FRIEDE GOLDMAN HALTER INC - 10-K Annual Report

Back to GetFilings.com

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

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 39503
Gulfport, Mississippi (Zip Code)
(Address of principal executive
offices)

(228) 896-0029
(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: Common Stock,
$.01, par value

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes. [X] No. [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 under the Securities Exchange Act of 1934)
is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes. [X] No. [_]

As of March 28, 2002 there were 48,710,579 shares of Common Stock, $.01 par
value, of Friede Goldman Halter, Inc. issued and outstanding, 37,539,840 of
which shares having an aggregate market value of approximately $2.3 million,
were held by non-affiliates of the registrant (affiliates being, for these
purposes only, directors, executive officers and holders of more than 5% of
the registrant's Common Stock).

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

TABLE OF CONTENTS

PART I

Page
----

Item 1. Business...................................................... 4
Risk Factors.................................................. 21
Item 2. Properties.................................................... 25
Item 3. Legal Proceedings............................................. 27
Item 4. Submission of Matters to a Vote of Security Holders........... 27
Executive Officers of the Registrant.......................... 28

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 29
Item 6. Selected Financial Data....................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 32
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.... 47
Item 8. Financial Statements and Supplementary Data................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 47

PART III

Item 10. Directors and Executive Officers of the Registrant............ 48
Item 11. Executive Compensation........................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 54
Item 13. Certain Relationships and Related Transactions................ 55

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K............................................................. 56

2

FORWARD-LOOKING STATEMENTS

This Report on Form 10-K contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, included in this Form
10-K, are forward-looking statements. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions, including (i) risks
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, new
construction and repair of vessels and the design of new vessels (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 future government funding for certain vessel contracts and
prospects, (xi) risks related to the completion of contracts to construct
offshore drilling rigs and vessels at costs not in excess of those currently
estimated and prior to the contractual delivery dates, (xii) risks of untimely
performance by companies which provide services to us as subcontractors under
construction contracts, and (xiii) 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.

3

ITEM 1. Business

General

Friede Goldman Halter, Inc. ("FGH") is a world leader in the design and
construction of equipment for the maritime and offshore energy industries.
Formerly Friede Goldman International, Inc. ("FGI"), our name was changed to
FGH effective with the merger with Halter Marine Group, Inc. ("HMG") on
November 3, 1999. FGH is a holding company which conducts substantially all of
its operations through its subsidiaries.

We 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, we
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, we did not pay the $4.2 million interest payment
due on March 15, 2001, on our outstanding 4 1/2% convertible subordinated
notes (the "Subordinated Notes") in the principal amount of $185.0 million
which resulted in the entire principal amount becoming immediately callable.
Our 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 generated substantial uncertainty
regarding our ability to meet our obligations in the ordinary course of
business. As a result, on April 19 and 20, 2001, we, including 31 of our
subsidiaries, elected to file separate petitions for relief under Chapter 11
of the United States Bankruptcy Code which allows for the reorganization of
our 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, we have maintained
possession of our property, and have continued to remain in control of our
ongoing business affairs as a Debtor in Possession. We also received approval
from the bankruptcy court to pay or otherwise honor certain of our pre-
petition obligations, including the authority to pay employee wages and to
maintain employee benefit programs. We are continuing operations in Chapter
11. The financial statements do not include all adjustments that might result
from uncertainties arising as a result of the implementation of our plan of
reorganization.

Under Chapter 11, certain claims against us in existence prior to the
filing of the petitions for relief under the federal bankruptcy laws are
stayed while we continue business operations as Debtor in Possession. These
claims are reflected in the December 31, 2001 balance sheet as "liabilities
subject to compromise." 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. Claims secured against our 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 our property, plant, and equipment.

We have retained the investment banking firm Houlihan, Lokey, Howard &
Zukin and restructuring advisor Glass and Associates to assist in the
preparation of a plan of reorganization. These advisors are assisting us and
our Board of Directors and the Official Unsecured Creditors' Committee ("UCC")
in evaluating all possible alternatives including, but not limited to, the
selling of certain of our business unit(s), infusion of capital, debt
restructuring and any combinations of these options.

Plan of Reorganization and Disposition of Assets

On March 22, 2002, we filed a Plan of Reorganization with the United States
Bankruptcy Court, which is subject to the approval of the Court. The Plan of
Reorganization includes the reorganization of substantially all of our
Offshore and Vessels segments and the disposition of our Engineered

4

Products segment as well as the disposition through sale, or otherwise, of our
other subsidiaries and assets as described below. In connection with the
development of the Plan of Reorganization, we reviewed our expected future
cash flows related to our operating segments to determine the recoverability
of the carrying value of our long-lived assets, including goodwill. This
review indicated an impairment related to the carrying value of goodwill;
accordingly, we recorded an impairment charge of $201.6 million for the year
ended December 31, 2001.

The Plan of Reorganization is subject to the review and approval of the
United States Bankruptcy Court. There can be no assurance that the Plan will
be approved or that the Company will continue to operate in some form. It is
not possible to assess the outcome of the Company's bankruptcy proceeding or
whether the Company will operate in accordance with the Plan, if approved. The
outcome of these uncertainties raises substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.

Disposition of Engineered Products Segment

In May 2001, we completed the sale of our 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, we
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 December 31, 2001. We recorded a gain of
approximately $16.0 million related to this transaction in the second quarter
of 2001 and have reflected this gain as a component of loss on disposal of our
Engineered Products segment for the year ended December 31, 2001.

In the fourth quarter of 2001, we received bids for Amclyde Engineered
Products ("Amclyde") to complete the disposition of our Engineered Products
segment. Pursuant to the terms of an Asset Sale Agreement dated February 15,
2002, we will receive $36.0 million in cash consideration for the sale of
Amclyde subject to certain net working capital adjustments. The ultimate
disposition is subject to possible competitive bids and the approval of the
Bankruptcy Court. We recorded a loss of approximately $42.0 million related to
this transaction in the second quarter of 2001 and have reflected this loss as
a component of loss on disposal of our Engineered Products segment for the
year ended December 31, 2001.

In addition, we have reported the operating results of our Engineered
Products segment separately in our consolidated statements of operations as a
component of discontinued operations. For the years ended December 31, 2001,
2000 and 1999 we recorded income from discontinued operations of approximately
$7.4 million, $11.0 million and $28,000, respectively. At December 31, 2001,
our financial statements include current assets of $17.5 million and current
liabilities of $6.4 million related to the Engineered Product segment.
Property, plant and equipment held for disposition include $6.3 million
related to the Engineered Products Segment.

Sale of the Assets of Friede Goldman Newfoundland, Limited

In connection with our reorganization plan, we entered into an agreement on
March 27, 2002 to sell the assets of our wholly owned subsidiary, Friede
Goldman Newfoundland Limited, ("FGN"). Under the sale agreement, we will
receive approximately $5.0 million in cash consideration for FGN which
represents primarily re-payment of intercompany debt. In addition, the
Province of Newfoundland has agreed to waive certain liquidated damages
related to noncompliance with minimum employment

5

levels at our Canadian shipyards during 1999 and 2000. In the fourth quarter
of 2001, we wrote down the assets of this subsidiary to their net realizable
value and recorded a loss of approximately $4.9 million. The property, plant
and equipment of FGN is included in property, plant and equipment including
goodwill held for disposition at December 31, 2001.

Disposition of FGO East Facility

As of December 31, 2001, we had approximately $19.9 million in outstanding
principal related to our bonds that are guaranteed by the U. S. Maritime
Administration ("MARAD"). The bonds were issued in December 1997, under Title
XI, to partially finance construction of our FGO East Facility. Our plan of
reorganization filed on March 22, 2002 contemplates abandoning this facility
to MARAD in full satisfaction of their claims. As a result, we 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 our FGO
East Facility's fixed assets over the outstanding principal amount of the
MARAD bonds. The property, plant and equipment of the FGO East Facility is
included in property, plant and equipment including goodwill held for
disposition at December 31, 2001.

Sale of Friede & Goldman, Ltd.

In an Asset Purchase Agreement entered into on March 14, 2002, we agreed to
sell substantially all the assets of Friede & Goldman, Ltd. ("FGL") for cash
consideration of approximately $8.0 million subject to certain net working
capital adjustments. The ultimate disposition is subject to possible
competitive bids and the approval of the Bankruptcy Court. We anticipate that
we will record a gain related to this transaction when it is consummated. The
property, plant and equipment of FGL is included in property, plant and
equipment including goodwill held for disposition at December 31, 2001.

Sale of Vessel Repair Operation

During August 2000, we sold certain of our shipyards engaged primarily in
the repair of marine vessels to Bollinger Shipyards, Inc. ("BSI") for
approximately $80.0 million subject to adjustment for the working capital of
the shipyards at the transaction date. Subsequent arbitration proceedings
regarding the working capital calculation resulted in a liability due to BSI
of $8.2 million. The working capital portion of the transaction escrow ($4.7
million) was distributed to BSI in August 2001. The remaining liability is
included in liabilities subject to compromise in the accompanying balance
sheet at December 31, 2001. There was no gain or loss recognized on this sale.

Sale of Yacht Operation

During April 2000, we completed the sale of our Trinity Yachts division to
a group led by John Dane III, our former chief operating officer and former
board member. The division was sold for $5.7 million in an all-cash
transaction. There was no gain or loss recognized on this sale.

Industry Conditions

The level of demand for 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

6

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, the demand for our services related to the construction,
conversion and repair of offshore drilling rigs and construction of offshore
service vessels was weak due to declines in oil and natural gas prices, the
general weakening in the domestic and international economy and uncertainties
related to our Chapter 11 filing. The price for oil generally remained above
$25 per barrel in 2001; however, natural gas prices declined dramatically from
a high on the spot market of almost $10/mcf to around $2/mcf at the end of the
year. Natural gas prices began to weaken during June 2001 as a result of
increasing inventory levels. Natural gas prices experienced further declines
as warmer than normal weather and economic slowdowns in the U.S. and
internationally reduced demands for natural gas. These economic events caused
exploration and production companies in the U.S. Gulf of Mexico to limit their
capital investments and contributed to a collapse in domestic drilling
activity during the second half of 2001. The U.S. Gulf of Mexico is the
primary market for our services related to the conversion and repair of
offshore drilling rigs and the construction of offshore service vessels. 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.

