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Draft #1 to Audit Committee 5/12/03
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: March 31, 2003
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes. [_] No. [X]
(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 May
9, 2003.
1
FRIEDE GOLDMAN HALTER, INC.
Table of Contents
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 ...................... 3
Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 .... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 .... 5
Notes to Consolidated Financial Statements .................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 17
Item 3. Quantitative and Qualitative Disclosures of Market Risk ..................................... 20
Item 4. Controls and Procedures ..................................................................... 20
Part II. Other Information
Item 1. Legal Proceedings ........................................................................... 21
Item 2. Changes in Securities and Use of Proceeds ................................................... 22
Item 3. Defaults Upon Senior Securities ............................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 22
Item 5. Other Information ........................................................................... 22
Item 6. Exhibits and Reports on Form 8-K ............................................................ 23
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Quarterly Report on Form 10-Q, future
filings by the Company with the Securities and Exchange Commission (the
"Commission"), the Company's press releases and oral statements by authorized
officers of the Company are intended to be subject to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. The Company
believes that forward-looking statements made by it are based on reasonable
expectations; however, no assurances can be given that actual results will not
differ materially from those contained in such forward-looking statements.
Forward-looking statements involve statements that are predictive in nature,
which depend upon or refer to future events or conditions, or which include the
words "estimate," "project," "anticipate," "expect," "predict," "believe,"
"could," "would," "may" and similar expressions.
2
Part I. Financial Information
Item I. Financial Statements
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
March 31, December 31,
2003 2002
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 7,218 $ 14,453
Restricted cash .......................................................... 64,833 56,107
Receivables, net:
Contract receivables ................................................... 895 7,442
Other receivables ...................................................... 1,051 1,346
Inventories, net ......................................................... -- 4,067
Costs and estimated earnings in excess of billings on uncompleted
contracts .............................................................. 1,274 5,074
Prepaid expenses and other ............................................... 4,819 8,403
----------- ------------
Total current assets ................................................ 80,090 96,892
Long-lived assets held for disposition ...................................... 3,650 49,284
Other assets ................................................................ -- 948
----------- ------------
Total assets ........................................................ $ 83,740 $ 147,124
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ......................................................... $ 5,277 $ 10,705
Accrued liabilities ...................................................... 11,580 23,655
Billings in excess of costs and estimated earnings on uncompleted
contracts .............................................................. -- 3,127
Debt ..................................................................... 10,307 48,712
----------- ------------
Total current liabilities ........................................... 27,164 86,199
Liabilities subject to compromise ........................................... 346,315 346,015
Stockholders' deficit:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares
issued and outstanding ................................................. -- --
Common stock, $0.01 par value; 125,000,000 shares authorized;
48,710,579 shares issued and outstanding at March 31, 2003 ............. 487 487
and December 31, 2002, respectively
Additional paid-in capital ............................................... 299,357 299,357
Retained deficit ......................................................... (585,720) (581,071)
Accumulated other comprehensive loss ..................................... (3,863) (3,863)
----------- ------------
Total stockholders' deficit ......................................... (289,739) (285,090)
----------- ------------
Total liabilities and stockholders' deficit ......................... $ 83,740 $ 147,124
=========== ============
The accompanying notes are an integral part of these financial statements.
3
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
Three Months Ended
------------------
March 31,
---------
2003 2002
-------- -------
Revenues ....................................................... $ -- $ --
Selling, general and administrative expenses ................... 2,623 3,459
-------- --------
Operating loss ................................................. (2,623) (3,459)
Other expense (income):
Interest expense, net (contractual interest of $2,195
and $5,907 for the three months ended March 31, 2003
and 2002, respectively) ................................. 142 3,087
Other ..................................................... (11) --
-------- --------
Total other expense ................................... 131 3,087
-------- --------
Loss before reorganization items, discontinued operations, and
income taxes ................................................ (2,754) (6,546)
Reorganization items--professional fees ........................ 2,128 4,296
-------- --------
Loss before discontinued operations and income taxes ........... (4,882) (10,842)
Income tax expense ............................................. -- 251
-------- --------
Loss before discontinued operations ............................ (4,882) (11,093)
Discontinued operations:
Loss from operations of Vessels segment ................... (258) (2,425)
Income from operations of Offshore segment ................ 196 3,674
Gain on disposal of Offshore segment ...................... 295 --
Income from operations of Engineered Products segment ..... -- 830
-------- --------
Total discontinued operations ........................ 233 2,079
-------- --------
Net loss ....................................................... $ (4,649) $ (9,014)
======== ========
Net loss per share, basic and diluted:
Net loss before discontinued operations ................... $ (0.10) $ (0.23)
Discontinued operations ................................... -- 0.04
-------- --------
Net loss .................................................. $ (0.10) $ (0.19)
======== ========
Weighted average shares outstanding:
Basic ..................................................... 48,711 48,711
Diluted ................................................... 48,711 48,711
The accompanying notes are an integral part of these financial statements.
