<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22595
----------------
Friede Goldman Halter, Inc.
(Exact name of Registrant as specified in its charter)
Mississippi 64-0900067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13085 Seaway Road 39503
Gulfport, Mississippi (Zip code)
(Address of principal executive
offices)
(228) 896-0029
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 48,725,444 shares as of
August 1, 2000.
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<PAGE>
FRIEDE GOLDMAN HALTER, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I.Financial Information
Item 1.Financial Statements.................................. 3
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999....................................... 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 2000 and 1999...... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999............................ 5
Notes to Consolidated Financial Statements............... 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 12
Item 3.Quantitative and Qualitative Disclosures of Market
Risk........................................................ 18
Part II.Other Information
Item 1.Legal Proceedings..................................... 19
Item 2.Changes in Securities and Use of Proceeds............. Not applicable
Item 3.Defaults upon Senior Securities....................... Not applicable
Item 4.Submission of Matters to a Vote of Security Holders... Not applicable
Item 5.Other Information..................................... Not applicable
Item 6.Exhibits.............................................. 19
Signatures...................................................... 20
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
ASSETS
------ (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 54,061 $ 15,124
Accounts receivable................................. 100,266 143,037
Income tax receivable............................... 29,443 38,657
Inventories......................................... 44,369 45,261
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 103,915 143,769
Prepaid expenses and other.......................... 10,884 17,048
Deferred income tax asset........................... 20,655 45,403
-------- ----------
Total current assets.............................. 363,593 448,299
-------- ----------
Investment in unconsolidated subsidiary............... 13,035 13,035
Property, plant and equipment, net of accumulated
depreciation......................................... 317,474 334,642
Goodwill, net of accumulated amortization............. 183,584 195,137
Other assets.......................................... 9,668 9,779
-------- ----------
$887,354 $1,000,892
======== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt, including current portion of long-
term debt.......................................... $ 7,838 $ 13,645
Accounts payable.................................... 103,976 115,918
Accrued liabilities................................. 66,140 117,966
Reserve for losses on uncompleted contracts......... 55,130 66,226
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 56,368 50,725
-------- ----------
Total current liabilities......................... 289,452 364,480
Deferred income tax liability......................... 11,148 56,190
Long-term debt, less current portion.................. 259,770 299,075
Other................................................. 463 --
-------- ----------
Total liabilities................................. 560,833 719,745
-------- ----------
Deferred government subsidy, net of accumulated
amortization......................................... 31,210 33,026
Stockholders' equity:
Preferred stock..................................... -- --
Common stock........................................ 487 400
Additional paid-in capital.......................... 299,690 230,166
Retained earnings (deficit)......................... (2,699) 18,520
Treasury stock...................................... (157) --
Accumulated other comprehensive income (loss)....... (2,010) (965)
-------- ----------
Total stockholders' equity........................ 295,311 248,121
-------- ----------
$887,354 $1,000,892
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months
ended Six months ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contract revenue earned................. $194,006 $133,489 $405,859 $278,645
Cost of revenue earned.................. 201,347 113,397 392,631 232,630
-------- -------- -------- --------
Gross profit.......................... (7,341) 20,092 13,228 46,015
Selling, general and administrative
expenses............................... 14,597 7,751 28,461 17,579
Amortization of goodwill................ 1,965 88 3,933 175
-------- -------- -------- --------
Operating income (loss)............. (23,903) 12,253 (19,166) 28,261
-------- -------- -------- --------
Other expense:
Interest expense, net................. 9,278 910 17,671 1,705
Other................................. 343 43 641 46
-------- -------- -------- --------
Total other expense................. 9,621 953 18,312 1,751
-------- -------- -------- --------
Income (loss) before income
taxes............................ (33,524) 11,300 (37,478) 26,510
Provision for income tax expense
(benefit).............................. (15,433) 3,272 (16,259) 8,475
-------- -------- -------- --------
Net income (loss)..................... $(18,091) $ 8,028 $(21,219) $ 18,035
======== ======== ======== ========
Net income (loss) per share:
Basic................................. $ (0.44) $ 0.34 $ (0.53) $ 0.77
======== ======== ======== ========
Diluted............................... $ (0.44) $ 0.34 $ (0.53) $ 0.76
======== ======== ======== ========
Weighted average shares outstanding:
Basic................................. 40,848 23,391 39,973 23,369
Diluted............................... 40,848 23,690 39,973 23,670
