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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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)
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MISSISSIPPI 64-0900067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13085 SEAWAY ROAD 39503
GULFPORT, MISSISSIPPI (Zip Code)
(Address of principal executive offices)
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(228) 896-0029
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: COMMON STOCK, $.01,
PAR VALUE
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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. [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 under the Securities Exchange Act of 1934)
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
As of March 20, 2000 there were 39,972,844 shares of Common Stock, $.01 par
value, of Friede Goldman Halter, Inc. issued and outstanding, 27,680,464 of
which shares having an aggregate market value of approximately $171.3 million,
were held by non-affiliates of the registrant (affiliates being, for these
purposes only, directors, executive officers and holders of more than 5% of the
registrant's Common Stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement related to the registrant's 2000 annual
meeting of shareholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 are incorporated by reference into Part III of
this Form 10-K.
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TABLE OF CONTENTS
PART I
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Item 1. Business.................................................... 3
Risk Factors................................................ 18
Item 2. Properties.................................................. 25
Item 3. Legal Proceedings........................................... 28
Item 4. Submission of Matters to a Vote of Security Holders......... 29
Executive Officers of the Registrant........................ 29
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 31
Item 6. Selected Financial Data..................................... 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
Item Quantitative and Qualitative Disclosures about Market
7a. Risk........................................................ 41
Item 8. Financial Statements and Supplementary Data................. 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III
Item Director and Executive Officers of the Registrant...........
10. 43
Item Executive Compensation......................................
11. 43
Item Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 43
Item Certain Relationships and Related Transactions..............
13. 43
PART IV
Item Exhibits, Financial Statement Schedules and Reports on Form
14. 8-K......................................................... 44
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FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, included in this Form
10-K, are forward-looking statements. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions, including (i) risks of
reduced levels of demand for the Company's products and services resulting from
reduced levels of capital expenditures of oil and gas companies relating to
offshore drilling and exploration activity and reduced levels of capital
expenditures of offshore drilling contractors, which levels of capital
expenditures may be affected by prevailing oil and natural gas prices,
expectations about future oil and natural gas prices, the cost of exploring for,
producing and delivering oil and gas, the sale and expiration dates of offshore
leases in the United States and overseas, the discovery rate of new oil and gas
reserves in offshore areas, local and international political and economic
conditions, the ability of oil and gas companies to access or generate capital
sufficient to fund capital expenditures for offshore exploration, development
and production activities, and other factors, (ii) risks related to expansion of
operations, either at its shipyards or one or more other locations, (iii)
operating risks relating to conversion, retrofit and repair of drilling rigs,
new construction of drilling rigs and production units and the design of new
drilling rigs, new construction and repair of vessels and the design of new
vessels, and the design and manufacture of engineered products (iv) contract
bidding risks, (v) risks related to dependence on significant customers, (vi)
risks 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, (viii) risks related to future
government funding for certain vessel contracts and prospects, (ix) risks
related to the completion of contracts to construct offshore drilling rigs and
vessels at costs not in excess of those currently estimated by the Company and
prior to the contractual delivery dates and (x) risks of untimely performance by
companies which provide services to the Company as subcontractors under
construction contracts. 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.
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ITEM 1. BUSINESS
GENERAL
Friede Goldman Halter, Inc. ("FGH" or, together with its subsidiaries, "the
Company") is a world leader in the design and manufacture of equipment for the
maritime and offshore energy industries. Formerly Friede Goldman International,
Inc. ("FGI"), the Company's name was changed to FGH effective with the merger
with Halter Marine Group, Inc. ("HMG") on November 3, 1999. FGH is incorporated
under the laws of the State of Mississippi. FGI, the predecessor company, was
formed in February 1997 to hold the combined assets of HAM Marine, Inc. ("HAM
Marine") and Friede & Goldman, Ltd. ("FGL") and completed an initial public
offering in July of 1997.
At the time of its initial public offering in July 1997, FGI conducted all
of its conversion, retrofit and repair services at its 32-acre shipyard, located
in Pascagoula, Mississippi (the "Pascagoula Facility" or "FGO West Facility").
Since the initial public offering, the Company has (i) opened its new shipyard
on Greenwood Island, Mississippi (the "Greenwood Island" or "FGO East
Facility"), (ii) added two Canadian shipyards to its operations, (iii) acquired
a group of affiliated French companies engaged in the design and fabrication of
marine and offshore rig deck equipment, and (iv) merged with HMG, a leading
provider of design, new construction, conversion and repair services for
ocean-going vessels, offshore drilling rigs and production platforms and
engineered products.
Through its subsidiary Friede Goldman Offshore, Inc. ("FGO", formerly HAM
Marine, Inc.), the Company has been continuously engaged in the business of
converting, retrofitting and repairing offshore drilling rigs since 1982.
Through F&G Ltd., also a subsidiary, the Company has been engaged in the
business of offshore rig design for more than 50 years. The merger with HMG
significantly expanded the Company's capacity to convert, retrofit, repair and
modify offshore drilling rigs; greatly expanded the product offerings of the
Company's Engineered Products segment, and made it a leader in designing,
building, and repairing a wide range of marine vessels.
The Company conducts its operations in three primary segments: Offshore,
Vessels, and Engineered Products.
Offshore Segment
Services provided by the Offshore segment include the conversion, retrofit,
repair and modification of existing offshore drilling rigs and the design,
construction and equipping of new offshore drilling units. The Company's
Offshore segment customers consist primarily of drilling contractors that drill
offshore exploratory and development wells for oil and gas companies throughout
the world, particularly in the Gulf of Mexico, the North Sea and areas offshore
of West Africa, South America and eastern Canada.
Vessels Segment
The Company's Vessels segment is the largest builder of small to
medium-sized ocean-going vessels in the United States. Services provided by the
Vessels segment include the design, new construction, conversion and repair for
ocean-going vessels including offshore support vessels ("OSV's"), double hull
fuel barges, oceanographic research and survey ships, high speed patrol boats
and ferries, tug boats, tow boats and offshore barges. Customers of the Vessels
segment consist of offshore energy service companies, domestic and foreign
governments and other commercial enterprises. The Vessels segment also provides
a wide variety of repair and conversion services for vessels and barges that
service the offshore energy and commercial markets.
Engineered Products Segment
The Engineered Products segment services include the design and manufacture
of the world's largest cranes, mooring systems, marine deck equipment, jacking
systems, specialty mechanical
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systems, and a comprehensive aftermarket repair and retrofitting operation. The
primary customers of the Company's Engineered Products Group, in addition to the
customers of the Company's Offshore segment, include offshore construction
contractors, shipyards, commercial cruise-liner operators, general merchant
marine, the fishing industry, on-land general construction contractors and the
U.S. Government.
MERGER WITH HALTER MARINE GROUP, INC.
On November 3, 1999, FGI completed a merger with HMG. HMG was a leading
provider of design, new construction, conversion and repair services for
ocean-going vessels, offshore drilling rigs and production platforms and
engineered products servicing the offshore energy, government and commercial
markets. Its Vessels segment was also the largest builder of small to
medium-sized ocean-going vessels in the United States. HMG maintained multiple
domestic production facilities and four international joint ventures. Through
combining operations with HMG, the Company believes it should be able to achieve
various synergies, cost savings and other benefits, including: (i) the ability
of the combined company to achieve greater efficiencies from integrating
production capacity; (ii) the diversification of product markets potentially
reducing dependence of the combined company on the cyclical offshore energy
market; (iii) the ability to pursue additional opportunities for construction of
deepwater exploration and production equipment through the greater production
capacity and larger workforce of the combined company; and (iv) the ability to
combine design and engineering expertise, as well as integrating the
complementary engineered products operations of both companies, to achieve a
broader range of engineered products for a larger customer base. As set forth in
the merger agreement, stockholders of HMG received 0.57 of a share of the
Company's Common Stock in exchange for each share of HMG common stock. A total
of 16,450,292 shares was issued at a value of $193.3 million. The merger is
being accounted for as a purchase business combination.
Operations acquired through the merger are primarily conducted through the
wholly-owned subsidiary, Halter Marine, Inc. ("Halter"). Halter has multiple
wholly-owned subsidiaries, including among others: (i) Maritime Holdings, Inc.
which encompasses the Texas operations now referred to by the Company as Friede
Goldman Offshore Texas ("FGOT"), a division of the Offshore Segment; and (ii)
Halter Engineered Products Group, Inc. ("EPG") which conducts the operations of
its Engineered Products segment. Halter has several other wholly-owned
subsidiaries through which it conducts its operations within the Company's
Vessels segment.
OVERVIEW OF PRODUCTS AND SERVICES
Offshore Segment
Primary customers of the Company's Offshore segment are drilling
contractors with operations offshore in the Gulf of Mexico, the North Sea, West
Africa, eastern Canada and South America and other offshore areas of the world.
These drilling contractors generally own and operate offshore drilling rigs and
provide drilling services to oil and gas companies. Several factors determine
the type of rig most suitable for a particular project, the more significant of
which are the marine environment, water depth and seabed conditions at the
proposed drilling location, whether the drilling is to be done over a production
platform or other fixed structure, the intended well depth, and variable deck
load and well control requirements. A brief description of the types of offshore
drilling rigs and production units currently serviced by the Offshore segment is
set forth below.
Semi-submersibles. Semi-submersible rigs consist of an upper working and
living deck resting on vertical columns connected to lower hull members. Such
rigs operate in a "semi-submerged" position, remaining afloat, in a position
which places the water-line approximately half way between the top of the lower
hulls and bottom of the deck. The rig is typically anchored in position and
remains stable for drilling in the semi-submerged floating position.
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There have been four generations of semi-submersible drilling rigs, with
each successive generation incorporating improvements that enable the rigs to
drill more efficiently and in increasingly harsh marine environments. Fourth
generation semi-submersibles are typically capable of operating in water depths
of up to 5,000 feet and, in some cases, greater depths. Certain fourth
generation semi-submersibles are equipped with computer controlled thrusters to
allow for dynamic positioning, which allows the rig to remain on location over a
drill site in deep waters without the use of anchors and mooring lines.
A major portion of the Company's work to date has involved the retrofit,
repair and conversion of earlier generation semi-submersibles which generally
operate in maximum water depths of between 1,000 to 2,000 feet into deepwater
semi-submersible. The design of many of these earlier generation
semi-submersible rigs, including long fatigue-life and advantageous stress
characteristics, together with increasing demand for deepwater drilling
capabilities have made them well-suited for significant retrofitting projects.
Jackups. Jackup rigs are mobile, self-elevating drilling platforms equipped
with legs that are lowered to the ocean floor until a foundation is established
to support the drilling platform. The rig hull includes the drilling rig,
jacking system, crew quarters, loading and unloading facilities, storage areas
for bulk and liquid materials, heliport and other related equipment. Jackups are
used extensively for drilling in water depths from 20 feet to 400 feet. Some
jackup rigs have a lower hull (mat) attached to the bottom of the rig legs,
while others have independent legs.
Jackup rigs can be generally characterized by their design as either slot
jackups or cantilevered jackups. Slot jackups are generally of an older vintage
and are configured for drilling operations to take place through a slot at the
aft of the hull. A slot design is generally appropriate for drilling exploratory
wells in the absence of any existing permanent structure, such as a production
platform. A cantilevered jackup can extend its drill floor and derrick and
either drill exploratory wells or drill over an existing, fixed structure,
thereby permitting the rig to drill new wells or work over existing wells
through such a structure. The Company has converted many slot-design rigs into
cantilever configurations.
Drillships. Drillships, which are typically a self-propelled ship shape
hull, are positioned over a drill site through the use of either a mooring
system or a computer controlled dynamic positioning system similar to those used
on certain fourth generation semi-submersible rigs. Drill-ships are capable of
operating in water depths ranging from 200 feet to 10,000 feet.
Floating Production Facilities. A floating production facility ("FPF")
consists of a ship or semi-submersible vessel upon which production equipment is
mounted. In many cases, the hull is a converted tanker (often referred to as a
floating, production, storage and offloading, or FPSO, unit). In addition,
semi-submersible drilling units have been converted into floating production
units. In a few cases, a new hull has been purpose-built as an FPF. For harsh
weather locations, FPFs are designed with a mooring system that provides
weathervaning capability so that the FPF can be rotated on location to minimize
the effects of wave, wind and current actions. The production risers in these
FPFs are connected to the hull through a swivel system that also accommodates
the mooring system. The hull of an FPF is typically used for on-board oil
storage, which is an important feature for remote locations where export
pipelines are not available and fixed oil storage availability is limited or
nonexistent.
Design and Engineering Services. Through its FGL subsidiary, the Company
performs design and engineering of offshore drilling and production units,
including jackups, semi-submersibles, drillships and floating production,
storage and offloading vessels. FGL has a long history of successful designs
with 50 F&G Ltd. designed semi-submersible drilling, pipelaying, and
accommodation units in service worldwide, and over 30 jackup drilling units of
FGL design operating worldwide.
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Vessels Segment
Primary customers of the Company's Vessels segment are offshore energy
service companies, domestic and foreign governments and other commercial
enterprises. Services provided by the Vessels segment include the design, new
construction, conversion and repair of ocean-going vessels including offshore
support vessels ("OSV's") and double hull fuel barges for energy service
companies; oceanographic research and survey ships, high speed patrol boats and
ferries for domestic and foreign governments; and, tugboats, towboats and
offshore barges for other commercial enterprises. The Vessels segment also
provides a wide variety of repair and conversion services for vessels and barges
that service the offshore energy and commercial markets. A brief description of
the products offered by the Vessels segment follows.
Offshore Support Vessels and Double-hull tank barges. The Company
constructs supply boats, anchor handling tug supply boats and anchor handling
tugs (collectively, "offshore support vessels" or "OSV's") which serve oil and
gas drilling and production facilities and support offshore construction and
maintenance work. The Company's supply boats range from 205 feet to 254 feet in
length and generally range in price from $7.0 million to $25.0 million. In
addition to transporting deck cargo, such as pipe or drummed materials, supply
boats transport liquid mud, potable water, diesel fuel, dry bulk cement and dry
bulk mud. Supply boats constructed by the Company range from standard supply
boats to multi-purpose sophisticated ships with high horsepower and bollard
pull, automated controls, dynamic positioning, controllable pitch propellers,
articulated rudders, kort nozzles and any type of auxiliary, deck or towing
equipment. Anchor handling tugs and anchor handling tug supply boats constitute
a separate class of offshore support vessels. These vessels have more powerful
engines and deck mounted winches and are capable of towing and positioning
mobile offshore rigs and their anchors as well as providing supply vessel
services.
The Company builds a variety of offshore barges for the energy market,
primarily offshore double-hull tank barges. Contract prices for such barges
range from $15.0 million to $26.0 million. These barges are used by operators to
carry cargo such as liquefied petroleum gas, molten sulfur, propane, butane,
propylene, heavy oil, phenol, jet fuel and other petroleum products and range
from 400 feet to 580 feet in length with as many cargo tanks, decks and support
systems as necessary for the barge to be used for its intended function.
Oceanographic Research and Survey Ships, High Speed Patrol Boats and
Ferries. The largest customer of the Vessels segment is the U.S. Navy for which
the Company constructs several types of vessels, principally oceanographic
survey and research ships and patrol boats. Oceanographic survey and research
ships range in length from 210 feet to 325 feet and range in price from $50.0
million to $70.0 million. Patrol boats are high-speed special operations craft,
which are approximately 80 feet in length and which generally range in price
from $3.0 million to $5.0 million.
In addition to the U.S. Navy, the Company constructs vessels for state,
federal and foreign governments. The Company constructs 78 foot patrol craft
fast ("FCFs") for foreign navies. The Company has also built passenger/vehicle
ferries for governmental operators on all three U.S. Coasts. These vessels range
in length from 90 feet to 383 feet and range in price from $1.0 million to $76.0
million.
Other Commercial Vessels. The Company constructs several types of vessels
for the non-energy related commercial market, principally offshore barges,
tugboats and inland tow boats. The Company builds a variety of offshore barges
for the non-energy related commercial market, including container and deck
barges. Contract prices for such barges range from approximately $2.0 million to
$26.0 million. These barges are used by operators to carry commodities such as
grain, coal, wood products, containers and rail cars. Other barges function as
pipe laying barges, cement unloaders and split hull dump scows. Such barges
range from 250 feet to 410 feet in length.
The Company builds both tug boats and inland tow boats. Tug boats are used
for towing and pushing, port management, shipping, piloting, fire fighting and
salvage. Tug boats are built with two
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or three engines, standard propellers, controllable pitch propellers, azimuthing
Z-drives, cycloidal propulsion, and with or without steerable or fixed nozzles.
Inland tow boats are used by waterway operators to push inland barges. The
Company manufactures a full line of tow or push boats. Tug and tow boats range
from 70 feet to 120 feet in length and generally range in price from $1.5
million to $5.0 million.
Repair Services. The Company repairs a wide range of marine vessels and
barges utilizing its 15 drydocks at five different facilities. Repair jobs can
range in value from $10,000 to $1.5 million. In addition, the Company performs
double hulling of single hull ocean-gling barges to its repair facilities that
range in price from $8.0 million to $16.0 million.
Engineered Products Segment
Primary customers of the Company's Engineered Products Group, in addition
to the customers of the Company's Offshore segment, include offshore
construction contractors, shipyards, commercial cruise-liner ship-owners,
general merchant marine, the fishing industry, on-land general construction
contractors and the U.S. Government. The Engineered Products segment services
include the design and manufacture of the world's largest cranes, mooring
systems, marine deck equipment, jacking systems, specialty mechanical systems,
and a comprehensive aftermarket repair and retrofitting operation.
Cranes, Mooring Systems, Drilling and Marine Deck Equipment. The Company's
Engineered Products Group includes AmClyde Engineered Products Company, Inc.
("AmClyde") and Friede Goldman France ("BLM").
AmClyde represents the following brand names: AmClyde (marine cranes,
shipyard gantry cranes, stevedoring cranes, stiffleg derricks, mooring systems,
winches, windlasses and specialty mechanical systems; Unit Mariner (pedestal
cranes); Lucker (linear winches and jacking systems); Hepburn (winches and
mooring systems); Fritz Culver (winches, deck equipment and related machinery);
McElroy (winches and deck equipment); Sauerman (material handling machinery,
bucket and components); and J & B (drilling rig machinery and related
equipment).
Friede Goldman France is a holding company with two operating subsidiaries:
Brissoneau & Lotz Marine S.A. ("BLM") and BOPP S.A. ("BOPP"). These entities are
collectively referred to herein as the "BLM Companies." The BLM Companies
represent the following brand names: BLM (deck equipment, including mooring,
anchoring and cargo handling equipment such as deck cranes, provision cranes and
hose handling cranes for general marine and merchant vessels); BLM Offshore
(rack and pinion jacking systems used on offshore drilling jack-up rigs, mooring
systems used on semi-submersible drilling rigs, and pedestal cranes used on
drilling rigs), and BOPP (fishing winches for tuna seiners and related
equipment. BOPP also includes the brand name Kerdranvant (steering gear for
marine vessels).
Drilling equipment typically consists of the items such as derricks, rotary
tables, top drive units, blow out preventers, pipe handling equipment, mud
pumps, etc. required to conduct drilling operations. Marine deck equipment
typically consists of mooring, anchoring, cargo handling equipment, pedestal
cranes, skidding equipment and rig jacking equipment (on jackup rigs). In
connection with most major retrofit, conversion or new build projects, the owner
of the drilling unit contracts directly with the suppliers of drilling and
marine deck equipment for the purchase of such equipment for the rig. Typically
such equipment will be installed by the shipyard, and is often referred to as
Owner Furnished Equipment or "OFE". Through the acquisition of the BLM Companies
and the merger with HMG, the Company has developed the Engineered Products
segment. The Company's Engineered Products segment has the capability to supply
a wide variety of marine deck equipment to its offshore drilling unit customers
and to participate in the market for the marine deck equipment on drilling units
being modified or constructed by other shipyards. The combined companies of the
Engineered Products segment are also involved in the design and manufacturing of
marine equipment for marine shipyards throughout the world (for fitting on
cruise
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liners, bulk carriers, cargo vessels, tankers, LNG's etc.) and are the leading
provider of large marine cranes for the world's offshore construction
contractors.
After-Market Sales and Service. The Engineered Products segment also sells
parts and service to support its products once they are delivered. It has a
service team who performs repair services worldwide and it maintains an
inventory of spare parts to support its products.
DESCRIPTION OF OPERATIONS
Offshore Segment
Through its Offshore segment, 1999 operations of the Company consisted of
several conversion, retrofit and repair projects for offshore drilling
contractors and work on the new build completion of three semi-submersible
offshore drilling units. Additionally, through its merger with HMG, the Company
was performing the new construction of three semi-submersible drilling units;
although, at year-end, fabrication on two of these units had been delayed. (See
Item 14 -- Note 14 of the Notes to the Consolidated Financial Statements for
additional information regarding the status of these two units.) Also, two
semi-submersible rigs were under conversion. Significant conversion or retrofit
projects generally take 8 to 14 months to complete, whereas certain repair
projects may require only 1 to 3 months to complete. New rig construction
projects can require from 18 to 30 months to complete.
Conversions. Conversions consist generally of the conversion of one type of
drilling rig into a different type, such as the conversion of a slot jackup to a
cantilevered jackup, the conversion of a submersible rig to a semi-submersible
rig, or the conversion of a drilling rig or tanker into an FPF. FPF conversions
typically require the demolition and removal of all drilling equipment and
substructure (including the derrick system, rotary system, tubulars, mud
treating and pumping units and well control systems) and the reconfiguration of
the decks to accommodate heavy skid mounted processing modules, production
risers and handling equipment. This production equipment is then interconnected
through the installation of piping, electrical wiring and walkways. Because
production, processing and storage facility additions typically increase a rig's
variable deck load, the Company is typically required to complete hull
reinforcements and buoyancy and stability enhancements.
The Company completed two conversions in 1999 and performed the final
outfitting of one other rig conversion. At December 31, 1999, the Company was in
the process of converting one submersible into a semi-submersible and had
entered into contracts to convert one additional submersible into a
semi-submersible and one jackup into a production unit.
Retrofits. Retrofits consist generally of improvements to the technical
capabilities, tolerances and systems of drilling and production equipment.
Retrofits performed on semi-submersible rigs include buoyancy and stability
enhancements (typically pontoon extensions and additional column sponsons) and
the addition or improvement of self-propulsion systems, positioning thrusters
and self-contained mooring systems. Jackup retrofits include strengthening and
extending the rig legs and reinforcing the spud cans on the existing legs. The
Company is also capable of upgrading living quarters and facilities to
accommodate harsh environment drilling conditions and to meet North Sea
regulatory requirements, improving ventilation systems and strengthening or
replacing heliports to accommodate larger aircraft.
At December 31, 1999, the Company was in the process of retrofitting two
semi-submersible drilling units.
Repairs. The Company performs a broad range of inspection and repair work
for its clients. Necessary repairs are identified both in connection with
retrofit and conversion projects as well as in connection with periodic
inspections performed at the shipyard which are required by the U.S. Coast Guard
and by vessel classification societies such as the American Bureau of Shipping.
Rigs are typically inspected for systems operability and structural integrity,
with ultrasonic thickness gauge
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readings employed to detect structural fatigue or aberrations. Repair work may
include the repair or renewal of piping, spud cans, electrical and drilling
systems, removal and replacement of deteriorated or pitted steel and blasting,
coating and painting of exterior surfaces. The Company's repair work has also
included the refurbishment of drilling systems as well as the overhaul of
generators, boilers, condensers, ballast and cargo valves, rig cranes and
production compressors.
New Completion and Construction. The FGO East Facility was designed
specifically for the efficient new build completion and construction of offshore
drilling rigs. Moreover, the combined capacity of the FGO East Facility (which
now has the added capacity of the Pascagoula facility acquired in the HMG
merger) and the FGO West Facility allows the Company to work on new build
completion and construction projects without any significant loss in its
capacity to perform conversion, retrofit and repair projects. In addition,
through the merger with HMG, FGOT's Orange Facility is ideally suited for the
construction of semi-submersible rigs. During 1999, the Company was working on
the new build completion of three semi-submersible hulls and the construction of
three new build semi-submersible drilling rigs. At year end, fabrication on two
of the new build units had been delayed. (See Item 14 -- Note 14 of the Notes to
the Consolidated Financial Statements for additional information regarding the
status of these two units.) A new build completion involves performing the
addition of decks, quarters, equipment installation and final outfitting of an
existing bare deck hull, while the construction of new build semi-submersibles
involves the above activities as well as building the hull.
Design and Engineering Services. Through its FGL subsidiary, the Company
performs design and engineering of offshore drilling and production units,
including jackups, semi-submersibles, drillships and floating production,
storage and offloading vessels.
Vessels Segment
Through the HMG merger, the Company added the operations of the Vessels
segment effective November 3, 1999. At December 31, 1999, Vessels segment
activities included the design, new construction, conversion and repair of
ocean-going vessels including offshore support vessels ("OSV's"), double hull
fuel barges, oceanographic research and survey ships, high speed patrol boats
and ferries, tug boats, tow boats and offshore barges. The Vessels segment also
provides a wide variety of repair and conversion services for vessels and barges
that service the offshore energy and commercial markets.
Design and New Construction. Through its Vessels segment, the Company
conducts its new construction and conversion operations for vessels at seven
shipyards. These shipyards employ advanced manufacturing techniques including
modular construction methods, advanced welding techniques, panel line
fabrication, computerized plasma arc metal cutting and automated sandblasting
and painting. The Company conducts its design activities at its engineering
facility located near corporate headquarters. At December 31, 1999, the Company
had 52 vessels under construction or conversion.
Repairs and Conversions. The Company performs a broad range of repair work
for vessels and barges that service the offshore energy and commercial markets,
including general repair and conversion and, gas freeing and cleaning services
on tank barges that carry fuels or other hazardous cargoes. In addition, its
conversion activities include the conversion of single hull barges to double
hull barges.
Engineered Products Segment
Through its Engineered Products segment, the Company designs, manufactures,
and services cranes, mooring, anchoring, rack-and-pinion jacking systems, cargo
handling equipment, deck machinery and equipment and steering systems. The
Company has the capability to outfit rigs for existing customers and to supply
other offshore rig manufacturers with rig kits consisting of legs,
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jacking systems, anchoring winches and offshore handling cranes and other marine
deck equipment, including spare parts and after sale services.
Cranes, Mooring Systems, and Marine Deck Equipment. As of December 31,
1999, the Engineered Products segment was performing work on several major new
equipment and after-market upgrades in the course of the Group's normal
business. In view of the Company's broad international scope of operations, the
design, procurement and project management functions were performed in the
Group's U.S. facilities for AmClyde projects and at the BLM facility in Nantes,
France. Primary manufacturing was performed at the Group's Gulf Coast Division
in Slidell, Louisiana, and at BLM in France, with a significant percentage at
various global subcontracting facilities.
The Engineered Products Group was involved in manufacturing several major
projects during the year: a 600-ton kingpost crane, a specialty "J-Lay"
pipelaying system, a 150-metric ton floating crane, three 50-ton pedestal
cranes, two floating 115-ton cranes, upgrading a very large marine crane, two
shipsets of deepwater mooring systems for semi-submersible drilling rigs, three
80-ton kingpost cranes, one rig-set of jacking units for a jack-up drilling rig,
and anchor windlasses and mooring equipment for the world's largest cruise
liner.
Marine deck equipment is typically manufactured to individual customer
specifications based on the planned application of the equipment. Manufacture of
the equipment required to complete a customer's order may require from a few
weeks to several months.
After-Market Sales and Service. The Engineered Products segment also sells
parts and service to support its products once they are delivered. It has a
service team that performs repair services worldwide and it maintains an
inventory of spare parts to support its products.
CUSTOMERS AND MARKETING
Offshore Segment
The Company's Offshore segment customers are primarily offshore drilling
contractors, many of whom have been customers of the Company for more than 15
years. The Company believes that it has developed strong relationships with its
customer base. The Company's marketing efforts are conducted from its sales
offices in Houston and target drilling contractors located primarily in the Gulf
Coast area, South America and in Europe. The Company's sales staff attempts to
identify future contracts by contacting its clients on a regular basis in order
to anticipate projects that will be competitively bid or negotiated exclusively
with the Company.
Vessels Segment
The Company's Vessels segment customers are primarily offshore energy
service companies, domestic and foreign governments, and other commercial inland
and near coastal shipping enterprises. The Company's marketing efforts for its
Vessels segment are coordinated at the Company's headquarters in Gulfport,
Mississippi. The sales staff attempts to identify future contracts by contacting
its clients on a regular basis in order to anticipate projects that will be
competitively bid or negotiated exclusively with the Company.
Engineered Products Segment
The Company's Engineered Products segment customers include offshore
drilling contractors, offshore marine construction contractors, oil companies
and operators in the offshore oil production sector, other shipyards, cruise
lines, shipping companies on-land construction contractors, general merchant
marine, the fishing industry, and the U.S. Government. Marketing efforts of this
segment are conducted through its offices in St. Paul, Minnesota with satellite
offices in Houston, Texas; Metairie, Louisiana; Slidell, Louisiana; Covington,
Louisiana; and Gulfport, Mississippi and in concert with other of the Company's
domestic marketing efforts. The Engineered Products segment
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also has a marketing office at its BLM headquarters in Nantes, France and sales
representatives in various locations in Europe, China and Asia.
Significant Customers
A large portion of the Company's revenue has historically been generated by
a few customers although not necessarily the same customers from year-to-year.
For example, the Company's largest customers (those which individually accounted
for more than 10% of revenue in a particular year) collectively accounted for
70%, 66%, and 62% of revenue for 1997, 1998, and 1999, respectively. For 1999,
the Company earned more than 10% of its revenue from Noble Drilling Corporation,
Marine Drilling Corporation and Ocean Rig ASA. In 1999, the Company derived more
than 10% of its revenue from each of three companies. Because the level of new
construction, conversion, retrofit or repair work that the Company may provide
to any particular customer depends on the size of that customer's capital
expenditure budget devoted to such projects in a particular year, customers that
account for a significant portion of revenue in one fiscal year may represent an
immaterial portion of revenue in subsequent years.
CONTRACT STRUCTURE AND PRICING
The Company generally performs conversion, retrofit and repair work
pursuant to contracts that provide for a portion of the work to be performed on
a fixed-price basis and a portion of the work to be performed on a cost-plus
basis. New construction projects typically involve a greater portion of the work
performed on a fixed-price basis. In many cases, the Company commences work with
respect to certain portions of a drilling rig or vessel conversion, retrofit or
repair project on a cost-plus arrangement as soon as the drilling rig or vessel
arrives in the Company's shipyard, and, thereafter, the scope and pricing
arrangements with respect to other aspects of the project are negotiated. In the
interest of expediting the completion of a conversion, retrofit or repair
project, a drilling rig or vessel may arrive in the Company's shipyard before
the design work for such project is finished or before all necessary budgetary
approval for such project has been reviewed at the appropriate level of
management of the customer. In many of these cases, the portion of the project
as to which no firm pricing arrangement has been agreed to at the time the
drilling rig arrives at the Company's shipyard ultimately becomes a significant
portion of the overall project. In addition, the scope of the services to be
performed with respect to a particular drilling rig often increases as the
project progresses due to additional retrofits or modifications requested by the
customer or additional repair work necessary to meet the safety, environmental
or construction standards established by the U.S. Coast Guard or other
regulatory or vessel classification authorities.
With respect to the fixed-price portions of a project, the Company receives
the price fixed in the contract for such aspect of the project, subject to
adjustment only for change orders placed by the customer. In its Offshore
segment, the Company typically receives a significant number of change orders on
each of its fixed-price projects as to which the Company and its customer
negotiate a separate charge. With respect to fixed-price contracts, the Company
generally retains the ability to capture cost savings and must absorb cost
over-runs. Under cost-plus arrangements, the Company receives specified amounts
in excess of its direct labor and materials cost and so is protected against
cost overruns but does not benefit directly from cost savings. The Company
generally prices materials at a mark-up under its contracts. The Company has
recently realized a majority of its revenue under fixed-price contracts,
although historically the percentages of revenue it has derived from fixed-price
contracts and cost-plus contracts have fluctuated significantly from project to
project and from period to period based on the nature of the projects involved,
the type of pricing arrangements preferred by its customers, the timing of the
commencement of work on a project in relation to the timing of the completion of
the negotiation and contracting process, and other factors.
Cranes, mooring systems, and marine deck equipment are generally sold
pursuant to fixed-price contracts.
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COMPETITION
The Company believes that its reputation for quality and reliability, its
long-standing relationships with most of the large drilling contractors, energy
service companies, domestic and foreign governments and other commercial
enterprises, its experienced management team, its existing skilled labor force
and its extensive fabrication experience with drilling rigs and marine vessels
are its key advantages in competing for projects. In the Offshore segment
businesses, the Company competes in a global market with companies based in the
United States, Europe and Asia. The Company believes that its long-term
investment in the design of new drilling rigs and production units will provide
it with a competitive advantage with respect to the new rig construction
business.
The Company's Offshore segment competes in a local market against other
companies based on the Gulf Coast for repair projects for drilling rigs that
operate in the Gulf of Mexico. The market for smaller retrofit and conversion
projects is also primarily local, but the market for larger retrofit and
conversion projects includes international competitors. The Company believes it
competes favorably against companies located in Europe or the Far East for
retrofit and conversion projects relating to drilling rigs operating in the Gulf
of Mexico and, to a lesser extent, rigs operating offshore West Africa and South
America due to, among other things, high European labor costs and the Company's
favorable geographical location. The Company believes that the addition of the
Marystown Facilities with their lower costs structure, enables the Company to
compete favorably for retrofit and conversion projects relating to drilling rigs
operating in the North Sea and offshore Canada.
In the Vessels segment, the Company offers a wide range of products. The
number and identity of competitors on particular projects vary greatly,
depending upon the type of vessel and the size of the project. There are several
domestic shipyards that compete with the Company for domestic shipbuilding
contracts depending upon the nature of the project. Most of the Company's
domestic competitors are significantly smaller than the Company. In pursuing
international contracts, the Company also competes with many foreign shipyards,
some of which are subsidized by their governments. In the vessel repair
business, the Company believes that it is the second largest participant on the
Gulf Coast; and, in addition to the one large competitor, it competes with
numerous repair yards along the Gulf Coast.
The Company competes in a global market in the design and manufacture of
deck equipment, although several competitors are domestically based. The
Company's Engineered Products segment competes with several domestic and foreign
manufacturers in the market for offshore marine cranes and shipyard gantry
cranes, and mooring systems.
The Company believes that certain barriers exist that prevent new companies
from competing with the Company for new rig and vessel construction, conversion,
retrofit and repair activities including the investment required to establish an
adequate facility, the difficulty of locating a facility adjacent to an adequate
waterway due to environmental and wetland regulations, and the limited
availability of experienced supervisory and management personnel. Although new
companies can enter the market for repair projects and small retrofit and
conversion projects more easily, management believes these factors will likely
limit the increase in domestic competition for larger projects, especially major
conversions and retrofits and new rig constructions.
BACKLOG
As of December 31, 1999, the Company's backlog was approximately $689.1
million, approximately 73% of which management expects to be performed within
the 12 months ending December 31, 2000. The Company's backlog as of December 31,
1998 was approximately $364.7 million.
The Company's backlog is based on management's estimate of future revenue
attributable to (i) the remaining amounts to be invoiced with respect to those
projects, or portions of projects, as to which a customer has authorized the
Company to begin work or purchase materials and
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(ii) projects, or portions of projects, that have been awarded to the Company as
to which the Company has not commenced work. Management's estimates are often
based on incomplete engineering and design specifications and as engineering and
design plans are finalized or changes to existing plans are made, management's
estimate of the total revenue for such projects is likely to change. In
addition, many projects currently included in the Company's backlog are subject
to termination at the option of the customer, although the customer in that case
is generally required to pay the Company for work performed and materials
purchased.
In February 1999, the Company entered into a $143.2 million contract with a
Brazilian company for the new build construction of a Friede & Goldman, Ltd.
designed Millennium S.A. semi-submersible drilling rig. The contract contained a
financing contingency which was not met; therefore, it is not included in the
Company's backlog at December 31, 1999. The Company does not currently
anticipate that this project will result in a firm contract.
MATERIALS
The principal materials used by the Company in its fabrication business are
standard steel shapes, steel plate, pipe, welding wire and gases, fuel oil,
gasoline and paint. Other materials used in large quantities include aluminum,
steel pipe, electrical cable and fittings. Similar materials are used in the
manufacture of cranes, moorings, and marine deck equipment. In addition,
electric motor components, steel forgings and castings are used. The Company
believes that such materials are currently available in adequate supply from
many sources. The Company does not depend upon any single supplier or source.
The Company seeks to obtain favorable pricing and payment terms for its
purchases by coordinating purchases among all of its facilities and buying in
large quantities. The Company has not engaged, and does not presently intend to
engage in hedging transactions with respect to its purchase requirements for
materials.
SAFETY AND QUALITY ASSURANCE
Management is concerned with the safety and health of the Company's
employees and maintains a stringent safety assurance program to reduce the
possibility of accidents. The Company's safety department establishes guidelines
to ensure compliance with all applicable foreign, federal and state safety
regulations. The Company provides training and safety education through
orientations for new employees and subcontractors, weekly crew safety meetings
and first aid and CPR training. The Company also employs emergency medical
technicians and registered nurses as in-house medics. The Company has a
comprehensive drug program and conducts periodic employee health screening. A
safety committee, whose members consist of management representatives and field
supervisors, meets monthly to discuss safety concerns and suggestions that could
prevent future accidents. The Company has contracted with a third party safety
consultant to provide training and suggestions and a licensed emergency medical
technician in its ongoing commitment to a safe and healthy work environment.
Similar practices are in place at the Company's foreign facilities. The Company
believes that its safety program and commitment to quality are vital to
attracting and retaining customers and employees.
Many of the Company's properties construct according to the standards of
certain regulatory and quality organizations including: the American Bureau of
Shipping, Det Norske Veritas, American Petroleum Institute, the American Welding
Society, the American Society of Mechanical Engineers and specific customer
specifications. The Company's international operations fabricate according to
certain of the above standards and certain additional standards, including those
of the Lloyds Registry of Shipping, the Canadian Welding Bureau and Bureau
Veritas. All of the Company's welding and fabrication procedures are performed
in accordance with the latest technology and industry requirements. The
Company's Engineered Products businesses are quality certified ISO9001 by Det
Norske Veritas. The Company also maintains training programs at each of its
facilities to train skilled personnel and to maintain high quality standards.
Management believes that these programs enhance the quality of its products and
reduce their repair rate.
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GOVERNMENT AND ENVIRONMENTAL REGULATION
Overview. Many aspects of the Company's operations and properties are
materially affected by foreign, federal, state and local regulation, as well as
certain international conventions and private industry organizations. These
regulations govern worker health and safety and the manning, construction and
operation of vessels. For example, the Company is subject to the jurisdiction of
the U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs
Service and the Maritime Administration of the U.S. Department of
Transportation, as well as private industry organizations such as the American
Bureau of Shipping. These organizations establish safety criteria and are
authorized to investigate vessel accidents and recommend improved safety
standards. In addition, the exploration and development of oil and gas
properties located on the outer continental shelf of the United States is
regulated primarily by the Minerals Management Service ("MMS"). The MMS has
promulgated federal regulations under the Outer Continental Shelf Lands Act
requiring the construction of offshore platforms located on the outer
continental shelf to meet stringent engineering and construction specifications.
Violations of these regulations and related laws can result in substantial civil
and criminal penalties as well as injunctions curtailing operations. The Company
believes that its operations are in compliance with these and all other
regulations affecting the fabrication of platforms for delivery to the outer
continental shelf of the United States.
In addition, the Company depends on the demand for its services from the
oil and gas industry and, therefore, is affected by changing taxes, price
controls and other laws and regulations relating to the oil and gas industry.
For example, the U.S. Coast Guard regulates and enforces various aspects of
marine offshore vessel operations, such as certification, routes, drydocking
intervals, manning requirements, tonnage requirements and restrictions, hull and
shafting requirements and vessel documentation. U.S. Coast Guard regulations
require that all drilling and production vessels are drydocked for inspection at
least once within a five-year period, and such inspections and resulting repair
requirements have constituted a significant portion of the Company's revenues in
some prior years. While the Company is not aware of any proposals to reduce the
frequency or scope of such inspections, any such reduction could adversely
affect the Company's results of operations. In addition, offshore construction
and drilling in certain areas have been opposed by environmental groups and, in
certain areas, has been restricted. To the extent laws are enacted or other
governmental actions are taken that prohibit or restrict offshore construction
and drilling or impose environmental protection requirements that result in
increased costs to the oil and gas industry in general and the offshore
construction industry in particular, the business and prospects of the Company
could be adversely affected. The Company cannot determine to what extent future
operations and earnings of the Company may be affected by new legislation, new
regulations or changes in existing regulations.
Environmental. The Company's operations and properties are subject to a
wide variety of increasingly complex and stringent foreign, federal, state and
local environmental laws and regulations, including those governing discharges
into the air and water, the handling and disposal of solid and hazardous wastes,
the remediation of soil and groundwater contaminated by hazardous substances and
the health and safety of employees. These laws may provide for "strict
liability" for damages to natural resources and threats to public health and
safety, rendering a party liable for the environmental damage without regard to
negligence or fault on the part of such party. Sanctions for noncompliance may
include revocation of permits, corrective action orders, administrative or civil
penalties and criminal prosecution. Certain environmental laws provide for
strict, joint and several liability for remediation of spills and other releases
of hazardous substances, as well as damage to natural resources. In addition,
the Company may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances. Such laws and
regulations may also expose the Company to liability for the conduct of or
conditions caused by others, or for acts of the Company that were in compliance
with all applicable laws at the time such acts were performed.
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The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, and similar laws provide for responses to and liability for
releases of hazardous substances into the environment. Additionally, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Safe Drinking Water Act, the Emergency Planning and Community Right to Know Act,
each as amended, and similar foreign, state or local counterparts to these
federal laws, regulate air emissions, water discharges, hazardous substances and
wastes, and require public disclosure related to the use of various hazardous
substances. For example, the Company's paint operations must comply with a
number of environmental regulations. All blasting and painting is done in
accordance with the requirements of the Company's air discharge permit and
disposal of paint waste is made in accordance with the National Pollution
Discharge Elimination System storm water pollution plan. Lead based paint is
vacuum blasted and all blasting debris is contained for hazardous waste
disposal. Company policy requires that existing coating be sampled and tested
prior to blasting operations to eliminate the possibility of lead contamination
and to assure that lead based paint is appropriately treated. The Company has
been classified as a "large quantity hazardous waste generator" and is
registered with the State of Mississippi Department of Environmental Quality as
such. Compliance with these and other environmental laws and regulations may
require the acquisition of permits or other authorizations for certain
activities and compliance with various standards or procedural requirements. The
Company believes that its facilities are in substantial compliance with current
regulatory standards.
The federal Resource Conservation and Recovery Act ("RCRA") and similar
state laws regulate the generation, treatment, storage, disposal, and other
handling of solid wastes, with the most stringent regulations applying to solid
wastes that are considered hazardous wastes. RCRA also may impose stringent
requirements on the closure, and the post-closure care, of facilities where
hazardous waste was treated, disposed of or stored. The Company generates solid
waste, including hazardous and non-hazardous waste, in connection with its
routine operations. Management believes that the Company's wastes are handled
properly under RCRA.
Amendments to the federal Clean Air Act in 1990 resulted in numerous
changes which the Environmental Protection Agency and similar state agencies
fully implemented by regulations. The Company does not expect these Clean Air
Act amendments to result in material expenses at its properties, but the amount
of increased expenses, if any, resulting from such amendments is not presently
determinable.
In connection with the Company's purchase of the Marystown Facilities, the
Newfoundland provincial government agreed to carry out and pay for a complete
environmental assessment and remediation program. The Phase I investigation
identified several issues surrounding possible subsurface contamination on site
at one of the Marystown Facilities. As a result of Phase I findings, remediation
work will commence at the shipyard facility in April 2000. Remediation efforts
will include the removal of underground oil storage tanks, removal and proper
disposal of contaminated soils and re-installation of new oil storage tanks at
the shipyard facility. The Phase II investigation has been completed and
additional environmental issues have been identified. The Company expects that
additional remediation efforts will be required; however, the specific nature of
these efforts is unknown at this time. The Newfoundland provincial government
has agreed to bear the cost of remediation procedures associated with the
Marystown Facilities and to indemnify the Company against any environmental
liabilities associated therewith.
The Company's fabrication site in Carquefou, France was named a "classified
installation" under French environmental law. Under French law, the operator of
a "classified installation" has various obligations with respect to the site,
including compliance with certain operating activities and clean-up obligations
upon cessation of the classified activity. In addition, the French authorities
may assess fines in the event of non-performance by the operator. As a
"classified installation", the site operates under an Arrete Prefectoral, or
administrative authorization, issued by regional environmental authorities. An
administrative authorization with respect to the Carquefou site was granted in
July of 1984 and renewed in January 1991. The administrative authorization
requires, among other
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things, that the Company follow any instructions that authorities may impose in
the interest of public health and agriculture and gives them the right to
conduct tests on air and waste quality at the site at any time. The Company does
not believe that "classified installation" status of the Carquefou site or the
requirements of the administrative authorization will have a material effect on
its operations.
The Company's compliance with environmental laws and regulations has
entailed certain additional expenses and changes in operating procedures. The
Company believes that compliance with these laws and regulations will not have a
material adverse effect on the Company's business or financial condition for the
foreseeable future. However, future events, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies, or stricter or different interpretations of existing laws
and regulations, may require additional expenditures by the Company, which
expenditures may be material.
