872) (953,195) 92,880 (1,751,018)
-------------- -------------- -------------- --------------
Income before income taxes 12,644,105 11,300,135 23,795,746 26,510,877
Income tax provision 4,997,210 3,271,999 9,410,836 8,475,414
-------------- -------------- -------------- --------------
Net income $ 7,646,895 $ 8,028,136 $ 14,384,910 $ 18,035,463
============== ============== ============== ==============
Earnings per share
Basic $ 0.31 $ 0.34 $ 0.59 $ 0.77
============== ============== ============== ==============
Diluted $ 0.31 $ 0.34 $ 0.58 $ 0.76
============== ============== ============== ==============
Weighted average shares
Basic 24,492,793 23,390,919 24,471,213 23,368,608
============== ============== ============== ==============
Diluted 24,895,389 23,689,559 24,863,856 23,670,212
============== ============== ============== ==============
The accompanying notes are an
integral part of these financial statements.
2
</TABLE>
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
-----------------------------------
July 5, June 30,
1998 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,384,910 $ 18,035,463
Adjustments to reconcile net income to net
cash provided by (used in) operation activities:
Depreciation and amortization 1,851,966 3,696,051
Compensation expense related to stock issued
to employees 304,180 97,225
(Gain) loss on sale of assets 310,687 (6,950)
Deferred income tax provision - 47,309
Net increase/(decrease) in billings in excess
of costs and estimated earnings on
uncompleted contracts (2,454,922) (20,692,845)
Net (increase)/decrease related to costs and
estimated earnings in excess of billings on
uncompleted contracts - (16,231,091)
Net effect of changes in assets and liabilities:
Accounts receivable (31,758,942) (9,834,962)
Inventory and stockpiled materials (874,690) 482,310
Prepaid expenses and other assets (4,285,774) (2,583,301)
Accounts payable and accrued expenses 34,556,957 (8,606,923)
--------------- ---------------
Net cash provided by (used in) operating
activities 12,034,372 (35,597,714)
--------------- ---------------
Cash flows from investing activities:
Capital expenditures for plant and equipment (45,371,512) (5,507,115)
Proceeds from sale of property and equipment - 95,698
Acquisition of French subsidiary (25,065,000) -
Cash acquired upon acquisition of French
holding company 20,553,300 -
Investment in unconsolidated subsidiary (11,917,043)
Payments received on sales-type lease 76,067 -
--------------- ---------------
Net cash used in investing activities $ (61,724,188) $ (5,411,417)
--------------- ---------------
The accompanying notes are an
integral part of these financial statements.
3
</TABLE>
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
-----------------------------------
July 5, June 30,
1998 1999
--------------- ---------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock $ 338,866 $ -
Proceeds from exercise of stock options 91,800 824,939
Net borrowings under lines of credit 7,680,813 8,455,941
Proceeds from borrowing under debt facilities 28,544,610 4,072,852
Repayments on borrowing under debt facilities (7,186,513) (5,840,277)
--------------- ---------------
Net cash provided by financing activities 29,469,576 7,513,455
--------------- ---------------
Effect of currency translation adjustments 195,196 (1,173,001)
--------------- ---------------
Net decrease in cash and cash equivalents (20,025,044) (34,668,677)
Cash and cash equivalents at beginning of year 57,038,036 42,796,320
--------------- ---------------
Cash and cash equivalents at end of period $ 37,012,992 $ 8,127,643
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 346,489 $ 1,697,884
=============== ===============
Cash paid during the period for income taxes $ - $ 10,928,268
=============== ===============
The accompanying notes are an
integral part of these financial statements.
4
</TABLE>
<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, net income and
basic income per share of approximately $1.4 million, $1.0 million and $0.04 per
share, respectively, in the quarter ended December 31, 1998, that is more
properly attributable to the six months ended July 5, 1998. Of these amounts,
$0.7 million, $0.5 million, and $.02 per share, respectively, were applicable to
the second 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 three
month and six month periods ended June 30, 1999 were 298,640 and 301,604,
respectively. Dilutive common equivalent shares for the three month and six
month periods ended July 5, 1998 were 402,596 and 392,643, respectively. Options
to purchase 21,652 and 243,152 shares of common stock were outstanding
5
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
as of July 5, 1998 and June 30, 1999, respectively, which were not included in
the computation of diluted EPS because the options are antidiluted.