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(21,219) $ 18,035
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 19,719 3,696
Provision for loss on uncompleted contracts.............. (2,313) --
Compensation expense related to stock or stock options
issued to employees..................................... -- 97
(Gain) loss on sale of assets............................ 175 (6)
Deferred income taxes.................................... (12,839) 48
Changes in operating assets and liabilities:
(Increase) decrease in receivables....................... 42,551 (9,835)
Decrease in income tax receivable........................ 9,214 --
Decrease in inventories.................................. 450 482
(Increase) decrease in other assets...................... 5,089 (2,583)
Decrease in accounts payable and accrued liabilities..... (63,270) (8,607)
Decrease in billings in excess of costs and estimated
earnings on uncompleted contracts....................... 5,994 (20,693)
(Increase) decrease in costs and estimated earnings in
excess of billings on uncompleted contracts............. 30,935 (16,231)
-------- --------
Net cash provided by (used in) operating activities.... 14,486 (35,597)
-------- --------
Investing activities:
Capital expenditures for plant and equipment.............. (2,202) (5,507)
Proceeds from sale of property, plant and equipment....... 7,141 96
-------- --------
Net cash provided by (used in) investing activities.... 4,939 (5,411)
-------- --------
Financing activities:
Proceeds from stock offering.............................. 69,650 --
Stock issuance fees....................................... (39) --
Proceeds from exercise of stock options................... -- 825
Net borrowings under line of credit....................... (42,856) 8,456
Proceeds from borrowings under debt facilities............ 4,147 4,072
Repayments on borrowing under debt facilities............. (10,976) (5,840)
Purchase of treasury stock................................ (157) --
-------- --------
Net cash provided by financing activities.............. 19,769 7,513
-------- --------
Effect of exchange rate changes on cash................... (257) (1,173)
-------- --------
Net increase (decrease) in cash and cash equivalents...... 38,937 (34,668)
Cash and cash equivalents at beginning of period.......... 15,124 42,796
-------- --------
Cash and cash equivalents at end of period................ $ 54,061 $ 8,128
======== ========
Supplemental disclosures:
Cash paid during the period for interest.................. $ 12,307 $ 1,698
Cash refunds received during the period for income taxes.. $ 13,338 $ --
Cash paid during the period for income taxes.............. $ 759 $ 10,928
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim reporting
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all disclosures required by generally
accepted accounting principles for complete financial statements. The
consolidated financial information has not been audited but, in the opinion of
management, includes all adjustments required (consisting of normal recurring
adjustments) for a fair presentation of the consolidated balance sheets,
statements of operations, and statements of cash flows at the dates and for
the periods indicated. Results of operations for the interim periods are not
necessarily indicative of results of operations for the respective full years.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The consolidated financial statements of Friede
Goldman Halter, Inc. (the "Company") should be read in conjunction with the
audited financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
2. MERGER
On November 3, 1999, a merger was consummated between Friede Goldman
International, Inc. ("FGI") and Halter Marine Group, Inc. ("HMG"). As set
forth in the merger agreement, stockholders of HMG received 0.57 of a share of
FGI's common stock in exchange for each share of HMG common stock. A total of
16,450,292 shares was issued for a total value of approximately $193.3
million. The merger was 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 were recorded at their fair market values at the acquisition
date. As a result of the merger, approximately $180.5 million was allocated to
goodwill. The goodwill is being amortized over 25 years.
The following summarized statement of operations data reflects the impact
which the merger with HMG would have had on the Company's results of
operations had the transactions taken place as of January 1, 1999.
<TABLE>
<CAPTION>
Proforma Results for
---------------------------
The Three The Six
Months Ended Months Ended
June 30, 1999 June 30, 1999
------------- -------------
(in 000's, except per share
data)
<S> <C> <C>
Contract revenue earned.......................... $325,616 $709,117
Operating income................................. $ 17,680 $ 36,336
Net income....................................... $ 9,951 $ 21,449
Net income per common share-basic................ $ 0.25 $ 0.54
Net income per common share-diluted.............. $ 0.25 $ 0.54
</TABLE>
6
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
June 30, 2000
3. INCOME TAXES
Income tax expense for interim periods is based on estimates of the
effective tax rate for the entire fiscal year. The effective tax rate
applicable to pre-tax income (loss) was 43% for the six months ended June 30,
2000 compared to 32% for the six months ended June 30, 1999. The difference in
the effective tax rate relates to tax savings identified in the second quarter
arising from the Company's merger with HMG offset by goodwill amortization.
4. BUSINESS SEGMENTS
Effective with the merger with HMG on November 3, 1999, 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 commercial 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.
Selected information as to the operations of the Company by segment is set
forth below.
