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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: September 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
November 7, 2002.
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FRIEDE GOLDMAN HALTER, INC.
Table of Contents
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001................................................ 3
Consolidated Statements of Operations for the three months and nine
months ended September 30, 2002 and 2001 (unaudited)............. 4
Consolidated Statements of Cash Flows for the nine months ended
September 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........................................ 23
Item 3. Quantitative and Qualitative Disclosures of Market Risk............ 30
Item 4. Controls and Procedures............................................ 30
Part II. Other Information
Item 1. Legal Proceedings.................................................. 30
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................................... 31
Signatures............................................................................ 32
CEO/CFO Letters of Certification...................................................... 33
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)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents................................................... $ 9,631 $ 20,403
Restricted cash............................................................. 58,492 17,998
Receivables, net:
Contract receivables.................................................... 11,405 23,705
Other receivables....................................................... 5,981 526
Income tax receivable....................................................... 206 206
Inventories, net............................................................ 7,261 17,580
Costs and estimated earnings in excess of billings on uncompleted contracts. 10,884 16,557
Prepaid expenses and other.................................................. 10,428 11,625
Deferred income tax asset................................................... 27,290 25,353
--------- ---------
Total current assets.................................................... 141,578 133,953
--------- ---------
Reinsurance receivables........................................................ 5,000 5,000
Property, plant and equipment, net of accumulated depreciation................. 57,148 155,458
Long-lived assets held for disposition......................................... 79,018 56,930
Other assets................................................................... 12,421 15,280
--------- ---------
Total assets............................................................ $ 295,165 $ 366,621
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable............................................................ $ 14,476 $ 13,948
Accrued liabilities......................................................... 27,715 28,976
Billings in excess of costs and estimated earnings on uncompleted contracts. 3,812 15,124
Current portion of long-term debt, including debt in default................ 109,650 115,355
--------- ---------
Total current liabilities 155,653 173,403
--------- ---------
Liabilities subject to compromise.............................................. 354,456 360,697
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............................................................ (538,216) (489,458)
Accumulated other comprehensive loss........................................ (3,862) (3,732)
--------- ---------
Total stockholders' deficit............................................. (242,234) (193,346)
--------- ---------
Total liabilities and stockholders' deficit............................. $ 295,165 $ 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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
-------- -------- -------- ---------
Contract revenue earned........................................................ $ 20,384 $ 15,374 $ 73,323 $ 101,312
Cost of revenue earned......................................................... 17,438 12,975 60,597 95,476
-------- -------- -------- ---------
Gross profit............................................................... 2,946 2,399 12,726 5,836
Selling, general and administrative expenses................................... 2,498 5,250 9,899 18,438
Goodwill amortization.......................................................... -- 2,788 -- 8,365
-------- -------- -------- ---------
Operating income (loss).................................................... 448 (5,639) 2,827 (20,967)
Other expense (income):
Interest expense, net (contractual interest of $5,706 and $4,446 for the
three months ended September 30, 2002 and 2001, respectively and
$17,296 and $18,028 for the nine months ended September 30, 2002
and 2001, respectively)................................................... 3,602 2,322 11,037 14,479
Discount on convertible subordinated notes................................. -- -- -- 54,878
Other...................................................................... -- (23) (9) 37
-------- -------- -------- ---------
Total other expense..................................................... 3,602 2,299 11,028 69,394
-------- -------- -------- ---------
Loss before reorganization items, income taxes and discontinued
operations.................................................................... (3,154) (7,938) (8,201) (90,361)
-------- -------- -------- ---------
Reorganization items:
Professional fees.......................................................... 3,340 5,274 11,181 7,274
Loss on investment in unconsolidated subsidiary............................ -- -- -- 1,372
Gain on termination of deferred compensation plan.......................... (1,242) -- (1,242) --
Write-off of deferred financing costs...................................... 1,683 -- 1,683 2,618
(Gain) loss on sale of assets.............................................. 474 -- (12,465) --
-------- -------- -------- ---------
Total reorganization items.............................................. 4,255 5,274 (843) 11,264
-------- -------- -------- ---------
Loss before income taxes and discontinued operations........................... (7,409) (13,212) (7,358) (101,625)
Income tax expense (benefit)................................................... -- (17) 251 3,980
-------- -------- -------- ---------
Loss before discontinued operations............................................ (7,409) (13,195) (7,609) (105,605)
-------- -------- -------- ---------
Discontinued operations
Income from operations of Engineered Products Segment...................... -- 1,231 568 5,432
Gain on disposal of Engineered Products Segment............................ 892 -- 1,299 16,041
Income (loss) from operations of Vessels Segment........................... (4,104) 1,143 (8,833) (9,130)
Loss on disposal of Vessels Segment........................................ (195) -- (34,183) --
-------- -------- -------- ---------
Total discontinued operations........................................... (3,407) 2,374 (41,149) 12,343
-------- -------- -------- ---------
Net loss....................................................................... $(10,816) $(10,821) $(48,758) $ (93,262)
======== ======== ======== =========
Net loss per share, basic and diluted:
Net loss before discontinued operations.................................... $ (0.15) $ (0.27) $ (0.15) $ (2.16)
Discontinued operations.................................................... (0.07) 0.05 (0.85) 0.25
-------- -------- -------- ---------