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. Management of the Company
has no plans for the purchase of additional treasury shares.
Reclassifications
Certain reclassifications have been made in the prior period financial
statements to conform to the classifications used in the current year.
5. ACQUISITIONS
Acquisition of Friede Goldman Newfoundland
On January 1, 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. Management is uncertain whether the man-hour requirements will be
met for 1999. 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 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 and is being
amortized over the lives of the assets acquired, which is approximately 17
years. Accumulated amortization of the deferred subsidy as of June 30, 1999, was
$3.5 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
and six month periods ended July 5, 1998 and June 30, 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 June 30, 1998:
Pro Forma Results For
The Six Months Ended July 5, 1998
(In thousands, except per share amount)
---------------------------------------
Revenues $ 160,797
Operating income 23,920
Net income 14,470
Earnings per common share - Basic $ 0.59
Earnings per common share - Diluted $ 0.58
6. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
At June 30, 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 June 30, 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 fifty 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
7
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. On July 30, 1999, the Insurers filed a motion to amend their
complaint to add certain former officers and directors of FGO and other third
party individuals and entities which the Insurers allege were involved in the
action which is the subject of complaint. The motion has not yet been heard by
the court. 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 3 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 2 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 $6.0 million loan incurred by the county to finance such
improvements.
8. CONTRACTUAL MATTERS
The construction of offshore drilling rigs involves complex design and
engineering, and equipment and supply delivery coordination throughout
construction periods that may exceed two years. It is not unusual in such
circumstances to encounter design, engineering and equipment delivery schedule
changes and other factors that impact the builder's ability to complete
construction of the rig in accordance with the original contractual delivery
schedule. Such work scope changes, delivery date changes and other factors may
give rise to claims by the Company against its customers for recovery of
8
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
additional costs incurred. The Company recognizes such claims as revenue if, 1)
the contract or other evidence provides a legal basis for the claim and there is
a reasonable basis for the claim; 2) the additional costs are caused by
circumstances unforeseen at the contract date and aren't contractor performance
related; 3) the additional costs are identifiable or otherwise determinable and
are reasonable in light of the work performed; 4) the evidence supporting the
claim is objective and verifiable; and 5) in management's opinion, it is
probable that the claim will be collected. During the three months ended June
30, 1999 the Company recognized revenue of $5.0 million related to claims.
Management anticipates the amount ultimately realized upon final resolution of
such claims will not be materially less than the amount recognized. No similar
claims were recognized in periods prior to the three months ended June 30, 1999.
In August 1999, the Company and a customer reached an agreement for new delivery
dates on two offshore drilling rigs under construction by the Company. The new
delivery dates extend beyond those called for under the original contracts. The
Company believes that the extended delivery dates are the result of customer
engineering and design deficiencies and untimely delivery of certain customer
furnished information and equipment. Further, the Company believes that it will
incur significant additional costs as a result of the customer caused delays and
plans to assert that it is entitled to additional compensation for delay and
disruption and for additional work related to changes to the original designs
and specifications. The customer has indicated that it does not agree with the
cause of the extended delivery and that it may assert a claim for liquidated
damages. A claim for liquidated damages could exceed $12 million.
As part of the August 1999 agreement, the customer agreed to make all milestone
payments currently due, limit the potential liquidated damages in the event the
revised delivery dates are not met and provide certain incentives to the Company
for delivery before the revised delivery dates. In addition, management of the
Company and the customer agreed to endeavor to reach a comprehensive settlement
agreement that clarifies the obligations of each party under the contracts. If
such a settlement agreement cannot be reached, the Company and the customer have
agreed to submit the disputed matters to fast track arbitration. Neither the
amount of potential claims for additional compensation due to the Company nor
the maximum amount of liquidated damages potentially payable to the customer
under the contracts have been determined. However, management of the Company
believes that this matter will be resolved in a manner that will not have a
material adverse effect on the Company's financial statements. However, if it is
ultimately determined that the Company is not entitled to additional
compensation or that the customer is entitled to significant liquidated damages,
or if the contracts were to be cancelled, the impact on the Company's Statement
of Income for the period in which such a determination is made could be
material.