<TABLE>
<CAPTION>
Three months ended June 30, 2000
----------------------------------------------------
Engineered
Vessels Offshore Products Corporate Total
-------- ---------- ---------- ------------ --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 60,882 $102,989 $30,135 $ -- $194,006
Operating income
(loss)................. $ 9,180 $(26,402) $ 760 $ (7,441) $(23,903)
Total assets............ $216,110 $247,931 $65,401 $357,912 $887,354
<CAPTION>
Three months ended June 30, 1999
----------------------------------------------------
Engineered
Offshore Products Corporate Eliminations Total
-------- ---------- ---------- ------------ --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................ $126,062 $ 7,427 $ -- $ -- $133,489
Operating income
(loss)................. $ 14,623 $ (187) $(2,183) $ -- $ 12,253
Total assets............ $254,064 $ 52,215 $60,183 $(59,522) $306,940
<CAPTION>
Six months ended June 30, 2000
----------------------------------------------------
Engineered
Vessels Offshore Products Corporate Total
-------- ---------- ---------- ------------ --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................ $145,167 $204,146 $56,546 $ -- $405,859
Operating income
(loss)................. $ 16,734 $(24,217) $ 2,975 $(14,658) $(19,166)
<CAPTION>
Six months ended June 30, 1999
-------------------------------------------
Engineered
Offshore Products Corporate Total
---------- ---------- ------------ --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues......................... $257,213 $21,432 $ -- $278,645
Operating income (loss).......... $ 33,022 $ 1,013 $ (5,774) 28,261
</TABLE>
7
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
June 30, 2000
5. RECONCILIATION OF NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
-------- ------- -------- -------
(in 000's, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss).................... $(18,091) $ 8,028 $(21,219) $18,035
======== ======= ======== =======
Numerator for net income (loss) per
share, diluted...................... $(18,091) $ 8,028 $(21,219) $18,035
======== ======= ======== =======
Denominator:
Denominator for net income per share-
weighted average shares
outstanding......................... 40,848 23,391 39,973 23,369
Effect of dilutive securities:
Stock options...................... -- 299 -- 301
-------- ------- -------- -------
Denominator for net income (loss) per
share, diluted...................... 40,848 23,690 39,973 23,670
======== ======= ======== =======
Net income (loss) per share............ $ (0.44) $ 0.34 $ (0.53) $ 0.77
======== ======= ======== =======
Net income (loss) per share, diluted... $ (0.44) $ 0.34 $ (0.53) $ 0.76
======== ======= ======== =======
</TABLE>
For the three and six months ended June 30, 2000, the effect on net income
per share, diluted, would be anti-dilutive if the Company's outstanding stock
options and the conversion of the 4 1/2% Convertible Subordinated Notes had
been assumed in the computation.
6. COMPREHENSIVE INCOME
Other comprehensive income includes foreign currency translation
adjustments. Total comprehensive income was as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
2000 1999
-------- -------
(in 000's)
<S> <C> <C>
Net income (loss)......................................... $(21,219) $18,035
Other comprehensive income (loss):
Foreign currency translation............................ (1,045) (1,399)
-------- -------
Comprehensive income (loss)............................... $(22,264) $16,636
======== =======
</TABLE>
8
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
June 30, 2000
7. 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
Credit Facility") that replaced the Company's Credit Facility. Under the terms
of the Credit Facility, the Company may borrow up to $120.0 million under a
senior secured revolving credit facility. In addition, the Credit Facility
provides an approximate $44.2 million senior secured letter of credit
facility. The 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 ranged 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; although, this was amended during the first quarter of 2000
as discussed below. Under the Credit Facility, the Company is obligated to pay
certain fees, including an annual commitment fee in an amount of 0.50% of the
unused portion of the commitment.
The 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. On March 28, 2000, the Credit Facility was amended
which, among other things, amended the leverage ratio, the fixed charge
coverage ratio and the minimum net worth requirement; and, required the
commitment amount under the Credit Facility to be reduced by 75% of the net
proceeds of asset sales. The amendment also changed the interest rate to the
lender's base rate plus 2.0% 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 1.0% of the unused portion of the commitment. The Company
was in noncompliance with the leverage ratio as of June 30, 2000. On August
11th, 2000, the Company obtained a waiver of noncompliance with such financial
covenant.
Amounts outstanding under the Credit Facility may not exceed an amount based
on specified percentages of the Company's cash, accounts receivable, inventory
and net contract related investments. On July 31, 2000, the Credit Facility
was further amended to provide for scheduled reductions in the Company's
borrowing capacity for accounts receivable, tax receivables, inventory, and
net contract related investments such that, by July 1, 2001, the Company will
no longer have borrowing capacity under these classes of assets. At June 30,
2000, the Company had $63.9 million in cash advances under the credit
agreement with $5.9 million available under the Credit Facility. Average usage
since December 31, 1999 has been $100.7 million, resulting in an average
availability of $17.8 over the same period. The Company has reduced its
commitment under this borrowing arrangement through additional cash generated
from the sale of common stock and certain non-strategic assets. The Company
repaid a portion of the outstanding balance under the revolving portion of its
credit facility with proceeds it received from the sale of its vessel repair
assets on August 9, 2000. At August 11, 2000, the Company had $39.3 million in
cash advances under the credit agreement.
