Back to GetFilings.com
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, 2002
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.
(as Debtor in Possession)
(Exact name of Registrant as specified in its charter)
Mississippi 72-1362492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13085 Seaway Road
Gulfport, Mississippi 39503
(Address of principal executive offices) (Zip code)
(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: 48,710,579 shares as of
August 7, 2002.
1
FRIEDE GOLDMAN HALTER, INC.
Table of Contents
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 3
Consolidated Statements of Operations for the three months
and six months ended June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures of Market Risk 22
Part II. Other Information
Item 1. Legal Proceedings 22
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 and Reports on form 8-K 23
Signatures 24
2
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
(as Debtor in Possession)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
June 30, December 31,
2002 2001
----------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,965 $ 20,403
Restricted cash 47,392 17,998
Receivables, net:
Contract receivables 12,839 23,705
Other receivables 20,388 526
Income tax receivable 206 206
Inventories, net 8,931 17,580
Costs and estimated earnings in excess of billings on uncompleted
contracts 13,807 16,557
Prepaid expenses and other 11,355 11,625
Deferred income tax asset $ 27,290 25,353
--------- ---------
Total current assets 150,173 133,953
--------- ---------
Reinsurance receivables 5,000 5,000
Property, plant and equipment, net of accumulated depreciation 58,848 155,458
Property, plant and equipment including goodwill of $23,479 held for
disposition at December 31, 2001 79,311 56,930
Other assets 13,411 15,280
--------- ---------
Total assets $ 306,743 $ 366,621
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 13,591 $ 13,948
Accrued liabilities 26,984 28,976
Billings in excess of costs and estimated earnings on uncompleted
contracts 3,585 15,124
Current portion of long-term debt, including debt in default 109,692 115,355
--------- ---------
Total current liabilities 153,852 173,403
--------- ---------
Liabilities subject to compromise 357,021 360,697
Deferred income tax liability 27,290 25,867
Stockholders' deficit:
Preferred stock -- --
Common stock 487 487
Additional paid-in capital 299,357 299,357
Retained deficit (527,400) (489,458)
Accumulated other comprehensive loss (3,864) (3,732)
--------- ---------
Total stockholders' deficit (231,420) (193,346)
--------- ---------
Total liabilities and stockholders' deficit $ 306,743 $ 366,621
========= =========
The accompanying notes are an integral part of these financial statements.
3
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
(as Debtor in Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
2002 2001 2002 2001
---------- ------------ ---------- ----------
Contract revenue earned $ 26,868 $ 34,792 $ 52,939 $ 85,938
Cost of revenue earned 21,867 33,188 43,158 82,501
-------- -------- -------- --------
Gross profit 5,001 1,604 9,781 3,437
Selling, general and administrative expenses 2,990 5,719 7,401 13,188
Goodwill amortization -- 2,789 -- 5,577
-------- -------- -------- --------
Operating income (loss) 2,011 (6,904) 2,380 (15,328)
Other expense (income):
Interest expense, net (contractual interest of
$5,682 and $5,182 for the three months ended June 30,
2002 and 2001, respectively and $11,590 and
$13,581 for the six months ended June 30, 2002
and 2001, respectively) 3,599 3,485 7,436 12,157
Discount on convertible subordinated notes -- (1,005) -- 54,878
Other (3) (9) (9) 60
-------- -------- -------- --------
Total other expense 3,596 2,471 7,427 67,095
-------- -------- ---------- --------
Loss before reorganization items, income taxes and
discontinued operations (1,585) (9,375) (5,047) (82,423)
-------- -------- -------- --------
Reorganization items:
Professional fees 3,543 2,000 7,839 2,000
Loss on investment in unconsolidated subsidiary -- 1,372 -- 1,372
Write-off of deferred financing costs -- 2,618 -- 2,618
Gain on sale of assets (12,350) -- (12,939) --
-------- -------- -------- --------
Total reorganization items (8,807) 5,990 (5,100) 5,990
Income (loss) before income taxes and
discontinued operations 7,222 (15,365) 53 (88,413)
Income tax expense -- 3,559 251 3,997
-------- -------- -------- --------
Income (loss) before discontinued operations 7,222 (18,924) (198) (92,410)
-------- -------- -------- --------
Discontinued operations
Income (loss) from operations of Engineered
Products Segment (263) 2,304 568 4,201
Gain on disposal of Engineered Products Segment 407 16,041 407 16,041
Loss from operations of Vessels Segment (2,307) (8,657) (4,732) (10,272)
Loss on disposal of Vessels Segment (33,987) -- (33,987) --
-------- -------- ------- --------
Total discontinued operations (36,150) 9,688 (37,744) 9,970
-------- -------- -------- --------
Net loss $(28,928) $ (9,236) $(37,942) $(82,440)
======== ======== ======== ========
Net income (loss) per share, basic and diluted:
Net income (loss) before discontinued operations $ 0.15 $ (0.39) $ -- $ (1.90)
Discontinued operations (0.74) 0.20 (0.77) 0.21
-------- -------- -------- --------
Net loss $ (0.59) $ (0.19) $ (0.77) $ (1.69)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 48,709 48,709 48,709 48,709
Diluted 48,709 48,709 48,709 48,709
The accompanying notes are an integral part of these financial statements.
4
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
(as Debtor in Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months ended
June 30,
2002 2001
----------- ----------
Cash flows from operating activities:
Net loss $ (37,942) $ (82,440)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,796 17,573
Provision for losses -- 25
Loss on investment in unconsolidated subsidiary -- 1,372
Write-off of deferred financing costs -- 2,618
(Gain) loss on sale of subsidiaries 20,641 (16,041)
Discount on convertible notes -- 54,878
Loss on sale of assets -- 10
Deferred income taxes 140 4,861
Changes in operating assets and liabilities:
Decrease in contract and other receivables 5,343 27,599
Decrease in income tax receivable -- 385
Decrease in inventories 522 3,084
Increase in other assets (589) (1,972)
Increase in accounts payable and
accrued liabilities (226) 15,138
Increase (decrease) in billings in excess of costs
and estimated earnings on uncompleted contracts (8,304) 8,470
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts (3,215) (16,984)
Decrease in reserve for losses on uncompleted contracts -- (36,416)
Decrease in liabilities subject to compromise (3,677) --
--------- ----------
Net cash used in operating activities (19,511) (17,840)
--------- ----------
Investing activities:
Capital expenditures for property, plant and equipment (74) (3,286)
Proceeds from sale of property, plant and equipment -- 8
Net proceeds from sale of subsidiaries, net of cash sold of $272 and
$5,717 for the six months ended June 30, 2002 and 2001,
respectively 39,934 26,559
Restricted cash and cash equivalents (29,393) (29,154)
--------- ----------
Net cash provided by (used in) investing activities 10,467 (5,873)
--------- ----------
The accompanying notes are an integral part of these financial statements.
5
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
(as Debtor in Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Unaudited)
(in thousands)
Six months ended
June 30,
2002 2001
---------- --------
Financing activities:
Net borrowings (repayments) under line of credit $ (1,262) $ 15,790
Proceeds from borrowings under debt facilities -- 2,549
Repayments on borrowings under debt facilities (2,458) (5,500)
--------- ---------
Net cash provided by (used in) financing activities (3,720) 12,839
--------- ---------
Effect of exchange rate changes on cash 326 (315)
--------- ---------
Net decrease in cash and cash equivalents (12,438) (11,189)
Cash and cash equivalents at beginning of period 20,403 25,244
--------- ---------
Cash and cash equivalents at end of period $ 7,965 $ 14,055
========= =========
Supplemental disclosures:
Cash paid for interest $ 4,788 $ 8,796
Cash paid for income taxes $ 30 $ 271
Cash refunds received for income taxes $ -- $ 385
Cash flows from operating activities before reorganization items:
Cash receipts from customers $ 106,772 $ 46,796
Cash payments to vendors, suppliers and employees $ 119,064 $ 46,357
The accompanying notes are an integral part of these financial statements.
6
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002
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, 2001 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, 2001.