4
FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended
March 31,
----------------------
2003 2002
------ ------
Cash flows from operating activities:
Net loss $ (4,649) $ (9,014)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 551 3,966
Gain on sale of assets -- (589)
Gain on disposal of segments (295) --
Deferred income taxes -- 140
Changes in operating assets and liabilities:
Increase in contract and other receivables (6,252) (2,706)
Decrease in inventories -- 155
Decrease in other assets 3,208 1,904
Increase (decrease) in accounts payable and accrued liabilities (6,904) 35
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts 495 (5,862)
Increase (decrease) in liabilities subject to compromise 302 (2,515)
--------- ---------
Net cash used in operating activities (13,544) (14,486)
--------- ---------
Investing activities:
(Increase) decrease in restricted cash (8,726) 3,449
Capital expenditures for property, plant and equipment -- (4)
Net Proceeds from sale of segments 15,093 3,706
--------- ---------
Net cash provided by investing activities 6,367 7,151
--------- ---------
Financing activities:
Net borrowings (repayments) under line of credit 409 (2,823)
Repayments on borrowings under debt facilities (467) (1,245)
--------- ---------
Net cash provided by financing activities (58) (4,068)
--------- ---------
Effect of exchange rate changes on cash -- 286
--------- ---------
Net decrease in cash and cash equivalents (7,235) (11,117)
Cash and cash equivalents at beginning of period 14,453 20,403
--------- ---------
Cash and cash equivalents at end of period $ 7,218 $ 9,286
========= =========
Supplemental disclosures:
Cash paid for interest $ 259 $ 4,264
Cash paid for income taxes $ -- $ --
Cash refunds received for income taxes $ -- $ --
Cash flows from operating activities before reorganization items:
Cash receipts from customers $ 3,057 $ 51,727
Cash payments to vendors, suppliers and employees $ 13,146 $ 65,147
The accompanying notes are an integral part of these financial statements.
5
FRIEDE GOLDMAN HALTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002 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, 2002.
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 Company's 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 its debts. The Company
filed the petitions in the U.S. Bankruptcy Court for the Southern District of
Mississippi, and they 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 it continues business operations as Debtor in Possession. These
claims are reflected in the March 31, 2003 and December 31, 2002 balance sheets
as "liabilities subject to compromise." Claims secured against the Company's
assets ("secured claims") also are stayed, although the holders of such claims
have the right to move the court for relief from the stay. Secured claims are
secured primarily by liens on the Company's property, plant, and equipment.
Additional claims (liabilities subject to compromise) have arisen subsequent to
the filing date resulting from rejection of executory contracts, including
leases, and from the determination by the court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed amounts.
The Company retained the investment banking firm of Houlihan, Lokey,
Howard & Zukin and restructuring advisor, Glass and Associates, Inc. to assist
in the preparation of a plan of reorganization. These advisors assisted
management and our Board of Directors in evaluating various alternatives
including, but not limited to, sales of assets and the Company's business
unit(s), infusion of capital, debt restructuring and any combination of these
6
options. Upon the sale of the Offshore segment in January 2003, Houlihan, Lokey,
Howard & Zukin completed their engagement. Glass and Associates continues to
assist management and the Board of Directors in preparation of an amended plan
of reorganization and with other operational matters.
As further described in Note 3, 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 due to the sale of the Vessels
and Offshore segments. The amended plan will result in no recovery for current
equity interests. The amount of any recovery to general creditors will depend
primarily on, but will not be limited to the following factors: (a) the ultimate
value of pre-petition claims, and (b) the dollar amount of claims associated
with the administration of this case. Note 3 also contains information regarding
the sale of the Vessels and Offshore segments as well as their asset sales and
dispositions.
The Company cannot provide assurance that the amended plan will be
approved. It is not possible to assess the outcome of the Company's bankruptcy
proceeding or whether the Company will operate in accordance with the amended
plan, if approved.
3. 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 its Offshore and Vessels segments and the disposition of
its Engineered Products segment as well as the disposition through sale, or
otherwise, of other of its subsidiaries and assets as described below. As
discussed in Note 2, the Company anticipates amending the plan of reorganization
due to the sale of the Vessels and Offshore segments. The sale of the Offshore
segment was completed on January 29, 2003.
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 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 was paid $2.5 million of these sales proceeds
as a contractual "break-up" fee. The proceeds of the sale were 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 the Vessels segments
separately in the consolidated statements of operations as a component of
discontinued operations. Revenue for the Vessels segment was $23.5 million for
the three months ended March 31, 2002. For the three months ended March 31, 2003
and 2002, the Company recorded losses from discontinued operations of $0.3
million and $2.4 million, respectively. Additionally, in 2002, the Company
recorded a loss on the disposal of the Vessels segment of $37.5 million.
At March 31, 2003, long-lived assets held for disposition includes $1.0
million which represents a parcel of real property, the Three Rivers Yard in
Gulfport, Mississippi.
Restricted cash at March 31, 2003 and December 31, 2002 includes the
proceeds remaining from the sale of the Vessels segment.
7
Disposition of Engineered Products Segment
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 were 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. This loss was adjusted during 2002 and a $0.7 million
gain on disposal was recorded after the consummation of the sale primarily
related to the working capital adjustment.
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 $0.8 million in the three
months ended March 31, 2002.
Revenue for the Engineered Products segment was $18.6 million for the
three months ended March 31, 2002.