9
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
June 30, 2000
8. 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 ("Ocean Rig"). The contracts had a combined value of $282.0 million
and called for delivery of the rigs on August 1999 and November 1999. The
Company was unable to meet those delivery dates because of delays and cost
increases associated with design changes initiated by Ocean Rig and the late
delivery by Ocean Rig of information and equipment it was required to provide.
Ocean Rig denied its responsibility for the delays. The dispute was resolved
pursuant to a negotiated settlement agreement, dated January 18, 2000, (the
"Settlement Agreement") which provided for an increase of $21.5 million in the
contract price of each rig, revised delivery dates of October 2000 and
December 2000 and total liquidated damages for late delivery beyond the new
delivery dates of $75,000 per day per rig up to a maximum of $7.5 million for
each rig.
The Company has adjusted previously recognized revenues and 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 of gross profit 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 accordance with the terms of the Settlement Agreement, both parties
agreed to engage a third party project evaluation consultant ("the
Consultant") to review the estimates to complete the projects and the
projected delivery dates. The Company recently received the Consultant's
report dated late July 2000 and consequently revised its estimate of the
projected costs and expected delivery dates of the rigs. The Company's
financial results for the second quarter 2000 were negatively impacted by
current period losses of $9.3 million relating to the Ocean Rig contracts and
an additional adjustment for expected future costs of $19.0 million. The
amount of the adjustment was based on, among other things, the results of the
Settlement Agreement, as adjusted for expected change orders, and management's
estimate of the percentage of completion of the projects as of June 30, 2000
in light of the Consultant's report. In addition, the Company currently
expects that it will deliver each of these rigs at least 60 days past their
respective revised delivery dates. However, the Company believes that any
delays will be permissible delays under the terms of its amended contracts
with Ocean Rig.
Petrodrill
In April 1998, one of the Company's subsidiaries entered into contracts to
construct two semi-submersible drilling rigs for two newly formed entities,
Petrodrill IV, Ltd. and Petrodrill V, Ltd. (collectively, "Petrodrill"). The
contracts had a combined value of $168.0 million. After the commencement of
construction, the Company began to experience delays in the production
schedule and increased costs, due in whole or in part, to delays caused by
Petrodrill and by subcontractors nominated by Petrodrill. In addition, we had
to perform as the lead yard as opposed to a follow-on yard as initially
anticipated by the contracting parties.
10
<PAGE>
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
June 30, 2000
On May 26, 2000, our subsidiary entered into amended contractual
arrangements with Petrodrill which provided for an increase in the contract
price of $3.0 million for each rig and an additional payment of $6.4 million
per rig subject to daily reduction for late delivery at a rate of
approximately $139,000 per day from 15 to 60 days until exhausted, revised
delivery dates of September, 2001 and December, 2001 and settled all of the
related litigation. The parties also agreed to increased liquidated damages
for late delivery of $20,000 per day commencing on the 61st day after the
revised delivery date, increasing to $40,000 per day commencing on the 91st
day after the revised delivery date, of up to a maximum of $4.2 million per
rig. The contract amendments have not resulted in any material change in our
previously announced estimate of costs in excess of contract prices of
approximately $60.0 million.
The Company evaluates its estimates to complete the Ocean Rig and Petrodrill
contracts on a regular basis. Any additional increases in the projected costs
to complete the Petrodrill project would likely result in an adjustment of the
Company's purchase accounting treatment of the assets and liabilities acquired
through the merger with Halter Marine Group. Any additional increases in the
projected costs to complete the Ocean Rig contracts would require us to record
an adjustment to amounts of revenue and gross profit that were recognized in
prior periods under the percentage of completion method. Any such adjustments,
if substantial, could have a material adverse effect on our results of
operations, financial condition and liquidity. We expect that funding the
losses associated with the Ocean Rig and Petrodrill contracts will negatively
impact our cash flow over the next twelve months which could significantly
impact our liquidity.
9. SALE OF YACHT DIVISION
During April 2000, the Company completed the sale of its Trinity Yachts
division to a group led by John Dane III, the Company's former chief operating
officer and former board member. The division was sold for $5.7 million in an
all-cash transaction.
10. EQUITY OFFERING
On June 22, 2000, the Company completed an offering of 8,750,000 million
shares of its common stock at a price of $8.25 per share. The offering
generated $69.7 million in net proceeds to the Company.