9. NEW CREDIT FACILITY
In August 1999, the Company entered into a new bank credit facility (the
"Supplemental Facility") to provide up to $20 million in borrowings in addition
to those available under its accounts receivable and inventory based Credit
Facility. Borrowings under the Supplemental Facility mature at the earlier of
November 26, 1999 or the closing of the Halter Merger. (See note 11). The
borrowings bear interest at 0.5% above Prime or 2.25% above a LIBOR rate. The
borrowings are secured by the pledge of substantially all of the Company's
9
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
domestic assets not otherwise encumbered. Proceeds under the Supplemental
Facility are expected to be used to meet short-term cash flow needs.
10. HALTER MERGER
On June 1, 1999, the Company entered into an agreement with Halter Marine Group
Inc. ("Halter") whereby the Company and Halter would be merged in a business
combination to be accounted for as a purchase (the "Halter Merger"). Under the
terms of the agreement, stockholders of Halter will receive 0.46 shares of the
Company's common stock in exchange for each share of Halter. Upon completion of
the Halter Merger, which is expected to occur by October 1999, former Halter
stockholders will own approximately 36.0% of the outstanding common stock of the
merged companies. The completion of the merger is subject to shareholder and
regulatory approvals.
11. 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 for the six months ended July 5, 1998 and June 30, 1999 is as follows:
July 5, June 30,
1998 1999
-------------- --------------
Net income $ 14,384,910 $ 18,035,463
Other comprehensive income
Foreign currency translation 195,196 (1,398,932)
-------------- --------------
Comprehensive income $ 14,580,106 $ 16,636,531
============== ==============
12. 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. SFAS No. 133 is required to be adopted in fiscal
years beginning after June 15, 2000. 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.
13. 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
10
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FRIEDE GOLDMAN INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 July 5, 1998 and June 30, 1999, below were prepared on the same basis as
the Company's consolidated financial statements.
(In thousands of dollars)
------------------------------------------------------------
Offshore
Drilling Rigs Equipment Intersegment
Construction Manufacturing Other Elimnations Total
------------- ------------- ------- ------------- --------
THREE MONTHS ENDED
JULY 5,1998
Revenues $ 75,301 $ 13,063 $ 1,944 $ (1,711) $ 88,597
Operating income 14,945 216 (2,462) - 12,699
Total assets 232,799 68,043 74,003 (80,784) 294,061
THREE MONTHS ENDED
JUNE 30, 1999
Revenues $ 125,930 $ 7,427 $ 392 $ (260) $133,489
Operating Income 14,453 (187) (2,013) - 12,253
Total assets 250,335 52,215 66,203 (61,813) 306,940
SIX MONTHS ENDED
JULY 5, 1998
Revenues $ 134,568 $ 22,278 $ 2,728 $ (2,226) $157,348
Operating income 28,025 777 (5,099) - 23,703
Total assets 232,799 68,043 74,003 (80,784) 294,061
SIX MONTHS ENDED
JUNE 30, 1999
Revenues $ 256,323 $ 21,432 $ 1,911 $ (1,021) $278,645
Operating Income 33,400 1,013 (6,079) (72) 28,262
Total assets 250,335 52,215 66,203 (61,813) 306,940
11
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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 June 30, 1999, and several of such projects remain in the
Company's backlog as of June 30, 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 July 30, 1999, the worldwide
utilization rate for mobile offshore drilling units was 73.8% compared to 91.3%
a year earlier. This overall decline in utilization rates has resulted in a
decline in orders for new offshore drilling rigs and retrofit or conversions of
existing offshore drilling rigs. Recently, oil and gas prices have increased.
While it is possible that such increased prices could stimulate interest in
orders for new construction, conversion and retrofit of offshore drilling rigs,
there is often a time lag between periods of increasing prices and definitive
orders for construction, conversion and retrofit. Such time lag can be caused by
uncertainty about whether the higher prices will be sustained, time required for
rig contractors and operators to revise capital budgets and reassess their rig
requirements and other factors. While management of the Company expects that
increased oil and gas prices will result in an increase in order activity, there
can be no assurance that any increase in activity will occur, the timing of any
such increase or that the Company will be successful in obtaining any resulting
orders.
The Company's backlog is approximately $343.9 million as of June 30, 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
will be cancelled. The backlog amount includes a $143.5 million contract for
the new construction of a Friede & Goldman, Ltd. designed Millennium S.A.,
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semisubmersible offshore drilling rig that is subject to the owner's securing
rig financing. Such financing is expected to be secured in the third quarter of
1999.