Our business, including the types of projects we undertake, will also be
affected by other factors affecting offshore drilling contractors, including
such factors as: (i) the condition and drilling capabilities of the existing
offshore drilling rigs operated by offshore drilling contractors, (ii) the
relative costs of building new offshore drilling rigs with advanced
capabilities versus the costs of retrofitting or converting existing rigs to
provide similar capabilities and (iii) new competition from offshore operator
owned construction yards.

Segments

We conduct our operations in three primary segments: Offshore, Vessels, and
Engineered Products. With the sale of the BLM Companies in May 2001 and the
expected sale of Amclyde in the second quarter of 2002, we will no longer have
an Engineered Products segment. In addition, we will no longer provide design
and engineering services of offshore drilling and production units with the
expected sale of Friede & Goldman, Ltd.

Offshore Segment

Services provided by our Offshore segment include the conversion, retrofit
and repair of existing offshore drilling rigs and the design and construction
of new offshore drilling rigs and other vessels and structures employed in the
offshore industry. Our Offshore segment customers consist primarily of
drilling contractors that drill offshore exploratory and development wells for
oil and gas companies throughout the world, particularly in the Gulf of
Mexico, the North Sea, eastern Canada, West Africa, South America, other
offshore areas of the world, and other parties who intend to lease newly
constructed rigs to drilling contractors.

Vessels Segment

Our Vessels segment is one of the largest builders of small to medium-sized
ocean-going vessels in the United States. Services provided by the Vessels
segment include the design, new construction and conversion of ocean-going
vessels including offshore service vessels ("OSVs"), cargo ships, double hull
tank barges, oceanographic research and survey ships, high speed patrol boats,
ferries, tug boats, tow boats and all types and sizes of barges. Customers of
the Vessels segment consist of offshore energy service companies, marine
transportation companies, domestic and foreign governments and other
commercial enterprises.

7

Engineered Products Segment

Our Engineered Products segment services include the design and manufacture
of marine cranes, mooring systems, deck equipment, jacking systems, specialty
mechanical systems, and a comprehensive aftermarket repair and retrofitting
operation. The primary customers of our Engineered Products segment, in
addition to the customers of our Offshore and Vessels segments, include
offshore construction contractors, shipyards, commercial cruise-liner
operators, general merchant marine, the fishing industry, on-land general
construction contractors and the U.S. Government.

Overview of Products and Services

Offshore Segment

Primary customers of our Offshore segment are drilling contractors with
operations offshore in the Gulf of Mexico, the North Sea, West Africa, eastern
Canada and South America and other offshore areas of the world. These drilling
contractors generally own and operate offshore drilling rigs and provide
drilling services to oil and gas companies. In addition, we have contracted
for the construction of rigs with customers who do not operate the equipment
but intend to charter the rigs to drilling contractors.

Several factors determine the type of rig most suitable for a particular
project, the more significant of which are the marine environment, water depth
and seabed conditions at the proposed drilling location, whether the drilling
is to be done over a production platform or other fixed structure, the
intended well depth, and variable deck load and well control requirements. A
brief description of the types of offshore drilling rigs and production units
currently serviced by our Offshore segment is set forth below.

Semi-submersibles. Semi-submersible rigs consist of an upper working and
living deck resting on vertical columns connected to lower hull members. Such
rigs operate in a "semi-submerged" position, remaining afloat, in a position
which places the water-line approximately half way between the top of the
lower hulls and bottom of the deck. Such rigs are typically anchored in
position to remain stable for drilling in the semi-submerged floating
position.

There have been five generations of semi-submersible drilling rigs, with
each successive generation incorporating improvements that enable the rigs to
drill more efficiently and in increasingly harsh marine environments. Fourth
generation semi-submersibles are typically capable of operating in water
depths of up to 5,000 feet and, in some cases, greater depths. Fifth
generation semi-submersibles are the newest generation of rigs in operation
and are capable of operating in water depths of up to 10,000 feet. Certain
fourth and fifth generation semi-submersibles are equipped with computer-
controlled thrusters to allow for dynamic positioning, which allows the rig to
remain on location over a drill site in deep waters without the use of anchors
and mooring lines.

A major portion of our work to date has involved the retrofit, repair and
conversion of earlier generation semi-submersibles, which generally operate in
maximum water depths of between 1,000 to 2,000 feet, into deepwater semi-
submersibles. The design of many of these earlier generation semi-submersible
rigs, including long fatigue-life and advantageous stress characteristics,
together with increasing demand for deepwater drilling capabilities have made
them well-suited for retrofitting.

Jackups. Jackup rigs are mobile, self-elevating drilling platforms equipped
with legs that are lowered to the ocean floor until a foundation is
established to support the drilling platform. The rig hull includes the
drilling rig, jacking system, crew quarters, loading and unloading facilities,
storage areas for bulk and liquid materials, heliport and other related
equipment. Jackups are used extensively for drilling in water depths from 20
feet to 500 feet. Some jackup rigs have a lower hull (mat) attached to the
bottom of the rig legs, while others have independent legs.

8

Jackup rigs can be generally characterized by their design as either slot
jackups or cantilevered jackups. Slot jackups are generally of an older
vintage and are configured for drilling operations to take place through a
slot at the aft of the hull. A slot design is generally appropriate for
drilling exploratory wells in the absence of any existing permanent structure,
such as a production platform. A cantilevered jackup can extend its drill
floor and derrick and either drill exploratory wells or drill over an
existing, fixed structure, thereby permitting the rig to drill new wells or
work over existing wells through such a structure. We have converted many
slot-design rigs into cantilever configurations.

Drillships. Drillships, which typically have a self-propelled ship-shape
hull, are positioned over a drill site through the use of either a mooring
system or a computer-controlled dynamic positioning system similar to those
used on certain fourth- and fifth- generation semi-submersible rigs.
Drillships are capable of operating in water depths ranging from 200 feet to
10,000 feet.

Floating Production Facilities. A floating production facility (FPF)
consists of a ship or semi-submersible vessel upon which production equipment
is mounted. In many cases, the hull is a converted tanker (often referred to
as a floating, production, storage and offloading, or FPSO, unit). In
addition, semi-submersible drilling units have been converted into floating
production units. In a few cases, a new hull has been purpose-built as an FPF.
For harsh-weather locations, FPFs are designed with a mooring system that
provides weathervaning capability so that the FPF can be rotated on location
to minimize the effects of wave, wind and current actions. The production
risers in these FPFs are connected to the hull through a swivel system that
also accommodates the mooring system. The hull of an FPF is typically used for
on-board oil storage, which is an important feature for remote locations where
export pipelines are not available and fixed oil storage availability is
limited or nonexistent.

Design and Engineering Services. Through our FGL subsidiary, we perform
design and engineering of offshore drilling and production units, including
jackups, semi-submersibles, drillships and floating production, storage and
offloading vessels. FGL has a long history of successful designs with 50 F&G
Ltd. designed semi-submersible drilling, pipelaying, and accommodation units
in service worldwide, and over 30 jackup drilling units of FGL design
operating worldwide.

Vessels Segment

Primary customers of our Vessels segment are offshore energy service
companies, marine transportation companies, domestic and foreign governments
and other commercial enterprises. Services provided by the Vessels segment
include the design, new construction, and conversion of ocean-going vessels
including OSVs for energy service companies, cargo ships, oceanographic
research and survey ships, high speed patrol boats and ferries for domestic
and foreign governments, and double-hull tank barges; tugboats, towboats and
other types of barges for other commercial enterprises. A brief description of
the products offered by our Vessels segment follows.

Offshore Service Vessels. We build OSVs including supply boats, anchor
handling tug supply boats and anchor handling tugs which serve oil and gas
drilling and production facilities and support offshore construction and
maintenance work. Our OSVs range from 200 feet to 300 feet in length and
generally range in price from $7.0 million to $50.0 million. In addition to
transporting deck cargo, such as pipe or drummed materials, supply boats
transport liquid mud, potable water, diesel fuel, dry bulk cement and dry bulk
mud. Supply boats we build range from standard supply boats to multi-purpose
sophisticated ships with high horsepower and bollard pull, automated controls,
dynamic positioning, controllable pitch propellers, articulated rudders, kort
nozzles and any type of auxiliary, deck or towing equipment. Anchor handling
tugs and anchor handling tug supply boats constitute a separate class of
offshore support vessels. These vessels have more powerful engines and deck
mounted winches and are capable of towing and positioning mobile offshore rigs
and their anchors as well as providing supply vessel services.

9

Tugs and Ocean-going Barges. We build a variety of ocean-going tugs and
barges for the energy marine transportation market, primarily ocean-going
double-hull tank barges. Contract prices for such tug-barge combinations range
from $7.0 million to $35.0 million. These barges are primarily used by
operators to carry petroleum products; but also carry dry bulk cargoes such as
grain, cement, iron ore, and coal; and general cargoes such as containers and
trailers. They range from 400 feet to 600 feet in length with as many cargo
tanks, decks and support systems as necessary.

Oceanographic Research and Survey Ships, High Speed Patrol Boats and
Ferries. The largest customer of the Vessels segment has historically been the
U.S. Government, for which we construct several types of vessels, including
logistics craft, oceanographic survey and research ships and patrol boats.
Oceanographic survey and research ships range in length from 200 feet to 350
feet and range in price from $40.0 million to $70.0 million. In addition to
the U. S. Government, we build vessels for foreign governments, primarily fast
patrol craft. We have also built passenger/vehicle ferries for governmental
operators on all three U.S. Coasts. These vessels range in length from 90 feet
to 400 feet and range in price from $1.0 million to $75.0 million.

Other Commercial Vessels. We build several other types of vessels for the
commercial marine market, including tugboats, inland tow boats, inland barges
and ocean-going cargo ships. Tug boats are used for towing and pushing, port
management operations, shipping, piloting, fire fighting and salvage. Tug
boats are built with two or three engines, standard propellers, controllable
pitch propellers, azimuthing Z-drives, cycloidal propulsion, and with or
without steerable or fixed nozzles. Inland tow boats are used by waterway
operators to push inland barges. We build a full line of tow or push boats.
Tug and tow boats range from 70 feet to 120 feet in length and generally range
in price from $1.5 million to $7.0 million. Inland barges are smaller and
simpler than ocean-going barges and are employed on the Inland River system.