Restricted cash at March 31, 2003 and December 31, 2002 includes the
proceeds remaining from the sale of the Engineered Products segment.
Disposition of Offshore Segment.
Friede Goldman Newfoundland Limited. In March 2002, the Company completed
the sale of substantially all of the assets of its wholly-owned subsidiary,
Friede Goldman Newfoundland Limited ("FGN") for cash consideration of $5.0
million which primarily represents 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 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 on disposal of Offshore segment of approximately $4.9
million pursuant to an asset purchase agreement entered into in November 2001.
The loss was adjusted 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. Certain assets were excluded from the sale of FGN, including a
Manitowoc Series 4600 Ringer Crane, (the "Crane") jack-up rig components, free
issue steel and spud cans. The assets were transported from Friede Goldman
Newfoundland to Friede Goldman Offshore's West Bank Facility. These assets,
excluding the Crane, were included in the sale of the Offshore segment discussed
below.
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, were subject to a sales commission to the Company's investment
banker. The Company recorded a gain on disposal of Offshore segment of $11.4
million related to this transaction in the second quarter of 2002.
Friede Goldman Offshore. On January 29, 2003, the Company completed the
sale of the Offshore segment for a purchase price of $18.0 million in cash and
the assumption of $38.4 million principal plus accrued interest in secured debt
including the U.S. Maritime Administration ("MARAD"), GE Capital Corporation,
and GE Capital Public Finance debt. The proceeds of the sale were subject to a
sales commission to the Company's investment banker. As a result of the sale of
FGO and FGOT in January 2003, the Company wrote down its assets to the net
realizable value and recorded a loss on the disposal of the Offshore segment of
$28.7 million in December 2002. The property, plant and equipment of the
Offshore segment was included in long-lived assets held for disposition at
December 31, 2002.
The Company has reported the operating results of the Offshore segment
separately in its consolidated statements of operations as a component of
discontinued operations. For the three months ended March 31, 2003 and 2002, the
Company recorded income from discontinued operations of approximately $0.2
million and $3.7 million, respectively. Revenue for the Offshore segment was
$12.4 million and $26.1 million for the three months ended March 31, 2003 and
2002, respectively.
At December 31, 2002, the consolidated financial statements included
current assets of $15.7 million and current liabilities of $17.5 million related
to the Offshore segment. Long-lived assets held for disposition at
8
December 31, 2002 included $48.3 million related to the Offshore segment. At
March 31, 2003, long-lived assets held for disposition totaled $2.7 million
which included the Crane and the FGOT Central Yard in Sabine Pass, Texas in the
amounts of $1.1 million and $1.6 million, respectively, which were excluded in
the sale of the Offshore segment.
Restricted cash at March 31, 2003 and December 31, 2002 includes the
proceeds remaining from the sale of the Offshore division.
The Consolidated Balance Sheet includes decreases in various balance
sheet accounts from December 31, 2002 to March 31, 2003 related primarily to the
disposition of the Offshore segment.
4. Restricted Cash
Restricted cash increased $8.7 million from December 31, 2002 to March
31, 2003. The increase is primarily related to the receipt of proceeds in
January 2003 from the sale of the Offshore segment, offset by the use of BLM
funds for the payment of professional fees and other administrative costs
related to the bankruptcy filing. An additional $2.1 million decrease in
restricted cash occurred in the first quarter of 2003 as a result of the release
of escrowed funds for the payment of a working capital settlement to the buyer
of the Vessels segment.
5. Inventories
At December 31, 2002, inventories consisted of the following:
(in thousands)
--------------
Jack-up rig components. ..................... $15,381
Steel and other raw materials ............... 2,763
-------
$18,144
Less reserve for obsolete inventories ....... 14,077
-------
$ 4,067
=======
6. Long-Lived Assets Held for Disposition
At March 31, 2003 and December 31, 2002, long-lived assets held for
disposition by business unit consisted of the following:
March 31, December 31,
2003 2002
-------- ------------
(in thousands)
Vessels (Includes Three Rivers Yard in Gulfport, Mississippi at
March 31, 2003 and December 31, 2002.) $1,000 $ 1,000
Friede Goldman Offshore East and Friede Goldman Offshore Texas
(Includes the FGOT Central Yard in Sabine Pass, Texas as of
March 31, 2003 and the total net realizable value of the Offshore
segment at December 31, 2002.) 1,550 47,184
Friede Goldman Newfoundland, Limited (Includes the Crane at March 31,
2003 and December 31, 2002.) 1,100 1,100
------ -------
$3,650 $49,284
====== =======
9
7. Workers Compensation Programs
Prior to March 1, 2000, Offshore Marine Indemnity Company ("OMIC"), a
wholly-owned subsidiary of the Company domiciled in Vermont, acted as a fronting
reinsurance captive company for the Company workers' compensation insurance
program. On June 7, 2001, the Commissioner of the Vermont Department of Banking,
Insurance, Securities and Healthcare Administration was ordered by the
Washington County Superior Court in the State of Vermont to take possession and
control of all or part of the property, books and accounts, documents and other
records of OMIC. OMIC and its officers, managers, agents, employees and other
persons were also enjoined from disposing of its property and from transacting
its business except with the written consent of the Commissioner. Based on the
court order, the Company does not exercise control over OMIC. Accordingly, the
subsidiary was deconsolidated and the Company eliminated the insurance reserves
and reinsurance receivables from its balance sheet and wrote off its investment
in OMIC totaling $1.4 million during 2001. At March 31, 2003, the Company had
recorded a $5.7 million liability in accrued liabilities in the accompanying
Consolidated Balance Sheet representing the remaining balance on an outstanding
letter of credit described below.