Contracts for the new construction or the conversion/retrofit of offshore
drilling rigs involve large amounts in relation to the Company's revenues and
backlog. Also, because of the cyclical nature of the oil and gas industry and
the impact of the conditions described in the first paragraph above on offshore
drilling contractors, it is not unusual for extended periods of time to pass
between the award of contracts. As a result, the Company's backlog is subject to
significant increases and decreases as contracts are awarded and the work is
performed under such contracts. During the first half of 1999, the Company's
backlog has declined as work has progressed under contracts included in the
backlog. Such decline could continue through the remainder of 1999 if no
significant contracts are awarded to the Company during that period.
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
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 2,400 employees
at July 5, 1998, to approximately 4,200 employees at June 30, 1999.
On January 1, 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'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, production unit or owner furnished equipment in 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
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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.
Results of Operations
Comparison of the Three Month Periods Ended June 30, 1999 and July 5, 1998
During the three months ended June 30,1999, the Company generated revenue of
$133.5 million, an increase of 50.7%, compared to the $88.6 million generated
for three months ended July 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 June 30, 1999 and July 5, 1998.
(In thousands of dollars)
Three Months Ended
--------------------------
June 30, July 5,
1999 1998
---------- ----------
New rig construction $ 75,793 $ 17,351
Conversion/retrofit of rigs 44,884 40,431
Shipbuilding and ship and rig repair 5,253 17,519
Equipment manufacturing 7,427 13,063
Other 392 1,944
Intersegment eliminations (260) (1,711)
---------- ----------
Total revenues $ 133,489 $ 88,597
========== ==========
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Revenues from new rig construction for the three months ended June 30, 1999,
relate to contracts for completion and outfitting of three new semisubmersible
drillings rigs. This compares to only one such project that was in progress
during the three months ended July 5, 1998. Revenues from conversion/retrofit of
rigs increased slightly in the second quarter of 1999 compared to 1998 primarily
as the result of the Company's having a larger workforce in place to perform
such services. During the three months ended June 30, 1999, the Company earned
revenue on four conversion/retrofit projects. 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 third quarter of
1999. Equipment manufacturing revenues decreased because of the general decline
in demand for such equipment as compared to the same quarter of 1998.
Cost of revenue was $113.4 million for the three months ended June 30, 1999,
compared to $67.7 million for the three months ended July 5, 1998, resulting in
an decrease in gross profit from $20.9 million for the three months ended July
5, 1998, to $20.1 million in the three months ended June 30, 1999. The gross
margin percentage earned by the Company for the quarter ended June 30, 1999, was
approximately 15.1% compared to 23.6% 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 June 30, 1999, attributable to the new
construction of offshore drilling rigs compared to the quarter ended July 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 July 5,
1998, approximately 45.8% 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 $343.9 million backlog
at June 30, 1999, approximately $252.3 million is attributable to fixed price
contracts for completion or construction of new rigs.
Selling, general and administrative expenses (SG&A expenses) were $7.8 million
in the three months ended June 30, 1999, compared to $8.2 million for the three
months ended July 5, 1998. As a percentage of revenues, SG&A expenses declined
to 5.9% for the three months ended June 30, 1999, compared to 9.3% for the three
months ended July 5, 1998. This decline in SG&A expenses is due to the
management's efforts to reduce costs in light of the general economic conditions
being encountered in energy related industries. Such efforts have included
certain staff reductions, reduced bonuses, reduced professional fees and a
general decline in other administrative costs.
Operating income was $12.3 million in the three months ended June 30, 1999,
compared to $12.7 million for the three months ended July 5, 1998. This slight
decline is the result of the decline in gross profit margin explained above.
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Interest expense for the three months ended June 30, 1999, increased to $1.1
million from $0.6 million for the three months ended July 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 June 30, 1999,
reflects a combined Federal and State income tax rate of approximately 29.0%.
The provision for income taxes for the three months ended July 5, 1998 reflects
a combined Federal and State tax rate of 39.5%. Foreign taxes included in the
provision for income taxes for the three months ended June 30, 1999, were
approximately $0.1 million. Foreign taxes for the three months ended July 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. Federal rate reductions related to revenues
generated by the Company's foreign sales corporation subsidiary.