2. Voluntary Filing under Chapter 11 of the United States Bankruptcy Code
The Company incurred substantial operating losses during 2000 and the first
quarter of 2001 and had a working capital deficit of $140.4 million and $343.9
million at December 31, 2000 and March 31, 2001, respectively. On April 13,
2001, the Company received a Notice of Continuing Events of Default and Demand
for Payment (the "Notice") from Foothill Capital Corporation, as agent for
itself and another lender under the Restated Credit Agreement, which demanded
the immediate payment of $85.7 million plus interest and various other costs,
within five days of the Notice. Further, the Company did not pay the $4.2
million interest payment due on March 15, 2001, on the Company's outstanding 4
1/2% convertible subordinated notes due in 2004 (the "Subordinated Notes") in
the principal amount of $185.0 million which resulted in the entire principal
amount becoming immediately callable. The Company's inability to meet the
obligations under the Restated Credit Agreement and the Subordinated Notes, the
working capital deficit, and the expectation of continued operating losses in
the short term had generated substantial uncertainty regarding the Company's
ability to meet its obligations in the ordinary course of business. As a result,
on April 19 and 20, 2001, the Company, including 31 of its subsidiaries, elected
to file separate petitions for relief under Chapter 11 of the United States
Bankruptcy Code which allows for the reorganization of the Company's debts. The
petitions were filed in the U.S. Bankruptcy Court for the Southern District of
Mississippi and are being jointly administered under Case No. 01-52173 SEG.
Since the date of the petition, the Company has maintained possession of its
property, and has continued to remain in control of its ongoing business affairs
as a Debtor in Possession.
Under Chapter 11, certain claims against the Company in existence prior to the
filing of the petitions for relief under the federal bankruptcy laws are stayed
while the Company continues business operations as Debtor in Possession. These
claims are reflected in the June 30, 2002 and December 31, 2001 balance sheet as
"liabilities subject to compromise." Claims secured against the Company's assets
("secured claims") also are stayed, although the holders of such claims have the
right to move the court for relief from the stay. Secured claims are secured
primarily by liens on the Company's property, plant, and equipment. Additional
claims (liabilities subject to compromise) have arisen subsequent to the filing
date resulting from rejection of executory contracts, including leases, and from
the determination by the court (or agreed to by parties in interest) of allowed
claims for contingencies and other disputed amounts.
The Company retained the investment banking firm of Houlihan, Lokey, Howard
& Zukin and the restructuring advisor of Glass and Associates, Inc. to assist in
the preparation of a plan of reorganization. These advisors are assisting
management and the Company's Board of Directors in evaluating various
alternatives including, but not limited to, sales of assets and certain of the
Company's business unit(s), infusion of capital, debt restructuring and any
combinations of these options.
7
As further described in Note 5, on March 22, 2002, the Company filed a plan
of reorganization with the United States Bankruptcy Court. The Company
anticipates amending and re-filing the plan of reorganization due to the sale of
the vessels segment. In addition to amending and re-filing the plan of
reorganization, the Company is also evaluating options to sell its Offshore
segment. The amended plan will likely result in no recovery for current equity
interests. The amount of any recovery to general creditors will depend on, but
will not be limited to the following factors: (a) the ultimate value of
pre-petition claims, (b) dollar value(s) obtained from possible sale of the
remaining business unit, (c) the dollar amount realized from possible capital
infusions and debt restructuring and (d) the dollar amount of claims associated
with the administration of this case. Note 5 also contains information regarding
asset sales and dispositions.
The amended plan of reorganization will be subject to the review and
approval of the United States Bankruptcy Court. There can be no assurance that
the amended plan will be approved or that the Company will continue to operate
in some form. It is not possible to assess the outcome of the Company's
bankruptcy proceeding or whether the Company will operate in accordance with the
amended plan, if approved.
3. Liabilities Not Subject to Compromise
Liabilities not subject to compromise include liabilities incurred
subsequent to the bankruptcy filing date, certain liabilities on contracts
assumed by the Company and long-term debt and related interest which are secured
by certain assets, primarily property and equipment. Long-term debt not subject
to compromise as of June 30, 2002 and December 31, 2001 was as follows:
June 30, December 31,
2002 2001
----------- ----------------
(in thousands)
Borrowings under the Restated Credit Agreement:
Line of credit $ 26,633 $ 28,346
Term loan 43,735 43,284
Notes payable to financial institutions and others bearing interest at rates
ranging from 6.25% to 12.00%, payable in monthly installments, maturing at
various dates through March 2013 and secured by equipment, a lease and real property 2,534 4,237
Bonds payable to MARAD bearing interest at 6.35% maturing June 2013 payable in semi-annual
installments, secured by equipment 19,854 19,854
Bonds payable, bearing interest at 7.99% payable in monthly installments commencing January 1999,
maturing December 2008, secured by equipment 14,409 14,982
Capital lease obligations bearing interest at rates ranging from 6.86% to 16.84% maturing at dates
ranging from June 2002 through September 2004 27 2,152
Note payable, bearing interest at 7.05%, payable in quarterly installments, matured March 2002,
secured by equipment 2,500 2,500
-------- --------
109,692 115,355
Less: Current portion of long-term debt including debt in default of $90.2 million and $91.5
million at June 30, 2002 and December 31, 2001, respectively 109,692 115,355
-------- --------
Long-term debt less current portion $ -- $ --
======== ========
Accrued interest on long-term debt not subject to compromise was included
in accrued liabilities at June 30, 2002 and December 31, 2001 in the amounts of
$3.9 million and $2.4 million, respectively.
Restated Credit Agreement
Effective October 24, 2000, the Company entered into a $110.0 million
amended and restated credit agreement, comprised of a $70.0 million line of
credit and a $40.0 million term loan (collectively, the "Restated Credit
Agreement"). The Restated Credit Agreement has a three-year term. The line of
credit is secured by substantially all of the Company's otherwise unencumbered
assets, including accounts receivable, inventory, equipment, real property and
all of the stock of its domestic subsidiaries and 67% of the stock of its
Canadian subsidiary. The term loan is secured by a subordinated security
interest in the line of credit collateral.
8
The interest rate on the line of credit is based on the default rate which
was 9.5% at June 30, 2002. The Company is also obligated to pay certain fees,
including a commitment fee equal to (i) during year one of the facility, 0.50%
of the unused portion of the line of credit and (ii) thereafter, a range of
0.25% to 0.50% of the unused portion of the line of credit. The term loan bears
interest at the default rate of 15.0% at June 30, 2002.
The Restated Credit Agreement requires that the Company comply with certain
financial and operating covenants, including limitations on additional
borrowings and capital expenditures, utilization of cash management accounts,
maintenance of certain minimum debt coverage ratios, minimum EBITDA, net worth
and other requirements. The Company was not in compliance with these covenants
during the six months ended June 30, 2002.
On February 15, 2002, the Company entered into its third Amended Cash
Collateral Agreement with Foothill Capital Corporation, as agent for itself and
another lender. Subsequent court hearings extended the Company's continued use
of its operating cash until October 4, 2002. The Company also agreed to comply
with certain requirements relating to cash receipts and disbursements and agreed
to make weekly adequate protection payments of $200,000. The Agreement also
stipulates the Company's consent for Foothill to accrue interest on all
indebtedness whether incurred pre or post petition at the contractual default
rate of interest set forth in the Pre-Petition Loan Documents.
Total balances outstanding under the Restated Credit Agreement at June 30,
2002 were $84.1 million including $13.7 million in letters of credit. Upon the
closing or soon thereafter of the Vessel segment, the outstanding letters of
credit will be reduced to $6.0 million resulting from the elimination of a
contract guarantee. Included in the letter of credit amount is a $5.7 million
letter of credit which is being used to fund worker's compensation claims
payable by the Company's unconsolidated captive insurance subsidiary.
With the funds realized and expected to be realized from the disposition
of assets, described in note 5, the Company anticipates having sufficient funds
available to pay the undisputed amount of the outstanding balance in the
Restated Credit Agreement upon approval of the U.S. Bankruptcy Court.
MARAD Financing Agreement
As of June 30, 2002, the Company had approximately $19.9 million in
outstanding principal related to its bonds that were guaranteed by the U.S.