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 were
secured by a letter of credit issued in favor of Reliance. At March 31, 2003,
the remaining balance of this letter of credit was $5.7 million, however on
April 18, 2003, Reliance drew the full remaining balance (see Note 8.) 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. The Company is evaluating its options for response to
the drawing of 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 statutes 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.
Current estimates of these claims are approximately $10.0 million. There is no
assurance that the Company's analysis of the relevant payment obligations will
be upheld by applicable courts and that additional liabilities in excess of the
$5.7 million would not result.
After March 1, 2000, the Company's workers' compensation programs were
provided by several insurance companies with self insurance limits. At March 31,
2003, the Company has recorded liabilities of approximately $2.9 million
relating to these programs. This liability includes pre-petition claims of $1.3
million which are included in liabilities subject to compromise.
There is no assurance that the Company's analysis of these payment
obligations will be upheld by applicable courts and that additional liabilities
in excess of the $2.9 million reserve will not result. Additionally, some or all
of the pre-petition liability could be deemed an administrative claim by the
bankruptcy court.
10
8. Debt
The following table includes the Company's debt obligations at March 31,
2003 and December 31, 2002. These debt obligations are not subject to
compromise.
March 31, December 31,
2003 2002
--------- ------------
(in thousands)
Borrowings under the Restated Credit Agreement:
Line of credit ................................................................................ $ 179 $ 47
Term loan ..................................................................................... 9,577 9,298
Notes payable to financial institutions and others bearing interest at rates ranging from 6.15% to
12.00%, payable in monthly installments, maturing at various dates through March 2014 and
secured by equipment, a lease and real property .................................................. 551 3,405
Demand note payable to MARAD bearing interest at 6.35%, secured by equipment ........................ -- 19,854
Bonds payable to GE Capital Public Finance, bearing interest at 7.99% payable in monthly
installments commencing January 1999, maturing December 2008, secured by equipment ............... -- 13,608
Note payable to GE Capital Corporation, bearing interest at 7.05%, payable in quarterly
installments, matured March 2002, secured by equipment ............................................ -- 2,500
-------- -------
$ 10,307 $48,712
======== =======
Accrued interest on these debt obligations was included in accrued
liabilities at March 31, 2003 and December 31, 2002 in the amounts of $2.4
million and $4.5 million, respectively.
Restated Credit Agreement
Effective October 24, 2000, the Company entered into a $110.0 million
amended and restated credit agreement with Foothill Capital Corporation
("Foothill"), 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.
On October 29, 2002, the Bankruptcy Court entered an order authorizing
the Company to pay to Foothill upon the sale of the Vessels segment,
approximately $64.0 million in undisputed principal and undisputed non-default
rate interest, and to provide $6.0 million in cash collateral to secure a letter
of credit. An escrow account of $14.4 million was also authorized to satisfy
potentially disputed charges, which include default interest and various fees
that might be awarded by the Bankruptcy Court. As of November 25, 2002, the
Company had made all payments required by the court order. Although the court
order requires use of the escrow account for payment of disputed charges,
Foothill retains all of its liens on the Company's remaining assets pending
final resolution.
Total balances outstanding under the Restated Credit Agreement at March 31,
2003 were $9.8 million. On April 18, 2003, $5.7 million was drawn against the
one remaining letter of credit issued under the Restated Credit Agreement (see
Note 7.) The Company's obligation to reimburse Foothill for any draws was
secured by $5.7 million in cash. At March 31, 2003, the amount was included in
restricted cash. Accordingly, restricted cash was also reduced in April 2003 by
an amount equal to the draw on the letter of credit. The letter of credit was
provided to secure the Company's worker's compensation obligations.
Notes Payable to Financial Institutions
In the first quarter of 2003, notes payable to financial institutions in
the amount of $2.5 million were assumed by the buyer in connection with the sale
of the Offshore segment in January 2003.
MARAD Financing Agreement
As of December 31, 2002, the Company had approximately $19.9 million in
outstanding principal related to its demand notes payable to MARAD. The notes
resulted from MARAD making payment under its guarantee
11
agreement to the holders of the bonds originally issued in December 1997, under
Title XI, to partially finance construction of the FGO East Facility. Pursuant
to the disposition of the Offshore segment in January 2003, the debt owed to
MARAD was assumed by the buyer of the Offshore segment, and the Company has no
further obligations thereunder.
Bonds Payable - GE Capital Public Finance Agreement
Pursuant to the disposition of the Offshore segment in January 2003, $13.6
million in debt owed to GE Capital Public Finance was assumed by the buyer of
the Offshore segment, and the Company has no further obligations thereunder.
Notes Payable - GE Capital Corporation Debt
Pursuant to the disposition of the Offshore segment in January 2003, $2.5
million in debt owed to GE Capital Corporation was assumed by the buyer of the
Offshore segment, and the Company has no further obligations thereunder.