Comparison of the Six Month Periods Ended June 30, 1999 and July 5, 1998
During the six months ended June 30,1999, the Company generated revenue of
$278.7 million, an increase of 77.2%, compared to the $157.3 million generated
for six months ended July 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
six months ended June 30, 1999 and July 5, 1998.
(In thousands of dollars)
Six Months Ended
--------------------------
June 30, July 5,
1999 1998
----------- ----------
New rig construction $ 163,517 $ 21,774
Conversion/retrofit of rigs 82,171 84,912
Shipbuilding and ship and rig repair 10,635 27,882
Equipment manufacturing 21,432 22,278
Other 1,911 2,728
Intersegment eliminations (1,021) (2,226)
----------- ----------
Total revenues $ 278,645 $157,348
=========== ==========
Revenues from new rig construction for the six months ended June 30, 1999,
relate to contracts for completion and outfitting of three new semisubmersible
drillings rigs. During the six months ended June 30, 1999, the Company earned
revenue on four conversion/retrofit projects. One of the rigs was delivered in
June 1999 and another is expected to be delivered in the third quarter of 1999.
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 six
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 third quarter of 1999.
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Cost of revenue was $232.6 million for the six months ended June 30, 1999,
compared to $117.8 million for the six months ended July 5, 1998, resulting in
an increase in gross profit from $39.5 million for the six months ended July 5,
1998, to $46.0 million in the six months ended June 30, 1999. The gross margin
percentage earned by the Company for the six months ended June 30, 1999, was
approximately 16.5% compared to 25.1% for the same period of 1998. This decline
is primarily the result of the significantly higher portion of the Company's
revenues for the six months ended June 30, 1999, attributable to the new
construction of offshore drilling rigs compared to the six months ended July 5,
1998. 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 six months
ended July 5, 1998, approximately 54% of the Company's revenues were
attributable to retrofit and conversion of existing offshore drilling rigs.
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
$343.9 million backlog at June 30, 1999, approximately $252.3 million is
attributable to fixed price contracts for completion or construction of new
rigs.
Selling, general and administrative expenses (SG&A expenses) were $17.8 million
in the six months ended June 30, 1999, compared to $15.8 million for the six
months ended July 5, 1998. The increase in SG&A expenses reflects an overall
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 explained above, the trend of
ncreasing SG&A costs related to the Company's rapid growth changed during the
three months ended June 30, 1999. As a percentage of revenues, SG&A expenses
declined to 6.4% for the six months ended June 30, 1999, compared to 10.1% for
the six months ended July 5, 1998.
Operating income increased by $4.6 million from the six months ended July 5,
1998, to $28.3 million for the six months ended June 30, 1999, primarily as a
result of increased revenue and gross profit discussed in the preceding
paragraphs.
Interest expense for the six months ended June 30, 1999, increased to $2.2
million from $0.7 million for the six months ended July 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 six months ended June 30, 1999, reflects
a combined Federal and State income tax rate of approximately 32.0%. The
provision for income taxes for the six months ended July 5, 1998 reflects a
combined Federal and State tax rate of 39.6%. Foreign taxes included in the
provision for income taxes for the six months ended June 30, 1999, were
approximately $0.9 million. Foreign taxes for the six months ended July 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.
17
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CONTRACTUAL MATTERS
The construction of offshore drilling rigs involves complex design and
engineering, and equipment and supply delivery coordination throughout
construction periods that may exceed two years. It is not unusual in such
circumstances to encounter design, engineering and equipment delivery schedule
changes and other factors that impact the builder's ability to complete
construction of the rig in accordance with the original contractual delivery
schedule. Such work scope changes, delivery date changes and other factors may
give rise to claims by the Company against its customers for recovery of
additional costs incurred. The Company recognizes such claims as revenue if, 1)
the contract or other evidence provides a legal basis for the claim and there is
a reasonable basis for the claim; 2) the additional costs are caused by
circumstances unforeseen at the contract date and aren't contractor performance
related; 3) the additional costs are identifiable or otherwise determinable and
are reasonable in light of the work performed; 4) the evidence supporting the
claim is objective and verifiable; and 5) in management's opinion, it is
probable that the claim will be collected. During the three months ended June
30, 1999 the Company recognized revenue of $5.0 million related to claims.
Management anticipates the amount ultimately realized upon final resolution of
such claims will not be materially less than the amount recognized. No similar
claims were recognized in periods prior to the three months ended June 30, 1999.