Maritime Administration ("MARAD"). MARAD has subsequently made full payment
relating to this guarantee. The bonds were issued in December 1997, under Title
XI, to partially finance construction of the FGO East Facility. The Company's
plan of reorganization filed on March 22, 2002 contemplated abandoning this
facility to MARAD in full satisfaction of its claims. The Company anticipates
amending and re-filing the plan or reorganization due to the sale of the Vessels
segment. The amended plan or the possible sale of the Offshore segment may
change the decision to abandon this facility.
4 1/2% Convertible Subordinated Notes
The 4 1/2% Convertible Subordinated Notes (the "Notes") were issued by
Halter Marine Group on September 15, 1997 and 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 price of $55.26 per share. As a result of
the November 3, 1999 merger, the recorded book value of the Notes was adjusted
to reflect the fair market value on the date of the merger. Accordingly, a
discount of $70.3 million was recorded. Interest on the Notes is payable
semiannually, in arrears, on March 15 and September 15 of each year, with
principal due at maturity. The Company has included the outstanding principal
balance of $185.0 million in liabilities subject to compromise as of June 30,
2002 and December 31, 2001. Pursuant to the requirements of Statement of
Position 90-7. "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," the Company ceased accruing interest related to these Notes
beginning April 19, 2001.
9
4. Liabilities Subject to Compromise
At June 30, 2002 and December 31, 2001, liabilities subject to compromise
included the following:
June 30, December 31,
2002 2001
---------------------------
(in thousands)
Convertible subordinated notes $185,000 $185,000
Accounts payable 74,353 86,739
Contract liabilities 68,713 63,542
Accrued interest 5,041 5,338
Other accrued liabilities 23,914 20,078
-------- --------
$357,021 $360,697
======== ========
5. Plan of Reorganization and Disposition of Assets
On March 22, 2002, the Company filed a Plan of Reorganization with the
United States Bankruptcy Court, which included the reorganization of
substantially all of the Company's Offshore and Vessels segments and the
disposition of its Engineered Products segment as well as the disposition
through sale, or otherwise, of other of the Company's subsidiaries and assets as
described below. As discussed in Note 2, the Company anticipates amending and
re-filing the plan of reorganization due to the sale of the vessels segment. In
addition to amending and re-filing the plan of reorganization, the Company is
also evaluating options to sell its Offshore segment. The amended plan will be
subject to the approval of the Court.
Disposition of Vessels Segment
In May 2002, the Company entered into a contract with Bollinger Shipyards,
Inc. to sell the assets and activities of Halter Marine, Inc. for $48.0 million
cash and other considerations. The agreement was subject to an auction and
approval by the United States Bankruptcy Court. The auction commenced on July
16, 2002 and was continued through the morning of July 23, 2002. During the
auction, Vision Technologies Kinetics, Inc., submitted the winning bid of $66.0
million, subject to certain net working capital adjustments, to purchase Halter
Marine, Inc. from the Company. As a result of this overbid, Bollinger Shipyards
is entitled to $2.5 million of these sales proceeds as a contractual "break-up"
fee. The proceeds of the sale are also subject to a sales commission to the
Company's investment banker. The sale includes all the operating assets and
properties of Halter, including the assets at Halter Pascagoula, Halter Moss
Point, Moss Point Marine, Halter Port Bienville, Halter Lockport, Halter
Gulfport, and Halter Gulfport Central. The closing is expected to take place by
early September 2002, following final Hart Scott-Rodino approval.
The Company has reported the operating results of its vessels segments
separately in its consolidated statements of operations as a component of
discontinued operations. For the six months and three months ended June 30,
2002, the Company recorded loss from discontinued operations of approximately
$4.7 million and $2.3 million, respectively. For the six months and three months
ended June 30, 2001, the Company recorded loss from discontinued operations of
approximately $10.3 million and $8.7 million, respectively. Additionally, in the
second quarter of 2002, the Company wrote down the assets of the vessels segment
to their net realizable value and recorded a loss on the disposal of the vessels
segment of $34.0 million.
Revenue for the vessels segment was $43.1 million and $19.6 million for the
six months and three months ended June 30, 2002, respectively. Additionally,
revenue for the vessels segment was $59.2 million and $24.6 million for the six
months and three months ended June 30, 2001, respectively.
At June 30, 2002, the Company's financial statements include current assets
of $21.6 million and current liabilities of $2.5 million related to the Vessels
segment. At December 31, 2001, the Company's financial statements include
current assets of $24.2 million and current liabilities of $7.9 million related
to the Vessels segment. Property, plant and equipment held for disposition at
June 30, 2002 and December 31, 2001 include $56.4 million and $2.0 million,
respectively, related to the Vessels segment.
10
Disposition of Engineered Products Segment
In May 2001, the Company completed the sale of its French subsidiaries,
Brissoneau et Lotz Marine, S.A., in Nantes, France, and BOPP S.A., in Brest,
France to Hydralift A.S.A. of Kristiansand, Norway for cash consideration of
$33.5 million, before expenses. Pursuant to an order of the Bankruptcy Court,
the Company agreed to escrow funds from the sale. Disbursement of such funds is
subject to the review and approval of legal counsel representing the Official
Committee of Unsecured Creditors and/or an order of the Bankruptcy Court. The
funds held in escrow are presented as restricted cash and cash equivalents in
the accompanying balance sheet as of June 30, 2002 and December 31, 2001. The
Company recorded a gain of approximately $16.0 million related to this
transaction in the second quarter of 2001.
In April 2002, the Company completed the sale of Engineered Products
("Amclyde") to Hydralift A.S.A. for cash consideration of approximately $36.0
million subject to certain net working capital adjustments. The proceeds of the
sale are subject to a sales commission to the Company's investment banker. The
Company recorded a loss on disposal of approximately $42.0 million related to
this transaction in the fourth quarter of 2001. The loss was adjusted in the
second quarter of 2002 and a gain on disposal was recorded in the amount of $0.4
million after the consummation of the sale.
In addition, the Company has reported the operating results of its
Engineered Products segments separately in its consolidated statements of
operations as a component of discontinued operations. The Company recorded
income from discontinued operations of approximately $0.6 million for the six
months ended June 30, 2002 and a loss from discontinued operations of $0.3
million for the second quarter of 2002. For the six months ended June 30, 2001
and the second quarter of 2001, the Company recorded income from discontinued
operations of approximately $4.2 million and $2.3 million, respectively.
Revenue for the Engineered Products segment was $22.7 million and $4.1
million for the six months and three months ended June 30, 2002, respectively.
Additionally, revenue for the Engineered Products segment was $54.8 million and
$23.6 million for the six months and three months ended June 30, 2001,
respectively.
At December 31, 2001, the Company's financial statements include current
assets of $17.5 million and current liabilities of $6.4 million related to the
Engineered Products segment. Property, plant and equipment, including goodwill,
held for disposition at December 31, 2001 include $29.7 million related to the
Engineered Products segment.
Restricted cash at June 30, 2002 represents the proceeds remaining from the
sale of the Engineered Products segments.
Sale of Friede Goldman Newfoundland, Limited
In March 2002, the Company completed the sale of substantially all the
assets of its wholly-owned subsidiary, Friede Goldman Newfoundland Limited
("FGN") for cash consideration of $5.0 million which represents primarily
repayment of intercompany debt. In addition, the Province of Newfoundland agreed
to waive certain liquidated damages related to noncompliance with minimum
employment levels at the Company's Canadian shipyards during 1999 and 2000. In
the fourth quarter of 2001, the Company wrote down the assets of this subsidiary
to their net realizable value and recorded a loss of approximately $4.9 million.
The loss was adjusted in 2002 and gains of $0.6 million and $0.5 million were
recorded in first and second quarters of 2002, respectively, after the
consummation of the sale. The property, plant and equipment of FGN is included
in property, plant and equipment including goodwill held for disposition at
December 31, 2001. A component of equipment and inventory which was not included
in the sale is in the process of being relocated to one of the Company's Texas
facilities within the Offshore segment.
Disposition of FGO East Facility
The Company has approximately $19.9 million in outstanding principal
related to its bonds that were guaranteed by the U. S. Maritime Administration
("MARAD"). MARAD has subsequently made full payment relating to this guarantee.