Our cargo ship production includes a variety of sizes and types of vessels
up to about 600 feet in length for RoRo, tankship, and bulk service. Contract
prices for such ships range from approximately $35.0 million to $100.0
million.

Engineered Products Segment

Primary customers of our Engineered Products segment, in addition to the
customers of our Offshore and Vessels segments, include offshore construction
contractors, shipyards, commercial cruise-liner ship-owners, general merchant
marine operators, the fishing industry, on-land general construction
contractors and the U.S. Government. The Engineered Products segment services
include the design and manufacture of the world's largest cranes, mooring
systems, marine deck equipment, jacking systems, specialty mechanical systems,
and a comprehensive aftermarket repair and retrofitting operation.

Cranes, Mooring Systems, Drilling and Marine Deck Equipment.

AmClyde represents the following brand names: AmClyde (marine cranes,
shipyard gantry cranes, stevedoring cranes, stiffleg derricks, mooring
systems, winches, windlasses and specialty mechanical systems; Unit Mariner
(pedestal cranes); Lucker (linear winches and jacking systems); Hepburn
(winches and mooring systems); Fritz Culver (winches, deck equipment and
related machinery); McElroy (winches and deck equipment); Norson Engineering
(pipelay and cable lay equipment and systems); Sauerman (material handling
machinery, bucket and components); and J & B (drilling rig machinery and
related equipment).

Prior to its sale in May 2001, Friede Goldman France was a holding company
with two operating subsidiaries: Brissoneau & Lotz Marine S.A. ("BLM") and
BOPP S.A. ("BOPP"). These entities are collectively referred to herein as the
"BLM Companies." The BLM Companies represented the

10

following brand names: BLM (deck equipment, including mooring, anchoring and
cargo handling equipment such as deck cranes, provision cranes and hose
handling cranes for general marine and merchant vessels); BLM Offshore (rack
and pinion jacking systems used on offshore drilling jack-up rigs, mooring
systems used on semi-submersible drilling rigs, and pedestal cranes used on
drilling rigs), and BOPP (fishing winches for tuna seiners and related
equipment). BOPP also included the brand name Kerdranvant (steering gear for
marine vessels).

Drilling equipment typically consists of items such as derricks, rotary
tables, top drive units, blow out preventers, pipe handling equipment and mud
pumps required to conduct drilling operations. Marine deck equipment typically
consists of mooring, anchoring, cargo handling equipment, pedestal cranes,
skidding equipment and rig jacking equipment (on jackup rigs). In connection
with most major retrofit, conversion or new build projects, the owner of the
drilling unit contracts directly with the suppliers of drilling and marine
deck equipment for the purchase of such equipment for the rig. Typically such
equipment will be installed by the shipyard, and is often referred to as Owner
Furnished Equipment or "OFE." Our Engineered Products segment has the
capability to supply a wide variety of marine deck equipment to its offshore
drilling unit customers and to participate in the market for the marine deck
equipment on drilling units being modified or constructed by other shipyards.
The combined companies of our Engineered Products segment are also involved in
the design and manufacturing of marine equipment for marine shipyards
throughout the world (for fitting on cruise liners, bulk carriers, cargo
vessels, tankers and LNG carriers) and are the leading provider of large
marine cranes for the world's offshore construction contractors.

After-Market Sales and Service. The Engineered Products segment also sells
parts and provides service to support its products once they are delivered. It
has a service team who performs repair services worldwide and it maintains an
inventory of spare parts to support its products.

Description of Operations

Offshore Segment

Operations of our Offshore segment during 2001 consisted of several
conversion, retrofit and repair projects for offshore drilling contractors as
well as work on the completion of one new construction semi-submersible
offshore drilling unit and the continuing new construction of three semi-
submersible offshore drilling units. Significant conversion or retrofit
projects generally take eight to fourteen months to complete, whereas certain
repair projects may require only one to three months to complete. New rig
construction projects can require from 18 to 30 months to complete.

New Construction and Completion. Our FGO East yard was designed
specifically for the efficient construction and completion of offshore
drilling rigs. Moreover, the combined capacity of our FGO East yard and our
FGO West yard allows us to work on new build completion and construction
projects without any significant loss in our capacity to perform conversion,
retrofit and repair projects. In addition, our Orange facility located in
Texas is ideally suited for the construction of semi-submersible rigs. During
2001 we were working on the completion of one new semi-submersible hull and
the construction of three new build semi-submersible drilling rigs. A new
build completion involves performing the addition of decks, quarters,
equipment installation and final outfitting of an existing bare deck hull,
while the construction of new build semi-submersibles involves the above
activities as well as building the hull.

Conversions. Conversions consist generally of the conversion of one type of
drilling rig into a different type, such as the conversion of a slot jackup to
a cantilevered jackup, the conversion of a submersible rig to a semi-
submersible rig, or the conversion of a drilling rig or tanker into an FPF.
FPF conversions typically require the destruction and removal of all drilling
equipment and substructure (including the derrick system, rotary system,
tubulars, mud treating and pumping units and well control

11

systems) and the reconfiguration of the decks to accommodate heavy skid
mounted processing modules, production risers and handling equipment. This
production equipment is then interconnected through the installation of
piping, electrical wiring and walkways. Because production, processing and
storage facility additions typically increase a rig's variable deck load, we
are typically required to complete hull reinforcements and buoyancy and
stability enhancements. We did not complete any conversions in 2001.

Retrofits. Retrofits consist generally of improvements to the technical
capabilities, tolerances and systems of drilling and production equipment.
Retrofits performed on semi-submersible rigs include buoyancy and stability
enhancements (typically pontoon extensions and additional column sponsons) and
the addition or improvement of self-propulsion systems, positioning thrusters
and self-contained mooring systems. Jackup retrofits include strengthening and
extending the rig legs and reinforcing the spud cans on the existing legs. We
are also capable of upgrading living quarters and facilities to accommodate
harsh environment drilling conditions and to meet North Sea regulatory
requirements, improving ventilation systems and strengthening or replacing
heliports to accommodate larger aircraft. During 2001 we did not complete the
retrofitting of any semi-submersible drilling units.

Repairs. We perform a broad range of inspection and repair work for our
customers. Necessary repairs are identified both in connection with retrofit
and conversion projects as well as in connection with periodic inspections
performed at the shipyard which are required by the U.S. Coast Guard and by
vessel classification societies such as the American Bureau of Shipping. Rigs
are typically inspected for systems operability and structural integrity, with
ultrasonic thickness gauge readings employed to detect structural fatigue or
aberrations. Repair work may include the repair or renewal of piping, spud
cans, electrical and drilling systems, removal and replacement of deteriorated
or pitted steel and blasting, coating and painting of exterior surfaces. Our
repair work has also included the refurbishment of drilling systems as well as
the overhaul of generators, boilers, condensers, ballast and cargo valves, rig
cranes and production compressors.

Design and Engineering Services. Through our FGL subsidiary, we perform
design and engineering of offshore drilling and production units, including
jackups, semi-submersibles, drillships and floating production, storage and
offloading vessels.

Vessels Segment

In our Vessels segment, 2001 operations included the design, new
construction, and conversion of ocean-going vessels, including OSVs, cargo
ships, oceanographic research and survey ships, high speed patrol boats,
ferries, tug boats, tow boats and ocean-going barges. The Vessels segment also
provides a wide variety of conversion services for vessels and barges employed
by the offshore energy and commercial marine markets.

Design and New Construction. Our Vessels segment conducts new construction
and conversion operations at six shipyards. These shipyards employ advanced
manufacturing techniques including modular construction methods, advanced
welding techniques, panel line fabrication, computerized plasma arc metal
cutting and automated sandblasting and painting. We conduct our design
activities at our engineering facility located near the corporate
headquarters. At December 31, 2001, we had ten vessels under construction or
conversion.

Conversions. We perform a broad range of conversion work for vessels and
barges employed in the offshore energy, commercial marine and governmental
markets. Conversion activities include the conversion of single-hull tank
barges to double-hull tank barges.

12

Engineered Products Segment

With the sale of the BLM Companies in May 2001 and the expected closing of
the Amclyde sale in April 2002, we will no longer have an Engineered Products
segment.

Through our Engineered Products segment, 2001 operations included the
design, manufacture, and servicing of cranes, mooring, anchoring, rack-and-
pinion jacking systems, pipe/cable lay equipment, cargo handling equipment,
deck machinery and equipment. We have the capability to outfit rigs for
existing customers and to supply other offshore rig manufacturers with rig
kits consisting of legs, jacking systems, anchoring winches and offshore
handling cranes and other marine deck equipment, including spare parts and
after sale services.

Cranes, Mooring Systems, and Marine Deck Equipment. As of December 31,
2001, our Engineered Products segment was performing work on several major new
equipment and after-market upgrades in the course of the segment's normal
business. The design, procurement and project management functions are
performed in our U.S. facilities for AmClyde projects. These functions were
also performed at the BLM facility in Nantes, France, prior to the sale of the
French Subsidiaries in May 2001. Primary manufacturing is performed at our
Gulf Coast Division in Louisiana through a cadre of subcontracts.
Manufacturing was also performed at BLM in France prior to the sale of the
French subsidiaries in May 2001.

The Engineered Products Group has been involved in manufacturing several
major projects during 2001: a mooring line deployment winch and an umbilical
carousel loading system, a specialty "J-Lay" pipelaying system, 3800 ton
marine crane and 12 point mooring system, a 150-metric ton floating crane, two
50-ton pedestal cranes, upgrading a very large marine crane, one shipset of a
deepwater mooring system for a semi-submersible drilling rig, one rig-set of
jacking units for a jack-up drilling rig, and general marine anchor windlasses
and mooring equipment.

Marine deck equipment is typically manufactured to individual customer
specifications based on the planned application of the equipment. Manufacture
of the equipment required to complete a customer's order may require from a
few weeks to several months.

After-Market Sales and Service. The Engineered Products segment also sells
parts and services to support its products once they are delivered. It has a
service team that performs repair services worldwide and it maintains an
inventory of spare parts to support its products.

Customers and Marketing

Offshore Segment

Our Offshore segment customers include offshore drilling contractors, many
of whom have been our customers for more than 15 years. In addition, we have
contracted for the construction of rigs with customers who do not operate the
equipment but rather, intend to charter the rigs to drilling contractors.