Health and Safety Matters. The Company's facilities and operations are
governed by laws and regulations, including the federal Occupational Safety and
Health Act, relating to worker health and workplace safety. The Company believes
that appropriate precautions are taken to protect employees and others from
workplace injuries and harmful exposure to materials handled and managed at its
facilities. While it is not anticipated that the Company will be required in the
near future to expend material amounts by reason of such health and safety laws
and regulations, the Company is unable to predict the ultimate cost of
compliance with these changing regulations.
Jones Act. The Jones Act requires that all vessels transporting products
between U.S. ports must be constructed in U.S. shipyards, owned and crewed by
U.S. citizens and registered under U.S. law, thereby eliminating competition
from foreign shipbuilders with respect to vessels to be constructed for the U.S.
coastwise trade. Many customers elect to have vessels constructed at U.S.
shipyards, even if such vessels are intended for international use, in order to
maintain flexibility to use such vessels in the U.S. coastwise trade in the
future. In 1996 a legislative bill seeking to substantially modify the
provisions of the Jones Act mandating the use of ships constructed in the United
States for U.S. coastwise trade was introduced in Congress; however, it did not
pass. Similar bills seeking to rescind or substantially modify the Jones Act and
eliminate or adversely affect the competitive advantages it affords to U.S.
shipbuilders have been introduced in Congress from time to time and are expected
to be introduced in the future. Any recission or material modification of the
Jones Act could adversely affect the Company's future prospects because many
foreign shipyards with which the Company competes are heavily subsidized by
their governments.
OPA '90. Demand for double hull carriers has been created by the Oil and
Pollution Act of 1990 ("OPA '90"), which generally requires U.S. and foreign
vessels carrying fuel and certain other hazardous cargoes and entering U.S.
ports to have double hulls by 2015. OPA '90 established a phase-out schedule
that began January 1, 1995 for all existing single hull vessels based on the
vessel's age and gross tonnage. The Company estimates that OPA '90 will require
66 barges engaged in domestic trade to be retrofitted or replaced by 2005 and
another 22 such barges to be retrofitted or replaced by 2010.
Title XI Loan Guarantee Amendments and OECD. In late 1993, Congress amended
the loan guarantee program under Title XI of the Merchant Marine Act of 1936
("MARAD"), to permit MARAD to guarantee loan obligations of foreign vessel
owners who construct new vessels in the United States. As a result of these
amendments, MARAD was authorized to guarantee loan obligations of foreign owners
for foreign-flagged vessels that are built in U.S. shipyards on terms generally
more advantageous than available under guarantee or subsidy programs of foreign
countries. Under the OECD Accord, which was negotiated in December 1994, among
the United States, the European Union, Finland, Japan, Korea, Norway and Sweden
(which collectively control over 75% of the market share for worldwide vessel
construction), the Title XI guarantee program will be required to be amended,
once the OECD Accord is ratified by the United States, to eliminate the
competitive advantages provided by the 1993 amendments to Title XI. In December
1995, a subcommittee of the Ways and Means Committee of the U.S. House of
Representatives passed a
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bill providing for the implementation of the OECD Accord and elimination of the
competitive advantages provided by the 1993 amendments to Title XI. To date,
such bill has not been approved by either the U.S. House of Representatives or
the U.S. Senate. If the OECD Accord is ratified by the U.S. (the only remaining
party to the OECD Accord that has not yet ratified the OECD Accord), the OECD
Accord would virtually eliminate all direct and indirect governmental
shipbuilding subsidies by the party nations. Despite the fact that the OECD
Accord will require the elimination of the competitive advantages provided to
U.S. shipbuilders by the 1993 amendments to Title XI, management believes that
the OECD Accord should significantly improve the ability of U.S. shipbuilders to
compete successfully for international commercial contracts with foreign
shipbuilders, many of which currently are heavily subsidized by their
governments. Governmental subsidies to foreign shipbuilders currently range up
to 19% of the vessel construction cost.
INSURANCE
The Company maintains a property and casualty insurance program protecting
it against damage caused by fire, flood, explosion and similar catastrophic
events. The Company also maintains commercial general liability insurance
including coverage for products and completed operations. The Company has in
place both builder's risk and ship repairer's construction risk programs. The
Company has workers' compensation and employers' liability insurance with
respect to its operations that satisfies the Federal and State Workers'
Compensation Acts and includes the U.S. Longshore and Harbor Workers Act and
maritime and outer continental shelf endorsements. The Company currently
maintains limits it deems are proper and necessary in the course of its
business. Although management believes that the Company's insurance is adequate
with respect to all of its domestic and international operations there can be no
assurance that the Company will be able to maintain adequate insurance at rates
which management considers commercially reasonable, nor can there be any
assurance such coverage will be adequate to cover all claims that may arise.
Some of the Company's contracts require a performance bond. The Company has
arranged a facility with a group of insurance companies to provide these bonds
when required.
The Company's wholly-owned subsidiary, Offshore Marine Indemnity Company
("OMIC") acts as a fronted re-insurance captive company for the Company's
worker's compensation program. This program provides both specific and aggregate
insurance products which limit the exposure of OMIC. OMIC is not involved in any
other business or any other lines of coverage.
EMPLOYEES
The Company's workforce varies based on the level of ongoing fabrication
activity at any particular time. As of December 31, 1999, the Company had
approximately 9,860 employees, including 9,242 in the United States, 229 in
Canada and 389 in France. Total workforce included contract labor of
approximately 1,077 employees at December 31, 1999.
None of the Company's United States employees is employed pursuant to a
collective bargaining agreement. The Company entered into a five-year collective
bargaining agreement with three Canadian unions in connection with the
acquisition of the Marystown Facilities. The Company is currently subject to two
collective bargaining agreements with respect to its French employees. The
Company is a member of two employers' federations which are party to the
respective collective bargaining agreements. The collective bargaining
agreements have no expiration date and, under French law, remain in force unless
canceled or modified. The Company believes that its relationship with its
employees is good.
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RISK FACTORS
THE COMPANY'S BUSINESS AND OPERATIONS DEPEND PRINCIPALLY UPON CONDITIONS
PREVAILING IN THE OFFSHORE DRILLING INDUSTRY; CHANGES IN THAT INDUSTRY COULD
MATERIALLY ADVERSELY AFFECT FRIEDE GOLDMAN HALTER'S OPERATING RESULTS.
The level of demand for Friede Goldman Halter's services is affected by the
level of demand for the services of offshore drilling contractors, including the
demand for specific types of offshore drilling rigs having required drilling
capabilities or technical specifications. This, in turn, is dependent upon the
condition of the oil and gas industry and, in particular, the level of capital
expenditures of oil and gas companies with respect to offshore drilling
activities 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. These capital expenditures are
influenced by prevailing oil and natural gas prices, expectations about future
prices, the level of activity in offshore oil and gas exploration, development
and production, 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.
Over the past several years, oil and natural gas prices and the level of
offshore drilling activity have fluctuated substantially. A significant or
prolonged reduction in oil and natural gas prices or the expectation that prices
will be lower in the future would likely depress offshore drilling and
development activity which would reduce demand for the Company's services and
could result in a material adverse effect on our operating results. Our
business, including the types of projects it undertakes, will also be affected
by other factors affecting offshore drilling contractors, including factors such
as:
- the condition and drilling capabilities of the existing offshore drilling
rigs operated by offshore drilling contractors; and
- the relative costs of building a new offshore drilling rig with advanced
capabilities versus the costs of retrofitting or converting an existing
offshore drilling rig to provide similar capabilities.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE RECENTLY COMPLETED THE MERGER WITH HALTER MARINE GROUP, INC. ANY FAILURE TO
SUCCESSFULLY INTEGRATE THEIR OPERATIONS WITH OURS OR TO MANAGE THE COMBINED
COMPANY COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Friede Goldman Halter has a brief operating history with respect to the HMG
entities. The acquisitions caused a significant increase in our costs due to
increased labor, lease rental and depreciation, amortization and interest
expenses in 1999. If such activity were to continue at levels greater than
management anticipates, our financial condition and results of operations could
be materially adversely affected.
The HMG merger involves the integration of separate companies that, prior
to the closing of the merger transaction, have operated independently and have
different corporate cultures. The process of combining the companies may be
disruptive to our businesses and may cause an
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<PAGE> 19
interruption of, or a loss of momentum in, these businesses as a result of the
following difficulties, among others:
- loss of key employees;
- failures or delays in getting new contracts with present and potential
customers of the former FGI or HMG as a result of their concerns related
to the integration of FGI and HMG;
- possible inconsistencies in standards, controls, procedures and policies
between FGI and HMG and the need to implement, integrate and harmonize
various business-specific operating procedures and systems, as well as
company-wide financial, accounting, information and other systems; and
- the diversion of management's attention from the day-to-day business of
Friede Goldman Halter as a result of the need to deal with integration
issues and the possible need to add management resources to do so.
These disruptions and difficulties, if they occur, may cause us to fail to
realize the revenue enhancements and operating efficiencies that it currently
expects to result from the integration and may cause material adverse short-term
and long-term effects on the operating results and financial condition of Friede
Goldman Halter.
THERE IS A RISK OF CONTINUED LITIGATION BETWEEN FRIEDE GOLDMAN HALTER AND
PETRODRILL
In April 1998, TDI-Halter, L.P., now Friede Goldman Offshore Texas, L.P.
("FGOT"), a subsidiary of the Company, entered into contracts to construct two
semi-submersible drilling rigs for Petrodrill IV Ltd. and Petrodrill V, Ltd.
("Petrodrill") with the combined contract value of $168.0 million (the
"Contracts"). FGOT provided certain bonds issued by Fireman's Fund guaranteeing
FGOT's performance under the Contracts. After FGOT commenced construction of the
two rigs, FGOT began to experience delays in the production schedule and
increased costs due, in whole or part, to delays caused by Petrodrill and by
certain subcontractors nominated for FGOT's use by Petrodrill, and by FGOT's
performing as the lead yard as opposed to a follow-on yard as anticipated by the
parties.
In April 1999, and in connection with a transaction whereby the Federal
Maritime Administration ("MARAD") agreed to finance the Petrodrill rigs, FGOT
and Petrodrill entered into an amendment to the Contracts that provided, among
other things, for extensions to the delivery dates of approximately six months
for each rig. Thereafter, production delays continued. Under the Contracts, FGOT
is entitled to extensions of the delivery dates for permissible delay as defined
in the Contracts ("Permissible Delay") and for delays caused by Petrodrill
breaches of contract. FGOT notified Petrodrill that, as a result of such delays,
it was entitled to additional extension of the delivery dates and to additional
compensation. Petrodrill refused to acknowledge FGOT's right to extension of the
delivery dates. Petrodrill was also advised that the rigs could not be completed
by their respective existing delivery dates.
Due to Petrodrill's refusal to grant extensions to the delivery dates FGOT
notified Petrodrill in January 2000 that it was mitigating its and Petrodrill's
damages by deferring certain fabrication efforts until engineering work could be
completed so that construction could go forward in an efficient manner. FGOT
also notified Petrodrill that it believed it was entitled to additional monetary
compensation from Petrodrill as a result of delay, disruption, inefficiencies
and other direct and indirect costs caused by, among other things, delays by
Petrodrill and its nominated subcontractors and by FGOT being required to
perform as the lead yard.
On January 13, 2000, Petrodrill filed suit against the Company and FGO, in
state court in Houston, Texas asserting, among other things, that the Company
and FGO had tortiously interfered with FGOT's Contracts with Petrodrill, seeking
injunctive relief and damages. On January 19, 2000, the case was removed to the
federal district court in Houston (the "US litigation"). On January 27,
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<PAGE> 20
2000, the Company filed a counterclaim and FGOT filed a complaint against
Petrodrill in the US litigation asserting breach of contract, and seeking
monetary damages, reformation of contract and declaratory relief.
On January 27, 2000, Petrodrill filed an action against FGOT in the court
in London, England, (the "UK action") seeking essentially the same relief on
different theories as it had in the US litigation. In March, the court in London
dismissed Petrodrill's application for interim relief that FGOT was not entitled
to cease construction work; confirmed that the proper jurisdiction and forum for
the disputes was the court in London; and ordered a stay of the US litigation.
As directed by the UK court, FGOT filed a counterclaim seeking monetary damages
in an amount of at least $68.5 million, and extension of the delivery dates
under various legal theories.
In late March 2000, FGOT and Petrodrill reached an agreement, which is
subject to various approvals, including that of MARAD and the Boards of
Directors of each Company, to further amend the Contracts (the "Amendment No.
2"). Amendment No. 2 will stay the UK action for six months and dismiss the US
litigation, with prejudice except as to FGOT's rights to pursue its enumerated
claims against Petrodrill for additional compensation in the UK action. Under
the Amendment, the delivery dates for the rigs will be extended until August 1,
2001 and November 1, 2001, respectively; Petrodrill will waive all of its claims
against FGOT accruing prior to the Amendment, including its right to terminate
the Contracts for events occurring prior to the Amendment; total liquidated
damages for late delivery beyond the new delivery dates will be capped at $6.6
million for each rig; any future right of Petrodrill to terminate each Contract
will accrue only if the respective rig is not delivered within 180 days of its
extended delivery date, as such date may be further extended under other
contractual provisions; and FGOT will credit Petrodrill up to $2 million per rig
against any amounts awarded against Petrodrill, but only to the extent FGOT
recovers against Petrodrill. After the six-month stay of the UK action, FGOT
intends to vigorously pursue its claims for additional compensation.
Notwithstanding the Amendment, the Company intends to proceed with
construction of the rigs while pursuing any and all remedies available to it
under the Contracts and applicable law. If the contract delivery dates are not
extended as provided in Amendment No. 2 for any reason, including any failure to
obtain an approval required for Amendment No. 2 to become effective, FGOT will
not be in a position to deliver the rigs on or before the pre-Amendment delivery
dates, or the date on which Petrodrill's contractual right to terminate the
Contracts will accrue. Petrodrill's remedies upon termination include among
others, the right to rescind the Contracts, transfer the rigs to FGOT, and
demand reimbursement for all amounts paid, including amounts paid for owner
furnished equipment. FGOT would likely not be in a position to meet such a
demand, and if such demand was successfully asserted, it could have a material
adverse effect on the Company.
Based upon current estimates, the Company believes that it will incur
approximately $60 million in costs in excess of the contract prices as adjusted
for change orders, to complete the contracts. A provision for these excess costs
has been provided in the Company's purchase accounting treatment of assets and
liabilities acquired through the merger with HMG. The funding of these costs
could have a significant impact on the Company's liquidity. The balance of the
excess costs at December 31, 1999 was approximately $49.7 million and is
included in the reserve for losses on uncompleted contracts in the consolidated
balance sheets. Management expects such costs will be expended by the Company
over eighteen months beginning in April 2000. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
FRIEDE GOLDMAN HALTER'S BUSINESS INVOLVES SIGNIFICANT OPERATING RISKS
Friede Goldman Halter's activities involve the fabrication, refurbishment
and repair of large steel structures, including drilling rigs and production
units. These activities have inherent risks associ-
20
<PAGE> 21
ated with them that could result in significant injury and loss of life, severe
damage and destruction of property and suspension of operations. These risks
include:
- operating hazards, including the operation of cranes and other heavy
machinery;
- the structural failure of a drilling rig or vessel;
- liabilities associated with a defect in design or a failure or
malfunction of a product developed or manufactured by Friede Goldman
Halter;
- marine accidents, including collisions with other vessels and sinkings;
and
- physical damage of Friede Goldman Halter's facilities caused by
hurricanes or flooding.
Litigation arising from any of these occurrences may result in Friede
Goldman Halter being named as a defendant in lawsuits asserting large claims.
Although we maintain and will continue to maintain insurance that we consider to
be economically prudent, it cannot be assured that this insurance will be
sufficient or effective under the circumstances. A successful claim for which we
are not fully insured could have a material adverse effect on Friede Goldman
Halter.
If Friede Goldman Halter is unable to manage this expansion efficiently or
effectively, or if we are unable to attract and retain additional qualified
management personnel to run the expanded operations, this could result in a
material adverse effect on Friede Goldman Halter.
FRIEDE GOLDMAN HALTER'S DEBT LEVEL REQUIRES THE ALLOCATION OF A SUBSTANTIAL
PORTION OF OPERATING CASH FLOW TO PAY INTEREST.
Friede Goldman Halter's debt level requires it to use a substantial portion
of operating cash flow to pay interest on debt instead of for other corporate
purposes. The inability to meet such cash flow requirements could have a
material adverse effect on our liquidity.
See Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 14 -- Note 8 of the Notes to the
Consolidated Financial Statements.
FRIEDE GOLDMAN HALTER'S INSURANCE PROTECTION COULD BE INSUFFICIENT OR
INEFFECTIVE.
Although Friede Goldman Halter maintains such insurance protection as we
consider economically prudent, there can be no assurance that any such insurance
will be sufficient or effective under all circumstances or against all hazards
to which we may be subject. In particular, due to the high cost of errors and
omissions policies relating to the design of drilling rigs and production units,
we do not carry insurance covering claims for personal injury, loss of life or
property damage relating to such design activity. A successful claim for which
Friede Goldman Halter is not fully insured could have a material adverse effect
on us. Moreover, no assurance can be given that Friede Goldman Halter will be
able to maintain adequate insurance in the future at rates that it considers
economical.
FRIEDE GOLDMAN HALTER COULD BEAR FINANCIAL LOSSES IN CONNECTION WITH CONTRACTS
STRUCTURED ON A FIXED-PRICE BASIS OR CONTRACTS CONTAINING LIQUIDATED DAMAGES
PROVISIONS.
A significant portion of Friede Goldman Halter's existing contracts are on
a fixed-price basis. We would be liable for the full amount of any cost overruns
under these fixed-price contracts. we generally attempt to cover anticipated
increased costs through an estimation of these costs, which is reflected in the
original price of the contract. However, revenue, cost and gross profit realized
on a fixed-price contract will often vary from the estimated amounts because of
many factors, including changes in job conditions and variations in labor and
equipment productivity over the term of the contract. The results of operations
and financial condition of Friede Goldman Halter could be materially adversely
affected if significant contracts are underpriced or revenue and gross profits
on large projects are different from those originally estimated.
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<PAGE> 22
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, 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. Our rig construction contracts generally require the customer to
compensate us for additional work or expenses incurred due to customer requested
change orders or failure of the customer to provide us with design or
engineering information or equipment, if specified in the contract for the
customer to provide these items. Under these circumstances, we generally
negotiate with the customer with respect to the amount of compensation to be
paid to us following the time at which the change order was requested or the
customer failed to provide us with items required by the contract to be provided
by the customer to us. We are subject to the risk that we are unable to obtain,
through negotiation, arbitration, litigation or otherwise, adequate amounts to
compensate us for the additional work or expenses incurred by us due to customer
requested change orders or failure by the customer to timely provide items
required to be provided by the customer. A failure to obtain adequate
compensation for these matters could require us to record an adjustment to
amounts of revenue and gross profit that were recognized in prior periods under
the percentage of completion accounting method. Any such adjustments, if
substantial, could have a material adverse effect on our results of operations
and financial condition.
Additionally, many of our existing contracts contain provisions requiring
us to pay liquidated damages in the event that we fail to meet specified
performance deadlines. It cannot be assured that we will not be required to make
payments under these liquidated damages provisions or that the requirement to
make payments will not have a material adverse effect on the Friede Goldman
Halter's operating results.
See Item 14 -- Note 14 of the Notes to the Consolidated Financial
Statements for more information on specific contractual matters involving Friede
Goldman Halter.
USE OF PERCENTAGE-OF-COMPLETION ACCOUNTING BY FRIEDE GOLDMAN HALTER COULD RESULT
IN MATERIAL CHARGES AGAINST OUR EARNINGS.
Most of Friede Goldman Halter's revenue is earned on a
percentage-of-completion basis based generally on the ratio of total costs
incurred to the total estimated costs. Accordingly, contract price and cost
estimates are reviewed periodically as the work progresses, and adjustments to
income proportionate to the percentage of completion are reflected in the period
when such estimates are revised. To the extent that these adjustments result in
a reduction or elimination of previously reported profits, we would have to
recognize a charge against current earnings, which may be significant depending
on the size of the project or the adjustment.
See Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FRIEDE GOLDMAN HALTER'S BUSINESS DEPENDS ON A FEW SIGNIFICANT CUSTOMERS
Friede Goldman Halter expects that a significant portion of our revenues in
any year will be derived from a few customers due to the relatively large nature
of many of the projects we have historically undertaken and to the relatively
small number of potential customers for projects related to the offshore oil and
gas industry. The loss of a significant customer could result in a substantial
loss of Friede Goldman Halter's revenue and could have a material adverse effect
on our Company.
Construction and conversion contracts from the U.S. Navy are important to
our Vessels segment. Contracts from the U.S. Navy accounted for 13% of our total
backlog at December 31, 1999. The reduced level of shipbuilding activity by the
U.S. Navy during the past decade has resulted in fewer contracts and workforce
reductions in the shipbuilding industry and has significantly intensified
competition. Furthermore, the Company cannot assure you that the shipbuilding
and
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<PAGE> 23
conversion programs currently in progress will continue to be funded, or that
those planned in the future by the U.S. Navy and other branches of the U.S.
military will be implemented. Purchases of vessels by the U.S. government are
generally subject to uncertainties inherent in the budgeting and appropriations
process, which is affected by political events over which we have no control.
Any significant reduction in the level of congressional appropriations for
shipbuilding programs could have a material adverse effect on our vessels
business.
See "Business -- Customers and Marketing."
INCORRECT ESTIMATES OF EXPECTED REVENUE RESULTING FROM FRIEDE GOLDMAN HALTER'S
BACKLOG OF PROJECTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR COMPANY.
Friede Goldman Halter's backlog is based on management's estimate of future
revenue to be earned under projects as to which a customer has authorized us to
begin work or purchase materials; and projects that have been awarded to us as
to which we have not commenced work. Substantially all of the projects in our
backlog are subject to change or termination by the customer, which could
substantially reduce the amount of backlog currently reported and could have a
material adverse effect on the Company's revenue, net income and cash flow.
In the case of a termination, the customer is required to pay Friede
Goldman Halter for work performed and materials purchased through the date of
termination; however, due to the large dollar amounts of backlog estimated for
each of a small number of projects, amounts included in our backlog could
decrease substantially if one or more of these projects were to be terminated by
one or more of our customers. In particular, approximately 51.0% of our backlog
as of December 31, 1999 was attributable to six projects with four different
customers. A termination of one or more of these large projects or the loss of a
significant customer could have a material adverse effect on Friede Goldman
Halter's revenue, net income and cash flow for 2000.
See "Business -- Backlog."
FRIEDE GOLDMAN HALTER COULD BE MATERIALLY ADVERSELY AFFECTED BY GOVERNMENT
REGULATIONS
Friede Goldman Halter's business and operations will be subject to and
affected by various types of governmental regulation, including numerous
federal, state and local environmental protection laws and regulations.
Compliance with these laws is increasingly complex and expensive. We could be
held strictly liable for damages to natural resources or threats to public
health and safety, without regard to our negligence or fault. We could also be
held liable for the conduct of or conditions caused by others or for its actions
that were in compliance with all applicable laws at the time the acts were
performed. Sanctions for noncompliance may include revocation of permits,
corrective action orders, administrative and civil penalties and criminal
prosecution.
Since the Friede Goldman Halter will depend on the demand for our services
from the oil and gas industry, changing taxes, price controls and other laws and
regulations which affect the oil and gas industry in general could impact the
operations of the combined company. The adoption of laws and regulations
curtailing exploration and development drilling would adversely affect our
operations by limiting demand for our services. We cannot determine to what
extent our operations and earnings may be affected by new legislation, new
regulations or changes in existing regulations.
See "Business -- Government and Environmental Regulation."
LOSS OF KEY PERSONNEL MAY HAVE A MATERIAL ADVERSE IMPACT ON FRIEDE GOLDMAN
HALTER.
Friede Goldman Halter's operations are dependent on the continued efforts
of our executive officers. Although certain of our executive officers has
entered into an employment agreement with Friede Goldman Halter, there can be no
assurance that any individual will continue in such capacity for any particular
period of time. The loss of key personnel, or the inability to hire and retain
qualified
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<PAGE> 24
employees, could have an adverse effect on our business, financial condition and
results of operations. Friede Goldman Halter does not carry key-person life
insurance on any of its employees.
COMPETITION AND EXCESS CAPACITY COULD PUT DOWNWARD PRESSURE ON FRIEDE GOLDMAN
HALTER'S PRICING AND PROFIT MARGINS.
The shipbuilding and offshore rig construction and conversion industries
are highly competitive. During the 1990's the U.S. shipbuilding industry has
been characterized by substantial excess capacity because of the significant
decline in U.S. Navy shipbuilding spending, the difficulties experienced by U.S.
shipbuilders in competing successfully for international commercial projects
against foreign shipyards, many of which are heavily subsidized by their
governments, and the decline in the construction of vessels utilized in the
offshore energy industry. As a result of these factors, competition by U.S.
shipbuilders for domestic commercial projects has increased significantly and
has resulted in downward pressure on pricing and profit margins and may continue
to do so in the future. Recently, there was an increase in demand for vessel
construction, conversion and repair services, and this increased demand resulted
in the redeployment of previously idle shipyard capacity or other shipyards
shifting their focus to the types of products and services we currently provide.
In addition, due to the increased demand for fabrication services involving the
offshore oil and gas industry, it is possible that land or facilities with water
access to the Gulf of Mexico that were previously not used in the fabrication
business could be converted to use for this purpose. Any of these events could
increase the amount of competition experienced by Friede Goldman Halter, which
could have a material adverse effect on our revenue and profit.
Friede Goldman Halter faces competitive pressures at every level of the
offshore rig construction, conversion, retrofitting and repair markets. We
compete in a global market for new rig construction projects against domestic,
European and Asian new rig construction firms. This market is highly competitive
because, among other things, some of our foreign competitors receive substantial
subsidies from their governments and are able to take advantage of lower labor
costs. Similarly, for larger rig conversion and retrofit projects, we face
intense competition from both domestic and foreign firms. For smaller rig
conversion, retrofit and repair projects, we compete against numerous companies
based principally on the Gulf Coast. In addition, shipyards and other companies
not previously engaged in the business can enter the market for these smaller
conversion, retrofitting and repair projects quickly and at relatively low cost.
FRIEDE GOLDMAN HALTER HAS IN PLACE A STOCKHOLDER RIGHTS PLAN AND OUR CHAIRMAN
AND CHIEF EXECUTIVE OFFICER BENEFICIALLY OWNS APPROXIMATELY 26% OF THE
OUTSTANDING COMMON STOCK OF THE COMPANY; THIS COULD DISCOURAGE OTHER COMPANIES
FROM ATTEMPTING TO ACQUIRE US.
Friede Goldman Halter adopted its stockholder rights plan in December 1998
and shortly thereafter distributed rights to each of its stockholders. While
Friede Goldman Halter believes that the rights plan is designed to strengthen
its ability to negotiate with potential acquirors and to protect stockholders
from coercive or abusive takeover tactics, the overall effect of the rights plan
may be to delay, defer or prevent a change in control or the removal of existing
management.
The Chairman of the board of directors and Chief Executive Officer of
Friede Goldman Halter, J. L. Holloway, beneficially owns approximately 26% of
the outstanding shares of Common Stock of Friede Goldman Halter. Mr. Holloway
has entered into a stockholder's agreement which will restrict his ability to
dispose of these shares. The size of Mr. Holloway's holdings and the
restrictions contained in the stockholder's agreement could also delay, defer or
prevent a change in control or the removal of existing management.
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<PAGE> 25
IF FRIEDE GOLDMAN HALTER DOES NOT MAINTAIN MINIMUM EMPLOYMENT LEVELS, IT MAY BE
SUBJECT TO FINANCIAL PENALTIES.
In connection with its acquisition of the Marystown Facilities and the
construction of the FGO East Facility, Friede Goldman agreed to maintain certain
minimum levels of employment at each facility and is subject to financial
penalties if it fails to do so. Under the terms of its acquisition of the
Marystown Facilities, the Company is obligated to maintain a minimum of 1.2
million employee man-hours (including man-hours for management, labor, salaried
and hourly employees) with respect to the shipyard operations acquired by the
Company for each of the 1998, 1999 and 2000 calendar years. The Company agreed
to pay liquidated damages of C$10 million for 1998 and C$5 million in 1999 and
2000 if such minimum number of man-hours is not attained in such year. The 1.2
million minimum man-hour requirement was met in 1998. The Company was not in
compliance with the man-hour requirement for 1999. As of this report date, the
Company has not received a waiver on its non-compliance with this requirement.
The Company is discussing the matter of liquidated damages with the Province of
Newfoundland with the final decision pending. If a waiver of the penalty or
other suitable accommodations cannot be agreed upon with the Province of
Newfoundland and a liquidated damages payment is required, it will be accounted
for as an adjustment to the purchase price of the Marystown Facility.
In addition, the County of Jackson, Mississippi has dredged the ship
channel and constructed roads and other infrastructure related to the FGO East
Facility, under an economic incentive program. However, in the event that the
Company does not maintain a minimum employment level of 400 jobs at the FGO East
Facility for each year during the primary term of its 20-year lease, the Company
could face statutory penalties under Mississippi law, which include the
repayment of the remaining balance of the $6.0 million loan incurred by the
county to finance such improvements. No payments were due in 1998 or 1999
related to this obligation.
BUSINESS AND GEOGRAPHIC SEGMENTS
Financial information about the Company's business and geographic segments
may be found in Item 14 -- Note 16 of the Notes to Consolidated Financial
Statements.
ITEM 2. PROPERTIES
Corporate Headquarters
The Company's corporate headquarters are located in Gulfport, Mississippi
at the same site as the Company's Gulfport shipyard in two buildings that,
together, occupy approximately 54,600 square feet of office space.
Offshore Segment
The Company's Offshore segment is headquartered in Pascagoula, Mississippi.
The Offshore segment operates twelve shipyards where it performs the conversion,
retrofit, repair and modification of existing offshore drilling rigs and the
construction and equipping of new offshore drilling rigs. In addition to the
yards dedicated to the Offshore segment, facilities included in the Vessels
segment can also support the fabrication requirements of the Offshore segment.
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<PAGE> 26
The principal shipyards dedicated to new construction within the Offshore
segment are summarized in the table below.
<TABLE>
<CAPTION>
COVERED
FABRICATION
AREA
OFFSHORE -- NEW CONSTRUCTION (SQUARE OWN OR EXPIRATION
PROPERTY NAME AND LOCATION FOOTAGE) LEASE DATE
- ---------------------------- ----------- ------ ----------
<S> <C> <C> <C>
FGO West Facility
Pascagoula, Mississippi................................... 196,000 Lease 2005(1)
FGO East Facility -- South Yard
Pascagoula, Mississippi................................... 400,000 Lease 2017(2)
FGO East Facility -- North End Yard
Pascagoula, Mississippi................................... 220,000 Own --
TDI-Halter Orange Shipyard
Orange, Texas............................................. 600,000 Own --
</TABLE>
- ---------------
(1) The Company leases the shipyard from the Jackson County Port Authority
pursuant to a long-term lease which expires in May 2005 with two additional
ten-year options for renewal. In December 1996, the Company entered into a
two-year lease for 160,000 square feet of this covered fabrication areas
which adjacent to its current facility. The lease was extended for an
additional 2 years in December 1998.
(2) The Company leases the FGO East Facility from Jackson County, Mississippi
pursuant tso a long-term lease which expires in June 2017 with three
additional extensions of ten years each.
The principal shipyards dedicated to conversion and repair within the
Offshore segment are summarized in the table below.
<TABLE>
<CAPTION>
DRYDOCK FEATURES
---------------------------------------------------------------
MAXIMUM MAXIMUM
LIFTING VESSEL
OFFSHORE -- CONVERSION AND REPAIR NUMBER CAPACITY WIDTH OWN OR EXPIRATION
PROPERTY NAME AND LOCATION ACRES DRYDOCKS (TONS)(2) (FEET) LEASE DATE
- --------------------------------- -------- -------- --------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
TDI-Halter Childers Road
Orange, Texas(1).............. 9 -- -- -- Lease 2000
TDI-Halter North Yard
Port Arthur, Texas(1)......... 17 -- -- -- Own --
TDI-Halter Dock Yard
Port Arthur, Texas
-- Ship Mode............. 100 1 64,000 122
-- Rig Mode.............. 100 1 64,000 363 Lease 2009
TDI-Halter Central Yard
Sabine Pass, Texas(1)......... 32 -- -- -- Own --
TDI-Halter Sabine Yard
Sabine Pass, Texas(1)......... 34 -- -- -- Own --
TDI-Halter South Yard
Sabine Pass, Texas............ 21 -- -- -- Own --
Marystown Facilities
Marystown, Newfoundland,
Canada (2 properties)......... 60,000 1 3,000 64 Own(3) --
meters tonnes
</TABLE>
- ---------------
(1) Facility is temporarily closed until demand warrants reopening.
(2) In tons unless otherwise noted.
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(3) The Company owns the Marystown Facilities in fee simple. The Company also
assumed five water lot leases with the Canadian government which run through
2015 covering the water area next to each of the Marystown Facilities.
Vessels Segment
The Company's Vessels segment is headquartered within the Company's
corporate headquarters in Gulfport, Mississippi. The engineering headquarters
for the Vessels segment is located one-half mile from the corporate headquarters
and contains approximately 33,600 square feet of office space, including a
separate secure space for classified work. The Vessels segment operates seven
shipyards principally dedicated to the new construction of marine vessels,
although several of these facilities also can perform work for the Offshore and
Engineered Products segments. The Vessels segment operates five shipyards
dedicated to the repair and conversion of vessels and barges.
The principal shipyards dedicated to new construction within the Vessels
segment are summarized in the table below.
<TABLE>
<CAPTION>
COVERED
FABRICATION
AREA
VESSELS -- NEW CONSTRUCTION (SQUARE OWN OR EXPIRATION
PROPERTY NAME AND LOCATION FOOTAGE) LEASE DATE
- --------------------------- ----------- ------ ----------
<S> <C> <C> <C>
Equitable and Trinity Yachts Shipyards
New Orleans, Louisiana(1)................................. 225,000 Lease 2016
Halter Moss Point Shipyard
Moss Point, Mississippi................................... 121,665 Own --
Lockport Shipyard
Lockport, Louisiana....................................... 97,000 Own --
Moss Point Marine Shipyard
Escatawpa, Mississippi.................................... 75,000 Own --
Gulfport Shipyards
Gulfport, Mississippi..................................... 554,500 Own --
Panama City Shipyard
Panama City, Florida(2)................................... 35,000 Own --
Port Bienville Shipyard
Pearlington, Mississippi.................................. 15,000 Own --
</TABLE>
- ---------------
(1) In March 2000, the Company entered into a purchase agreement to sell the
yacht division of its Vessels to a Company whose controlling stockholder is
the former Chief Operating Officer of the Company and is currently a member
of the Board of Directors.
(2) Facility is temporarily closed until demand warrants reopening.
27
<PAGE> 28
The principal shipyards dedicated to repair and conversion within the
Vessels segment are summarized in the table below:
<TABLE>
<CAPTION>
DRYDOCK FEATURES
-----------------------------------------------------------
MAXIMUM MAXIMUM
LIFTING VESSEL
VESSELS -- REPAIR AND CONVERSION NUMBER CAPACITY WIDTH OWN OR EXPIRATION
PROPERTY NAME AND LOCATION ACRES DRYDOCKS (TONS) (FEET) LEASE DATE
- -------------------------------- ----- -------- -------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Gretna Shipyard
Harvey, Louisiana................ 30 1 1,800 55 Lease 2001
Halter Gulf Repair Shipyard
New Orleans, Louisiana........... 59 4 22,400 120 Lease 2016
Bludworth Bond -- Houston
Shipyard, Houston, Texas......... 11 4 2,000 65 Own --
Bludworth Bond -- Texas City
Shipyard, Texas City, Texas...... 4 3 4,500 80 Lease 2015
Halter-Calcasieu Shipyard
Sulphur, Louisiana............... 35 3 2,200 60 Own --
</TABLE>
Engineered Products Segment
The Company's Engineered Products segment headquarters is located in St.
Paul, Minnesota in two buildings that, together, occupy 47,000 square feet. The
Engineered Products segment also operates small satellite sales offices in
Houston, Texas; Metairie, Louisiana; Slidell, Louisiana; Covington, Louisiana;
and Gulfport, Mississippi. Through the BLM Companies, it also leases office
space in Carquefou, France; Pusan, South Korea; Shanghai, China and St.
Petersburg, Russia.
The Engineered Products segment utilizes six plants to manufacture its
products. These manufacturing plants are summarized in the table below.
<TABLE>
<CAPTION>
COVERED
FABRICATION
AREA
(SQUARE OWN OR EXPIRATION
PROPERTY NAME AND LOCATION FOOTAGE)(1) LEASE DATE
- -------------------------- ----------- ------ ----------
<S> <C> <C> <C>
Gulf Coast Manufacturing Division
(2 locations)
Slidell, Louisiana........................................ 155,000 Own --
Covington Manufacturing Division
Covington, Louisiana...................................... 46,000 Own --
Gulfport Manufacturing Division
Gulfport, Mississippi..................................... 30,000 Own --
BLM Properties (2 properties)
Carquefou and Lanveoc, France............................. 100,000
meters Own --
</TABLE>
- ---------------
(1) In square feet unless otherwise noted.
Other Properties
The Company also leases office space in Jackson, Mississippi, New Orleans,
Louisiana and Houston, Texas.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. See Item 14 -- Notes 13 and 14 to the Consolidated
Financial Statements for more information on legal and contractual matters
involving the Company.
28
<PAGE> 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 3, 1999, stockholders of FGI voted affirmatively on the
following matters: (i) approval of the HMG merger agreement; (ii) approval of a
proposal to increase the number of authorized directors to 11, and (iii)
approval of an amendment to the FGI 1997 equity incentive plan to: (a) increase
the number of shares available for grant; and (b) to increase the number of
options which may be granted to some executive officers of FGI and HMG pursuant
to the transactions contemplated by the merger agreement. Stockholders did not
approve an amendment to the FGI charter to make the provision relating to the
indemnification of the officers and directors of FGI as favorable as the
indemnification provided to the then current officers and directors of HMG under
the HMG charter.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company are elected annually to serve for the
ensuing year or until their successors have been elected. The following table
sets forth certain information with respect to the executive officers of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
J.L. Holloway........................ 55 Chairman and Chief Executive Officer
John F. Alford....................... 40 President and Chief Operating Officer
John Dane III........................ 48 Vice-Chairman, Former President and Chief
Operating Officer
Rick S. Rees......................... 46 Executive Vice President and Chief Financial
Officer
Ronald W. Schnoor.................... 46 Executive Vice President, Offshore Operations
Richard T. McCreary.................. 44 Group President, Halter Marine
Richard J. Juelich................... 48 Group President, Engineered Products Group
Maureen O'Connor Sullivan............ 51 Senior Vice President, General Counsel and
Secretary
</TABLE>
Set forth below are descriptions of the backgrounds of the executive
officers and directors of the Company and their principal occupations for the
past five years:
J. L. Holloway has served as the Chairman of the Board, Chief Executive
Officer and President of the Company since April 1997. In addition, Mr. Holloway
has served as the Chairman of the Board, Chief Executive Officer and President
of HAM Marine (now Friede Goldman Offshore, Inc., "FGO") from its formation in
1982 until April 1997, and from April 1997 Mr. Holloway has been the Chairman of
the Board of FGO. Mr. Holloway serves as a Director of Delta Health Group, a
company that operates and manages health care facilities in the South and as
President of State Street Properties, Inc., a commercial real estate development
firm headquartered in Mississippi. Mr. Holloway also serves as a Director of
Bancorp South, a publicly traded company.
John Dane III has served as Vice-Chairman of the Board of Directors since
November 3, 1999. He served as President and Chief Operating Officer from
November 3, 1999 through January 12, 2000 when he resigned his officer positions
with the Company.
John F. Alford has served as President and Chief Operating Officer since
March 23, 2000. Prior to this, he served as Executive Vice President of the
Company since December 1997. He served as Senior Vice President and Chief
Financial Officer of the Company from May 1997 to December 1997. Mr. Alford
joined FGO in 1996. Mr. Alford began his career in banking and previously served
as a member of the Board of Directors and as Chief Operating Officer of Baton
Rouge Bank and Trust Company, and a related financial firm, for more than the
past five years.
Rick S. Rees has served as Executive Vice President and Chief Financial
Officer since November 3, 1999. Mr. Rees joined HMG in April 1997 and was
serving as Board member,
29
<PAGE> 30
Executive Vice President and the Chief Financial Officer at the time of the
merger between HMG and FGI. Mr. Rees has been involved in the marine industry
since 1975. Prior to joining the Company, Mr. Rees was President of Maritime
Holdings, Inc., the parent company of Texas Drydock, Inc., a company with
operations in the offshore rig construction, conversion and repair business
which was acquired by HMG in April 1997. From 1989 to 1996, he was President of
Maritime Capital Corporation, a marine finance company. From 1975 to 1983, he
was with Halter Marine, Inc., an antecedent of Halter Marine Group, Inc., and
served in several capacities, including Chief Financial Officer and as a
director of the Company. Mr. Rees is a certified public accountant.
Ronald W. Schnoor has served as Executive Vice President of the Company
since November 1998. He served as President of FGO from April 1997 and as the
Vice President, Manager of Operations of since 1992. Mr. Schnoor joined FGO in
1984 and previously served as both Senior Project Engineer and as a Project
Manager.
Richard T. McCreary has served as Group President, Halter Marine, since
March 23, 2000. Prior to this, he served as Senior Vice President,
Administration and Repair since November 3, 1999. Mr. McCreary joined HMG in
April 1997 and was serving as Senior Vice President, Administration and Repair
at the time of the merger between HMG and FGI. From April 1995 to 1997, Mr.
McCreary served as President Gulf Division, Maritrans Operating Partners. From
1990 to 1995, Mr. McCreary served as Vice President Operations, Canal Barge
Company, Inc.
Richard J. Juelich has served as Group President, Engineered Products Group
since November 3, 1999. Mr. Juelich joined HMG in November 1997 and was serving
as Group President, Engineered Products Group at the time of the merger between
HMG and FGI. From 1995 to 1997, Mr. Juelich served as President of AmClyde
Engineered Products, which was acquired by the Company in 1997. Mr. Juelich has
served as Chief Operating Officer of AmClyde Engineered Products since 1992.
Maureen O'Connor Sullivan has served as Senior Vice President, General
Counsel and Secretary since November 3, 1999. Ms. Sullivan joined HMG in August
1997 and was serving as Senior Vice President, General Counsel and Secretary of
HMG at the time of the merger between HMG and FGI. In private practice with the
McGlinchey Stafford law firm from 1979 to 1997, partner since 1984, specializing
in business law and complex commercial litigation. Manager of the firm's Dallas
office and member of its Management Committee from 1989-1997.
30
<PAGE> 31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
During most of 1998, the Company's Common Stock was traded on the Nasdaq
National Market. On December 1, 1998, the Company's Common Stock began trading
on the New York Stock Exchange. At March 20, 2000, there were 2,375 stockholders
of record of the Common Stock. The Company estimates that an additional 27,075
stockholders held the Common Stock in street name as of such date. The Company's
Common Stock was first listed for quotation on the Nasdaq National Market on
July 22, 1997. The following table sets forth the high and low sales price per
share of the Common Stock, as quoted on the Nasdaq National Market through
November 30, 1998 and on the New York Stock Exchange from December 1, 1998
through December 31, 1999, for the periods indicated.
<TABLE>
<CAPTION>
1999
---------------
QUARTER HIGH LOW
- ------- ------ ------
<S> <C> <C>
First............................................. $17.44 $ 9.94
Second............................................ 19.19 12.63
Third............................................. 14.00 10.13
Fourth............................................ 10.75 6.50
</TABLE>
<TABLE>
<CAPTION>
1998
---------------
QUARTER HIGH LOW
- ------- ------ ------
<S> <C> <C>
First............................................. $35.50 $20.56
Second............................................ 41.88 26.00
Third............................................. 30.00 10.25
Fourth............................................ 18.94 9.75
</TABLE>
The Company does not anticipate paying cash dividends for the foreseeable
future. The Company expects that it will retain all available earnings generated
by the Company's operations for the development and growth of its business. Any
future determination as to the payment of dividends will be made at the
discretion of the Board of Directors and will depend on the Company's operating
results, financial condition, capital requirements, general business condition
and other factors as the Board of Directors deems relevant.
SALES OF UNREGISTERED SECURITIES
In December 1999, the Company issued an aggregate of 90,000 shares of its
Common Stock pursuant to a Sale and Purchase Agreement dated November 22, 1999
between FGH and a company for the purchase of a jackup barge. The issuance of
such shares was the only issuance or sale of securities by the Company during
its most recently completed calendar year which was not registered under the
Securities Act. Such issuance was conducted in reliance upon the exemption from
registration provided in Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder. Furthermore, the certificate issued
representing the Company's securities in connection with this transaction
contained a restrictive legend. The shares are listed with the New York Stock
Exchange.
31
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data as of the
dates and for the periods indicated. The historical financial data set forth
below are derived from the audited consolidated financial statements of the
Company and the Company's predecessor companies, F&G Ltd. and HAM Marine
(collectively, the "Predecessors"). The consolidated financial statements
include the accounts of FGH, Inc. and its wholly-owned subsidiaries, including,
among others, Friede Goldman Offshore, Inc. ("FGO"), Friede & Goldman, Ltd.