11. SUBSEQUENT EVENT
On August 9, 2000 the Company completed the sale of its vessel repair unit
to Bollinger Shipyards, Inc. of Lockport, Louisiana, for $80.0 million in an
all-cash transaction. The vessel repair business sold was an operating unit of
the Company's Vessel segment and consisted of five facilities devoted to
vessel repair and maintenance that are located in Louisiana and Texas.
11
<PAGE>
Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This Report on Form 10-Q contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, included in this Form 10-Q, are forward-
looking statements. Such forward-looking statements are subject to certain
risks, uncertainties and assumptions, including:
(i) risks of reduced levels of demand for the Company's products and
services resulting from reduced levels of capital expenditures of
oil and gas companies relating to offshore drilling and exploration
activity and reduced levels of capital expenditures of offshore
drilling contractors, which levels of capital expenditures may be
affected by prevailing oil and natural gas prices, expectations
about future oil and natural gas prices, the cost of exploring for,
producing and delivering oil and gas, the sale and expiration dates
of offshore leases in the United States and overseas, the discovery
rate of new oil and gas reserves in offshore areas, local and
international political and economic conditions, the ability of oil
and gas companies to access or generate capital sufficient to fund
capital expenditures for offshore exploration, development and
production activities, and other factors,
(ii) risks related to expansion of operations, either at its shipyards or
one or more other locations,
(iii) operating risks relating to conversion, retrofit and repair of
drilling rigs, new construction of drilling rigs and production
units and the design of new drilling rigs, 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.
Financial Condition
Decreases in balance sheet accounts at June 30, 2000 compared to December
31, 1999 were primarily attributable to decreases in accounts payable, accrued
liabilities, and long-term debt. These decreases were primarily funded with
cash on hand, collections on accounts receivable, proceeds from
12
<PAGE>
the sale of certain fixed assets and the Yacht Division, proceeds from income
tax refunds, and proceeds from the sale of shares of common stock. (See
"Liquidity and Capital Resources")
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 Halter for all periods
subsequent to November 3, 1999. All significant intercompany accounts and
transactions have been eliminated.
Three Months Ended June 30, 2000 vs. Three Months Ended June 30, 1999
The following table sets forth contract revenue earned by business segment as
a percentage of the Company's revenue for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------
2000 1999
---------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
Contract revenue earned by
business segment:
Vessels................. $ 60,882 31.4% $ -- --%
Offshore................ 102,989 53.1 126,062 94.4
Engineered Products..... 30,135 15.5 7,427 5.6
-------- ----- -------- -----
$194,006 100.0% $133,489 100.0%
======== ===== ======== =====
</TABLE>
Contract revenue increased 45.3% to $194.0 million for the quarter ended June
30, 2000 compared to $133.5 million for the quarter ended June 30, 1999. Of the
$60.5 million increase, $60.9 million was attributable to the Vessels segment,
newly acquired in the merger with Halter Marine Group, Inc. (the "HMG merger")
which occurred during the fourth quarter of 1999, and $22.7 million was
attributable to the Engineered Products segment. Included in the Engineered
Products segment is approximately $23.1 million of revenue generated by
operations acquired in the HMG merger offset by an $0.4 million decline in
revenue of Engineered Products segment entities existing prior to the merger
which occurred due to a decrease in overall demand for these products. Revenue
increases in the Vessels and Engineered Products segments were offset by an
$23.1 million decrease in revenues generated by the Offshore segment which was
primarily due to the completion of several contracts during 1999 that were not
replaced in 2000 due to a decreased demand for repair, conversion and
retrofitting projects. Offsetting this decrease were new revenues of
approximately $60.6 million generated by offshore entities acquired in the HMG
merger.
The gross profit margin decreased to a loss of $7.3 million or a negative
margin of 3.8% for the second quarter of 2000 compared to $20.1 million or
15.1% for the second quarter of 1999. Gross profit for the Offshore segment
decreased from $18.7 million or 14.8% for the second quarter of 1999 to a gross
loss of $22.0 million or a negative margin of 21.4% for the second quarter of
2000. 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. Additionally, during the second quarter of 2000, a loss was
recorded on a contract to construct two semi-submersible drilling rigs for
Ocean Rig ASA due to increased estimated manhours required to complete this
project. These decreases were offset by a $4.4 million or 7.2% gross profit
generated by offshore operations acquired in the HMG merger. Gross profit for
the newly acquired Vessels segment was $11.1 million or 18.2%. Gross profit for
the Engineered Products segment
13
<PAGE>
increased $2.2 million or 151.1% from $1.4 million for the second quarter of
1999 to $3.6 million for the second quarter of 2000 while the gross profit
percentage decreased from 19.3% to 11.9%. These changes are a result of
additional lower margin revenues generated by engineered products operations
acquired in the HMG merger.