We believe we have developed strong relationships with this segment of our
customer base. Our marketing efforts are conducted from our sales offices in
Houston and target drilling contractors located worldwide.

Vessels Segment

Our Vessels segment customers are primarily offshore energy service
companies, domestic and foreign governments, and commercial marine
transportation companies, many of whom have been our customers for decades.
Marketing efforts for our Vessels segment are coordinated at our headquarters
in Gulfport, Mississippi.

13

Engineered Products Segment

Our Engineered Products segment customers include offshore drilling
contractors, offshore marine construction contractors, oil companies and
operators in the offshore oil production sector, other shipyards, cruise
lines, shipping companies, on-land construction contractors, general merchant
marine operators, the fishing industry, and the U.S. Government. Marketing
efforts of this segment are conducted through offices in St. Paul, Minnesota
with satellite offices in Houston, Texas; Slidell, Louisiana; and Covington,
Louisiana and in concert with other of our domestic marketing efforts. Our
Engineered Products segment also has sales representatives in various
locations in Europe, China and Asia.

Significant Customers

A large portion of our revenue has historically been generated by a few
customers although not necessarily the same customers from year-to-year. For
example, our largest customers (those which individually accounted for more
than 10% of revenue in a particular year) collectively accounted for 68%, 29%
and 42% of revenue for 1999, 2000, and 2001, respectively. For 2001, Ocean
Rig, Petrodrill and Vessels Management Services individually accounted for
more than 10% of our revenue. Because the level of new construction,
conversion, retrofit or repair work that we may provide to any particular
customer depends on the size of that customer's capital expenditure budget
devoted to such projects in a particular year, customers that account for a
significant portion of revenue in one fiscal year may represent an immaterial
portion of revenue in subsequent years.

Contract Structure and Pricing

We generally perform conversion, retrofit and repair work pursuant to
contracts that can provide for a portion of the work to be performed on a
fixed-price basis and a portion of the work to be performed on a cost-plus
basis. New construction projects typically involve a greater portion of the
work performed on a fixed-price basis. In many cases, we commence work with
respect to certain portions of a drilling rig or vessel conversion, retrofit
or repair project on a cost-plus arrangement as soon as the drilling rig or
vessel arrives in our shipyard, and, thereafter, the scope and pricing
arrangements with respect to other aspects of the project are negotiated. In
the interest of expediting the completion of a conversion, retrofit or repair
project, a drilling rig or vessel may arrive in our shipyard before the design
work for such project is finished or before all necessary budgetary approval
for such project has been reviewed at the appropriate level of management of
the customer. In these cases, the portion of the project which does not have
complete design work will not be given firm pricing arrangements at the time
the drilling rig or vessel arrives at our shipyard. In these cases, the cost-
plus arrangement ultimately becomes a significant portion of the overall
project. In addition, the scope of the services to be performed with respect
to a particular drilling rig or vessel often increases as the project
progresses due to additional retrofits or modifications requested by the
customer or additional repair work necessary to meet the safety, environmental
or construction standards established by the U.S. Coast Guard or other
regulatory or vessel classification authorities.

With respect to the fixed-price contracts or the fixed-price portions of a
project, we receive the price fixed in the contract for such aspect of the
project, subject to adjustment only for change orders placed by the customer
or as required by regulatory bodies. In our Offshore segment, we may receive a
significant number of change orders on our fixed-price projects as to which we
negotiate with our customer a separate charge. With respect to fixed-price
contracts, we generally retain the ability to capture cost savings and must
absorb cost over-runs. Under cost-plus arrangements, we receive specified
amounts in excess of our direct labor and materials cost and so are protected
against cost overruns but we do not benefit directly from cost savings. We
generally price materials at a mark-up under our contracts. In recent years,
we have realized a majority of our revenue under fixed-price contracts,
although historically the percentages of revenue we have derived from fixed-
price contracts

14

and cost-plus contracts have fluctuated significantly from project to project
and from period to period based on the nature of the projects involved, the
type of pricing arrangements preferred by our customers, the timing of the
commencement of work on a project in relation to the timing of the completion
of the negotiation and contracting process, and other factors.

New construction of vessels, cranes, mooring systems, and marine deck
equipment are generally sold pursuant to fixed-price contracts.

Competition

We believe our reputation for quality and reliability, our long-standing
relationships with most of the large drilling contractors, energy service
companies, domestic and foreign governments and other commercial enterprises,
our experienced management team, our existing skilled labor force and our
extensive fabrication experience with drilling rigs and vessels are our key
advantages in competing for projects; however, our bankruptcy filing has
negatively impacted our ability to compete against other companies.

Our Offshore segment competes in a local market against other companies
based on the Gulf Coast for repair projects for drilling rigs that operate in
the Gulf of Mexico. The market for smaller retrofit and conversion projects is
also primarily local, but the market for larger retrofit and conversion
projects includes international competitors. We believe we compete favorably
against companies located in Europe or the Far East for retrofit and
conversion projects relating to drilling rigs operating in the Gulf of Mexico
and, to a lesser extent, rigs operating offshore West Africa and South America
due to, among other things, high European labor costs and our favorable
geographical location.

In our Vessels segment, the number and identity of competitors on
particular projects varies greatly, depending upon the type of vessel and the
size of the project. There are several domestic shipyards that compete with us
for domestic shipbuilding contracts depending upon the nature of the project.
Most of our domestic competitors are smaller than us. In pursuing
international contracts, we also compete with many foreign shipyards, some of
which are subsidized by their governments.

We compete in a global market in the design and manufacture of deck
equipment, although several competitors are domestically based. Our Engineered
Products segment competes with several domestic and foreign manufacturers in
the market for offshore marine cranes and shipyard gantry cranes, mooring
systems, jacking systems and pipe/cable lay equipment.

We believe certain barriers exist that prevent new companies from competing
with us for new rig and vessel construction, conversion, retrofit and repair
activities including the investment required to establish an adequate
facility, the difficulty of locating a facility adjacent to an adequate
waterway due to environmental and wetland regulations, and the limited
availability of experienced supervisory and management personnel. Although new
companies can enter the market for repair projects and small retrofit and
conversion projects more easily, we believe these factors will likely limit
the increase in domestic competition for larger projects, especially major
conversions and retrofits and new rig construction.

Backlog

As of December 31, 2001 our backlog from continuing operations by segment
was: Offshore, $37.7 million and Vessels $94.1 million. Of the total $131.8
million backlog at December 31, 2001, approximately 84.1% is expected to be
performed within the 12 months ending December 31, 2002. Additionally, the
total backlog of $131.8 million at December 31, 2001 includes FGL's backlog in
the amount of $6.9 million. We entered into an agreement to sell this division
in March 2002.

15

Our backlog is based on our estimate of future revenue attributable to (i)
the remaining amounts to be invoiced with respect to those projects, or
portions of projects, as to which a customer has authorized us to begin work
or purchase materials and (ii) projects, or portions of projects, that have
been awarded to us as to which we have not commenced work. Management's
estimates are often based on incomplete engineering and design specifications
and as engineering and design plans are finalized or changes to existing plans
are made, management revises the estimate of total revenue through negotiated
fixed price or cost-plus changes. In addition, many projects currently
included in our backlog are subject to termination at the option of the
customer, although the customer in that case is generally required to pay us
for work performed and materials purchased.

Materials

The principal materials used in our business are steel shapes, steel plate,
pipe, welding wire and gases, fuel oil, gasoline and paint. Other materials
used in large quantities include aluminum, electrical cable and fittings.
Similar materials are used in the manufacture of cranes, moorings, and marine
deck equipment. In addition, electric motor components, steel forgings and
castings are used. We believe that such materials are available in adequate
supply from many sources. In certain cases, however, the specifications of a
particular project may require materials which may be available from a limited
number or a single supplier or source. We have not engaged, and do not
presently intend to engage in hedging transactions with respect to our
purchase requirements for materials.

Safety and Quality Assurance

Management is concerned with the safety and health of our employees and
maintains a stringent safety assurance program to reduce the possibility of
accidents. Our safety department establishes guidelines to ensure compliance
with all applicable foreign, federal and state safety regulations. We provide
training and safety education through orientations for new employees and
subcontractors, weekly crew safety meetings and first aid and CPR training. We
also employ emergency medical technicians and/or registered nurses as in-house
medics. We have a comprehensive drug program and conduct periodic employee
health screenings. A safety committee, whose members consist of management
representatives and field supervisors, meets monthly to discuss safety
concerns and suggestions that could prevent future accidents. From time to
time we contract with third party safety consultants to provide training.
Similar practices are in place at our foreign facilities. We believe that our
safety program and commitment to quality are vital to attracting and retaining
customers and employees.

Many of our facilities construct according to the standards of certain
regulatory and quality control organizations including: the American Bureau of
Shipping, Lloyd's Register of Shipping, Bureau Veritas, Det Norske Veritas,
American Petroleum Institute, the American Welding Society, the American
Society of Mechanical Engineers and customer specifications. Our international
operations fabricate according to certain of the above standards and their own
national standards. All of our welding and fabrication procedures are
performed in accordance with the latest technology and industry requirements.
Our Engineered Products businesses are quality certified ISO 9001 by Det
Norske Veritas. We also maintain training programs at each of our facilities
to train skilled personnel and to maintain high quality standards. Management
believes that these programs enhance the quality of our products.

Government and Environmental Regulation

Overview. Many aspects of our operations and properties are materially
affected by foreign, federal, state and local regulation, as well as certain
international conventions and private industry organizations. These
regulations govern worker health and safety and the manning, construction and

16

operation of vessels. For example, we are subject to the jurisdiction of the
U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs
Service and the Maritime Administration of the U.S. Department of
Transportation, as well as private industry organizations such as the American
Bureau of Shipping. These organizations establish safety criteria and are
authorized to investigate vessel accidents and recommend improved safety
standards. In addition, the exploration and development of oil and gas
properties located on the outer continental shelf of the United States is
regulated primarily by the Minerals Management Service ("MMS"). The MMS has
promulgated federal regulations under the Outer Continental Shelf Lands Act
requiring the construction of offshore platforms located on the outer
continental shelf to meet stringent engineering and construction
specifications. Violations of these regulations and related laws can result in
substantial civil and criminal penalties as well as injunctions curtailing
operations. We believe that our operations are in compliance with these and
all other regulations affecting the fabrication of platforms for delivery to
the outer continental shelf of the United States.