("FGL"), Friede Goldman Newfoundland Limited ("FGN"), Friede Goldman France
S.A.S. ("FGF"), and Halter Marine, Inc. ("Halter") (collectively referred to as
the "Company"). These consolidated statements include the accounts of FGN for
all periods subsequent to January 1, 1998, FGF for all periods subsequent to
February 5, 1998, Halter for all periods subsequent to November 3, 1999 and all
other subsidiaries from their dates of incorporation. All significant
intercompany accounts and transactions have been eliminated. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements of the Company and the related notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue earned............. $ 479,698 $382,913 $113,172 $21,759 $19,865
Cost of revenue earned.............. 474,391 293,712 75,236 15,769 13,510
---------- -------- -------- ------- -------
Gross profit...................... 5,307 89,201 37,936 5,990 6,355
Selling, general and administrative
expenses.......................... 42,475 32,365 11,963 6,673 3,862
Amortization of goodwill............ 1,576 334 134 -- --
---------- -------- -------- ------- -------
Operating income (loss)........... (38,744) 56,502 25,839 (683) 2,493
Other income (expense):
Interest expense, net............... (9,172) (201) 673 (448) (197)
Gain (loss) on asset sales.......... (8) (374) 3,922 349 1,869
Other............................... (43) 38 776 3,571 756
---------- -------- -------- ------- -------
Income (loss) before income
taxes.......................... (47,967) 55,965 31,210 2,788 4,921
Income tax expense (benefit)........ (17,141) 20,679 7,941 -- --
---------- -------- -------- ------- -------
Net income (loss)......... $ (30,826) $ 35,286 $ 23,269 $ 2,788 $ 4,921
========== ======== ======== ======= =======
PRO FORMA NET INCOME:
Net income as reported above........ $ 23,269 $ 2,788 $ 4,921
Pro forma income taxes(1)........... (3,980) (1,032) (1,821)
-------- ------- -------
Pro forma net income...... $ 19,289 $ 1,756 $ 3,100
======== ======= =======
Net income (loss) per share:
Basic............................. $ (1.18) $ 1.46 $ 1.10 $ 0.15 $ 0.27
Diluted........................... (1.18) 1.43 1.09 0.15 0.27
Pro forma net income per share:
Basic............................. $ 0.92 $ 0.10 $ 0.17
Diluted........................... 0.91 0.10 0.17
Weighted average shares outstanding
Basic............................. 26,148 24,211 21,065 18,400 18,400
Diluted........................... 26,148 24,599 21,297 18,400 18,400
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA:
Cash provided by (used in) operating
activities........................ $ (61,061) $ 21,088 $ 52,122 $ 4,875 $ 269
Cash used in investing activities... (4,747) (77,299) (26,541) (3,866) (2,410)
Cash provided by (used in) financing
activities........................ 39,558 41,156 29,947 (706) 2,581
OTHER FINANCIAL DATA:
Depreciation and amortization....... $ 13,127 $ 5,875 $ 1,608 $ 696 $ 425
Capital expenditures................ 7,502 60,738 26,595 2,357 2,670
EBITDA(2)........................... (25,439) 62,155 28,464 1,092 2,919
BALANCE SHEET DATA:
Working capital..................... $ 83,819 $ 5,859 $ 45,522 $ 1,104 $ 2,714
Net property, plant and equipment... 334,642 139,078 11,817 5,546 4,079
Total assets........................ 1,000,892 314,560 142,555 27,582 14,980
Long-term debt...................... 299,075 45,863 25,767 2,853 3,270
Stockholders' equity................ 248,121 85,290 63,805 6,219 5,255
</TABLE>
- ---------------
(1) The pro forma provision for income taxes gives pro forma effect to the
application of federal and state income taxes to the Company as if it had
been a C Corporation for tax purposes for all periods presented. Prior to
June 1997, the Company and the Predecessors operated as S Corporations for
federal and state income tax purposes. In June 1997, the stockholders of the
Company and the Predecessors made elections terminating the S Corporation
status of the Company and the Predecessors. As a result, the Company became
subject to corporate level income taxation following the termination of such
elections.
(2) EBITDA represents operating income plus depreciation, amortization and
non-cash compensation expense related to the issuance of stock and stock
options to employees. EBITDA is not a measure of cash flow, operating
results or liquidity as determined by generally accepted accounting
principles. The Company has included information concerning EBITDA as
supplemental disclosure because management believes that EBITDA is commonly
accepted as providing useful information regarding a company's historical
ability to incur and service debt. Management of the Company believes that
factors which should be considered by investors in evaluating EBITDA
include, but are not limited to, trends in EBITDA as compared to cash flow
from operations, debt service requirements, and capital expenditures.
Management of the Company believes that the trends depicted by the Company's
historical EBITDA reflect historical fluctuations in the Company's business
and the recent increase in the level of the Company's activities. EBITDA as
defined and measured by the Company may not be comparable to similarly
titled measures of other companies. Further, EBITDA should not be considered
in isolation or as an alternative to, or more meaningful than, net income or
cash flow provided by operations as determined in accordance with generally
accepted accounting principles as an indicator of the Company's
profitability or liquidity.
33
<PAGE> 34
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company's results of operations are affected primarily by conditions
prevailing in the offshore energy industry. In particular, the level of demand
for the Company's services is affected by the level of demand for the services
of offshore drilling contractors, including the demand for offshore supply
vessels and specific types of offshore drilling rigs having required drilling
capabilities or technical specifications. This, in turn, is dependent upon the
condition of the oil and gas industry and, in particular, the level of capital
expenditures of oil and gas companies with respect to offshore drilling
activities 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. These capital expenditures are
influenced by prevailing oil and natural gas prices, expectations about future
prices, the level of activity in offshore oil and gas exploration, development
and production, 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.
Over the past several years, oil and natural gas prices and the level of
offshore drilling activity have fluctuated substantially. According to Offshore
Data Services, Inc. as of March 13, 2000, the utilization rate of the worldwide
fleet of offshore mobile drilling units was 76.6%, only slightly less than the
81% utilization rate of a year ago. This level of drilling activity is generally
attributed to a number of recent industry trends, including three-dimensional
seismic mapping, directional drilling and other advances in technology that have
increased drilling success rates and efficiency and have led to the discoveries
of oil and gas in subsalt geological formations (which generally are located in
depths of 300 to 800 feet of water) and deepwater areas of the Gulf of Mexico.
In the deepwater areas where larger and more technically advanced drilling rigs
are needed, increased drilling activity resulted in increased demand for newly
constructed semi-submersible drilling rigs and for retrofitting offshore
drilling rigs.
A significant or prolonged reduction in oil and natural gas prices or the
expectation that prices will be lower in the future would likely depress
offshore drilling and development activity which would reduce demand for the
Company's services and could result in a material adverse effect on the
Company's operating results. The business of the Company, including the types of
projects it undertakes, will also be affected by other factors affecting
offshore drilling contractors, including factors such as: (i) the condition and
drilling capabilities of the existing offshore drilling rigs operated by
offshore drilling contractors and (ii) the relative costs of building a new
offshore drilling rig with advanced capabilities versus the costs of
retrofitting or converting an existing offshore drilling rig to provide similar
capabilities.
Low prices for crude oil and natural gas experienced during 1998 and much
of 1999 created a general decline in the demand for the Company's products.
Although the prices of these commodities have recently increased, there can be
no assurance that drilling contractors and vessel operators will proceed with
plans for new construction or modification of drilling units and or vessels. The
Company has maintained a significant contract backlog of deepwater related
projects. At December 31, 1998, the Company's backlog was approximately $364.7
million. The Company's backlog at December 31, 1999 was approximately $689.1
million, of which $353.9 million was related to contracts acquired through the
HMG merger. Over $403.6 million of total backlog at year end was related to
deepwater projects. Some new contracts included in backlog are subject to
cancellation by the customers, however, the Company has had no indication that
any of its contracts might be canceled. In February 1999, the Company entered
into a $143.2 million contract with a Brazilian company for the new build
construction of a Friede & Goldman, Ltd. designed Millennium S.A. semi-
submersible drilling rig. The contract contained a financing contingency which
was not met;
34
<PAGE> 35
therefore, it is not included in the Company's backlog at December 31, 1999. The
Company does not currently anticipate that this project will result in a firm
contract.
A significant portion of the Company's existing contracts are on a
fixed-price basis. The Company would be liable for the full amount of any cost
overruns under these fixed-price contracts. The Company generally attempts to
cover anticipated increased costs through an estimation of these costs, which is
reflected in the original price of the contract. However, revenue, cost and
gross profit realized on a fixed-price contract will often vary from the
estimated amounts because of many factors, including changes in job conditions
and variations in labor and equipment productivity over the term of the
contract. The results of operations and financial condition of the Company could
be materially adversely affected if significant contracts are underpriced or
revenue and gross profits on large projects are different from those originally
estimated.
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, 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. The Company's construction contracts generally require the customer to
compensate the Company for additional work or expenses incurred due to customer
requested change orders or failure of the customer to provide design or
engineering information or equipment, if specified in the contract for the
customer to provide these items. Under these circumstances, the Company
generally negotiates with the customer with respect to the amount of
compensation to be paid following the time at which the change order was
requested or the customer failed to provide the items required by the contract.
The Company is subject to risk that when it is unable to obtain, through
negotiation, arbitration, litigation or otherwise, adequate amounts to
compensate for the additional work or expenses incurred due to customer
requested change orders or failure by the customer to timely provide items
required to be provided by the customer. A failure to obtain adequate
compensation for these matters could require the Company to record an adjustment
to amounts of revenue and gross profit that were recognized in prior periods
under the percentage of completion accounting method. Any such adjustments, if
substantial, could have a material adverse effect on the results of operations
and financial condition of the Company.
Additionally, many of the Company's existing contracts contain provisions
requiring the payment by the Company of liquidated damages in the event that it
fails to meet specified performance deadlines. It cannot be assured that the
Company will not be required to make payments under these liquidated damages
provisions or that the requirement to make payments will not have a material
adverse effect on the Company's operating results. In certain circumstances,
delivery delay beyond a specified period would entitle a customer to terminate
the contract and to elect various remedies, including return of the purchase
price.
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 and the timing of the receipt of awards for
new projects. In addition, the Company schedules projects based on the timing of
available capacity to perform the services requested and, to the extent that
there are delays in the arrival of a drilling rig or production unit into the
shipyard, the Company generally is not able to utilize the excess capacity
created by such delays. Although the Company may be able to offset the effect of
such delays through adjustments to the size of its skilled labor force on a
temporary basis, such delays may adversely affect the Company's results of
operations in any period in which such delays occur.
Most of the Company's revenue is earned on a percentage-of-completion basis
based generally on the ratio of total costs incurred to the total estimated
costs. Accordingly, contract price and cost estimates are reviewed periodically
as the work progresses, and adjustments to income proportion-
35
<PAGE> 36
ate to the percentage of completion are reflected in the period when such
estimates are revised. To the extent that these adjustments result in a
reduction or elimination of previously reported profits, the Company would have
to recognize a charge against current earnings, which may be significant
depending on the size of the project or the adjustment.
In January 2000, the Company entered into a Confidential Settlement
Agreement with Ocean Rig ASA, a Norwegian company, relating to a dispute with
respect to contracts to construct two semi-submersible drilling rigs. Among
other things, the settlement with Ocean Rig allowed for an increase of $21.5
million in the contract price of each rig and revised delivery dates of October
31, 2000 and December 31, 2000 for the two rigs. 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
settled claim and related additional costs incurred and for the timing of
recognition of related revenues and expenses was a net reduction for the year
ended December 31, 1999 of approximately $37.4 million. The amount of the
adjustment was based on, among other things, the outcome of the settlement
negotiations and management's estimate of the percentage of completion of the
projects at the end of the year.
In late March 2000, FGOT and Petrodrill reached an agreement, which is
subject to various approvals, including that of MARAD and the Boards of
Directors of each company, to amend two contracts relating to the construction
of two semi-submersible rigs (the "Amendment No. 2"). Amendment No. 2 will stay
for six months the litigation proceeding previously commenced in the United
Kingdom (the "UK action") and will dismiss the litigation previously commenced
in the United States, with prejudice, except as to FGOT's rights to pursue its
enumerated claims against Petrodrill for additional compensation in the UK
action. Under Amendment No. 2, the delivery dates for the rigs will be extended
until August 1, 2001 and November 1, 2001, respectively; Petrodrill will waive
all of its claims against FGOT accruing prior to the Amendment, including its
right to terminate the contracts for events occurring prior to Amendment No. 2;
total liquidated damages for late delivery beyond the new delivery dates will be
capped at $6.6 million for each rig; any future right of Petrodrill to terminate
each contract will accrue only if the respective rig is not delivered within 180
days of its extended delivery date, as such date may be further extended under
other contractual provisions; and FGOT will credit Petrodrill up to $2 million
per rig against any amounts awarded against Petrodrill, but only to the extent
FGOT recovers against Petrodrill. After the six month stay of the UK action,
FGOT intends to vigorously pursue its claims for additional compensation.
Notwithstanding the Amendment, the Company intends to proceed with
construction of the rigs while pursuing any and all remedies available to it
under the contracts and applicable law. If the contract delivery dates are not
extended as provided in Amendment No. 2 for any reason, including any failure to
obtain an approval required for Amendment No. 2 to become effective, FGOT will
not be in a position to deliver the rigs on or before the pre-Amendment delivery
dates, or the date on which Petrodrill's contractual right to terminate the
contracts will accrue. Petrodrill's remedies upon termination include among
others, the right to rescind the contracts, transfer the rigs to FGOT, and
demand reimbursement for all amounts paid, including amounts paid for owner
furnished equipment. FGOT would likely not be in a position to meet such a
demand, and if such demand was successfully asserted, it could have a material
adverse effect on the Company.
Based upon current estimates, the Company believes that it will incur
approximately $60.0 million in costs in excess of the contract prices, as
adjusted for change orders, to complete these contracts. A provision for these
excess costs has been provided in the Company's purchase accounting treatment of
assets and liabilities acquired through the merger with HMG. The balance of the
excess costs at December 31, 1999 was approximately $49.7 million and is
included in the reserve for losses on uncompleted contracts in the consolidated
balance sheets. Management expects such costs will be expended by the Company
over eighteen months beginning in April 2000. Any revisions of the estimates of
costs and claims recoveries in the next 12 months should be
36
<PAGE> 37
recorded as an adjustment to goodwill. The funding of these excess costs could
have a significant impact on the Company's liquidity. See "Liquidity and Capital
Resources."
See Item 14 -- Note 14 of the Notes to the Consolidated Financial
Statements for more information relating to these contractual disputes.
RESULTS OF OPERATIONS
The consolidated financial statements include the accounts of FGH, Inc. and
its wholly-owned subsidiaries, including, among others, Friede Goldman Offshore,
Inc. ("FGO"), Friede & Goldman, Ltd. ("FGL"), Friede Goldman Newfoundland
Limited ("FGN"), Friede Goldman France S.A.S. ("FGF"), and Halter Marine,
Inc.("Halter")(collectively referred to as the "Company"). These consolidated
statements include the accounts of FGN for all periods subsequent to January 1,
1998, FGF for all periods subsequent to February 5, 1998, HMG for all periods
subsequent to November 3, 1999 and all other subsidiaries from their dates of
incorporation. All significant intercompany accounts and transactions have been
eliminated.
Comparison of the Years Ended December 31, 1999 and 1998
During the year ended December 31, 1999, the Company generated revenue of
$479.7 million, an increase of 25.3%, compared to the $382.9 million generated
for the year ended December 31, 1998. Of this increase, approximately $109.8
million was attributable to businesses acquired through the HMG merger. Revenue
for the Offshore segment increased by $68.8 million or 20.7% in 1999. This
increase was primarily caused by (1) revenues of approximately $61.8 million
generated by offshore entities acquired in the HMG merger, and (2) approximately
$90.0 million attributable to the ongoing construction of two semi-submersible
drilling rigs, offset by (3) an $83.2 million decline in revenue primarily
related to the completion and outfitting of seven conversions in 1998 and a
portion of 1999 which were not replaced in 1999 due to a decrease in demand for
conversion projects. Also contributing to the Company's overall growth in
revenue in 1999 were $38.9 million in revenues generated by the Vessels segment
acquired through the HMG merger. Revenue for the Engineered Products segment
decreased $11.6 million or 22.4% in 1999 as result of the completion of projects
which were not replaced due to a decrease in demand. Revenues in this segment
include $9.1 million generated by the Engineered Products Group acquired in the
HMG merger.
Cost of revenue was $474.4 million for the year ended December 31, 1999
compared to $293.7 million for the year ended December 31, 1998. Gross profit
decreased from $89.2 million or 23.3% in 1998 to $5.3 million or 1.1% in 1999.
Gross profit for the Offshore segment decreased from 23.4% in 1998 to a negative
2.0% in 1999. This decrease was primarily related to a shift in the mix of the
segment's business to new build completion of semi-submersible drilling rigs,
from the higher margin, business of repair, conversion and retrofitting of
drilling rigs. The Company recorded a gross loss on two contracts in the amount
of $37.4 million, including a provision for future losses of $16.5 million. In
addition, a third contract for the completion of a semi-submersible rig
experienced minimal gross profit. These decreases were offset by an $8.9 million
increase in gross profit generated by offshore operations acquired in the HMG
merger. Gross profit for the newly acquired Vessels segment was $5.9 million or
15.3%. Gross profit for the Engineered Products segment decreased from 23.0% in
1998 to 18.7% in 1999 primarily as result of the lower volume of revenue
recognized by the segment in 1999 compared to 1998.
Selling, general and administrative expenses ("SG&A expenses") were $42.5
million for the year ended December 31, 1999 compared to $32.4 million for the
year ended December 31, 1998. The increase in SG&A expenses primarily reflects
the inclusion of SG&A expenses of HMG for two months as well as an increase in
sales and administrative workforce and facilities due to overall growth of the
Company's business. Legal fees also increased from 1998 to 1999.
37
<PAGE> 38
Amortization of goodwill increased $1.3 million from $0.3 million for the
year ended December 31, 1998 to $1.6 million for the year ended December 31,
1999 primarily as a result of the HMG merger.
Operating income decreased by $95.2 million from $56.5 million for the year
ended December 31, 1998 to an operating loss of $38.7 million for the year ended
December 31, 1999 primarily as a result of increased revenue and decreased gross
profit discussed in the preceding paragraphs.
Net interest expense (interest expense less interest income) increased to
$9.2 million for the year ended December 31, 1999 from $0.2 million for the year
ended December 31, 1998, primarily as a result of: (1) interest and fees
associated with increased borrowings by the Company prior to the merger; (2)
interest expense in the amount of $1.6 million related to accretion of the $70.3
million discount recorded to reflect the fair market value of the $185.0 million
4 1/2% Convertible Subordinated Notes assumed in connection with the HMG merger;
(3) additional interest expense as a result of the $210.9 in debt assumed by the
Company in connection with the HMG merger; and (4) increased usage and
amortization of fees associated with the New Credit Facility (See Management's
Discussion and Analysis -- "Liquidity and Capital Resources").
The change in other income (expense) was primarily attributable to
miscellaneous items, none of which are individually material.
The Company had an income tax benefit of $17.1 million in 1999 compared to
income tax expense of $20.7 million in 1998 reflecting the Company's pretax loss
of $48.0 million in 1999 compared to pretax income of $56.0 million in 1998.
Comparison of the Years Ended December 31, 1998 and 1997
During the year ended December 31, 1998, the Company generated revenue of
$382.9 million, an increase of 238%, compared to the $113.2 million generated
for the year ended December 31, 1997. This increase was caused by (1) an
increase in demand for conversion and retrofit services related to deep water
offshore drilling rigs, (2) revenues of approximately $71.0 million attributable
to the completion and outfitting of an existing semisubmersible drilling rig
hull, (3) approximately $62.2 million of revenues attributable to the new
construction of semi-submersible drilling rigs, and (4) revenues of
approximately $113.9 million generated by the Company's Marystown Facility and
French operations.
Cost of revenue was $293.7 million for the year ended December 31, 1998
compared to $75.2 million for the year ended December 31, 1997, resulting in an
increase in gross profit from $37.9 million for the year ended December 31, 1997
to $89.2 million in the year ended December 31, 1998. The decrease in gross
profit as a percentage of revenues can be explained as follows: (1) the new
build construction of semisubmersible offshore drilling rigs generally results
in lower gross margin percentages than those generated from repair and retrofit
work, (2) the company earned smaller margin percentages on contracts assumed
upon the acquisition of the Marystown Facility, and (3) margin percentages
earned on equipment sales from the Company's French operations, while typically
higher than margins earned on new build construction are generally less than
those earned from repair and retrofit work. Management expects that gross
margins, as a percentage of revenues, may trend lower as a more significant
portion of the Company's total revenue is derived from the new construction of
offshore drilling rigs and from sales of equipment. Such lower gross margin
percentages result from a higher dollar volume of lower margin material and
subcontract costs included in cost of revenue, and from a greater portion of the
total project being performed on a fixed price basis. Gross margins on repair
and retrofit projects also vary based on, among other things, the size of the
project undertaken.
Selling, general and administrative expenses ("SG&A expenses") were $32.4
million in the year ended December 31, 1998 compared to $12.0 million for the
year ended December 31, 1997. The increase in SG&A expenses reflects an increase
in sales and administrative workforce and
38
<PAGE> 39
facilities due to overall growth of the Company's business, the additional
administrative costs associated with international activities and costs
associated with being a publicly held corporation.
Operating income increased by $30.7 million from the year ended December
31, 1997 to $56.5 million for the year ended December 31, 1998 primarily as a
result of increased revenue and gross profit discussed in the preceding
paragraphs.
Net interest expense (interest expense less interest income) declined to
$0.2 million for the year ended December 31, 1998 from $0.6 million for the year
ended December 31, 1997, primarily as a result of increased interest expense
attributable to borrowings related to FGO East and equipment additions in the
existing FGO West yard.
The change in other income (expense) is primarily attributable to
miscellaneous items, none of which are individually material.
The provision for income taxes for the year ended December 31, 1998
reflects a composite income tax rate of approximately 37% including foreign
taxes of approximately $2.9 million. The actual and proforma provision for
income taxes for the year ended December 31, 1997, reflects a combined Federal
and State tax rate of 38%. The decline in the overall rate for the year ended
December 31, 1998 is the result of available state income tax credits related to
increased employment levels at the Company's Pascagoula, Mississippi locations.
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 acquired with proceeds
from such borrowings. Net cash provided by (used in) operations was ($61.1)
million and $21.1 million for the year ended December 31, 1999 and 1998,
respectively. The primary reason for the change in cash flows from operating
activities in 1999 was the Company's net loss of $30.8 million, an increase in
net contract costs of $33.0 million, and a decrease in accounts payable of $37.0
million.
During the year ended December 31, 1999, the Company incurred approximately
$7.5 million in capital expenditures compared to $60.7 million during 1998 when
the Company was completing its FGO East Facility. In addition, in February 1998,
approximately $25.0 million was expended for the acquisition of the Company's
French subsidiary. Capital expenditures were funded in 1999 primarily from the
Company's cash balances, and borrowings under a credit facility. The 1998
capital expenditures and acquisition costs were funded from operating cash flow,
borrowings under its credit facility, the issuance of $24.8 million in bonds
guaranteed by the United States Maritime Administration ("MARAD"), the issuance
of $18.0 million of Mississippi Business Finance Corporation Taxable Industrial
Development Revenue Bonds (the "MBFC Bonds"), and $8.0 million in equipment
financing. The Company anticipates that its level of capital expenditures during
2000 will not exceed $10.0 million.
During 1998, the Board of Directors authorized a stock repurchase plan
under which the Company could repurchase shares of its common stock in open
market transactions with an aggregate fair value of up to $30.0 million. Through
December 31, 1998, the Company had repurchased 1,188,900 shares of its Common
Stock for an aggregate of approximately $15.5 million. The Company utilized a
$15.0 million short-term credit facility provided by an investment banking firm
to finance a portion of the purchases. No amounts were outstanding under that
arrangement as of December 31, 1998. During 1999 the Company's Board of
Directors discontinued the share repurchase program, and no additional purchases
were made during the year.
At December 31, 1998, the Company had invested approximately $12.8 million
in an unconsolidated subsidiary ("Ilion LLC") in which the Company currently
owns a 50% equity interest. The Company's ownership interest in Ilion LLC is
expected to be reduced to 30%. Ilion LLC owns a hull for a semi-submersible
drilling rig that requires substantial completion and outfitting. The Company
39
<PAGE> 40
and the other member of Ilion LLC (who is also one of the Company's largest
customers) 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 December 31, 1998. The Company's investment in Ilion LLC is accounted for
using the equity method.
In March 1997, FGO entered into a credit facility (the "Credit Facility")
that provided for borrowings of up to $10.0 million, subject to a borrowing base
limitation equal to 80% of eligible receivables. The Credit Facility was secured
by contract-related receivables. During 1998, the borrowing capacity under the
Credit Facility was increased to $25.0 million and was extended until March 31,
1999. During 1999, the Company extended the maturity of its Credit Facility and
entered into a supplemental bank credit facility (the "Supplemental Facility")
to provide for an additional $20 million in borrowings. Borrowings under the
Credit Facility and the Supplemental Facility were 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 were to
mature on the earlier of November 26, 1999, or the closing of the HMG merger.
In connection with the merger with HMG, on November 3, 1999, the Company
entered into a new secured bank revolving and letter of credit facility ("the
New Credit Facility") that replaced the Credit Facility. Under the terms of the
New Credit Facility, the Company may borrow up to $120 million under a senior
secured revolving credit facility. In addition, the New Credit Facility provides
a $44.2 million senior secured letter of credit facility. The New Credit
Facility has a three-year term and is secured by substantially all of the
Company's otherwise unencumbered assets, all of the Company's domestic
subsidiaries and 67% of the stock of its foreign subsidiaries. The interest rate
ranges from 1.375% to 2.75% over the London Inter Bank Offered Rate ("LIBOR"),
or the base rate (as defined), at the Company's choice. Under the New Credit
Facility, the Company is obligated to pay certain fees, including an annual
commitment fee in an amount of .50% of the unused portion of the commitment.
Amounts outstanding under the New Credit Facility may not exceed an amount based
on specified percentages of the Company's accounts receivable, inventory and net
contract related investments. At December 31, 1999, the Company had $106.7
million in cash advances under the credit agreement with $4.2 million available
under the New Credit Facility. Average usage since inception of the New Credit
Facility has been $96.4 million, resulting in an average availability of $13.9
million over the same period.
The New Credit Facility requires the Company to comply with certain
financial covenants, including limitations on additional borrowings and capital
expenditures, certain debt coverage ratios, minimum net worth and other
customary requirements. At December 31, 1999, the Company was not in compliance
with the leverage ratio, the minimum fixed charge coverage ratio and the minimum
net worth requirement. On March 28, 2000, the Company obtained a waiver of
noncompliance with these requirements and an amendment to the New Credit
Facility that among other things, amends the leverage ratio, the fixed charge
coverage ratio, and minimum net worth requirement, and requires the commitment
amount under the New Credit Facility to be reduced by 75% of the net proceeds of
asset sales. The amendment changes the interest rate to the lender's base rate
plus 2.00% per annum until the Company completes certain of its contracts. It is
not anticipated that the Company will complete these contracts until the fourth
quarter of 2001. In connection with the amendment, the Company is obligated to
pay certain fees, including an annual commitment fee in an amount of 1.00% of
the unused portion of the commitment.
The Company believes that cash generated from operations, including the
collection of recoverable income taxes, ($38.7 million at December 31, 1999),
the settlement of certain recoverable contract claims, and funds available under
the New Credit Facility will be sufficient to fund its requirements for working
capital (including contract losses), capital expenditures, and other capital
needs for at least the next 12 months and to remain in compliance with the new
loan covenants. However, additional debt or equity financing or asset sales may
be required if the
40
<PAGE> 41
Company's estimated costs on the Ocean Rig contracts and/or the Petrodrill
contracts are materially higher than those utilized in preparing the financial
statements at December 31,1999 or if the Company's level of business activity
picks up considerably and the Company is unable to negotiate contract terms that
provide for contract funding as costs are incurred. Although the Company
believes that, under such circumstances, it would be able to obtain additional
funding from these sources, there can be no assurance that funding from these
sources will be available to the Company for these purposes or, if available,
will be on terms satisfactory to the Company.
YEAR 2000 ("Y2K")
Year 2000 issues arose from the fact that many software applications,
hardware and equipment and embedded chip systems identify dates using only the
last two digits of the year. These products may not have been able to
distinguish between dates in the Year 2000 and dates in the year 1900.
In prior periods, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
Expenses incurred by the Company in association with the overall Year 2000
efforts were insignificant. The Company is not aware of any material problems
resulting from Year 2000 issues, either with products, internal systems, or the
products and services of third parties. The Company will continue to monitor its
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
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" (SFAS 133). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. Given the Company's historically
minimal use of these types of instruments, the Company does not expect a
material impact on its statements from adoption of SFAS 133.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk due to changes in interest
rates, primarily in the United States. The Company's policy is to manage
interest rates through the use of a combination of fixed and floating rate debt.
The Company currently does not use any derivative financial instruments to
manage its exposure to interest rate risk.
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<PAGE> 42
The table below provides information about the Company's future maturities
of principal for outstanding debt instruments and fair value at December 31,
1999. All instruments described are non-trading instruments ($ in thousands).
<TABLE>
<CAPTION>
THERE- FAIR
2000 2001 2002 2003 2004 AFTER VALUE
------- ------ -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt,
including current
portion
Fixed rate......... $13,645 $6,285 $ 4,831 $4,765 $192,166 $52,977 $192,437
Average interest
rate............ 5.10% 5.16% 5.12% 5.09% 5.06% 6.79%
Variable rate...... $106,708 $106,708
Average interest
rate............ LIBOR
plus
1.375%
to 2.750%
</TABLE>
FOREIGN CURRENCY RISKS
Although the majority of the Company's transactions are in U.S. dollars,
two of the Company's subsidiaries conduct some of their operations in various
foreign currencies. The Company currently does not use any off balance sheet
hedging instruments to manage its risks associated with its operating activities
conducted in foreign currencies unless that particular operation enters into a
contract in a foreign currency which is different that the local currency of the
particular operation. In limited circumstances and when considered appropriate,
the Company will utilize forward exchange contracts to hedge the anticipated
purchases and/or sales. The Company has historically used these instruments
primarily in the manufacturing and selling of certain marine deck equipment. The
Company attempts to minimize its exposure to foreign currency fluctuations by
matching its revenues and expenses in the same currency for its contracts. As of
December 31, 1999, the Company does not have any outstanding forward exchange
contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is contained in a separate section
of this report. See Consolidated Financial Statements in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Prior to the merger with HMG, FGI had historically engaged Arthur Andersen
LLP, ("AA") as its certifying accountant while HMG had historically engaged
Ernst and Young LLP ("E&Y"). With the merger, a process was established to
select between AA and E&Y as the certifying accountant for the merged entity.
Selection of E&Y as the certifying accountant was recommended to the FGH Audit
Committee on December 1, 1999. The Audit Committee approved the selection on
December 14, 1999 and so reported to the FGH Board of Directors at which time AA
was dismissed.
The reports of AA on the financial statements of FGI for the past two
fiscal years contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with its audits for the two most recent fiscal years and
through December 13, 1999 there have been no disagreements with AA on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of AA would have caused them to make reference thereto in their
reports on the financial statements for such years. During the two most recent
fiscal years and through Decem-
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<PAGE> 43
ber 13, 1999 there have been no reportable events with regard to changes in or
disagreements with accountants (as defined in Regulation S-K, Item 304(a)(1)(v))
other than the information reported above.
PART III
ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to
the Company's definitive Proxy Statement (the "Proxy Statement") to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, within 120 days after the end of
the fiscal year covered by this report. See also "Executive Officers of the
Registrant" included in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to
the Proxy Statement.
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<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The Consolidated Financial Statements listed by the Registrant on the
accompanying Index to Consolidated Financial Statements are filed as part of
this Annual Report. (See page F-1).
(a)(2) Financial Statement Schedules
The required information is included in the Consolidated Financial
Statements or Notes thereto.
(a)(3) Exhibits
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of June 1, 1999
between Friede Goldman International Inc. and Halter
Marine Group, Inc. (incorporated by reference to Exhibit
2.1 to Friede Goldman International Inc.'s Registration
Statement on Form S-4 (Registration No. 333-87853) filed
with the SEC on September 27, 1999).
2.2 -- Amendment No. 1, dated September 14, 1999, to Agreement
and Plan of Merger between Friede Goldman International
Inc. and Halter Marine Group, Inc. (incorporated by
reference to Exhibit 2.2 to Friede Goldman International
Inc.'s Registration Statement on Form S-4 (Registration
No. 333-87853) filed with the SEC on September 27, 1999).
3.1 -- Articles of Incorporation of Friede Goldman Mississippi,
Inc.,as amended. (incorporate by reference to Exhibit 3.1
to Friede Goldman International Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1998).
3.2 -- Amended and Restated Bylaws of Friede Goldman Halter,
Inc. (incorporated by reference to Exhibit 3.1 to Friede
Goldman Halter, Inc.'s Current Report on Form 8-K filed
with the SEC on November 9, 1999).
4.1 -- Specimen Stock Certificate. (incorporated by reference to
Exhibit 3 to Friede Goldman International Inc.'s
Registration Statement on Form 8-A (File No. 001-14627)
filed with the SEC on November 18, 1998).
4.2 -- Stockholder's Agreement by and between Friede Goldman
International Inc. and J. L. Holloway, dated as of June
1, 1999. (incorporated by reference to Exhibit 4.1 to
Friede Goldman International Inc.'s Registration
Statement on Form S-4 (Registration No. 333-87853) filed
with the SEC on September 27, 1999).
4.3 -- Registration Rights Agreement among Friede Goldman
International Inc., J. L. Holloway, Carl M. Crawford,
Ronald W. Schnoor, James A. Lowe, III and John F. Alford.
(incorporated by reference to Exhibit 4.3 to Friede
Goldman International Inc.'s Registration Statement on
Form S-4 (Registration No. 333-87853) filed with the SEC
on September 27, 1999).
</TABLE>
44
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.4 -- Amendment No. 1 to Registration Rights Agreement among
Friede Goldman International Inc., J. L. Holloway, Carl
M. Crawford, Ronald W. Schnoor, James A. Lowe, III, John
F. Alford, Holloway Partners, L.P., Carl Crawford
Children's Trust and Bodin Children's Trust.
(incorporated by reference to Exhibit 4.4 to Friede
Goldman International Inc.'s Registration Statement on
Form S-4 (Registration No. 333-87853) filed with the SEC
on September 27, 1999).
4.5 -- Indenture dated September 15, 1997 between the Halter
Marine Group, Inc. and the United States Trust Company of
Texas, N.A., as Trustee for Halter Marine Group Inc.'s
4 1/2% Convertible Subordinated Notes due 2004.
(incorporated by reference to Exhibit 4.1 to Halter
Marine Group Inc.'s Registration Statement on Form S-3
(Registration No. 333-38491) filed with the SEC on
October 22, 1997).
4.6 -- First Supplemental Indenture, dated as of November 2,
1999 and effective as of November 3, 1999, by and among
Friede Goldman International Inc., Halter Marine Group,
Inc. and U.S. Trust Company of Texas, N.A., as Trustee
for the 4 1/2% Convertible Subordinated Notes due 2004.
(incorporated by reference to Exhibit 4.1 to Friede
Goldman Halter, Inc.'s Current Report on Form 8-K filed
with the SEC on November 9, 1999).
4.7 -- Registration Rights Agreement dated September 15, 1997,
among the Company and Donaldson, Lufkin & Jenrette
Securities Corporation and Merrill Lynch, Pierce, Fenner
& Smith Incorporated. (incorporated by reference to
Exhibit 4.2 to Halter Marine Group Inc.'s Registration
Statement on Form S-3 (Registration No. 333-38491) filed
with the SEC on October 22, 1997).
4.8 -- Rights Agreement, dated December 7, 1998, between the
Company and American Stock Transfer & Trust Company, as
Rights Agent. (incorporated by reference to Exhibit 1 to
Friede Goldman International Inc.'s Registration
Statement on Form 8-A (File No. 001-14627) filed with the
SEC on January 12, 1999).
4.9 -- First Amendment to Rights Agreement, dated as of October
18, 1999, between the Company and American Stock Transfer
& Trust Company, as Rights Agent. (incorporated by
reference to Exhibit 4.4 to Friede Goldman International
Inc.'s Registration Statement on Form 8-A/A (File No.
001-14627) filed with the SEC on October 20, 1999).
10.1 -- Credit Agreement, dated as of November 3, 1999, among
Friede Goldman Halter, Inc., Wells Fargo Bank (Texas),
National Association, as administrative agent and
co-arranger, Banc One Capital Markets, Inc., as
co-arranger and syndication agent, and the lenders party
thereto. (incorporated by reference to Exhibit 10.1 to
Friede Goldman Halter, Inc.'s Current Report on Form 8-K
filed with the SEC on November 9, 1999).
*10.2 -- Amendment No. 1, dated December 1999, to Credit
Agreement, among Friede Goldman Halter, Inc. and Wells
Fargo Bank (Texas) National Association, as
administrative agent and co-arranger, Banc One Capital
Markets, Inc., as co-arranger and syndication agent, and
the lenders party thereto.
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*10.3 -- Form of Amendment No. 2, dated March 30, 2000 to Credit
Agreement, among Friede Goldman Halter, Inc. and Wells
Fargo Bank (Texas) National Association, as
administrative agent and co-arranger, Banc One Capital
Markets, Inc., as co-arranger and syndication agent, and
the lenders party thereto.
*10.4 -- Employment Agreement, dated June 1, 1999 and effective as
of November 3, 1999, between Friede Goldman International
Inc. and J. L. Holloway.
*10.5 -- Employment Agreement, dated June 1, 1999 and effective as
of November 3, 1999, between Friede Goldman International
Inc. and John F. Alford.
*10.6 -- Employment Agreement, dated June 1, 1999 and effective as
of November 3, 1999, between Friede Goldman International
Inc. and Rick S. Rees.
*10.7 -- Employment Agreement, dated June 1, 1999 and effective as
of November 3, 1999, between Friede Goldman International
Inc. and Ronald W. Schnoor.
10.8 -- Friede Goldman Halter, Inc. Amended and Restated 1997
Equity Incentive Plan. (incorporated by reference to
Exhibit 99.1 to Friede Goldman Halter, Inc.'s
Registration Statement on Form S-8 (Registration No.
333-92051) filed with the SEC on December 3, 1999).
10.9 -- Amendment No. 1 to Friede Goldman Halter, Inc. Amended
and Restated 1997 Equity Incentive Plan. (incorporated by
reference to Exhibit 99.2 to Friede Goldman Halter,
Inc.'s Registration Statement on Form S-8 (Registration
No. 333-92051) filed with the SEC on December 3, 1999).
10.10 -- Business Purchase Agreement, dated November 22, 1996, by
and among J. L. Holloway Holdings, Inc., Friede &
Goldman, Ltd. and Jerome L. Goldman. (incorporated by
reference to Exhibit 10.19 to the Friede Goldman
International Inc.'s Registration Statement on Form S-1
(Registration No. 333-27599) filed with the SEC on May
22, 1997).
10.11 -- Amendment to Business Purchase Agreement, dated December
3, 1996, by and among Friede & Goldman, Ltd. (f/k/a J. L.
Holloway Holdings, Inc.), J. L. Goldman Associates, Inc.
(f/k/a Friede & Goldman, Ltd.) and Jerome L. Goldman.
(incorporated by reference to Exhibit 10.20 to Friede
Goldman International Inc.'s Registration Statement on
Form S-1 (Registration No. 333-27599) filed with the SEC
on May 22, 1997).
10.12 -- Second Amendment to Business Purchase Agreement, dated
May 19, 1997, by and among Friede & Goldman, Ltd., J. L.
Goldman Associates, Inc. and Jerome L. Goldman.
(incorporated by reference to Exhibit 10.21 to Friede
Goldman International Inc.'s Registration Statement on
Form S-1 (Registration No. 333-27599) filed with the SEC
on May 22, 1997).
10.13 -- Third Amendment to Business Purchase Agreement, dated
June 13, 1997, by and among Friede & Goldman, Ltd., J. L.
Goldman Associates, Inc. and Jerome L. Goldman.
(incorporated by reference to Exhibit 10.22 to Friede
Goldman International Inc.'s Registration Statement on
Form S-1 (Registration No. 333-27599) filed with the SEC
on May 22, 1997).
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.14 -- Stock Purchase Agreement, dated January 1, 1998, by and
among Marystown Shipyard Limited, Newfoundland Ocean
Enterprises Ltd., Friede Goldman Canada, Inc., Friede
Goldman International Inc. and Friede Goldman Marystown,
Ltd. (incorporated by reference to Exhibit 99.2 to the
Friede Goldman International Inc.'s Current Report on
Form 8-K filed with the SEC on January 16, 1998).
10.15 -- Aircraft Dry Lease, dated as of December 1, 1998, by and
between Equipment Management Systems, LLC, lessor, and
Friede Goldman International Inc., lessee. (incorporated
by reference to Exhibit 10.21 to Friede Goldman
International Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998).
16.1 -- Letter from Arthur Andersen, dated December 21, 1999,
addressed to the SEC (incorporated by reference to
Exhibit 16.1 to Friede Goldman Halter, Inc.'s Current
Report on Form 8-K filed with the SEC on December 21,
1999).
*21.1 -- Subsidiaries of Friede Goldman Halter, Inc.
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Arthur Andersen LLP.
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K on the following dates:
October 26, 1999
November 4, 1999
November 9, 1999
December 21, 1999
47
<PAGE> 48
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Friede Goldman Halter, Inc.
We have audited the accompanying consolidated balance sheet of Friede
Goldman Halter, Inc. and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Friede Goldman
Halter, Inc. and Subsidiaries at December 31, 1999, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New Orleans, Louisiana
March 28, 2000
48
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Friede Goldman Halter, Inc.