Net loss................................................................... $ (0.22) $ (0.22) $ (1.00) $ (1.91)
======== ======== ======== =========
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)
Nine Months Ended
September 30,
------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss............................................................................ $(48,758) $(93,262)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 11,573 24,686
Provision for losses............................................................ -- 25
Loss on investment in unconsolidated subsidiary................................. -- 1,372
Gain on termination of deferred compensation plan............................... (1,242) --
Write-off of deferred financing costs........................................... 1,683 2,618
(Gain) loss on sale of subsidiaries............................................. 20,419 (16,041)
Discount on convertible notes................................................... -- 54,878
Loss on sale of assets.......................................................... -- 10
Deferred income taxes........................................................... 140 4,844
Changes in operating assets and liabilities:
Decrease in contract and other receivables................................... 6,783 22,369
Decrease in income tax receivable............................................ -- 385
Decrease in inventories...................................................... 655 1,339
(Increase) decrease in other assets.......................................... (844) 1,638
Increase in accounts payable and accrued liabilities......................... 968 27,623
Decrease in billings in excess of costs and estimated earnings on
uncompleted contracts...................................................... (8,077) (25,444)
Decrease in costs and estimated earnings in excess of billings on
uncompleted contracts...................................................... (1,658) (2,903)
Decrease in reserve for losses on uncompleted contracts...................... -- (36,416)
Decrease in liabilities subject to compromise................................ (3,460) --
-------- --------
Net cash used in operating activities........................................ (21,818) (32,279)
-------- --------
Investing activities:
Capital expenditures for property, plant and equipment.............................. (303) (4,064)
Proceeds from sale of property, plant and equipment................................. 207 8
Net proceeds from sale of subsidiaries, net of cash sold of $272 in 2002 and $5,717
in 2001........................................................................... 55,073 26,559
Restricted cash and cash equivalents................................................ (40,494) (26,456)
-------- --------
Net cash provided by (used in) investing activities.......................... 14,483 (3,953)
-------- --------
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)
Nine Months Ended
September 30,
------------------
2002 2001
-------- --------
Financing activities:
Net borrowings (repayments) under line of credit.............. $ (818) $ 24,974
Proceeds from borrowings under debt facilities................ -- 4,274
Repayments on borrowings under debt facilities................ (2,944) (7,984)
-------- --------
Net cash provided by (used in) financing activities....... (3,762) 21,264
-------- --------
Effect of exchange rate changes on cash....................... 325 (313)
-------- --------
Net decrease in cash and cash equivalents..................... (10,772) (15,281)
Cash and cash equivalents at beginning of period.............. 20,403 25,244
-------- --------
Cash and cash equivalents at end of period.................... $ 9,631 $ 9,963
======== ========
Supplemental disclosures:
Cash paid for interest........................................ $ 7,695 $ 8,722
Cash paid for income taxes.................................... $ 194 $ 271
Cash refunds received for income taxes........................ $ -- $ 385
Cash flows from operating activities before reorganization items:
Cash receipts from customers.................................. $143,532 $ 52,802
Cash payments to vendors, suppliers and employees............. $152,249 $ 56,212
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)
September 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 September 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.
7
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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
combination of these options.
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 the plan of reorganization, inter alia, due to the sale of
the vessels segment. In addition to amending the plan of reorganization, the
Company is also evaluating options to sell its Offshore segment. On October 22,
2002, a hearing took place on the sale of Friede Goldman Offshore and the
United States Bankruptcy Court approved the bidding procedures and set the
auction for November 5, 2002. The Company and its Unsecured Creditor's
Committee are evaluating offers received during this bidding process to
conclude whether to sell the Offshore segment or include it in its
reorganization. If the Offshore segment is sold and the sales price is less
than the net book value of its assets, there will be a significant loss on the
disposal of the Offshore segment. The amended plan will likely result in no
recovery for current equity interests, whether or not the offshore segment is
sold. 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) the dollar value 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 will reflect the Company's decision regarding the
reorganization or disposition of the Offshore segment and that decision will be
subject to approval of the United States Bankruptcy Court. The Company cannot
provide assurance that the amended plan will be approved or that the Company
will continue to operate in any 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.
8
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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 September 30, 2002 and December 31, 2001 was as
follows:
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
Borrowings under the Restated Credit Agreement:
Line of credit................................................................... $ 27,190 $ 28,346
Term loan........................................................................ 43,622 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...... 2,512 4,237
Demand note payable to MARAD bearing interest at 6.35%, 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............. 13,951 14,982
Capital lease obligations bearing interest at rates ranging from 6.86% to 16.84%
maturing at dates ranging from October 2002 through September 2004................ 21 2,152
Note payable, bearing interest at 7.05%, payable in quarterly installments, matured
March 2002, secured by equipment.................................................. 2,500 2,500
-------- --------
109,650 115,355
Less: Current portion of long-term debt including debt in default of $90.7 million
and $91.5 million at September 30, 2002 and December 31, 2001, respectively....... 109,650 115,355
-------- --------
Long-term debt less current portion................................................. $ -- $ --
======== ========
Accrued interest on long-term debt not subject to compromise was included in
accrued liabilities at September 30, 2002 and December 31, 2001 in the amounts
of $4.5 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. The term loan is secured by a
subordinated security interest in the line of credit collateral.
