<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 9/30/99
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 Halter, Inc.
(Exact name of Registrant as specified in its charter)
Mississippi 64-0900067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13085 Seaway Road
Gulfport, Mississippi 39503
(Address of principal executive offices) (Zip code)
(601) 896-0029
(Registrant's telephone number including area code)
Friede Goldman International Inc.
(Former name)
525 East Capitol Street
Jackson, Mississippi 39201
(Former address)
----------------
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.
<TABLE>
<CAPTION>
Outstanding
Title (as of November 12, 1999)
----- -------------------------
<S> <C>
Common Stock, $.01 par value 39,882,744
</TABLE>
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<PAGE>
FRIEDE GOLDMAN HALTER, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements.............................................. 1
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999............................................... 1
Consolidated Statements of Operations for the three-month and
nine-month periods ended October 4, 1998 and September 30, 1999.. 2
Consolidated Statements of Cash Flows for the nine-month periods
ended October 4, 1998 and September 30, 1999..................... 3
Notes to Consolidated Financial Statements........................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
Part II.Other Information
Item 1. Legal Proceedings................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders............... 26
Item 5. Other Information................................................. 26
Item 6. Exhibits.......................................................... 26
Signatures.................................................................... 27
</TABLE>
i
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
(formerly Friede Goldman International Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, Sept. 30,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................ $ 42,796,320 $ 9,865,315
Accounts receivable.............................. 52,956,309 29,241,294
Inventory and stockpiled materials............... 34,191,727 45,354,203
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 14,397,714 14,700,094
Prepaid expenses and other....................... 2,535,947 9,303,403
Current deferred tax asset....................... 2,246,084 2,680,757
------------ ------------
Total current assets........................... 149,124,101 111,145,066
Investment in unconsolidated subsidiary............ 12,825,000 12,897,000
Property, plant and equipment, net of accumulated
depreciation...................................... 138,108,264 139,782,820
Construction in progress........................... 969,978 --
Goodwill and other assets net of accumulated
amortization...................................... 13,532,760 12,235,923
------------ ------------
Total assets................................... $314,560,103 $276,060,809
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt, including current portion of
long- term debt ................................ $ 16,129,380 $ 25,421,541
Accounts payable................................. 62,968,178 26,905,993
Accrued expenses................................. 16,640,068 7,807,484
Billings in excess of costs and estimated
earnings on uncompleted contracts............... 47,527,884 36,050,198
------------ ------------
Total current liabilities...................... 143,265,510 96,185,216
Deferred income tax liabilities.................... 6,794,177 7,496,481
Long-term debt, less current maturities............ 45,862,732 44,172,177
------------ ------------
Total liabilities.............................. 195,922,419 147,853,874
------------ ------------
Deferred government subsidy, net of accumulated
amortization...................................... 33,347,604 33,228,435
Commitments and contingencies......................
Stockholders' equity:
Common stock; par value $0.01; 125,000,000 shares
authorized; 24,535,168 and 23,432,452 shares
issued and outstanding at December 31, 1998, and
September 30, 1999, respectively.................. 245,351 234,325
Additional paid-in capital....................... 50,928,526 36,158,972
Retained Earnings................................ 49,345,947 58,853,498
Less: Treasury stock at cost, 1,188,900 shares at
December 31, 1998............................ (15,827,557) --
Accumulated other comprehensive income........... 597,813 (268,295)
------------ ------------
Total stockholders' equity..................... 85,290,080 94,978,500
------------ ------------
Total liabilities and stockholders' equity... $314,560,103 $276,060,809
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
(formerly Friede Goldman International Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------- --------------------------
Oct. 4, Sept. 30, Oct. 4, Sept. 30,
1998 1999 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue................. $92,669,670 $ 51,699,220 $250,017,809 $330,344,590
Cost of revenue......... 70,751,600 56,132,464 188,572,909 288,762,011
----------- ------------ ------------ ------------
Gross profit.......... 21,918,070 (4,433,244) 61,444,900 41,582,579
----------- ------------ ------------ ------------
Selling, general, and
administrative
expenses............... 7,682,270 7,099,812 23,506,234 24,853,740
----------- ------------ ------------ ------------
Operating
income/(loss)...... 14,235,800 (11,533,056) 37,938,666 16,728,839
----------- ------------ ------------ ------------
Other income/(expense):
Interest expense...... (576,312) (1,439,258) (1,315,100) (3,585,763)
Interest income....... 377,689 35,326 1,752,364 476,464
Gain/(loss) on sale or
distribution of
assets............... (49,459) (33,523) (261,228) 6,462
Other................. 80,319 17,988 (250,919) (67,648)
----------- ------------ ------------ ------------
Total other
income/(expense)... (167,763) (1,419,467) (74,883) (3,170,485)
----------- ------------ ------------ ------------
Income before
income taxes..... 14,068,037 (12,952,523) 37,863,783 13,558,354
Income tax
provision/(benefit).... 5,090,825 (4,424,612) 14,501,661 4,050,803
----------- ------------ ------------ ------------
Net income/(loss)..... $ 8,977,212 $ (8,527,911) $ 23,362,122 $ 9,507,551