We have audited the accompanying consolidated balance sheets of Friede
Goldman Halter, Inc. (formerly Friede Goldman International, Inc.), a
Mississippi corporation, and its subsidiaries, (the "Company") as of December
31, 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the each of the years in the two year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Friede Goldman
Halter, Inc. and its subsidiaries as of December 31, 1998 and the results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
February 9, 1999
49
<PAGE> 50
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,124 $ 42,796
Accounts receivable....................................... 143,037 52,956
Income tax receivable..................................... 38,657 --
Inventories............................................... 45,261 34,192
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 143,769 14,398
Prepaid expenses and other................................ 17,048 2,536
Deferred income tax asset................................. 45,403 2,246
---------- --------
Total current assets.............................. 448,299 149,124
---------- --------
Investment in unconsolidated subsidiary..................... 13,035 12,825
Property, plant and equipment, net of accumulated
depreciation.............................................. 334,642 139,078
Goodwill, net of accumulated amortization................... 195,137 10,834
Other assets................................................ 9,779 2,699
---------- --------
$1,000,892 $314,560
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current portion of long-term
debt................................................... $ 13,645 $ 16,129
Accounts payable.......................................... 115,918 62,968
Accrued liabilities....................................... 117,966 18,640
Reserve for losses on uncompleted contracts............... 66,226 --
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 50,725 45,528
---------- --------
Total current liabilities......................... 364,480 143,265
Deferred income tax liability............................... 56,190 6,794
Long-term debt, less current portion........................ 299,075 45,863
---------- --------
Total liabilities................................. 719,745 195,922
---------- --------
Deferred government subsidy, net of accumulated
amortization.............................................. 33,026 33,348
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock, $0.01 par value; 125,000,000 shares;
authorized 39,972,844 and 24,535,168 issued and
outstanding at December 31, 1999 and December 31, 1998,
respectively........................................... 400 245
Additional paid-in capital................................ 230,166 50,928
Retained earnings......................................... 18,520 49,346
Treasury stock at cost, 1,188,900 shares at December 31,
1998................................................... -- (15,827)
Accumulated other comprehensive income (loss)............. (965) 598
---------- --------
Total stockholders' equity........................ 248,121 85,290
---------- --------
Total liabilities and stockholders' equity........ $1,000,892 $314,560
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE> 51
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Contract revenue earned................................... $479,698 $382,913 $113,172
Cost of revenue earned.................................... 474,391 293,712 75,236
-------- -------- --------
Gross profit.................................... 5,307 89,201 37,936
Selling, general and administrative expenses.............. 42,475 32,365 11,963
Amortization of goodwill.................................. 1,576 334 134
-------- -------- --------
Operating income (loss)......................... (38,744) 56,502 25,839
-------- -------- --------
Other income(expense):
Interest expense, net................................... (9,172) (201) 673
Gain (loss) on sale or distribution of assets........... (8) (374) 3,922
Other................................................... (43) 38 776
-------- -------- --------
Total other income (expense).................... (9,223) (537) 5,371
-------- -------- --------
Income (loss) before income taxes....................... (47,967) 55,965 31,210
Provision for income taxes expense (benefit).............. (17,141) 20,679 7,941
-------- -------- --------
Net income (loss)............................... $(30,826) $ 35,286 $ 23,269
======== ======== ========
Pro forma net income:
Net income.............................................. $ 23,269
Pro forma income tax expense............................ 3,980
--------
Pro forma net income.................................... $ 19,289
========
Net income (loss) per share:
Basic................................................... $ (1.18) $ 1.46 $ 1.10
======== ======== ========
Diluted................................................. $ (1.18) $ 1.43 $ 1.09
======== ======== ========
Pro forma net income per share:
Basic................................................... $ 0.92
========
Diluted................................................. $ 0.91
========
Weighted average shares outstanding:
Basic................................................... 26,148 24,211 21,065
Diluted................................................. 26,148 24,599 21,297
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE> 52
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------- PAID-IN RETAINED TREASURY COMPREHENSIVE
NUMBER AMOUNT CAPITAL EARNINGS STOCK INCOME (LOSS) TOTAL
------- ------ ---------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996..... 1 $ 5 $ 2,056 $ 2,549 $ -- $ 1,609 $ 6,219
Comprehensive income:
Net income................... -- -- -- 23,269 -- -- 23,269
Other comprehensive income:
Unrealized loss on
marketable securities.... -- -- -- -- -- (704) (704)
--------
Total comprehensive income..... -- -- -- -- -- -- 22,565
Stock options granted to
employees as compensation.... -- -- 475 -- -- -- 475
Distribution to stockholders... -- -- -- (11,758) -- (905) (12,663)
Exchange of stock in connection
with reorganization.......... 9,199 87 (87) -- -- -- --
Sale of stock in public
offering..................... 3,003.. 30 46,637 -- -- -- 46,667
Stock options granted.......... -- -- 542 -- -- -- 542
Stock split.................... 12,202 122 (122) -- -- -- --
------- ---- -------- -------- -------- ------- --------
Balance, December 31, 1997..... 24,405 244 49,501 14,060 -- -- 63,805
Comprehensive income:
Net income................... -- -- -- 35,286 -- -- 35,286
Other comprehensive income:
Net change in foreign
currency translation
adjustment............... -- -- -- -- -- 598 598
--------
Total comprehensive income..... 35,884
Stock options granted to
employees as compensation.... -- -- 316 -- -- -- 316
Stock options exercised........ 119 1 772 -- -- -- 773
Sale of stock.................. 11 -- 339 -- -- -- 339
Purchase of treasury stock..... -- -- -- -- (15,827) -- (15,827)
------- ---- -------- -------- -------- ------- --------
Balance, December 31, 1998..... 24,535 245 50,928 49,346 (15,827) 598 85,290
Comprehensive income:
Net income (loss)............ -- -- -- (30,826) -- -- (30,826)
Other comprehensive income
(loss):
Net change in foreign
currency translation
adjustment............... -- -- -- -- -- (1,563) (1,563)
--------
Total comprehensive income
(loss)....................... (32,389)
Stock options granted.......... -- -- 178 -- -- -- 178
Stock options exercised........ 86 1 901 -- -- -- 902
Stock issuances................ 90 1 848 -- -- -- 849
Stock issuance -- HMG Merger... 16,450 164 193,127 -- -- -- 193,291
Retirement of treasury stock... (1,188) (11) (15,816) -- 15,827 -- --
------- ---- -------- -------- -------- ------- --------
Balance, December 31, 1999..... 39,973 $400 $230,166 $18,520 $ -- $ (965) $248,121
======= ==== ======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE> 53
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss)......................................... $(30,826) $ 35,286 $ 23,269
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 13,127 5,875 1,608
Provision for loss on uncompleted contracts............. 16,508 -- --
Compensation expense related to stock or stock options
issued to employees................................... 178 316 1,017
(Gain) loss on sale of assets........................... 8 374 (3,922)
Deferred income taxes................................... 6,536 704 683
Net (increase) decrease in billings in excess of costs
and estimated earnings on uncompleted contracts....... (21,494) (7,499) 33,510
Net increase (decrease) in costs and estimated earnings
in excess of billings on uncompleted contracts........ 8,375 (14,111) --
Changes in operating assets and liabilities:
Decrease in restricted certificates of deposit........ -- -- 4,652
(Increase) decrease in receivables.................... 35,823 (19,153) (15,699)
Increase in income tax receivable..................... (38,657) -- --
(Increase) decrease in inventories.................... 3,984 (23,210) (4,638)
(Increase) decrease in other assets................... (7,822) 2,384 (55)
Increase (decrease) in accounts payable and accrued
liabilities......................................... (46,801) 40,122 11,697
-------- -------- --------
Net cash provided by (used in) operating
activities........................................ (61,061) 21,088 52,122
-------- -------- --------
Investing activities:
Capital expenditures for plant and equipment.............. (7,502) (60,738) (26,595)
Acquisition of French subsidiary.......................... -- (25,285) --
Cash acquired upon acquisition of French subsidiary....... -- 20,581 --
Cash acquired in Halter Marine merger..................... 2,501 -- --
Proceeds from sale of property, plant and equipment....... 463 59 423
Investment in unconsolidated subsidiary................... (209) (11,916) (908)
Payments received on notes receivable or sales type
lease................................................... -- -- 539
-------- -------- --------
Net cash used in investing activities............... (4,747) (77,299) (26,541)
-------- -------- --------
Financing activities:
Proceeds from stock offering.............................. -- -- 46,668
Proceeds from sale and issuance of stock.................. 849 339 --
Proceeds from exercise of stock options................... 902 773 --
Net borrowings (repayments) under line of credit.......... 36,615 9,328 (1,501)
Proceeds from borrowings under debt facilities............ 13,177 39,828 701
Release of restricted escrowed funds...................... -- 24,817 --
Purchase of treasury stock................................ -- (15,828) --
Principal payments on debt................................ (11,985) (18,101) (7,898)
Distributions to stockholders............................. -- -- (6,673)
Payments of financing charges for Title XII debt.......... -- -- (1,350)
-------- -------- --------
Net cash provided by financing activities........... 39,558 41,156 29,947
-------- -------- --------
Effect of exchange rate changes on cash................... (1,422) 813 --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents...... (27,672) (14,242) 55,528
Cash and cash equivalents at beginning of year............ 42,796 57,038 1,510
-------- -------- --------
Cash and cash equivalents at end of year.................. $ 15,124 $ 42,796 $ 57,038
======== ======== ========
Supplemental disclosures:
Cash paid during the period for interest.................. $ 4,667 $ 1,105 $ 1,256
Cash paid during the period for income taxes.............. $ 13,059 $ 19,072 $ 4,750
Non-cash distributions of property to stockholders........ $ -- $ -- $ 1,641
Assumption of note payable by stockholder................. $ -- $ -- $ 198
Proceeds from borrowings under Title XI held in escrow.... $ -- $ -- $ 24,817
Distribution of marketable securities to stockholder to
satisfy note payable.................................... $ -- $ -- $ 1,400
Distribution of marketable securities to stockholder...... $ -- $ -- $ 6,391
Assumption of margin account debt by stockholder.......... $ -- $ -- $ 2,749
Non-cash investing activities:
Acquisitions:
Fair value of assets acquired........................... $495,868 $102,728 $ --
======== ======== ========
Fair value of liabilities assumed....................... $490,322 $ 48,699 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE> 54
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
General
On November 3, 1999, a merger was consummated between Friede Goldman
International, Inc. ("FGI") and Halter Marine Group, Inc. ("HMG") with FGI
remaining as the surviving corporation. Effective with the merger, the corporate
name was changed to Friede Goldman Halter, Inc. ("FGH"). FGH is incorporated
under the laws of the State of Mississippi. The consolidated financial
statements include the accounts of FGH, Inc. and its wholly-owned subsidiaries,
including, among others, Friede Goldman Offshore, Inc. ("FGO"), Friede &
Goldman, Ltd. ("FGL"), Friede Goldman Newfoundland Limited ("FGN"), Friede
Goldman France S.A.S. ("FGF"), and Halter Marine, Inc.("Halter")(collectively
referred to as the "Company"). These consolidated statements include the
accounts of FGN for all periods subsequent to January 1, 1998, FGF for all
periods subsequent to February 5, 1998, HMG for all periods subsequent to
November 3, 1999 and all other subsidiaries from their dates of incorporation.
All significant intercompany accounts and transactions have been eliminated.
Reorganization and Initial Public Offering
The Company was originally incorporated under the laws of the State of
Delaware in February 1997. In anticipation of the Company's initial public
offering of its common stock, the stockholders of two predecessor companies, HAM
Marine, Inc. ("HAM") and FGL, contributed all of their ownership in HAM and FGL
to the Company in exchange for shares of common stock in the Company; and HAM
and FGL became wholly-owned subsidiaries of the Company (the "Reorganization").
Because HAM and FGL were owned in substantially identical proportions, the
number of shares of common stock of the Company received by each of the
stockholders of HAM and FGL in the Reorganization was based on each
stockholder's percentage of ownership of HAM shares. The Reorganization was
accounted for as a reorganization of entities under common control.
The Company's certificate of incorporation established authority to issue
1,000 shares of $0.01 par value preferred stock and 2,000 shares of $0.01 par
value common stock. Preferred stock may be issued in one or more series and in
such amounts as may be determined by the Company's board of directors. The
voting powers, designations, preferences and relative, participating, optional
or other special rights, if any, and the qualifications, limitations or
restrictions, if any, of each preferred stock issue shall be fixed by resolution
of the board of directors providing for the issue. All shares of common stock of
the Company shall be identical, and, except as otherwise provided in a
resolution of the board of directors with respect to preferred stock, the
holders of common stock shall exclusively possess all voting power with each
share of common stock having one vote.
In May 1997, in conjunction with the Company's initial public offering of
its common stock, the Company authorized an increase in the amount of authorized
shares to 5,000,000 shares of $0.01 par value preferred stock and 25,000,000
shares of $0.01 par value common stock. Effective prior to the public offering,
the Company issued, pursuant to a stock exchange agreement, 18,400,000 shares
(as adjusted for the 2-for-1 stock split discussed below) of the Company's
common stock to the stockholders of HAM and FGL as described above. Therefore,
for the historical per share and pro forma per share data included in the
statements of operations, the weighted average number of common shares
outstanding includes 18,400,000 shares for all periods presented.
In July 1997, the Company completed an initial public offering (the
"Offering") of its common stock. In connection with the Offering, the Company
sold 3,002,521 (6,005,042 after the 2 for 1
54
<PAGE> 55
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock split discussed below) shares of its common stock for net proceeds of
approximately $46.6 million. The Company has utilized the proceeds to fund the
expansion of its facilities and equipment, complete the acquisition of FGF, and
for working capital.
Stock Split and Increase in Authorized Shares
In September 1997, the Company declared a 2 for 1 stock split, effective
October 16, 1997 for all stockholders of record as of October 1, 1997. Unless
otherwise indicated, all references to number of shares and to per share
information in the financial statements and notes have been adjusted to reflect
the stock split on a retroactive basis.
In January 1998, in connection with a special meeting of the stockholders
of the Company, the number of authorized shares of common stock of the Company
was increased to 125,000,000 shares.
The Company adopted a stockholder rights plan on December 4, 1998, designed
to assure that the Company's stockholders receive free and equal treatment in
the event of a takeover of the Company and to guard against partial tender
offers, squeeze-outs, open market accumulations, and other abusive tactics to
gain control without paying all stockholders a fair price. The rights plan was
not adopted in response to any specific takeover proposal. Under the rights
plan, the Company's shareholders were issued a Preferred Stock Purchase Right on
each share of the Company's common stock. Each right entitles its holder to
purchase one one-thousandth of a share of a new series of Junior Preferred
Stock, par value, $0.01 per share for $75 per share. The Purchase Right grant
was made on December 21, 1998, to stockholders of record at that date. The
rights will expire on February 26, 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Construction Contracts
The Company's revenue is earned on the percentage-of-completion method.
Under the percentage of completion method used in its Offshore and Engineered
Products segments, substantially all of the revenues from construction contracts
are measured 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 cost estimates are reviewed periodically
as the work progresses, and adjustments proportionate to the percentage of
completion are reflected in the accounting period in which the facts that
require such adjustments become known. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
identified. Other changes, including those arising from contract penalty
provisions and final contract settlements, are recognized in the period in which
the revisions are determined. To the extent that these adjustments result in a
reduction or elimination of previously reported profits, the Company would
report such a change by recognizing a charge against current earnings, which
might be significant depending on the size of the project or the adjustment.
Cost of revenue includes costs associated with the fabrication process and can
be further broken down between direct costs (such as direct labor costs and raw
materials) allocated to specific projects and indirect costs (such as
supervisory labor, utilities, supplies, equipment costs, and depreciation) that
are associated with production but are not directly related to a specific
project. Selling, general and administrative costs are charged to expense as
incurred.
Under the percentage of completion method used in its Vessels segment,
revenues from construction contracts are measured by the percentage of labor
hours incurred to date to estimated
55
<PAGE> 56
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
total labor hours for each contract. Management considers expended labor hours
to be the best available measure of progress on its vessels contracts.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
Research and Development
FGL performs new design work on rigs for subsequent licensing. The costs of
developing designs that are not performed pursuant to a customer's contract are
charged to cost of revenue as incurred. Such charges amounted to $0.8 million,
$1.2 million and $0.9 million for the years ended December 31, 1999, 1998 and
1997.
Cash Equivalents
The Company considers all short-term cash investments with an original
maturity of less than three months to be cash equivalents.
Inventories
Inventories, which consist primarily of steel and other marine vessel
components, are valued at the lower of cost or market. Inventory cost is
determined principally on the specific identification method. Market is
replacement cost or net realizable value. At December 31, 1999 and 1998, the
Company's inventory included $10.9 million and $6.1 million of costs it incurred
related to the manufacture or purchase of certain jackup rig components.
Management of the Company believes that contracts for new construction,
modification or repairs will be secured that will utilize these components. No
further commitments for these components have been made as of December 31, 1999.
Goodwill
Goodwill is recognized for the excess of the purchase price over the fair
value of identifiable net assets acquired. Realization of goodwill is
periodically assessed by management based on the expected future profitability
and undiscounted cash flows of acquired companies and their overall contribution
to the operation of the Company.
The Company recorded goodwill of $187.7 million related to the HMG merger
in 1999 and $10.1 million related to the acquisition of FGF in 1998. Goodwill is
being amortized over a 25 year period. The related amortization expense was $1.6
million and $0.3 million for the years ended December 31, 1999 and 1998,
respectively.
Other Assets
Other assets includes $6.9 million of debt issuance costs. The debt
issuance costs relate to $185.0 million of 4 1/2% Convertible Subordinated
Notes, $30.0 million of Taxable Revenue Bonds and the New Credit Facility. Other
assets also includes $1.2 million of deferred financing costs associated with
the Title XI debt. These debt issuance costs are being amortized over the life
of the related debt. Accumulated amortization of debt issuance costs was $0.5
million and $0.1 million at December 31, 1999 and 1998, respectively.
56
<PAGE> 57
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. See Note 10 for stock option
information.
Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including goodwill, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS
121 requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. In that event, a loss is recognized based on
the amount by which the carrying amount exceeds the fair market value of the
long-lived asset. Loss on long-lived assets to be disposed of is determined in a
similar manner, except that fair market values are reduced for the cost of
disposal.
Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) establishes
standards for public companies relating to the reporting of financial and
descriptive information about operating segments in financial statements. SFAS
131 requires that financial information be reported on the same basis that is
reported internally for evaluating segment performance and allocating revenue to
segments. See Note 16 for segment information.
Accounting for Income Taxes
Subsequent to the termination of its S corporation status for income tax
purposes (See Note 6), the Company has followed the asset and liability method
of accounting for deferred income taxes prescribed by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes (SFAS 109)." Under
this method, deferred tax assets and liabilities are recorded for temporary
differences that occur between the financial reporting and tax bases of assets
and liabilities based on enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
Use of Estimates
These financial statements have been prepared in conformity with generally
accepted accounting principles. Such preparation requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the dates
of the balance sheets and the reported amounts of revenues and expenses for the
years presented. Actual results could differ materially from those estimates.
Areas requiring significant estimates to be made by management include the
application of the percentage-of-completion accounting method; recoverability of
inventory, equipment, and goodwill; depreciation and amortization; income taxes;
and accruals for certain estimated liabilities, including loss contingencies.
57
<PAGE> 58
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments at December 31,
1999 and 1998, including cash and investment in unconsolidated subsidiary
approximates fair value. See Note 9 regarding the carrying value of long-term
debt.
Net Income Per Share
Basic net income (loss) per share is calculated based on the weighted
average number of shares of common stock outstanding for the periods presented.
Diluted net income (loss) per share is based on the weighted average number of
shares of common stock outstanding for the periods, including potential dilutive
common shares which reflect the dilutive effect of the Company's stock options.
See Note 17 for a reconciliation of net income (loss) per share.
Foreign Currency Translation
The financial statements of subsidiaries outside the United States, FGN and
FGF (see Note 3), are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. The resulting translation
adjustments are included as a separate component of stockholders' equity. Income
and expense items are translated at average monthly rates of exchange during the
period.
Treasury Stock
During 1998, the Company's Board of Directors authorized a stock repurchase
plan. Through December 31, 1998, 1,188,900 shares of the Company's Common Stock
had been repurchased for an aggregate consideration of approximately $15.8
million. Funds used to accomplish the Common Stock repurchase were provided from
operating cash flow and borrowings under a short-term credit facility provided
by an investment banking firm. All such borrowings were repaid in November 1998.
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.
Certain Risks and Uncertainties
Low prices for crude oil and natural gas experienced during 1998 and much
of 1999, created a general decline in the demand for the Company's products.
Although the prices of these commodities have recently increased, there is no
assurance that drilling contractors and vessels operators will proceed with
plans for new construction or modification of drilling units or vessels.
In addition, most of the Company's revenue is earned on a percentage of
completion basis. Many of the Company's projects are sophisticated and complex
and estimating total costs at completion during early stages of construction
involves many variables that may change during the course of construction,
including labor productivity and increases in the cost of materials and labor.
Accordingly, cost estimates are reviewed periodically as work progresses, and
adjustments to income proportionate to the percentage of completion are
reflected in the period in which the estimates are revised. To the extent that
adjustments result in a reduction or elimination of previously reported profits,
the Company would have to recognize a charge against current
58
<PAGE> 59
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings, which may be significant depending upon the size of the project or the
adjustment (Also see Notes 13 and 14).
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" (SFAS 133). 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 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 133.
3. MERGERS AND ACQUISITIONS
Merger with Halter Marine Group, Inc.
On November 3, 1999, a merger was consummated between FGI and HMG (See Note
1). As set forth in the merger agreement, stockholders of HMG received 0.57 of a
share of the Company's common stock in exchange for each share of HMG, Inc.
common stock. A total of 16,450,292 shares was issued for a total value of
approximately $193.3 million. The merger is being accounted for as a purchase
business combination and the operating activities of HMG have been included in
the accompanying financial statements for periods subsequent to November 3,
1999. The net assets acquired have been recorded at their fair values and, at
the acquisition date, included adjustments to increase fixed assets by $37.6
million, to record certain contract reserves (See Note 14) and a deferred credit
reflecting the fair value of the construction contracts that were in progress at
the date of acquisition in the amount of $36.2 million, and to decrease
long-term debt by $70.3 million. As a result of the merger, approximately $187.7
million was allocated to goodwill. The goodwill is being amortized over 25
years.
Acquisition of Friede Goldman France S.A.S.
Effective February 5, 1998, the Company, through its wholly-owned
subsidiary, 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 $10.1
million (amortized over 25 years), and other assets net of liabilities in the
amount of $1.7 million.
Acquisition of Friede Goldman Newfoundland
On January 1, 1998, the Company purchased, through its wholly owned
subsidiary, 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
59
<PAGE> 60
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company was not in compliance
with the man-hour requirement for 1999. As of this report date, the Company had
not received a waiver on its non-compliance with this requirement and it is not
yet certain as to whether or not the Company will be able to obtain a waiver of
the liquidated damages payment as described above. 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 $5.6 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
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 was $4.6 million and $2.3 million as of December 31, 1999 and 1998,
respectively. Amortization of the subsidy is recorded in the statement of
operations as a reduction to cost of revenue and represents a reduction in
depreciation and amortization in the statement of cash flows for the twelve
months ended December 31, 1999 and 1998.
The following summarized income statement data reflects the impact that the
acquisitions of FGF, FGN and the merger with HMG would have had on the Company's
results of operations had the transactions taken place as of the beginning of
the periods presented:
<TABLE>
<CAPTION>
PRO FORMA RESULTS FOR THE YEARS ENDED
DECEMBER 31
----------------------------------------
1999 1998 1997
------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue........................................ $1,216,571 $1,335,676 $809,918
Operating income (loss)........................ $ (24,352) $ 74,841 $ 76,739
Net income (loss).............................. $ (26,088) $ 47,755 $ 51,583
Net income (loss) per common share -- basic.... $ (0.66) $ 1.17 $ 1.38
Net income (loss) per common share -- diluted.. $ (0.65) $ 1.16 $ 1.37
</TABLE>
4. MARKETABLE SECURITIES
During 1997, the Company distributed all marketable securities to
stockholders in conjunction with the Reorganization and realized a gain of $3.9
million. The cost basis of securities distributed was calculated using the
specific identification method.
5. SIGNIFICANT CUSTOMERS
The nature of the conversion and modification projects undertaken by the
Company can result in an individual contract comprising a large percentage of a
fiscal year's contract revenue. Similarly, relatively few companies own offshore
rigs. As a result, contracts performed for an individual
60
<PAGE> 61
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customer may comprise a significant portion of a particular year's contract
revenue. During the year ended December 31, 1999, the largest single customer
accounted for 30% of total revenue. A second and third customer accounted for
22% and 10% of revenue, respectively. During the year ended December 31, 1998,
the largest single customer accounted for 32% of total revenue. A second and
third customer accounted for 19% and 15% of revenue, respectively. During the
year ended December 31, 1997, the largest single customer accounted for 53% of
total revenue. A second customer accounted for 17% of total revenue. All revenue
derived from these customers was recognized in the Company's Offshore segment.
6. INCOME TAXES
Prior to June 15, 1997, certain of the Company's predecessor entities were
taxed as S Corporations for federal and state income tax purposes, whereby the
stockholders were liable for individual federal and state income taxes on their
allocated portions of each entity's taxable income. On June 15, 1997, before the
closing of the public offering, the stockholders elected to terminate this
status, and the Company became subject to federal and state income taxes.
The election resulted in the establishment of a net deferred tax liability
calculated at applicable federal and state income tax rates resulting primarily
from temporary differences arising from differences in depreciation rates for
tax and financial reporting purposes, timing of gain recognition related to a
sales-type lease or leases and unrealized appreciation on marketable securities.
The initial recordation of a net deferred tax liability by the Company resulted
in a provision for income taxes of $0.8 million.
All income before provision for income taxes for the year ended December
31, 1997 was domestic. Income (loss) before income taxes for the years ended
December 31, 1999 and 1998 was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Domestic.................................................... $(51,573) $46,903
Foreign..................................................... 3,606 9,062
-------- -------
Total............................................. $(47,967) $55,965
======== =======
</TABLE>
61
<PAGE> 62
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) included in the statement of operations for
the years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998 1997
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Domestic............................................. $(24,360) $17,448 $7,258
Foreign.............................................. 683 2,526 --
-------- ------- ------
(23,677) 19,974 7,258
-------- ------- ------
Deferred:
Domestic-attributable to activity subsequent to June
15, 1997.......................................... 5,716 922 (117)
Domestic-attributable to activity prior to June 15,
1997.............................................. -- -- 800
Foreign.............................................. 820 (217) --
-------- ------- ------
6,536 705 683
-------- ------- ------
Total........................................ $(17,141) $20,679 $7,941
======== ======= ======
</TABLE>
Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 differs from the amount computed by applying the statutory federal
income tax rate to income (loss) before income taxes as a result of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
----------------- ---------------- ----------------
% OF % OF % OF
PRETAX PRETAX PRETAX
TAX INCOME TAX INCOME TAX INCOME
-------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense
(benefit) computed on income
(loss) before taxes.......... $(16,788) (35.0)% $19,587 35.0% $10,924 35.0%
Amortization of goodwill....... 612 1.3 117 0.2 47 0.2
Decrease in tax resulting from
income earned as an S
Corporation.................. -- -- -- -- (3,700) (11.9)
Deferred income tax liability
recorded upon termination of
S-Corporation election....... -- -- -- -- 800 2.6
Taxes on foreign source
income....................... -- -- 127 0.2 -- --
Domestic tax credits........... -- -- (350) (0.6) -- --
State income tax............... (1,678) (3.5) 1,551 2.8 658 2.1
Non-taxable distribution of
marketable securities........ -- -- -- -- (890) (2.9)
Other.......................... 713 1.4 (353) (0.7) 102 0.3
-------- ----- ------- ---- ------- -----
Income tax expense(benefit).... $(17,141) (35.8)% $20,679 36.9% $ 7,941 25.4%
======== ===== ======= ==== ======= =====
</TABLE>
62
<PAGE> 63
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities give rise to the following deferred
income taxes at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1999 1998
------------------------- -------------------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
ASSET ASSET ASSET ASSET
(LIABILITY) (LIABILITY) (LIABILITY) (LIABILITY)
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed assets..................................... $ -- $(49,192) $ -- $(19,854)
Deferred government subsidy...................... -- 11,871 -- 12,839
Stock based compensation......................... -- -- -- 162
Gain on sale of assets........................... -- -- -- (233)
Foreign tax credit............................... -- 2,490 -- 900
Accounts receivable valuation.................... -- -- (109) --
Accrued liabilities.............................. 7,242 2,985 862 --
Contract reserves................................ 26,939 -- -- --
Fair value adjustment for contracts in progress
at acquisition................................. 11,222 -- 1,665 --
Other............................................ -- 128 (172) 92
Debt discount.................................... -- (26,925) -- --
NOL carryforward................................. -- 4,758 -- --
Valuation allowance.............................. -- (2,305) -- (700)
------- -------- ------ --------
Deferred income tax asset (liability)............ $45,403 $(56,190) $2,246 $ (6,794)
======= ======== ====== ========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards of
$7.9 million and $4.9 million available to offset future U.S. and Canadian
taxable income, respectively. The U.S. operating loss carryforwards expire in
2014 and the Canadian operating loss carryforwards expire in 2007.
The valuation allowance was established for the deferred tax asset related
to foreign tax credits. Companies may use foreign tax credits to offset the
United States income tax due on income earned from foreign sources. However, the
credit is limited by the total income on the United States income tax return as
well as by the ratio of foreign source income in each statutory category total
income. Excess foreign tax credits may be carried back two years and forward
five years.
The Company has evaluated the need for an additional valuation allowance
for deferred tax assets other than those for foreign source income. Based on the
weight of the available evidence, the Company has determined that it is more
likely than not that all such assets will be realized.
As an S Corporation, the tax attributes of the Company's predecessors
flowed to the stockholders and, accordingly, no provision for income taxes is
included in the results of operations for the Company prior to June 15, 1997.
The pro forma provision for income taxes is the result of the application of a
combined federal and state rate of 37% to income before income taxes for periods
prior to June 15, 1997.
7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
At December 31, 1999 and 1998, the Company had invested approximately $13.0
and $12.8 million, respectively, 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%
63
<PAGE> 64
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 had no significant activity as of
December 31, 1999. The Company's investment in Ilion LLC is accounted for using
the equity method.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Ordinary maintenance and repairs that do not extend the physical
or economic lives of the assets are charged to expense as incurred. Depreciation
is computed on the straight-line basis over the estimated useful lives of the
assets.
Useful lives utilized in the depreciation of fixed assets for each class of
property, plant and equipment are as follows:
<TABLE>
<CAPTION>
CLASS LIFE
- ----- -------------
<S> <C>
15 -- 40
Buildings and dock facilities....................... years
10 -- 40
Leasehold improvements.............................. years
Machinery and equipment............................. 3 -- 20 years
Other............................................... 3 -- 7 years
</TABLE>
A summary of property, plant, and equipment and construction in progress
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 32,447 $ 4,879
Buildings and improvements.................................. 155,260 72,841
Machinery and equipment..................................... 165,619 72,555
Construction in progress.................................... 4,985 970
-------- --------
Total property, plant and equipment............... 358,311 151,245
Less accumulated depreciation............................... 23,669 12,167
-------- --------
Total property, plant and equipment, net.......... $334,642 $139,078
======== ========
</TABLE>
Depreciation expense was $11.6 million, $7.9 million, and $1.5 million for
the years ended December 31, 1999, 1998 and 1997, respectively.
Effective January 1, 1998, the Company revised its estimate of the useful
lives of certain machinery and equipment (primarily cranes and dry docks), and
dock facilities (bulkheads, foundations, etc.). The useful lives of the
machinery and equipment were extended from an average of 9 years to 20 years and
the useful lives of the dock facilities were increased from an average of 18
years to 40 years. These changes were made to more accurately reflect the
estimated periods during which such assets will remain in service.
Substantially all of the assets of the Company have been pledged as
collateral under various debt arrangements entered into by the Company. (See
Note 9).
64
<PAGE> 65
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998 and 1997, the Company had capitalized interest of approximately
$1.3 million and $0.1 million, related to construction of the FGO East Facility.
There was no interest capitalized during 1999.
9. DEBT
A summary of short and long-term debt follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Borrowings under 1999 Credit Facility....................... $106,708 $ --
Borrowings under 1998 Credit Facility....................... -- 9,328
Convertible Subordinated Notes bearing interest at 4 1/2%,
principal due at maturity in September 2004, unsecured
(less discount of $68,658)................................ 116,342 --
Taxable revenue bonds bearing interest at 6.39%, principal
due at maturity in December 2013, secured by letter of
credit.................................................... 30,000
Notes payable to financial institutions and others bearing
interest at rates ranging from 5.7% to 12.0%, payable in
monthly installments, maturing at dates ranging from
January 1999 to March 2005 and secured by equipment, a
lease and real property................................... 11,090 1,978
Bonds payable to MARAD bearing interest at 6.35% maturing
June 2013 payable in semi-annual installments commencing
July 1, 1999, secured by equipment........................ 23,163 24,817
Bonds payable, bearing interest at 7.99% payable in monthly
installments commencing January 1999, maturing December
2008, secured by equipment................................ 16,880 18,000
Capital lease obligations bearing interest at rates ranging
from 4.7% to 10.0%, maturing at dates ranging from
February 2000 through November 2004....................... 4,037 1,369
Note payable, bearing interest at 7.05% payable in quarterly
installments commencing April 1998, maturing March 2002,
secured by equipment...................................... 4,500 6,500
-------- -------
Total............................................. 312,720 61,992
Less: Short-term debt and current portion of long-term
debt...................................................... 13,645 16,129
-------- -------
Long term debt less current portion............... $299,075 $45,863
======== =======
</TABLE>
1999 Credit Facility
In connection with the merger with HMG, on November 3, 1999, the Company
entered into a new secured bank revolving and letter of credit facility ("the
New Credit Facility") that replaced the Credit Facility. Under the terms of the
New Credit Facility, the Company may borrow up to $120 million under a senior
secured revolving credit facility. In addition, the New Credit Facility provides
a $44.2 million senior secured letter of credit facility. The New Credit
Facility has a three-year term and is secured by substantially all of the
Company's otherwise unencumbered assets, all of the Company's domestic
subsidiaries and 67% of the stock of its foreign subsidiaries. The interest rate
ranges from 1.375% to 2.75% over the London Inter Bank Offered Rate ("LIBOR")or
the base rate (as defined), at the Company's choice. Under the New Credit
Facility, the Company is obligated to pay certain fees, including an annual
commitment fee in an amount of 0.50% of the
65
<PAGE> 66
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unused portion of the commitment. Amounts outstanding under the New Credit
Facility may not exceed an amount based on specified percentages of the
Company's accounts receivable, inventory and net contract related investments.
At December 31, 1999, the Company had $106.7 million in cash advances under the
credit agreement with $4.2 million available under the New Credit Facility.
Average usage since inception of the New Credit Facility has been $96.4 million,
resulting in an average availability of $13.9 million over the same period.
The New Credit Facility requires the Company to comply with certain
financial covenants, including limitations on additional borrowings and capital
expenditures, certain debt coverage ratios, minimum net worth and other
customary requirements. At December 31, 1999, the Company was not in compliance
with the leverage ratio, the minimum fixed charge coverage ratio and the minimum
net worth requirement. On March 28, 2000 the Company obtained a waiver of
noncompliance with these requirements and an amendment to the New Credit
Facility that, among other things, amend the leverage ratio, the fixed charge
coverage ratio, and minimum net worth requirement, and requires the commitment
amount under the New Credit Facility to be reduced by 75% of the net proceeds of
asset sales. The amendment changes the interest rate to the lender's base rate
plus 2.00% per annum until the Company completes certain of its contracts. It is
not anticipated that the Company will complete these contracts until the fourth
quarter of 2001. In connection with the amendment, the Company is obligated to
pay certain fees, including an annual commitment fee in an amount of 1.00% of
the unused portion of the commitment.
1998 Credit Facility
In 1997, HAM entered into a credit facility (the "Credit Facility") with a
bank that provided for accounts receivable and contract related inventory based
borrowings of up to $20 million at prime plus 1/2% through March 20, 1998.
These borrowings were secured by accounts receivable and personal guarantees of
certain stockholders of the Company. The Credit Facility expired in 1998 and was
extended until May 3, 1999, and the borrowing capacity was increased to $25
million at prime plus 1/2% (8.13% at December 31, 1998). A balance of $9.3
million was outstanding at December 31, 1998, and an additional $9.6 million was
available. In August 1999, the Company entered into a supplemental bank credit
facility to provide an additional $20 million in borrowing capacity.
Convertible Subordinated Notes
In conjunction with the HMG merger, the Company assumed, through a
Supplemental Indenture, an aggregate principal amount of $185.0 million of
4 1/2% Convertible Subordinated Notes (the "Notes"). The Notes, originally
issued on September 15, 1997, mature on September 15, 2004. The Notes were
issued under an Indenture Agreement (the "Indenture") that provides that the
Notes are convertible at the option of the holder into shares of common stock of
the Company at a conversion rate of $55.26 per share, subject to adjustment for
certain events (as defined in the Indenture). As a result of purchase accounting
adjustments related to the merger, the recorded book value of the Notes was
adjusted to reflect fair market value on the date of the merger. Accordingly, a
discount of $70.3 million was recorded. For the year ended December 31, 1999,
accretion of this discount amounted to $1.6 million, which resulted in an
effective interest rate of 15.79% on the Notes, and is included in interest
expense.
Interest on the Notes is payable semiannually, in arrears, on March 15 and
September 15 of each year, with principal due at maturity.
The Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after September 15, 2000, at the redemption prices
(expressed as percentages of the principal
66
<PAGE> 67
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount) set forth below, plus accrued and unpaid interest and liquidated
damages, if any, to, but excluding, the redemption date.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2000..................................................... 102.57%
2001..................................................... 101.93
2002..................................................... 101.28
2003..................................................... 100.64
2004..................................................... 100.00
</TABLE>
Holders of the Notes may, at their option, require that the Company
repurchase all or a portion of the Notes upon the occurrence of a "change of
control" (as defined in the Indenture) at a cash price equal to 100% of the
principal amount, together with accrued and unpaid interest and liquidated
damages, if any, to the date of purchase.
The fair value of the Company's 4 1/2% convertible subordinated notes as of
December 31, 1999 was $111.0 million. The fair value of the Company's remaining
long-term debt approximates its recorded value.
Taxable Revenue Bonds, Series 1998
In conjunction with the HMG merger, the Company assumed an aggregate
principal amount of $30 million of Mississippi Business Finance Corporation
Taxable Revenue Bonds, Series 1998 (the "Bonds"). The Bonds, originally issued
on January 1, 1998, mature on December 31, 2013. Interest on the bonds is
payable semiannually, in arrears, on June 30 and December 31 of each year, at an
annual interest rate of 6.39%. Principal is due at maturity.
The Bonds are subject to mandatory sinking fund redemption requirements of
$3 million annually. These payments, together with accrued interest to the date
of redemption and without premium or penalty, are due on December 31 of each
year commencing December 31, 2004 and continuing through December 31, 2013. The
Company has the option to redeem the Bonds, in whole at any time, or in part on
any payment date, in the inverse order of their maturities at an amount equal to
the principal amount together with accrued interest through the redemption date.
Other Debt
In December 1997, the Company issued bonds under Title XI that are
guaranteed by MARAD to partially finance construction of the Company's FGO East
Facility. The bonds bear interest at a rate of 6.35% and are payable over 15
years in semi-annual installments. The financing agreement includes several
restrictive financial and non-financial covenants, the violation of which would
carry monetary penalties. The Company was not in compliance with all such
covenants as of December 31, 1999 but had received waivers of such covenants.
In 1998, the Company borrowed $8.0 million from GE Capital Corporation for
the financing of the purchase of certain equipment used in the Company's
Pascagoula, Mississippi facilities. The loan, which is secured by the purchased
equipment, bears interest at 7.05% and is repayable in quarterly installments of
$0.5 million plus interest through 2002.
In December 1998, the Company issued $18.0 million of 7.99% taxable revenue
bonds through the Mississippi Business Finance Corporation to finance the
purchase of equipment used primarily at the FGO East Facility. The Bonds are
repayable in monthly installments of approximately
67
<PAGE> 68
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$0.2 million, including interest for 10 years. The Bonds are secured by the
purchased equipment. The Company received certain state sales, use and state
income tax incentives related to the bonds.
A summary of debt maturities including the discount on the Convertible
Subordinated Notes over the next five years follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------
(IN THOUSANDS)
<S> <C>
2000................................................... $ 13,645
2001................................................... 6,285
2002................................................... 111,539
2003................................................... 4,765
2004................................................... 192,166
</TABLE>
10. EMPLOYEE BENEFIT PLANS
Pension Plan
In conjunction with the HMG merger, the Company assumed a liability related
to an employee pension plan. The plan was frozen effective March 31, 1998. The
plan provides income and death benefits for eligible employees who were members
of the plan at the time of curtailment. The Company's policy is to fund
retirement costs accrued but only to the extent such amounts are deductible for
income tax purposes. Plan assets include cash, short-term debt securities, and
other investments. Benefits are based on years of credited service and
compensation.
The Company has adopted Statement of Financial Accounting Standard No. 132,
"Employer's Disclosures about Pension and Other Postretirement Benefits," which
revises the required disclosures about pension and other postretirement benefit
plans. The changes in benefit obligations and plan assets during the period from
November 3, 1999 through December 31, 1999 were not material. The following
table summarizes the funded status of the pension plan at December 31, 1999 (in
thousands):
<TABLE>
<S> <C>
Benefit obligation at end of year........................... $8,306
======
Fair value of plan assets at end of year.................... $9,793
======
Funded status of the plan................................... $1,487
Unrecognized net actuarial loss............................. (133)
------
Prepaid benefit cost........................................ $1,354
======
Assumptions used in actuarial calculations were as follows:
Weighted average assumptions:
Discount rate............................................. 7.75%
Expected return on plan assets............................ 9.00%
Rate of compensation increase............................. 4.75%
</TABLE>
401(k) Plan
The Company has a contributory 401(k) plan in which employees of the
Company may participate. Under the plan, eligible employees are allowed to make
voluntary pretax contributions which are matched, up to certain limits, by the
Company. Employer contributions to the plan were $1.5 million, $0.7 million, and
$0.1 million during the years ended December 31, 1999, 1998 and 1997,
respectively.
68
<PAGE> 69
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Incentive Compensation Plan
The Company has an Incentive Compensation Plan (the Plan) under which both
qualified and non-qualified options, and restricted stock and other forms of
incentive compensation may be granted. As of December 31,1999, approximately
5,982,000 shares of common stock are reserved for issuance under the Plan. The
Plan is administered by a committee of the Board, which selects persons eligible
to receive options and determines the number of shares subject to each option,
the vesting schedule, the exercise price and the duration of the option. The
exercise price of any option granted under the Plan cannot be less than 100% of
the fair market value on the date of grant and its duration cannot exceed 10
years.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123), allows companies to record expense based
on the fair value of stock-based compensation upon issuance or elect to remain
under the current Accounting Principles Board Opinion No. 25 ("APB 25") method
whereby no compensation cost is recognized upon grant if certain requirements
are met. The Company accounts for its stock-based compensation under APB 25.
However, pro forma disclosures as if the Company adopted the cost recognition
requirements under SFAS 123 are presented below.
If the compensation cost for the Company's 1999, 1998, and 1997 grants for
stock-based compensation plans had been determined consistent with SFAS 123, the
Company's net income (loss) per common share for the years ended December 31,
1999, 1998 and 1997 would have approximated the pro forma amounts below.
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
AS AS AS
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)............ $(30,826) $(34,558) $35,286 $29,974 $23,269 $19,731
Net income (loss) per common
share:
Basic...................... $ (1.18) $ (1.32) $ 1.46 $ 1.23 $ 1.10 $ 0.94
Diluted.................... $ (1.18) $ (1.32) $ 1.43 $ 1.22 $ 1.09 $ 0.93
</TABLE>
The weighted average grant date fair value of options granted during the
year ended December 31, 1999 was $7.90. The fair value of options was estimated
using the Black-Scholes option-pricing model with the following assumptions: (a)
dividend yield of 0%; (b) expected volatility of 90.7%; (c) risk-free interest
rate ranging from 6.60% to 6.71%; and (d) average expected life of 7 years.
The fair value of options was estimated using the Black-Scholes
option-pricing model with the following assumptions: (a) dividend yield of 0%;
(b) expected volatility of 95.6%; (c) risk-free interest rate ranging from 5.2%
to 5.88%; and (d) expected life of 10 years.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.
69
<PAGE> 70
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock options as of December 31, 1999, 1998 and
1997 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ----------------
WGT. WGT. WGT.
NUMBER AVG. NUMBER AVG. NUMBER AVG.
OF EXER. OF EXER. OF EXER.
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ------ --------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 1,054,110 $13.44 937,950 $ 7.08 -- $ --
Granted........................ 3,914,500 9.65 355,053 25.02 937,950 7.08
Forfeited...................... (5,333) 10.66 (119,698) 10.31 -- --
Exercised...................... (82,384) 7.35 (119,195) 3.60 -- --
--------- --------- --------
Outstanding at end of year..... 4,880,893 $10.45 1,054,110 $13.44 937,950 $7.08
========= ====== ========= ====== ======== =====
Options exercisable at year
and.......................... 1,552,478 $10.36 195,225 $ 8.14 76,820 $1.20
Options vesting in future
years........................ 3,328,415 10.49 858,885 14.65 861,130 6.63
--------- --------- --------
Options outstanding at year
end.......................... 4,880,893 $10.45 1,054,110 $13.44 937,950 $7.08
========= ====== ========= ====== ======== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 ........................... 87,000 7.5 $ 0.500 34,800 $ 0.500
2.50............................ 20,000 7.0 2.500 8,000 2.500
8.75............................ 575,000 9.5 8.750 -- 5.750
8.50............................ 516,341 7.5 8.500 342,627 8.500
9.625........................... 3,000,000 9.5 9.625 1,050,000 9.625
11.375........................... 339,500 9.0 11.375 -- 11.375
15.188-19.75..................... 103,000 8.8 15.321 34,333 15.321
27.625-46.50..................... 240,052 8.5 29.790 82,718 30.239
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.500............................ 99,200 8.5 $ 0.500 17,600 $ 0.500
2.500............................ 20,000 8.0 2.500 4,000 2.500
8.500............................ 591,758 8.5 8.500 170,958 8.500
15.00-24.99....................... 103,000 9.6 15.321 -- --
24.00-46.50....................... 240,152 9.5 29.790 2,667 43.670
</TABLE>
70
<PAGE> 71
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, HAM agreed to grant an employee fully vested shares of
common stock of HAM equal to approximately 0.418% of the common shares then
outstanding (76,820 shares) and granted that employee options to purchase an
equal amount of additional shares at $1.20 per share that were to vest ratably
on January 1, 1999, 2000 and 2001, subject to forfeiture if the employee
terminates employment. The options expire if unexercised by December 31, 2006.
Pursuant to the terms of the option agreements, all of the options outstanding
became fully vested subsequent to the initial public offering because of a
change in ownership of the Company. Accordingly, HAM charged $0.8 million to
selling, general and administrative expenses in the year ended December 31,
1997.
In July, August, and December 1997 and in February 1998, respectively, the
Company issued 202,000, 9,000, 27,130, and 15,038 stock options to certain
employees. The option price for these issues ranged from $0.50 to $17.00, which
was less than their fair market value at the date of grant, and vested over
terms ranging from 3 to 5 years. Such differences in the option price and the
per share fair market value represent non-cash compensation to the individuals
receiving the options, which is measured at the date of the stock option's
grant, and is amortized and included in selling, general, and administrative
expenses over the respective vesting terms of the options in accordance with APB
25. Future expense to be recognized with respect to these options amounted to
$0.4 million at December 31, 1999. Compensation expenses related to these stock
options of $0.2 million, $0.3 million and $0.6 million was recognized in 1999,
1998 and 1997, respectively. Total non-cash compensation expense for the years
ended December 31, 1999, 1998 and 1997 was $0.2 million, $0.3 million and $1.0
million, respectively.
All of the shares issued to employees in connection with the agreements
described above were exchanged for shares of the Company in connection with the
Reorganization. In addition, any options to purchase shares of HAM outstanding
at the time of the Reorganization were exchanged for options to purchase shares
of the Company, with the number of shares and option price being changed based
on the share exchange ratio used in the Reorganization.
11. LEASES
The Company leases certain land, drydocks, and machinery and equipment
under noncancelable operating leases which expire at various dates through the
year 2017.
Future minimum lease payments for long-term lease arrangements are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------
(IN THOUSANDS)
<S> <C>
2000.................................................. $ 4,347
2001.................................................. 3,785
2002.................................................. 3,648
2003.................................................. 3,602
2004.................................................. 3,493
Thereafter............................................ 13,417
</TABLE>
Lease expense on long-term lease arrangements was $1.8 million, $1.3
million and $2.3 million for the years ended December 31, 1999, 1998, and 1997,
respectively. The Company enters into short-term lease arrangements for
equipment needed to fulfill the requirements of specific jobs. Any payments owed
or committed under these lease arrangements as of December 31, 1999 are not
included as part of total minimum lease payments. Rent expense for these
arrangements was $5.2 million, $5.8 million and $3.1 million for the fiscal
years ended December 31, 1999, 1998 and 1997, respectively.