The Company understands that the lenders are accruing interest on the line
of credit based on the default rate which was 9.00% at September 30, 2002.
Additionally, the Restated Credit Agreement calls for 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 Company
9
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
further understands that the lenders are accruing interest on the term loan at
the default rate of 15% at September 30, 2002. The United States Bankruptcy
Court has not yet approved default rate interest or any post petition fees in
favor of the lendors.
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 certain of these
covenants during the nine months ended September 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 orders have extended the Company's continued
use of its operating cash until December 29, 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
September 30, 2002 were $84.8 million including $13.7 million in letters of
credit. Upon the closing of the Vessels segment or soon thereafter, the
outstanding letters of credit will be reduced to $5.7 million. This remaining
balance relates to a letter of credit which was posted to provide funding for
the Company's worker's compensation obligations.
The Company has reached an agreement which is the subject of a Bankruptcy
Court order to pay Foothill Capital Corporation approximately $64.0 million in
undisputed principal amount and undisputed non-default rate interest upon the
sale of Halter Marine, Inc. Potentially disputed charges, which include default
interest and various fees, in the estimated amount of $14.4 million will be
held in an escrow account pending claims resolution. Further, the Company will
fund an additional $6.0 million to cash secure the remaining outstanding
letters of credit. On October 30, 2002, the Company made an initial payment to
Foothill Capital Corporation in the amount of $73.7 million. Complete funding
is subject to finalization and release of transaction escrow accounts related
to our asset purchase agreements. Due to this agreement to satisfy the Foothill
obligations, the Company recorded a loss of $1.7 million during the third
quarter of 2002 to write-off the remaining balance of the deferred financing
costs related to this debt.
MARAD Financing Agreement
As of September 30, 2002, the Company had approximately $19.9 million in
outstanding principal related to its demand notes payable to the U.S. Maritime
Administration ("MARAD"). The demand note resulted from MARAD making payment
under its guarantee agreement to the holders of the bonds originally 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 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 treatment of MARAD reflected in the original
plan.
10
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
GE Capital Public Finance Agreement
On June 13, 2002, the Company entered into an agreed order in the Bankruptcy
Court with GE Capital Public Finance ("GECPF") to make adequate protection
payments on the GECPF loan. The order further provided that collateral proposed
to be abandoned to GECPF in the Company's Plan of Reorganization filed March
22, 2002, would be abandoned to GECPF. As of this filing, GECPF has not taken
action to obtain ownership or possession of the collateral. Negotiations are
ongoing with GECPF regarding the ultimate disposition of collateral.
4. Liabilities Subject to Compromise
At September 30, 2002 and December 31, 2001, liabilities subject to
compromise included the following:
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
Convertible subordinated notes $185,000 $185,000
Accounts payable.............. 72,651 86,739
Contract liabilities.......... 69,064 63,542
Accrued interest.............. 5,041 5,338
Other accrued liabilities..... 22,700 20,078
-------- --------
$354,456 $360,697
======== ========
In September 2002, the Bankruptcy Court issued an order limiting the amount
of cash that could be disbursed to the participants in the Company's deferred
compensation program which was less than the recorded liability. The Company
reported a $1.2 million gain in the third quarter of 2002 as a result of
reducing its liabilities subject to compromise related to its deferred
compensation program.
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 September
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.
11
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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
the plan of reorganization, inter alia, due to the sale of the Vessels segment.
In addition to amending the plan of reorganization, the Company is also
evaluating options to sell its Offshore segment. On October 22, 2002, a hearing
took place on the sale of Friede Goldman Offshore and the United States
Bankruptcy Court approved the bidding procedures and set the auction for
November 5, 2002. The Company and its Unsecured Creditor's Committee are
evaluating offers received during this bidding process to conclude whether to
sell the Offshore segment or include it in its reorganization. The amended plan
will reflect the Company's and its Unsecured Creditor's Committee decision
regarding the reorganization or disposition of the Offshore segment and that
decision will be subject to approval of the United States Bankruptcy Court. If
the Offshore segment is sold and the sales price is less than the net book
value of its assets, there will be a significant loss on the disposal of the
offshore segment.
Disposition of Vessels Segment
In May 2002, the Company entered into a contract with Bollinger Shipyards,
Inc. to sell the assets and operations of its Vessels operating segment for
$48.0 million cash and other consideration. 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 $65.2 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 substantially all the operating assets and properties of Halter
Marine, Inc., 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 was finalized on October 23, 2002.
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 nine months and three months ended September
30, 2002, the Company recorded loss from discontinued operations of
approximately $8.8 million and $4.1 million, respectively. For the nine months
and three months ended September 30, 2001, the Company recorded a loss from
discontinued operations of approximately $9.1 million and income from
discontinued operations of $1.1 million, respectively. Additionally, in 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
$34.2 million.
Revenue for the Vessels segment was $55.1 million and $11.9 million for the
nine months and three months ended September 30, 2002, respectively.
Additionally, revenue for the vessels segment was $90.8 million and $31.6
million for the nine months and three months ended September 30, 2001,
respectively.