=========== ============ ============ ============
Earnings per share
Basic................. $ 0.37 $ (0.36) $ 0.96 $ 0.41
=========== ============ ============ ============
Diluted............... $ 0.37 $ (0.36) $ 0.95 $ 0.40
=========== ============ ============ ============
Weighted average shares
Basic................. 24,077,815 23,428,319 24,342,842 23,353,221
Diluted............... 24,394,596 23,428,319 24,719,383 23,586,464
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
(formerly Friede Goldman International Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
-------------------------
Oct. 4, Sept. 30,
1998 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $23,362,122 $ 9,507,551
Adjustments to reconcile net income to net
Cash provided by (used in) operation activities:
Depreciation and amortization..................... 3,362,229 6,058,899
Compensation expense related to stock issued to
employees........................................ 283,347 145,836
(Gain) loss on sale of assets..................... 261,228 (6,462)
Deferred income tax provision..................... 928,740 483,084
Net increase/(decrease) in billings in excess of
costs and estimated earnings on uncompleted
contracts........................................ 11,443,709 (10,491,250)
Net (increase)/decrease related to costs and
estimated earnings in excess of billings on
uncompleted contracts............................ -- (730,640)
Net effect of changes in assets and liabilities:
Accounts receivable............................... (29,074,270) 23,218,418
Inventory and stockpiled materials................ (4,680,584) (11,946,865)
Prepaid expenses and other assets................. (5,401,219) (6,812,849)
Accounts payable and accrued expenses............. 18,538,648 (43,150,990)
----------- ------------
Net cash provided by (used in) operating
activities..................................... 19,023,950 (33,725,268)
----------- ------------
Cash flows from investing activities:
Capital expenditures for plant and equipment....... (55,464,039) (6,751,067)
Proceeds from sale of property and equipment....... -- 93,197
Acquisition of French subsidiary................... (25,285,072) --
Cash acquired upon acquisition of French holding
company........................................... 20,553,300 --
Investment in unconsolidated subsidiary............ (11,917,043) --
Payments received on sales-type lease.............. 112,406 --
----------- ------------
Net cash used in investing activities........... (72,000,448) (6,657,870)
----------- ------------
Cash flows from financing activities:
Proceeds from sale of common stock................. 338,866 --
Proceeds from exercise of stock options............ 422,521 901,190
Net borrowings under lines of credit............... 1,063,904 3,902,562
Proceeds from borrowing under debt facilities...... 20,093,134 11,968,061
Release of restricted escrowed funds............... 24,653,901 --
Purchase of Friede Goldman International Treasury
Stock............................................. (14,401,579) --
Repayments on borrowing under debt facilities...... (9,555,827) (8,240,667)
----------- ------------
Net cash provided by financing activities....... 22,614,920 8,531,146
----------- ------------
Effect of currency translation adjustments......... 1,344,938 (1,079,013)
----------- ------------
Net decrease in cash and cash equivalents....... (29,016,640) (32,931,005)
----------- ------------
Cash and cash equivalents at beginning of year..... 57,038,036 42,796,320
----------- ------------
Cash and cash equivalents at end of period......... $28,021,396 $ 9,865,315
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........... $ 776,202 $ 4,055,465
=========== ============
Cash paid during the period for income taxes....... $ -- $ 12,946,424
=========== ============
Issuance of common stock as compensation........... $ 760,991 $ --
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FRIEDE GOLDMAN HALTER, INC.
(formerly Friede Goldman International Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of FRIEDE GOLDMAN HALTER, INC.
(formerly known as 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. 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").
This agreement was amended on September 14, 1999 and under the terms of the
new agreement, stockholders of Halter received 0.57 shares of the Company's
common stock in exchange for each share of Halter. The merger was completed on
November 3, 1999, and, as a result, former Halter stockholders own
approximately 41.2% of the outstanding common stock of the merged companies.
Effective with the merger, the Company's name was changed to Friede Goldman
Halter, Inc. The merger will be accounted for as a purchase business
combination. Accordingly, the Company will reflect the assets and liabilities
of Halter at fair value as of November 3, 1999 and will report the operating
activities of Halter for periods subsequent to November 3, 1999.
3. 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 the assets of Newfoundland Ocean Enterprises Ltd. 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 $2.2 million, $1.5 million and $0.06 per share, respectively, in
the quarter ended December 31, 1998, that is more properly attributable to the
nine months ended October 4, 1998. Of these amounts, $0.8 million, $0.5
million, and $0.02 per share, respectively, were applicable to the third
quarter of 1998.
4. 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
<PAGE>
FRIEDE GOLDMAN HALTER, INC.
(formerly Friede Goldman International Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS--(Continued)
5. 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. Because the Company incurred a loss
during the three months ended September 30, 1999, basic and dilutive shares
were the same. Dilutive common equivalent shares for the nine month period
ended September 30, 1999 were 233,243. Dilutive common equivalent shares for
the three month and nine month periods ended October 4, 1998 were 316,781 and
376,541, respectively. Options to purchase 256,591 and 359,819 shares of
common stock were outstanding as of October 4, 1998 and September 30, 1999,
respectively, which were not included in the computation of diluted EPS
because the options are antidilutive.