Selling, general and administrative ("SG&A) expenses increased $6.9 million
to $14.7 million, or 7.1% of revenue, for the second quarter of 2000 compared
to $7.8 million, or 5.8% of revenue for the second quarter of 1999. The
increase is primarily attributable to growth in the Company as a result of the
HMG merger.
Amortization of goodwill increased to $2.0 million for the second quarter of
2000 compared to $0.1 million for the second quarter of 1999 as a result of
goodwill recorded in conjunction with the HMG merger.
Net interest expense (interest expense less interest income) increased to
$9.3 million for the second quarter of 2000 compared to $0.9 million for the
second quarter of 1999 primarily as a result of (1) additional interest expense
from the $210.9 million in debt assumed by the Company in connection with the
merger with HMG, (2) increased usage and amortization of fees associated with
the New Credit Facility, and (3) interest expense in the amount of $2.7 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 (See "Liquidity and Capital
Resources").
Other expense increased by $0.3 million from the second quarter of 1999 as
result of various items, none of which were individually material.
Income (loss) before income taxes decreased $44.8 million to a $33.5 million
loss for the second quarter of 2000 compared to income of $11.3 million for the
second quarter of 1999. The decrease was the result of a decline in gross
profit margin as well as increases in SG&A expenses, amortization of goodwill
and interest expense as discussed above. The Company does not expect its gross
margin to improve significantly during 2000, principally because its Offshore
segment contains several contracts on which it expects to earn minimal gross
profit. The Company expects SG&A expenses to continue at approximately the same
level of revenues as currently reflected in the first quarter of 2000 and
amortization of goodwill is expected to remain at approximately the same level.
The Company expects the increase in interest expense to continue during 2000
principally due to the additional debt assumed in the HMG merger, increased
usage and amortization of fees associated with the New Credit Facility, and
accretion of the discount recorded in association with the 4 1/2% Convertible
Subordinated Notes assumed in the HMG merger.
The Company had an income tax benefit of $15.4 million for the second quarter
of 2000 compared to income tax expense of $3.3 million for the second quarter
of 1999 reflecting the Company's pretax loss of $33.5 million for the second
quarter of 2000 compared to pretax income of $11.3 million for the second
quarter of 1999.
14
<PAGE>
Six Months Ended June 30, 2000 vs. Six Months Ended June 30, 1999
The following table sets forth contract revenue earned by business segment as
a percentage of the Company's revenue for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
2000 1999
---------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
Contract revenue earned by
business segment:
Vessels................. $145,167 35.7% $ -- --%
Offshore................ 204,146 50.3 257,213 92.3
Engineered Products..... 56,546 14.0 21,432 7.7
-------- ----- -------- -----
$405,859 100.0% $278,645 100.0%
======== ===== ======== =====
</TABLE>
Contract revenue increased 45.7% to $405.9 million for the six months ended
June 30, 2000 compared to $278.6 million for the six months ended June 30,
1999. Of the $127.3 million increase, $145.2 million was attributable to the
Vessels segment, newly acquired in the merger with Halter Marine Group, Inc.
(the "HMG merger") which occurred during the fourth quarter of 1999, and $35.1
million was attributable to the Engineered Products segment. Included in the
Engineered Products segment is approximately $43.5 million of revenue generated
by operations acquired in the HMG merger offset by an $8.4 million decline in
revenue of Engineered Products segment entities existing prior to the merger
which occurred due to a decrease in overall demand for these products. Revenue
increases in the Vessels and Engineered Products segments were offset by a
$53.1 million decrease in revenues generated by the Offshore segment which was
primarily due to the completion of several contracts during 1999 that were not
replaced in 2000 due to a decreased demand for repair, conversion and
retrofitting projects. Offsetting this decrease were new revenues of
approximately $124.8 million generated by offshore entities acquired in the HMG
merger.
The gross profit margin decreased to $13.2 million or 3.3% for the first six
months of 2000 compared to $46.0 million or 16.5% for the first six months of
1999. Gross profit for the Offshore segment decreased from $41.5 million or
16.1% for the first six months of 1999 to a loss of $16.0 million or a negative
margin of 7.8% for the first six months of 2000. 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. Additionally, during the second
quarter of 2000, a loss was recorded on a contract to construct two semi-
submersible drilling rigs for Ocean Rig ASA due to increased estimated manhours
required to complete this project. These decreases were offset by a $12.9
million or 10.3% gross profit generated by offshore operations acquired in the
HMG merger. Gross profit for the newly acquired Vessels segment was $20.5
million or 14.1%. Gross profit for the Engineered Products segment increased
$4.2 million or 91.6% from $4.5 million for the first six months of 1999 to
$8.7 million for the first six months of 2000 while the gross profit percentage
decreased from 21.3% to 15.4%. These changes are a result of additional lower
margin revenues generated by engineered products operations acquired in the HMG
merger.