The bonds were issued in December 1997, under Title XI, to partially finance
construction of the Company's FGO East Facility. The Company's plan of
reorganization filed March 22, 2002 contemplates abandoning this facility to
MARAD in full satisfaction of its claims. As a result, the Company recorded a
loss on assets held for disposition of approximately $17.1 million in the fourth
quarter of 2001, which represents the excess of the carrying value of the
Company's FGO East Facility's fixed assets over the outstanding principal amount
of the MARAD bonds. The property, plant and equipment of the FGO East Facility
is included in property, plant and equipment including goodwill held for
disposition at June 30, 2002 and December 31, 2001. The Company anticipates
amending and re-filing the plan of reorganization due to the sale of the Vessels
segment. The amended plan or the possible sale of the Offshore segment may
change the decision to abandon this facility.
Sale of Friede & Goldman, Ltd.
In June 2002, the company completed the sale of substantially all the
assets of its wholly owned subsidiary, Friede & Goldman, Ltd. ("FGL") for cash
consideration of $15.0 million subject to certain net working capital
adjustments. The proceeds of the sale are subject to a sales commission to the
Company's investment banker. The Company has recorded a gain of $11.9 million
related to this transaction in the second quarter of 2002. The property, plant
and equipment of FGL is included in property, plant and equipment including
goodwill held for disposition at December 31, 2001.
11
6. Other Receivables
Other receivables consist of $15.4 million related to the sale of FGL and
$5.0 million related to the working capital adjustment on the Amclyde sale. The
receivable related to the sale of FGL was paid on July 5, 2002. The Company and
Hydralift have not reached an agreement regarding the working capital adjustment
and the parties have engaged a third party arbitrator to finalize the working
capital adjustment.
7. Inventories
At June 30, 2002 and December 31, 2001, inventories consisted of the
following:
June 30, December 31,
2002 2001
------------------------
(in thousands)
Jack-up rig components $15,381 $15,381
Steel and other raw materials 7,050 14,487
Other -- 3,704
------- -------
22,431 33,572
Less reserve for obsolete inventories 13,500 15,992
------- -------
$ 8,931 $17,580
======= =======
8. Other Assets
At June 30, 2002 and December 31, 2001, other assets included restricted
cash in the amount of $8.6 million that has been pledged to secure bonds
relating to construction contracts and $1.2 million in restricted cash related
to the sale of BLM.
9. Reconciliation of Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share before discontinued operations:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in 000's, except per share data)
Numerator:
Net income (loss) before discontinued
operations, basic and diluted $ 7,222 $(18,924) $ (198) $(92,410)
======== ======== ======== ========
Denominator:
Weighted average shares outstanding 48,709 48,709 48,709 48,709
Effect of dilutive securities:
Stock options -- -- -- --
-------- ------- -------- --------
Denominator for net income (loss) before
discontinued operations, basic and diluted 48,709 48,709 48,709 48,709
======== ======= ======== ========
Net income (loss) per share before
discontinued operations, diluted $ 0.15 $ (0.39) $ -- $ (1.90)
======== ======== ======== ========
The effect on net income (loss) per share before discontinued operations,
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 for the
three and six months ended June 30, 2002 and 2001.
12
10. Comprehensive loss
Other comprehensive loss includes foreign currency translation adjustments.
Total comprehensive loss was as follows:
Six Months Ended
June 30,
2002 2001
----------- -------------
(in thousands)
Net loss $(37,942) $(82,440)
Other comprehensive loss:
Foreign currency translation (132) (1,337)
-------- --------
Comprehensive loss $(38,074) $(83,777)
======== ========
11. Captive Insurance Company
Prior to March 1, 2000, Offshore Marine Indemnity Company ("OMIC"), a
wholly-owned subsidiary of the Company domiciled in Vermont, acted as a fronting
reinsurance captive company for the Company workers' compensation insurance
program. On June 7, 2001, the Commissioner of the Vermont Department of Banking,
Insurance, Securities and Healthcare Administration was ordered by the
Washington County Superior Court in the State of Vermont to take possession and
control of all or part of the property, books and accounts, documents and other
records of OMIC. OMIC and its officers, managers, agents, employees and other
persons were also enjoined from disposing of its property and from transacting
its business except with the written consent of the Commissioner. Based on the
court order, the Company does not exercise control over OMIC. Accordingly, the
subsidiary was deconsolidated and the Company eliminated the insurance reserves
and reinsurance receivables from its balance sheet and wrote off its investment
in OMIC totaling $1.4 million during 2001. At June 30, 2002, the Company had
amounts due to OMIC of approximately $5.2 million. This liability is included in
accrued liabilities in the accompanying balance sheet.
OMIC assumed certain risks from Reliance Insurance Company (Reliance) under
a reinsurance agreement from March 1997 to March 2000. OMIC assumed risk for the
first $250,000 on individual workers' compensation losses written through
Reliance for the Company. Pursuant to the terms of the reinsurance agreement
with Reliance, amounts due from OMIC to Reliance are secured by a letter of
credit issued in favor of Reliance. At June 30, 2002, the remaining balance of
this letter of credit was $5.7 million. Reliance has notified the Company that
it believes the letter of credit was issued for the benefit of all of Reliance's
policyholders. The Company has filed suit against Reliance to prevent any draws
on the letter of credit that would fund claim payments other than payments
related to OMIC. The outcome of this suit is uncertain.
Prior to its deconsolidation, OMIC had a reinsurance receivable from
Reliance of approximately $11.0 million. On October 3, 2001, Reliance was placed
into liquidation by the Pennsylvania Insurance Commissioner. The Company, in
consultation with legal counsel, believes the liquidation of Reliance triggers
relevant state guaranty association statues and the guaranty associations become
obligated, to the extent of each state's statutory coverage, for payment of the
claims of Reliance's insureds and claimants. As a result, management believes
that amounts due from Reliance to OMIC or the Company and its claimants will be
paid by the applicable state guaranty association. However, the state guaranty
associations may assert claims against OMIC and the Company for payments made to
claimants of Reliance. There is no assurance that the Company's position will be
upheld by applicable courts and that additional liabilities will not result.
12. Contingencies
Bankruptcy Claims
As a result of certain of the contractual matters described in Note 12 and
other claims asserted by secured and unsecured creditors, the Company has been
notified that proofs of claims filed with the Bankruptcy Court related to its
Chapter 11 filing significantly exceed the liabilities the Company has recorded.
At June 30, 2002 and December 31, 2001, the Company accrued its
13
best estimate of the liability for the resolution of these claims. This estimate
has been developed in consultation with outside counsel that is handling the
bankruptcy and defense of these matters. To the extent additional information
arises or the Bankruptcy Court approves the proofs of claims as filed, it is
possible that the Company's estimate of its liability in these matters may
change. Management believes any change to the Company's estimate will increase
the balance of its liabilities subject to compromise.
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 interest to
the county based upon the labor shortfall or pay the remaining balance of the
$6.0 million loan incurred by the county to finance such improvements. The
Company was in compliance with this provision at June 30, 2002.
Liberty Mutual and Wausau
On December 5, 2000, the Company reached a settlement agreement with a
former workers' compensation provider. In conjunction with this agreement, the
Company was to pay approximately $3.0 million as its share of the settlement of
all claims arising from this case. As of the bankruptcy filing date, the Company
had paid approximately $1.75 million of the settlement. The Bankruptcy Court on
October 2, 2001 denied the Company and another co-defendant permission to pay
the remaining $1.25 million of the settlement. As a result of this ruling, the
insurer may file a claim for an amount substantially greater than the remaining
installment. As of June 30, 2002, $1.25 million, the amount of the remaining
installment, was included in liabilities subject to compromise on the
accompanying balance sheet. The Company believes that any additional amounts,
which may be approved by the Bankruptcy Court, will also be a liability subject
to compromise.
13. Contractual Matters
The Company's results of operations for the six months ended June 30, 2002
and 2001 and its current financial condition have been materially and adversely
impacted by contracts for the construction of four semi-submersible drilling
rigs (Ocean Rig and Petrodrill contracts), one vehicle car carrier (Pasha
contract) and one heavy derrick-lay barge (CNOOC contract), as further described
below.