9. Liabilities Subject to Compromise
As a result of certain contractual matters and other claims asserted by
creditors (as further described in Notes 10 and 11 of the Consolidated Financial
Statements), 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 March 31, 2003 and December 31, 2002,
the Company accrued its 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.
Based upon management's assessment of information currently available,
management believes that a reasonable estimate of the possible claims that could
be approved by the court could be as much as $575.0 million. There is no
assurance that either of these estimates will reflect the ultimate position of
the Bankruptcy Court. The amount of the awarded claim could be higher.
At March 31, 2003 and December 31, 2002, liabilities subject to compromise
included the following:
March 31, December 31,
2003 2002
--------- ------------
(in thousands)
Convertible subordinated notes .... $ 185,000 $ 185,000
Accounts payable .................. 74,944 74,774
Contract liabilities .............. 68,272 68,142
Accrued interest .................. 5,041 5,041
Other accrued liabilities ......... 13,058 13,058
--------- ------------
$ 346,315 $ 346,015
========= ============
12
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 and 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 March 31, 2003 and December
31, 2002. 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.
10. Contingencies
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 March 31, 2003, $1.25 million, the amount of the remaining
installment, was included in liabilities subject to compromise in 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 a fire on July 2, 2002. Subsequently, the owner of the vessel, Felham
Enterprises (Cayman) Ltd. and the general contractor, Trinity Yachts, Inc.,
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. The Company also
has certain claims arising out of the subject fire. The Company believes any
losses or damages incurred by the vessel owner or Trinity Yachts, Inc. will be
covered by its Builder' Risk Insurance policy. Towards this end, Builder's Risk
Underwriters subscribing to 70% of the policy have recently settled with the
parties, including the Company. This will result in a payment to the Company of
$1.1 million. Furthermore, the aforementioned administrative claims of Felham
and Trinity will be reduced to $6.5 million and $0.1 million, respectively. The
parties, including the Company, have reserved rights to seek recovery of the
remaining 30% of the loss from the other Underwriters on the subject Builder's
Risk policy, one of whom (holding 15% of the risk) has denied coverage. The
Company's remaining portion of the settlement is over $0.5 million.
WARN Act
A class-action lawsuit was filed in 2003 in the United States Bankruptcy
Court naming Friede Goldman Halter, Inc. and Friede Goldman Offshore, Inc. as
the defendants. The suit alleges wrongful termination in violation of the
Workers Adjustment and Retraining Notification Act ("WARN Act"), and seeks wages
for each member of the proposed class in an amount equal to the employee's wage
rate times the workdays within the 60-day notification period required by the
WARN Act, coverage for medical expenses incurred by each member of the proposed
class that would have been covered under a benefit plan during the 60-day
notification period required by the WARN Act, prejudgment interest, attorney
fees and costs. Based on the latest information available, the Company estimates
its maximum exposure to be approximately $4.0 million. The Company believes that
it has sufficient defenses to mitigate and/or eliminate this claim and has
recorded no liability. The eventual outcome of this matter or the potential
monetary liability can not be determined at this time.
13
Other
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. The ultimate disposition of these matters,
management believes, will not have a material adverse effect on the Company's
financial position or results of operations. Management believes that the
Company's significant contingencies have been disclosed; however, there may be
other matters for which the ultimate disposition could have a material adverse
effect on the Company's financial position and results of operations.
11. Contractual Matters
The Ocean Rig, Petrodrill, Pasha and CNOOC Contracts
The Company's current financial condition has 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 cost
overruns and delays in the construction of these rigs. As a result, the Company
recorded provisions for contract losses during the second, third and fourth
quarters of 2000 of approximately $24.6 million, $7.0 million and $38.2 million,
respectively, related to this project. Losses for the fourth quarter included 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" contract. 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 completed final sea trial commissioning and is in operation.
The second rig left the Company's facility in July 2001 and construction was
completed at a Canadian shipyard in late 2002.
On December 10, 2001, the Company entered into a Delivery and Close-Out
Agreement with Ocean Rig (the "Agreement") under which both parties waived and
released all claims each had against the other except certain limited claims
reserved in the Agreement. The Agreement was subject to the approval of the
Bankruptcy Court. The Bankruptcy Court's approval of the 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
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 Agreement, the proofs of claim could be reactivated and
amended. The Company does not believe that the proofs of claim will be
reactivated and amended.
Petrodrill
In April 1998, one of the Company's subsidiaries Friede Goldman Offshore
Texas ("FGOT") 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 United
States 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.
14
Thereafter, production delays continued. Under the contracts, FGOT was 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 extensions of the delivery dates and to additional
compensation. Petrodrill refused to acknowledge FGOT's right to an 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 a 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, thereby 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 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 Bankruptcy 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 March 31, 2003, $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 March 31, 2003, $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 March 31, 2003 is limited to the sum of
these two liabilities, approximately $44.4 million. This amount is included in
liabilities subject to compromise in the Consolidated Financial Statements.
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 March 31, 2003 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
15
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 March 31, 2003.