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.
6. 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
believes it is probable that the man-hour requirements will not be met for
1999. If a liquidated damages payment is required, it will be accounted for as
an adjustment to the purchase price of the Marystown Facility. Pursuant to the
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, was not
material. The net assets
5
<PAGE>
FRIEDE GOLDMAN HALTER, INC.
(formerly Friede Goldman International Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS--(Continued)
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 September 30, 1999, was $4.0 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 nine month periods
ended October 4, 1998 and September 30, 1999.
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 September
30, 1998:
<TABLE>
<CAPTION>
Pro Forma Results
For The Nine Months
Ended
October 4, 1998
-------------------
(In thousands,
except per share
amount)
<S> <C>
Revenues.............................................. $253,467
Operating income...................................... $ 38,156
Net income............................................ $ 23,447
Earnings per common share--Basic...................... $ 0.96
Earnings per common share--Diluted.................... $ 0.95
</TABLE>
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 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.
6
<PAGE>
FRIEDE GOLDMAN HALTER, INC.
(formerly Friede Goldman International Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS--(Continued)
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 $6.0 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
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 nine months ended September 30, 1999, the Company has recognized revenue
of $27.5 million related to claims.
In December 1997 and June 1998, the Company entered into contracts to
construct two semisubmersible drilling rigs for Ocean Rig ASA, a Norwegian
company. The Company commenced
7
<PAGE>
FRIEDE GOLDMAN HALTER, INC.
(formerly Friede Goldman International Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS--(Continued)
construction of one rig in June 1998 and the other in January 1999. In late
July and early August 1999, Friede Goldman initiated discussions with Ocean
Rig with respect to anticipated delays in the completion and delivery of the
two rigs from the original delivery dates of August 26, 1999 and November 23,
1999. The Company has asserted that Ocean Rig is responsible for the delays
due to Ocean Rig-initiated design changes and late delivery by Ocean Rig of
information and equipment required to be provided to The Company by Ocean Rig
pursuant to the terms of the construction contracts.
As a result of the delays, the Company expects that the aggregate cost to
construct the two rigs will increase significantly. Friede Goldman entered
into negotiations with Ocean Rig in early August for the purpose of seeking
compensation from Ocean Rig for additional costs and delay damages resulting
from the Ocean Rig-initiated design changes and late deliveries of information
and equipment. In connection with these negotiations, Ocean Rig denied
responsibility for causing the delivery delays and indicated that it would
seek delay damages from Friede Goldman in the event that the delivery dates
were not met.
On August 16, 1999, The Company and Ocean Rig entered into an agreement
providing for new delivery dates of March 31, 2000 and June 30, 2000 for the
two rigs. As part of this agreement, Ocean Rig agreed to make all payments
when due and as construction milestones are met in accordance with the two
contracts. The agreement also required both parties to submit supporting
documentation relating to their respective claims and required the parties to
meet to negotiate a resolution of their dispute. The parties provided each
other the required information and conducted meetings in late August to
discuss a resolution of the dispute. A resolution between the parties was not
reached during these meetings and fast track arbitration with respect to the
claims was initiated by Ocean Rig in London, England on September 3, 1999.
The Company has asserted an arbitration claim in excess of $75 million
seeking compensation for additional costs and delay damages relating to the
construction of the two rigs. Ocean Rig has indicated that it intends to seek
liquidated damages and damages at large for delay of up to a total of $28
million.
Neither the amount of potential claims for additional compensation due to
Friede Goldman nor the maximum amount of liquidated damages potentially
payable to Ocean Rig under the contracts have been finally determined. Based
on settlement negotiations that have occurred subsequent to the initiation of
arbitration proceedings, the Company believes that it is likely that a
settlement will be reached that provides recovery to Friede Goldman of a
significant amount of its total additional costs, including direct contract-
related costs and a portion of its fixed costs and corporate overhead incurred
on these contracts. For financial reporting purposes, as of September 30,
1999, the Company has recognized revenue only to the extent of the amount of
direct contract-related costs incurred which it expects to recover, as
required by generally accepted accounting principles to account for claims.
Accordingly, the Company has adjusted previously recognized revenues and
gross profits to reflect the percentage of completion based on the revised
delivery dates and related cost estimates and expected recoveries. The net
impact of this adjustment to account for the unresolved claim and related
additional costs incurred and for the timing of recognition of related
revenues and expenses was a reduction of revenues in the third quarter of
approximately $12.8 million. The amount of the adjustment was based on, among
other things, management's evaluation of the status of the arbitration
proceedings and settlement negotiations and management's estimate of the
percentage of
8
<PAGE>
FRIEDE GOLDMAN HALTER, INC.
(formerly Friede Goldman International Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS--(Continued)
completion of the projects at the end of the quarter. Once the matter is
settled, under percentage of completion accounting, the Company will be
required to adjust revenues and estimated costs of the two projects in the
period in which the settlement occurs based on the actual settlement amount.