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. Since January 2000, when the Company entered into a
Confidential Settlement Agreement with Ocean Rig to resolve disputes with
respect to these contracts, the Company continued to experience significant
continuing cost overruns and delays in the construction of these rigs. As a
result, the Company recorded provisions for contract losses during the second,
third and fourth quarters of 2000 of approximately $24.6 million, $7.0 million
and $38.2 million, respectively, related to this project. Losses for the fourth
quarter include a provision for all costs the Company incurred through the date
of the March 9, 2001 amendment to the contract, at which time the contract was
converted to a "time and materials" basis. The significant events which occurred
during 2000 and 2001 related to this project are discussed below.
Delays and cost increases related to additional design changes initiated by
Ocean Rig and the late delivery by Ocean Rig of information and equipment the
Company was required to provide continued after the Settlement Agreement. Ocean
Rig denied responsibility for these delays and cost increases. This
Post-Settlement Agreement dispute was resolved pursuant to a negotiated
Co-operation Agreement dated November 30, 2000 (the "Co-operation Agreement")
which provided for additional compensation to the Company from Ocean Rig and
revised delivery dates of March 2001 and June 2001 and imposition of liquidated
damages thereafter at the rate and subject to the maximum amount stated in the
Settlement Agreement.
Despite the Company's best efforts to progress the project consistent with
the terms of the Co-operation Agreement, it continued to experience additional
cost overruns and delays which have had a significant adverse impact on its
financial results in the fourth quarter of 2000 and its current financial
condition. On March 1, 2001, the Company stopped work on the Ocean Rig project
and Ocean Rig commenced an arbitration proceeding in London. Further, on March
2, 2001, Ocean Rig commenced
14
proceedings before the United States District Court for the Southern District of
Mississippi seeking possession of the rigs. On March 9, 2001, the Company
entered into a Remuneration Agreement with Ocean Rig ASA in order to resolve the
disputes which had arisen; to amend certain provisions of the completion
contracts to construct two Bingo design semi-submersible offshore drilling rigs
and previous settlement agreements; and to ensure the successful and timely
completion of the rigs to the mutual benefit of both parties. In accordance with
the Remuneration Agreement, Ocean Rig ASA was granted control over the rig
projects and paid the Company a contractually established rate for equipment,
personnel and labor provided by the Company to cover the costs of completing the
projects. As a further result of the agreement, Ocean Rig withdrew the
arbitration and other legal proceedings. The Company also agreed to issue 2.0
million warrants to Ocean Rig ASA to purchase its common stock at a strike price
of $5.00 per share, but FGOT's completion of the project on a "time and
materials" basis, including payment of all direct labor and these warrants were
not issued due to the Company's bankruptcy filing. Shipyard construction of the
first rig was completed in May 2001 and that rig left the Company's facility to
undergo final outfitting, including the installation of the dynamic positioning
thruster system. This rig has completed final sea trial commissioning and is in
operation. The second rig left the Company's facility in July 2001 and
construction will be completed at a Canadian shipyard.
On December 10, 2001, the Company entered into a Delivery and Close-Out
Agreement with Ocean Rig under which both parties waived and released all claims
each had against the other except certain limited claims reserved in the
Agreement. The Agreement is subject to the approval of the Bankruptcy Court. The
Court's approval of the Delivery and Close-Out Agreement was not received prior
to the deadline for filing proofs of claim in the Bankruptcy Court. In order to
preserve its rights, Ocean Rig filed unquantified proofs of claim for both rigs.
On May 16, 2002, the Court entered an order approving the Delivery and Close-Out
Agreement. Pursuant to the order, the proofs of claim filed by Ocean Rig are
deemed held in abeyance. If the Company fails to comply with the mutual waivers
and releases of the Delivery and Close-Out Agreement, the proofs of claim could
be reactivated and amended. The Company does not believe that the proofs of
claim will be reactivated and amended.
Petrodrill
In April 1998, one of the Company's subsidiaries Friede Goldman
Offshore-Texas ("FGOT") (and a former subsidiary of HMG) entered into contracts
to construct two semi-submersible drilling rigs for two newly formed entities,
Petrodrill IV, Ltd. and Petrodrill V, Ltd. ("Petrodrill"). After the
commencement of construction, FGOT began to experience delays in the production
schedule and increased costs due, in whole or part, to delays caused by
Petrodrill and by subcontractors nominated by Petrodrill. In addition, FGOT had
to perform as the lead yard as opposed to a follow-on yard as initially
anticipated by the contracting 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.
In January 2000, FGOT notified Petrodrill that it was mitigating FGOT's and
Petrodrill's damages by deferring certain fabrication efforts until engineering
work could be completed so that the Company could determine the ultimate cost of
the project and permit construction to 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. Consequently, Petrodrill and the Company filed a
series of actions against one another in the United States federal court and in
a court in London, England. In May 2000, FGOT and Petrodrill finalized an
agreement to amend the construction contract and dismiss the litigation
previously filed against each other. The amendment extended delivery dates,
capped liquidated damages and increased the Company's contract value.
On February 28, 2001, the Company announced an agreement in principle with
Fireman's Fund, the surety company which wrote the performance bonds of $87.0
million per rig on the Petrodrill project, pursuant to which the surety company
had agreed to provide certain funding for the completion of construction of the
two semi-submersible drilling rigs. The agreement provided that the surety
company would contract with FGOT for fringe benefit costs, materials,
subcontractor and other costs and an allocation for overhead and general and
administrative expenses. The terms of the final agreement were not successfully
negotiated resulting in the surety ceasing to provide funding.
On May 4, 2001, the Company announced that it filed with the Bankruptcy
Court a motion to reject the contracts related to the Petrodrill project. This
motion was approved by the Bankruptcy Court in June 2001 and finalized in July
2001. Work on the projects was discontinued effective May 4, 2001. Construction
on the projects resumed pursuant to a Bankruptcy Court motion effective
September 6, 2001. This motion provided for the Company to work as authorized by
the customer and surety company for a 120-day period on Rig I and a 150-day
period on Rig II. These periods began on September 6, 2001. The
15
construction was to be performed at specified labor, equipment and material
billing rates. In December 2001, the Company, Petrodrill and Fireman's Fund
jointly moved for and were granted an extension of time to April 4, 2002 for the
removal of the first rig from the Company's Pascagoula, Mississippi shipyard and
to May 9, 2002 for the removal of the second rig from the Company's shipyard in
Orange, Texas. Work continued past the deadlines based on a mutual agreement by
both parties under the same terms of the court agreement. Our work was completed
on the first rig and it was removed from our property on May 3, 2002. Our work
was completed on the second rig and it was removed from our property on July 26,
2002.
At June 30, 2002, $19.2 million was included in the Company's reserve for
estimated costs to compete the contract, which represents its estimate of the
remaining cost of completion in excess of future billings at the time work on
the project was suspended. The Company's estimate was based on an uninterrupted
work plan the Company developed during the first quarter of 2001. At June 30,
2002, $24.8 million was included in the Company's liabilities related to costs
funded to date by the surety. The Company believes its liability related to the
project at June 30, 2002 is limited to the sum of these two liabilities,
approximately $44.0 million. This amount is included in liabilities subject to
compromise in the accompanying balance sheet.
Petrodrill has submitted proofs of claim totaling $477.0 million based on
estimated costs to complete the rigs and lost revenues. Fireman's Fund has
submitted proofs of claim which are unquantified at this time. The Company
believes Petrodrill's claim substantially exceeds its reserve of $44.0 million
as of June 30, 2002 due to delays caused by the customer/surety and the
customer's/surety's inaction on resolving the strategy to complete construction
of the rigs. The Company is not privileged to the customer's/surety's final
strategy for completion of these projects and their claims and does not have
information as to the estimated final cost to complete under the
customer's/surety's strategy. The Company believes the claims made by Petrodrill
and the surety, if substantiated, would be a liability subject to compromise.
There is no assurance that management's position regarding the value of the
claims of Petrodrill and Fireman's Fund will be upheld by applicable courts and
additional liabilities will not result in excess of the reserve recorded at June
30, 2002.
PASHA
On December 28, 1999, the Company signed a contract for the construction of
a 4,000 car-carrier vessel for transport of vehicles between the West Coast and
the Hawaiian Islands. On May 1, 2001 the Company gave notice to the customer
that it was not financially capable of completing this contract without further
funding to ensure a cash flow positive contract from the date of filing Chapter
11 reorganization on April 20, 2001. This additional funding was anticipated to
come from the surety company which wrote the performance bond for the project.