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
federal 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
Mississippi state court. The suits are seeking specific performance of the
surety under the terms of the performance bond. This suit was settled, but the
agreement was sealed by the federal court. Because substantially all of the
assets of the Company's Vessels segment were sold on October 23, 2002, the
Company will not complete the project.
At March 31, 2003, $2.4 million was included in the Company's reserve for
estimated costs to complete the contract, which represents its estimate of the
remaining costs of completion in excess of future billings at the time work on
the project was suspended. The customer has submitted proofs of claim totaling
$906.0 million and the surety has submitted proofs of claim which are
unquantified at this time. The Company believes 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 March 31, 2003.
The surety also asserts certain secured claims against the Company's assets and
post-petition administrative claims for payments made under the payment bond.
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 the
sales proceed cash account for the Vessels segment 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 would indemnify Liberty Mutual for any amount paid to Royal Bank under
the counter guarantee. At March 31, 2003, approximately $10.9 million was
included in the Company's liabilities subject to compromise 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 contracts
between the subsidiary and CNOOC. The Company believes that 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 the sales proceed cash account
for the Engineered Products segment subject to certain adjustments.
16
12. Reconciliation of Net Loss Per Share
The following table sets forth the computation of basic and diluted net
loss per share:
Three Months Ended
March 31,
----------------------
2003 2002
-------- ---------
(in thousands, except
per share data)
Numerator:
Net loss before discontinued operations, basic and diluted ... $(4,882) $(11,093)
======= ========
Denominator:
Weighted average shares outstanding .......................... 48,711 48,711
Effect of dilutive securities:
Stock options. .......................................... -- --
------- --------
Denominator for net loss before discontinued operations,
basic and diluted. ...................................... 48,711 48,711
======= ========
Net loss per share, basic and diluted. ............................ $ (0.10) $ (0.23)
======= ========
The effect on net loss per share, diluted, would be anti-dilutive if the
stock options and the conversion of the 4 1/2% Convertible Subordinated Notes
had been assumed in the computation for all periods presented.
13. Comprehensive loss
Other comprehensive loss includes foreign currency translation adjustments.
Total comprehensive loss was as follows:
Three Months Ended
March 31,
-----------------------
2003 2002
-------- ---------
(in thousands)
Net loss $(4,649) $ (9,014)
Other comprehensive loss:
Foreign currency translation -- (170)
------- --------
Comprehensive loss $(4,649) $ (9,184)
======= ========
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On March 22, 2002, we filed a Plan of Reorganization with the United States
Bankruptcy Court, which included the reorganization of substantially all of our
Offshore and Vessels segments and the disposition of our Engineered Products
segment as well as the disposition through sale, or otherwise, of other
subsidiaries and assets as described below. As discussed in Note 2 to the
Consolidated Financial Statements, we anticipate amending the plan of
reorganization due to the sale of the Vessels and Offshore segments. We have no
ongoing operations after the Offshore segment sale in January 2003.
Results of Operations
The consolidated financial statements include the accounts of Friede
Goldman Halter, Inc. and its wholly-owned subsidiaries, including, among others,
Friede Goldman Offshore, Inc. ("FGO"), Friede & Goldman, Ltd. ("FGL"), Friede
Goldman Newfoundland Limited ("FGN"), Amclyde Engineered Products Inc.
("Amclyde") and Halter Marine, Inc. ("Halter") (collectively referred to as the
"Company"). These consolidated financial statements include
17
the accounts of FGN for all periods through its sale date of March 22, 2002,
Amclyde for all periods through its sale date of April 25, 2002, FGL for all
periods through its sale date of June 30, 2002, Halter for all periods through
its sale date of October 23, 2002 and FGO for all periods through its sale date
of January 29, 2003.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A expenses") were $2.6
million and $3.5 million from continuing operations for the three months ended
March 31, 2003 and 2002. The decrease in SG&A expenses is the result of
personnel reductions and other cost-savings measures that we implemented.
Net interest expense
Net interest expense decreased to $0.1 million from continuing operations
for the three months ended March 31, 2003 from $3.1 million from continuing
operations for the three months ended March 31, 2002. The $3.0 million decrease
is primarily the result our $64.0 million payment in undisputed principal and
undisputed non-default rate interest to Foothill Capital Corporation in the
fourth quarter of 2002. Additionally, $38.4 million in secured debt, including
the MARAD, GE Capital Corporation, and GE Capital Public Finance debt, was
assumed by the buyer in the sale of the Offshore segment in January 2003.
Contractual interest expense of $2.0 million and $2.8 million on the 4 1/2%
convertible subordinated notes was not recorded in the three months ended March
31, 2003 and 2002, respectively, due to the Chapter 11 filing.
Reorganization items-professional fees
We incurred professional fees of $2.1 million related to the bankruptcy
proceeding and reorganization in the three months ended March 31, 2003 compared
to $4.3 million in the three months ended March 31, 2002. In January 2003, our
last remaining operating division, the Offshore segment, was sold which has
resulted in the occurrence of less professional fees in 2003.
Income taxes
We had income tax expense of $0.3 million in the first quarter of 2002
related to FGN. As a result of losses incurred in prior years by the Company, we
were not able to record income tax benefits for financial reporting purposes in
the three months ended March 31, 2003 and 2002.