In addition, we depend on the demand for our services from the oil and gas
industry and, therefore, are affected by changing taxes, price controls and
other laws and regulations relating to the oil and gas industry. For example,
the U.S. Coast Guard regulates and enforces various aspects of marine offshore
vessel operations, such as certification, routes, drydocking intervals,
manning requirements, tonnage requirements and restrictions, hull and shafting
requirements and vessel documentation. U.S. Coast Guard regulations require
that all drilling and production vessels are drydocked for inspection at least
once within a five-year period, and such inspections and resulting repair
requirements have constituted a significant portion of our revenues in some
prior years. While we are not aware of any proposals to reduce the frequency
or scope of such inspections, any such reduction could adversely affect our
results of operations. In addition, offshore construction and drilling in
certain areas have been opposed by environmental groups and, in certain areas,
has been restricted. To the extent laws are enacted or other governmental
actions are taken that prohibit or restrict offshore construction and drilling
or impose environmental protection requirements that result in increased costs
to the oil and gas industry in general and the offshore construction industry
in particular, our business and prospects could be adversely affected. We
cannot determine to what extent our future operations and earnings may be
affected by new legislation, new regulations or changes in existing
regulations.

Environmental. Our operations and properties are subject to a wide variety
of increasingly complex and stringent foreign, federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes,
the remediation of soil and groundwater contaminated by hazardous substances
and the health and safety of employees. These laws may provide for "strict
liability" for damages to natural resources and threats to public health and
safety, rendering a party liable for the environmental damage without regard
to negligence or fault on the part of such party. Sanctions for noncompliance
may include revocation of permits, corrective action orders, administrative or
civil penalties and criminal prosecution. Certain environmental laws provide
for strict, joint and several liability for remediation of spills and other
releases of hazardous substances, as well as damage to natural resources. In
addition, we may be subject to claims alleging personal injury or property
damage as a result of alleged exposure to hazardous substances. Such laws and
regulations may also expose us to liability for the conduct of or conditions
caused by others, or for our acts that were in compliance with all applicable
laws at the time such acts were performed.

The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, and similar laws provide for responses to and liability
for releases of hazardous substances into the environment. Additionally, the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery
Act, the Safe Drinking Water Act, the Emergency Planning and Community Right
to Know Act, each as amended, and similar foreign, state or local counterparts
to these federal laws,

17

regulate air emissions, water discharges, hazardous substances and wastes, and
require public disclosure related to the use of various hazardous substances.
For example, our paint operations must comply with a number of environmental
regulations. All blasting and painting is done in accordance with the
requirements of our air discharge permit and disposal of paint waste is made
in accordance with the federal Resource Conservation and Recovery Act
("RCRA"). In the event of lead-based paint, the disposal is handled in a
manner based on local, state and federal regulations. Our policy requires that
existing coating be sampled and tested prior to blasting operations to
eliminate the possibility of lead contamination and to assure that lead-based
paint is appropriately treated. We have been classified as a "large quantity
hazardous waste generator" and are registered with the State of Mississippi
Department of Environmental Quality, Texas National Resource Conservation
Commission, Louisiana Department of Environmental Quality, as such. Compliance
with these and other environmental laws and regulations may require the
acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. We believe our
facilities are in substantial compliance with current regulatory standards.

The RCRA and similar state laws regulate the generation, treatment,
storage, disposal, and other handling of solid wastes, with the most stringent
regulations applying to solid wastes that are considered hazardous wastes.
RCRA also may impose stringent requirements on the closure, and the post-
closure care, of facilities where hazardous waste was treated, disposed of or
stored. We generate solid waste, including hazardous and non-hazardous waste,
in connection with our routine operations. We believe that our waste is
handled properly under RCRA.

Amendments to the federal Clean Air Act in 1990 resulted in numerous
changes which the Environmental Protection Agency and similar state agencies
fully implemented by regulations. We do not expect these Clean Air Act
amendments to result in material expenses at our properties, but the amount of
increased expenses, if any, resulting from such amendments is not presently
determinable.

In connection with our purchase of the Marystown Facilities, the
Newfoundland provincial government agreed to carry out and pay for a complete
environmental assessment and remediation program. The Phase I investigation
identified several issues surrounding possible subsurface contamination on
site at one of the Marystown Facilities. As a result of Phase I findings,
remediation work was completed in 2000. Remediation efforts included the
removal of underground oil storage tanks, removal and proper disposal of
contaminated soils and re-installation of new oil storage tanks at the
shipyard facility. The Phase II investigation has been completed and
additional environmental issues were identified. Additional remediation
efforts were required for asbestos and lead paint abatement. Remediation work
was substantially completed in 2001. The Newfoundland Provincial Government
funded the cost of remediation procedures associated with the Marystown
Facilities as agreed upon at the time the facility was purchased. In addition,
the Newfoundland Provincial Government will indemnify us against any
environmental liabilities associated therewith. The asset sale agreement
executed in March 2002 continues this indemnification.

Our compliance with environmental laws and regulations has entailed certain
additional expenses and changes in operating procedures. We believe that
compliance with these laws and regulations will not have a material adverse
effect on our business or financial condition for the foreseeable future.
However, future events, such as changes in existing laws and regulations or
their interpretation, more vigorous enforcement policies of regulatory
agencies, or stricter or different interpretations of existing laws and
regulations, may require additional expenditures on our part, which
expenditures may be material.

Health and Safety Matters. Our facilities and operations are governed by
laws and regulations, including the federal Occupational Safety and Health
Act, relating to worker health and workplace safety. We believe appropriate
precautions are taken to protect employees and others from workplace injuries
and harmful exposure to materials handled and managed at our facilities. While
it is not

18

anticipated that we will be required in the near future to expend material
amounts by reason of such health and safety laws and regulations, we are
unable to predict the ultimate cost of compliance with these changing
regulations.

Jones Act. The Jones Act requires that all vessels transporting products
between U.S. ports must be constructed in U.S. shipyards, owned and crewed by
U.S. citizens and registered under U.S. law, thereby eliminating competition
from foreign shipbuilders with respect to vessels to be constructed for the
U.S. coastwise trade. Many customers elect to have vessels constructed at U.S.
shipyards, even if such vessels are intended for international use, in order
to maintain flexibility to use such vessels in the U.S. coastwise trade in the
future. In 1996 a legislative bill seeking to substantially modify the
provisions of the Jones Act mandating the use of ships constructed in the
United States for U.S. coastwise trade was introduced in Congress; however, it
did not pass. Similar bills seeking to rescind or substantially modify the
Jones Act and eliminate or adversely affect the competitive advantages it
affords to U.S. shipbuilders have been introduced in Congress from time to
time and are expected to be introduced in the future. Any recission or
material modification of the Jones Act could adversely affect our future
prospects because many foreign shipyards with which we compete are heavily
subsidized by their governments.

OPA '90. Demand for double-hull tankers and tank barges has been created by
the Oil Pollution Act of 1990 ("OPA '90"), which generally requires U.S. and
foreign vessels carrying oil and certain other hazardous cargoes and entering
U.S. ports to have double hulls by 2015. OPA '90 established a phase-out
schedule that began January 1, 1995 for all existing single hull vessels based
on the vessel's age and gross tonnage. We estimate that there are still 37
product carriers and 90 tank barges that must be replaced of which 10 and 65,
respectively, must be replaced by January 1, 2005. Because of the requirements
of the Jones Act, any replacement vessels must be built in U.S. shipyards.

Title XI Loan Guarantee Amendments and OECD Accord. In late 1993, Congress
amended the loan guarantee program under Title XI of the Merchant Marine Act
of 1936 ("MARAD"), to permit MARAD to guarantee loan obligations of foreign
vessel owners who construct new vessels in the United States. As a result of
these amendments, MARAD was authorized to guarantee loan obligations of
foreign owners for foreign-flagged vessels that are built in U.S. shipyards on
terms generally more advantageous than available under guarantee or subsidy
programs of foreign countries. Under the OECD Accord, which was negotiated in
December 1994, among the United States, the European Union, Finland, Japan,
Korea, Norway and Sweden (which collectively control over 75% of the market
share for worldwide vessel construction), the Title XI guarantee program will
be required to be amended, once the OECD Accord is ratified by the United
States, to eliminate the competitive advantages provided by the 1993
amendments to Title XI. In December 1995, a subcommittee of the Ways and Means
Committee of the U.S. House of Representatives passed a bill providing for the
implementation of the OECD Accord and elimination of the competitive
advantages provided by the 1993 amendments to Title XI. To date, such bill has
not been approved by either the U.S. House of Representatives or the U.S.
Senate. If the OECD Accord is ratified by the U.S. (the only remaining party
to the OECD Accord that has not yet ratified the OECD Accord), the OECD Accord
would virtually eliminate all direct and indirect governmental shipbuilding
subsidies by the party nations. Management does not expect that the U.S. will
ratify the OECD Accord and that Title XI will continue, but there can be no
assurance of this.

Insurance

We maintain a property and casualty insurance program protecting us against
damage caused by fire, flood, explosion and similar catastrophic events. We
also maintain commercial general liability insurance including coverage for
products and completed operations. We have in place both builder's risk and
ship repairer's construction risk programs. We maintain a workers'
compensation and employers' liability insurance program with respect to our
operations that satisfies the Federal and

19

State Workers' Compensation Acts and includes the U.S. Longshore and Harbor
Workers Act and maritime and outer continental shelf endorsements. We
currently maintain limits we deem are proper and necessary in the course of
our business. Although management believes that our insurance is adequate with
respect to all of our domestic and international operations there can be no
assurance that we will be able to maintain adequate insurance at rates which
management considers commercially reasonable, nor can there be any assurance
such coverage will be adequate to cover all claims that may arise.

In the past we have arranged to provide performance bonds or other
performance related security when required under the terms of the contracts.
We have not been able to obtain performance bonds or other performance related
security since our filing for reorganization under Chapter 11 of the U.S.
Bankruptcy code. We are expecting this situation to improve as the
reorganization plan is further developed, approved and implemented. Inability
to provide such bonds or alternative forms of security could have a material
effect on our ability to obtain new construction contracts.