At September 30, 2002, the Company's financial statements include current
assets of $18.6 million and current liabilities of $1.4 million related to the
Vessels segment. At December 31, 2001, the Company's financial
12
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
statements include current assets of $24.2 million and current liabilities of
$7.9 million related to the Vessels segment. Long-lived assets held for
disposition at September 30, 2002 and December 31, 2001 include $58.1 million
and $2.0 million, respectively, related to the Vessels segment.
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 September 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 the assets and operations
of the Engineered Products segment ("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 during the nine months ended September 30, 2002
and a gain on disposal was recorded in the amount of $1.3 million after the
consummation of the sale primarily related to the working capital adjustment
described in Note 6.
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 nine
months ended September 30, 2001. For the nine months and three months ended
September 30, 2001, the Company recorded income from discontinued operations of
approximately $5.4 million and $1.2 million, respectively.
Revenue for the Engineered Products segment was $22.7 million for the nine
months ended September 30, 2002. Additionally, revenue for the Engineered
Products segment was $69.4 million and $14.6 million for the nine months and
three months ended September 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. Long-lived assets held for disposition at December
31, 2001 include $29.8 million related to the Engineered Products segment.
Restricted cash at September 30, 2002 includes 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 alleged noncompliance
with minimum employment levels at the
13
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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 the first and second quarters of 2002, respectively, after the consummation
of the sale. The property, plant and equipment of FGN is included in long-lived
assets held for disposition at December 31, 2001. Certain assets were excluded
from the sale of FGN, including jack-up rig components, free issue steel and
spud cans, and were transported from Friede Goldman Newfoundland to Friede
Goldman Offshore's West Bank Facility. These assets will be included as part of
the possible sale or reorganization of the Offshore segment.
Disposition of FGO East Facility
The Company has approximately $19.9 million in outstanding principal related
to its demand notes payable to the U. S. Maritime Administration ("MARAD"). The
demand note resulted from MARAD making payment under its guarantee agreement to
the holders of the bonds originally 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 satisfaction of its secured 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 demand notes. The property, plant and
equipment of the FGO East Facility is included in long-lived assets held for
disposition at September 30, 2002 and December 31, 2001.
As discussed in Note 2, the Company anticipates amending the plan of
reorganization due to the sale of the Vessels segment. In addition to amending
the plan of reorganization, the Company is also evaluating options to sell its
Offshore segment. On October 22, 2002, a hearing took place on the sale of
Friede Goldman Offshore and the United States Bankruptcy Court approved the
bidding procedures and set the auction for November 5, 2002. The Company and
its Unsecured Creditor's Committee are evaluating offers received during this
bidding process to conclude whether to sell the Offshore segment or include it
in its reorganization. The amended plan will reflect the Company's and its
Unsecured Creditor's Committee decision regarding the reorganization or
disposition of the Offshore segment and that decision will be subject to
approval of the United States Bankruptcy Court. The amended plan or the
possible sale of the Offshore segment may change the treatment of MARAD
reflected in the original plan. If the Offshore segment is sold and the sales
price is less than the net book value of its assets, there will be a
significant loss on the disposal of the Offshore segment.
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, which were received on July 5, 2002, are
subject to a sales commission to the Company's investment banker. The Company
recorded a gain of $11.4 million related to this transaction in 2002. The
property, plant and equipment of FGL is included in long-lived assets held for
disposition at December 31, 2001.
Restricted cash at September 30, 2002 includes the proceeds remaining from
the sale of FGL.
14
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
6. Other Receivables
Other receivables consist of $6.0 million related to the working capital
adjustment on the Amclyde sale. On November 6, 2002, a third party arbitrator
engaged by the Company and Hydralift determined that the final working capital
adjustment related to the Amclyde sale was $12.2 million resulting in a $1.0
million additional increase to both other receivables and gain on disposal of
Engineered Products segment in September of 2002.
7. Inventories
At September 30, 2002 and December 31, 2001, inventories consisted of the
following:
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
Jack-up rig components............... $15,381 $15,381
Steel and other raw materials........ 5,380 14,487
Other................................ -- 3,704
------- -------
20,761 33,572
Less reserve for obsolete inventories 13,500 15,992
------- -------
$ 7,261 $17,580
======= =======
As discussed in Note 5, certain assets were excluded from the sale of FGN,
including jack-up rig components, free issue steel and spud cans, and were
transported from Friede Goldman Newfoundland to Friede Goldman Offshore's West
Bank Facility. These components and inventory will be included as part of the
possible sale or reorganization of the Offshore segment.
8. Long-Lived Assets Held for Disposition
At September 30, 2002 and December 31, 2001, long-lived assets held for
disposition by business unit consisted of the following:
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
Vessels..................................................... $58,064 $ 1,950
Friede Goldman Offshore East Facility....................... 19,854 19,854
Friede & Goldman, Ltd....................................... -- 326
Friede Goldman Newfoundland, Limited........................ 1,100 5,000
Amclyde (including goodwill of $23,479 at December 31, 2001) -- 29,800
------- -------
$79,018 $56,930
======= =======
9. Other Assets
At September 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.