This could result in an additional adjustment to revenues and gross profit
depending on the amount ultimately recovered and the timing of recognition of
the related costs.
In the event that a settlement is not reached that permits Friede Goldman to
recover substantially all of its direct claim-related costs or if it is
ultimately determined in an arbitration proceeding that Friede Goldman is not
entitled to additional compensation or that Ocean Rig is entitled to
significant liquidated damages, the impact on Friede Goldman's operating
results for the period in which such a determination is made would be
materially and adversely affected to a significantly greater extent than that
described above. Conversely, to the extent settlement negotiations or the
arbitration proceeding result in the Company's recovering an amount in excess
of its direct claim-related costs, operating results for the period in which
such a determination is made would be favorable impacted.
9. NEW CREDIT FACILITY
In connection with the Halter Merger, the Company entered into a new senior-
secured revolving and letter of credit facility with a group of banks ("The
New Bank Credit Facility") that replaces the Company's existing Credit
Facility and Halter's existing Revolving Credit Agreement. All outstanding
amounts under these existing facilities were repaid with funds from the New
Bank Credit Facility. Under the terms of the New Bank Credit Facility, the
Company may borrow up to $120 million under a revolving credit facility. In
addition, the New Bank Credit Facility provides an approximate $44.2 million
letter of credit facility. The New Bank Credit Facility is guaranteed by all
of the Company's domestic subsidiaries and has a three-year term. Borrowings
are secured by substantially all of the Company's otherwise unencumbered
assets. Amounts outstanding under the senior secured revolving credit facility
may not exceed an amount based on specified percentages of the Company's
accounts receivable, inventory and net contract related investments. The New
Bank Credit Facility requires the Company to comply with certain financial
covenants, including placing limitations on additional borrowings and capital
expenditures, certain debt coverage ratios, minimum net worth and other
customary requirements.
10. 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 nine months ended October 4, 1998 and September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Oct. 4, Sept. 30,
1998 1999
----------- ----------
<S> <C> <C>
Net income........................................ $23,362,122 $9,507,551
Other comprehensive income
Foreign currency translation.................... 1,344,938 (866,107)
----------- ----------
Comprehensive income.............................. $24,707,060 $8,641,444
=========== ==========
</TABLE>
11. 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
9
<PAGE>
FRIEDE GOLDMAN HALTER, INC.
(formerly Friede Goldman International Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS--(Continued)
(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.
12. 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 rigs construction" and "equipment manufacturing."
The offshore drilling rigs 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 October 4, 1998 and September
30, 1999, below were prepared on the same basis as the Company's consolidated
financial statements.
<TABLE>
<CAPTION>
(In thousands of dollars)
---------------------------------------------------------
Offshore
Drilling
Rigs Equipment Intersegment
Construction Manufacturing Other Eliminations Total
------------ ------------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED OCT.
4, 1998
Revenues................ $ 79,729 $12,554 $ 1,757 $ (1,370) $ 92,670
Operating income........ 15,289 1,561 (2,614) -- 14,236
Total assets............ 209,525 72,432 54,418 (47,937) 288,438
THREE MONTHS ENDED SEP.
30, 1999
Revenues................ $ 46,234 $ 5,196 $ 449 $ (180) $ 51,699
Operating income........ (7,827) (689) (3,089) 72 (11,533)
Total assets............ 210,207 50,867 65,331 (50,344) 276,061
NINE MONTHS ENDED OCT.
4. 1998
Revenues................ $214,297 $34,832 $ 4,484 $ (3,595) $250,018
Operating income........ 43,314 2,338 (7,713) -- 37,939
Total assets............ 209,525 72,432 54,418 (47,937) 288,438
NINE MONTHS ENDED SEP
30, 1999
Revenues................ $302,557 $26,628 $ 2,362 $ (1,202) $330,345
Operating income........ 25,573 324 (9,168) -- 16,729
Total assets............ 210,207 50,867 65,331 (50,344) 276,061
</TABLE>
As a result of the Halter Merger discussed in Note 2, segment data presented
in future quarters may be changed to reflect new business segments that result
from reorganization of the combined companies' operations.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Industry Conditions and General Information
On November 3, 1999, the Company completed a merger with the Halter Marine
Group, Inc. ("Halter")and the name of the Company was changed to Friede
Goldman Halter Inc. Under the terms of the merger agreement, each stockholder
of Halter received 0.57 share of common stock of the Company for each share of
Halter. As a result, the Company issued approximately 16.4 million shares of
common stock to Halter stockholders. The merger will be accounted for as a
purchase business combination in which the Company will reflect the assets and
liabilities of Halter at fair value as of November 3, 1999 and will report the
operating activities of Halter for periods subsequent to November 3, 1999.
Accordingly, the following discussion and analysis does not include the
operations of Halter. In connection with the merger, the Company entered into
a new bank credit facility that provides up to $120 million in borrowings
under a senior-secured revolving and letter of credit facility of
approximately $44.2 million. See "Liquidity and Capital Resources".