In August 1999, the Company and a customer reached an agreement for new delivery
dates on two offshore drilling rigs under construction by the Company. The new
delivery dates extend beyond those called for under the original contracts. The
Company believes that the extended delivery dates are the result of customer
engineering and design deficiencies and untimely delivery of certain customer
furnished information and equipment. Further, the Company believes that it will
incur significant additional costs as a result of the customer caused delays and
plans to assert that it is entitled to additional compensation for delay and
disruption and for additional work related to changes to the original designs
and specifications. The customer has indicated that it does not agree with the
cause of the extended delivery and that it may assert a claim for liquidated
damages. A claim for liquidated damages could exceed $12 million.
As part of the August 1999 agreement, the customer agreed to make all milestone
payments currently due, limit the potential liquidated damages in the event the
revised delivery dates are not met and provide certain incentives to the Company
for delivery before the revised delivery dates. In addition, management of the
Company and the customer agreed to endeavor to reach a comprehensive settlement
agreement that clarifies the obligations of each party under the contracts. If
such a settlement agreement cannot be reached, the Company and the customer have
agreed to submit the disputed matters to fast track arbitration. Neither the
amount of potential claims for additional compensation due to the Company nor
the maximum amount of liquidated damages potentially payable to the customer
under the contracts have been determined. However, management of the Company
believes that this matter will be resolved in a manner that will not have a
material adverse effect on the Company's financial statements. However, if it is
ultimately determined that the Company is not entitled to additional
compensation or that the customer is entitled to significant liquidated damages,
or if the contracts were to be cancelled, the impact on the Company's Statement
of Income for the period in which such a determination is made could be
material.
Halter Merger
On June 1, 1999, the Company entered into an agreement with Halter Marine Group
Inc. ("Halter") whereby the Company and Halter would be merged in a business
combination to be accounted for as a purchase (the "Halter Merger"). Under the
terms of the agreement, stockholders of Halter will receive 0.46 shares of the
Company's common stock in exchange for each share of Halter. Upon completion of
the Halter Merger, which is expected to occur by October 1999, former Halter
stockholders will own approximately 36.0% of the outstanding common stock of the
merged companies. The completion of the merger is subject to shareholder and
regulatory approvals.
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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.
During the six month period ended June 30, 1999, working capital increased by
approximately $15.4 million. This increase is the result of earnings during the
six-month period ended June 30, 1999 and the relatively low level of capital
expenditures for this period compared to calendar year 1998. Cash used in
operations was $35.6 million for the six months ended June 30, 1999, compared to
cash provided by operations of $12.0 million for the six months ended July 5,
1998. This change is primarily the result of the changes in costs and estimated
earnings in excess of billings and billings in excess of costs and estimated
earnings. As of June 30, 1999 costs and estimated earnings in excess of billings
increased $15.7 million from December 31, 1998, while billings in excess of
costs and estimated earnings decreased $21.9 million during that period. As
noted above, over $161 million of revenues for the period ended June 30, 1999
were from new rig construction projects compared to only $23 million in the same
period in 1998. Under two of the new construction projects, the Company invoices
the customer upon the achievement of specific construction milestone. As a
result, balances in cash, accounts receivable, costs and estimated earnings in
excess of billings and billing in excess of costs and estimated earnings on
uncompleted contracts are subject to significant variations based on the timing
of when such contract milestones are met. During the early stages of the
projects, an initial deposit is received and construction milestones occur
frequently resulting in billings in excess of costs and estimated earnings.
During the later phases of the projects, milestones are less frequent and a
final payment is not due until delivery of the rig, resulting in increases in
costs and estimated earnings in excess of billings. With respect to the
Company's contracts for rig conversion/retrofit projects, billings are
typically made monthly based on construction progress agreed upon by the
customer.
During the three-month and six-month periods ended June 30, 1999, the Company
incurred approximately $1.8 million and $5.5 million, respectively, in capital
expenditures primarily related to completion on an administration building,
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% (7.71% at June 30, 1999). A balance of $17.8 million
was outstanding at June 30, 1999, and an additional $7.2 million was available.
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. In August 1999, the Company entered into a
supplemental bank credit facility (the "Supplemental Facility") to provide up to
an additional $20 million in borrowings. Borrowings under the Credit Facility
and the Supplemental Facility are secured by the pledge of substantially all of
the Company's domestic assets not otherwise encumbered. Borrowings under the
Credit Facility and the Supplemental Facility mature at the earlier of November
26, 1999 or the closing of the Halter Merger.