The surety company provided additional funding for the project under court order
until July 27, 2001 when it informed the Company that it would not fund
completion of the vessel. Construction on the project was suspended when this
funding ceased. The Company and the customer maintain that this is a violation
of the terms of the performance bond. The customer has sued the surety in U.S.
District Court. The United States Department of Justice ("USDOJ"), which
represents the United States Maritime Administration ("MARAD") (the provider of
customer financing) and the customer have also sued the surety in the state
court of Mississippi. The suits are seeking specific performance of the surety
under the terms of the performance bond and are pending. The customer has signed
a letter of intent with the Company to complete the project with or without the
surety's participation subject to the Company's financial status as the Company
emerges from Chapter 11.
At June 30, 2002, $7.8 million was included in the Company's reserve for
estimated costs to complete the contract, which represents its estimate of the
remaining costs of completion in excess of future billings at the time work on
the project was suspended. The customer has submitted proofs of claim totaling
$906.0 million and the surety has submitted proofs of claim which are
unquantified at this time. The Company believes the claims made by the customer
and the surety, if substantiated, would be a liability subject to compromise.
There is no assurance that management's position regarding the value of the
claims of the customer and the surety will be upheld by applicable courts and
additional liabilities will not result in excess of the reserve recorded at June
30, 2002.
CNOOC
The Company filed a motion with the Bankruptcy Court to reject the contract
with China National Offshore Oil Company (CNOOC) for the construction of a heavy
derrick-lay barge. Liberty Mutual Insurance Company (Liberty Mutual) opposed the
contract rejection. Pursuant to the contract, CNOOC was provided a bank
guarantee from Royal Bank of Canada (Royal Bank). After the Company filed for
bankruptcy, CNOOC received approximately $10.9 million from Royal Bank under the
bank guarantee. Under a counter guarantee, Royal Bank received from Liberty
Mutual the same amount that Royal Bank paid to CNOOC. Prior to filing for
bankruptcy, the Company and certain of its subsidiaries entered into an
indemnification agreement with Liberty Mutual providing that the Company and
those subsidiaries would indemnify Liberty Mutual for any amount paid to Royal
Bank under the counter guarantee. At June 30,2002, approximately $10.9 million
was included in the Company's liabilities subject to compromise in the
accompanying balance sheet for the indemnification agreement. Liberty Mutual has
submitted proofs of claim which are unquantified at this time. Liberty Mutual
has also asserted claims against proceeds received by a subsidiary of the
Company under post-petition contacts between the subsidiary and CNOOC. The
Company believes any claim made by Liberty Mutual would be a liability subject
to compromise and no loss exposure exists in excess of the liability recorded.
16
14. Subsequent Event
The Company is a subcontractor in the construction of a vessel which was
damaged by fire on July 2, 2002. Subsequently, the owner of the vessel and
Trinity Yachts, Inc. have each filed motions with the United States Bankruptcy
Court seeking administrative claims against the Company in the amounts of
approximately $19.0 and $24.0 million, respectively, relating to their alleged
damages. At this time, the Company believes that insurance coverage is adequate
to cover any liability the Company is determined to bear in this matter and no
provision for loss has been made at this time.
Item 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Overview
On March 22, 2002, we filed a Plan of Reorganization with the United States
Bankruptcy Court, which is subject to the approval of the Court. The Plan of
Reorganization includes the reorganization of substantially all of our Offshore
and Vessels segments and the disposition of our Engineered Products segment as
well as the disposition through sale, or otherwise, of our other subsidiaries
and assets. The Company anticipates amending and re-filing the plan of
reorganization due to the sale of the Vessels segment. In addition to amending
and re-filing the plan of reorganization, the Company is also evaluating options
to sell its Offshore segment. The amended plan will be subject to the approval
of the Court.
Industry Conditions
The level of demand for a significant portion of our 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.
During 2001 and 2002, the demand for our services related to the
construction, conversion and repair of offshore drilling rigs was weak due to
declines in oil and natural gas prices, the general weakening in the domestic
and international economy and uncertainties related to our Chapter 11 filing.
The price for oil generally remained above $25 per barrel in 2001; however,
natural gas prices declined dramatically from a high on the spot market of
almost $10/mcf to around $2/mcf at the end of the year. Natural gas prices began
to weaken during June 2001 as a result of increasing inventory levels. Natural
gas prices experienced further declines as warmer than normal weather and
economic slowdowns in the U.S. and internationally reduced demands for natural
gas. These economic events caused exploration and production companies in the
U.S. Gulf of Mexico to limit their capital investments and contributed to a
collapse in domestic drilling activity during the second half of 2001. These
trends have continued in 2002. The U.S. Gulf of Mexico is the primary market for
our services related to the conversion and repair of offshore drilling rigs. As
the demand for offshore drilling rigs in the Gulf of Mexico softened, our
operating results were negatively impacted because of our dependence on
customers that operate drilling rigs and provide other offshore energy services
in this market.
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") through the sale date of June 30,
2002, Friede Goldman Newfoundland Limited ("FGN") through the sale date of March
28, 2002, and Halter Marine, Inc.
17
("Halter")(collectively referred to as the "Company"). All significant
intercompany accounts and transactions have been eliminated.
Three Months Ended June 30, 2002 vs. Three Months Ended June 30, 2001
The Company has reported the operating results of its Vessels and
Engineered Products segments for the three months ended June 30, 2002 and 2001
separately in its consolidated statements of operations as a component of
discontinued operations.
Contract revenue from continuing operations decreased 22.7% to $26.9
million for the second quarter of 2002 compared to $34.8 million for the second
quarter of 2001. The overall decrease of $7.9 million was primarily due to work
on two new build semi-submersible drilling rigs (Ocean Rig) which were completed
in the third quarter of 2001 and have not been replaced in 2002. Additionally,
work performed on the CNOOC contract in 2001 has not been replaced in 2002.
Gross profit from continuing operations increased to $5.0 million, or 18.6%
of revenue, for the second quarter of 2002 compared to $1.6 million, or 4.6% of
revenue, for the second quarter of 2001. The increase in margin is primarily due
to earnings on post rejection work on the Petrodrill court motion and various
smaller projects included in 2002 which were not in progress in the second
quarter of 2001.
Selling, general and administrative expenses ("SG&A expenses") were $3.0
million for the second quarter of 2002, or 11.1% of gross revenue, compared to
$5.7 million, or 16.4% of gross revenue, for the second quarter of 2001. The
decrease in SG&A expenses is due to personnel reductions and other cost-saving
measures we implemented.
Amortization of goodwill was $2.8 million for the second quarter of 2001.
Amortization of goodwill is no longer being recorded in 2002 as a result of the
goodwill impairment charge of $201.6 million that was recorded in the fourth
quarter of 2001 and the disposition of the Company's Engineered Products
segment.
Net interest expense (interest expense less interest income) was $3.6
million for the second quarter of 2002 relatively unchanged compared to $3.5
million for the second quarter of 2001. The Company recorded a $1.0 million
adjustment in the second quarter of 2001 related to discount accretion on the
$185.0 million, 4 1/2% convertible subordinated notes. Contractual interest
expense of $2.1 million and $1.7 million on the 4 1/2% convertible subordinated
notes was not recorded in the second quarters of 2002 and 2001 due to the
Chapter 11 filing.
The Company incurred professional fees of $3.5 million in the second
quarter of 2002 compared to $2.0 million in the second quarter of 2001 related
to its bankruptcy proceeding and reorganization in 2001. The Company also
wrote-off $2.6 million of debt issuance costs related to the 4 1/2% subordinated
convertible notes in the second quarter of 2001 due to the notes being
reclassified as a liability subject to compromise.
The Company recorded a gain on sale of assets in the amount of $12.4
million in the second quarter of 2002. This gain includes $11.9 million related
to the sale of FGL and a $0.5 million adjustment related to the FGN sale.