71
<PAGE> 72
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
Transactions with Stockholders
During 1997, HAM distributed certain assets to its stockholders. Assets
distributed included real estate previously held for investment with an
estimated market value of $1.1 million and a carrying value of approximately
$0.3 million, along with related debt of $0.2 million and an airplane with an
estimated market value of $0.6 million and a carrying value of approximately
$0.5 million. The difference between the estimated fair market value and the
carrying value of the distributed assets has been recognized as a gain in the
statement of operations for the year ended December 31, 1997.
Between March 31 and June 30, 1997, one of the Company's predecessors made
cash distributions to its stockholders of approximately $1.4 million, primarily
to provide the stockholders with cash to meet income tax obligations on earnings
of such predecessors prior to 1997. In addition, in contemplation of the
proposed initial public offering, one of the predecessors distributed to its
stockholders marketable securities with a fair value of approximately $4.8
million, together with related margin account debt of approximately $2.7
million. Further, one of the predecessors distributed approximately $4.5 million
to its stockholders representing the stockholders' estimated income tax
obligations on the earnings of the predecessors during 1997 through the date of
termination of its S Corporation status.
During 1999 and 1998, the Company maintained cash deposits in a single
financial institution on whose Board of Directors the Company's President and
Chief Executive Officer is a member. Deposits in this bank were in the amount of
$0.1 million and $19.7 million as of December 31, 1999 and 1998, respectively.
The Company is obligated to make payments pursuant to an aircraft lease
agreement with Equipment Management Systems, a company owned primarily by the
Company's President and Chief Executive Officer. Under previous leases, the
Company paid $50,000 per month during January 1997 through October 1998 and also
paid operating expenses of the aircraft. The monthly lease payment was increased
to $65,000 for November 1998 and pursuant to a new lease executed in December
1998, the payment increased to $85,000 per month. Lease payments for the first
quarter of 2000 were suspended but the Company continues to pay operating
expenses.
13. LITIGATION SETTLEMENTS AND CONTINGENCIES
Liberty Mutual
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 $2.3 million and punitive damages of
$4.5 million. On October 1, 1999, the Insurers were allowed 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 the complaint.
72
<PAGE> 73
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hyundai
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
$149.9 million. 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 Hyundai'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.
Economic Incentive Program
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 maintain a minimum
employment level of 400 jobs through the FGO East Facility during the primary
term of the FGO East Facility's 20-year lease. If the Company fails to maintain
the minimum employment level, the Company could be required to pay the remaining
balance of the $6 million loan incurred by the county to finance such
improvements.
General Exposure to Industry Conditions
The nature of the Company's activities relating to the conversion, retrofit
and repair of drilling rigs subjects its property and employees, along with the
property and employees of its customers and others, to hazards which can cause
personal injury or damage or destruction of property. Although the Company
maintains such insurance protection as it considers economically prudent, there
can be no assurance that any such insurance will be sufficient or effective
under all circumstances or against all hazards to which the Company may be
subject. In particular, due to the cost of errors and omissions policies related
to the design of drilling rigs and production units, the Company does not carry
insurance covering claims for personal injury, loss of life or property damage
relating to such design activity. A successful claim for which the Company is
not fully insured could have a material adverse effect on the Company's
financial position and results of operations.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
73
<PAGE> 74
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. CONTRACTUAL MATTERS
Ocean Rig
In December 1997 and June 1998, the Company entered into contracts to
construct two semi-submersible 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 asserted that Ocean Rig was
responsible for the delays and certain cost increases 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.
Friede Goldman entered into negotiations with Ocean Rig in early August
1999 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. A resolution between the parties was not reached
and fast track arbitration with respect to the claims was initiated by Ocean Rig
in London, England on September 3, 1999. The Company asserted an arbitration
claim in excess of $75.0 million seeking compensation for additional costs and
delay damages relating to the construction of the two rigs.
Ocean Rig sought liquidated damages and damages at large for delay of up to
$28.0 million. The dispute between the Company and Ocean Rig was settled
pursuant to the terms and conditions of a Confidential Settlement Agreement
dated January 18, 2000. Among other things, the settlement with Ocean Rig
provided for an increase of $21.5 million in the contract price of each rig and
revised delivery dates of October 2000 and December 2000 for the two rigs; and
total liquidated damages for late delivery beyond the new delivery dates of up
to $7.5 million for each rig.
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 settled claim and related additional costs
incurred and for the timing of recognition of related revenues and expenses was
a net reduction for the year ended December 31, 1999 of approximately $37.4
million. The amount of the adjustment was based on, among other things, the
outcome of the settlement negotiations and management's estimate of the
percentage of completion of the projects at the end of the year.
Petrodrill
In April 1998, TDI-Halter, L.P., now Friede Goldman Offshore Texas, L.P.
("FGOT"), a subsidiary of the Company, entered into contracts to construct two
semi-submersible drilling rigs for Petrodrill IV Ltd. and Petrodrill V, Ltd.
("Petrodrill") with the combined contract value of $168.0 million (the
"Contracts"). FGOT provided certain bonds issued by Fireman's Fund guaranteeing
FGOT's performance under the Contracts. After FGOT commenced construction of the
two rigs,
74
<PAGE> 75
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FGOT began to experience delays in the production schedule and increased costs
due, in whole or part, to delays caused by Petrodrill and by certain
subcontractors nominated for FGOT's use by Petrodrill, and by FGOT's performing
as the lead yard as opposed to a follow-on yard as anticipated by the parties.
In April 1999, and in connection with a transaction whereby the Federal
Maritime Administration ("MARAD") agreed to finance the Petrodrill rigs, FGOT
and Petrodrill entered into an amendment to the Contracts that provided, among
other things, for extensions to the delivery dates of approximately six months
for each rig. Thereafter, production delays continued. Under the Contracts, FGOT
is entitled to extensions of the delivery dates for permissible delay as defined
in the Contracts ("Permissible Delay") and for delays caused by Petrodrill
breaches of contract. FGOT notified Petrodrill that, as a result of such delays,
it was entitled to additional extension of the delivery dates and to additional
compensation. Petrodrill refused to acknowledge FGOT's right to extension of the
delivery dates. Petrodrill was also advised that the rigs could not be completed
by their respective existing delivery dates.
Due to Petrodrill's refusal to grant extensions to the delivery dates FGOT
notified Petrodrill in January 2000 that it was mitigating its and Petrodrill's
damages by deferring certain fabrication efforts until engineering work could be
completed so that construction could go forward in an efficient manner. FGOT
also notified Petrodrill that it believed it was entitled to additional monetary
compensation from Petrodrill as a result of delay, disruption, inefficiencies
and other direct and indirect costs caused by, among other things, delays by
Petrodrill and its nominated subcontractors and by FGOT being required to
perform as the lead yard.
On January 13, 2000, Petrodrill filed suit against the Company and FGO, in
state court in Houston, Texas asserting, among other things, that the Company
and FGO had tortiously interfered with FGOT's Contracts with Petrodrill, seeking
injunctive relief and damages. On January 19, 2000, the case was removed to the
federal district court in Houston (the "US litigation"). On January 27, 2000,
the Company filed a counterclaim and FGOT filed a complaint against Petrodrill
in the US litigation asserting breach of contract, and seeking monetary damages,
reformation of contract and declaratory relief.
On January 27, 2000, Petrodrill filed an action against FGOT in the court
in London, England, (the "UK action") seeking essentially the same relief on
different theories as it had in the US litigation. In March, the court in London
dismissed Petrodrill's application for interim relief that FGOT was not entitled
to cease construction work; confirmed that the proper jurisdiction and forum for
the disputes was the court in London; and ordered a stay of the US litigation.
As directed by the UK court, FGOT filed a counterclaim seeking monetary damages
in an amount of at least $68.5 million, and extension of the delivery dates
under various legal theories.
In late March 2000, FGOT and Petrodrill reached an agreement, which is
subject to various approvals, including that of MARAD and the Boards of
Directors of each Company, to further amend the Contracts (the "Amendment No.
2"). Amendment No. 2 will stay the UK action for six months and dismiss the US
litigation, with prejudice except as to FGOT's rights to pursue its enumerated
claims against Petrodrill for additional compensation in the UK action. Under
the Amendment, the delivery dates for the rigs will be extended until August 1,
2001 and November 1, 2001, respectively; Petrodrill will waive all of its claims
against FGOT accruing prior to the Amendment, including its right to terminate
the Contracts for events occurring prior to the Amendment; total liquidated
damages for late delivery beyond the new delivery dates will be capped at $6.6
million for each rig; any future right of Petrodrill to terminate each Contract
will accrue only if the respective rig is not delivered within 180 days of its
extended delivery date, as such date may be further extended under other
contractual provisions; and FGOT will credit Petrodrill up to $2 million per rig
against any
75
<PAGE> 76
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts awarded against Petrodrill, but only to the extent FGOT recovers against
Petrodrill. After the six-month stay of the UK action, FGOT intends to
vigorously pursue its claims for additional compensation.
Notwithstanding the Amendment, the Company intends to proceed with
construction of the rigs while pursuing any and all remedies available to it
under the Contracts and applicable law. If the contract delivery dates are not
extended as provided in Amendment No. 2 for any reason, including any failure to
obtain an approval required for Amendment No. 2 to become effective, FGOT will
not be in a position to deliver the rigs on or before the pre-Amendment delivery
dates, or the date on which Petrodrill's contractual right to terminate the
Contracts will accrue. Petrodrill's remedies upon termination include among
others, the right to rescind the Contracts, transfer the rigs to FGOT, and
demand reimbursement for all amounts paid, including amounts paid for owner
furnished equipment. FGOT would likely not be in a position to meet such a
demand, and if such demand was successfully asserted, it could have a material
adverse effect on the Company.
Based upon current estimates, the Company believes that it will incur
approximately $60 million in costs in excess of the contract prices as adjusted
for change orders, to complete the contracts. A provision for these excess costs
has been provided in the Company's purchase accounting treatment of assets and
liabilities acquired through the merger with HMG. The funding of these costs
could have a significant impact on the Company's liquidity. The balance of the
excess costs at December 31, 1999 was approximately $49.7 million and is
included in the reserve for losses on uncompleted contracts in the consolidated
balance sheets. Management expects such costs will be expended by the Company
over eighteen months beginning in April 2000.
15. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The Company's contracts in progress at December 31, 1999 and 1998, consist
of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $1,758,484 $220,727
Estimated earnings.......................................... 35,095 51,605
---------- --------
1,793,579 272,332
Less billings to date....................................... 1,766,761 303,462
---------- --------
$ 26,818 $(31,130)
========== ========
Included in the following balance sheet captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $ 143,769 $ 14,398
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 50,725 45,528
Reserve for losses on uncompleted contracts............... 66,226 --
---------- --------
$ 26,818 $(31,130)
========== ========
</TABLE>
16. BUSINESS SEGMENTS
As a result of the merger with HMG, the Company classifies its business
into three segments: Vessels, Offshore, and Engineered Products. Operations
within the Vessels segment include the new construction and repair of a wide
variety of vessels for the government, offshore energy and
76
<PAGE> 77
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commercial markets. Products in this segment include offshore support vessels
and offshore double hull tank barges for energy markets; offshore and inland tug
boats, ocean-going barges and oil spill recovery vessels for commercial markets;
and, oceanographic survey and research ships, high-speed patrol boats and
ferries for government markets. Operations within the Offshore segment include
the new construction, conversion and repair of mobile offshore drilling rigs and
production platforms. Operations within the Engineered Products segment include
the design, manufacture and marketing of cranes, mooring systems, derricks, and
other marine deck equipment. The Company evaluates the performance of its
segments based upon income before interest and income taxes as these expenses
are not allocated to the segments. Accounting policies are the same as those
described in Note 2, "Basis of Presentation and Significant Accounting
Policies."
Selected information as to the operations of the Company by segment is set
forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------------
ENGINEERED
VESSELS OFFSHORE PRODUCTS CORPORATE ELIMINATIONS TOTAL
-------- -------- ---------- --------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues............. $ 38,920 $400,520 $40,258 $ -- $ -- $ 479,698
Cost of revenue...... 32,971 408,684 32,736 -- -- 474,391
Operating income
(loss)............. 4,225 (24,634) 10 (18,345) -- (38,744)
Capital
expenditures....... 401 6,527 310 264 -- 7,502
Total assets......... 256,803 318,561 82,626 483,190 (140,288) 1,000,892
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------
ENGINEERED
OFFSHORE PRODUCTS CORPORATE ELIMINATIONS TOTAL
-------- ---------- --------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue............................ $331,753 $51,906 $ -- $ (746) $382,913
Cost of revenue.................... 254,226 39,986 -- (500) 293,712
Operating income (loss)............ 64,316 3,899 (11,464) (249) 56,502
Capital expenditures............... 58,675 1,005 1,058 -- 60,738
Total assets....................... 256,315 69,126 81,473 (92,354) 314,560
</TABLE>
The Company's revenue attributable to the country of domicile and to
foreign countries based on the location of the customer is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
United States............................................... $245,341 $233,389
Norway...................................................... 151,775 62,254
Bahamas..................................................... 23,695 --
Canada...................................................... 17,547 35,362
France...................................................... 12,679 12,262
Other....................................................... 28,661 39,646
-------- --------
$479,698 $382,913
======== ========
</TABLE>
At December 31, 1999, the Company had $64.2 million in long-lived assets
which were held in foreign countries with amounts of $46.2 million and $18.0
million in Canada and France, respectively. Included in the long-lived assets
held in France in 1999 are $8.3 million in net intangible
77
<PAGE> 78
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets. At December 31, 1998, the Company had $69.3 million in long-lived assets
which were held in foreign countries with amounts of $46.6 million and $22.7
million in Canada and France, respectively. Included in the long lived assets
held in France in 1998 are $9.9 million in net intangible assets.
17. RECONCILIATION OF NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss)................................... $(30,826) $35,286 $23,269
======== ======= =======
Numerator for net income (loss) per share,
diluted.......................................... $(30,826) $35,286 $23,269
======== ======= =======
Denominator:
Denominator for net income (loss) per share-weighted
average shares outstanding....................... 26,148 24,211 21,065
Effect of dilutive securities:
Stock options.................................... -- 388 232
-------- ------- -------
Denominator for net income (loss) per share,
diluted.......................................... 26,148 24,599 21,297
======== ======= =======
Net Income (loss) per share........................... $ (1.18) $ 1.46 $ 1.10
======== ======= =======
Net Income (loss) per share, diluted.................. $ (1.18) $ 1.43 $ 1.09
======== ======= =======
</TABLE>
18. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999
Contract revenue........................... $145,156 $133,488 $51,699 $149,355
Gross profit (loss)........................ 25,923 20,092 (4,433) (36,275)
Operating income (loss).................... 16,009 12,253 (11,533) (55,473)
Income (loss) before taxes................. 15,211 11,300 (12,953) (61,525)
Net income (loss).......................... 10,007 8,028 (8,528) (40,333)
Net income (loss) per share
Basic.................................... 0.43 0.34 (0.36) (1.39)
Diluted.................................. 0.43 0.34 (0.36) (1.39)
</TABLE>
The effect on net income per share, diluted, would be anti-dilutive if the
stock options and the conversion of the 4 1/2% Convertible Subordinated Notes
had been assumed in the computation. See Notes 9 and 10.
78
<PAGE> 79
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Contract revenue............................. $68,751 $88,597 $92,669 $132,896
Gross profit................................. 18,622 20,904 21,918 27,757
Operating income............................. 11,003 12,699 14,236 18,564
Income before taxes.......................... 11,152 12,644 14,068 18,101
Net income................................... 6,738 7,647 8,977 11,924
Net income per share
Basic...................................... 0.28 0.31 0.37 0.51
Diluted.................................... 0.27 0.31 0.37 0.51
</TABLE>
Results of operations for the third and fourth quarters of 1999 include a
downward adjustment in revenues and gross profits as a result of a change in
estimate to complete two new build semi-submersible drilling rigs.
During the fourth quarter of 1998, the Company finalized the accounting for
the acquisition of FGN and completed the determination of the fair value of the
construction contracts that were in progress at the date of acquisition. The
determination resulted in the Company's recognizing revenue and net income and
basic income per share of approximately $2.2 million and $1.5 million and $0.06
per share, respectively, in the quarter ended December 31, 1998, that were more
properly attributable to the first three quarters of 1998.
Effective January 1, 1998, the Company adopted a 13-week quarterly
reporting period by which the fiscal year is divided into four 13-week periods
ending on the last Sunday in each period. The fiscal year-end continued to be
December 31. Accordingly, for calendar year 1998, quarterly periods ended on
April 5, July 5, October 4, and December 31. This change in reporting periods
was made to allow the close of interim financial reporting periods to coincide
with the close of direct labor reporting periods. 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.
19. SUBSEQUENT EVENT
In March 2000, the Company entered into a purchase agreement to sell the
Yacht division of its Vessels segment to a company whose controlling shareholder
is the former Chief Operating Officer of the Company, and currently a member of
the Company's Board of Directors. Also see Notes 9, 13 and 14.
79
<PAGE> 80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 2000.
FRIEDE GOLDMAN HALTER, INC.
/s/ J. L. HOLLOWAY
------------------------------------
J. L. Holloway
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf of the registrant
and in the capacities indicated on March 30, 2000.
<TABLE>
<CAPTION>
SIGNATURE ------------------------------------------- TITLE ----------------------------------------
<C> <S>
/s/ J. L. HOLLOWAY Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
J. L. Holloway
/s/ RICK S. REES Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial Officer and
Rick S. Rees Principal Accounting Officer)
/s/ ALAN A. BAKER Director
- -----------------------------------------------------
Alan A. Baker
/s/ T. JAY COLLINS Director
- -----------------------------------------------------
T. Jay Collins
/s/ ANGUS R. COOPER II Director
- -----------------------------------------------------
Angus R. Cooper II
/s/ BARRY J. GALT Director
- -----------------------------------------------------
Barry J. Galt
/s/ JEROME L. GOLDMAN Director
- -----------------------------------------------------
Jerome L. Goldman
/s/ GARY L. KOTT Director
- -----------------------------------------------------
Gary L. Kott
</TABLE>
80
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of June 1, 1999
between Friede Goldman International Inc. and Halter
Marine Group, Inc. (incorporated by reference to Exhibit
2.1 to Friede Goldman International Inc.'s Registration
Statement on Form S-4 (Registration No. 333-87853) filed
with the SEC on September 27, 1999).
2.2 -- Amendment No. 1, dated September 14, 1999, to Agreement
and Plan of Merger between Friede Goldman International
Inc. and Halter Marine Group, Inc. (incorporated by
reference to Exhibit 2.2 to Friede Goldman International
Inc.'s Registration Statement on Form S-4 (Registration
No. 333-87853) filed with the SEC on September 27, 1999).
3.1 -- Articles of Incorporation of Friede Goldman Mississippi,
Inc.,as amended. (incorporate by reference to Exhibit 3.1
to Friede Goldman International Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1998).
3.2 -- Amended and Restated Bylaws of Friede Goldman Halter,
Inc. (incorporated by reference to Exhibit 3.1 to Friede
Goldman Halter, Inc.'s Current Report on Form 8-K filed
with the SEC on November 9, 1999).
4.1 -- Specimen Stock Certificate. (incorporated by reference to
Exhibit 3 to Friede Goldman International Inc.'s
Registration Statement on Form 8-A (File No. 001-14627)
filed with the SEC on November 18, 1998).
4.2 -- Stockholder's Agreement by and between Friede Goldman
International Inc. and J. L. Holloway, dated as of June
1, 1999. (incorporated by reference to Exhibit 4.1 to
Friede Goldman International Inc.'s Registration
Statement on Form S-4 (Registration No. 333-87853) filed
with the SEC on September 27, 1999).
4.3 -- Registration Rights Agreement among Friede Goldman
International Inc., J. L. Holloway, Carl M. Crawford,
Ronald W. Schnoor, James A. Lowe, III and John F. Alford.
(incorporated by reference to Exhibit 4.3 to Friede
Goldman International Inc.'s Registration Statement on
Form S-4 (Registration No. 333-87853) filed with the SEC
on September 27, 1999).
4.4 -- Amendment No. 1 to Registration Rights Agreement among
Friede Goldman International Inc., J. L. Holloway, Carl
M. Crawford, Ronald W. Schnoor, James A. Lowe, III, John
F. Alford, Holloway Partners, L.P., Carl Crawford
Children's Trust and Bodin Children's Trust.
(incorporated by reference to Exhibit 4.4 to Friede
Goldman International Inc.'s Registration Statement on
Form S-4 (Registration No. 333-87853) filed with the SEC
on September 27, 1999).
4.5 -- Indenture dated September 15, 1997 between the Halter
Marine Group, Inc. and the United States Trust Company of
Texas, N.A., as Trustee for Halter Marine Group Inc.'s
4 1/2% Convertible Subordinated Notes due 2004.
(incorporated by reference to Exhibit 4.1 to Halter
Marine Group Inc.'s Registration Statement on Form S-3
(Registration No. 333-38491) filed with the SEC on
October 22, 1997).
</TABLE>
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.6 -- First Supplemental Indenture, dated as of November 2,
1999 and effective as of November 3, 1999, by and among
Friede Goldman International Inc., Halter Marine Group,
Inc. and U.S. Trust Company of Texas, N.A., as Trustee
for the 4 1/2% Convertible Subordinated Notes due 2004.
(incorporated by reference to Exhibit 4.1 to Friede
Goldman Halter, Inc.'s Current Report on Form 8-K filed
with the SEC on November 9, 1999).
4.7 -- Registration Rights Agreement dated September 15, 1997,
among the Company and Donaldson, Lufkin & Jenrette
Securities Corporation and Merrill Lynch, Pierce, Fenner
& Smith Incorporated. (incorporated by reference to
Exhibit 4.2 to Halter Marine Group Inc.'s Registration
Statement on Form S-3 (Registration No. 333-38491) filed
with the SEC on October 22, 1997).
4.8 -- Rights Agreement, dated December 7, 1998, between the
Company and American Stock Transfer & Trust Company, as
Rights Agent. (incorporated by reference to Exhibit 1 to
Friede Goldman International Inc.'s Registration
Statement on Form 8-A (File No. 001-14627) filed with the
SEC on January 12, 1999).
4.9 -- First Amendment to Rights Agreement, dated as of October
18, 1999, between the Company and American Stock Transfer
& Trust Company, as Rights Agent. (incorporated by
reference to Exhibit 4.4 to Friede Goldman International
Inc.'s Registration Statement on Form 8-A/A (File No.
001-14627) filed with the SEC on October 20, 1999).
10.1 -- Credit Agreement, dated as of November 3, 1999, among
Friede Goldman Halter, Inc., Wells Fargo Bank (Texas),
National Association, as administrative agent and
co-arranger, Banc One Capital Markets, Inc., as
co-arranger and syndication agent, and the lenders party
thereto. (incorporated by reference to Exhibit 10.1 to
Friede Goldman Halter, Inc.'s Current Report on Form 8-K
filed with the SEC on November 9, 1999).
*10.2 -- Amendment No. 1, dated December 1999, to Credit
Agreement, among Friede Goldman Halter, Inc. and Wells
Fargo Bank (Texas) National Association, as
administrative agent and co-arranger, Banc One Capital
Markets, Inc., as co-arranger and syndication agent, and
the lenders party thereto.
*10.3 -- Form of Amendment No. 2, dated March 30, 2000 to Credit
Agreement, among Friede Goldman Halter, Inc. and Wells
Fargo Bank (Texas) National Association, as
administrative agent and co-arranger, Banc One Capital
Markets, Inc., as co-arranger and syndication agent, and
the lenders party thereto.
*10.4 -- Employment Agreement, dated June 1, 1999 and effective as
of November 3, 1999, between Friede Goldman International
Inc. and J. L. Holloway.
*10.5 -- Employment Agreement, dated June 1, 1999 and effective as
of November 3, 1999, between Friede Goldman International
Inc. and John F. Alford.
*10.6 -- Employment Agreement, dated June 1, 1999 and effective as
of November 3, 1999, between Friede Goldman International
Inc. and Rick S. Rees.
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*10.7 -- Employment Agreement, dated June 1, 1999 and effective as
of November 3, 1999, between Friede Goldman International
Inc. and Ronald W. Schnoor.
10.8 -- Friede Goldman Halter, Inc. Amended and Restated 1997
Equity Incentive Plan. (incorporated by reference to
Exhibit 99.1 to Friede Goldman Halter, Inc.'s
Registration Statement on Form S-8 (Registration No.
333-92051) filed with the SEC on December 3, 1999).
10.9 -- Amendment No. 1 to Friede Goldman Halter, Inc. Amended
and Restated 1997 Equity Incentive Plan. (incorporated by
reference to Exhibit 99.2 to Friede Goldman Halter,
Inc.'s Registration Statement on Form S-8 (Registration
No. 333-92051) filed with the SEC on December 3, 1999).
10.10 -- Business Purchase Agreement, dated November 22, 1996, by
and among J. L. Holloway Holdings, Inc., Friede &
Goldman, Ltd. and Jerome L. Goldman. (incorporated by
reference to Exhibit 10.19 to the Friede Goldman
International Inc.'s Registration Statement on Form S-1
(Registration No. 333-27599) filed with the SEC on May
22, 1997).
10.11 -- Amendment to Business Purchase Agreement, dated December
3, 1996, by and among Friede & Goldman, Ltd. (f/k/a J. L.
Holloway Holdings, Inc.), J. L. Goldman Associates, Inc.
(f/k/a Friede & Goldman, Ltd.) and Jerome L. Goldman.
(incorporated by reference to Exhibit 10.20 to Friede
Goldman International Inc.'s Registration Statement on
Form S-1 (Registration No. 333-27599) filed with the SEC
on May 22, 1997).
10.12 -- Second Amendment to Business Purchase Agreement, dated
May 19, 1997, by and among Friede & Goldman, Ltd., J. L.
Goldman Associates, Inc. and Jerome L. Goldman.
(incorporated by reference to Exhibit 10.21 to Friede
Goldman International Inc.'s Registration Statement on
Form S-1 (Registration No. 333-27599) filed with the SEC
on May 22, 1997).
10.13 -- Third Amendment to Business Purchase Agreement, dated
June 13, 1997, by and among Friede & Goldman, Ltd., J. L.
Goldman Associates, Inc. and Jerome L. Goldman.
(incorporated by reference to Exhibit 10.22 to Friede
Goldman International Inc.'s Registration Statement on
Form S-1 (Registration No. 333-27599) filed with the SEC
on May 22, 1997).
10.14 -- Stock Purchase Agreement, dated January 1, 1998, by and
among Marystown Shipyard Limited, Newfoundland Ocean
Enterprises Ltd., Friede Goldman Canada, Inc., Friede
Goldman International Inc. and Friede Goldman Marystown,
Ltd. (incorporated by reference to Exhibit 99.2 to the
Friede Goldman International Inc.'s Current Report on
Form 8-K filed with the SEC on January 16, 1998).
10.15 -- Aircraft Dry Lease, dated as of December 1, 1998, by and
between Equipment Management Systems, LLC, lessor, and
Friede Goldman International Inc., lessee. (incorporated
by reference to Exhibit 10.21 to Friede Goldman
International Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998).
16.1 -- Letter from Arthur Andersen, dated December 21, 1999,
addressed to the SEC (incorporated by reference to
Exhibit 16.1 to Friede Goldman Halter, Inc.'s Current
Report on Form 8-K filed with the SEC on December 21,
1999).
*21.1 -- Subsidiaries of Friede Goldman Halter, Inc.
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Arthur Andersen LLP.
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1
TO
FIRST PREFERRED FLEET MORTGAGE
AMENDMENT NO. 1 dated December __, 1999 ("Amendment No. 1") to First
Preferred Fleet Mortgage dated November 3, 1999 (the "Mortgage") by
_____________, a _____________________ with its principal place of business at
13085 Seaway Road, Gulfport, Mississippi 39503 (the "Shipowner") and WELLS FARGO
BANK (TEXAS), NATIONAL ASSOCIATION, a national banking association, with offices
at 1000 Louisiana, Houston, Texas 77002 as Agent for the Lenders described below
(the "Mortgagee").
W I T N E S S E T H:
A. The Shipowner is the sole-owner of 100% of the United States flag
vessels listed on Schedule 1 attached hereto, which vessels have been duly
documented in the name of the Shipowner in accordance with the laws of the
United States of America.
B. Pursuant to the Credit Agreement dated as of November 3, 1999 (the
"Credit Agreement") among Friede Goldman Halter, Inc., a Mississippi corporation
(the "Borrower"), the financial institutions named therein, as lenders (the
"Lenders") and the Mortgagee as Agent for the Lenders, the Lenders have agreed
to provide a credit facility to the Borrower in an amount up to USD 164,218,250.
C. Pursuant to the Guaranty dated as of November 3, 1999 (the
"Guaranty") from the Shipowner to the Mortgagee, the Shipowner has guaranteed
the obligations of the Borrower under the Credit Agreement and the Notes.
D. The Shipowner granted the Mortgage to secure, among other things,
payment of all amounts due and owing under the Guaranty;
E. The Mortgage was received for record on November __, 1999 at the
United States Coast Guard National Vessel Documentation Office in Falling
Waters, West Virginia and recorded in Book PM-99-__, page___; and
WHEREAS, pursuant to the Amendment No. 1 to Credit Agreement dated
the date hereof ("Amendment No. 1 to Credit Agreement"), the Borrower and the
Lenders have agreed to amend certain provisions of the Credit Agreement; and
WHEREAS, the Mortgagee requires that the Shipowner add the United
States flag vessel CHIEF, Official No. ________ (the "New Vessel", and together
with the Vessels, hereinafter referred to as the "Vessels") to the lien and
operation of the Mortgage.
NOW, THEREFORE, THIS AMENDMENT NO. 1 WITNESSETH:
<PAGE> 2
That, in consideration of the premises and other valuable
consideration, the receipt whereof is hereby acknowledged, and in order to
secure the payment of all amounts due under the Credit Agreement, as amended
by Amendment No. 1 to Credit Agreement, and the Notes and all other sums that
may be secured by the Mortgage, the Shipowner has granted, conveyed, mortgaged,
pledged, assigned, transferred, set over and confirmed, and by these presents
does grant, convey, mortgage, pledge, assign, transfer, set over and confirms,
unto the Mortgagee:
The whole of the following vessel:
<TABLE>
<CAPTION>
Name Official Number Hailing Port
---- --------------- ------------
<S> <C> <C>
CHIEF 535748 Houma, Louisiana
</TABLE>
which vessel has been duly documented in the name of the Shipowner under the
laws of the United States of America, together with all of the boilers, engines,
generators, air compressors, cranes, machinery, masts, spars, rigging, boats,
anchors, cables, chains, tackle, tools, pumps and pumping equipment, apparel,
furniture, fittings and equipment (excluding equipment not owned by the
Shipowner), and all other appurtenances thereunto appertaining or belonging,
whether now owned or hereafter acquired, whether on board or not, and all
additions, improvements, renewals and replacements hereafter made in or to such
vessel, or any part thereof, or in or to said appurtenances, all of which
property shall be deemed to be included in the term "Vessel" as used in
the Mortgage.
TO HAVE AND TO HOLD all and singular the above mortgaged and described
property unto the Mortgagee, to its own use, benefit and behoof forever.
ARTICLE FIRST
SECTION 1. The Granting Clause of the Mortgage is hereby amended by
adding thereto an additional paragraph reading as follows:
"The whole of the following vessel:
<TABLE>
<CAPTION>
Name Official No. Hailing Port
---- ------------ ------------
<S> <C> <C>
CHIEF 535748 Houma, La.
</TABLE>
which vessel has been duly documented in the name of the Shipowner under the
laws of the United States of America, together with all of the boilers, engines,
generators, air compressors, cranes, machinery, masts, spars, rigging, boats,
anchors, cables, chains, tackle, tools, pumps and pumping equipment, apparel,
furniture, fittings and equipment (excluding equipment not owned by the
Shipowner), and all other appurtenances thereunto appertaining or belonging,
whether now owned or hereafter acquired, whether on board or not, and all
additions, improvements, renewals and replacements hereafter made in or to such
vessel, or any part thereof, or in or to
2
<PAGE> 3
said appurtenances, all of which property shall be deemed to be included in the
term "Vessel" as used in the Mortgage."
SECTION 2. The form of Credit Agreement as Exhibit A to the Mortgage is
hereby supplemented by adding thereto Amendment No. 1 to Credit Agreement in the
form of Exhibit A to this Amendment No. 1.
SECTION 3. Hereinafter each reference in the Mortgage, as amended, to
the Credit Agreement shall refer to the Credit Agreement as amended by Amendment
No. 1 to Credit Agreement.
SECTION 4. For the purpose of recording this Amendment No. 1, as
required by 46 U.S. Code Ch. 313, it amends mortgage covenants and the New
Vessel is added to the Mortgage; the discharge amount is the same as the total
amount; and there is no separate discharge amount.
ARTICLE SECOND
SECTION 1. All of the covenants and agreements on the part of the
Shipowner which are set forth in, and all of the rights, privileges, powers and
immunities of the Mortgagee which are provided for in the Mortgage are
incorporated herein and shall apply to the Vessels hereby and heretofore
subjected to the lien of the Mortgage and otherwise with the same force and
effect as though set forth at length in this supplement.
SECTION 2. This instrument is executed as and shall constitute an
instrument supplemental to the Mortgage, and shall be construed in connection
with and as part of the Mortgage.
SECTION 3. Except as modified and expressly amended by this Amendment
No. 1 and any other supplement, the Mortgage is in all respects ratified and
confirmed and all of the terms, provisions and conditions thereof shall be and
remain in full force and effect.
SECTION 4. THIS AMENDMENT NO. 1 TO FIRST PREFERRED FLEET MORTGAGE
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE UNITED
STATES OF AMERICA AND, TO THE EXTENT THEY DO NOT APPLY, TO THE INTERNAL LAWS OF
THE STATE OF TEXAS.
3
<PAGE> 4
IN WITNESS WHEREOF, Amendment No. 1 has been executed and delivered on
the day and year date first above written.
---------------------------------------
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION, AS AGENT
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
4
<PAGE> 5
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
On this ___ day of December, 1999, before me personally came
____________________, to me known, who, being by me duly sworn, did depose and
say that his address is 13085 Seaway Road, Gulfport, Mississippi 39503; that he
is the ________________ of____________, the ____________ described in and which
executed the foregoing instrument; and that he signed his name thereto pursuant
to authority granted to him by the ___________ of said __________________ .
---------------------------------------
Notary Public, State of Texas
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
On this ___ day of December, 1999, before me personally came
_____________________, to me known, who, being by me duly sworn, did depose and
say that his address is 1000 Louisiana, Houston, Texas 77002; that he is
__________________________ of Wells Fargo Bank (Texas), National Association,
the association described in and which executed the foregoing instrument; and
that he signed his name thereto pursuant to authority granted to him by the
Board of Directors of said association.
---------------------------------------
Notary Public, State of Texas
5
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 2
TO
CREDIT AGREEMENT
AMENDMENT NO. 2 ("Amendment No. 2") dated as of March __, 2000 (the
"Amendment Date") to the Credit Agreement dated as of November 3, 1999 (the
"Credit Agreement"), among FRIEDE GOLDMAN HALTER, INC., a corporation organized
and existing under the laws of the State of Mississippi (the "Borrower"), the
financial institutions from time to time party thereto (the "Lenders"), WELLS
FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking association, as
Administrative Agent and Co-Arranger (the "Agent"), and BANK ONE CAPITAL
MARKETS, INC., as Co-Arranger and Syndication Agent.
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders made available
to the Borrower a loan facility of up to USD 164,218,250, as evidenced by the
promissory note of the Borrower dated November 3, 1999; and
WHEREAS, the parties wish to amend certain provisions of the Credit
Agreement as set forth herein.
NOW THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree to amend the Credit Agreement as follows:
1. Section 1.1 is hereby amended as follows:
1.1 The definition of "Amendment Date" is hereby added to
Section 1.1 and reads as follows:
"`Amendment Date' means the date of Amendment No. 2 to this
Credit Agreement."
1.2 The second sentence of the definition of "Applicable
Commitment Fee Percentage" is deleted in its entirety
and the following shall be substituted in place
thereof:
"Notwithstanding the foregoing table or anything else
herein contained to the contrary, from and after
April 1, 2000, the Applicable Commitment Fee
Percentage shall be 1.0% until the delivery to the
purchaser of each and every vessel to be delivered
under the Ocean Rig Contracts and the Petrodrill Rig
Contracts, after which date, and provided that no
Default or Event of Default has occurred and is
continuing, the Applicable Commitment Fee Percentage
shall be reduced to the rate
<PAGE> 2
of 0.75%, until the earlier of (x) December 31, 2000 and (y)
the Voluntary Step Down Date after which date the foregoing
table shall be applicable."
1.3 The table set forth in the definition of "Applicable
Margin Amount" is deleted in its entirety and the
following shall be substituted in place thereof:
<TABLE>
<CAPTION>
Applicable Margin
(basis points)
-----------------
Borrower's LIBOR Base Rate
Leverage Ratio Margin Margin
---------------- ------ ---------
<S> <C> <C> <C>
Level I: < 1.0 137.5 25.0
Level II: => 1.00 to 1.50 175.0 50.0
Level III: => 1.50 to 2.00 212.5 75.0
Level IV: => 2.00 to 2.50 250.0 100.0
Level V: => 2.50 to 3.25 275.0 125.0
Level VI: => 3.25 300.0 150.0
</TABLE>
1.4 The second sentence of the definition of "Applicable
Margin Amount" is deleted in its entirety and the
following shall be substituted in place thereof:
"Notwithstanding the foregoing table or anything else
herein contained to the contrary, from and after
April 1, 2000 for any new Advances and Base Rate
Advances and from and after the expiration of any
LIBOR Advances outstanding on the Amendment Date, the
Applicable Margin Amount for Base Rate Advances shall
be 2.0% until the delivery to the purchaser of each
and every vessel to be delivered under the Ocean Rig
Contracts and the Petrodrill Rig Contracts, after
which date the Applicable Margin Amount shall be
determined in accordance with the foregoing table,
provided that no Default or Event of Default has
occurred and is continuing."
1.5 The second sentence of the definition of "Asset
Sales" shall be deleted in its entirety and the
following shall be substituted in place thereof:
"Notwithstanding the foregoing, the following
transactions will be deemed not to be Asset Sales:
(A) a sale of assets by the Borrower to a Guarantor
or by a Guarantor to the Borrower or to another
Guarantor and (B) a sale of assets if either the
sales price or the appraised value of such assets is
$1,000,000 or less, and if such assets are promptly
replaced thereafter by assets of a similar type and
value."
2
<PAGE> 3
1.6 A new definition is hereby added to the Credit
Agreement, which reads as follows:
"`Commitment Reduction Fee' shall mean a fee equal to
two and one-half percent (2.5%) of the Commitment as
of the Amendment Date, payable to the Agent for the
ratable benefit of the Lenders, subject to a single
reduction in accordance with the following table:
<TABLE>
<CAPTION>
Reduction in Commitment Reduction Fee
-------------------------------------
Commitment Amount By 6/30/00 By 7/31/00 By 8/31/00 By 9/30/00
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Less than $100,000,000 20% 15% 10% 5%
Less than $75,000,000 30% 25% 20% 15%
Less than $50,000,000 40% 35% 30% 25%
$0 50% 45% 40% 35%
</TABLE>
The Commitment Reduction Fee shall be reduced in
accordance with the highest percentage corresponding
to the level of the reduction of the Commitment
attained by the Borrower. As an example, if the
Borrower reduces the Commitment by June 30, 2000 to
an amount less than $100,000,000 but greater than
$75,000,000, the Commitment Reduction Fee shall be
reduced by 20%. If the Borrower then reduces the
Commitment to less than $75,000,000 but greater than
$50,000,000 by July 31, 2000, the total aggregate
reduction in the Commitment Reduction Fee shall be
25%."
1.7 A new definition is hereby added to the Credit
Agreement, which reads as follows:
"`Contract Loss' shall mean a loss under any contract
of the Borrower or any Subsidiary in which the stated
contract amount is USD 10,000,000 or greater, such
loss being measured at the time the Borrower or such
Subsidiary becomes aware that it must recognize a
contract loss in respect of such contract in
accordance with GAAP."
1.8 A new definition is hereby added to the Credit
Agreement, which reads as follows:
"`Documentation Agent' shall mean Royal Bank of
Canada."
1.9 The definition of "Fixed Charge Coverage Ratio" shall
be deleted in its entirety and the following shall be
substituted in place thereof:
"`Fixed Charge Coverage Ratio' shall mean, for any
period, (A) the sum of (i) GAAP Cash Flow from
Operations, (ii) unrestricted cash balances, and
(iii) the available Commitment under the Revolving
Credit Facility, less capital expenditures used for
the maintenance or repair of existing assets, divided
by the sum total of cash payments in respect of
required principal payments on Indebtedness and
required payments under capital leases.
3
<PAGE> 4
1.10 A new definition is hereby added to the Credit Agreement,
which reads as follows:
"`GAAP Cash Flow from Operations' means, for any
period, the amount set forth in the quarterly and
annual consolidated financial statements of the
Borrower on the line in the statement of cash flows
which summarizes the Borrower's cash flow from
operating activities."
1.11 The definition of "Leverage Ratio" is amended to add
the following language:
"; provided that EBITDA shall be determined for
purposes of this definition as follows:
(a) for the fiscal quarter ending March 31, 2000,
EBITDA shall mean the Borrower's EBITDA for the
fiscal quarter then ending, multiplied by four;
(b) for the fiscal quarter ending June 30, 2000,
EBITDA shall mean the Borrower's EBITDA for the
two fiscal quarters then ending, multiplied by
two;
(c) for the fiscal quarter ending September 30,
2000, EBITDA shall mean the Borrower's EBITDA for
the three quarters then ending, multiplied by one
and one-third; and
(d) thereafter on a rolling four-quarter basis."
1.12 The definition of "Majority Lenders" shall be amended
and revised so that all references to "fifty-one
percent (51%)" are changed to "sixty-six and
two-thirds percent (66.66%)".
1.13 The definitions of "Material adverse effect" and
"materially adversely affected" shall be amended and
revised so that all references to "USD 2,000,000" are
changed to "USD 1,000,000."
1.14 The definition of "Mortgages" is hereby amended to
include any leasehold mortgages the Agent may request
the Borrower or any Subsidiary to execute and deliver
to the Agent from time to time.
1.15 A new definition is hereby added to the Credit
Agreement, which reads as follows:
"`Ocean Rig Contracts' shall mean those contracts
between the Borrower (or one of its Subsidiaries) and
Ocean Rig ASA, Inc. concerning the construction,
delivery and price of the Bingo 9001 and Bingo 9002
drilling rigs."
1.16 A new definition is hereby added to the Credit
Agreement, which reads as follows:
4
<PAGE> 5
"`Petrodrill Rig Contracts' shall mean those
contracts between the Borrower and _________
concerning the construction, delivery and price of
the B103 and B104 drilling rigs."
1.17 A new definition is hereby added to the Credit
Agreement, which reads as follows:
"`Settlement' shall mean, any revision, extension or
renegotiation of an existing contract whether entered
into through the mutual consent of the contracting
parties or by court order or direction of an
arbitration panel where the amended contract amount
represents a change of greater than $10,000,000.00
from the original contract amount."
2. Section 2 is hereby amended as follows:
2.1 The following sentence is hereby added as the
penultimate sentence of Section 2.1(c):
"The Agent may terminate the Swing Line in its sole
discretion upon two (2) weeks' prior written notice
to the Borrower, setting forth in such notice the
date upon which the Swing Line shall terminate, at
which time all outstanding Swing Line Advances, plus
interest accrued thereon and any fees incurred in
connection therewith, shall be repaid in full."
2.2 Section 2.1(d) is deleted in its entirety and the
following shall be substituted in place thereof:
"(d) The Revolving Loan Commitment shall be reduced
by seventy-five percent (75%) of the Net
Proceeds of any Asset Sales."
2.3 A new sentence is hereby added to Section 2.3(c)
which reads as follows:
"The LC Facility will be reduced by the face amount
of any expiring, drawn or canceled Tranche B Letters
of Credit, excluding, however, those expiring Tranche
B Letters of Credit with automatic renewals which are
actually renewed."
3. A new Section 5.1(e) is hereby added to the Credit Agreement,
which reads as follows:
"(e) Notwithstanding anything herein contained to
the contrary, from and after the Amendment
Date, no Advance shall be a LIBOR Advance
until the delivery to the purchaser of each
and every vessel to be delivered under the
Ocean Rig Contracts and the Petrodrill Rig
Contracts."
5
<PAGE> 6
4. Section 9.1(b) is deleted in its entirety and the following
added in substitution thereof:
"(b) The Borrower shall pay to the Agent for distribution
to the Issuing Lender an annual letter of credit fee equal
to the face amount of each Letter of Credit (including the
Dollar Equivalent of the face amounts of outstanding
Offshore Currency Letters of Credit) outstanding times (i)
three percent (3%) per annum for the period from April 1,
2000 until the delivery to the purchaser of each and every
vessel to be delivered under the Ocean Rig Contracts and
the Petrodrill Rig Contracts, and (ii) the Applicable
Margin Amount then in effect for LIBOR Advances for all
other periods hereunder, each such fee to be payable
quarterly in arrears; provided that the Agent shall deduct
from such fee, for payment to the Issuing Lender, an
amount equal to one-tenth of one percent (0.10%) of the
face amount of each such Letter of Credit (including the
Dollar Equivalent of the face amounts of outstanding
Offshore Currency Letters of Credit); and provided
further, that if any Existing Letter of Credit is not
replaced with a new Letter of Credit within ninety (90)
days following the date hereof, the Borrower shall pay to
the Issuing Lender for such Existing Letters of Credit an
additional letter of credit fee equal to one-tenth of one
percent (0.10%) of the face amount of each such Letter of
Credit, payable quarterly in arrears."