Prior to March 1, 2000, our wholly-owned subsidiary, Offshore Marine
Indemnity Company ("OMIC") acted as a fronted re-insurance captive company for
our workers' compensation program. Our workers' compensation program included
both specific and aggregate loss retention amounts which limit the exposure of
OMIC. OMIC is not involved in any other business or any other lines of
coverage.

Employees

Our workforce varies based on the level of ongoing fabrication activity at
any particular time. As of December 31, 2001, we had approximately 2,596
employees, including 2,529 in the United States, 46 in Canada, and 21 in
Scotland. Total workforce included contract labor of approximately 152
employees at December 31, 2001.

None of the our United States employees is employed pursuant to a
collective bargaining agreement. We entered into a five-year collective
bargaining agreement with three Canadian unions in connection with the
acquisition of the Marystown Facilities. We believe that our relationship with
our employees is good.

20

RISK FACTORS

Due to the Chapter 11 Filing, It Is Unlikely That There Will Be Any Recovery
for Our Equity Security Holders . There is Also No Assurance That Our Plan of
Reorganization Will Ultimately Be Approved by the Bankruptcy Court.

On April 19 and 20, 2001, we, including 31 of our subsidiaries, elected to
file separate petitions for relief under Chapter 11 of the United States
Bankruptcy Code. At this time, we are focusing on maximizing the recoveries
for the creditors. Under our current plan of reorganization, equity holders
would not receive any recovery. In addition, there can be no assurance that
our plan of reorganization will ultimately be approved by the bankruptcy
court.

Our Business and Operations Depend Principally Upon Conditions Prevailing in
the Offshore Drilling Industry; Changes in that Industry Could Materially
Adversely Affect Friede Goldman Halter's Operating Results.

The level of demand for Friede Goldman Halter's services is affected by the
level of demand for the services of offshore drilling contractors, including
the demand for specific types of offshore drilling rigs having required
drilling capabilities or technical specifications. This, in turn, is dependent
upon the condition of the oil and gas industry and, in particular, the level
of capital expenditures of oil and gas companies with respect to offshore
drilling activities and the ability of oil and gas companies to access or
generate capital sufficient to fund capital expenditures for offshore
exploration, development, and production activities. These capital
expenditures are influenced by prevailing oil and natural gas prices,
expectations about future prices, the level of activity in offshore oil and
gas exploration, development and production, the cost of exploring for,
producing and delivering oil and gas, the sale and expiration dates of
offshore leases in the United States and overseas, the discovery rate of new
oil and gas reserves in offshore areas, local and international political and
economic conditions, and the ability of oil and gas companies to access or
generate capital sufficient to fund capital expenditures for offshore
exploration, development and production activities.

Over the past several years, oil and natural gas prices and the level of
offshore drilling activity have fluctuated substantially. A significant or
prolonged reduction in oil and natural gas prices or the expectation that
prices will be lower in the future would likely depress offshore drilling and
development activity which would reduce demand for our services and could
result in a material adverse effect on our operating results. Higher than
normal day rates available to drilling contractors for existing equipment may
delay decisions by contractors to bring their equipment into the shipyard for
conversion, retrofit or repair projects. Our business, including the types of
projects we undertake, will also be affected by other factors affecting
offshore drilling contractors, including factors such as:

. The condition and drilling capabilities of the existing offshore
drilling rigs operated by offshore drilling contractors; and

. the relative costs of building a new offshore drilling rig with advanced
capabilities versus the costs of retrofitting or converting an existing
offshore drilling rig to provide similar capabilities.

During 2001 the demand for our services related to the construction,
conversion and repair of offshore drilling rigs and construction of offshore
service vessels was weak due to declines in oil and natural gas prices, the
general weakening in the domestic and international economy and uncertainties
related to our Chapter 11 filing. The price for oil generally remained above
$25 per barrel in 2001; however, natural gas prices declined dramatically from
a high on the spot market of almost $10/mcf to around $2/mcf at the end of the
year. Natural gas prices began to weaken during June 2001 as a result of
increasing inventory levels. Natural gas prices experienced further declines
as warmer than normal weather and economic slowdowns in the U.S. and
internationally reduced demands for natural gas. These economic events caused
exploration and production companies in the U.S. Gulf of Mexico to

21

limit their capital investments and contributed to a collapse in domestic
drilling activity during the second half of 2001. The U.S. Gulf of Mexico is
the primary market for our services related to the conversion and repair of
offshore drilling rigs and the construction of offshore service vessels. 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.

In addition, as a result of our filing Chapter 11, many of our conversion,
retrofit, repair, and new build customers have elected not to use our shipyard
but instead have sought the services of one or more of our competitors.

Our Business Involves Significant Operating Risks; Our Insurance Protection
Could Be Insufficient or Ineffective.

Our activities involve the fabrication, refurbishment and repair of large
steel structures, including drilling rigs, vessels, cranes and production
units. These activities have inherent risks associated with them that could
result in significant injury and loss of life, severe damage and destruction
of property and suspension of operations. These risks include:

. operating hazards, including the operation of cranes and other heavy
machinery;

. the structural failure of a drilling rig, crane, vessel or other
equipment;

. liabilities associated with a defect in design or a failure or
malfunction of a product developed or manufactured by us;

. marine accidents, including collisions with other vessels and sinkings;
and

. physical damage of our facilities caused by hurricanes or flooding.

Litigation arising from any of these occurrences may result in Friede
Goldman Halter being named as a defendant in lawsuits asserting large claims.
Although we maintain and will continue to maintain insurance that we consider
to be economically prudent, it cannot be assured that this insurance will be
sufficient or effective under the circumstances. A successful claim for which
we are not fully insured could have a material adverse effect on Friede
Goldman Halter.

Although we maintain such insurance protection as we consider economically
prudent, there can be no assurance that any such insurance will be sufficient
or effective under all circumstances or against all hazards to which we may be
subject. A successful claim for which we are not fully insured could have a
material adverse effect on us. Moreover, no assurance can be given that we
will be able to maintain adequate insurance in the future at rates that we
consider economical. In addition, we may be unsuccessful in collecting amounts
due under our reinsurance agreements related to our workers' compensation
program.

We Have Incurred and Could Incur Additional Financial Losses in Connection
with Contracts Structured on a Fixed-Price Basis or Contracts Containing
Liquidated Damages Provisions.

A significant portion of our existing contracts is on a fixed-price basis.
We could be liable for the full amount of any cost overruns under these fixed-
price contracts. We generally attempt to cover anticipated cost increases
through an estimation of these increases in the original price of the
contract. However, revenue, cost and gross profit realized on a fixed-price
contract will often vary from the estimated amounts because of many factors,
including changes in job conditions and variations in labor and equipment
productivity over the term of the contract. The results of operations and
financial condition of Friede Goldman Halter could be materially adversely
affected if significant contracts are under priced or revenue and gross
profits on large projects are different from those originally estimated.

22

The construction of offshore drilling rigs, vessels and other equipment
frequently involves complex design and engineering and equipment and supply
delivery coordination throughout construction periods that may extend from
several months to two years. It is not unusual in such circumstances to
encounter design, engineering, equipment delivery schedule changes and other
factors that impact the builder's ability to complete construction of the
project in accordance with the original contractual delivery schedule. Our
construction contracts generally require the customer to compensate us for
additional work as well as reassessed delivery dates or expenses incurred due
to customer requested change orders or failure of the customer to provide us
with design or engineering information or equipment, if specified in the
contract for the customer to provide these items. Under these circumstances,
we generally negotiate with the customer with respect to the amount of
compensation to be paid to us following the time at which the change order was
requested or the customer failed to provide us with items required by the
contract to be provided by the customer to us. We are subject to the risk that
we are unable to obtain, through negotiation, arbitration, litigation or
otherwise, adequate amounts to compensate us for the additional work or
expenses incurred by us due to customer requested change orders or failure by
the customer to timely provide items required to be provided by the customer.
A failure to obtain adequate compensation for these matters could require us
to record an adjustment to amounts of revenue and gross profit recognized
under the percentage of completion accounting method.

Many of our existing contracts, and contracts that we expect to execute in
the future, contain or will contain provisions requiring the payment by us of
liquidated damages if we fail to meet specified performance deadlines. We
cannot assure you that we will not be required to make payments under these
liquidated damages provisions or that the requirement to make such payments
will not have a material adverse effect on our operating results. In certain
circumstances, delivery delay beyond a specified period could entitle the
customer to terminate the contract and to elect various remedies, including
return of the purchase price.

Use of Percentage-of-Completion Accounting by Friede Goldman Halter Could
Result in Material Charges Against Our Earnings.

For accounting purposes, we earn most of our revenue on a percentage-of-
completion basis based generally on the ratio of hours incurred to the
estimated hours at completion. Accordingly, we review contract price and cost
estimates periodically as the work progresses, and reflect adjustments to
income proportionate to the percentage of completion in the period when such
estimates are revised. To the extent that these adjustments result in a
reduction or elimination of previously reported profits, we would have to
recognize a charge against current earnings, which could be significant
depending on the size of the project or the adjustment.

Our Business Depends on a Few Significant Customers.

We expect a significant portion of our revenues in any year will be derived
from a few customers due to the relatively large size of many of the projects
we have historically undertaken and to the relatively small number of
potential customers for projects related to the offshore oil and gas industry.
The loss of a significant customer could result in a substantial loss of
Friede Goldman Halter's revenue and could have a material adverse effect on
us. (See "Business--Customers and Marketing")

Incorrect Estimates of Expected Revenue Resulting from Friede Goldman Halter's
Backlog of Projects May Have a Material Adverse Effect on Our Company.

Our backlog is based on management's estimate of future revenue to be
earned under projects as to which a customer has authorized us to begin work
or purchase materials; and projects that have been awarded to us as to which
we have not commenced work. Some of the projects in our backlog are subject to
change or termination by the customer, which could substantially reduce the
amount of

23

backlog currently reported and could have a material adverse effect on our
revenue, net income and cash flows.