15
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
10. Reconciliation of Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss
per share before discontinued operations:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
2002 2001 2002 2001
------- -------- ------- ---------
(in 000's, except per share data)
Numerator:
Net loss before discontinued operations, basic and
diluted.......................................... $(7,409) $(13,195) $(7,609) $(105,605)
======= ======== ======= =========
Denominator:
Weighted average shares outstanding................ 48,709 48,709 48,709 48,709
Effect of dilutive securities:
Stock options...................................... -- -- -- --
------- -------- ------- ---------
Denominator for net loss before discontinued
operations, basic and diluted.................... 48,709 48,709 48,709 48,709
======= ======== ======= =========
Net loss per share before discontinued operations,
diluted............................................. $ (0.15) $ (0.27) $ (0.15) $ (2.16)
======= ======== ======= =========
The effect on net 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 nine months ended September 30, 2002 and 2001.
11. Comprehensive loss
Other comprehensive loss includes foreign currency translation adjustments.
Total comprehensive loss was as follows:
Nine Months Ended
September 30,
------------------
2002 2001
-------- --------
(in thousands)
Net loss........................ $(48,758) $(93,262)
Other comprehensive loss:
Foreign currency translation. (132) (1,358)
-------- --------
Comprehensive loss.............. $(48,890) $(94,620)
======== ========
12. 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,
16
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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 September 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 asserts
a claim of approximately $10.7 million against the Company.
OMIC assumed certain risks from Reliance Insurance Company (Reliance) under
a reinsurance agreement from March 1997 to March 2000. In general, OMIC assumed
risk for the first $250,000 on individual workers' compensation losses written
through Reliance for the Company. Further, 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 September 30,
2002, the remaining balance of this letter of credit was $5.7 million. The
Company believes that Reliance may take the position that the letter of credit
was issued for the benefit of all of Reliance's policyholders. Due to the
dispute over Reliance's rights to the use of the letter of credit, the Company
filed suit against Reliance to prevent any draws on the letter of credit that
would fund claim payments other than payments related to OMIC. This suit was
dismissed as premature but will be restated if Reliance asserts the position
previously described regarding the letter of credit.
Prior to its deconsolidation, OMIC had a reinsurance receivable from
Reliance of approximately $11.0 million. On or about October 3, 2001, Reliance
was placed into liquidation by the Pennsylvania Insurance Commissioner. The
Company believes the liquidation of Reliance triggers relevant state guaranty
association statues and that 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 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.
There is no assurance that the Company's analysis of the relevant payment
obligations will be upheld by applicable courts and that additional liabilities
will not result.
13. Contingencies
Bankruptcy Claims
As a result of certain contractual matters described in Note 14 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 September 30, 2002 and December 31, 2001, the Company accrued its
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.
17
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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 September 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 September 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.
Yacht Fire
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 million and $24.0 million, respectively, relating to their
alleged damages. Insurance claims have been filed by Felham Enterprises (yacht
owner), Trinity Yachts, Inc. and the Company. The matter is under review by
underwriters at this time. One underwriter, MOAC which holds 15% of the risk,
has denied coverage. The Company believes MOAC's coverage denial position is
without merit.
14. Contractual Matters
The Company's results of operations for the nine months ended September 30,
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
18
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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 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 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.
19
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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 nine 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 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
20
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
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. The Company's work was completed on the
first rig and it was removed from its property on May 3, 2002. The Company's
work was completed on the second rig and it was removed from our property on
July 26, 2002.
At September 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 September 30, 2002, $25.2 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 September 30, 2002 is limited to the sum of
these two liabilities, approximately $44.4 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 the amount of Petrodrill's asserted claim substantially exceeds the
Company's reserve of $44.4 million as of September 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 September 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. Because substantially
all of the assets of the Company's marine division were sold on October 23,
2002, the Company does not anticipate completing the project.
At September 30, 2002, $7.7 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
21
FRIEDE GOLDMAN HALTER, INC.
(as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
September 30, 2002
the surety has submitted proofs of claim which are unquantified at this time.
The Company believes that these pre-petition claims made by the customer and
the surety are objectionable on one or more grounds, although no such
objections have been made to date. If the claims are substantiated, then they
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 September 30, 2002. Pending
resolution of the Surety's lien and claim rights, the Bankruptcy Court has
ordered the Company to maintain a minimum balance of $7.5 million in its Halter
sales proceed cash account subject to certain adjustments.
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 September 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.
Pending resolution of certain rights asserted by Liberty Mutual, the Bankruptcy
Court has ordered the Company to maintain a minimum balance of $10.5 million in
its Amclyde sales proceed cash account subject to certain adjustments.
22
Item 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations Introduction
Overview
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
the plan of reorganization, inter alia, due to the sale of the Vessels segment.
In addition to amending the plan of reorganization, the Company is also
evaluating options to sell its Offshore segment. On October 22, 2002, a hearing
took place on the sale of Friede Goldman Offshore and the United States
Bankruptcy Court approved the bidding procedures and set the auction for
November 5, 2002. The Company and its Unsecured Creditor's Committee are
evaluating offers received during this bidding process to conclude whether to
sell the Offshore segment or include it in its reorganization. The amended plan
will reflect the Company's and its Unsecured Creditor's Committee decision
regarding the reorganization or disposition of the Offshore segment and that
decision will be subject to approval of the Bankruptcy Court. If the Offshore
segment is sold and the sales price is less than the net book value of its
assets, there will be a significant loss on the disposal of the Offshore
segment.