Selling, general and administrative ("SG&A) expenses increased $10.9 million
to $28.5 million, or 6.8% of revenue, for the first six months of 2000 compared
to $17.6 million, or 6.3% of revenue for the first six months of 1999. The
increase is primarily attributable to growth in the Company as a result of the
HMG merger.
Amortization of goodwill increased to $3.9 million for the first six months
of 2000 compared to $0.2 million for the first six months of 1999 as a result
of goodwill recorded in conjunction with the HMG merger.
15
<PAGE>
Net interest expense (interest expense less interest income) increased to
$17.7 million for the first six months of 2000 compared to $1.7 million for the
first six months of 1999 primarily as a result of (1) additional interest
expense from the $210.9 million in debt assumed by the Company in connection
with the merger with HMG, (2) increased usage and amortization of fees
associated with the New Credit Facility, and (3) interest expense in the amount
of $5.2 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 (See "Liquidity
and Capital Resources").
Other expense increased by $0.6 million from the first six months of 1999 as
result of various items, none of which were individually material.
Income (loss) before income taxes decreased $64.0 million to a $37.5 million
loss for the first six months of 2000 compared to income of $26.5 million for
the first six months of 1999. The decrease was the result of a decline in gross
profit margin as well as increases in SG&A expenses, amortization of goodwill
and interest expense as discussed above. The Company does not expect its gross
margin to improve significantly during 2000, principally because its Offshore
segment contains several contracts on which it expects to earn minimal gross
profit. The Company expects SG&A expenses to continue at approximately the same
level of revenues as currently reflected in the first six months 2000 and
amortization of goodwill is expected to remain at approximately the same level.
The Company expects the increase in interest expense to continue during 2000
principally due to the additional debt assumed in the HMG merger, increased
usage and amortization of fees associated with the New Credit Facility and
accretion of the discount recorded in association with the 4 1/2% Convertible
Subordinated Notes assumed in the HMG merger.
The Company had an income tax benefit of $16.3 million for the first six
months of 2000 compared to income tax expense of $8.5 million for the first six
months of 1999 reflecting the Company's pretax loss of $37.5 million for the
first six months of 2000 compared to pretax income of $26.5 million for the
first six months of 1999.
The Company's construction backlog of $450.8 million at June 30, 2000
decreased $34.6 compared to $689.1 million at December 31, 1999 and increased
31.1% compared to $343.9 million at June 30, 1999. At June 30, 2000, backlog by
segment was as follows: Vessels, $135.0 million; Offshore, $221.6 million; and
Engineered Products, $94.2 million.
Liquidity and Capital Resources
The Company's principal needs for capital are the funding of ongoing
operations and capital expenditures. The Company's principal sources of
liquidity during the first six months of 2000 were cash balances, including
those generated through collections of accounts receivable, income tax refunds,
proceeds from the sale of certain fixed assets and the Company's yacht division
and proceeds from the sale of common stock. Cash flows from these sources were
$15.1 million from cash and cash equivalent balances at the beginning of the
period, $42.6 million from a decrease in accounts receivable, $13.3 from a cash
refund of income taxes, $4.2 million from the sale of certain fixed assets,
$5.7 million from the sale of the yacht division, and $69.7 million in proceeds
generated through the sale of 8.8 million shares of our common stock.
During the six months ended June 30, 2000, the Company incurred approximately
$2.2 million in capital expenditures compared to $5.5 million during the six
months ended June 30, 1999. The Company anticipates that our level of capital
expenditures during 2000 will not exceed $10.0 million.
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
Credit Facility") that replaced the Company's
16
<PAGE>
Credit Facility. Under the terms of the Credit Facility, the Company may
borrow up to $120.0 million under a senior secured revolving credit facility.
In addition, the Credit Facility provides an approximate $44.2 million senior
secured letter of credit facility. The 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 ranged 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; although, this was amended during the first quarter of
2000 as discussed below. Under the Credit Facility, the Company is obligated
to pay certain fees, including an annual commitment fee in an amount of 0.50%
of the unused portion of the commitment.
The 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. On March 28, 2000, the Credit Facility was amended
which, among other things, amended the leverage ratio, the fixed charge
coverage ratio and the minimum net worth requirement; and, required the
commitment amount under the Credit Facility to be reduced by 75% of the net
proceeds of asset sales. The amendment also changed the interest rate to the
lender's base rate plus 2.0% 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 1.0% of the unused portion of the commitment. The Company
was in noncompliance with the leverage ratio as of June 30, 2000. On August
11th, 2000, the Company obtained a waiver of noncompliance with such financial
covenant.