In the case of a termination, the customer is required to pay us for work
performed and materials purchased through the date of termination; however,
due to the large dollar amounts of backlog estimated for each of a small
number of projects, amounts included in our backlog could decrease
substantially if one or more of these projects were to be terminated by one or
more of our customers. In particular, three projects with an estimated
contract value in excess of $82.5 million constitute approximately 69.6% of
our backlog as of February 28, 2002. Approximately 58.7% of our backlog as of
December 31, 2001 was attributable to three projects with three different
customers. A termination of one or more of these large projects or the loss of
a significant customer could have a material adverse effect on our revenue,
net income and cash flows for 2002.

Friede Goldman Halter Could Be Materially Adversely Affected By Government
Regulations.

Our business and operations are subject to and affected by various types of
governmental regulation, including numerous federal, state and local
environmental protection laws and regulations. Compliance with these laws is
increasingly complex and expensive. We could be held strictly liable for
damages to natural resources or threats to public health and safety, without
regard to our negligence or fault. We could also be held liable for the
conduct of or conditions caused by others or for our actions that were in
compliance with all applicable laws at the time the acts were performed.
Sanctions for noncompliance may include revocation of permits, corrective
action orders, administrative and civil penalties and criminal prosecution.

We depend on the demand for certain of our services from the oil and gas
industry; therefore, industry factors such as changing taxes, price controls
and other laws and regulations which affect the oil and gas industry in
general could impact our combined operations. The adoption of laws and
regulations curtailing exploration and development drilling would adversely
affect our operations by limiting demand for our services. We cannot determine
to what extent our operations and earnings may be affected by new legislation,
new regulations or changes in existing regulations.

Loss of Key Personnel May Have a Material Adverse Impact on Our Operations.

Our operations are dependent on the continued efforts of our executive
officers. Although certain of our executive officers have entered into an
employment agreement with Friede Goldman Halter, we cannot assure you that any
individual will continue in such capacity for any particular period of time.
The loss of key personnel, or the inability to hire and retain qualified
employees, could have an adverse effect on our business, financial condition
and results of operations. Friede Goldman Halter does not carry key-person
life insurance on any of its employees.

Competition and Excess Capacity Could Put Downward Pressure on Our Pricing and
Profit Margins.

The shipbuilding and offshore rig construction and conversion industries
are highly competitive. For the past decade, the U.S. shipbuilding industry
has been characterized by substantial excess capacity because of the
significant decline in U.S. Navy shipbuilding spending, the difficulties
experienced by U.S. shipbuilders in competing successfully for international
commercial projects against foreign shipyards, many of which are heavily
subsidized by their governments, and the decline in the construction of
vessels utilized in the offshore energy industry. As a result of these
factors, competition by U.S. shipbuilders for domestic commercial projects has
increased significantly and has resulted in downward pressure on pricing and
profit margins and may continue to do so in the future. In addition, when
demand increases for fabrication services involving the offshore oil and gas
industry, it is possible that land or facilities with water access to the Gulf
of Mexico not previously used in the

24

fabrication business could be converted to use for this purpose. Any of these
events could increase the amount of competition experienced by Friede Goldman
Halter, which could have a material adverse effect on our revenue and profit.

We face competitive pressures at every level of the offshore rig
construction, conversion, retrofitting and repair markets. We compete in a
global market for new rig construction projects against domestic, European and
Asian new rig construction firms. This market is highly competitive because,
among other factors, some of our foreign competitors receive substantial
subsidies from their governments and are able to take advantage of lower labor
costs. Similarly, for larger rig conversion and retrofit projects, we face
intense competition from both domestic and foreign firms. For smaller rig
conversion, retrofit and repair projects, we compete against numerous
companies based principally on the Gulf Coast. In addition, shipyards and
other companies not previously engaged in the business can enter the market
for these smaller conversion, retrofitting and repair projects quickly and at
relatively low cost.

Business and Geographic Segments

Financial information about our business and geographic segments may be
found in Item 14-- Note 20 of the Notes to Consolidated Financial Statements.

ITEM 2. Properties

Corporate Headquarters

Our corporate headquarters is located in Gulfport, Mississippi at the same
site as our Gulfport shipyard in two buildings that, together, occupy
approximately 54,600 square feet of office space.

Offshore Segment

Our Offshore segment is headquartered in Pascagoula, Mississippi. The
Offshore segment operates nine shipyards where it performs the conversion,
retrofit, repair and modification of existing offshore drilling rigs and the
construction of new offshore drilling rigs.

The principal shipyards dedicated to the Offshore segment are summarized in
the following table.

Drydock Features
--------------------------------------------------------
Offshore-Conversion and
Repair Maximum Maximum
Lifting Vessel Own
Property Name and Number Capacity Width or Expiration
Location Acres Drydocks (Tons) (Feet) Lease Date
----------------------- --------- -------- ---------- ------- ----- ------------

FGO West (see note 1)
Pascagoula,
Mississippi............ 13 -- -- -- Lease 2005
FGO East (see notes 2 2017
and 6) (see note 3)
Pascagoula,
Mississippi............ 90 1 30,000 203 Lease
TDI-Halter Orange
Facility
Orange, Texas.......... 77 -- -- -- Own --
FGOT-Halter North Yard
Port Arthur, Texas (see
note 4)................ 17 -- -- -- Own --
FGOT-Halter Dock Yard
Port Arthur, Texas--
Ship Mode.............. 100 1 64,000 122 Lease 2009
Or Rig Mode............ 363
FGOT-Halter Central Yard
Sabine Pass, Texas (see
note 4)................ 32 -- -- -- Own --
FGOT-Halter South Yard
Sabine Pass, Texas(see
note 4)................ 21 -- -- -- Own --
Marystown Facilities
Marystown,
Newfoundland, Canada
(2 yards) (see note
5)..................... 60 Meters 1 3,000 tons 64 Own --

25

- --------
(1) We lease this facility from the Jackson County Port Authority pursuant to
a long-term lease which expires in May 2005 with two additional ten-year
options for renewal.
(2) The North End Yard is used jointly by the Offshore and Vessels segments
for new construction activities.
(3) We lease the FGO East Yard from Jackson County, Mississippi pursuant to a
long-term lease which expires in June 2017 with three additional
extensions of ten years each.
(4) Facility is temporarily closed until demand warrants reopening.
(5) We own the Marystown Facilities in fee simple. We also assumed five water
lot leases with the Canadian government which run through 2015 covering
the water area next to each of the Marystown Facilities. Effective March
27, 2002, we sold this facility.
(6) Our plan of reorganization filed March 22, 2002 contemplates abandoning
this facility to MARAD in full satisfaction of their claims.

Vessels Segment

Our Vessels segment is headquartered within the corporate headquarters in
Gulfport, Mississippi. Our engineering headquarters for the Vessels segment is
located one-half mile from the corporate headquarters and contains
approximately 33,600 square feet of office space, including a separate secure
space for classified work. Our Vessels segment operates six shipyards
principally dedicated to the new construction of marine vessels, although
several of these facilities also can perform work for our Offshore and
Engineered Products segments.

The principal shipyards dedicated to new construction within our Vessels
segment are summarized in the table below.

Vessels--New Construction Covered
Fabrication Area Own
Property Name and Location (Square Footage) or Lease
-------------------------- ---------------- --------

Halter Pascagoula Shipyard
Pascagoula, Mississippi........................... 220,000 Own
Halter Moss Point Shipyard
Moss Point, Mississippi........................... 121,665 Own
Own Lockport Shipyard
Lockport, Louisiana............................... 97,000 Own
Moss Point Marine Shipyard
Escatawpa, Mississippi............................ 75,000 Own
Gulfport Shipyards (3 facilities)
Gulfport, Mississippi............................. 554,500 Own
Port Bienville Shipyard
Pearlington, Mississippi.......................... 15,000 Own

Engineered Products Segment

Our Engineered Products segment headquarters is located in St. Paul,
Minnesota in three buildings that, together, occupy 60,000 square feet. This
is a lease facility and will be assumed by purchaser. This segment also
operates small satellite sales offices in Houston, Texas; Slidell, Louisiana;
and Covington, Louisiana. The segment also leases a facility for its Norson
Engineering operation in Glasgow, Scotland.

26

Our Engineered Products segment utilizes two plants to manufacture its
products. These manufacturing plants are summarized in the table below.

Covered Own
Fabrication Area Or
Property Name and Location (Square Footage) Lease
-------------------------- ---------------- -----

Gulf Coast Manufacturing Division (2 locations)
Slidell, Louisiana................................... 155,000 Own
Covington Manufacturing Division
Covington, Louisiana................................. 46,000 Own
meters

In February 2002, we signed an agreement to dispose of our remaining
operations within the Engineered Products segment. This sale is subject to
possible overbidding and the required court approval under Chapter 11 of the
United States Bankruptcy Code.

Other Properties.

We also lease office space in Houston, Texas which is associated with FGL.
In March 2002, we executed a purchase agreement to sell FGL and this lease
will be assumed by the purchaser.

ITEM 3. Legal Proceedings

We are involved in various claims and legal actions arising in the ordinary
course of business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of these matters. See
Item 14--Notes 17 and 18 to the Consolidated Financial Statements for more
information on legal and contractual matters in which we are involved.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

27

EXECUTIVE OFFICERS OF THE REGISTRANT

Our Executive Officers are elected annually to serve for the ensuing year
or until their successors have been elected. The following table sets forth
certain information with respect to the executive officers:

Name Age Position
---- --- --------

John F. Alford.............. 43 President and Chief Executive Officer
Anil Raj.................... 51 Executive Vice President and Chief Operating
Officer
Robert Shepherd............. 44 Executive Vice President and Chief
Administrative Officer & CEO Friede Goldman
Newfoundland
Ronald W. Schnoor........... 48 Group President, Friede Goldman Offshore
Richard T. McCreary......... 47 Group President, Halter Marine
Richard J. Juelich.......... 51 Group President, Engineered Products Group

Set forth below are descriptions of the backgrounds of our executive
officers and directors and their principal occupations for the past five
years:

John F. Alford served as President and Chief Executive Officer from August
7, 2000 to April 2, 2002, the effective date of his resignation. Prior to this
he served as President and Chief Operating Officer since March 23, 2000. He
served as Executive Vice President of the Company from December 1997 to March
2000. He served as Senior Vice President and Chief Financial Officer of the
Company from May 1997 to December 1997. Mr. Alford joined FGO in 1996.