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
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. Although crude oil and natural gas prices have
improved during 2002, Gulf of Mexico rig utilization has improved only slightly
and exploration and production companies have continued to limit their capital
investments. 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.
23
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. ("Halter") (collectively
referred to as the "Company"). All significant intercompany accounts and
transactions have been eliminated.
Three Months Ended September 30, 2002 vs. Three Months Ended September 30, 2001
The Company has reported the operating results of its Vessels and Engineered
Products segments for the three months ended September 30, 2002 and 2001
separately in its consolidated statements of operations as a component of
discontinued operations.
Contract revenue from continuing operations increased 32.6% to $20.4 million
for the third quarter of 2002 compared to $15.4 million for the third quarter
of 2001. The overall increase of $5.0 million was primarily due new repair work
in 2002.
Gross profit from continuing operations increased to $2.9 million, or 14.2%
of revenue, for the third quarter of 2002 compared to $2.4 million, or 15.6% of
revenue, for the third quarter of 2001. The increase in margin is primarily due
to earnings on new repair and conversion work which were not in progress in the
third quarter of 2001.
Selling, general and administrative expenses ("SG&A expenses") were $2.5
million for the third quarter of 2002, or 12.3% of gross revenue, compared to
$5.3 million, or 34.1% of gross revenue, for the third quarter of 2001. The
decrease in SG&A expenses is due to cost-saving measures implemented by
management.
Amortization of goodwill was $2.8 million for the third 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 third quarter of 2002 compared to $2.3 million for the third
quarter of 2001. In the third quarter of 2001, the interest rate on the
Company's line of credit and term loan was accrued at the non-default rate
instead of the default rate which resulted in an adjustment for additional
interest expense that was recorded in the fourth quarter of 2001. Contractual
interest expense of $2.1 million on the 4 1/2% convertible subordinated notes
was not recorded in each of the third quarters of 2002 and 2001 due to the
Chapter 11 filing.
The Company incurred professional fees of $3.3 million in the third quarter
of 2002 compared to $5.3 million in the third quarter of 2001 related to its
bankruptcy proceeding and reorganization in 2001. The $5.3 million in
professional fees incurred in the third quarter of 2001 includes approximately
$1.5 million in fees related to the second quarter of 2001 due to the timing of
invoices and accruals during the early months after the Chapter 11 filing.
In September 2002, the Bankruptcy Court issued an order limiting the amount
of cash that could be disbursed to the participants in the Company's deferred
compensation program which was less than the recorded liability. The Company
reported a $1.2 million gain in the third quarter of 2002 as a result of
reducing its liabilities subject to compromise related to its deferred
compensation program.
Due to the agreement to satisfy the Company's obligations to Foothill, the
Company recorded a loss of $1.7 million during the third quarter of 2002 to
write-off the remaining balance of the deferred financing costs related to this
debt. (See Note 3 in the Notes to Consolidated Financial Statements.)
24
The Company's loss on sale of assets was $0.5 million for the third quarter
of 2002 primarily as a result of an adjustment to the working capital
receivable on the FGL sale.
The Company did not record income tax expense in the third quarter of 2002
compared to a $17,000 income tax benefit in the third 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 third quarter of
2001 relates to income generated by foreign subsidiaries.
Discontinued Operations
The Company recorded income from discontinued operations of its Engineered
Products segment of $1.2 million in the third quarter of 2001. The disposition
of Amclyde occurred in the second quarter of 2002.
The Company recorded an adjustment to the disposal of Engineered Products in
the amount of a $0.9 million gain in the third quarter of 2002. On November 6,
2002, a third party arbitrator engaged by the Company and Hydralift determined
that the final working capital adjustment related to the Amclyde sale was $12.2
million resulting in a $1.0 million additional increase to both other
receivables and gain on disposal of Engineered Products segment in September
2002.
The Company recorded a loss from discontinued operations of Vessels in the
amount of $4.1 million in the third quarter of 2002 and income from
discontinued operations of $1.1 million in the third quarter of 2001.
In the third quarter of 2002, the Company recorded a loss on the disposal of
Vessels in the amount of $0.2 million related to the sale of Halter Marine, Inc.
Nine Months Ended September 30, 2002 vs. Nine Months Ended September 30, 2001
The Company has reported the operating results of its Vessels and Engineered
Products segments for the nine months ended September 30, 2002 and 2001
separately in its consolidated statements of operations as a component of
discontinued operations.
Contract revenue from continuing operations, decreased 27.6% to $73.3
million for the nine months ended September 30, 2002 compared to $101.3 million
for the nine months ended September 30, 2001. The overall decrease of $28.0
million was primarily due to the completion of FGO's work on four new build
semi-submersible drilling rigs (two for Ocean Rig and two for Petrodrill) which
were completed in the third quarter of 2001 and 2002, respectively, and have
not been replaced in 2002. Additionally, work performed on the CNOOC contract
during the nine months ended September 30, 2001 has not been replaced in 2002.
Gross profit from continuing operations was $12.7 million, or 17.4% of
revenue, for nine months ended September 30, 2002 compared to $5.8 million, or
5.8% of revenue, for the nine months ended September 30, 2001. The overall
change is primarily due to earnings on new repair and conversion projects
included in 2002 most of which were not in progress in the nine months ended
September 30, 2001.