5. A new Section 9.1(d) is hereby added to the Credit Agreement,
which reads as follows:
"(d) The Borrower will pay to the Agent for ratable
distribution to the Lenders, the Commitment
Reduction Fee on the earlier of (a) the
termination of the Commitment and (b) September
30, 2000."
6. Section 11 is hereby amended as follows:
6.1 Section 11.1(a)(iv) shall be deleted in its entirety and
the following shall be substituted in place thereof:
"(iv) as soon as available and in any event within
thirty (30) days after the end of each month, a
profit and loss report by contract for projects
where the total contract amount is in excess of
$10,000,000, in form and substance satisfactory
to the Agent."
6.2 The following sentence is hereby added to Section 11.1(b)
as the second sentence thereof:
"The Agent may order audits and examinations by outside
auditing or consulting firms that may include the review
and testing of the Borrower's business plan and any items
relating to its business plan including underlying
contract assumptions, expense projections, revenue timing,
Eligible Accounts (including, without limitation, test
verifications, aging and reconciliations thereof, and
trial balances
6
<PAGE> 7
therefor), Eligible Inventory and other related items, the
costs of which shall be borne by the Borrower."
6.3 A new Section 11.1(g) is hereby added to the Credit
Agreement, which reads as follows:
"(g) The Borrower will furnish to the Agent, as soon as
available and in any event within thirty (30) days
after the end of each month, a statement of
Borrower's consolidated cash receipts for such
month and a consolidating cash receipts projection
for the subsequent three months, setting forth by
contract the payments to the Borrower and its
Subsidiaries under each of their contracts for the
repair, construction and refurbishment of vessels
and other equipment, and the costs to the Borrower
and its Subsidiaries of the goods and services
required thereunder for such period; provided that
such statement shall not include or take into
account any changes or adjustments to balance
sheet items."
6.4 A new Section 11.1(h) is hereby added to the Credit
Agreement, which reads as follows:
"(h) Promptly upon the occurrence of each Contract
Loss, and no less than five (5) Business Days
prior to the Borrower's or any Subsidiary's
entering into any Settlement, the Borrower shall
provide to the Agent a statement of projected
expenses and revenues of the Borrower (on a
consolidated basis), which statement shall give
effect to each Settlement (including without
limitation the proposed Settlement) and each
Contract Loss."
6.5 A new Section 11.11 is hereby added to the Credit
Agreement, which reads as follows:
"11.11 Field Audits and Environmental Audits. The Borrower
shall, and shall cause each Subsidiary to, within thirty
(30) days following the date of Amendment No. 2:
(a) commence Phase I environmental audits for each
parcel of real property owned by the Borrower or any
Subsidiary; and
(b) cooperate fully with the Agent and the Lenders to
commence an audit of the Borrower's and the
Subsidiaries' books, records and accounts."
7. Section 12 is hereby amended as follows:
7
<PAGE> 8
7.1 Section 12.5(h) of the Credit Agreement shall be deleted
in its entirety and the following shall be substituted in
place thereof:
"(h) other Indebtedness not otherwise permitted by this
Section 12.5 in the principal amount outstanding
of up to USD 5,000,000 in any year, and up to an
aggregate of USD 10,000,000 from the date hereof
through the Maturity Date."
7.2 Section 12.10 of the Credit Agreement shall be deleted in
its entirety and the following shall be substituted in
place thereof:
"Sale of Fixed Assets or Accounts. Sell, transfer or
assign any fixed assets or any account receivable;
provided, however, that the Borrower may sell, transfer or
assign any assets in the ordinary course of business in an
amount of up to an aggregate of USD 5,000,000 from the
date of this Credit Agreement through the Maturity Date;
provided, further, that one hundred percent (100%) of the
Net Proceeds from such sales shall be applied first to
repay the any amounts outstanding under the Revolving
Credit Facility and second to cash collateralize Tranche B
Letters of Credit to the extent the aggregate face amount
of such Letters of Credit exceeds eighty percent (80%) of
the orderly liquidation value of the Equipment."
7.3 Section 12.11 of the Credit Agreement shall be deleted in
its entirety and the following shall be substituted in
place thereof:
"Leverage Ratio. Permit the Leverage Ratio to be greater
than the Required Ratio set forth below:
<TABLE>
<CAPTION>
Quarter Ending Required Ratio
-------------- --------------
<S> <C>
March 31, 2000 4.50 to 1.00
June 30, 2000 4.00 to 1.00
September 30, 2000 4.00 to 1.00
December 31, 2000 3.00 to 1.00
March 31, 2001 3.00 to 1.00
June 30, 2001 and 2.25 to 1.00"
each quarter thereafter
</TABLE>
7.4 Section 12.12 of the Credit Agreement shall be deleted in
its entirety and the following shall be substituted in
place thereof:
"Fixed Charge Coverage Ratio. Permit its Fixed Charge
Coverage Ratio to be less than the Required Ratio set
forth below:
8
<PAGE> 9
<TABLE>
<CAPTION>
Quarter Ending Required Ratio
-------------- --------------
<S> <C>
March 31, 2000 1.10
June 30, 2000 1.50
September 30, 2000 1.35
December 31, 2000 1.25
March 31, 2001 1.50
June 30, 2001 1.50
September 30, 2001 1.35
December 31, 2001 1.25
March 31, 2002 and 1.50
thereafter
</TABLE>
7.5 Section 12.13 of the Credit Agreement shall be deleted in
its entirety and the following shall be substituted in
place thereof:
"Net Worth. Permit its Net Worth, as measured on a
quarterly basis, to be less than the aggregate of (a)
ninety-five percent (95%) of Net Worth at December 31,
1999, plus (b) seventy-five percent (75%) of positive net
income for each fiscal quarter and (c) seventy-five
percent (75%) of the Net Proceeds of future offerings of
common stock or other equity of the Borrower."
7.6 Section 12.15(a) shall be amended and revised such that
the following shall be added to the end of the existing
paragraph:
"; provided further, that, until delivery to the purchaser
of each and every vessel to be delivered under the Ocean
Rig Contracts and the Petrodrill Rig Contracts, neither
the Borrower nor any Subsidiary shall make any
Acquisition."
7.7 Section 12.15(d) shall be deleted in its entirety and the
following shall be substituted in place thereof:
"(d) present and future investments in joint ventures
or similar arrangements, including guarantees of
joint venture obligations, up to USD 13,000,000 in
respect of any one such investment, not to exceed
USD 20,000,000 in respect of all such investments;
and"
7.8 Section 12.15(e) shall be deleted in its entirety and the
following shall be substituted in place thereof:
"(e) capitalized fixed asset additions, not to exceed
USD 12,000,000 per calendar year; provided that,
notwithstanding anything herein to the contrary,
neither the Borrower nor any of its U.S.
subsidiaries shall make advances or loans to any
one non-U.S. subsidiary in excess of USD 5,000,000
and to all non-U.S. subsidiaries which exceed, in
the aggregate, USD 10,000,000."
9
<PAGE> 10
7.9 Section 12.17 shall be deleted in its entirety and the
following shall be substituted in place thereof:
"Dividends. Without the consent of the Majority Lenders,
make any dividend payments (other than dividends payable
in stock) or other distributions to its stockholders or
redeem or otherwise acquire any of its stock."
8. A new Section 13.1(l) is hereby added to the Credit Agreement,
which reads as follows:
"(l) The Borrower or any Subsidiary incurs a Contract
Loss or enters into a Settlement, and after giving
effect to such Settlement or Contract Loss and all
other Settlements and Contract Losses, the cash
flow projections of the Borrower in any statement
required to be delivered under Section 11.1(h)
indicate such Settlement or Contract Loss shall or
is likely to result in a Default or Event of
Default under Sections 13.1 (a) through (h)."
9. Conditions Precedent.
9.1 Documents and Other Items Required as Conditions Precedent to
Amendment No. 2. The effectiveness of the modifications to the
Credit Agreement contemplated by this Amendment No. 2 is subject
to the condition precedent that the Agent shall have received at
or prior to the Amendment Date all of the following, each dated on
or before the Amendment Date and each in form and substance
satisfactory to the Agent and its counsel:
(a) Each of the following documents (the "Amendment
Documents") shall have been duly authorized and executed with
original counterparts thereof delivered to the Agent:
(i) This Amendment No. 2;
(ii) Amendment No. 2 to the U.S. Preferred Fleet
Mortgage;
(iii) Ratifications of Security Agreements;
(iv) Ratifications of Pledges;
(v) Ratification of Guaranty;
(vi) Legal Opinion of Jones Walker Waechter
Poitevent Carrere & Denegre L.L.P.,
(vii) Ratification by the Board of Directors of
Friede Goldman Halter, Inc.;
10
<PAGE> 11
(viii) Leasehold Mortgages on properties designated
by the Agent;
(ix) A Borrowing Base Certificate with respect to
the Borrowing Base for the month ending
February 29, 2000; and
(x) such further documents as the Lenders may
reasonably request;
(b) The Lenders shall have received satisfactory evidence
that all amounts of principal, interest and fees outstanding under
or in connection with the Swing Line Loans have been repaid by the
Borrower in full.
(c) The Agent shall have received satisfactory evidence
that the Borrower shall have paid all reasonable fees and expenses
of Agent's counsel.
(d) The Agent shall have received from the Borrower
payment of an amendment fee equal to 0.5% of the Commitment.
(e) The representations and warranties contained in
Section 10 of the Credit Agreement shall be true on the Amendment
Date with the same effect as though such representations and
warranties had been made on and as of such date, and no Event of
Default specified in Section 13 of the Credit Agreement and no
event which, with the lapse of time or the giving of notice and
the lapse of time specified in Section 13 of the Credit Agreement,
would become such an Event of Default, shall have occurred and be
continuing.
9.2 Waiver of Conditions Precedent. All of the conditions
precedent contained in this Section 9 are for the sole benefit of
the Agent and the Lenders and the Agent may waive any of them in
its absolute discretion, and on such conditions as it deems
proper.
10. Representations. The Borrower represents and warrants that:
(a) The Borrower is a corporation, duly organized and validly
existing in good standing under the laws of the State of Mississippi,
and has the requisite power and authority (i) to carry on its business
as presently conducted; and (ii) to enter into and perform its
obligations under the Amendment Documents.
(b) The execution, delivery and performance by Borrower and the
Guarantors of the Amendment Documents and any other instrument or
agreement provided for by this Amendment No. 2 to which it is a party,
have been duly authorized by all necessary corporate action, do not
require stockholder approval other than such as has been duly obtained
or given, do not or will not contravene any of the terms of its
Certificate of Incorporation or Bylaws, or similar such organizational
documentation, and will not violate any provision of law or of any
order of any court or governmental agency or constitute (with or
without notice or lapse of time or both) a default under, or result
(except as contemplated
11
<PAGE> 12
by this Amendment No. 2) in the creation of any security interests,
lien, charge or encumbrance upon any of its properties or assets
pursuant to, any agreement, indenture or other instrument to which it
is a party or by which it may be bound other than is in favor of the
Agent; the Amendment Documents have been duly executed and delivered by
the Borrower and the Guarantors and constitute the respective legal,
valid and binding agreements, enforceable in accordance with the
respective terms thereof as to which each of the Borrower and the
Guarantors is a party. The enforceability of this Amendment No. 2,
however, is subject to all applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws affecting the rights or
creditors and to general equity principles.
(c) Except as set forth in the Credit Agreement, there are no
suits or proceedings pending or to its knowledge threatened against or
affecting Borrower or any Guarantor which if adversely determined would
have a material adverse effect upon its business, financial condition
or operations.
(d) Other than such as have been obtained, no license, consent or
approval of any Governmental Agency or other regulatory authority is
required for the execution, delivery or performance of this Amendment
No. 2 or any other Amendment Document or any instrument contemplated
herein or therein.
11. Expenses. The Borrower agrees to promptly, whether or not the
modifications to the Credit Agreement contemplated by this Amendment
No. 2 become effective, (x) reimburse the Agent for all fees and
disbursements of external counsel to the Agent and all reasonable out
of pocket fees and disbursements of the Agent incurred in connection
with the preparation, execution and delivery of this Amendment No. 2
and all other documents referred to herein, and all amendments or
waivers to or termination of this Amendment No. 2 or any agreement
referred to herein; and (y) reimburse the Agent for all fees and
disbursements of internal and external counsel to the Agent and all
reasonable out of pocket fees, disbursements and travel-related
expenses of the Agent incurred in connection with the protection of the
rights of the Agent under this Amendment No. 2 and all other documents
referred to herein, whether by judicial proceedings or otherwise. The
obligations of the Borrowers under this Section 11 shall survive
payment of the Loan.
12. Wherever and in each such place the term "Credit Agreement" is used
throughout the Credit Agreement, such term shall be read to mean the
Credit Agreement as amended by this Amendment No. 2.
13. Except as specifically amended by this Amendment No. 2, all of the
terms and provisions of the Credit Agreement shall remain in full force
and effect.
14. All capitalized terms used herein but not defined herein shall have
the meanings given to them in the Credit Agreement.
12
<PAGE> 13
15. THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment No. 2 to Credit Agreement on the date first written above.
BORROWER:
--------
FRIEDE GOLDMAN HALTER, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
LENDERS:
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By:
Name: Joseph P. Maxwell
Title: Vice President
ROYAL BANK OF CANADA
By:
Name:
Title:
HIBERNIA NATIONAL BANK
By:
Name:
Title:
14
<PAGE> 15
BANK ONE, N.A.
By:
Name:
Title:
ADMINISTRATIVE AGENT AND CO-ARRANGER:
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By:
Name: Joseph P. Maxwell
Title: Vice President
SYNDICATION AGENT AND CO-ARRANGER:
BANC ONE CAPITAL MARKETS, INC.
By:
Name:
Title:
15
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EXHIBIT 10.4
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (the
"Agreement") is made and entered into as of June 1, 1999, by and between FRIEDE
GOLDMAN INTERNATIONAL INC. (the "Company"), a Mississippi corporation, and J.L.
Holloway (the "Executive");
WHEREAS, the Company and the Employee entered into an
Employment and Non-Competition Agreement, effective as of January 1, 1997, as
amended (the "Original Agreement");
WHEREAS, the Executive is currently serving as Chairman of the
Board of Directors, Chief Executive Officer and President of the Company;
WHEREAS, pursuant to the Agreement and Plan of Merger (the
"Merger Agreement"), dated as of June 1, 1999, by and between Halter Marine
Group, Inc., a Delaware corporation ("Halter"), and the Company, the parties
thereto have agreed to a merger (the "Merger") pursuant to the terms thereof;
WHEREAS, the Company desires to secure the continued
employment of the Executive in accordance herewith and the Executive is willing
to commit himself to be employed by the Company on the terms and conditions
herein set forth and thus to forego opportunities elsewhere; and
WHEREAS, the parties desire to replace the Original Agreement
and enter into this Agreement, as of the Effective Date (as defined below),
setting forth the terms and conditions for the employment relationship of the
Executive with the Company during the Employment Period (as defined below);
NOW, THEREFORE, IN CONSIDERATION of the mutual premises,
covenants and agreements set forth below, it is hereby agreed as follows:
1. Employment and Term.
(a) Employment. The Company agrees to employ the Executive,
and the Executive agrees to be employed by the Company, in accordance with the
terms and provisions of this Agreement during the Employment Period (as defined
below).
(b) Term. The term of the Executive's employment under this
Agreement shall commence (the "Effective Date") as of the Effective Time of the
Merger as defined in the Merger Agreement, and shall continue until the second
anniversary of the Effective Date (such
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term being referred to hereinafter as the "Employment Period"); provided,
however, notwithstanding the foregoing, in the event that the Merger Agreement
is terminated, this Agreement shall be deemed canceled and of no force or effect
and the Executive shall continue to be subject to such agreements and
arrangements that were in effect on the date hereof, including, without
limitation, the Original Agreement between the Executive and the Company.
2. Duties and Powers of Executive.
(a) Position. During the Employment Period, the Executive
shall serve as Chairman of the Board and Chief Executive Officer of the Company
with such authority, duties and responsibilities with respect to such position
as set forth in subsection (b) hereof
(b) Duties.
(i) Chairman of the Board. The Chairman of the
Board shall be a director and shall preside at meetings of the Board and
meetings of the shareholders. The Chairman shall be responsible for Board and
shareholder governance and shall have such duties and responsibilities as are
customarily assigned to such positions.
(ii) Chief Executive Officer. The duties of the
Chief Executive Officer of the Company shall include, but not be limited to,
directing the overall business, affairs and operations of the Company, through
its officers, all of whom shall report directly or indirectly to the Chief
Executive Officer.
(c) Board Membership. The Executive shall be a member of
the Board on the first day of the Employment Period, and the Company shall
nominate the Executive for re-election to the Board throughout the Employment
Period.
(d) Attention. Except as provided below, during the
Employment Period, and excluding any periods of vacation and sick leave to which
the Executive is entitled, the Executive shall devote full attention and time
during normal business hours to the business and affairs of the Company and, to
the extent necessary to discharge the responsibilities assigned to the Executive
under this Agreement, use the Executive's best efforts to carry out such
responsibilities faithfully and efficiently. The Executive shall be entitled to
fulfill his duties under this Agreement from the Company's offices in Jackson,
Mississippi or Gulfport, Mississippi or his personal residence in Byram,
Mississippi, or such other location as shall be the Company's principal
executive offices. It shall not be considered a violation of the foregoing for
the Executive to serve on corporate, industry, civic, governmental or charitable
boards or committees, as long as such activities do not interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement.
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3. Compensation. As a general rule, each of the components of the
Executive's compensation set forth in subsections (a), (b) and (c) below shall
be no less than the level of compensation that is payable to [JD3] at any time
during the Employment Period.
(a) Base Salary. During the Employment Period, the Executive's
annual base salary ("Annual Base Salary") shall be payable in accordance with
the Company's general payroll practices. The Executive's Annual Base Salary
shall be at least $500,000. The Executive's Annual Base Salary (as increased
from time to time) may not be decreased during the Employment Period. Any
increase in Annual Base Salary shall not serve to limit or reduce any other
obligation of the Company under this Agreement.
(b) Annual Bonus. During the Employment Period, the Executive
shall participate in the Company's annual bonus plans and shall be awarded
bonuses thereunder that provide him, on a year-by-year basis, an annual bonus
(the "Annual Bonus"). The Company's annual bonus plans shall, as necessary, be
amended to provide that Executive may earn an Annual Bonus of up to 2 times
Annual Base Salary; provided, however, that Executive's Annual Bonus shall be at
least equal to the highest annual bonus granted to any other executive of the
Company for such year.
(c) Equity Compensation. During the Employment Period, the
Executive shall participate in the Company's equity compensation plans (the
"Incentive Compensation Plans") and will be granted awards thereunder providing
him, on a year-by-year basis, long-term incentive compensation (the "Incentive
Compensation Awards") at least equal to the highest amount of Incentive
Compensation Awards granted to any other officer or employee of the Company for
such year with the exception of new hires. In addition to the annual Incentive
Compensation Awards described above, on the Effective Date, the Executive shall
receive a grant of an option to purchase 1,000,000 shares of the Company's
common stock, at an exercise price equal to the closing price of the Company's
common stock on the Effective Date. Options to purchase 350,000 of such shares
shall be immediately exercisable. Subject to the further provisions of this
Agreement, the options to purchase the remaining 650,000 shares shall vest
ratably over the next four years on each successive anniversary of the Effective
Date. Any equity awards granted to the Executive from time to time may be
transferred, at the Executive's election, to trusts established for the benefit
of members of the Executive's family.
(d) Existing Options. All of the Executive's existing options
to purchase shares of the Company's Common Stock shall remain outstanding
following the consummation of the Merger.
(e) Retirement and Welfare Plans. During the Employment
Period, the Executive shall be eligible to participate in all savings,
retirement and welfare plans, practices,
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policies and programs applicable generally to employees and/or senior executive
officers of the Company.
(f) Deferred Compensation. During the Employment Period, the
Executive shall be credited with an amount equal to 10% of his Annual Base
Salary and Annual Bonus which shall be contributed to a non-qualified deferred
compensation plan of the Company.
(g) Expenses. The Company shall reimburse the Executive for
all expenses, including those for travel and entertainment, properly incurred by
him in the performance of his duties hereunder in accordance with policies
established from time to time by the Company.
(h) Fringe Benefits and Perquisites. During the Employment
Period, the Executive shall be entitled to receive fringe benefits and
perquisites in accordance with the plans, practices, programs and policies of
the Company from time to time in effect, commensurate with his position.
4. Termination of Employment.
(a) Death or Disability. The Executive's employment shall
terminate upon the Executive's death or, at the election of the Board or the
Executive, by reason of Disability (as defined below) during the Employment
Period; provided, however, that the Board may not terminate the Executive's
employment hereunder by reason of Disability unless at the time of such
termination there is no reasonable expectation that the Executive will return to
work within the next one hundred eighty (180) day period. For purposes of this
Agreement, disability ("Disability") shall have the same meaning as set forth in
the Halter long-term disability plan or its successor.
(b) By the Company for Cause. The Company may terminate the
Executive's employment during the Employment Period for Cause (as defined
below). For purposes of this Agreement, "Cause" shall mean (i) the Executive's
gross negligence in the performance or intentional nonperformance (continuing
for ten days after receipt of written notice of need to cure) of any of the
Executive's material duties hereunder (other than such failure resulting from
the Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 4(d)) or (ii) the Executive's
commission of one or more acts of moral turpitude that constitutes a felony,
which have or result in an adverse effect on the Company, monetarily or
otherwise or one or more significant acts of dishonesty, fraud or misconduct
with respect to the business or affairs of the Company which materially and
adversely affects the operations or reputation of the Company. The determination
of whether Cause exists must be made by a resolution that is passed upon the
affirmative vote of at least two-thirds (2/3) of the membership of the Board.
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(c) By the Company without Cause. Notwithstanding any other
provision of this Agreement, the Company may terminate the Executive's
employment other than by a termination for Cause during the Employment Period,
but only upon the affirmative vote of at least one-half (1/2) of the membership
of the Board.
(d) By the Executive for Good Reason. The Executive may
terminate his employment during the Employment Period for Good Reason (as
defined below). For purposes of this Agreement, "Good Reason" shall mean the
occurrence without the written consent of the Executive of any one of the
following acts by the Company, or failures by the Company to act, unless such
act or failure to act is corrected prior to the Date of Termination (as defined
below) specified in the Notice of Termination (as defined below) given in
respect thereof:
(i) an adverse change in the Executive's title, authority,
duties, responsibilities or reporting lines as specified in Sections
2(a) and 2(b) of this Agreement;
(ii) a reduction by the Company in the Executive's Annual
Base Salary below the amounts set forth in Section 3(a) above;
(iii) any failure by the Company to continue in effect any
benefit plan or arrangement (including, without limitation, the
Company's tax-qualified and supplemental retirement plans, deferred
compensation plans, group life insurance plan, and medical, dental,
accident and disability plans or any other plans providing the
Executive with similar benefits (herein referred to as "Benefit
Plans")) without replacing such Benefit Plan with a plan providing for
substantially similar benefits or the taking of any action by the
Company that would adversely affect the Executive's participation in
any Benefit Plan or deprive the Executive of any material fringe
benefit enjoyed by the Executive;
(iv) any failure by the Company to continue in effect any
incentive plan or arrangement, as amended and supplemented, in which
the Executive is participating from time to time without replacing such
incentive plan with a plan providing for substantially similar
benefits, or the taking of any action by the Company that would
adversely affect the Executive's opportunity to participate in any such
plan or reduce the Executive's ability to obtain benefits under any
such plan, expressed as a percentage of Annual Base Salary, in any
fiscal year as compared to the immediately preceding fiscal year;
(v) any failure by the Company to continue in effect any
plan or arrangement to receive securities of the Company without
replacing such plan with a plan providing for substantially similar
benefits or the taking of any action by the Company that would
adversely affect the Executive's opportunity to participate in or
materially reduce the Executive's ability to obtain benefits under any
such plan;
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(vi) any failure by the Company to provide the Executive with
the number of paid vacation days to which he is entitled under the
Company's vacation policies as in effect from time to time;
(vii) the relocation of the Company's principal executive
offices to a location outside of Gulfport, Mississippi, unless the
Company's principal executive offices are relocated outside of
Gulfport, Mississippi for a valid business reason. In the event the
Company's principal executive offices are so relocated, the Company
will, at the option of the Executive, either (A) provide an apartment
for the Executive in the new location and will reimburse the Executive
for his reasonable costs in commuting from either Jackson, Mississippi
or Gulfport, Mississippi, at the Executive's election, to such new
location or (B) allow the Executive to work out of either the Company's
Gulfport, Mississippi or Jackson, Mississippi offices or the
Executive's personal residence in Byram, Mississippi. If the Company
does not provide the Executive with such option, any such relocation
shall constitute Good Reason;
(viii) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation and benefits or to pay
to the Executive any portion of an installment of deferred compensation
under any deferred compensation program of the Company within thirty
(30) days of the date such compensation is due;
(ix) a substantial increase in the Executive's business
travel obligations or an adverse change in the Executive's manner of
travel as of the Effective Date;
(x) the failure of the shareholders to elect the Executive
to the Board during the Employment Period;
(xi) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 4(e); for purposes of this Agreement, no such
purported termination shall be effective;
(xii) the failure of the Company to obtain a satisfactory
agreement from any successor of the Company requiring such successor to
assume and agree to perform the Company's obligations under this
Agreement, as contemplated in Section 13;
(xiii) the failure by the Company to comply with any material
provision of this Agreement.
(e) Determination of Good Reason Upon a Change in Control.
Following a Change in Control (as defined in Exhibit A hereto), the Executive's
determination that an act or failure to act constitutes Good Reason shall be
presumed to be valid unless such determination is
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deemed to be unreasonable by an arbitrator. The Executive's right to terminate
the Executive's employment for Good Reason shall not be affected by the
Executive's incapacity due to physical or mental illness. The Executive's
continued employment shall not constitute consent to, or a waiver of rights with
respect to, any act or failure to act constituting Good Reason hereunder.
(f) Notice of Termination. During the Employment Period, any
purported termination of the Executive's employment (other than by reason of
death) shall be communicated by written Notice of Termination from one party
hereto to the other party hereto in accordance with Section 15(b). For purposes
of this Agreement, a "Notice of Termination" shall mean a notice that shall
indicate the specific termination provision in this Agreement relied upon, if
any, and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than two-thirds (2/3) of the entire membership of the Board at a
meeting of the Board that was called and held no more than ninety (90) days
after the date the Board had knowledge of the most recent act or omission giving
rise to such breach for the purpose of considering such termination (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board and, if
possible, to cure the breach that was the basis for the Notice of Termination
for Cause) finding that, in the good faith opinion of the Board, the Executive
was guilty of conduct set forth in clause (i) or (ii) of the definition of
Cause, and specifying the particulars thereof in detail. Unless the Board
determines otherwise, a Notice of Termination by the Executive alleging a
termination for Good Reason must be made within thirty (30) days of the act or
failure to act that the Executive alleges to constitute Good Reason.
(g) Date of Termination. "Date of Termination" with respect to
any purported termination of the Executive's employment during the Employment
Period, shall mean the date specified in the Notice of Termination (which, in
the case of a termination by the Company, for reasons other than Cause, shall
not be less than thirty days and, in the case of a termination by the Executive,
shall not be less than thirty (30) days nor more than sixty (60) days, from the
date such Notice of Termination is given).
5. Obligations of the Company Upon Termination.
(a) Termination other than for Cause, Death or Disability.
During the Employment Period, if the Company shall terminate the Executive's
employment (other than for Cause, death or Disability) or the Executive shall
terminate his employment for Good Reason (termination in any such case being
referred to as "Termination") the Company shall pay to the Executive the
amounts, and provide the Executive with the benefits, described in this Section
5 (hereinafter referred to as the "Severance Payments"). The amounts specified
in this Section 5(a) shall be paid within thirty (30) days after the Date of
Termination. Such payments shall be in
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addition to those rights and benefits to which the Executive may be entitled
under the relevant Company employee benefit plans or programs.
(i) Lump Sum Payment. The Company shall pay to the Executive a
lump sum cash payment of $1,500,000.00. Furthermore, if at the Date of
Termination the fair market value (as defined below) of the stock
option granted to the Executive pursuant to Section 3(c) of this
Agreement is less than $5,000,000.00, then the Company shall pay to the
Executive an additional lump sum cash payment, not to exceed
$1,500,000.00, in an amount equal to the excess of $5,000,000.00 over
the fair market value of the stock option granted to the Executive
pursuant to Section 3(c). Solely for the purposes of computing this
additional cash payment, it shall be assumed that (A) the Executive
still owns and has not yet exercised the option to purchase 1,000,000
shares of the Company's common stock granted pursuant to Section 3(c)
and (B) the fair market value of the stock option is equal to the
excess, if any, of the closing price of the Company's common stock on
the Date of Termination as such price is reported by the exchange upon
which the Company's common stock is then traded over the exercise price
of the stock option as determined pursuant to Section 3(c) of this
Agreement.
(ii) Accrued Obligations. The Company shall pay the Executive
a lump sum amount in cash equal to the sum of (A) the Executive's
Annual Base Salary through the Date of Termination to the extent not
theretofore paid, (B) an amount equal to any Annual Bonus earned with
respect to fiscal years ended prior to the year that includes the Date
of Termination to the extent not theretofore paid and (C) an amount
equal to the target amount payable under any Annual Bonus for the
fiscal year that includes the Date of Termination or, if greater, the
average of the three years' highest gross bonus awards, not necessarily
consecutive, paid by the Company to the Executive in the five years
preceding the year of Termination multiplied by a fraction the
numerator of which shall be the number of days from the beginning of
such fiscal year to and including the Date of Termination and the
denominator of which shall be 365, in each case to the extent not
theretofore paid. (The amounts specified in clauses (A), (B) and (C)
shall be hereinafter referred to as the "Accrued Obligations.")
(iii) Deferred Compensation. The Company shall vest or provide
for the lapse of all restrictions on any compensation previously
deferred by the Executive and shall pay the Executive a lump sum
payment in an amount equal to any compensation previously deferred by
the Executive (together with any accrued interest or earnings thereon).
(iv) Accelerated Vesting and Payment of Long-Term Incentive
Awards. All equity-based Incentive Compensation Awards held by the
Executive under any Incentive Compensation Plan maintained by the
Company or any affiliate and all of the Executive's
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options, whether granted hereunder or otherwise, shall immediately vest
and become exercisable as of the Date of Termination. In addition, all
of the Executive's options shall remain outstanding and exercisable
until the expiration of the original term of such option. Moreover, the
restrictions on the transfer of the underlying shares of such options
described in the fifth sentence of Section 3(c) shall lapse.
(v) Continuation of Welfare Benefits. For three years
following the Date of Termination, the Company shall provide or arrange
to provide the Executive and his dependants with life, disability,
accident and health insurance benefits substantially similar to those
provided to similarly situated senior executive officers of the Company
during such period, with the Executive charged a monthly premium(s) for
such coverage(s) that does not exceed the premium(s) charged to a
similarly situated senior executive officers of the Company for such
coverage(s); provided, however, the Executive must elect continuation
coverage under such group health plans in accordance with COBRA,
effective as of the Date of Termination; provided, further, benefits
otherwise receivable by the Executive pursuant to this Section 5(a)(v)
shall be reduced to the extent other comparable benefits are actually
received by the Executive and his dependants during the three-year
period following the Date of Termination, and any such benefits
actually received by the Executive or his dependants shall be reported
to the Company.
(b) Termination by the Company for Cause or by the Executive
Other than for Good Reason. Subject to the provisions of Section 7 of this
Agreement, if the Executive's employment shall be terminated for Cause during
the Employment Period, or if the Executive terminates employment during the
Employment Period other than for Good Reason, the Company shall have no further
obligations to the Executive under this Agreement other than the Accrued
Obligations and deferred compensation and such rights and benefits to which the
Executive may be entitled under the relevant Company employee benefit plans or
programs. The Company hereby agrees to provide the Executive with an additional
180-day period following the Date of Termination in which to exercise any
options that were vested as of his Date of Termination. Such 180-day period
shall be extended by a number of days equal to the number of days in any
"blackout" periods, if any, imposed by the Company during which such options are
unexercisable.
(c) Termination due to Death and Disability. If the
Executive's employment shall terminate by reason of death or Disability, the
Company shall pay the Executive or his estate, as the case may be, the Accrued
Obligations and deferred compensation. Such payments shall be in addition to
those rights and benefits to which the Executive or his estate may be entitled
under the relevant Company employee benefit plans or programs.
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(d) Gross-Up Payment. In the event that any payment or benefit
received or to be received by the Executive (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with (A) the Company
or (B) any Person (as defined in Section 4 (e)) whose actions result in a Change
in Control or (C) any Person affiliated with the Company or such Person) (all
such payments and benefits, including the Severance Payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part) by the
Company, an affiliate or Person making such payment or providing such benefit as
a result of Section 280G of the Code, then, the Company shall pay to the
Executive such additional amounts (the "Gross-Up Payment") such that the net
amount retained by the Executive, after deduction of any excise tax imposed
under Section 4999 of the Code (the "Excise Tax") on the Total Payments and any
federal, state and local income and employment taxes and Excise Tax upon the
Gross-Up Payment, shall be equal to the Total Payments. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the date on which the Gross-Up Payment
is calculated for purposes of this Section 5(d), net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes. In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account hereunder, the Executive shall repay to
the Company, at the time that the amount of such reduction in Excise Tax is
finally determined, the portion of the Gross-Up Payment attributable to such
reduction (plus that portion of the Gross-Up Payment attributable to the Excise
Tax and federal, state and local income tax imposed on the Gross-Up Payment
being repaid by the Executive to the extent that such repayment results in a
reduction in Excise Tax and/or a federal, state or local income tax deduction)
plus interest on the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder (including by reason of any
payment the existence or amount of which cannot be determined at the time of the
Gross-Up Payment), the Company shall make an additional Gross-Up Payment in
respect of such excess (plus any interest, penalties or additions payable by the
Executive with respect to such excess) at the time that the amount of such
excess is finally determined. The Executive and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Total Payments.
6. Indemnification. In the event the Executive is made party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against the Executive), by reason of the fact that he is or was performing
services under this Agreement, then the Company shall indemnify the Executive
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement, as actually and reasonably incurred by the Executive in
connection therewith. In
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the event that both the Executive and the Company are made a party to the same
third-party action, complaint, suit or proceeding, the Company agrees to engage
competent legal representation, and the Executive agrees to use the same
representation, provided that if counsel selected by the Company shall have a
conflict of interest that prevents such counsel from representing the Executive,
the Executive may engage separate counsel and the Company shall pay all
attorneys' fees of such separate counsel. Further, while the Executive is
expected at all times to use his best efforts to faithfully discharge his duties
under this Agreement, the Executive cannot be held liable to the Company for
errors or omissions made in good faith where the Executive has not exhibited
gross, willful and wanton negligence and misconduct or performed criminal and
fraudulent acts which materially damage the business and the Company.
7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, plan,
program, policy or practice provided by the Company and for which the Executive
may qualify (except with respect to any benefit to which the Executive has
waived his rights in writing), nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other contract or
agreement entered into after the Effective Date with the Company. Amounts which
are vested benefits or which the Executive is otherwise entitled to receive
under any benefit, plan, policy, practice or program of, or any contract or
agreement entered into with, the Company shall be payable in accordance with
such benefit, plan, policy, practice or program or contract or agreement except
as explicitly modified by this Agreement.
8. Full Settlement; Mitigation. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others, provided that nothing herein shall preclude the Company
from separately pursuing recovery from the Executive based on any such claim. In
no event shall the executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts (including amounts for damages
for breach) payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced whether or not the Executive
obtains other employment.
9. Arbitration. Any dispute or controversy about the validity,
interpretation, effect or alleged violation of this Agreement (an "arbitrable
dispute") must be submitted to confidential arbitration in Jackson, Mississippi.
Arbitration shall take place before an experienced employment arbitrator
licensed to practice law in such state and selected in accordance with the Model
Employment Arbitration Procedures of the American Arbitration Association.
Arbitration shall be the exclusive remedy of any arbitrable dispute. Judgement
may be entered on the arbitrator's award in any court having jurisdiction. The
parties hereby agree that the arbitrator shall be empowered to enter an
equitable decree mandating specific enforcement of the terms of this Agreement.
Should any party to this Agreement pursue any arbitrable dispute by any
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method other than arbitration, the other party shall be entitled to recover from
the party initiating the use of such method all damages, costs, expenses and
attorneys' fees incurred as a result of the use of such method. Notwithstanding
anything herein to the contrary, nothing in this Agreement shall purport to
waive or in any way limit the right of any party to seek to enforce any judgment
or decision on an arbitrable dispute in a court of competent jurisdiction.
10. Non-competition Agreement.
(a) The Executive recognizes that the willingness of the
Company to enter into this Agreement is based in material part on the
Executive's agreement to the provisions of this Section 10, and that Executive's
breach of the provisions of this Section 10 could materially damage the Company
and its subsidiaries (the Company and its subsidiaries are hereinafter
collectively referred to as the "Affiliates" and individually as an
"Affiliate"). Therefore, in consideration of the benefits to be received by
Executive as a result of this employment with the Company, Executive agrees that
Executive shall not, for a period of one year immediately following the Date of
Termination, for any reason whatsoever, directly or indirectly, for himself or
on behalf of or in conjunction with any other person, persons, company,
partnership, corporation or business of whatever nature:
(i) contact any customer of any Affiliate or other
person for the purpose of including or attempting to induce
such customer or other person to cease doing business with any
Affiliate;
(ii) induce or attempt to trade any agent or
employee of any Affiliate to terminate employment with an
Affiliate or to commence work with any competitor of any
Affiliate;
(iii) call on, solicit, attempt to obtain, accept, or
in any way secure business from any of the customers of any
Affiliate, nor, directly or indirectly, aid or assist any
other person, firm or corporation in the solicitation of such
customer; and
(iv) engage, as an officer, director, shareholder,
owner, partner, joint venture, or in a managerial capacity,
whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any business selling
any products or services in direct competition with any
Affiliate in the states of Texas, Louisiana or Mississippi.
(b) Because of the difficulty of measuring economic losses to
the Affiliates as a result of a breach of the foregoing covenant and because of
the immediate and irreparable damage that could be caused to the Affiliates for
which they would have no other adequate
<PAGE> 13
13
remedy, the Executive agrees that the foregoing covenant may be enforced by the
Affiliates, or any of them, in the event of breach by him, by injunctions and
restraining orders without the necessity of posting any bond or other security
therefor.
(c) The covenants in this Section 10 are severable and
separate, and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. Moreover, in the event any court of competent
jurisdiction shall determine that any restrictions set forth in this Section 10
are unreasonable, then it is the intention of the parties that such restrictions
be enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(d) Each of the covenants in this Section 10 shall be
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of the Executive against the
Company or any Affiliate, whether predicated on this Agreement or otherwise
shall not constitute defense to the enforcement by the Company or any Affiliate
of such covenants.
11. Confidentiality.
(a) The Executive acknowledges and agrees that all
Confidential Information (as defined below) of the Company and any Affiliate is
confidential and a valuable, special, and unique asset of the Company that gives
the Company an advantage over its actual and potential, current, and future
competitors. The Executive further acknowledges and agrees that the Executive
owes the Company and any Affiliate a fiduciary duty to preserve and the protect
all Confidential Information from unauthorized disclosure or unauthorized use,
certain Confidential Information constitutes "trade secrets" under the laws of
the state of Mississippi; and unauthorized disclosure or unauthorized use of the
Company's or any Affiliate's Confidential Information would irreparably injure
the Company and its Affiliates.
(b) Both during the term of the Executive's employment and
after the termination of the Executive's employment for any reason (including
wrongful termination), the Executive shall hold all Confidential Information in
strict confidence, and shall not use any Confidential Information except for the
benefit of the Company, in accordance with the duties assigned to the Executive.
The Executive shall not at any time (either during or after the term of the
Executive's employment), disclose any Confidential Information to any person or
entity (except other employees of the Company who have a need to know the
information in connection with the performance of their employment duties), or
copy, reproduce, modify, decompile, or reverse engineer any Confidential
Information, or remove any Confidential Information from the Company's premises,
without the prior written consent of the Board of Directors of the Company or
permit any other person to do so, except as may otherwise be required by law or
legal process. The Executive shall take reasonable precautions to protect the
physical security of all documents
<PAGE> 14
14
and other material containing Confidential Information (regardless of the medium
on which the Confidential Information is stored). This Agreement applies to all
Confidential Information, whether now known or later to become known to the
Executive.
(c) Upon the termination of the Executive's employment with
the Company for any reason, and upon request of the Company at any other time,
the Executive shall promptly surrender and deliver to the Company all documents
and other written material regardless of the form or medium of any nature
containing or pertaining to any Confidential Information and shall not retain
any such document or other material. Within five days of any such request, the
Executive shall certify to the Company in writing that all such materials have
been returned.
(d) As used in this Agreement, the term "Confidential
Information" shall mean any information or material known to or used by or for
the Company or any Affiliate (whether or not owned or developed by the Company
or any Affiliate and whether or not developed by the Executive) that is not
generally known to the public. Confidential Information includes, without
limitation, the following: all trade secrets of the Company or any Affiliate;
all information that the Company or any Affiliate has marked as confidential or
has otherwise described to the Executive (either in writing or orally) as
confidential; all non-public information concerning the Company's or any
Affiliate's products, services, prospective products or services, research,
product designs, prices, discounts, costs, marketing plans, marketing
techniques, market studies test data, customers, customer lists and records,
suppliers and contracts; all Company and Affiliate business records and plans;
all Company and Affiliate personnel files; all financial information of or
concerning the Company or any Affiliate; all information relating to operating
system software, applications software, software and system methodology,
hardware platforms, technical information, inventions, computer programs and
listings, source codes, object codes, copyrights, patents, trademarks, service
marks, and other intellectual property; all technical specifications; any
proprietary information belonging to the Company or any Affiliate; all computer
hardware or software manuals; all training or instruction manuals; all data and
all computer system passwords and user codes.
12. Cooperation of the Executive. During and after the Executive's
employment with the Company, the Executive shall reasonably cooperate with the
Company in the defense or prosecution of any claims or actions now in existence
or which may be brought in the future against or on behalf of the Company and in
connection with any investigation or review of any federal, state or local
regulatory authority as any such investigation or review relates to events or
occurrences that transpired while the Executive was employed by the Company. The
Company shall reimburse the Executive for all reasonable costs and expenses
incurred in connection with his performance under this Section 12, including,
without limitation, all reasonable attorneys' fees and costs.
<PAGE> 15
15
13. Legal Fees. Subject to Section 9 and Section 12, the Company shall
pay to the Executive all legal fees and expenses (including, without limitation,
fees and expenses in connection with any arbitration) incurred by the Executive
in disputing in good faith any issue arising under this Agreement relating to
the Termination of the Executive's employment or in seeking in good faith to
obtain or enforce any benefit or right provided by this Agreement.
Notwithstanding the foregoing, in the event that any arbitrator or court
determines that the legal fees incurred by the Executive are not payable by the
Company, the Company shall not be obligated with respect thereto.
14. Successors.
(a) Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Company shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representative.
(b) Successors and Assigns of Company. This Agreement shall
inure to the benefit of and be binding upon the Company, its successors and
assigns.
(c) Assumption. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its businesses and/or assets as
aforesaid that assumes and agrees to perform this Agreement by operation of law
or otherwise.
15. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Mississippi, without
reference to its principles of conflict of laws. The captions of this Agreement
are not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended, modified, repealed, modified, waived, extended or
discharged, except by an agreement in writing signed by the party against whom
enforcement of such amendment, modification, repeal, waiver, extension or
discharge is being sought. No person, other than pursuant to a resolution of the
Board or a committee thereof, shall have authority on behalf of the Company to
agree to amend, modify, repeal, waive, extend or discharge any provision of this
Agreement or anything in reference thereto.
(b) Notices. All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the other party or by
registered or certified mail,
<PAGE> 16
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return receipt requested, postage prepaid, addressed, in either case, to the
Company's headquarters or to such other address as either party shall have
furnished to the other in writing in accordance herewith. Notices and
communications shall be effective when actually received by the addressee.
(c) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(d) Taxes. The Company may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) No Waiver. The Executive's or the Company's failure to
insist upon strict compliance with any provision hereof or any other provision
of this Agreement or the failure to assert any right that the Executive or the
Company may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason pursuant to Section 4 of this
Agreement, or the right of the Company to terminate the Executive's employment
for Cause pursuant to Section 4 of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) Entire Agreement. This instrument contains the entire
agreement of the Executive, the Company or any predecessor or subsidiary
thereof, with respect to the subject matter hereof, and all promises,
representations, understandings, arrangements and prior agreements are merged
herein and superseded hereby including, without limitation, the Original
Agreement.
* * * * *
<PAGE> 17
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IN WITNESS WHEREOF, the Executive and, pursuant to due
authorization from its Board of Directors, the Company have caused this
Agreement to be executed as of the day and year first above written.
FRIEDE GOLDMAN INTERNATIONAL INC.