Discontinued Operations
We recorded a loss from discontinued operations of our Vessels segment of
$0.3 million for the three months ended March 31, 2003 as compared to a loss of
$2.4 million for the three months ended ended March 31, 2002. The loss from
discontinued operations in the three months ended March 31, 2002 was primarily
due to overhead costs inefficiencies resulting from decreased sales volume and
the suspension of production on the Pasha contract in 2002. The $0.3 million
loss from discontinued operations in the three months ended March 31, 2003
relates to various immaterial adjustments.
We recorded income from discontinued operations of our Offshore segment of
$0.2 million for the three months ended March 31, 2003 as compared to $3.7
million for the three months ended March 31, 2002. The decrease is primarily due
to the sale of the Offshore segment in January 2003.
During the three months ended March 31, 2003, we recorded a $0.3 million
gain on disposal of the Offshore segment which reflected funds received from the
buyer of the Offshore segment related to certain payroll reimbursements.
18
We recorded income from discontinued operations of our Engineered Products
segment of $0.8 million for the three months ended March 31, 2002 related to
Amcylde, which was sold in April 2002.
Liquidated and Capital Resources
Cash flow summary
During the first quarter of 2003, we financed our business activities
primarily through funds generated from cash balances, borrowings under the
Restated Credit Agreement and proceeds received from the sale of the Offshore
segment.
Net cash used in operating activities during the first quarter of 2003 was
approximately $13.5 million, including a net loss of $4.6 million for the three
months ended March 31, 2003, offset by non-cash depreciation and amortization of
$0.6 million. Funds generated through operating activities included a $3.2
million decrease in other assets. Funds used by operating activities included a
$6.9 million decrease in accounts payable and accrued liabilities and a $6.3
million increase in contract and other receivables. In addition, the gain on
disposal of the Offshore segment recorded during the first quarter of 2003 was
$0.3 million.
Net cash provided by investing activities during the first quarter of 2003
was $6.4 million which includes net cash of $15.1 million generated from the
sale of the Offshore segment. Additionally, restricted cash increased by $8.7
million primarily due to the remaining Offshore sale proceeds held in escrow.
Net cash used in financing activities during the first quarter of 2003 was
$0.1 million. Sources of cash included net borrowings under our line of credit
of $0.4 million. Funds used in financing activities included net repayments on
other debt facilities of $0.5 million.
Restated Credit Agreement
Effective October 24, 2000, the Company entered into a $110.0 million
amended and restated credit agreement with Foothill Capital Corporation
("Foothill"), 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.
On October 29, 2002, the Bankruptcy Court entered an order authorizing the
Company to pay, upon the sale of the Vessels segment to Foothill, approximately
$64.0 million in undisputed principal and undisputed non-default rate interest,
and to provide $6.0 million in cash collateral to secure a letter of credit. An
escrow account of $14.4 million was also authorized to satisfy potentially
disputed charges, which include default interest and various fees that might be
awarded by the Bankruptcy Court. As of November 25, 2002, the Company had made
all payments required by the court order. Although the court order requires use
of the escrow account for payment of disputed charges, Foothill retains all of
its liens on the Company's assets pending final resolution.
Total balances outstanding under the Restated Credit Agreement at March 31,
2003 were $9.8 million. On April 18, 2003, $5.7 million was drawn against the
one remaining letter of credit issued under the Restated Credit Agreement (see
Note 7 of the Consolidated Financial Statements.) The Company's obligation to
reimburse Foothill for any draws was secured by $5.7 million in cash. At March
31, 2003, the amount was included in restricted cash. Accordingly, restricted
cash was also reduced in April 2003 by an amount equal to the draw on the letter
of credit. The letter of credit was provided to secure the Company's worker's
compensation obligations.
19
Notes Payable to Financial Institutions
In the first quarter of 2003, notes payable to financial institutions in
the amount of $2.5 million was assumed by the buyer in connection with the sale
of the Offshore segment in January 2003 and the Company has no further
obligations thereunder.
MARAD Financing Agreement
As of December 31, 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 notes 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. Pursuant to the disposition of the Offshore segment in January 2003,
the debt owed to MARAD was assumed by the buyer of the Offshore segment, and the
Company has no further obligations thereunder.
Bonds Payable - GE Capital Public Finance Agreement
Pursuant to the disposition of the Offshore segment in January 2003, $13.6
million in debt owed to GE Capital Public Finance was assumed by the buyer of
the Offshore segment, and the Company has no further obligations thereunder.
Notes Payable - GE Capital Corporation Debt
Pursuant to the disposition of the Offshore segment in January 2003, $2.5
million in debt owed to GE Capital Corporation was assumed by the buyer of the
Offshore segment, and the Company has no further obligations thereunder.
Liabilities Subject to Compromise
As of March 31, 2003, the Company had liabilities subject to compromise of
$346.3 million over and above the debt described above. These liabilities
resulted from certain contractual matters and other claims asserted by creditors
(as further described in Notes 10 and 11 of the Consolidated Financial
Statements). 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 March 31, 2003 and December 31, 2002,
the Company accrued its 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.