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 September
30, 1999, and several of such projects remain in the Company's backlog as of
September 30, 1999.
During the second half of 1998, oil and gas prices declined rapidly, and the
utilization rates for mobile offshore drilling units also declined and remains
below previously achieved levels. According to Offshore Data Services, Inc.,
as of October 22, 1999, the worldwide utilization rate for mobile offshore
drilling units was 74.6% compared to 86.2% 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.
11
<PAGE>
The Company's backlog was approximately $337.9 million as of September 30,
1999. Substantially all of this backlog consisted 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., semisubmersible offshore drilling rig that is subject to the
owner's securing rig financing. Such financing is expected to be secured in
the fourth quarter of 1999. Halter's backlog was approximately $393.6 million
as of September 30, 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 nine months ended
September 30, 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 substantially increased its construction capacity by completing a
state-of-the-art shipyard 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 of 1998.
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 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. 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 impact of the factors discussed above is reflected by the decline in
third quarter 1999 revenues. Such decline was due, in part, to the completion
of certain projects and the delay in the commencement of other expected
projects. A further reflection of the cyclical nature of the industry is the
reduction in the company's workforce from approximately 3,000 employees at
October 4, 1998 to 2,700 at September 30, 1999.
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
12
<PAGE>
become known. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are identified. Other changes,
including those arising from contract penalty provisions and final contract
settlements, are recognized in the period in which the revisions are
determined. To the extent that these adjustments result in a reduction or
elimination of previously reported profits, the Company would report such a
change by recognizing a charge against current earnings, which might be
significant depending on the size of the project or the adjustment. Cost of
revenue includes costs associated with the fabrication process and can be
further broken down between direct costs (such as direct labor hours and raw
materials) allocated to specific projects and indirect costs (such as
supervisory labor, utilities, welding supplies and equipment costs) that are
associated with production but are not directly related to a specific project.
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.
In December 1997 and June 1998, the Company entered into contracts to
construct two semisubmersible drilling rigs for Ocean Rig ASA, a Norwegian
company. The Company commenced construction of one rig in June 1998 and the
other in January 1999. In late July and early August 1999, Friede Goldman
initiated discussions with Ocean Rig with respect to anticipated delays in the
completion and delivery of the two rigs from the original delivery dates of
August 26, 1999 and November 23, 1999. The Company has asserted that Ocean Rig
is responsible for the delays due to Ocean Rig-initiated design changes and
late delivery by Ocean Rig of information and equipment required to be
provided to The Company by Ocean Rig pursuant to the terms of the construction
contracts.
As a result of the delays, the Company expects that the aggregate cost to
construct the two rigs will increase significantly. Friede Goldman entered
into negotiations with Ocean Rig in early August for the purpose of seeking
compensation from Ocean Rig for additional costs and delay damages resulting
from the Ocean Rig-initiated design changes and late deliveries of information
and equipment. In connection with these negotiations, Ocean Rig denied
responsibility for causing the delivery delays and indicated that it would
seek delay damages from Friede Goldman in the event that the delivery dates
were not met.
On August 16, 1999, The Company and Ocean Rig entered into an agreement
providing for new delivery dates of March 31, 2000 and June 30, 2000 for the
two rigs. As part of this agreement, Ocean Rig agreed to make all payments
when due and as construction milestones are met in accordance with the two
contracts. The agreement also required both parties to submit supporting
documentation relating to their respective claims and required the parties to
meet to negotiate a resolution of their dispute. The parties provided each
other the required information and conducted meetings in late August to
discuss a resolution of the dispute. A resolution between the parties was not
reached during these meetings and fast track arbitration with respect to the
claims was initiated by Ocean Rig in London, England on September 3, 1999.
The Company has asserted an arbitration claim in excess of $75 million
seeking compensation for additional costs and delay damages relating to the
construction of the two rigs. Ocean Rig has indicated that it intends to seek
liquidated damages and damages at large for delay of up to a total of $28
million.
13
<PAGE>
Neither the amount of potential claims for additional compensation due to
Friede Goldman nor the maximum amount of liquidated damages potentially
payable to Ocean Rig under the contracts have been finally determined. Based
on settlement negotiations that have occurred subsequent to the initiation of
arbitration proceedings, the Company believes that it is likely that a
settlement will be reached that provides recovery to Friede Goldman of a
significant amount of its total additional costs, including direct contract-
related costs and a portion of its fixed costs and corporate overhead incurred
on these contracts. For financial reporting purposes, as of September 30,
1999, the Company has recognized revenue only to the extent of the amount of
direct contract-related costs incurred which it expects to recover, as
required by generally accepted accounting principles to account for claims.
Accordingly, the Company has adjusted recognized revenues and gross profits to
reflect the percentage of completion based on the revised delivery dates and
related costs revised costs estimated and expected recoveries. The net impact
of this adjustment to account for the unresolved claim and related additional
costs incurred and for the timing of recognition of related revenues and
expenses was a reduction in the third quarter of approximately $12.8 million.