Selling, general and administrative expenses ("SG&A expenses") were $9.9
million for the nine months ended September 30, 2002, or 13.5% of gross
revenue, compared to $18.4 million, or 18.2% of gross revenue, for the nine
months ended September 30, 2001. The decrease in SG&A expenses is due to
cost-saving measures implemented by management.
25
Amortization of goodwill was $8.4 million for the nine months ended
September 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
$11.0 million for the nine months ended September 30, 2002 compared to $14.5
million for the nine months ended September 30, 2001. The decrease of $3.5
million is primarily the result of interest expense recorded on the 4 1/2%
convertible subordinated notes from January 2001 through April 18, 2001, before
the Chapter 11 filing, while no related interest was recorded in the nine
months ended September 30, 2002. Contractual interest expense of $6.3 million
and $3.5 million on the 4 1/2% convertible subordinated notes was not recorded
in the nine months ended September 30, 2002 and 2001, respectively, due to the
Chapter 11 filing.
The Company recorded discount accretion of $54.9 million during the nine
months ended September 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 $11.2 million in the nine months
ended September 30, 2002 related to its bankruptcy proceeding and
reorganization in 2001 compared to $7.3 million for the nine months ended
September 30, 2001. The Company's professional fees were lower in 2001 as a
result of the Company filing Chapter 11 in mid-April 2001.
In September 2002, the Bankruptcy Court issued an order limiting the amount
of cash that could be disbursed to the participants in the Company's deferred
compensation program which was less than the recorded liability. The Company
reported a $1.2 million gain in the third quarter of 2002 as a result of
reducing its liabilities subject to compromise related to its deferred
compensation program.
Due to the agreement to satisfy the Company's obligations to Foothill, the
Company recorded a loss of $1.7 million during the third quarter of 2002 to
write-off the remaining balance of the deferred financing costs related to this
debt. (See Note 3 in the Notes to Consolidated Financial Statements.) 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
$12.5 million in the nine months ended September 30, 2002. This gain includes
$11.4 million related to the sale of FGL. Additionally, an adjustment of $1.1
million was recorded which relates to the sale of FGN.
The Company had income tax expense of $0.3 million in the nine months ended
September 30, 2002 compared to $4.0 million in the nine months ended September
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 nine
months ended September 30, 2002 and 2001 relates to income generated by foreign
subsidiaries.
Our backlog from continuing operations was $34.0 million at September 30,
2002 compared to $34.4 million at September 30, 2001.
Discontinued Operations
The Company recorded income from operations of its Engineered Products
segment of $0.6 million for the nine months ended September 30, 2002 as
compared to $5.4 million from discontinued operations recorded for the nine
months ended September 30, 2001 due to the disposition of Amclyde in the second
quarter of 2002.
26
The Company recorded a gain of $16.0 million in the second quarter of 2001
related to the sale of its French subsidiaries. Additionally, the Company
recorded an adjustment to the disposal of Engineered Products in the amount of
a $1.3 million gain in 2002. On November 6, 2002, a third party arbitrator
engaged by the Company and Hydralift determined that the final working capital
adjustment related to the Amclyde sale was $12.2 million resulting in a $1.0
million additional increase to both other receivables and gain on disposal of
Engineered Products segment in September of 2002.
The Company recorded a loss from operations of Vessels in the amounts of
$8.8 million and $9.1 million in the nine months ended September 30, 2002 and
2001, respectively.
In 2002, the Company recorded a loss on the disposal of Vessels in the
amount of $34.2 million related to the sale of Halter Marine, Inc.
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 nine months ended September 30, 2002, we financed our business
activities through funds generated from cash balances including those generated
through collections of accounts receivable.
Net cash used in operating activities during the nine months ended September
30, 2002 was $21.8 million including a net loss of $48.8 million offset by a
$20.4 million non-cash loss on the sale of subsidiaries, a $1.7 million
write-off of deferred financing costs and $11.6 million in depreciation and
amortization. Additionally, a $1.2 million gain related to the termination of
the deferred compensation plan was recorded during the nine months ended
September 30, 2002. Funds generated through operating activities included a
$6.8 million decrease in contract and other receivables. Funds used by
operating activities included an $8.1 million decrease in billings in excess of
costs and estimated earnings on uncompleted contracts.
Net cash provided by investing activities during the nine months ended
September 30, 2002 was $14.5 million which reflected $35.7 million, $15.2
million and $4.2 million in net proceeds from the sale of Engineered Products,
FGL and FGN, respectively, during the period. This was offset by a $40.5
million increase in restricted cash which reflects the proceeds remaining from
the sale of the Engineered Products segment and FGL.
Net cash used by financing activities during the nine months ended September
30, 2002 was $3.8 million. We had net repayments under our line of credit of
$0.8 million and repayments of borrowings from other debt facilities of $2.9
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. The term loan is secured by a
subordinated security interest in the line of credit collateral.
The Company understands that the lenders are accruing interest on the line
of credit based on the default rate which was 9.00% at September 30, 2002.