Anil Raj has served as Executive Vice President and Chief Operating Officer
since his appointment on March 29, 2001. Mr. Raj was previously our Senior
Vice President, Government Projects. He joined Halter Marine in 1987 as
Director of Engineering, and had previously been employed by Brown & Root,
Inc. and by Gulf Fleet Marine Corporation. He holds a BSE degree in naval
architecture and marine engineering from the University of Michigan.

Robert Shepherd has served as Executive Vice President and Chief
Administrative Officer since his appointment on September 26, 2001. Prior to
this Mr. Shepherd was President of Friede Goldman Offshore since January 2000.
He joined the Company's Canadian Operation in April 1998 as President and
Chief Executive Officer of Friede Goldman Newfoundland (FGN). He continues to
hold the position of Chief Executive Officer of FGN today. Prior to joining
FGN, Mr.Shepherd was employed as General Manager of a major Canadian shipyard
from 1994-1998.

Ronald W. Schnoor has served as Group President of Friede Goldman Offshore
since November 1998. He served as President of FGO from April 1997 and as the
Vice President, Manager of Operations of FGO since 1992. Mr. Schnoor joined
FGO in 1984 and previously served as both Senior Project Engineer and as a
Project Manager.

Richard T. McCreary has served as Group President, Halter Marine, since
March 23, 2000. Prior to this, he served as Senior Vice President,
Administration and Repair since November 3, 1999. Mr. McCreary joined HMG in
April 1997 and was serving as Senior Vice President, Administration and Repair
at the time of the merger between HMG and FGI. From April 1995 to 1997, Mr.
McCreary served as President Gulf Division, Maritrans Operating Partners. From
1990 to 1995, Mr. McCreary served as Vice President Operations, Canal Barge
Company, Inc.

Richard J. Juelich has served as Group President, Engineered Products Group
since November 3, 1999. Mr. Juelich joined HMG in November 1997 and was
serving as Group President, Engineered Products Group at the time of the
merger between HMG and FGI. From 1995 to 1997, Mr. Juelich served as President
of AmClyde Engineered Products, which was acquired by the Company in 1997. Mr.
Juelich has served as Chief Operating Officer of AmClyde Engineered Products
since 1992.

28

PART II

ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Our Common Stock is listed for trading on the Over the Counter Bulletin
Board under the symbol "FGHLQ" due to our Chapter 11 bankruptcy filing on
April 20, 2001. Prior to filing bankruptcy, our stock was listed on the New
York Stock Exchange under the symbol "FGH". The following table sets forth the
high and low sales price per share of the Common Stock, as reported on the New
York Stock Exchange composite tape from January 1, 2000 through April 20, 2001
and on the Over the Counter Bulletin Board from April 23, 2001 through
December 31, 2001, for the periods indicated:

2001
-----------
Quarter High Low
------- ----- -----

First............................................................ $6.60 $1.24
Second........................................................... 2.45 0.18
Third............................................................ 0.85 0.40
Fourth........................................................... 0.53 0.18

2000
-----------
Quarter High Low
------- ----- -----

First............................................................ $8.13 $4.88
Second........................................................... 9.31 5.31
Third............................................................ 9.00 5.13
Fourth........................................................... 7.38 3.56

We will not be paying any cash dividends. In addition, under our current
plan of reorganization, equity holders would not receive any recovery.

29

ITEM 6. Selected Financial Data

The following table sets forth selected historical financial data as of the
dates and for the periods indicated. The historical financial data set forth
below are derived from the audited consolidated financial statements of Friede
Goldman Halter, Inc. ("FGH") and its predecessor companies, F&G Ltd. and HAM
Marine (collectively, the "Predecessors"). The consolidated financial
statements include the accounts of FGH and its wholly-owned subsidiaries,
including, among others, Friede Goldman Offshore, Inc. ("FGO"), Friede &
Goldman, Ltd. ("FGL"), Friede Goldman Newfoundland Limited ("FGN"), Friede
Goldman France S.A.S. ("FGF"), and Halter Marine Group, Inc. ("Halter"). On
May 23, 2001, we sold FGF; therefore, the selected financial data includes FGF
for periods from February 6, 1998 through May 22, 2001. Additionally, the
selected financial data includes the accounts of FGN for all periods
subsequent to January 1, 1998, Halter for all periods subsequent to
November 3, 1999, and all other subsidiaries for all periods presented. All
significant intercompany accounts and transactions have been eliminated. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and the related notes thereto.

Years Ended December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- -------- --------
(in thousands, except per share data)

Statement of operations
data:
Contract revenue earned..... $ 246,066 $ 580,985 $439,440 $382,913 $113,172
Cost of revenue earned...... 265,909 628,113 441,655 293,712 75,236
--------- --------- -------- -------- --------
Gross profit (loss)....... (19,843) (47,128) (2,215) 89,201 37,936
Selling, general and
administrative expenses.... 29,495 46,087 34,963 32,365 11,963
Goodwill amortization....... 11,153 7,524 1,576 334 134
Goodwill impairment......... 201,622 -- -- -- --
--------- --------- -------- -------- --------
Operating income (loss)... (262,113) (100,739) (38,754) 56,502 25,839
Other income (expense):
Interest expense, net
(contractual interest:
$24,727 in 2001)........... (19,052) (33,814) (9,173) (201) 673
Discount on convertible
subordinated note.......... (54,878) -- -- -- --
Gain (loss) on asset sales.. 145 -- (8) (374) 3,922
Other....................... 78 (79) (60) 38 776
--------- --------- -------- -------- --------
Income (loss) before
reorganization items,
income taxes,
discontinued operations
and extraordinary item... (335,820) (134,632) (47,995) 55,965 31,210
Reorganization items:
Professional fees......... 11,691 -- -- -- --
Loss on investment in
unconsolidated
subsidiary............... 1,371 -- -- -- --
Write-off of deferred
financing costs.......... 2,618 -- -- -- --
Loss on assets held for
disposition.............. 21,951 -- -- -- --
--------- --------- -------- -------- --------
Total reorganization
items................... 37,631 -- -- -- --
--------- --------- -------- -------- --------
Income (loss) before
discontinued operations,
income taxes and
extraordinary item......... (373,451) (134,632) (47,995) 55,965 31,210
Income tax expense
(benefit).................. 9,510 (21,042) (17,141) 20,679 7,941
--------- --------- -------- -------- --------
Income (loss) before
discontinued operations and
extraordinary item......... (382,961) (113,590) (30,854) 35,286 23,269
Discontinued operations:
Income from operation of
Engineered Products
segment.................. 7,337 11,072 28 -- --
Loss on sale of Engineered
Products segment......... (25,983) -- -- -- --
--------- --------- -------- -------- --------
Total discontinued
operations.............. (18,646) 11,072 28 -- --
Income (loss) before
extraordinary item....... (401,607) (102,518) (30,826) 35,286 23,269
Extraordinary loss.......... -- 3,853 -- -- --
--------- --------- -------- -------- --------
Net income (loss)...... $(401,607) $(106,371) $(30,826) $ 35,286 $ 23,269
========= ========= ======== ======== ========

30

Years Ended December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
-------- --------- ---------- -------- --------
(in thousands, except per share data)

Net income (loss) per
share, basic:
Net income (loss) before
discontinued operations
and extraordinary
item................... $ (7.86) $ (2.55) $ (1.18) $ 1.46 $ 1.10
Discontinued
operations............. (0.38) 0.25 -- -- --
Extraordinary loss...... -- (0.09) -- -- --
-------- --------- ---------- -------- --------
Net income (loss).... $ (8.24) $ (2.39) $ (1.18) $ 1.46 $ 1.10
======== ========= ========== ======== ========
Net income (loss) per
share, diluted:
Net income (loss) before
discontinued operations
and extraordinary
item................... $ (7.86) $ (2.55) $ (1.18) $ 1.43 $ 1.09
Discontinued
operations............. (0.38) 0.25 -- -- --
Extraordinary loss...... -- (0.09) -- -- --
-------- --------- ---------- -------- --------
Net income (loss).... $ (8.24) $ (2.39) $ (1.18) $ 1.43 $ 1.09
======== ========= ========== ======== ========
Pro forma net income:
Net income as reported
above.................. $ 23,269
Pro forma income taxes
(1).................... (3,980)
--------
Pro forma net
income.............. $ 19,289
========
Pro forma net income per
share:
Basic.................. $ 0.92
Diluted................ 0.91
Weighted average shares
outstanding
Basic.................. 48,711 44,562 26,148 24,211 21,065
Diluted................ 48,711 44,562 26,148 24,599 21,297
Statement of Cash Flows
Data:
Cash provided by (used in)
operating activities..... $(33,267) $ (53,767) $ (61,061) $ 21,088 $ 52,122
Cash provided by (used) in
investing activities..... 6,824 95,813 (4,747) (77,299) (26,541)
Cash provided by (used in)
financing activities..... 21,949 (31,739) 39,558 41,156 29,947
Other Financial Data:
Depreciation and
amortization, including
goodwill impairment of
$201,622 in 2001 232,762 37,476 10,987 5,875 1,608
Capital expenditures...... 4,039 5,578 7,502 60,738 26,595
EBITDA (2)................ (31,647) (74,880) (27,184) 62,155 28,464
Balance Sheet Data:
Working capital
(deficit)................ $(39,450) $(140,423) $ 83,819 $ 5,859 $ 45,522
Net property, plant and
equipment................ 155,458 261,337 334,642 139,078 11,817
Total assets.............. 366,621 822,014 1,010,491 314,560 142,555
Long-term debt, less
current portion and
amounts in default....... -- 147,397 299,075 45,863 25,767
Stockholders' equity
(deficit)................ (193,346) 209,793 248,121 85,290 63,805

- --------
(1) The pro forma provision for income taxes gives pro forma effect to the
application of federal and state income taxes to Friede Goldman Halter as
if it had been a C Corporation for tax purposes for all periods presented.
Prior to June 1997, Friede Goldman Halter and its predecessors operated as
S Corporations for federal and state income tax purposes. In June 1997,
stockholders of Friede Goldman Halter and its predecessors made elections
terminating the S Corporation status. As a result, we became subject to
corporate level income taxation following the termination of such
elections.
(2) EBITDA represents operating income plus depreciation, amortization,
goodwill impairment and non-cash compensation expense related to the
issuance of stock and stock options to employees. EBITDA is not a measure
of cash fl