The amount of the adjustment was based on, among other things, management's
evaluation of the status of the arbitration proceedings and settlement
negotiations and management's estimate of the percentage of completion of the
projects at the end of the quarter. Once the matter is settled, under
percentage of completion accounting, the Company will be required to adjust
revenues and estimated costs of the two projects in the period in which the
settlement occurs. This could result in an additional adjustment to revenues
and gross profit depending on the amount ultimately recovered and the timing
of recognition of the related costs.
In the event that a settlement is not reached that permits Friede Goldman to
recover substantially all of its direct claim-related costs or if it is
ultimately determined in an arbitration proceeding that Friede Goldman is not
entitled to additional compensation or that Ocean Rig is entitled to
significant liquidated damages, the impact on Friede Goldman's operating
results for the period in which such a determination is made would be
materially and adversely affected to a significantly greater extent than that
described above. Conversely, to the extent settlement negotiations or the
arbitration proceeding result in the Company's recovering an amount in excess
of its direct claim-related costs, operating results for the period in which
such a determination is made would be favorable impacted.
Results of Operations
Comparison of the Three Month Periods Ended September 30, 1999 and October
4, 1998
During the three months ended September 30, 1999, the Company generated
revenue of $51.7 million, compared to the $92.7 million generated for three
months ended October 4, 1998. In the third quarter of 1998, the company was
operating at a near full capacity level in its U.S. and Canadian facilities.
During the second half of 1999, several projects have been completed and
other, anticipated projects have been delayed. Further, conditions in the
energy service sector have cause potential customers to delay placing orders
for new construction of rigs, and major repair or conversion projects.
Revenues for the third quarter of 1999 were also reduced by the adjustment in
revenues attributable to the Company's customer dispute and related claim
discussed above.
14
<PAGE>
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
September 30, 1999 and October 4, 1998.
<TABLE>
<CAPTION>
(In thousands
of dollars)
Three Months
Ended
----------------
Sept.
30, Oct. 4,
1999 1999
------- -------
<S> <C> <C>
New rig construction.................................... $24,100 $49,257
Conversion/retrofit of rigs............................. 17,658 29,865
Shipbuilding and ship and rig repair.................... 4,476 607
Equipment manufacturing................................. 5,196 12,554
Other................................................... 449 1,757
Intersegment eliminations............................... (180) (1,370)
------- -------
Total revenues........................................ $51,699 $92,670
======= =======
</TABLE>
Revenues from new rig construction for the three month period ended
September 30, 1999, relate to contracts for completion and outfitting of two
new semisubmersible drillings rigs. New rig construction revenues for the
three months ended October 4, 1998 related to three contracts. New rig
construction revenues for the third quarter of 1999 were also reduced by the
adjustment related to the contract dispute discussed above.
Revenues from conversion/retrofit of rigs decreased in the third quarter of
1999 compared to 1998 primarily as the result of some of the projects reaching
completion. During the three months ended September 30, 1999, the Company
earned revenue on two conversion/retrofit projects compared to four such
projects that were in progress during the same period of 1998. 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 fourth quarter of 1999. Equipment manufacturing revenues decreased because
of the cyclical decline in demand for energy service related equipment.
Cost of revenue was $56.1 million for the three months ended September 30,
1999, compared to $70.8 million for the three months ended October 4, 1998.
The gross margin earned by the Company for the quarter ended September 30,
1999, was reduced by the adjustment to revenue discussed below related to a
customer contract dispute. Excluding the adjustment to revenue, the gross
margin percentage declined as a result of a lower amount of higher margin work
on repair and conversion projects than in prior quarters and a decline in
equipment manufacturing revenues.
Selling, general and administrative expenses (SG&A expenses) were $7.1
million in the three months ended September 30, 1999, compared to $7.7 million
for the three months ended October 4, 1998. This decline in SG&A expenses is
due to 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 employee bonuses, reduced
professional fees and a general decline in other administrative costs.
An operating loss of $11.5 million was incurred in the three months ended
September 30, 1999, compared to income of $14.1 million for the three months
ended October 4, 1998. This change in operating results is primarily
attributable to the adjustment in revenues and resulting gross profit as a
result of the accounting for the claims related to the customer dispute
discussed in more detail above and the decline in volume due to completion of
several projects earlier in the year.
15
<PAGE>
Interest expense for the three months ended September 30, 1999, increased to
$1.4 million from $0.6 million for the three months ended October 4, 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 (benefit) for income taxes for the three months ended
September 30, 1999, reflects a combined Federal and State income tax rate of
approximately 34.2%, resulting from the recovery of previously provided income
taxes on earnings in the first half of 1999. The provision for income taxes
for the three months ended October 4, 1998 reflects a combined Federal and
State tax rate of 36.2%. Foreign taxes included in the provision for income
taxes for the three month periods ended September 30, 1999 and October 4, 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 Nine Month Periods Ended September 30, 1999 and October 4,
1998
During the nine months ended September 30, 1999, the Company generated
revenue of $330.3 million, an increase of 32.1%, compared to the $250.0
million generated for nine months ended October 4, 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 nine months ended September 30, 1999 and October 4,
1998.