Amounts outstanding under the Credit Facility may not exceed an amount based
on specified percentages of the Company's cash, accounts receivable, inventory
and net contract related investments. On July 31, 2000, the Credit Facility
was further amended to provide for scheduled reductions in the Company's
borrowing capacity for accounts receivable, tax receivables, inventory, and
net contract related investments such that, by July 1, 2001, the Company will
no longer have borrowing capacity under these classes of assets. At June 30,
2000, the Company had $63.9 million in cash advances under the credit
agreement with $5.9 million available under the Credit Facility. Average usage
since December 31, 1999 has been $100.7 million, resulting in an average
availability of $17.8 over the same period. The Company has reduced its
commitment under this borrowing arrangement through additional cash generated
from the sale of common stock and certain non-strategic assets. The Company
repaid a portion of the outstanding balance under the revolving portion of its
credit facility with proceeds it received from the sale of its vessel repair
assets on August 9, 2000. At August 11, 2000, the Company had $39.3 million in
cash advances under the credit agreement.
The Company is currently considering a range of financing alternatives
including negotiating with a group of lenders to enter into a new credit
facility and/or undertaking a private placement of term debt. In the event the
Company is unable to complete one of these transactions, its financial
condition will likely be materially adversely affected.
In 2000, the Company initiated a liquidity campaign through the sale of non-
core assets and the acceleration of certain claims. The Company has raised
$125 million through the date of this Form 10-Q, of which $80 million relates
to the sale of our vessel repair business, and have firm contracts for an
additional $6 million. The Company is also actively marketing excess real
estate and strategic investments that could provide additional cash proceeds
and the Company expects to receive tax refunds totaling $29.4 million by the
end of 2000. However, receipt of these tax refunds could be indefinitely
delayed if the Internal Revenue Service elects to review the Company's claims
for these refunds.
17
<PAGE>
The Company expects that funding losses associated with its Ocean Rig and
Petrodrill contracts will negatively impact its cash flow over the next 12
months which could significantly impact its liquidity.
On June 22, 2000, the Company completed an offering of 8,750,000 shares of
our common stock at a price of $8.25 per share. The offering generated $69.7
million in net proceeds.
The Company believes that cash on hand, cash generated from operations, the
collection of income taxes paid in prior years, the settlement of certain
recoverable contract claims, funds available under the Credit Facility or a
new credit facility and proceeds from the sale of its common stock and its
vessel repair assets will be sufficient to fund our requirements for working
capital (including contract losses), capital expenditures, and other capital
needs for at least the next 12 months. However, additional debt or equity
financing or assets sales may be required if estimated costs on the Ocean Rig
contracts and/or the Petrodrill contracts are materially higher than current
estimates or if our 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 for these purposes or, if available, will be on satisfactory terms.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's market risk disclosures set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 have not
changed significantly through the period ended June 30, 2000.
18
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
On September 18, 1998, Liberty Mutual and Employers Insurance of Wausau (the
"Insurers") filed suit against one of our subsidiaries, FGO (formerly HAM
Marine, Inc.), two contract labor providers, Petra Contractors, Inc., KT
Contractors, Inc., and fifty unnamed individuals. The 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. On June 22, 2000, FGO and the
other defendants filed a joint motion to dismiss the Insurers' claims due to
the Insurers' failure to exhaust their administrative remedies before the
Mississippi Insurance Commission and requesting the court to refer the matter
to the Mississippi Commissioner of Insurance for determination.
We were also involved in litigation with respect to two projects in our
offshore segment which have recently been settled. See "Notes to Consolidated
Financial Statements--Note 8--Contractual Matters". We also recently settled
litigation with Hyundai Heavy Industries Co. Limited.
We are involved in various claims and legal actions arising in the ordinary
course of business. In the opinion of our management, the ultimate disposition
of these matters will not have a material adverse effect on our financial
position or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
*10.1 Amendment No. 3, dated June 9, 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.
*10.2 Amendment No. 4 dated July 31, 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.
*27.1 Financial Data Schedule
</TABLE>
--------
* Filed herewith
(b) Reports of Form 8-K.
The Company filed Current Reports on Form 8-K on the following dates:
June 6, 2000
June 30, 2000
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Gulfport, State of
Mississippi, on the 14th day of August 2000.
FRIEDE GOLDMAN HALTER, INC.
/s/ Emile J. Dumesnil
By:__________________________________
Emile J. Dumesnil
Sr. Vice President--Finance
20