Discontinued Operations
The Company recorded a loss from operations of its Engineered Products
segment of $0.3 million for the quarter ended June 30, 2002 as compared to
income of $2.3 million from discontinued operations recorded for the quarter
ended June 30, 2001 due to the disposition of Amclyde in the second quarter of
2002.
The Company recorded an adjustment to the disposal of Engineered Products
in the amount of $0.4 million in the second quarter of 2002 and a gain of $16.0
million in the second quarter of 2001 related to the sale of its French
subsidiaries in the Engineered Products segment.
The Company recorded losses from operations of Vessels in the amounts of
$2.3 million and $8.7 million in the second quarter of 2002 and 2001,
respectively.
In the second quarter of 2002, the Company recorded a loss on the disposal
of Vessels in the amount of $34.0 million related to the sale of Halter Marine,
Inc.
18
The Company did not record income tax expense in the second quarter of
2002 compared to $3.6 million in the second quarter of 2001. As a result of
losses recorded during the fourth quarter of 2000 and during the year ended
December 31, 2001, the benefits available for financial reporting purposes were
limited significantly. The Company has recorded a valuation allowance which
offsets substantially all of the deferred tax assets arising from contract
reserves and net operating loss carry-forwards generated through the current
period. The income tax expense recorded during the second quarter of 2001
relates to income generated by foreign subsidiaries.
Six Months Ended June 30, 2002 vs. Six Months Ended June 30, 2001
The Company has reported the operating results of its Vessels and
Engineered Products segments for the six months ended June 30, 2002 and 2001
separately in its consolidated statements of operations as a component of
discontinued operations.
Contract revenue from continuing operations, decreased 38.4% to $52.9
million for the six months ended June 30, 2002 compared to $85.9 million for the
six months ended June 30, 2001. The overall decrease of $33.0 million was
primarily due to work on two new build semi-submersible drilling rigs (Ocean
Rig) which were completed in the third quarter of 2001 and have not been
replaced in 2002. Additionally, work performed on the CNOOC contract during the
six months ended June 30, 2001 has not been replaced in 2002.
Gross profit from continuing operations was $9.8 million, or 18.3% of
revenue, for six months ended June 30, 2002 compared to $3.4 million or 4.0% of
revenue, for the six months ended June 30, 2001. The overall change is primarily
due to earnings on post rejection work on the Petrodrill court motion and
various smaller projects included in 2002 which were not in progress in the six
months ended June 30, 2001.
Selling, general and administrative expenses ("SG&A expenses") were $7.4
million for the six months ended June 30, 2002, or 14.0% of gross revenue,
compared to $13.2 million, or 15.3% of gross revenue, for the six months ended
June 30, 2001. The decrease in SG&A expenses is due to personnel reductions and
other cost-saving measures we implemented.
Amortization of goodwill was $5.6 million for the six months ended June 30,
2001. Amortization of goodwill is no longer being recorded in 2002 as a result
of the goodwill impairment charge of $201.6 million that was recorded in the
fourth quarter of 2001 and the disposition of the Company's Engineered Products
segment.
Net interest expense (interest expense less interest income) decreased to
$7.4 million for the six months ended June 30, 2002 compared to $12.2 million
for the six months ended June 30, 2001 primarily due to contractual interest
expense of $4.2 million and $1.4 million on the 4 1/2% convertible subordinated
notes not being recorded in the six months ended June 30, 2002 and 2001,
respectively, due to the Chapter 11 filing.
The Company recorded discount accretion of $54.9 million during the six
months ended June 30, 2001 related to the reclassification of the $185.0
million, 4 1/2% convertible subordinated notes as a liability subject to
compromise.
The Company incurred professional fees of $7.8 million in the six months
ended June 30, 2002 related to it's bankruptcy proceeding and reorganization in
2001 compared to $2.0 million for the six months ended June 30, 2001. In 2001,
the Company also wrote-off $2.6 million of debt issuance costs related to the 4
1/2% subordinated convertible notes due to the notes being reclassified as a
liability subject to compromise.
Additionally, the Company recorded a gain on sale of assets in the amount
of $12.9 million in the six months ended June 30, 2002. This gain includes $11.8
million related to the sale of FGL. Additionally, an adjustment of $1.1 million
was recorded which relates to the sale of FGN.
Discontinued Operations
The Company recorded income from operations of its Engineered Products
segment of $0.6 million for the six months ended June 30, 2002 as compared to
$4.2 million from discontinued operations recorded for the six months ended
June 30, 2001 due to the disposition of Amclyde in the second quarter of 2002.
19
The Company recorded an adjustment to the disposal of Engineered Products
in the amount of a $ 0.4 million gain in the second quarter of 2002 and a gain
of $16.0 million in the second quarter of 2001 related to the sale of Amclyde
and its French subsidiaries, respectively.
The Company recorded a loss from operations of Vessels in the amounts of
$4.7 million and $10.3 million in the six months ended June 30, 2002 and 2001,
respectively.
In the second quarter of 2002, the Company recorded a loss on the disposal
of Vessels in the amount of $34.0 million related to the sale of Halter Marine,
Inc.
The Company had income tax expense of $0.3 million in the six months ended
June 30, 2002 compared to $4.0 million in the six months ended June 30, 2001. As
a result of losses recorded during the fourth quarter of 2000 and during the
year ended December 31, 2001, the benefits available for financial reporting
purposes were limited significantly. The Company has recorded a valuation
allowance which offsets substantially all of the deferred tax assets arising
from contract reserves and net operating loss carry-forwards generated through
the current period. The income tax expense recorded during the six months ended
June 30, 2002 and 2001 relates to income generated by foreign subsidiaries.
Our backlog from continuing operations of $24.1 million at June 30, 2002
increased 200.0% compared to $8.0 million at June 30, 2001.
Liquidity and Capital Resources
As further described in Note 2, we filed a petition for relief under
Chapter 11 of the United States Bankruptcy code in April 2001.
Cash flow summary
During the six months ended June 30, 2002, we financed our business
activities through funds generated from cash balances, including those generated
through collections of accounts receivable and proceeds received from the sale
of FGN and Engineered Products.
Net cash used in operating activities during the six months ended June 30,
2002 was $19.5 million including a net loss of $37.9 million and a $20.6 million
loss on sale of subsidiaries for the period offset by $7.8 million in
depreciation and amortization. Funds generated through operating activities
included a $5.3 million decrease in contract and other receivables. Funds used
by operating activities included a $8.3 million decrease in billings in excess
of costs and estimated earnings on uncompleted contracts.
Net cash provided by investing activities during the six months ended
June 30, 2002 was $10.5 million which reflected $35.7 million and $4.2 million
in net proceeds from the sale of Engineered Products and FGN, respectively,
during the period. This was offset by a $29.4 million increase in restricted
cash which reflects the proceeds remaining from the sale of the Engineered
Products segment.
Net cash used by financing activities during the six months ended June 30,
2002 was $3.7 million. We had net repayments under our line of credit of $1.3
million and repayments of borrowings from other debt facilities of $2.5 million.
Restated Credit Agreement
Effective October 24, 2000, the Company entered into a $110.0 million
amended and restated credit agreement, comprised of a $70.0 million line of
credit and a $40.0 million term loan (collectively, the "Restated Credit
Agreement"). The Restated Credit Agreement has a three-year term. The line of
credit is secured by substantially all of the Company's otherwise unencumbered
assets, including accounts receivable, inventory, equipment, real property and
all of the stock of its domestic subsidiaries and 67% of the stock of its
Canadian subsidiary. The term loan is secured by a subordinated security
interest in the line of credit collateral.
20
The interest rate on the line of credit is based on the default rate which
was 9.5% at June 30, 2002. The Company is also obligated to pay certain fees,
including a commitment fee equal to (i) during year one of the facility, 0.50%
of the unused portion of the line of credit and (ii) thereafter, a range of
0.25% to 0.50% of the unused portion of the line of credit. The term loan bears
interest at the default rate of 15.0% at June 30, 2002.
The Restated Credit Agreement requires that the Company comply with certain
financial and operating covenants, including limitations on additional
borrowings and capital expenditures, utilization of cash management accounts,
maintenance of certain minimum debt coverage ratios, minimum EBITDA, net worth
and other requirements. The Company was not in compliance with these covenants
during the quarter ended June 30, 2002.