<TABLE>
<CAPTION>
(In thousands of
dollars)
Nine months ended
------------------
Sept.30, Oct. 4,
1999 1998
-------- --------
<S> <C> <C>
New rig construction.................................. $187,618 $ 71,032
Conversion/retrofit of rigs........................... 99,828 114,777
Shipbuilding and ship and rig repair.................. 15,111 28,488
Equipment manufacturing............................... 26,628 34,832
Other................................................. 2,362 4,484
Intersegment eliminations............................. (1,202) (3,595)
-------- --------
Total revenues...................................... $330,345 $250,018
======== ========
</TABLE>
Revenues from new rig construction for the nine month periods ended October
4, 1998 and September 30, 1999, relate to contracts for completion and
outfitting of three new submersible drillings rigs. Construction on one of the
rig commenced in August, 1998 and another in December, 1998. Accordingly,
revenues for 1999 reflect construction activity for several more months than
are reflected in 1998 revenues. During the nine months ended September 30,
1999, the Company earned revenue on four conversion/retrofit projects. One of
the rigs was delivered in June 1999, another was delivered in July 1999, and a
third is expected to be delivered in the fourth 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 fourth quarter of 1999. Equipment manufacturing revenues decreased because
of a decline in the demand of energy service related equipment.
Cost of revenue was $288.8 million for the nine months ended September 30,
1999, compared to $188.6 million for the nine months ended October 4, 1998.
The gross margin percentage earned by the Company for the nine months ended
September 30, 1999, was approximately 12.6% compared
16
<PAGE>
to 24.6% for the same period of 1998. This decline is primarily the result of
the significantly higher portion of the Company's revenues for the nine months
ended September 30, 1999, attributable to the new construction of offshore
drilling rigs compared to the nine months ended October 4, 1998. Gross profits
for the nine months ended September 30, 1999 were reduced as a result of the
adjustment to revenues discussed above to the account for the claim related to
the customer dispute. The adjustment directly reduced revenues and, as a
result, gross profit for the period. During the nine months ended October 4,
1998, approximately 45.9% 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 $337.9
million backlog at September 30, 1999, approximately $273.4 million is
attributable to fixed price contracts for completion or construction of new
rigs.
Selling, general and administrative expenses (SG&A expenses) were $24.9
million in the nine months ended September 30, 1999, compared to $23.5 million
for the nine months ended October 4, 1998. The slight 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. As a
percentage of revenues, SG&A expenses declined to 7.5% for the nine months
ended September 30, 1999, compared to 9.4% for the nine months ended October
4, 1998.
Operating income for the nine months ended September 30, 1999 decreased to
$16.7 million for the nine months ended September 30, 1999, primarily as a
result of decreased gross profit discussed in the preceding paragraphs.
Interest expense for the nine months ended September 30, 1999, increased to
$3.6 million from $1.3 million for the nine months ended October 4, 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 nine months ended September 30, 1999,
reflects a combined Federal and State income tax rate of approximately 29.9%.
The provision for income taxes for the nine months ended October 4, 1998
reflects a combined Federal and State tax rate of 38.3%. Foreign taxes
included in the provision for income taxes for the nine months ended September
30, 1999, were approximately $1.3 million. Foreign taxes for the nine months
ended October 4, 1998, were $1.2 million. 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.
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 nine month period ended September 30, 1999, working capital
increased by approximately $9.1 million. This increase is the result of
earnings during the nine-month period ended September 30, 1999 and the
relatively low level of capital expenditures for this period compared to
calendar year 1998. Cash used in operations was $33.7 million for the nine
months ended September 30, 1999, compared to cash provided by operations of
$19.0 million for the nine months ended October 4, 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
September 30, 1999 billings in excess of costs and estimated earnings
decreased $11.4 million during that period. As noted above, over $187.6
million of revenues for the nine month period ended September 30, 1999 were
17
<PAGE>
from new rig construction projects compared to only $71.0 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
milestones. As a result, balances in cash, accounts receivable, costs and
estimated earnings in excess of billings and billings 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 nine-month periods ended September 30, 1999, the
Company incurred approximately $1.2 million and $6.7 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 had 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% (7.88% at September 30, 1999). A balance of
$12.0 million was outstanding at September 30, 1999, and an additional $13.0
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 $25 million in
borrowings. The available balance was $25.0 million at September 30, 1999.
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.
In connection with the Halter Merger, the Company entered into a new senior-
secured revolving and letter of credit facility with a group of banks ("The
New Bank Credit Facility") that replaces the Company's existing Credit
Facility described above and Halter's existing Revolving Credit Agreement. All
outstanding amounts under these existing facilities were repaid with funds
from the New Bank Credit Facility. Under the terms of the New Bank Credit
Facility, the Company may borrow up to $120 million under a revolving credit
facility. In addition, the New Bank Credit Facility provides an approximate
$44.2 million letter of credit facility. The New Bank Credit Facility is
guaranteed by all of the Companies domestic subsidiaries and has a three-year
term. Borrowings are secured by substantially all of the Company's otherwise
unencumbered assets. Amounts outstanding under the senior secured revolving
credit facility may not exceed an amount based on specified percentages of the
Company's accounts receivable, inventory and net contract related investments.