By: /s/ James A. Lowe III
-------------------------------------
Name: James A. Lowe III
Title: General Counsel and Secretary
EXECUTIVE
/s/ J. L. Holloway
----------------------------------------
J.L. Holloway
<PAGE> 18
EXHIBIT A
For purposes of this Agreement, a "Change in Control" shall
mean the occurrence of any of the following events from and after the Effective
Date:
(i) Any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such Person
any securities acquired directly from the Company or its
affiliates other than in connection with the acquisition by
the Company or its affiliates of a business) representing
twenty percent (20%) or more of the combined voting power of
the Company's then outstanding securities; or
(ii) The following individuals cease for any reason
to constitute a majority of the number of directors then
serving: individuals who, on the Effective Date, constitute
the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual
or threatened election contest, including, without limitation,
a consent solicitation, relating to the election of directors
of the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders was
approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors on the Effective Date or whose appointment, election
or nomination for election was previously so approved or
recommended; or
(iii) There is consummated a merger or consolidation
of the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of
the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), in combination
with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or
any subsidiary of the Company, at least sixty percent (60%) of
the combined voting power of the securities of the Company or
such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (B) a
merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person is or becomes the beneficial owner, directly
or indirectly, of securities of the Company (not including in
the securities beneficially owned by such Person any
securities acquired directly from the Company or its
affiliates other than in connection with the acquisition by
the Company or its affiliates of a business) representing
twenty percent (20%) or more of the combined voting power of
the Company's then outstanding securities; or
<PAGE> 19
A2
(iv) The shareholders of the Company approve a plan
of complete liquidation or dissolution of the Company or there
is consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least sixty percent (60%) of the combined voting power of the
voting securities of which are owned by shareholders of the
Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale.
"Person" shall have the meaning given in Section 3(a)(9) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
modified and used in Sections 13(d) and 14(d) thereof, except that such term
shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or any of its affiliates, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, (iv) a corporation owned, directly
or indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of stock of the Company, or (v) a person or group
as used in Rule 13d-l(b) under the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
Notwithstanding the foregoing, any event or transaction which
would otherwise constitute a Change in Control (a "Transaction") shall not
constitute a Change in Control for purposes of this Agreement if, in connection
with the Transaction, the Executive participates as an equity investor in the
acquiring entity or any of its affiliates (the "Acquiror"). For purposes of the
preceding sentence, the Executive shall not be deemed to have participated as an
equity investor in the Acquiror by virtue of (i) obtaining beneficial ownership
of any equity interest in the Acquiror as a result of the grant to the Executive
of an incentive compensation award under one or more incentive plans of the
Acquiror (including, without limitation, the conversion in connection with the
Transaction of incentive compensation awards of the Company into incentive
compensation awards of the Acquiror), on terms and conditions substantially
equivalent to those applicable to other executives of the Company immediately
prior to the Transaction, after taking into account normal differences
attributable to job responsibilities, title and the like, (ii) obtaining
beneficial ownership of any equity interest in the Acquiror on terms and
conditions substantially equivalent to those obtained in the Transaction by all
other shareholders of the Company, or (iii) obtaining beneficial ownership of
any equity interest in the Acquiror in a manner unrelated to a Transaction.
<PAGE> 1
EXHIBIT 10.5
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement ("Agreement")
made and entered into as of June 1, 1999, by and between FRIEDE GOLDMAN
INTERNATIONAL INC. (the "Company"), a Mississippi corporation, and John F.
Alford (the "Executive");
WHEREAS, the Company and the Employee entered into an
Employment and Non-Competition Agreement, effective as of January 1, 1997, as
amended (the "Original Agreement"), and the Executive is currently serving as
Executive Vice President of the Company;
WHEREAS, pursuant to the Agreement and Plan of Merger (the
"Merger Agreement"), dated as of June 1, 1999, by and between Halter Marine
Group, Inc., a Delaware corporation ("Halter Marine"), and the Company, the
parties thereto have agreed to a merger (the "Merger") pursuant to the terms
thereof;
WHEREAS, the Company desires to secure the continued
employment of the Executive in accordance herewith and the Executive is willing
to commit himself to be employed by the Company on the terms and conditions
herein set forth and thus to forego opportunities elsewhere; and
WHEREAS, the parties desire to amend and restate the Original
Agreement and enter into this Agreement, as of the Effective Date (as defined
below), setting forth the terms and conditions for the employment relationship
of the Executive with the Company during the Employment Period (as defined
below);
NOW, THEREFORE, IN CONSIDERATION of the mutual premises,
covenants and agreements set forth below, it is hereby agreed as follows:
1. Employment and Term.
(a) Employment. The Company agrees to employ the Executive,
and the Executive agrees to be employed by the Company, in accordance with the
terms and provisions of this Agreement during the Employment Period (as defined
below).
(b) Term. The term of the Executive's employment under this
Agreement shall commence (the "Effective Date") as of the Effective Time of the
Merger as defined in the Merger Agreement, and shall continue until the third
anniversary of the Effective Date (such term being referred to hereinafter as
the "Employment Period"); provided, however, that commencing on the second
anniversary of the Effective Date (and each anniversary of the Effective Date
thereafter) the Employment Period shall automatically be extended for one
additional year,
<PAGE> 2
2
unless, 90 days prior to such date, the Company or the Executive shall give
written notice to the other party that it or he, as the case may be, does not
wish to so extend this Agreement. Notwithstanding the foregoing, in the event
that the Merger Agreement is terminated, this Agreement shall be deemed canceled
and of no force or effect and the Executive shall continue to be subject to such
agreements and arrangements that were in effect on the date hereof, including,
without limitation, the Original Agreement.
2. Duties and Powers of Executive.
(a) Position. During the Employment Period, the Executive
shall serve as an Executive Vice President of the Company with such authority,
duties and responsibilities with respect to such position as set forth in
subsection (b) hereof.
(b) Duties. The Executive shall perform such reasonable duties
as may be delineated in the Company's By-laws, as the same may be amended from
time to time, or as may be determined by the Board of Directors of the Company
(the "Board") from time to time. In such capacity, the Executive shall report
directly to JLH and to the Board.
(c) Attention. Except as provided below, during the Employment
Period, and excluding any periods of vacation and sick leave to which the
Executive is entitled, the Executive shall devote full attention and time during
normal business hours to the business and affairs of the Company and, to the
extent necessary to discharge the responsibilities assigned to the Executive
under this Agreement, use the Executive's best efforts to carry out such
responsibilities faithfully and efficiently. The Executive shall be entitled to
fulfill his duties under this Agreement from the Company's offices in Jackson,
Mississippi, Gulfport, Mississippi or such other location as shall be the
Company's principal executive office. It shall not be considered a violation of
the foregoing for the Executive to serve on corporate, industry, civic or
charitable boards or committees, as long as such activities do not interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
3. Compensation.
(a) Base Salary. During the Employment Period, the Executive's
annual base salary ("Annual Base Salary") shall be payable in accordance with
the Company's general payroll practices. The Executive's Annual Base Salary
shall be at least $300,000. The Executive's Annual Base Salary (as increased
from time to time) may not be decreased during the Employment Period. Any
increase in Annual Base Salary shall not serve to limit or reduce any other
obligation of the Company under this Agreement.
(b) Annual Bonus. During the Employment Period, the Executive
shall participate in the Company's annual bonus plans and shall be awarded
bonuses thereunder that provide him, on a year-by-year basis, an annual bonus
(the "Annual Bonus"). The Company's
<PAGE> 3
3
annual bonus plans shall, as necessary, be amended to provide that Executive may
earn an Annual Bonus of up to 1-1/2 times his Annual Base Salary; provided,
however, that Executive's Annual Bonus shall be at least equal to the highest
annual bonus granted to any other executive of the Company for such year other
than JLH and JD3.
(c) Equity Compensation. During the Employment Period, the
Executive shall participate in the Company's equity compensation plans (the
"Incentive Compensation Plans") and will be granted awards thereunder providing
him, on a year-by-year basis, long-term incentive compensation (the "Incentive
Compensation Awards") at least equal to the highest amount of Incentive
Compensation Awards granted to any other officer or employee of the Company for
such year (other than JLH and JD3), with the exception of new hires. In addition
to the annual Incentive Compensation Awards described above, on the Effective
Date, the Executive shall receive a grant of an option to purchase 500,000
shares of the Company's common stock, at an exercise price equal to the closing
price of the Company's common stock on the Effective Date. Options to purchase
175,000 of such shares shall be immediately exercisable. Subject to the further
provisions of this Agreement, the options to purchase the remaining 325,000
shares shall vest ratably over the next three years on each successive
anniversary of the Effective Date.
(d) Existing Options. All of the Executive's existing options
to purchase shares of the Company's common stock shall remain outstanding
following the consummation of the Merger.
(e) Retirement and Welfare Benefit Plans. During the
Employment Period, the Executive shall be eligible to participate in all
savings, retirement and welfare plans, practices, policies and programs
applicable generally to employees and/or senior executive officers of the
Company.
(f) Deferred Compensation. During the Employment Period, the
Executive shall be credited with an amount equal to 10% of his Annual Base
Salary and Annual Bonus which shall be contributed to a non-qualified deferred
compensation plan of the Company.
(g) Expenses. The Company shall reimburse the Executive for
all expenses, including those for travel and entertainment, properly incurred by
him in the performance of his duties hereunder in accordance with policies
established from time to time by the Company.
(h) Fringe Benefits and Perquisites. During the Employment
Period, the Executive shall be entitled to receive fringe benefits and
perquisites in accordance with the plans, practices, programs and policies of
the Company from time to time in effect, commensurate with his position.
<PAGE> 4
4
4. Termination of Employment.
(a) Death or Disability. The Executive's employment shall
terminate upon the Executive's death or, at the election of the Board of
Directors of the Company ("Board") or the Executive, by reason of Disability (as
defined below) during the Employment Period; provided, however, that the Board
may not terminate the Executive's employment hereunder by reason of Disability
unless at the time of such termination there is no reasonable expectation that
the Executive will return to work within the next one hundred eighty (180) day
period. For purposes of this Agreement, disability ("Disability") shall have the
same meaning as set forth in the Halter Marine long-term disability plan or its
successor.
(b) By the Company for Cause. The Company may terminate the
Executive's employment during the Employment Period for Cause (as defined
below). For purposes of this Agreement, "Cause" shall mean (i) the Executive's
gross negligence in the performance or intentional nonperformance (continuing
for ten days after receipt of written notice of need to cure) of any of the
Executive's material duties hereunder (other than such failure resulting from
the Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 4(d)) or (ii) the Executive's
commission of one or more acts of moral turpitude that constitutes a felony,
which have or result in an adverse effect on the Company, monetarily or
otherwise or one or more significant acts of dishonesty, fraud or misconduct
with respect to the business or affairs of the Company which materially and
adversely affects the operations or reputation of the Company. The determination
of whether Cause exists must be made by a resolution that is passed upon the
affirmative vote of at least two-thirds (2/3) of the membership of the Board.
(c) By the Company without Cause. Notwithstanding any other
provision of this Agreement, the Company may terminate the Executive's
employment other than by a termination for Cause during the Employment Period,
but only upon the affirmative vote of at least one-half (1/2) of the membership
of the Board.
(d) By the Executive for Good Reason. The Executive may
terminate his employment during the Employment Period for Good Reason (as
defined below). For purposes of this Agreement, "Good Reason" shall mean the
occurrence without the written consent of the Executive of any one of the
following acts by the Company, or failures by the Company to act, unless such
act or failure to act is corrected prior to the Date of Termination (as defined
below) specified in the Notice of Termination (as defined below) given in
respect thereof:
(i) an adverse change in the Executive's title, authority,
duties, responsibilities or reporting lines as specified in Sections
2(a) and 2(b) of this Agreement;
(ii) a reduction by the Company in the Executive's Annual
Base Salary below the amounts set forth in Section 3(a) above;
<PAGE> 5
5
(iii) any failure by the Company to continue in effect any
benefit plan or arrangement (including, without limitation, the
Company's tax-qualified and supplemental retirement plans, deferred
compensation plans, group life insurance plan, and medical, dental,
accident and disability plans or any other plans providing the
Executive with similar benefits (herein referred to as "Benefit
Plans")) without replacing such Benefit Plan with a plan providing for
substantially similar benefits or the taking of any action by the
Company that would adversely affect the Executive's participation in
any Benefit Plan or deprive the Executive of any material fringe
benefit enjoyed by the Executive;
(iv) any failure by the Company to continue in effect any
incentive plan or arrangement, as amended and supplemented, in which
the Executive is participating from time to time without replacing such
incentive plan with a plan providing for substantially similar
benefits, or the taking of any action by the Company that would
adversely affect the Executive's opportunity to participate in any such
plan or reduce the Executive's ability to obtain benefits under any
such plan, expressed as a percentage of Annual Base Salary, in any
fiscal year as compared to the immediately preceding fiscal year;
(v) any failure by the Company to continue in effect any
plan or arrangement to receive securities of the Company without
replacing such plan with a plan providing for substantially similar
benefits or the taking of any action by the Company that would
adversely affect the Executive's opportunity to participate in or
materially reduce the Executive's ability to obtain benefits under any
such plan;
(vi) any failure by the Company to provide the Executive
with the number of paid vacation days to which he is entitled under the
Company's vacation policies as in effect from time to time;
(vii) the relocation of the Company's principal executive
offices to a location outside of Gulfport, Mississippi, unless the
Company's principal executive offices are relocated outside of
Gulfport, Mississippi for a valid business reason. In the event the
Company's principal executive offices are so relocated, the Company
will, at the option of the Executive, either (A) provide an apartment
for the Executive in the new location and will reimburse the Executive
for his reasonable costs in commuting from either Jackson, Mississippi
or Gulfport, Mississippi to such new location or (B) allow the
Executive to work out of any of the Company's Jackson, Mississippi,
Gulfport, Mississippi or New Orleans, Louisiana offices. If the Company
does not provide the Executive with such option, any such relocation
shall constitute Good Reason;
(viii) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation and benefits or to pay
to the Executive any portion of
<PAGE> 6
6
an installment of deferred compensation under any deferred compensation
program of the Company within thirty (30) days of the date such
compensation is due;
(ix) a substantial increase in the Executive's business
travel obligations or an adverse change in the Executive's manner of
travel as of the Effective Date;
(x) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 4(e); for purposes of this Agreement, no such
purported termination shall be effective;
(xi) the failure of the Company to obtain a satisfactory
agreement from any successor of the Company requiring such successor to
assume and agree to perform the Company's obligations under this
Agreement, as contemplated in Section 13; or
(xii) the failure by the Company to comply with any material
provision of this Agreement.
(e) Determination of Good Reason Upon a Change in Control.
Following a Change in Control (as defined in Exhibit A hereto), the Executive's
determination that an act or failure to act constitutes Good Reason shall be
presumed to be valid unless such determination is deemed to be unreasonable by
an arbitrator. The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to physical
or mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(f) Notice of Termination. During the Employment Period, any
purported termination of the Executive's employment (other than by reason of
death) shall be communicated by written Notice of Termination from one party
hereto to the other party hereto in accordance with Section 15(b). For purposes
of this Agreement, a "Notice of Termination" shall mean a notice that shall
indicate the specific termination provision in this Agreement relied upon, if
any, and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than two-thirds (2/3) of the entire membership of the Board at a
meeting of the Board that was called and held no more than ninety (90) days
after the date the Board had knowledge of the most recent act or omission giving
rise to such breach for the purpose of considering such termination (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board and, if
possible, to cure the breach that was the basis for the Notice of Termination
for Cause) finding that, in the good faith opinion of the Board, the Executive
was guilty of conduct set forth in clause (i) or (ii) of the definition of
Cause, and specifying the particulars thereof in detail. Unless the Board
determines otherwise, a Notice of Termination by the Executive
<PAGE> 7
7
alleging a termination for Good Reason must be made within thirty (30) days of
the act or failure to act that the Executive alleges to constitute Good Reason.
(g) Date of Termination. "Date of Termination" with respect to
any purported termination of the Executive's employment during the Employment
Period, shall mean the date specified in the Notice of Termination (which, in
the case of a termination by the Company, for reasons other than Cause, shall
not be less than thirty days and, in the case of a termination by the Executive,
shall not be less than thirty (30) days nor more than sixty (60) days, from the
date such Notice of Termination is given).
5. Obligations of the Company Upon Termination.
(a) Termination other than for Cause, Death or Disability.
During the Employment Period, if the Company shall terminate the Executive's
employment (other than for Cause, death or Disability) or the Executive shall
terminate his employment for Good Reason (termination in any such case being
referred to as "Termination") the Company shall pay to the Executive the
amounts, and provide the Executive with the benefits, described in this Section
5 (hereinafter referred to as the "Severance Payments"). The amounts specified
in this Section 5(a) shall be paid within thirty (30) days after the Date of
Termination. Such payments shall be in addition to those rights and benefits to
which the Executive may be entitled under the relevant Company employee benefit
plans or programs.
(i) Lump Sum Payment. The Company shall pay to the Executive
a lump sum cash payment of $750,000.00. Furthermore, if at the Date of
Termination the fair market value (as defined below) of the stock
option granted to the Executive pursuant to Section 3(c) of this
Agreement is less than $2,500,000.00, then the Company shall pay to the
Executive an additional lump sum cash payment, not to exceed
$750,000.00, in an amount equal to the excess of $2,500,000.00 over the
fair market value of the stock option granted to the Executive pursuant
to Section 3(c). Solely for the purposes of computing this additional
cash payment, it shall be assumed that (A) the Executive still owns and
has not yet exercised the option to purchase 500,000 shares of the
Company's common stock granted pursuant to Section 3(c) and (B) the
fair market value of the stock option is equal to the excess, if any,
of the closing price of the Company's common stock on the Date of
Termination as such price is reported by the exchange upon which the
Company's common stock is then traded over the exercise price of the
stock option as determined pursuant to Section 3(c) of this Agreement.
(ii) Accrued Obligations. The Company shall pay the Executive
a lump sum amount in cash equal to the sum of (A) the Executive's
Annual Base Salary through the Date of Termination to the extent not
theretofore paid, (B) an amount equal to any Annual Bonus earned with
respect to fiscal years ended prior to the year that includes the Date
of Termination to the extent not theretofore paid and (C) an amount
equal to the
<PAGE> 8
8
target amount payable under any Annual Bonus for the fiscal year that
includes the Date of Termination or, if greater, the average of the
three years' highest gross bonus awards, not necessarily consecutive,
paid by the Company to the Executive in the five years preceding the
year of Termination multiplied by a fraction the numerator of which
shall be the number of days from the beginning of such fiscal year to
and including the Date of Termination and the denominator of which
shall be 365, in each case to the extent not theretofore paid. (The
amounts specified in clauses (A), (B) and (C) shall be hereinafter
referred to as the "Accrued Obligations.")
(iii) Deferred Compensation. The Company shall vest or provide
for the lapse of all restrictions on any compensation previously
deferred by the Executive and shall pay the Executive a lump sum
payment in an amount equal to any compensation previously deferred by
the Executive (together with any accrued interest or earnings thereon).
(iv) Accelerated Vesting and Payment of Long-Term Incentive
Awards. All equity-based Incentive Compensation Awards held by the
Executive under any Incentive Compensation Plan maintained by the
Company or any affiliate and all of the Executive's options, whether
granted hereunder or otherwise, shall immediately vest and become
exercisable as of the Date of Termination. In addition, all of the
Executive's options shall remain outstanding and exercisable until the
expiration of the original term of such option. Moreover, the
restrictions on the transfer of the underlying shares of such options
described in the fifth sentence of Section 3 (c) shall lapse.
(v) Continuation of Welfare Benefits. For three years
following the Date of Termination, the Company shall provide or arrange
to provide the Executive and his dependants with life, disability,
accident and health insurance benefits substantially similar to those
provided to similarly situated senior executive officers of the Company
during such period, with the Executive charged a monthly premium(s) for
such coverage(s) that does not exceed the premium(s) charged to a
similarly situated senior executive officers of the Company for such
coverage(s); provided, however, the Executive must elect continuation
coverage under such group health plans in accordance with COBRA,
effective as of the Date of Termination; provided, further, benefits
otherwise receivable by the Executive pursuant to this Section 5(a)(v)
shall be reduced to the extent other comparable benefits are actually
received by the Executive and his dependants during the three-year
period following the Date of Termination, and any such benefits
actually received by the Executive or his dependants shall be reported
to the Company.
(b) Failure of the Company to Renew the Agreement. Subject to
the provisions of Section 7 of this Agreement, in the event that the Company
notifies the Executive that it does not intent to extend the Employment Period,
as contemplated in Section 1(b), the Executive shall be entitled to receive all
of the Severance Payments described in Section 5(a)
<PAGE> 9
9
above, except that the period of continuation of welfare benefits in Section
5(a)(v) shall be for two years instead of three. Such payments shall be in
addition to those rights and benefits to which the Executive may be entitled
under the relevant Company employee benefit plans or programs.
(c) Termination by the Company for Cause or by the Executive
Other than for Good Reason. Subject to the provisions of Section 7 of this
Agreement, if the Executive's employment shall be terminated for Cause during
the Employment Period, or if the Executive terminates employment during the
Employment Period other than for Good Reason, the Company shall have no further
obligations to the Executive under this Agreement other than the Accrued
Obligations and deferred compensation and such rights and benefits to which the
Executive may be entitled under the relevant Company employee benefit plans or
programs. The Company hereby agrees to provide the Executive with an additional
180-day period following the Date of Termination in which to exercise any
options that were vested as of his Date of Termination. Such 180-day period
shall be extended by a number of days equal to the number of days in any
"blackout" periods, if any, imposed by the Company during which such options are
unexercisable.
(d) Termination due to Death and Disability. If the
Executive's employment shall terminate by reason of death or Disability, the
Company shall pay the Executive or his estate, as the case may be, the Accrued
Obligations and deferred compensation. Such payments shall be in addition to
those rights and benefits to which the Executive or his estate may be entitled
under the relevant Company employee benefit plans or programs.
(e) Gross-Up Payment. In the event that any payment or benefit
received or to be received by the Executive (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with (A) the Company
or (B) any Person (as defined in Section 4 (e)) whose actions result in a Change
in Control or (C) any Person affiliated with the Company or such Person) (all
such payments and benefits, including the Severance Payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part) by the
Company, an affiliate or Person making such payment or providing such benefit as
a result of Section 280G of the Code, then, the Company shall pay to the
Executive such additional amounts (the "Gross-Up Payment") such that the net
amount retained by the Executive, after deduction of any excise tax imposed
under Section 4999 of the Code (the "Excise Tax") on the Total Payments and any
federal, state and local income and employment taxes and Excise Tax upon the
Gross-Up Payment, shall be equal to the Total Payments. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the date on which the Gross-Up Payment
is calculated for purposes of this Section 5(e), net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes. In the event that the
<PAGE> 10
10
Excise Tax is subsequently determined to be less than the amount taken into
account hereunder, the Executive shall repay to the Company, at the time that
the amount of such reduction in Excise Tax is finally determined, the portion of
the Gross-Up Payment attributable to such reduction (plus that portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income tax imposed on the Gross-Up Payment being repaid by the Executive to the
extent that such repayment results in a reduction in Excise Tax and/or a
federal, state or local income tax deduction) plus interest on the amount of
such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into account
hereunder (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) at the time that the amount of such excess is finally determined. The
Executive and the Company shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Total
Payments.
6. Indemnification. In the event the Executive is made party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against the Executive), by reason of the fact that he is or was performing
services under this Agreement, then the Company shall indemnify the Executive
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement, as actually and reasonably incurred by the Executive in
connection therewith. In the event that both the Executive and the Company are
made a party to the same third-party action, complaint, suit or proceeding, the
Company agrees to engage competent legal representation, and the Executive
agrees to use the same representation, provided that if counsel selected by the
Company shall have a conflict of interest that prevents such counsel from
representing the Executive, the Executive may engage separate counsel and the
Company shall pay all attorneys' fees of such separate counsel. Further, while
the Executive is expected at all times to use his best efforts to faithfully
discharge his duties under this Agreement, the Executive cannot be held liable
to the Company for errors or omissions made in good faith where the Executive
has not exhibited gross, willful and wanton negligence and misconduct or
performed criminal and fraudulent acts which materially damage the business and
the Company.
7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, plan,
program, policy or practice provided by the Company and for which the Executive
may qualify (except with respect to any benefit to which the Executive has
waived his rights in writing), nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other contract or
agreement entered into after the Effective Date with the Company. Amounts which
are vested benefits or which the Executive is otherwise entitled to receive
under any benefit, plan, policy, practice or program of, or any contract or
agreement entered into with, the Company shall be payable in
<PAGE> 11
11
accordance with such benefit, plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
8. Full Settlement; Mitigation. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others, provided that nothing herein shall preclude the Company
from separately pursuing recovery from the Executive based on any such claim. In
no event shall the executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts (including amounts for damages
for breach) payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced whether or not the Executive
obtains other employment.
9. Arbitration. Any dispute or controversy about the validity,
interpretation, effect or alleged violation of this Agreement (an "arbitrable
dispute") must be submitted to confidential arbitration in [GULFPORT,
MISSISSIPPI]. Arbitration shall take place before an experienced employment
arbitrator licensed to practice law in such state and selected in accordance
with the Model Employment Arbitration Procedures of the American Arbitration
Association. Arbitration shall be the exclusive remedy of any arbitrable
dispute. Judgement may be entered on the arbitrator's award in any court having
jurisdiction. The parties hereby agree that the arbitrator shall be empowered to
enter an equitable decree mandating specific enforcement of the terms of this
Agreement. Should any party to this Agreement pursue any arbitrable dispute by
any method other than arbitration, the other party shall be entitled to recover
from the party initiating the use of such method all damages, costs, expenses
and attorneys' fees incurred as a result of the use of such method.
Notwithstanding anything herein to the contrary, nothing in this Agreement shall
purport to waive or in any way limit the right of any party to seek to enforce
any judgment or decision on an arbitrable dispute in a court of competent
jurisdiction.
10. Non-competition Agreement.
(a) The Executive recognizes that the willingness of the
Company to enter into this Agreement is based in material part on the
Executive's agreement to the provisions of this Section 10, and that Executive's
breach of the provisions of this Section 10 could materially damage the Company
and its subsidiaries (the Company and its subsidiaries are hereinafter
collectively referred to as the "Affiliates" and individually as an
"Affiliate"). Therefore, in consideration of the benefits to be received by
Executive as a result of this employment with the Company, Executive agrees that
Executive shall not, for a period of two years immediately following the
Effective Date, for any reason whatsoever, directly or indirectly, for himself
or on behalf of or in conjunction with any other person, persons, company,
partnership, corporation or business of whatever nature:
<PAGE> 12
12
(i) contact any customer of any Affiliate or other
person for the purpose of including or attempting to induce
such customer or other person to cease doing business with any
Affiliate;
(ii) induce or attempt to trade any agent or
employee of any Affiliate to terminate employment with an
Affiliate or to commence work with any competitor of any
Affiliate;
(iii) call on, solicit, attempt to obtain, accept, or
in any way secure business from any of the customers of any
Affiliate, nor, directly or indirectly, aid or assist any
other person, firm or corporation in the solicitation of such
customer; and
(iv) engage, as an officer, director, shareholder,
owner, partner, joint venture, or in a managerial capacity,
whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any business selling
any products or services in direct competition with any
Affiliate in the states of Texas, Louisiana or Mississippi.
(b) Because of the difficulty of measuring economic losses to
the Affiliates as a result of a breach of the foregoing covenant and because of
the immediate and irreparable damage that could be caused to the Affiliates for
which they would have no other adequate remedy, the Executive agrees that the
foregoing covenant may be enforced by the Affiliates, or any of them, in the
event of breach by him, by injunctions and restraining orders without the
necessity of posting any bond or other security therefor.
(c) The covenants in this Section 10 are severable and
separate, and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. Moreover, in the event any court of competent
jurisdiction shall determine that any restrictions set forth in this Section 10
are unreasonable, then it is the intention of the parties that such restrictions
be enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(d) Each of the covenants in this Section 10 shall be
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of the Executive against the
Company or any Affiliate, whether predicated on this Agreement or otherwise
shall not constitute defense to the enforcement by the Company or any Affiliate
of such covenants.
<PAGE> 13
13
11. Confidentiality.
(a) The Executive acknowledges and agrees that all
Confidential Information (as defined below) of the Company and any Affiliate is
confidential and a valuable, special, and unique asset of the Company that gives
the Company an advantage over its actual and potential, current, and future
competitors. The Executive further acknowledges and agrees that the Executive
owes the Company and any Affiliate a fiduciary duty to preserve and the protect
all Confidential Information from unauthorized disclosure or unauthorized use,
certain Confidential Information constitutes "trade secrets" under the laws of
the state of Mississippi; and unauthorized disclosure or unauthorized use of the
Company's or any Affiliate's Confidential Information would irreparably injure
the Company and its Affiliates.
(b) Both during the term of the Executive's employment and
after the termination of the Executive's employment for any reason (including
wrongful termination), the Executive shall hold all Confidential Information in
strict confidence, and shall not use any Confidential Information except for the
benefit of the Company, in accordance with the duties assigned to the Executive.
The Executive shall not at any time (either during or after the term of the
Executive's employment), disclose any Confidential Information to any person or
entity (except other employees of the Company who have a need to know the
information in connection with the performance of their employment duties), or
copy, reproduce, modify, decompile, or reverse engineer any Confidential
Information, or remove any Confidential Information from the Company's premises,
without the prior written consent of the Board of Directors of the Company or
permit any other person to do so, except as may otherwise be required by law or
legal process. The Executive shall take reasonable precautions to protect the
physical security of all documents and other material containing Confidential
Information (regardless of the medium on which the Confidential Information is
stored). This Agreement applies to all Confidential Information, whether now
known or later to become known to the Executive.
(c) Upon the termination of the Executive's employment with
the Company for any reason, and upon request of the Company at any other time,
the Executive shall promptly surrender and deliver to the Company all documents
and other written material regardless of the form or medium of any nature
containing or pertaining to any Confidential Information and shall not retain
any such document or other material. Within five days of any such request, the
Executive shall certify to the Company in writing that all such materials have
been returned.
(d) As used in this Agreement, the term "Confidential
Information" shall mean any information or material known to or used by or for
the Company or any Affiliate (whether or not owned or developed by the Company
or any Affiliate and whether or not developed by the Executive) that is not
generally known to the public. Confidential Information includes, without
limitation, the following: all trade secrets of the Company or any Affiliate;
all information that the Company or any Affiliate has marked as confidential or
has otherwise described to the Executive (either in writing or orally) as
confidential; all non-public information concerning the Company's or any
Affiliate's products, services, prospective products or services, research,
product designs, prices, discounts, costs, marketing plans, marketing
techniques, market
<PAGE> 14
14
studies test data, customers, customer lists and records, suppliers and
contracts; all Company and Affiliate business records and plans; all Company and
Affiliate personnel files; all financial information of or concerning the
Company or any Affiliate; all information relating to operating system software,
applications software, software and system methodology, hardware platforms,
technical information, inventions, computer programs and listings, source codes,
object codes, copyrights, patents, trademarks, service marks, and other
intellectual property; all technical specifications; any proprietary information
belonging to the Company or any Affiliate; all computer hardware or software
manuals; all training or instruction manuals; all data and all computer system
passwords and user codes.
12. Cooperation of the Executive. During and after the Executive's
employment with the Company, the Executive shall reasonably cooperate with the
Company in the defense or prosecution of any claims or actions now in existence
or which may be brought in the future against or on behalf of the Company and in
connection with any investigation or review of any federal, state or local
regulatory authority as any such investigation or review relates to events or
occurrences that transpired while the Executive was employed by the Company. The
Company shall reimburse the Executive for all reasonable costs and expenses
incurred in connection with his performance under this Section 12, including,
without limitation, all reasonable attorneys' fees and costs.
13. Legal Fees. Subject to Section 9 and Section 12, the Company shall
pay to the Executive all legal fees and expenses (including, without limitation,
fees and expenses in connection with any arbitration) incurred by the Executive
in disputing in good faith any issue arising under this Agreement relating to
the Termination of the Executive's employment or in seeking in good faith to
obtain or enforce any benefit or right provided by this Agreement.
Notwithstanding the foregoing, in the event that any arbitrator or court
determines that the legal fees incurred by the Executive are not payable by the
Company, the Company shall not be obligated with respect thereto.
14. Successors.
(a) Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Company shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representative.
(b) Successors and Assigns of Company. This Agreement shall
inure to the benefit of and be binding upon the Company, its successors and
assigns.
(c) Assumption. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement
<PAGE> 15
15
in the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its businesses and/or assets as aforesaid that assumes and agrees to perform
this Agreement by operation of law or otherwise.
15. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Mississippi, without
reference to its principles of conflict of laws. The captions of this Agreement
are not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended, modified, repealed, modified, waived, extended or
discharged, except by an agreement in writing signed by the party against whom
enforcement of such amendment, modification, repeal, waiver, extension or
discharge is being sought. No person, other than pursuant to a resolution of the
Board or a committee thereof, shall have authority on behalf of the Company to
agree to amend, modify, repeal, waive, extend or discharge any provision of this
Agreement or anything in reference thereto.
(b) Notices. All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed, in either case, to the Company's headquarters or to such other
address as either party shall have furnished to the other in writing in
accordance herewith. Notices and communications shall be effective when actually
received by the addressee.
(c) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(d) Taxes. The Company may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) No Waiver. The Executive's or the Company's failure to
insist upon strict compliance with any provision hereof or any other provision
of this Agreement or the failure to assert any right that the Executive or the
Company may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason pursuant to Section 4 of this
Agreement, or the right of the Company to terminate the Executive's employment
for Cause pursuant to Section 4 of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) Entire Agreement. This instrument contains the entire
agreement of the Executive, the Company or any predecessor or subsidiary
thereof, with respect to the subject matter hereof, and all promises,
representations, understandings, arrangements and prior agreements are merged
herein and superseded hereby including, without limitation, the Original
Agreement.
* * * * *
<PAGE> 16
16
IN WITNESS WHEREOF, the Executive and, pursuant to due
authorization from its Board of Directors, the Company have caused this
Agreement to be executed as of the day and year first above written.
FRIEDE GOLDMAN INTERNATIONAL INC.
By: /s/ J. L. Holloway
---------------------------------
Name: J. L. Holloway
Title: President
EXECUTIVE
/s/ John F. Alford
------------------------------------
John F. Alford
<PAGE> 17
EXHIBIT A
For purposes of this Agreement, a "Change in Control" shall
mean the occurrence of any of the following events from and after the Effective
Date:
(i) Any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such Person
any securities acquired directly from the Company or its
affiliates other than in connection with the acquisition by
the Company or its affiliates of a business) representing
twenty percent (20%) or more of the combined voting power of
the Company's then outstanding securities; or
(ii) The following individuals cease for any reason
to constitute a majority of the number of directors then
serving: individuals who, on the Effective Date, constitute
the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual
or threatened election contest, including, without limitation,
a consent solicitation, relating to the election of directors
of the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders was
approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors on the Effective Date or whose appointment, election
or nomination for election was previously so approved or
recommended; or
(iii) There is consummated a merger or consolidation
of the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of
the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), in combination
with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or
any subsidiary of the Company, at least sixty percent (60%) of
the combined voting power of the securities of the Company or
such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (B) a
merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person is or becomes the beneficial owner, directly
or indirectly, of securities of the Company (not including in
the securities beneficially owned by such Person any
securities acquired directly from the Company or its
affiliates other than in connection with the acquisition by
the Company or its affiliates of a business) representing
twenty percent (20%) or more of the combined voting power of
the Company's then outstanding securities; or
<PAGE> 18
A-2
(iv) The shareholders of the Company approve a plan
of complete liquidation or dissolution of the Company or there
is consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least sixty percent (60%) of the combined voting power of the
voting securities of which are owned by shareholders of the
Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale.
"Person" shall have the meaning given in Section 3(a)(9) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
modified and used in Sections 13(d) and 14(d) thereof, except that such term
shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or any of its affiliates, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, (iv) a corporation owned, directly
or indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of stock of the Company, or (v) a person or group
as used in Rule 13d-l(b) under the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
Notwithstanding the foregoing, any event or transaction which
would otherwise constitute a Change in Control (a "Transaction") shall not
constitute a Change in Control for purposes of this Agreement if, in connection
with the Transaction, the Executive participates as an equity investor in the
acquiring entity or any of its affiliates (the "Acquiror"). For purposes of the
preceding sentence, the Executive shall not be deemed to have participated as an
equity investor in the Acquiror by virtue of (i) obtaining beneficial ownership
of any equity interest in the Acquiror as a result of the grant to the Executive
of an incentive compensation award under one or more incentive plans of the
Acquiror (including, without limitation, the conversion in connection with the
Transaction of incentive compensation awards of the Company into incentive
compensation awards of the Acquiror), on terms and conditions substantially
equivalent to those applicable to other executives of the Company immediately
prior to the Transaction, after taking into account normal differences
attributable to job responsibilities, title and the like, (ii) obtaining
beneficial ownership of any equity interest in the Acquiror on terms and
conditions substantially equivalent to those obtained in the Transaction by all
other shareholders of the Company, or (iii) obtaining beneficial ownership of
any equity interest in the Acquiror in a manner unrelated to a Transaction.
NOTWITHSTANDING THE FOREGOING, THE SALE OF SHARES OF THE COMPANY'S
COMMON STOCK BY J. L. HOLLOWAY IN ACCORDANCE WITH THE STOCKHOLDER'S AGREEMENT BY
AND BETWEEN THE COMPANY AND J. L. HOLLOWAY, DATED JUNE 1, 1999, SHALL NOT
CONSTITUTE A CHANGE IN CONTROL FOR PURPOSES OF THIS AGREEMENT; PROVIDED SUCH
SHARES ARE NOT SOLD IN A TRANSACTION OR A SERIES OF TRANSACTIONS DESCRIBED IN
SUBSECTIONS (A) OR (C) ABOVE.
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") made and entered into
as of June 1, 1999, by and between FRIEDE GOLDMAN INTERNATIONAL INC. (the
"Company"), a Mississippi corporation, and RICK S. REES (the "Executive");
WHEREAS, the Executive is currently serving as Executive Vice
President and Chief Financial Officer of HALTER MARINE GROUP, INC., a Delaware
corporation ("Halter Marine");
WHEREAS, pursuant to the Agreement and Plan of Merger (the
"Merger Agreement"), dated as of June 1, 1999, between Halter Marine and the
Company, the parties thereto have agreed to merge Halter Marine with and into
the Company (the "Merger") pursuant to the terms thereof;
WHEREAS, the Company desires to secure the continued
employment of the Executive in accordance herewith and the Executive is willing
to commit himself to be employed by the Company on the terms and conditions
herein set forth and thus to forego opportunities elsewhere; and
WHEREAS, the parties desire to enter into this Agreement, as
of the Effective Date (as defined below), setting forth the terms and conditions
for the employment relationship of the Executive with the Company during the
Employment Period (as defined below);
NOW, THEREFORE, IN CONSIDERATION of the mutual premises,
covenants and agreements set forth below, it is hereby agreed as follows:
1. Employment and Term.
(a) Employment. The Company agrees to employ the Executive,
and the Executive agrees to be employed by the Company, in accordance with the
terms and provisions of this Agreement during the Employment Period (as defined
below).
(b) Term. The term of the Executive's employment under this
Agreement shall commence (the "Effective Date") as of the Effective Time of the
Merger as defined in the Merger Agreement, and shall continue until the third
anniversary of the Effective Date (such term being referred to hereinafter as
the "Employment Period"); provided, however, that commencing on the second
anniversary of the Effective Date (and each anniversary of the Effective Date
thereafter) the Employment Period shall automatically be extended for one
additional year, unless, at least 90 days prior to such date, the Company or the
Executive shall give written notice to the other party that it or he, as the
case may be, does not wish to so extend this Agreement.
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Notwithstanding the foregoing, in the event that the Merger Agreement is
terminated, this Agreement shall be deemed canceled and of no force or effect
and the Executive shall continue to be subject to such agreements and
arrangements that were in effect on the date hereof, including, without
limitation, the Executive Severance Agreement dated April 28, 1998, between the
Executive and Halter Marine.
2. Duties and Powers of Executive.
(a) Position. During the Employment Period, the Executive
shall serve as an Executive Vice President and the Chief Financial Officer of
the Company with such authority, duties and responsibilities with respect to
such position as set forth in subsection (b) hereof.
(b) Duties. The Executive shall perform such reasonable duties
as may be delineated in the Company's By-laws, as the same may be amended from
time to time, which shall include, but not be limited to, the responsibility for
the financial management of the Company. In such capacity, the Executive shall
report directly to John Dane III.
(c) Attention. Except as provided below, during the Employment
Period, and excluding any periods of vacation and sick leave to which the
Executive is entitled, the Executive shall devote full attention and time during
normal business hours to the business and affairs of the Company and, to the
extent necessary to discharge the responsibilities assigned to the Executive
under this Agreement, use the Executive's best efforts to carry out such
responsibilities faithfully and efficiently. It shall not be considered a
violation of the foregoing for the Executive to serve on corporate, industry,
civic or charitable boards or committees, as long as such activities do not
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement.
3. Compensation.
(a) Base Salary. During the Employment Period, the Executive's
annual base salary ("Annual Base Salary") shall be payable in accordance with
the Company's general payroll practices. The Executive's Annual Base Salary
shall be at least $300,000. The Executive's Annual Base Salary (as increased
from time to time) may not be decreased during the Employment Period. Any
increase in Annual Base Salary shall not serve to limit or reduce any other
obligation of the Company under this Agreement.
(b) Annual Bonus. During the Employment Period, the Executive
shall participate in the Company's annual bonus plans and shall be awarded
bonuses thereunder that provide him, on a year-by-year basis, an annual bonus
(the "Annual Bonus"). The Company's annual bonus plans shall, as necessary, be
amended to provide that Executive may earn an Annual Bonus of up to 1-1/2 times
his Annual Base Salary; provided, however, that Executive's
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Annual Bonus shall be at least equal to the highest annual bonus granted to any
other executive of the Company for such year, other than J. L. Holloway and John
Dane III .
(c) Equity Compensation. During the Employment Period, the
Executive shall participate in the Company's equity compensation plans (the
"Incentive Compensation Plans") and will be granted awards thereunder providing
him, on a year-by-year basis, long-term incentive compensation (the "Incentive
Compensation Awards") at least equal to the highest amount of Incentive
Compensation Awards granted to any other officer or employee of the Company for
such year (other than John Dane III and J. L. Holloway), with the exception of
new hires. In addition to the annual Incentive Compensation Awards described
above, on the Effective Date, the Executive shall receive a grant of an option
to purchase 500,000 shares of the Company's common stock, at an exercise price
equal to the closing price of the Company's common stock on the Effective Date.
Options to purchase 175,000 of such shares shall be immediately exercisable.
Subject to the further provisions of this Agreement, the options to purchase the
remaining 325,000 shares shall vest ratably over the next three years on each
successive anniversary of the Effective Date.
(d) Halter Marine Options. All of the Executive's outstanding
options to purchase shares of Halter Marine common stock, shall be subject to
the terms and conditions of the Halter Marine 1996 Stock Option and Incentive
Plan.
(e) Retirement and Welfare Benefit Plans. During the
Employment Period, the Executive shall be eligible to participate in all
savings, retirement and welfare plans, practices, policies and programs
applicable generally to employees and/or senior executive officers of the
Company.
(f) Deferred Compensation. During the Employment Period, the
Executive shall continue to be credited with an amount equal to 10% of his
Annual Base Salary and Annual Bonus which shall be contributed to a
non-qualified deferred compensation plan of the Company. In addition, as of the
Effective Date, all of the compensation previously deferred by the Executive
under the deferred compensation program of Halter Marine shall become vested and
any restrictions thereon shall lapse, and the restrictions on all bonuses
deferred under the annual bonus plans of Halter Marine, whether payable in cash
or stock, shall lapse and such amounts shall be paid to the Executive not later
than 15 days after the Effective Date.
(g) Expenses. The Company shall reimburse the Executive for
all expenses, including those for travel and entertainment, properly incurred by
him in the performance of his duties hereunder in accordance with policies
established from time to time by the Company.
(h) Fringe Benefits and Perquisites. During the Employment
Period, the Executive shall be entitled to receive fringe benefits and
perquisites in accordance with the plans, practices, programs and policies of
the Company from time to time in effect, commensurate with
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his position, as well as the continuation of those certain executive perquisites
provided by Halter Marine which are set forth on Exhibit A hereto.
4. Termination of Employment.
(a) Death or Disability. The Executive's employment shall
terminate upon the Executive's death or, at the election of the Board of
Directors of the Company ("Board") or the Executive, by reason of Disability (as
defined below) during the Employment Period; provided, however, that the Board
may not terminate the Executive's employment hereunder by reason of Disability
unless at the time of such termination there is no reasonable expectation that
the Executive will return to work within the next one hundred eighty (180) day
period. For purposes of this Agreement, disability ("Disability") shall have the
same meaning as set forth in the Halter Marine long-term disability plan or its
successor.
(b) By the Company for Cause. The Company may terminate the
Executive's employment during the Employment Period for Cause (as defined
below). For purposes of this Agreement, "Cause" shall mean (i) the Executive's
gross negligence in the performance or intentional nonperformance (continuing
for ten days after receipt of written notice of need to cure) of any of the
Executive's material duties hereunder (other than such failure resulting from
the Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 4(d)) or (ii) the Executive's
commission of one or more acts of moral turpitude that constitutes a felony,
which have or result in an adverse effect on the Company, monetarily or
otherwise or one or more significant acts of dishonesty, fraud or misconduct
with respect to the business or affairs of the Company which materially and
adversely affects the operations or reputation of the Company. The determination
of whether Cause exists must be made by a resolution that is passed upon the
affirmative vote of at least two-thirds (2/3) of the membership of the Board.
(c) By the Company without Cause. Notwithstanding any other
provision of this Agreement, the Company may terminate the Executive's
employment other than by a termination for Cause during the Employment Period,
but only upon the affirmative vote of at least one-half (1/2) of the membership
of the Board.