In connection with the Halter Merger, the Company is expected to put in place a
new bank credit facility that would provide, among other things, up to $200
million of working capital, capital expenditure and other financing needs to the
new combined company. It is anticipated that such facility will be finalized
simultaneously with the closing of the Halter Merger.
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<PAGE>
In the event that the Halter Merger were to not occur, management of the Company
believes that it could successfully extend its current bank credit facilities
and/or negotiate a revised bank credit facility that would meet the Company's
bank financing requirements.
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 of the Company has no plans for the
purchase of additional treasury shares.
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 June 30, 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 and
one half 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
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.
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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
fourth 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 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 fourth quarter of 1999. Nevertheless, the Company
has tested its existing domestic information systems for Y2K compliance and
believes, based on the testing and certifications from vendors, that such
systems are Y2K compliant. 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 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
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.
21
<PAGE>
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 the end of the third
quarter of 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. SFAS No. 133 is required to be adopted in fiscal
years beginning after June 15, 2000. 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.
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" include, without
limitation, statements relating to (i) estimates of backlog, (ii) estimates of
capital expenditures, (iii) expectations of collection on claims by the Company
against customers for recovery of additional costs incurred based on design
modifications, changes in work scope or schedule or other factors, (iv)
expectations regarding settlement of contract disputes, (v) expectations
regarding the Company's state of readiness for Y2K, (vi) expectations regarding
costs of the Company's Y2K compliance program, (vii)expectations regarding the
impact of failure of the Company or third parties to achieve Y2K compliance,
(viii) expectations relating to the proposed merger with Halter Marine Group,
Inc. and (ix) expectations relating to obtaining a new credit facility prior to
or at the closing of the merger. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including (i) risks of reduced
22
<PAGE>
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 and risks of customer disputes related to contractual
arrangements, (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, (vii) risks
related to regulatory and environmental matters and (viii) risks related to the
outcome of disputes, claims and litigation. 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 June 30, 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. On July 30, 1999, the Insurers filed a motion to amend their
complaint to add certain former officers and directors of FGO and other third
party individuals and entities which the Insurers allege were involved in the
action which is the subject of complaint. The motion has not yet been heard by
the court. 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
23
<PAGE>
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 3 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 2 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.
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
24
<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 13 day of August 1999.
FRIEDE GOLDMAN INTERNATIONAL INC.
By: /s/ JOBIE T. MELTON, JR.
---------------------------------------------
Jobie T. Melton, Jr., Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Exhibit 11.1
Exhibit 27
</TABLE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
SIX MONTHS ENDED
-----------------------------------
July 5, June 30,
1998 1999
--------------- --------------
Net Income $ 14,384,910 $ 18,035,463
Basic:
Weighted average number of shares
outstanding 24,471,213 23,368,608
--------------- --------------
Basic earnings per share $ 0.59 $ 0.77
=============== ==============
Diluted:
Weighted average number of shares
outstanding 24,471,213 23,368,608
Dilutive effects of stock options using
the Treasury stock method 392,643 301,604
--------------- --------------
24,863,856 23,670,212
--------------- --------------
Diluted earnings per share $ 0.58 $ 0.76
=============== ==============
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 8,127,643
<SECURITIES> 0
<RECEIVABLES> 62,219,349
<ALLOWANCES> 0
<INVENTORY> 32,682,241
<CURRENT-ASSETS> 141,749,049
<PP&E> 136,861,367
<DEPRECIATION> 16,617,887
<TOTAL-ASSETS> 306,939,722
<CURRENT-LIABILITIES> 120,519,143
<BONDS> 68,535,358
0
0
<COMMON> 234,235
<OTHER-SE> 102,614,491
<TOTAL-LIABILITY-AND-EQUITY> 306,939,722
<SALES> 278,645,370
<TOTAL-REVENUES> 278,645,370
<CGS> 232,629,547
<TOTAL-COSTS> 278,645,370
<OTHER-EXPENSES> 48,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,146,505
<INCOME-PRETAX> 26,510,877
<INCOME-TAX> 8,475,414
<INCOME-CONTINUING> 18,035,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,035,463
<EPS-BASIC> .77
<EPS-DILUTED> .77
</TABLE>