The New Bank Credit Facility requires the Company to comply with certain
financial covenants, including placing limitations on additional borrowings
and capital expenditures, certain debt coverage ratios, minimum net worth and
other customary requirements.
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 (including any payment required to be made
related to the Marystown Facility) 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, borrowings under
the New Bank Credit Facility, or other debt financing or equity financing, may
be required in the future if the Company significantly increases its
conversion, retrofit and repair business, obtains significant additional
orders to construct new drilling rigs or production units or does not recover
damages from Ocean Rig on a timely basis to cover additional costs incurred by
the Company with respect to the construction of the two rigs for Ocean Rig as
discussed above. Although the Company believes that, under such circumstances,
it would have adequate borrowing capacity
18
<PAGE>
under the New Bank Credit Facility for these purposes, 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 September 30, 1999, the Company had invested approximately $12.9 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 September 30, 1999. The Company's investment in Ilion LLC is
accounted for using the equity method.
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.
The following discussion addresses how the Company has addressed Year 2000
Compliance prior to the Halter Merger. See Halter's Year 2000 Compliance
below.
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 for testing in December, 1999, and is expected to be substantially
complete by January 1, 2000. As part of the implementation process, the new
system has been tested for Y2K compliance. Implementation of the system's
applications at the Company's international locations will follow the domestic
implementation.
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.
19
<PAGE>
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 by January 1, 2000. 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 complete. 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 fourth 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
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 $1.8 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 the end of the
year. 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.
HALTER'S YEAR 2000 COMPLIANCE. Management of Halter formed a year 2000
project team ("Project 2000") responsible for identifying the functions
affected by Year 2000 and developed a plan to reduce the potentially harmful
impact of year 2000 issues on its operations. The focus of Project 2000 is
segregated into three areas: information technology, which primarily includes
the Company's financial applications and voice communication equipment;
production processes and systems, which primarily includes machinery and
equipment with embedded technology and software used in the design and
production of its products; and external agents, which includes key business
relationships with vendors, customers, and other third parties including, but
not limited to, financial institutions. An evaluation of each of these areas
has been or is being performed according to the following four phases:
assessment, remediation, testing and implementation.
20
<PAGE>
Project 2000 has completed its assessment of significant software used in
the information technology area and has completed the remediation, testing and
implementation phases of this area. The Company has determined that its
financial software is Year 2000 compliant and expects to be able to continue
to take customer orders, invoice customers, collect payments and process
payments to vendors. Project 2000 has completed its assessment of the
production processes and systems area as well as the remediation, testing, and
implementation phases. Assessment, remediation, testing and implementation
measures are currently being finalized in the area of external agents. These
phases are expected to be completed by year-end.
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 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
21
<PAGE>
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 September 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 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.
22
<PAGE>
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
<TABLE>
<C> <S>
11.1 Computation of Earnings per Share
27 Financial Data Schedule
</TABLE>
(b) Report of Form 8-K.
The Company filed a Current Report on Form 8-K on September 15, 1999
23
<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 Gulfport, State of
Mississippi, on the 15th day of November 1999.
FRIEDE GOLDMAN INTERNATIONAL INC.
/s/ Rick S. Rees
By: _________________________________
Rick S. Rees, Executive Vice-
President and
Chief Financial Officer
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
11.1 Computation of Earnings per Share
27 Financial Data Schedule
</TABLE>
25
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Oct. 4,
1998 Sept. 30, 1999
----------- --------------
<S> <C> <C>
Net Income.......................................... $23,362,122 $ 9,507,551
Basic:
Weighted average number of shares outstanding..... 24,342,842 23,353,221
----------- -----------
Basic earnings per share.......................... $ 0.96 $ 0.41
=========== ===========
Diluted:
Weighted average number of shares outstanding..... 24,342,842 23,353,221
Dilutive effects of stock options using the
Treasury stock method............................ 376,541 233,243
----------- -----------
24,719,383 23,586,464
----------- -----------
Diluted earnings per share.......................... $ 0.95 $ 0.40
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 9,865,315
<SECURITIES> 0
<RECEIVABLES> 29,241,294
<ALLOWANCES> 0
<INVENTORY> 45,354,203
<CURRENT-ASSETS> 111,145,066
<PP&E> 139,782,820
<DEPRECIATION> 19,199,407
<TOTAL-ASSETS> 276,060,809
<CURRENT-LIABILITIES> 96,185,222
<BONDS> 69,593,718
0
0
<COMMON> 234,325
<OTHER-SE> 94,744,175
<TOTAL-LIABILITY-AND-EQUITY> 276,060,809
<SALES> 330,344,590
<TOTAL-REVENUES> 330,344,590
<CGS> 288,762,011
<TOTAL-COSTS> 313,615,751
<OTHER-EXPENSES> 61,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,585,763
<INCOME-PRETAX> 13,558,354
<INCOME-TAX> 4,050,803
<INCOME-CONTINUING> 9,507,551
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,507,551
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.40
</TABLE>