Based upon an assessment of information currently available, management believes
that a reasonable estimate of the possible claims that could be approved by the
court could be as much as $575.0 million. There is no assurance that either of
these estimates will reflect the ultimate position of the Bankruptcy Court. The
amount of the awarded claim could be higher. See Note 9 of the Consolidated
Financial Statements.
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, 2002 have not changed significantly through
the three month period ended March 31, 2003.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
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Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Acting
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Company's management, including the Chief Executive Officer and Acting Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
(b) 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
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 March 31, 2003, $1.25 million, the amount of the remaining
installment, was included in liabilities subject to compromise in 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 a fire on July 2, 2002. Subsequently, the owner of the vessel, Felham
Enterprises (Cayman) Ltd. and the general contractor, Trinity Yachts, Inc.,
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. The Company also
has certain claims arising out of the subject fire. The Company believes any
losses or damages incurred by the vessel owner or Trinity Yachts, Inc. will be
covered by its Builder' Risk Insurance policy. Towards this end, Builder's Risk
Underwriters subscribing to 70% of the policy have recently settled with the
parties, including the Company. This will result in a payment to the Company of
$1.1 million. Furthermore, the aforementioned administrative claims of Felham
and Trinity will be reduced to $6.5 million and $0.1 million, respectively. The
parties, including the Company, have reserved rights to seek recovery of the
remaining 30% of the loss from the other Underwriters on the subject Builder's
Risk policy, one of whom (holding 15% of the risk) has denied coverage. The
Company's remaining portion of the settlement is over $0.5 million.
WARN Act
A class-action lawsuit was filed in 2003 in the United States Bankruptcy
Court naming Friede Goldman Halter, Inc. and Friede Goldman Offshore, Inc. as
the defendants. The suit alleges wrongful termination in violation of the
Workers Adjustment and Retraining Notification Act ("WARN" Act), and seeks wages
for each member of the proposed class in an amount equal to the employee's wage
rate times the workdays within the 60-day notification period required by the
WARN Act, coverage for medical expenses incurred by each member of the proposed
class that would have been covered under a benefit plan during the 60-day
notification period required by the WARN Act, prejudgment interest, attorney
fees and costs. Based on the latest information available, the Company estimates
its maximum exposure to be approximately $4.0 million. The Company believes that
it has sufficient defenses to mitigate and/or eliminate this claim and has
recorded no liability. The eventual outcome of this matter or the potential
monetary liability can not be determined at this time.
21
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 17 to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, refer to Note 11 to the Consolidated Financial Statements
contained in Part I of this Form 10-Q.
Preference Actions
On or about April 18, 2003, the Company, in concert with the Official
Unsecured Creditors Committee, filed approximately 225 preference actions on
behalf of the Company's bankruptcy estates, seeking an aggregate of
approximately $25.0 million in recoveries. There can be no assurance as to the
likelihood of success on the merits of those claims and the Company has not
included any amounts in its financial statement related to these claims.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
Restated Credit Agreement
Effective October 24, 2000, the Company entered into a $110.0 million
amended and restated credit agreement with Foothill Capital Corporation
("Foothill"), 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.
On October 29, 2002, the Bankruptcy Court entered an order authorizing the
Company to pay to Foothill upon the sale of the Vessels segment, approximately
$64.0 million in undisputed principal and undisputed non-default rate interest,
and to provide $6.0 million in cash collateral to secure a letter of credit. An
escrow account of $14.4 million was also authorized to satisfy potentially
disputed charges, which include default interest and various fees that might be
awarded by the Bankruptcy Court. As of November 25, 2002, the Company had made
all payments required by the court order. Although the court order requires use
of the escrow account for payment of disputed charges, Foothill retains all of
its liens on the Company's remaining assets pending final resolution.
Total balances outstanding under the Restated Credit Agreement at March 31,
2003 were $9.8 million. On April 18, 2003, $5.7 million was drawn against the
one remaining letter of credit issued under the Restated Credit Agreement (see
Note 7 of the Consolidated Financial Statements.) The Company's obligation to
reimburse Foothill for any draws was secured by $5.7 million in cash. At March
31, 2003, the amount was included in restricted cash. Accordingly, restricted
cash was also reduced in April 2003 by an amount equal to the draw on the letter
of credit. The letter of credit was provided to secure the Company's worker's
compensation obligations.
MARAD Financing Agreement
As of December 31, 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 notes 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. Pursuant to the disposition of the Offshore segment in January 2003,
the debt owed to MARAD was assumed by the buyer of the Offshore segment, and the
Company has no further obligations thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 CEO Certification
(b) Reports of Form 8-K.
During the first quarter of 2003, the Company filed the following current
reports on Form 8-K:
February 11, 2003 Completion of Friede Goldman Offshore Sale
January 3, 2003 Approval of Friede Goldman Offshore Sale
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Gulfport, State of
Mississippi, on the 15th day of May 2003.
FRIEDE GOLDMAN HALTER, INC.
By: /s/ T. JAY COLLINS
------------------------------
T. Jay Collins
Chief Executive Officer and
Acting Chief Financial Officer
24
Certification
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: May 15, 2003 By: /s/ T. Jay Collins
-----------------------------------
T. Jay Collins
Chief Executive Officer and
Acting 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.
25