Additionally, the Restated Credit Agreement calls for 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 Company
27
further understands that the lenders are accruing interest on the term loan at
the default rate of 15% at September 30, 2002. The United States Bankruptcy
Court has not yet approved default rate interest or any post petition fees in
favor of the lenders.
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 certain of these
covenants during the nine months ended September 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 orders have extended the Company's continued
use of its operating cash until December 29, 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 September
30, 2002 were $84.8 million including $13.7 million in letters of credit. Upon
the closing of the Vessels segment or soon thereafter, the outstanding letters
of credit will be reduced to $5.7 million. This remaining balance relates to a
letter of credit which was posted to provide funding for the Company's worker's
compensation obligations.
The Company has reached an agreement which is the subject of a Bankruptcy
Court order to pay Foothill Capital Corporation approximately $64.0 million in
undisputed principal amount and undisputed non-default rate interest upon the
sale of Halter Marine, Inc. Potentially disputed charges, which include default
interest and various fees, in the estimated amount of $14.4 million will be
held in an escrow account pending claims resolution. Further, the Company will
fund an additional $6.0 million to cash secure the remaining outstanding letter
of credit. On October 30, 2002, the Company made an initial payment to Foothill
Capital Corporation in the amount of $73.7 million. Complete funding is subject
to finalization and release of transaction escrow accounts related to our asset
purchase agreements. Due to this agreement to satisfy the Foothill obligations,
the Company recorded a loss of $1.7 million during the third quarter of 2002 to
write-off the remaining balance of the deferred financing costs related to this
debt.
If the Offshore segment is sold and the sales price is less than the net
book value of its assets, there will be a significant loss on the disposal of
the Offshore segment.
MARAD Financing Agreement
As of September 30, 2002, the Company had approximately $19.9 million in
outstanding principal related to its demand notes payable to the U. S. Maritime
Administration ("MARAD"). The demand note resulted from MARAD making payment
under its guarantee agreement to the holders of the bonds originally 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 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 treatment of MARAD reflected in the original
plan.
28
GE Capital Public Finance Agreement
On June 13, 2002, the Company entered into an agreed order in the Bankruptcy
Court with GE Capital Public Finance ("GECPF") to make adequate protection
payments on the GECPF loan. The order further provided that collateral proposed
to be abandoned to GECPF in the Company's Plan of Reorganization filed March
22, 2002, would be abandoned to GECPF. As of this filing, GECPF has not taken
action to obtain ownership or possession of the collateral. Negotiations are
ongoing with GECPF regarding the ultimate disposition of collateral.
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 September 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 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.
29
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 September 30, 2002.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures as of a date within 90 days
of the filing of this quarterly report, the chief executive officer and chief
financial officer of the Company have concluded that the disclosure controls
and procedures are effective.
Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
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 September 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.
Pending resolution of certain rights asserted by Liberty Mutual, the Company
has agreed by court order, to maintain a minimum balance of $10.5 million in
its Amclyde sales proceed cash account subject to certain adjustments.
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 September 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.
Yacht Fire
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
30
Bankruptcy Court seeking administrative claims against the Company in the
amounts of approximately $19.0 million and $24.0 million, respectively,
relating to their alleged damages. Insurance claims have been filed by Felham
Enterprises (yacht owner), Trinity Yachts, Inc. and the Company. The matter is
under review by underwriters at this time. One underwriter, MOAC which holds
15% of the risk, has denied coverage. The Company believes MOAC's coverage
denial position is without merit.
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.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.19 Amendment #3 to the Purchase Agreement for the Sale of Halter Marine, Inc. between Friede
Goldman Halter, Inc. and Vision Technologies Kinetics, Inc.
10.20 Amendment #4 to the Asset Purchase Agreement for the Sale of Halter Marine, Inc. between Friede
Goldman Halter, Inc. and Vision Technologies Kinetics, Inc.
99.1 CEO Certification
99.2 CFO Certification
(b) Reports of Form 8-K.
During the third quarter of 2002, the Company filed the following current
reports on Form 8-K:
Date of Report Description
- -------------- -----------
August 8, 2002 Vision Technologies Kinetics, Inc. provides winning bid to purchase Halter Marine.
July 17, 2002 Auction process for Halter Marine continued.
July 1, 2002 Court auction and sale hearing dates set for sale of Halter Marine.
31
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 November 2002.
FRIEDE GOLDMAN HALTER, INC.
By: /s/ T. JAY COLLINS
-----------------------------
T. Jay Collins
Chief Executive Officer
By: /s/ CHRIS CUNNINGHAM
-----------------------------
Chris Cunningham
Senior Vice President & Chief
Accounting Officer
32
Form of Certification for Quarterly Report
on Form 10-Q
I, T. Jay Collins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Friede Goldman
Halter, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ T. JAY COLLINS
----------------------------------
T. Jay Collins
Chairman and Chief Executive
Officer
This certification is made solely pursuant to the requirements of Section
1350 of 18 U.S.C., and is not for any other purpose.
33
Form of Certification for Quarterly Reports
on Form 10-Q
I, Chris Cunningham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Friede Goldman
Halter, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ CHRIS CUNNINGHAM
----------------------------------
Chris Cunningham
Chief Financial Officer
This certification is made solely pursuant to the requirements of Section
1350 of 18 U.S.C., and is not for any other purpose.
34