(d) By the Executive for Good Reason. The Executive may
terminate his employment during the Employment Period for Good Reason (as
defined below). For purposes of this Agreement, "Good Reason" shall mean the
occurrence without the written consent of the Executive of any one of the
following acts by the Company, or failures by the Company to act, unless such
act or failure to act is corrected prior to the Date of Termination (as defined
below) specified in the Notice of Termination (as defined below) given in
respect thereof:
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(i) an adverse change in the Executive's title, authority,
duties, responsibilities or reporting lines as specified in Sections
2(a) and 2(b) of this Agreement;
(ii) a reduction by the Company in the Executive's Annual
Base Salary below the amounts set forth in Section 3(a) above or any
action by the Company that reduces the Executive's Annual Bonus
opportunity below the amounts set forth in Section 3(b) above;
(iii) any failure by the Company to continue in effect any
benefit plan or arrangement (including, without limitation, the
Company's tax-qualified and supplemental retirement plans, deferred
compensation plans, group life insurance plan, and medical, dental,
accident and disability plans or any other plans providing the
Executive with similar benefits (herein referred to as "Benefit
Plans")) without replacing such Benefit Plan with a plan providing for
substantially similar benefits or the taking of any action by the
Company that would adversely affect the Executive's participation in
any Benefit Plan or deprive the Executive of any material fringe
benefit enjoyed by the Executive;
(iv) any failure by the Company to continue in effect any
incentive plan or arrangement, as amended and supplemented, in which
the Executive is participating from time to time without replacing such
incentive plan with a plan providing for substantially similar
benefits, or the taking of any action by the Company that would
adversely affect the Executive's opportunity to participate in any such
plan or reduce the Executive's ability to obtain benefits under any
such plan, expressed as a percentage of Annual Base Salary, in any
fiscal year as compared to the immediately preceding fiscal year;
(v) any failure by the Company to continue in effect any
plan or arrangement to receive securities of the Company without
replacing such plan with a plan providing for substantially similar
benefits or the taking of any action by the Company that would
adversely affect the Executive's opportunity to participate in or
materially reduce the Executive's ability to obtain benefits under any
such plan;
(vi) any failure by the Company to provide the Executive with
the number of paid vacation days to which he is entitled under either
the Company's vacation policies as in effect from time to time or as
specified in Exhibit A hereto;
(vii) the relocation of the Company's principal executive
offices to a location outside of Gulfport, Mississippi, unless the
Company's principal executive offices are relocated outside of
Gulfport, Mississippi for a valid business reason. In the event the
Company's principal executive offices are so relocated, the Company
will, at the option of the Executive, either (A) provide an apartment
for the Executive in the new location and will reimburse the Executive
for his reasonable costs in commuting from Gulfport, Mississippi to
such new location or (B) allow the Executive to work out of the
Company's
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New Orleans, Louisiana offices. If the Company does not provide the
Executive with such option, any such relocation shall constitute Good
Reason;
(viii) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation and benefits or to pay
to the Executive any portion of an installment of deferred compensation
under any deferred compensation program of the Company within thirty
(30) days of the date such compensation is due;
(ix) a substantial increase in the Executive's business
travel obligations or an adverse change in the Executive's manner of
travel as of the Effective Date;
(x) any failure by the Company to continue the means of
transportation provided to the Executive by Halter Marine for purposes
of commuting between his residence and the Company's principal
executive offices in Gulfport, Mississippi;
(xi) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 4(f); for purposes of this Agreement, no such
purported termination shall be effective;
(xii) the failure of the Company to obtain a satisfactory
agreement from any successor of the Company requiring such successor to
assume and agree to perform the Company's obligations under this
Agreement, as contemplated in Section 14; or
(xiii) the failure by the Company to comply with any material
provision of this Agreement.
(e) Determination of Good Reason Upon a Change in Control.
Following a Change in Control (as defined in Exhibit B hereto), the Executive's
determination that an act or failure to act constitutes Good Reason shall be
presumed to be valid unless such determination is deemed to be unreasonable by
an arbitrator. The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to physical
or mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(f) Notice of Termination. During the Employment Period, any
purported termination of the Executive's employment (other than by reason of
death) shall be communicated by written Notice of Termination from one party
hereto to the other party hereto in accordance with Section 15(b). For purposes
of this Agreement, a "Notice of Termination" shall mean a notice that shall
indicate the specific termination provision in this Agreement relied upon, if
any, and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly
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adopted by the affirmative vote of not less than two-thirds (2/3) of the entire
membership of the Board at a meeting of the Board that was called and held no
more than ninety (90) days after the date the Board had knowledge of the most
recent act or omission giving rise to such breach for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board and, if possible, to cure the breach that was the basis for the Notice of
Termination for Cause) finding that, in the good faith opinion of the Board, the
Executive was guilty of conduct set forth in clause (i) or (ii) of the
definition of Cause, and specifying the particulars thereof in detail. Unless
the Board determines otherwise, a Notice of Termination by the Executive
alleging a termination for Good Reason must be made within thirty (30) days of
the act or failure to act that the Executive alleges to constitute Good Reason.
(g) Date of Termination. "Date of Termination" with respect to
any purported termination of the Executive's employment during the Employment
Period, shall mean the date specified in the Notice of Termination (which, in
the case of a termination by the Company, for reasons other than Cause, shall
not be less than thirty days and, in the case of a termination by the Executive,
shall not be less than thirty (30) days nor more than sixty (60) days, from the
date such Notice of Termination is given).
5. Obligations of the Company Upon Termination.
(a) Termination other than for Cause, Death or Disability.
During the Employment Period, if the Company shall terminate the Executive's
employment (other than for Cause, death or Disability) or the Executive shall
terminate his employment for Good Reason (termination in any such case being
referred to as "Termination") the Company shall pay to the Executive the
amounts, and provide the Executive with the benefits, described in this Section
5 (hereinafter referred to as the "Severance Payments"). The amounts specified
in this Section 5(a) shall be paid within thirty (30) days after the Date of
Termination. Such payments shall be in addition to those rights and benefits to
which the Executive may be entitled under the relevant Company employee benefit
plans or programs.
(i) Lump Sum Payment. The Company shall pay to the Executive a
lump sum cash payment of $750,000.00. Furthermore, if at the Date of
Termination the fair market value (as defined below) of the stock
option granted to the Executive pursuant to Section 3(c) of this
Agreement is less than $2,500,000.00, then the Company shall pay to the
Executive an additional lump sum cash payment, not to exceed
$750,000.00, in an amount equal to the excess of $2,500,000.00 over the
fair market value of the stock option granted to the Executive pursuant
to Section 3(c). Solely for the purposes of computing this additional
cash payment, it shall be assumed that (A) the Executive still owns and
has not yet exercised the option to purchase 500,000 shares of the
Company's common stock granted pursuant to Section 3(c) and (B) the
fair market value of the stock option is equal to the excess, if any,
of the closing price of the Company's common stock
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on the Date of Termination as such price is reported by the exchange
upon which the Company's common stock is then traded over the exercise
price of the stock option as determined pursuant to Section 3(c) of
this Agreement.
(ii) Accrued Obligations. The Company shall pay the Executive
a lump sum amount in cash equal to the sum of (A) the Executive's
Annual Base Salary through the Date of Termination to the extent not
theretofore paid, (B) an amount equal to any Annual Bonus earned with
respect to fiscal years ended prior to the year that includes the Date
of Termination to the extent not theretofore paid and (C) an amount
equal to the target amount payable under any Annual Bonus for the
fiscal year that includes the Date of Termination or, if greater, the
average of the three years' highest gross bonus awards, not necessarily
consecutive, paid by the Company (or Halter Marine) to the Executive in
the five years preceding the year of Termination multiplied by a
fraction the numerator of which shall be the number of days from the
beginning of such fiscal year to and including the Date of Termination
and the denominator of which shall be 365, in each case to the extent
not theretofore paid. (The amounts specified in clauses (A), (B) and
(C) shall be hereinafter referred to as the "Accrued Obligations.")
(iii) Deferred Compensation. The Company shall vest or provide
for the lapse of all restrictions on any compensation previously
deferred by the Executive and shall pay the Executive a lump sum
payment in an amount equal to any compensation previously deferred by
the Executive (together with any accrued interest or earnings thereon).
(iv) Accelerated Vesting and Payment of Long-Term Incentive
Awards. All equity-based Incentive Compensation Awards held by the
Executive under any Incentive Compensation Plan maintained by the
Company or any affiliate and all of the Executive's options, whether
granted hereunder or otherwise, shall immediately vest and become
exercisable as of the Date of Termination. In addition, all of the
Executive's options shall remain outstanding and exercisable until the
expiration of the original term of such option. Moreover, the
restrictions on the transfer of the underlying shares of such options
described in the fifth sentence of Section 3(c) shall lapse.
(v) Continuation of Welfare Benefits. For three years
following the Date of Termination, the Company shall provide or arrange
to provide the Executive and his dependants with life, disability,
accident and health insurance benefits substantially similar to those
provided to similarly situated senior executive officers of the Company
during such period, with the Executive charged a monthly premium(s) for
such coverage(s) that does not exceed the premium(s) charged to a
similarly situated senior executive officers of the Company for such
coverage(s); provided, however, the Executive must elect continuation
coverage under such group health plans in accordance with COBRA,
effective as of the Date of Termination; provided, further, benefits
otherwise receivable by the Executive pursuant to this Section 5(a)(v)
shall be reduced to
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the extent other comparable benefits are actually received by the
Executive and his dependants during the three-year period following the
Date of Termination, and any such benefits actually received by the
Executive or his dependants shall be reported to the Company.
(b) Failure of the Company to Renew the Agreement. Subject to
the provisions of Section 7 of this Agreement, in the event that the Company
notifies the Executive that it does not intent to extend the Employment Period,
as contemplated in Section 1(b), the Executive shall be entitled to receive all
of the Severance Payments described in Section 5(a) above, except that the
period of continuation of welfare benefits in Section 5(a)(v) shall be for two
years instead of three. Such payments shall be in addition to those rights and
benefits to which the Executive may be entitled under the relevant Company
employee benefit plans or programs.
(c) Termination by the Company for Cause or by the Executive
Other than for Good Reason. Subject to the provisions of Section 7 of this
Agreement, if the Executive's employment shall be terminated for Cause during
the Employment Period, or if the Executive terminates employment during the
Employment Period other than for Good Reason, the Company shall have no further
obligations to the Executive under this Agreement other than the Accrued
Obligations and deferred compensation and such rights and benefits to which the
Executive may be entitled under the relevant Company employee benefit plans or
programs. The Company hereby agrees to provide the Executive with an additional
180-day period following the Date of Termination in which to exercise any
options that were vested as of his Date of Termination. Such 180-day period
shall be extended by a number of days equal to the number of days in any
"blackout" periods, if any, imposed by the Company during which such options are
unexercisable.
(d) Termination due to Death and Disability. If the
Executive's employment shall terminate by reason of death or Disability, the
Company shall pay the Executive or his estate, as the case may be, the Accrued
Obligations and deferred compensation. Such payments shall be in addition to
those rights and benefits to which the Executive or his estate may be entitled
under the relevant Company employee benefit plans or programs.
(e) Gross-Up Payment. In the event that any payment or benefit
received or to be received by the Executive (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with (A) the Company
or (B) any Person (as defined in Section 4 (e)) whose actions result in a Change
in Control or (C) any Person affiliated with the Company or such Person) (all
such payments and benefits, including the Severance Payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part) by the
Company, an affiliate or Person making such payment or providing such benefit as
a result of Section 280G of the Code, then, the Company shall pay to the
Executive such additional amounts (the "Gross-Up Payment") such that the net
amount retained by the Executive, after deduction of
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any excise tax imposed under Section 4999 of the Code (the "Excise Tax") on the
Total Payments and any federal, state and local income and employment taxes and
Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For
purposes of determining the amount of the Gross-Up Payment, the Executive shall
be deemed to pay federal income tax at the highest marginal rate of federal
income taxation in the calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Executive's residence on the date on which the
Gross-Up Payment is calculated for purposes of this Section 5(e), net of the
maximum reduction in federal income taxes which could be obtained from deduction
of such state and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account hereunder, the
Executive shall repay to the Company, at the time that the amount of such
reduction in Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income tax
imposed on the Gross-Up Payment being repaid by the Executive to the extent that
such repayment results in a reduction in Excise Tax and/or a federal, state or
local income tax deduction) plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise
Tax is determined to exceed the amount taken into account hereunder (including
by reason of any payment the existence or amount of which cannot be determined
at the time of the Gross-Up Payment), the Company shall make an additional
Gross-Up Payment in respect of such excess (plus any interest, penalties or
additions payable by the Executive with respect to such excess) at the time that
the amount of such excess is finally determined. The Executive and the Company
shall each reasonably cooperate with the other in connection with any
administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Total Payments.
6. Indemnification. In the event the Executive is made party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against the Executive), by reason of the fact that he is or was performing
services under this Agreement, then the Company shall indemnify the Executive
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement, as actually and reasonably incurred by the Executive in
connection therewith. In the event that both the Executive and the Company are
made a party to the same third-party action, complaint, suit or proceeding, the
Company agrees to engage competent legal representation, and the Executive
agrees to use the same representation, provided that if counsel selected by the
Company shall have a conflict of interest that prevents such counsel from
representing the Executive, the Executive may engage separate counsel and the
Company shall pay all attorneys' fees of such separate counsel. Further, while
the Executive is expected at all times to use his best efforts to faithfully
discharge his duties under this Agreement, the Executive cannot be held liable
to the Company for errors or omissions made in good faith where the Executive
has not exhibited gross, willful and wanton negligence and misconduct or
performed criminal and fraudulent acts which materially damage the business and
the Company.
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7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, plan,
program, policy or practice provided by the Company and for which the Executive
may qualify (except with respect to any benefit to which the Executive has
waived his rights in writing), nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other contract or
agreement entered into after the Effective Date with the Company. Amounts which
are vested benefits or which the Executive is otherwise entitled to receive
under any benefit, plan, policy, practice or program of, or any contract or
agreement entered into with, the Company shall be payable in accordance with
such benefit, plan, policy, practice or program or contract or agreement except
as explicitly modified by this Agreement.
8. Full Settlement; Mitigation. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others, provided that nothing herein shall preclude the Company
from separately pursuing recovery from the Executive based on any such claim. In
no event shall the executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts (including amounts for damages
for breach) payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced whether or not the Executive
obtains other employment.
9. Arbitration. Any dispute or controversy about the validity,
interpretation, effect or alleged violation of this Agreement (an "arbitrable
dispute") must be submitted to confidential arbitration in Gulfport,
Mississippi. Arbitration shall take place before an experienced employment
arbitrator licensed to practice law in such state and selected in accordance
with the Model Employment Arbitration Procedures of the American Arbitration
Association. Arbitration shall be the exclusive remedy of any arbitrable
dispute. Judgement may be entered on the arbitrator's award in any court having
jurisdiction. The parties hereby agree that the arbitrator shall be empowered to
enter an equitable decree mandating specific enforcement of the terms of this
Agreement. Should any party to this Agreement pursue any arbitrable dispute by
any method other than arbitration, the other party shall be entitled to recover
from the party initiating the use of such method all damages, costs, expenses
and attorneys' fees incurred as a result of the use of such method.
Notwithstanding anything herein to the contrary, nothing in this Agreement shall
purport to waive or in any way limit the right of any party to seek to enforce
any judgment or decision on an arbitrable dispute in a court of competent
jurisdiction.
10. Non-competition Agreement.
(a) The Executive recognizes that the willingness of the
Company to enter into this Agreement is based in material part on the
Executive's agreement to the provisions of this Section 10, and that Executive's
breach of the provisions of this Section 10 could materially damage the Company
and its subsidiaries (the Company and its subsidiaries are hereinafter
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collectively referred to as the "Affiliates" and individually as an
"Affiliate"). Therefore, in consideration of the benefits to be received by
Executive as a result of this employment with the Company, Executive agrees that
Executive shall not, for a period of two years immediately following the
Effective Date, for any reason whatsoever, directly or indirectly, for himself
or on behalf of or in conjunction with any other person, persons, company,
partnership, corporation or business of whatever nature:
(i) contact any customer of any Affiliate or other
person for the purpose of including or attempting to induce
such customer or other person to cease doing business with any
Affiliate;
(ii) induce or attempt to trade any agent or
employee of any Affiliate to terminate employment with an
Affiliate or to commence work with any competitor of any
Affiliate;
(iii) call on, solicit, attempt to obtain, accept, or
in any way secure business from any of the customers of any
Affiliate, nor, directly or indirectly, aid or assist any
other person, firm or corporation in the solicitation of such
customer; and
(iv) engage, as an officer, director, shareholder,
owner, partner, joint venture, or in a managerial capacity,
whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any business selling
any products or services in direct competition with any
Affiliate in the states of Texas, Louisiana or Mississippi.
(b) Because of the difficulty of measuring economic losses to
the Affiliates as a result of a breach of the foregoing covenant and because of
the immediate and irreparable damage that could be caused to the Affiliates for
which they would have no other adequate remedy, the Executive agrees that the
foregoing covenant may be enforced by the Affiliates, or any of them, in the
event of breach by him, by injunctions and restraining orders without the
necessity of posting any bond or other security therefor.
(c) The covenants in this Section 10 are severable and
separate, and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. Moreover, in the event any court of competent
jurisdiction shall determine that any restrictions set forth in this Section 10
are unreasonable, then it is the intention of the parties that such restrictions
be enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(d) Each of the covenants in this Section 10 shall be
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim
<PAGE> 13
13
or cause of action of the Executive against the Company or any Affiliate,
whether predicated on this Agreement or otherwise shall not constitute defense
to the enforcement by the Company or any Affiliate of such covenants.
11. Confidentiality.
(a) The Executive acknowledges and agrees that all
Confidential Information (as defined below) of the Company and any Affiliate is
confidential and a valuable, special, and unique asset of the Company that gives
the Company an advantage over its actual and potential, current, and future
competitors. The Executive further acknowledges and agrees that the Executive
owes the Company and any Affiliate a fiduciary duty to preserve and the protect
all Confidential Information from unauthorized disclosure or unauthorized use,
certain Confidential Information constitutes "trade secrets" under the laws of
the state of Mississippi; and unauthorized disclosure or unauthorized use of the
Company's or any Affiliate's Confidential Information would irreparably injure
the Company and its Affiliates.
(b) Both during the term of the Executive's employment and
after the termination of the Executive's employment for any reason (including
wrongful termination), the Executive shall hold all Confidential Information in
strict confidence, and shall not use any Confidential Information except for the
benefit of the Company, in accordance with the duties assigned to the Executive.
The Executive shall not at any time (either during or after the term of the
Executive's employment), disclose any Confidential Information to any person or
entity (except other employees of the Company who have a need to know the
information in connection with the performance of their employment duties), or
copy, reproduce, modify, decompile, or reverse engineer any Confidential
Information, or remove any Confidential Information from the Company's premises,
without the prior written consent of the Board of Directors of the Company or
permit any other person to do so, except as may otherwise be required by law or
legal process. The Executive shall take reasonable precautions to protect the
physical security of all documents and other material containing Confidential
Information (regardless of the medium on which the Confidential Information is
stored). This Agreement applies to all Confidential Information, whether now
known or later to become known to the Executive.
(c) Upon the termination of the Executive's employment with
the Company for any reason, and upon request of the Company at any other time,
the Executive shall promptly surrender and deliver to the Company all documents
and other written material regardless of the form or medium of any nature
containing or pertaining to any Confidential Information and shall not retain
any such document or other material. Within five days of any such request, the
Executive shall certify to the Company in writing that all such materials have
been returned.
(d) As used in this Agreement, the term "Confidential
Information" shall mean any information or material known to or used by or for
the Company or any Affiliate (whether or not owned or developed by the Company
or any Affiliate and whether or not
<PAGE> 14
14
developed by the Executive) that is not generally known to the public.
Confidential Information includes, without limitation, the following: all trade
secrets of the Company or any Affiliate; all information that the Company or any
Affiliate has marked as confidential or has otherwise described to the Executive
(either in writing or orally) as confidential; all non-public information
concerning the Company's or any Affiliate's products, services, prospective
products or services, research, product designs, prices, discounts, costs,
marketing plans, marketing techniques, market studies test data, customers,
customer lists and records, suppliers and contracts; all Company and Affiliate
business records and plans; all Company and Affiliate personnel files; all
financial information of or concerning the Company or any Affiliate; all
information relating to operating system software, applications software,
software and system methodology, hardware platforms, technical information,
inventions, computer programs and listings, source codes, object codes,
copyrights, patents, trademarks, service marks, and other intellectual property;
all technical specifications; any proprietary information belonging to the
Company or any Affiliate; all computer hardware or software manuals; all
training or instruction manuals; all data and all computer system passwords and
user codes.
12. Cooperation of the Executive. During and after the Executive's
employment with the Company, the Executive shall reasonably cooperate with the
Company in the defense or prosecution of any claims or actions now in existence
or which may be brought in the future against or on behalf of the Company and in
connection with any investigation or review of any federal, state or local
regulatory authority as any such investigation or review relates to events or
occurrences that transpired while the Executive was employed by the Company or
Halter Marine. The Company shall reimburse the Executive for all reasonable
costs and expenses incurred in connection with his performance under this
Section 12, including, without limitation, all reasonable attorneys' fees and
costs.
13. Legal Fees. Subject to Section 9 and Section 12, the Company shall
pay to the Executive all legal fees and expenses (including, without limitation,
fees and expenses in connection with any arbitration) incurred by the Executive
in disputing in good faith any issue arising under this Agreement relating to
the Termination of the Executive's employment or in seeking in good faith to
obtain or enforce any benefit or right provided by this Agreement.
Notwithstanding the foregoing, in the event that any arbitrator or court
determines that the legal fees incurred by the Executive are not payable by the
Company, the Company shall not be obligated with respect thereto.
14. Successors.
(a) Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Company shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representative.
<PAGE> 15
15
(b) Successors and Assigns of Company. This Agreement shall
inure to the benefit of and be binding upon the Company, its successors and
assigns.
(c) Assumption. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its businesses and/or assets as
aforesaid that assumes and agrees to perform this Agreement by operation of law
or otherwise.
15. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
reference to its principles of conflict of laws. The captions of this Agreement
are not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended, modified, repealed, modified, waived, extended or
discharged, except by an agreement in writing signed by the party against whom
enforcement of such amendment, modification, repeal, waiver, extension or
discharge is being sought. No person, other than pursuant to a resolution of the
Board or a committee thereof, shall have authority on behalf of the Company to
agree to amend, modify, repeal, waive, extend or discharge any provision of this
Agreement or anything in reference thereto.
(b) Notices. All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed, in either case, to the Company's headquarters or to such other
address as either party shall have furnished to the other in writing in
accordance herewith. Notices and communications shall be effective when actually
received by the addressee.
(c) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(d) Taxes. The Company may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) No Waiver. The Executive's or the Company's failure to
insist upon strict compliance with any provision hereof or any other provision
of this Agreement or the failure to assert any right that the Executive or the
Company may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason pursuant to Section 4 of this
Agreement, or the right of the Company to terminate the Executive's
<PAGE> 16
16
employment for Cause pursuant to Section 4 of this Agreement, shall not be
deemed to be a waiver of such provision or right or any other provision or right
of this Agreement.
(f) Entire Agreement. This instrument contains the entire
agreement of the Executive, the Company or any predecessor or subsidiary
thereof, including, without limitation, Halter Marine, with respect to the
subject matter hereof, and all promises, representations, understandings,
arrangements and prior agreements are merged herein and superseded hereby
including, without limitation, that certain Executive Severance Agreement dated
April 28, 1998, between the Executive and Halter Marine.
* * * * *
<PAGE> 17
17
IN WITNESS WHEREOF, the Executive and, pursuant to due authorization from its
Board of Directors, the Company have caused this Agreement to be executed as of
the day and year first above written.
FRIEDE GOLDMAN INTERNATIONAL
INC.
By: /s/ J. L. Holloway
--------------------------------------
Name: J. L. Holloway
Title: President, CEO and Chairman of
the Board
RICK S. REES
/s/ Rick S. Rees
-----------------------------------------
<PAGE> 18
EXHIBIT A
1. Executive auto allowance.
2. First-class air travel and accommodations.
3. Company paid health insurance at executive level.
4. YPO membership costs, forum fees and expenses.
5. Paid vacation time consisting of at least 20 days per year.
<PAGE> 19
EXHIBIT B
For purposes of this Agreement, a "Change in Control" shall
mean the occurrence of any of the following events from and after the Effective
Date:
(A) Any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such Person
any securities acquired directly from the Company or its
affiliates other than in connection with the acquisition by
the Company or its affiliates of a business) representing
twenty percent (20%) or more of the combined voting power of
the Company's then outstanding securities; or
(B) The following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on the Effective Date, constitute the Board
and any new director (other than a director whose initial
assumption of office is in connection with an actual or
threatened election contest, including, without limitation, a
consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders was
approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors on the Effective Date or whose appointment, election
or nomination for election was previously so approved or
recommended; or
(C) There is consummated a merger or consolidation of
the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than (i) a merger or
consolidation which would result in the voting securities of
the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), in combination
with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or
any subsidiary of the Company, at least sixty percent (60%) of
the combined voting power of the securities of the Company or
such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (ii) a
merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person is or becomes the beneficial owner, directly
or indirectly, of securities of the Company (not including in
the securities beneficially owned by such Person any
securities acquired directly from the Company or its
affiliates other than in connection with the acquisition by
the Company or its affiliates of a business) representing
twenty percent (20%) or more of the combined voting power of
the Company's then outstanding securities; or
<PAGE> 20
B-2
(D) The shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least sixty percent (60%) of the combined voting power of the
voting securities of which are owned by shareholders of the
Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale.
"Person" shall have the meaning given in Section 3(a)(9) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
modified and used in Sections 13(d) and 14(d) thereof, except that such term
shall not include (a) the Company or any of its subsidiaries, (b) a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or any of its affiliates, (c) an underwriter temporarily holding securities
pursuant to an offering of such securities, (d) a corporation owned, directly or
indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of stock of the Company, or (e) a person or group
as used in Rule 13d-l(b) under the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
Notwithstanding the foregoing, any event or transaction which
would otherwise constitute a Change in Control (a "Transaction") shall not
constitute a Change in Control for purposes of this Agreement if, in connection
with the Transaction, the Executive participates as an equity investor in the
acquiring entity or any of its affiliates (the "Acquiror"). For purposes of the
preceding sentence, the Executive shall not be deemed to have participated as an
equity investor in the Acquiror by virtue of (x) obtaining beneficial ownership
of any equity interest in the Acquiror as a result of the grant to the Executive
of an incentive compensation award under one or more incentive plans of the
Acquiror (including, without limitation, the conversion in connection with the
Transaction of incentive compensation awards of the Company into incentive
compensation awards of the Acquiror), on terms and conditions substantially
equivalent to those applicable to other executives of the Company immediately
prior to the Transaction, after taking into account normal differences
attributable to job responsibilities, title and the like, (y) obtaining
beneficial ownership of any equity interest in the Acquiror on terms and
conditions substantially equivalent to those obtained in the Transaction by all
other shareholders of the Company, or (z) obtaining beneficial ownership of any
equity interest in the Acquiror in a manner unrelated to a Transaction.
Notwithstanding the foregoing, the sale of shares of the
Company's common stock by J. L. Holloway in accordance with the Stockholder's
Agreement by and between the Company and J. L. Holloway, dated June 1, 1999,
shall not constitute a Change in Control for purposes of this Agreement;
provided such shares are not sold in a transaction or a series of transactions
described in subsections (A) or (C) above.
<PAGE> 1
EXHIBIT 10.7
AMENDED AND RESTATED
EMPLOYMENT AND NON-COMPETITION AGREEMENT
This Employment and Non-Competition Agreement (the "Agreement"), made
and entered into as of June 1, 1999, is by and among Friede Goldman
International Inc., a Mississippi corporation (the "Company"), and Ronald W.
Schnoor ("Employee").
WHEREAS, the Friede Goldman Offshore, Inc., a Mississippi corporation,
and the Employee entered into an Employment and Non-Competition Agreement,
effective as of January 1, 1997, as amended (the "Original Agreement");
WHEREAS, pursuant to the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of June 1, 1999, among Magellan, a Delaware corporation,
and Columbus, a Mississippi corporation and the parent of the Company, the
parties thereto have agreed to a merger (the "Merger") pursuant to the terms
thereof;
WHEREAS, the Company desires to secure the continued employment of the
Employee in accordance herewith and the Employee is willing to commit himself to
be employed by the Company on the terms and conditions herein set forth and thus
to forego opportunities elsewhere; and
WHEREAS, the parties desire to amend and restate the Original Agreement
and enter into this Agreement, as of the Effective Date (as defined below),
setting forth the terms and conditions for the employment relationship of the
Employee with the Company during the Term (as defined below) of this Agreement;
THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein and the performance of each, it is hereby agreed
as follows:
1. Employment and Duties.
(a) The Company hereby employs Employee as its Executive Vice
President--Shipyard Operations. As such, Employee shall have responsibilities,
duties and authority commensurate with such position and as may be assigned to
him by the Company from time to time during the term of this Agreement. Employee
hereby accepts this employment upon the terms and conditions herein contained
and agrees to devote his time, attention and best efforts to promote and further
the business of the Company.
(b) Employee shall faithfully adhere to, execute and fulfill all
policies established by the Company.
(c) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. However, the foregoing limitations shall
<PAGE> 2
not be construed as prohibiting Employee from making personal investments in
such form or manner as will neither require his services in the operation or
affairs of the enterprises in which such investments are made nor violate the
terms of paragraph 3 hereof.
2. Compensation. For all services rendered by Employee, the Company
shall compensate Employee as follows:
(a) Base Salary. Beginning on the date of this Agreement, the base
salary payable to Employee shall be $256,000 per year, payable on a regular
basis in accordance with the Company's standard payroll procedures. On at least
an annual basis, the Compensation Committee (the "Committee") of the Board of
Directors of the Company (the "Board") will review Employee's performance and
may recommend increases to such base salary if, in the Committee's discretion,
any such increase is warranted.
(b) Executive Perquisites, Benefits and Other Compensation. Employee
shall be entitled to receive additional benefits and compensation from the
Company in such form and to such extent as specified below:
(1) Reimbursement for all business travel and other out-of-pocket
expenses (including those costs to maintain any professional
certifications held or obtained by Employee) reasonably incurred
by Employee in the performance of his services pursuant to this
Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Employee upon submission of
any request for reimbursement and in a format and manner
consistent with the Company's expense reporting policy.
(2) Each calendar year two (2) weeks of paid vacation or such greater
amount as may be afforded officers and key employees at similar
levels under the Company's policies in effect from time to time.
(3) The Company shall provide Employee with such other executive
perquisites as may be available to or deemed appropriate for
Employee by the Board or the Committee.
(4) Employee shall be eligible to participate in all Company-wide
employee benefit programs as may be adopted from time to time by
the Company, upon satisfying the regular eligibility requirements
of such programs.
3. Non-Competition Agreement.
(a) Employee recognizes that the Company's willingness to enter into
this Agreement is based in material part on Employee's agreement to the
provisions of this paragraph 3, and that Employee's breach of the provisions of
this paragraph could materially damage the Company. Therefore, in consideration
of the benefits to be received by Employee as an employee of the Company,
Employee agrees that Employee shall not, for a period of one (1) year
immediately
-2-
<PAGE> 3
following the termination of his employment with the Company and its affiliates,
for any reason whatsoever, directly or indirectly, for himself or on behalf of
or in conjunction with any other person, persons, company, partnership,
corporation or business of whatever nature:
(1) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any business selling any products or services in
direct competition with the Company or any of the Company's affiliates
within 100 miles of where the Company or any of the Company's
affiliates conducts business (the "Territory");
(2) call upon any person who is a managerial employee of the
Company (including its affiliates) for the purpose or with the intent
of enticing such employee away from or out of the employ of the Company
(including its affiliates); or
(3) call upon any person or entity which is a customer of the
Company (including its affiliates) within the Territory for the purpose
of soliciting or selling products or services in direct competition
with the Company within the Territory.
(b) Because of the difficulty of measuring economic losses to the
Company as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to the Company for which
it would have no other adequate remedy, Employee agrees that the foregoing
covenant may be enforced by the Company in the event of breach by him, by
injunctions and restraining orders.
(c) The covenants in this paragraph 3 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions set forth in
this paragraph 3 are unreasonable, then it is the intention of the parties that
such restrictions be enforced to the fullest extent which the court deems
reasonable, and this Agreement shall thereby be reformed.
(d) Each of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of such covenants.
4. Term; Termination; Rights on Termination. Unless terminated sooner
as herein provided, the term of this Agreement (the "Term") shall commence (the
"Effective Date") as of the Effective Time of the Merger (as defined in the
Merger Agreement) and continue until the third anniversary of the Effective
Date; provided, however, commencing on the second anniversary of the Effective
Date (and on each anniversary of the Effective Date thereafter) the Term shall
automatically be extended for one year on the same terms and conditions
contained herein unless not less than six months prior to any such anniversary
of the Effective Date either party shall give written
-3-
<PAGE> 4
notice to the other party that the Term shall not be so extended.
Notwithstanding the foregoing, in the event that the Merger Agreement is
terminated, this Agreement shall be deemed canceled and of no force or effect
and the Employee shall continue to be subject to the Original Agreement. In
addition to the foregoing, this Agreement and Employee's employment may be
terminated in any one of the followings ways:
(a) Death. The death of Employee shall immediately terminate this
Agreement with no severance compensation due Employee's estate.
(b) Disability. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been absent from his full-time duties
hereunder for four (4) consecutive months, then thirty (30) days after receiving
written notice (which notice may occur before or after the end of such four (4)
month period, but which shall not be effective earlier than the last day of such
four (4) month period), the Company may terminate Employee's employment
hereunder provided Employee is unable to resume his full-time duties at the
conclusion of such notice period. Also, Employee may terminate his employment
hereunder if his health should become impaired to an extent that makes the
continued performance of his duties hereunder hazardous to his physical or
mental health, provided that Employee shall have furnished the Company with a
written statement from a qualified doctor to such effect and provided, further,
that, at the Company's request made within thirty (30) days of the date of such
written statement, Employee shall submit to an examination by a doctor selected
by the Company who is reasonably acceptable to Employee or Employee's doctor and
such doctor shall have concurred in the conclusion of Employee's doctor. In the
event such doctors do not agree, they shall jointly select a third doctor whose
opinion shall be controlling. In the event this Agreement is terminated as a
result of Employee's disability, Employee shall receive from the Company, in a
lump-sum payment due within ten (10) days of the effective date of termination,
one year's base salary at the rate then in effect.
(c) For Cause. The Company may terminate this Agreement ten (10) days
after written notice to Employee for Cause, which shall be: (1) Employee's
material and irreparable breach of this Agreement; (2) Employee's gross
negligence in the performance or intentional nonperformance (continuing for ten
(10) days after receipt of written notice of need to cure) of any of Employee's
material duties and responsibilities hereunder; (3) Employee's dishonesty, fraud
or misconduct with respect to the business or affairs of the Company which
materially and adversely affects the operations or reputation of the Company or
is intended to personally benefit Employee (other than any de minimis personal
use of Company property); (4) Employee's conviction of or plea of nolo
contendere to a felony crime involving moral turpitude; or (5) chronic alcohol
abuse or illegal drug abuse by Employee. In the event of a termination for
Cause, Employee shall have no right to any severance compensation.
(d) Without Cause or Good Reason. At any time the Company or Employee
may, without Cause, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to the other party.
Should Employee be terminated by the Company without Cause, Employee shall
receive from the Company, in a lump-sum payment due on the
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<PAGE> 5
effective date of termination, one year's base salary at the rate then. If
Employee resigns or otherwise terminates his employment without Good Reason,
Employee shall receive no severance compensation.
(e) For Good Reason. Employee may terminate this Agreement for Good
Reason thirty (30) days after written notice to the Company of such Good Reason
event. A "Good Reason" event shall be a material breach by the Company of this
Agreement that occurred during the thirty (30) day period preceding the date of
such written notice to the Company and is not remedied by the Company during the
thirty (30) day period following such written notice. If Employee terminates his
employment for Good Reason, Employee shall receive from the Company, in a
lump-sum payment due within ten (10) days of the effective date of such
termination, one year's base salary at the rate then in effect.
Upon termination of this Agreement for any reason, Employee shall be
entitled to receive all compensation earned and all vested benefits and
reimbursements due through the effective date of termination. Except to the
extent expressly provided above, all other rights and obligations of the Company
and Employee under this Agreement shall cease as of the effective date of
termination, except that the Company's obligations under paragraph 8 herein and
Employee's obligations under paragraphs 3, 6 and 7 herein shall survive such
termination in accordance with their terms.
If termination of Employee's employment arises out of the Company's
failure to pay Employee on a timely basis the amounts to which he is entitled
under this Agreement or as a result of any other breach of this Agreement by the
Company, as determined by a court of competent jurisdiction or pursuant to the
provisions of paragraph 14 below, the Company shall pay all amounts and damages
to which Employee may be entitled as a result of such breach, including interest
thereon and all reasonable legal fees and expenses and other costs incurred by
Employee to enforce his rights hereunder. Further, none of the provisions of
paragraph 3 shall apply in the event this Agreement is terminated as a result of
a breach by the Company.
5. Mitigation; Offset; Release. Employee shall not be required to
mitigate the amount of any Company payment provided for in this Agreement by
seeking other employment or otherwise. The amount of any payment required to be
paid to Employee by the Company pursuant to this Agreement shall not be reduced
by any amounts that are owed to the Company by Employee. However,
notwithstanding anything in this Agreement to the contrary, Employee shall not
be entitled to receive any severance payments pursuant to paragraph 4 of this
Agreement unless Employee has executed (and not revoked) a general release of
all claims Employee may have against the Company and its affiliates in a form of
such release reasonably acceptable to the Company.
6. Inventions. Employee shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are directly related to the business or
activities of the Company or its affiliates and which Employee conceives as a
result of his
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<PAGE> 6
employment by the Company. Employee hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Employee shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. Confidentiality.
(a) Employee acknowledges and agrees that all Confidential Information
(as defined below) of the Company and its affiliates is confidential and a
valuable, special, and unique asset of the Company that gives the Company an
advantage over its actual and potential, current, and future competitors.
Employee further acknowledges and agrees that Employee owes the Company a
fiduciary duty to preserve and protect all Confidential Information from
unauthorized disclosure or unauthorized use; certain Confidential Information
constitutes "trade secrets" under the laws of the state of Mississippi; and
unauthorized disclosure or unauthorized use of the Company's Confidential
Information would irreparably injure the Company.
(b) Both during the term of Employee's employment and after the
termination of Employee's employment for any reason (including wrongful
termination), Employee shall hold all Confidential Information in strict
confidence, and shall not use any Confidential Information except for the
benefit of the Company, in accordance with the duties assigned to Employee.
Employee shall not, at any time (either during or after the term of Employee's
employment), disclose any Confidential Information to any person or entity
(except other employees of the Company who have a need to know the information
in connection with the performance of their employment duties), or copy,
reproduce, modify, decompile, or reverse engineer any Confidential Information,
or remove any Confidential Information from the Company's premises, without the
prior written consent of the Board, or permit any other person to do so.
Employee shall take reasonable precautions to protect the physical security of
all documents and other material containing Confidential Information (regardless
of the medium on which the Confidential Information is stored). This Agreement
applies to all Confidential Information, whether now known or later to become
known to Employee.
(c) Upon the termination of Employee's employment with the Company for
any reason, and upon request of the Company at any other time, Employee shall
promptly surrender and deliver to the Company all documents and other written
material of any nature containing or pertaining to any Confidential Information
and all other manuals, memoranda, lists and other property delivered to or
compiled by Employee by or on behalf of the Company or its affiliates or the
representatives, vendors or customers thereof which pertain to the business of
the Company or its affiliates and all correspondence, reports, records, charts,
advertising materials and other similar data pertaining to the business,
activities or future plans of the Company or its affiliates which have been
collected by Employee and shall not retain any such document or other material.
Within five (5) days of any such request, Employee shall certify to the Company
in writing that all such materials have been returned.
-6-
<PAGE> 7
(d) As used in this Agreement, the term "Confidential Information"
shall mean any information or material known to or used by or for the Company or
its affiliates (whether or not owned or developed by the Company or its
affiliates and whether or not developed by Employee) that is not generally known
to the public. Confidential information included, but is not limited to, the
following: all trade secrets of the Company or its affiliates; all information
that the Company or its affiliates has marked as confidential or has otherwise
described to Employee (either in writing or orally) as confidential; all
nonpublic information concerning the Company's or its affiliates products,
services, prospective products or services, research, product designs, prices,
discounts, costs, marketing plans, marketing techniques, market studies, test
data, customers, customer lists and records, suppliers, and contracts; all
Company business records and plans; all Company personnel files; all financial
information of or concerning the Company or its affiliates; all information
relating to operating system software, application software, software and system
methodology, hardware platforms, technical information, inventions, computer
programs and listings, source codes, object codes, copyrights, and other
intellectual property; all technical specifications; any proprietary information
belonging to the Company or its affiliates; all computer hardware or software
manual; all training or instruction manuals; all data and all computer system
passwords and user codes.
8. Indemnification. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Employee), by reason of the fact that he is or was performing services
under this Agreement, then the Company shall indemnify Employee, to the fullest
extent permitted by applicable law, against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, as actually and
reasonably incurred by Employee in connection therewith. In the event that both
Employee and the Company are made a party to the same third-party action,
complaint, suit or proceeding, the Company agrees to engage competent legal
representation, and Employee agrees to use the same representation, provided
that if counsel selected by the Company shall have a conflict of interest that
prevents such counsel from representing Employee, Employee may engage separate
counsel and the Company shall pay all attorneys' fees of such separate counsel.
Further, while Employee is expected at all times to use his best efforts to
faithfully discharge his duties under this Agreement, Employee cannot be held
liable to the Company for errors or omissions made in good faith where Employee
has not exhibited gross, willful and wanton negligence and misconduct or
performed criminal and fraudulent acts which materially damage the business of
the Company.
9. No Prior Agreements. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Employee agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses of investigation, by
any such third party that such third party may now have or may hereafter come to
have against the Company based upon or arising out of any noncompetition
agreement, invention or secrecy agreement between Employee and such third party
which was in existence as of the date of this Agreement.
-7-
<PAGE> 8
10. Assignment; Binding Effect. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Employee agrees, therefore, he cannot
assign all or any portion of his performance under this Agreement. The Company
may assign this Agreement to any affiliate of the Company. This Agreement shall
be binding upon, inure to the benefit of and be enforceable by the parties
hereto and their respective heirs, legal representatives, successors and
assigns.
11. Complete Agreement. Except as expressly provided herein, this
Agreement is not a promise of future employment. Employee has no oral
understandings or agreements with the Company or any of its officers, directors
or representatives covering the same subject matter as this Agreement. This
written Agreement is the final, complete and exclusive statement and expression
of the agreement between the Company and Employee and of all the terms of this
Agreement, and it cannot be varied, contradicted or supplemented by evidence of
any prior or contemporaneous oral or written agreements. This written Agreement
may not be later modified except by a further writing signed by a duly
authorized officer of the Company and Employee, and no term of this Agreement
may be waived except by writing signed by the party waiving the benefit of such
term.
12. Notice. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: Friede Goldman International Inc.
525 East Capitol
7th Floor
Jackson, Mississippi 39201
To Employee: Ronald W. Schnoor
c/o Friede Goldman Offshore, Inc.
P.O. Box 7007
Pascagoula, Mississippi 39568-7007
Notice shall be deemed given and effective three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this paragraph 12.
13. Severability Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
-8-
<PAGE> 9
14. Arbitration. Any unresolved dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before an arbitrator in Pascagoula, Mississippi, in accordance with
the rules of the American Arbitration Association then in effect. The arbitrator
shall not have the authority to add to, detract from, or modify any provision
hereof nor to award punitive damages to any injured party. The arbitrator shall
have the authority to order back-pay, severance compensation, vesting of options
(or cash compensation in lieu of vesting of options), reimbursement of costs,
including those incurred to enforce this Agreement, and interest thereon in the
event the arbitrator determines that Employee was terminated by the Company
without disability, as defined in paragraph 4(b), or Cause or that the Company
has otherwise materially breached this Agreement. A decision by the arbitrator
shall be final and binding. Judgment may be entered on the arbitrator's award in
any court having jurisdiction.
15. Governing Law. This Agreement shall in all respects be construed
according to the laws of the State of Mississippi.
16. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
17. Prior Employment Agreement. The Company and Employee have
heretofore entered into an Employment Agreement dated effective as of January 1,
1997. Such agreement is hereby terminated in its entirety upon the execution of
this Agreement by the Company and Employee.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective for all purposes as provided above.
FRIEDE GOLDMAN INTERNATIONAL INC.
By: /s/ J. L. Holloway
----------------------------------
Name: J. L. Holloway
Title: President
EMPLOYEE
/s/ Ronald W. Schnoor
-------------------------------------
Ronald W. Schnoor
-9-
<PAGE> 1
[FRIEDE GOLDMAN HALTER FLOWCHART]
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-69021) pertaining to the 1997 Equity Incentive Plan of Friede
Goldman Halter, Inc., the Registration Statement (Form S-8 No. 333-92237)
pertaining to the 401(k) Profit Sharing Plan of Friede Goldman Halter, Inc., and
the Registration Statement (Form S-8 No. 333-92051) pertaining to the Amended
and Restated 1997 Equity Incentive Plan of Friede Goldman Halter, Inc. of our
report dated March 28, 2000, with respect to the consolidated financial
statements of Friede Goldman Halter, Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
March 28, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-69021, 333-92237, and 333-92051.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
March 29, 2000
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