On February 15, 2002, the Company entered into its third Amended Cash
Collateral Agreement with Foothill Capital Corporation, as agent for itself and
another lender. Subsequent court hearings extended the Company's continued use
of its operating cash until October 4, 2002. The Company also agreed to comply
with certain requirements relating to cash receipts and disbursements and agreed
to make weekly adequate protection payments of $200,000. The Agreement also
stipulates the Company's consent for Foothill to accrue interest on all
indebtedness whether incurred pre or post petition at the contractual default
rate of interest set forth in the Pre-Petition Loan Documents.
Total balances outstanding under the Restated Credit Agreement at June 30,
2002 were $84.1 million including $13.7 million in letters of credit. Upon the
closing of the Vessel segment, the outstanding letter of credit will be reduced
to $6.0 million resulting from the elimination of a contract guarantee. Included
in the letter of credit amount is a $5.7 million letter of credit which is being
used to fund worker's compensation claims payable by the Company's
unconsolidated captive insurance subsidiary.
MARAD Financing Agreement
As of June 30, 2002, the Company had approximately $19.9 million in
outstanding principal related to its bonds that were guaranteed by the U. S.
Maritime Administration ("MARAD"). MARAD has subsequently made full payment
relating to this guarantee. The bonds were issued in December 1997, under
Title XI, to partially finance construction of our FGO East Facility. The
Company's plan of reorganization filed on March 22, 2002 contemplates abandoning
this facility to MARAD in full satisfaction of its claims. The Company
anticipates amending and re-filing the plan or reorganization due to the sale of
the Vessels segment. The amended plan or the possible sale of the Offshore
segment may change the decision to abandon this facility.
Convertible Subordinated Notes
The 4 1/2% Convertible Subordinated Notes (the "Notes") were issued by HMG
on September 15, 1997 and 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 price of $55.26 per share. As a result of the
November 3, 1999 merger, the recorded book value of the Notes was adjusted to
reflect the fair market value on the date of the merger. Accordingly, a discount
of $70.3 million was recorded. Interest on the Notes is payable semiannually, in
arrears, on March 15 and September 15 of each year, with principal due at
maturity. The Company has included the outstanding principal balance of $185.0
million in liabilities subject to compromise as of June 30, 2002 and December
31, 2001. Pursuant to the requirements of Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
the Company ceased accruing interest related to these Notes beginning April 19,
2001.
Forward-Looking Statements
This Report on Form 10-Q 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-Q, are forward-looking statements. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions, including (i) risks
related to our ability to meet our financial obligations when due and generate
sufficient cash flow from operating or financing activities to sustain projected
operating levels, and (ii) risks related to uncertainties caused by our Chapter
11 filing, (iii) risks of reduced levels of demand for our 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
21
capital sufficient to fund capital expenditures for offshore exploration,
development and production activities, and other factors, (iv) risks related to
expansion of operations, either at our shipyards or one or more other locations,
(v) 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 (vi) contract bidding risks, (vii) risks related to dependence
on and performance by significant customers, (viii) risks related to the failure
to realize the level of estimated backlog due to determinations by one or more
customers to change or terminate all or portions of projects included in such
estimation of backlog, (ix) risks related to regulatory and environmental
matters, (x) risks related to the completion of contracts to construct offshore
drilling rigs at costs not in excess of those currently estimated and prior to
the contractual delivery dates, (xi) risks of untimely performance by companies
which provide services to us as subcontractors under construction contracts, and
(xii) risks related to our ability to retain a highly skilled and motivated
workforce and attract additional personnel to perform under our existing and
anticipated 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 we
believe 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our market risk disclosures set forth in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2001 have not changed significantly through
the period ended June 30, 2002.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
CNOOC
The Company filed a motion with the Bankruptcy Court to reject the contract
with China National Offshore Oil Company (CNOOC) for the construction of a heavy
derrick-lay barge. Liberty Mutual Insurance Company (Liberty Mutual) opposed the
contract rejection. Pursuant to the contract, CNOOC was provided a bank
guarantee from Royal Bank of Canada (Royal Bank). After the Company filed for
bankruptcy, CNOOC received approximately $10.9 million from Royal Bank under the
bank guarantee. Under a counter guarantee, Royal Bank received from Liberty
Mutual the same amount that Royal Bank paid to CNOOC. Prior to filing for
bankruptcy, the Company and certain of its subsidiaries entered into an
indemnification agreement with Liberty Mutual providing that the Company and
those subsidiaries would indemnify Liberty Mutual for any amount paid to Royal
Bank under the counter guarantee. At June 30,2002, approximately $10.9 million
was included in the Company's liabilities subject to compromise in the
accompanying balance sheet for the indemnification agreement. Liberty Mutual has
submitted proofs of claim which are unquantified at this time. Liberty Mutual
has also asserted claims against proceeds received by a subsidiary of the
Company under post-petition contacts between the subsidiary and CNOOC. The
Company believes any claim made by Liberty Mutual would be a liability subject
to compromise and no loss exposure exists in excess of the liability recorded.
Liberty Mutual and Wausau
On December 5, 2000, the Company reached a settlement agreement with a
former workers' compensation provider. In conjunction with this agreement, the
Company was to pay approximately $3.0 million as its share of the settlement of
all claims arising from this case. As of the bankruptcy filing date, the Company
had paid approximately $1.75 million of the settlement. The Bankruptcy Court on
October 2, 2001 denied the Company and another co-defendant permission to pay
the remaining $1.25 million of the settlement. As a result of this ruling, the
insurer may file a claim for an amount substantially greater than the remaining
installment. As of June 30, 2002, $1.25 million, the amount of the remaining
installment, was included in liabilities subject to compromise on the Company's
balance sheet. The Company believes that any additional amounts, which may be
approved by the Bankruptcy Court, will also be a liability subject to
compromise.
In addition to the matters discussed herein, the Company is involved in a
number of legal proceedings where adverse rulings by the courts would be a
liability subject to compromise.
Regarding developments with regard to matters discussed in our disclosures
surrounding contractual matters as set forth in Note 18 to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, refer to Note 12 to the Consolidated Financial Statements
contained in Part I of this Form 10-Q.
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.
22
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.13 Purchase Agreement for the Sale of Halter Marine, Inc. between Friede
Goldman Halter, Inc. and Bollinger Shipyards, Inc.
10.14 Purchase Agreement for the Sale of Halter Marine, Inc. between Friede
Goldman Halter, Inc. and Vision Technologies Kinetics, Inc.
10.15 Amendment #1 to the Purchase Agreement for the Sale of Halter Marine, Inc.
between Friede Goldman Halter, Inc. and Bollinger Shipyards, Inc.
10.16 Amendment #2 to the Purchase Agreement for the Sale of Halter Marine, Inc.
between Friede Goldman Halter, Inc. and Bollinger Shipyards, Inc.
10.17 Amendment #1 to the Purchase Agreement for the Sale of Halter Marine, Inc.
between Friede Goldman Halter, Inc. and Vision Technologies Kinetics, Inc.
10.18 Amendment #2 to the Asset Purchase Agreement for the Sale of Halter
Marine, Inc. between Friede Goldman Halter, Inc. and Vision Technologies
Kinetics, Inc.
99.1 CFO Certification
99.2 CEO Certification
(b) Reports of Form 8-K.
During the second quarter of 2002, the Company filed the following current
reports on Form 8-K:
Date of Report Description
- -------------- --------------
June 12, 2002 Sale of Friede and Goldman LTD to United Heavy Machinery.
June 12, 2002 T. Jay Collins Assumes CEO Position
June 12, 2002 Friede Goldman Halter, Inc. signs contract to sell Halter
Marine.
May 15, 2002 J.L. Holloway resigns as Chairman of the Board of Directors.
April 19, 2002 Sale of Friede Goldman Newfoundland.
April 8, 2002 Friede Goldman Halter submits reorganization plan.
April 8, 2002 New Interim President and CEO
23
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 2002.
FRIEDE GOLDMAN HALTER, INC.
By: /s/ T. Jay Collins
-----------------------------
T. Jay Collins
Chief Executive Officer
By: /s/ John J. Siben, II
------------------------------
John J. Siben, II
Senior Vice President
and Chief Accounting Officer
24